Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
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: 001-34846 
 
RealPage, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
75-2788861
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
2201 Lakeside Boulevard
Richardson, Texas
 
75082-4305
(Address of principal executive offices)
 
(Zip Code)
(972) 820-3000
(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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
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. (Check one):
Large accelerated filer
ý
 
 
Accelerated filer
¨
Non-accelerated filer
¨
 
 
Smaller reporting company
¨
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
October 19, 2018
Common Stock, $0.001 par value
 
93,911,615


Table of Contents

INDEX
 
 
 
 


Table of Contents

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
RealPage, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
 
September 30, 2018
 
December 31, 2017
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
279,872

 
$
69,343

Restricted cash
90,919

 
96,002

Accounts receivable, less allowance for doubtful accounts of $8,169 and $3,951 at September 30, 2018 and December 31, 2017, respectively
114,441

 
124,505

Prepaid expenses
20,215

 
12,107

Other current assets
17,834

 
6,622

Total current assets
523,281

 
308,579

Property, equipment, and software, net
151,213

 
148,428

Goodwill
1,009,462

 
751,052

Intangible assets, net
293,382

 
252,337

Deferred tax assets, net
42,397

 
44,887

Other assets
18,992

 
11,010

Total assets
$
2,038,727

 
$
1,516,293

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
27,422

 
$
26,733

Accrued expenses and other current liabilities
94,588

 
79,379

Current portion of deferred revenue
110,507

 
116,622

Current portion of term loans
16,133

 
14,116

Convertible notes, net
289,868

 

Customer deposits held in restricted accounts
91,010

 
96,057

Total current liabilities
629,528

 
332,907

Deferred revenue
5,079

 
5,538

Revolving facility

 
50,000

Term loans, net
291,504

 
303,261

Convertible notes, net

 
281,199

Other long-term liabilities
36,893

 
41,513

Total liabilities
963,004

 
1,014,418

Commitments and contingencies (Note 9)


 


Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value: 10,000,000 shares authorized and zero shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

Common stock, $0.001 par value: 250,000,000 and 125,000,000 shares authorized, 96,588,906 and 87,153,085 shares issued and 94,025,304 and 83,180,401 shares outstanding at September 30, 2018 and December 31, 2017, respectively
97

 
87

Additional paid-in capital
1,190,110

 
637,851

Treasury stock, at cost: 2,563,602 and 3,972,684 shares at September 30, 2018 and December 31, 2017, respectively
(70,319
)
 
(61,260
)
Accumulated deficit
(44,372
)
 
(75,046
)
Accumulated other comprehensive income
207

 
243

Total stockholders’ equity
1,075,723

 
501,875

Total liabilities and stockholders’ equity
$
2,038,727

 
$
1,516,293

See accompanying notes.

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RealPage, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
On demand
$
215,413

 
$
161,578

 
$
615,658

 
$
462,518

Professional and other
9,540

 
7,480

 
26,848

 
20,765

Total revenue
224,953

 
169,058

 
642,506

 
483,283

Cost of revenue
85,540

 
65,794

 
240,319

 
189,000

Amortization of product technologies
8,946

 
5,497

 
26,368

 
14,750

Gross profit
130,467


97,767


375,819


279,533

Operating expenses:
 
 
 
 
 
 
 
Product development
28,942

 
21,885

 
88,753

 
63,562

Sales and marketing
43,179

 
36,802

 
121,523

 
102,548

General and administrative
30,036

 
31,004

 
85,570

 
82,625

Amortization of intangible assets
9,738

 
3,838

 
26,323

 
10,601

Total operating expenses
111,895

 
93,529

 
322,169

 
259,336

Operating income
18,572

 
4,238

 
53,650

 
20,197

Interest expense and other, net
(8,816
)
 
(4,677
)
 
(25,004
)
 
(8,549
)
Income (loss) before income taxes
9,756

 
(439
)
 
28,646

 
11,648

Income tax expense (benefit)
683

 
(7,273
)
 
193

 
(9,594
)
Net income
$
9,073

 
$
6,834


$
28,453

 
$
21,242

 
 
 
 
 
 
 
 
Net income per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.10

 
$
0.09

 
$
0.33

 
$
0.27

Diluted
$
0.09

 
$
0.08

 
$
0.31

 
$
0.26

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
91,222

 
79,838

 
85,874

 
79,045

Diluted
96,590

 
82,760

 
90,451

 
82,051

See accompanying notes.

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RealPage, Inc.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
9,073

 
$
6,834

 
$
28,453

 
$
21,242

(Loss) gain on interest rate swaps, net
(126
)
 
(10
)
 
(3
)
 
72

Foreign currency translation adjustment
80

 
88

 
(33
)
 
86

Comprehensive income
$
9,027

 
$
6,912

 
$
28,417

 
$
21,400

See accompanying notes.

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RealPage, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands)
(unaudited)
 
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Other Comprehensive Income
 
Accumulated Deficit
 
Treasury Stock
 
Total
Stockholders’ Equity
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
Balance as of December 31, 2017
87,153

 
$
87

 
$
637,851

 
$
243

 
$
(75,046
)
 
3,973

 
$
(61,260
)
 
$
501,875

Cumulative effect of adoption of ASU 2014-09

 

 

 

 
2,221

 

 

 
2,221

Public offering of common stock, net of $17,056 of offering costs
8,050

 
8

 
441,786

 

 

 

 

 
441,794

Issuance of common stock in connection with our acquisitions
1,361

 
2

 
75,148

 

 

 

 

 
75,150

Stock option exercises
25

 

 
4,389

 

 

 
(472
)
 
5,564

 
9,953

Issuance of restricted stock

 

 
(7,824
)
 

 

 
(1,597
)
 
7,824

 

Treasury stock purchases, at cost

 

 
325

 

 

 
660

 
(22,447
)
 
(22,122
)
Stock-based compensation

 

 
38,435

 

 

 

 

 
38,435

Interest rate swap agreements

 

 

 
410

 

 

 

 
410

Foreign currency translation

 

 

 
(33
)
 

 

 

 
(33
)
Reclassification of realized gain on cash flow hedge to earnings, net of tax

 

 

 
(413
)
 

 

 

 
(413
)
Net income

 

 

 

 
28,453

 

 

 
28,453

Balance as of September 30, 2018
96,589

 
$
97

 
$
1,190,110

 
$
207

 
$
(44,372
)
 
2,564

 
$
(70,319
)
 
$
1,075,723

See accompanying notes.

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RealPage, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
28,453

 
$
21,242

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
74,018

 
45,814

Amortization of debt discount and issuance costs
9,272

 
4,340

Deferred taxes
(2,720
)
 
(10,811
)
Stock-based expense
37,492

 
35,732

Loss on disposal and impairment of other long-lived assets
3,439

 
472

Acquisition-related consideration
806

 
382

Changes in assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
 
 
 
Accounts receivable
6,933

 
773

Prepaid expenses and other current assets
(15,778
)
 
(1,950
)
Other assets
(2,757
)
 
(106
)
Accounts payable
4,044

 
3,702

Accrued compensation, taxes, and benefits
2,574

 
1,173

Deferred revenue
(5,193
)
 
4,783

Customer deposits
(6,361
)
 
(710
)
Other current and long-term liabilities
740

 
1,047

Net cash provided by operating activities
134,962

 
105,883

Cash flows from investing activities:
 
 
 
Purchases of property, equipment, and software
(37,287
)
 
(38,576
)
Acquisition of businesses, net of cash and restricted cash acquired
(230,474
)
 
(347,550
)
Purchase of other investment
(1,800
)
 

Net cash used in investing activities
(269,561
)
 
(386,126
)
Cash flows from financing activities:
 
 
 
Payments on term loans
(10,083
)
 
(1,533
)
Proceeds from revolving credit facility
140,000

 

Payments on revolving line of credit
(190,000
)
 

Proceeds from borrowings on convertible notes

 
345,000

Purchase of convertible note hedges

 
(62,549
)
Proceeds from issuance of warrants

 
31,499

Payments of deferred financing costs
(1,135
)
 
(11,026
)
Payments on capital lease obligations
(219
)
 
(232
)
Payments of acquisition-related consideration
(28,110
)
 
(8,073
)
Proceeds from public offering, net of underwriters’ discount and offering costs
441,794

 

Proceeds from exercise of stock options
9,953

 
21,614

Purchase of treasury stock related to stock-based compensation
(22,122
)
 
(21,189
)
Net cash provided by financing activities
340,078

 
293,511

Net increase in cash, cash equivalents and restricted cash
205,479

 
13,268

Effect of exchange rate on cash
(33
)
 
86

Cash, cash equivalents and restricted cash:
 
 
 
Beginning of period
165,345

 
188,540

End of period
$
370,791

 
$
201,894

See accompanying notes.

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RealPage, Inc.
Condensed Consolidated Statements of Cash Flows, continued
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
12,274

 
$
2,757

Cash paid for income taxes, net of refunds
$
2,546

 
$
1,705

Non-cash investing and financing activities:
 
 
 
Fair value of stock consideration in connection with our acquisitions
$
53,334

 
$

Redemption of noncontrolling interest in connection with acquisition of ClickPay
$
21,816

 
$

Accrued property, equipment, and software
$
1,837

 
$
3,242

 
 
 
 
       The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets and that shown in the Condensed Consolidated Statements of Cash Flows:
 
September 30, 2018
 
December 31, 2017
Cash and cash equivalents
$
279,872

 
$
69,343

Restricted cash
90,919

 
96,002

Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash flows
$
370,791

 
$
165,345

See accompanying notes.

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RealPage, Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
1. The Company
RealPage, Inc., a Delaware corporation (together with its subsidiaries, the “Company” or “we” or “us”), is a leading global provider of software and data analytics to the real estate industry. Our platform of data analytics and software solutions enables the rental real estate industry to manage property operations (such as marketing, pricing, screening, leasing, and accounting), identify opportunities through market intelligence, and obtain data-driven insight for better operational and financial decision-making. Our integrated, on demand platform provides a single point of access and a massive repository of real-time lease transaction data, including prospect, renter, and property data. By leveraging data as well as integrating and streamlining a wide range of complex processes and interactions among the rental real estate ecosystem (owners, managers, prospects, renters, service providers, and investors), our platform helps our clients improve financial and operational performance and prudently place and harvest capital.
During May 2018 and as disclosed in our Form 10-Q for the quarter ended March 31, 2018, we were the subject of a targeted email phishing campaign that led to a business email compromise, pursuant to which an unauthorized party gained access to an external third party system used by a subsidiary that we acquired in 2017. The incident resulted in the diversion of approximately $6.0 million, net of recovered funds, intended for disbursement to three clients. We immediately restored all funds to the client accounts. During the quarter ended June 30, 2018, we remediated the security weakness that gave rise to the incident and implemented additional preventive and detective control procedures. We maintain insurance coverage to limit our losses related to criminal and network security events. As of September 30, 2018, we recognized a receivable of $6.0 million included in “Other current assets” in the accompanying Condensed Consolidated Balance Sheet for losses and related expenses arising from this incident that we believe are probable of recovery from our insurance carriers. We have submitted a proof of loss notification to our insurance carriers. For the three and nine months ended September 30, 2018, we also recognized a charge of $0.1 million and $0.4 million, respectively, which is included in the line “General and administrative” in the accompanying Condensed Consolidated Statement of Operations for losses and related expenses that we do not expect to recover.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements and footnotes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. We believe that the disclosures made are appropriate and conform to those rules and regulations, and that the condensed or omitted information is not misleading.
The unaudited Condensed Consolidated Financial Statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year.
Effective for the quarter ended September 30, 2018, we have changed the presentation of our Condensed Consolidated Statements of Operations to add “Amortization of product technologies” and “Amortization of intangible assets” as separate line items within such statements. Amounts shown as amortization of product technologies were previously included within “Cost of revenue”, and amounts shown as amortization of intangible assets were previously included within the “Sales and marketing” operating expense category. Amounts for prior periods have been reclassified in order to conform to the current period presentation. We believe this revised presentation helps readers of our financial statements isolate non-cash amortization expenses that arise from our acquisitions and internally developed software.
These financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K filed with the SEC on March 1, 2018 (“Form 10-K”).
Segment and Geographic Information
Our chief operating decision maker is our Chief Executive Officer, who reviews financial information presented on a company-wide basis. As a result, we determined that the Company has a single reporting segment and operating unit structure.
Principally, all of our revenue for the three and nine months ended September 30, 2018 and 2017 was earned in the United States. Net property, equipment, and software located in the United States amounted to $141.2 million and $140.0 million at September 30, 2018 and December 31, 2017, respectively. Net property, equipment, and software located in our international subsidiaries amounted to $10.0 million and $8.4 million at September 30, 2018 and December 31, 2017, respectively.

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Substantially all of the net property, equipment, and software held in our international subsidiaries was located in the Philippines, Spain, and India at both September 30, 2018 and December 31, 2017.
Correction of an Immaterial Error in Previously Issued Financial Statements
During the three months ended September 30, 2018, we identified an error related to the misclassification of amortization expense related to intangible assets on certain acquired technologies, recognized as “Sales and marketing” expense. Such expense should have been recognized as a component of “Cost of revenue”. As a result, our cost of revenue was understated, and our sales and marketing expense was overstated by identical amounts, which also resulted in an overstatement of gross profit and total operating expenses by the same amount for the effected periods. There was no effect on reported revenues, net income, earnings per share, or cash flows. In accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, we have evaluated the materiality of the error from a qualitative and quantitative perspective and concluded that the effect of the misclassification was not material to our previously issued financial statements.
We have corrected the presentation of the amortization expense for all prior periods presented in this Form 10-Q. Periods not presented herein will be revised, as applicable, in future filings. The immaterial error correction resulted in an increase of cost of revenue and reduction in sales and marketing expense for the three and six months ended June 30, 2018 by $5.3 million and $9.8 million, respectively; for the three months ended March 31, 2018 by $4.5 million; and for the three months ended December 31, 2017, September 30, 2017, June 30, 2017 and March 31, 2017 by $3.0 million, $1.9 million, $1.1 million and $0.8 million, respectively. There was no change in our accounting for amortization expense related to client relationship, non-compete agreements and trade name intangible assets. Such expense remains a component of sales and marketing expense in all periods.
Concentrations of Credit Risk
Our cash accounts are maintained at various financial institutions and may, from time to time, exceed federally insured limits. We have not experienced any losses in such accounts.
Concentrations of credit risk with respect to accounts receivable result from substantially all of our clients being in the residential rental housing market. Our clients, however, are dispersed across different geographic areas. We do not require collateral from clients. We maintain an allowance for doubtful accounts for credits we offer our clients in certain instances and to reflect our best estimate of the amount of consideration we will ultimately receive based on relevant factors such as our historical experience, current contractual requirements, age of the outstanding balance, and our clients’ ability to pay.
No single client accounted for 10% or more of our revenue or accounts receivable for the three or nine months ended September 30, 2018 or 2017.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include the allowance for doubtful accounts; the useful lives of intangible assets and the recoverability or impairment of tangible and intangible asset values; fair value measurements; contingent commissions related to the sale of insurance products; valuation of net assets acquired and contingent consideration in connection with business combinations; revenue and deferred revenue and related reserves; stock-based expense; and our effective income tax rate and the recoverability of deferred tax assets, which are based upon our expectations of future taxable income and allowable deductions. Actual results could differ from these estimates. For greater detail regarding these accounting policies and estimates, refer to our Form 10-K.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity date, when purchased, of three months or less to be cash equivalents.
Restricted Cash
Restricted cash consists of cash collected from tenants that will be remitted primarily to our clients.
Business Combinations
We apply the guidance contained in ASC Topic 805, Business Combinations (“ASC 805”) in determining whether an acquisition transaction constitutes a business combination. ASC 805 defines a business as consisting of inputs and processes applied to those inputs that have the ability to create outputs. The acquisition transactions in Note 3 were determined to constitute business combinations and were accounted for under ASC 805.

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Purchase consideration includes assets transferred, liabilities assumed, and/or equity interests issued by us, all of which are measured at their fair value as of the date of acquisition. Our business combination transactions may be structured to include a combination of up-front, deferred and contingent payments. These payments may include a combination of cash and common stock. Deferred and contingent payments are made at specified dates subsequent to the date of acquisition. Deferred cash payments and stock issuances are included in the acquisition consideration based on their fair value as of the acquisition date. The fair value of these obligations is estimated based on the present value, as of the date of acquisition, of the anticipated future payments. The future payments are discounted using a rate that considers an estimate of the return expected by a market-participant and a measurement of the risk inherent in the cash flows, among other inputs. These deferred obligations are generally subject to adjustments specified in the underlying purchase agreement related to the seller’s indemnification obligations. Contingent consideration is an obligation to make future cash payments to the seller, the payment of which is contingent upon the achievement of stipulated operational or financial targets in the post-acquisition period. Contingent consideration is included in the purchase consideration at its fair value as of the acquisition date. The fair value of these payments is estimated using a probability weighted discount model based on the achievement of the specified targets. The fair value of these liabilities is re-evaluated on a quarterly basis, and any change is reflected in the line “General and administrative” in the accompanying Condensed Consolidated Statements of Operations. These estimates are inherently uncertain and unpredictable. Unanticipated events and circumstances may occur that would affect the accuracy or validity of these estimates.
The total purchase consideration is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Any excess consideration is classified as goodwill. Acquired intangibles are recorded at their estimated fair value based on the income approach using market-based estimates. Acquired intangibles generally include developed product technologies, which are amortized over their useful life on a straight-line basis, and client relationships, which are amortized over their useful life proportionately to the expected discounted cash flows derived from the asset. When trade names acquired are not classified as indefinite-lived, they are amortized on a straight-line basis over their expected useful life.
Acquisition costs are expensed as incurred and are included in the line “General and administrative” in the accompanying Condensed Consolidated Statements of Operations. We include the results of operations from acquired businesses in our Condensed Consolidated Financial Statements from the effective date of the acquisition.
Derivative Financial Instruments
We are exposed to interest rate risk related to our variable rate debt. We manage this risk through a program that includes the use of interest rate derivatives, the counterparties to which are major financial institutions. Our objective in using interest rate derivatives is to add stability to interest cost by reducing our exposure to interest rate movements. We do not use derivative instruments for trading or speculative purposes.
Our interest rate derivatives are designated as cash flow hedges and are carried in the Condensed Consolidated Balance Sheets at their fair value. Unrealized gains and losses resulting from changes in the fair value of these instruments are classified as either effective or ineffective. The effective portion of such gains or losses is recorded as a component of accumulated other comprehensive income (“AOCI”), while the ineffective portion is recorded as a component of interest expense in the period of change. Amounts reported in AOCI related to interest rate derivatives are reclassified into interest expense as interest payments are made on our variable-rate debt. If an interest rate derivative agreement is terminated prior to its maturity, the amounts previously recorded in AOCI are recognized into earnings over the period that the forecasted transactions impact earnings. If the hedging relationship is discontinued because it is probable that the forecasted transactions will not occur according to our original strategy, any related amounts previously recorded in AOCI are recognized in earnings immediately.
Accounts Receivable
Accounts receivable primarily represent trade receivables from clients that are recorded at the invoice amount, net of an allowance for doubtful accounts and credits. For certain transactions, we have met the requirements to recognize revenue in advance of invoicing the client. In these instances, we record unbilled receivables for the amount that will be due from the client upon invoicing.
We maintain an allowance for doubtful accounts for credits we offer our clients in certain instances that reflects our best estimate of the amount of consideration to which we are entitled and that we will ultimately receive. In evaluating the sufficiency of the allowance for doubtful accounts, we consider relevant factors such as our historical experience, current contractual requirements, age of the outstanding balance, and our clients’ ability to pay. Any change in the assumptions used in analyzing a specific account receivable might result in an additional allowance for doubtful accounts being recognized in the period in which the change occurs. A portion of our allowance is for services not yet rendered and is therefore classified as an offset to deferred revenue.
Accounts receivable are written off upon determination of non-collectability following established Company policies. We incurred bad debt expense of $0.9 million for both of the three month periods ended September 30, 2018 and 2017, and $3.0 million and $2.2 million for the nine months ended September 30, 2018 and 2017, respectively.

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Accounts receivable includes commissions due to us related to the sale of insurance products to residents and commissions which are contingent based upon the activity in the underlying policies. Contingent commissions receivables are recorded at their estimated net realizable value, based on estimates and considerations which include, but are not limited to, the historical and projected loss rates incurred by the underlying policies.
Deferred Revenue
Deferred revenue primarily consists of billings issued or payments received for service obligations we have not yet completed. For several of our solutions, we invoice our clients in annual, monthly, or quarterly installments in advance of the commencement of the service period. Accordingly, the deferred revenue balance does not represent the total contract value of annual or multi-year, non-cancellable subscription agreements. Deferred revenue that will be recognized during the succeeding twelve-month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent.
Revenue Recognition
We derive our revenue from two primary sources: (1) on demand software solutions and (2) professional services and other goods and services. We recognize revenue as we satisfy one or more service obligations under the terms of a contract, generally as control of goods and services are transferred to our clients. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. We include estimates of variable consideration in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur.
We determine revenue recognition through the following steps:
identification of the contract, or contracts, with a client;
identification of the performance obligations in the contract;
determination of the transaction price;
allocation of the transaction price to the performance obligations in the contract; and
recognition of revenue when, or as, we satisfy a performance obligation.
On Demand Revenue
Our on demand revenue consists of license and subscription fees, transaction fees related to certain of our software-enabled value-added services, and commissions derived from our sales of certain risk mitigation services.
We generally recognize revenue from subscription fees on a straight-line basis over the access period beginning on the date that we make our service available to the client. Our subscription agreements generally are non-cancellable, have an initial term of one year or longer and are billed either monthly, quarterly or annually in advance. Non-refundable upfront fees billed at the initial order date that are not associated with an upfront service obligation are recognized as revenue on a straight-line basis over the period over which the client is expected to benefit, which we consider to be three years.
We recognize revenue from transaction fees in the month the related services are performed based on the amount we have a right to invoice.
As part of our resident services offerings, we offer risk mitigation services to our clients by acting as an insurance agent and derive commission revenue from the sale of insurance products to our clients’ residents. The commissions are based upon a percentage of the premium that our insurance company underwriting partners charge to the policyholder and are subject to forfeiture in instances where a policyholder cancels prior to the end of the policy. Our contracts with our underwriting partners also provide for contingent commissions to be paid to us in accordance with the agreements. Our estimate of contingent commission revenue considers the variable factors identified in the terms of the applicable agreement. We recognize commissions related to these services as earned ratably over the policy term.
Professional and Other Revenue
Professional services and other revenues generally consist of the fees we receive for providing implementation and consulting services, submeter equipment and ongoing maintenance of our existing on premise licenses.
Professional services are billed either on a time and materials basis or on a fixed price basis, and revenue is recognized over time as we perform the obligation. Professional services are typically sold bundled in a contract with other on demand solutions but may be sold separately. Professional service contracts sold separately generally have terms of one year or less. For bundled arrangements, where we account for individual services as a separate performance obligation, the transaction price is allocated between separate services in the bundle based on their relative standalone selling prices.
Other revenues consist primarily of submeter equipment sales that include related installation services. Such sales are considered bundled, and revenue from these bundled sales is recognized in proportion to the number of fully installed units completed to date as compared to the total contracted number of units to be provided and installed. For all other equipment sales, we generally recognize revenue when control of the hardware has transferred to our client. Revenue recognized for on

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premise software sales generally consists of annual maintenance renewals on existing term or perpetual licenses, which is recognized ratably over the service period.
Contracts with Multiple Performance Obligations
The majority of the contracts we enter into with clients, including multiple contracts entered into at or near the same time with the same client, require us to provide one or more on demand software solutions, professional services and/or equipment. For these contracts, we account for individual performance obligations separately i) if they are distinct or ii) if the promised obligations represent a series of distinct services that are substantially the same and have the same pattern of transfer to the client. Once we determine the performance obligations, we determine the transaction price, which includes estimating the amount of variable consideration, if any, to be included in the transaction price. For contracts with multiple performance obligations, we allocate the transaction price to the separate performance obligations on a relative standalone selling price basis. The standalone selling prices of our services are estimated using a market assessment approach based on our overall pricing objectives taking into consideration market conditions and other factors including the number of solutions sold, client demographics, and the number and types of users within our contracts.
Sales, value add, and other taxes we collect from clients and remit to governmental authorities are excluded from revenues.
Deferred Commissions
Sales commissions, including sales-based incentive payments, earned by our direct sales force are considered incremental and recoverable costs of obtaining a contract with a client. These costs are deferred in “Other current assets” and “Other assets” and amortized into “Sales and marketing expense” on a straight line basis over a period of benefit that we have determined to be three years. We determined the period of benefit by taking into consideration our client contracts, our technology, historical pricing practices and other factors. We periodically review these capitalized costs for impairment.
Fair Value Measurements
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Legal Contingencies
We review the status of each legal matter and record a provision for a liability when we consider that it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We review these provisions quarterly and make adjustments where needed as additional information becomes available. If either or both of the criteria are not met, we assess whether there is at least a reasonable possibility that a loss, or additional losses beyond those already accrued, may be incurred. If there is a reasonable possibility that a material loss (or additional material loss in excess of any accrual) may be incurred, we disclose an estimate of the amount of loss or range of losses, either individually or in the aggregate, as appropriate, if such an estimate can be made, or disclose that an estimate of loss cannot be made.
Recently Adopted Accounting Standards
Accounting Standards Update 2014-09
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09, as amended by certain supplementary ASU’s released in 2016, replaces all current GAAP guidance on this topic and eliminates all industry-specific guidance. The new revenue recognition standard requires the recognition of revenue when promised goods or services are transferred to clients in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a client. Collectively, we refer to Topic 606 and Subtopic 340-40 as the “new revenue standard” or “ASC 606.”
We adopted the requirements of the new revenue standard on January 1, 2018 using the modified retrospective method and applied the guidance to contracts not substantially completed as of the date of initial application, or open contracts. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings at the beginning of 2018. Comparative information from prior year periods has not been restated and continues to be reported under the accounting standards in effect for those periods. The cumulative effects of the changes made to our condensed consolidated January 1, 2018 balance sheet for the adoption of the new revenue standard were as follows:

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Balance at
December 31, 2017
 
Adjustments due
to ASU 2014-09
 
Balance at
January 1, 2018
 
(in thousands)
Assets
 
 
 
 
 
Accounts receivable, less allowance for doubtful accounts
$
124,505

 
$
(7,925
)
 
$
116,580

Other current assets
$
6,622

 
$
2,771

 
$
9,393

Deferred tax assets, net
$
44,887

 
$
(780
)
 
$
44,107

Other assets
$
11,010

 
$
4,459

 
$
15,469

Liabilities
 
 
 
 
 
Current portion of deferred revenue
$
116,622

 
$
(3,696
)
 
$
112,926

Stockholders’ Equity
 
 
 
 
 
Accumulated deficit
$
(75,046
)
 
$
2,221

 
$
(72,825
)
Adoption of the new revenue standard resulted in changes to our accounting policies for revenue recognition, certain variable considerations, and commissions expense. The adoption of the new revenue standard did not have a significant effect on our revenue; however, it did have an impact on the timing of when we expense commission costs incurred to obtain a contract and the reserves we establish for variable consideration from credits or other pricing accommodations we provide our clients. We expect the effect of the new revenue standard to be immaterial to our revenue on an ongoing basis. The primary effect to our net income on an ongoing basis relates to the reserve for credit accommodations and deferral of incremental commission costs incurred to obtain new contracts. Under the new revenue standard, we accrue for credit accommodations in our reserve during the month of billing and credits reduce this reserve when issued. Further, we now initially defer commission costs and amortize these costs to expense over a period of benefit that we have determined to be three years. Deferred commissions were capitalized for open contracts at the date of initial application and will be capitalized for new contracts in 2018. As a result, there will be a net benefit to “Operating income” in our Condensed Consolidated Statements of Operations during 2018 as capitalization of costs exceed amortization. As capitalized costs amortize into expense over time, the accretive benefit in 2018 is expected to moderate in 2019 and normalize in 2020.
See Note 4 for additional required disclosures related to the impact of adopting the new revenue standard and our accounting for costs to obtain a contract.
Accounting Standards Update 2016-18
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows - Restricted Cash, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. This ASU must be adopted retrospectively.
We adopted ASU 2016-18 effective January 1, 2018. As a result of our adoption, changes in customer deposits held in restricted accounts will result in an increase or reduction in our cash flows from operating activities. Under previous rules, such changes were largely offset by the corresponding change in restricted cash and had a minimal impact on our statement of cash flows. The prior period financial statements included in this filing have been adjusted to reflect the adoption of ASU 2016-18. The effects of those adjustments to the Condensed Consolidated Statements of Cash Flows have been summarized in the table below:
 
Originally Reported
 
Effect of Change
 
As Adjusted
 
(in thousands)
Statement of Cash Flows for the nine months ended September 30, 2017
 
 
 
 
 
Net cash provided by operating activities
$
106,288

 
$
(405
)
 
$
105,883

Net cash used in investing activities
$
(395,437
)
 
$
9,311

 
$
(386,126
)
Cash, cash equivalents and restricted cash at end of period
$
109,334

 
$
92,560

 
$
201,894

Accounting Standards Update 2017-09
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the fair value, vesting conditions, or award classification (as equity or liability) and would not be required if the changes are considered non-substantive. We adopted this

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standard effective January 1, 2018. Adoption of ASU 2017-09 did not have a material impact on our consolidated financial statements.
Accounting Standards Update 2017-01
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business to assist entities with evaluating whether a set of transferred assets and activities (a "set") is a business. Under the new guidance, an entity first determines whether substantially all of the fair value of the set is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set is not a business. If the threshold is not met, the entity evaluates whether the set meets the requirements that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. We adopted the provisions of this ASU effective January 1, 2018, and the adoption did not have a significant impact on our classification of businesses and complementary technologies acquired.
Accounting Standards Update 2016-01
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10) in February 2018, which provides clarification on certain guidance issued under ASU 2016-01. Among other things, ASU 2016-01 eliminates the cost method of accounting and requires that investments in equity securities that were previously accounted for under the cost method must now be measured at fair value, with changes in fair value recognized in net income. Equity instruments that do not have readily determinable fair values may be measured at cost less impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. This ASU became effective on January 1, 2018. We hold an investment which was accounted for under the cost method of accounting prior to January 1, 2018, which does not have a readily determinable fair value and has had no observable price change. Therefore, we continue to measure this investment at cost, less any impairment. The adoption of this standard did not have a material impact on our consolidated financial statements.
Accounting Standards Update 2018-07
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under this ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. We early adopted ASU 2018-07 effective July 1, 2018, and the adoption did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Standards
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The amendments in this update will be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the impact of this ASU on our consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides companies the option to reclassify tax effects stranded in accumulated other comprehensive income as a result of the 2017 Tax Cuts and Jobs Act (“Tax Reform Act”) to retained earnings. ASU 2018-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. Early adoption is permitted. We are currently evaluating this ASU, but the adoption is not expected to have a material impact on our consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which expands an entity’s ability to apply hedge accounting for nonfinancial and financial risk components and allows for a simplified approach for fair value hedging of interest rate risk. Certain of the amendments in this ASU as they relate to cash flow hedges, eliminate the requirement to separately record hedge ineffectiveness currently in earnings. Instead, the entire change in the fair value of the hedging instrument is recorded in Other Comprehensive Income (“OCI”), and amounts deferred in OCI will be reclassified to earnings in the same income statement line item in which the

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earnings effect of the hedged item is reported. Additionally, this ASU simplifies the hedge documentation and effectiveness assessment requirements under the previous guidance. ASU 2017-12 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. The changes in this ASU will be applied on a modified retrospective basis through a cumulative effect adjustment to the opening balance of retained earnings as of the initial application date.
While we are continuing to assess all potential impacts of ASU 2017-12 on our consolidated financial statements, its most immediate effect will be the initial recognition of the entire change in the fair value of our interest rate swaps in other comprehensive income. Similar to our current treatment of the effective portion of a change in fair value, the ineffective portion will be reclassified into interest expense as interest payments are made on our variable rate debt. Under our current practice, the ineffective portion is initially recorded as a component of interest expense in the period of change. We will adopt this standard effective January 1, 2019 and do not expect the changes in the ASU to have a material impact on our consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments of this ASU allow companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, and the guidance is to be applied using a full or modified retrospective approach. We are currently evaluating the impact of adopting ASU 2017-11 on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in fiscal years beginning after December 15, 2018. The amendments in this ASU are to be applied through a cumulative-effect adjustment to retained earnings as of the first reporting period in which the ASU is effective. We have not yet selected a transition date and are currently evaluating the impact of adopting ASU 2016-13 on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new guidance requires lessees to recognize assets and liabilities arising from all leases with a lease term of more than 12 months, including those classified as operating leases under previous accounting guidance. It also requires disclosure of key information about leasing arrangements to increase transparency and comparability among organizations.
ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. In July 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements, which provides for an optional transition method to allow companies to initially account for the impact of the adoption with a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019. This eliminates the requirement to restate amounts presented prior to January 1, 2019. We will adopt the standard effective January 1, 2019, and we expect to elect this optional transition method, as well as certain practical expedients permitted under the transition guidance. As previously disclosed, we anticipate that the standard will have a material impact on our balance sheet from the recognition of right of use assets and lease liabilities for operating leases. We believe the adoption of this guidance will modify our ongoing analysis and disclosures of lease agreements. We are in the latter stages of implementing a new lease software solution and continue to evaluate the impact to our consolidated financial statements.

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3. Acquisitions
Current Acquisition Activity
LeaseLabs
In September 2018, we acquired substantially all of the assets of LeaseLabs, Inc. (“LeaseLabs”), a full-stack marketing solutions provider to the multifamily housing industry. LeaseLabs provides online, social media and website marketing services to property management companies. Aggregate purchase consideration was $112.7 million, including contingent consideration of up to $10.0 million based on the collection of acquisition date accounts receivable balances during the six-month period after the acquisition date. The fair value of the contingent consideration was $7.0 million on the date of acquisition. We issued 86,745 shares of our common stock at closing, which had a fair value of $5.3 million on the date of acquisition. We will issue shares of our common stock with a fair value of $5.0 million on the first anniversary date of the acquisition. A liability of $4.8 million has been recorded for the obligation to issue these shares. The acquisition was financed using cash on hand.
The acquired identified intangible assets consisted of client relationships, developed technology and trade names and were assigned estimated useful lives of ten, seven and ten years, respectively. Preliminary goodwill recognized of $84.1 million is primarily comprised of anticipated synergies from the expansion of our marketing platform with LeaseLabs’ marketing solutions and the combination of our marketing content, websites and lead management with LeaseLabs’ marketing solutions. Goodwill and acquired intangible assets are deductible for tax purposes. Accounts receivable acquired have a gross value of $3.1 million, of which $0.5 million is estimated to be uncollectible. Acquisition costs associated with this transaction totaled $0.3 million and were expensed as incurred.
BluTrend
In July 2018, we acquired substantially all of the assets of Blu Trend, LLC (“BluTrend”), a provider of utility management services for the multifamily housing industry. The acquired assets will be integrated with our existing resident utility management platform. Purchase consideration was $8.5 million of cash, deferred cash obligations of up to $1.0 million, and deferred stock obligations of up to $1.0 million. The $2.0 million of deferred obligations are subject to indemnification claims as well as continued employment of certain BluTrend employees and will be released on the first and second anniversary dates of the closing date. The deferred obligations will be recognized as compensation expense over the two-year period after the acquisition date. The acquisition was financed using cash on hand.
The acquired identifiable intangible assets consisted of client relationships, developed technology and trade names and were assigned estimated useful lives of ten, five and two years, respectively. Preliminary goodwill recognized of $3.9 million is primarily comprised of anticipated synergies from integrating the BluTrend business into our utility management platform. Goodwill and the acquired identified intangible assets are deductible for tax purposes. Acquisition costs associated with this transaction totaled $0.1 million and were expensed as incurred.
ClickPay
In April 2018, we acquired substantially all of the outstanding membership units of NovelPay, LLC (“NovelPay”), other than those owned by ClickPay Services, Inc. On the same day, we acquired all of the outstanding stock of ClickPay Services, Inc. (collectively with NovelPay, “ClickPay”). ClickPay provides an electronic payment platform servicing resident units across multiple segments of real estate, which offers integrated payment services to increase operational efficiencies for property owners and managers. The acquisition of ClickPay broadens our presence in the real estate industry, and solidifies the integration of our leasing platform with third-party property management systems.
We acquired ClickPay for purchase consideration of $221.0 million. The purchase consideration consisted of $138.8 million of cash, net of cash acquired of $7.5 million, the issuance of 870,168 shares of our common stock valued at $48.0 million, a deferred obligation of up to $10.2 million, which had a fair value of $9.8 million on the date of acquisition, and a liability of $24.7 million related to put and call option agreements, which had a fair value of $24.4 million on the date of acquisition. Approximately 187,480 shares of common stock issued at closing are subject to a holdback. Subject to any indemnification claims made, the 187,480 shares of common stock issued at closing and the deferred obligation will be released on the first and second anniversary dates of the closing date, respectively. The acquisition of ClickPay was financed using funds available under our Credit Facility, as defined in Note 7, and cash on hand.
Pursuant to the acquisition agreement, certain holders initially retained units representing approximately 12% of the membership units of NovelPay, subject to put rights that could be exercised by the holders on or after September 1, 2018, and call rights that could be exercised by us on or after October 1, 2018. The exercise price of the put and call rights was the same as the per unit price of the membership units purchased at the closing. We evaluated the put and call options and determined the put and call options were embedded within the noncontrolling interests, and the economic substance represented a financing arrangement of the noncontrolling interests because of the substantially fixed exercise price and stated exercise dates. In June 2018, we and one of the remaining NovelPay noncontrolling interest holders agreed to waive the put and call exercise date, and we completed the purchase of such holder’s membership units for 395,206 shares of common stock valued at $21.8 million. In

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September 2018, the remaining NovelPay noncontrolling interest holders exercised their put rights, and we completed the purchase of the noncontrolling interest holders’ membership units for $2.9 million in cash. As of September 30, 2018, all outstanding membership units of NovelPay have been acquired. No earnings were attributed to the noncontrolling interests in the accompanying Condensed Consolidated Statements of Operations.
The acquired identified intangible assets consisted of developed technology, client relationships, and trade names. These intangible assets were assigned estimated useful lives of seventen, and ten years, respectively. Preliminary goodwill recognized of $172.6 million is primarily comprised of anticipated synergies from leveraging ClickPay’s electronic payment platform, which is compatible with multiple third-party property management systems. Goodwill of $105.0 million arising from the acquisition of NovelPay is deductible for tax purposes; goodwill arising from the acquisition of ClickPay Services, Inc. is not. Accounts receivable acquired had a gross contractual value of $2.8 million at acquisition, of which $0.5 million was estimated to be uncollectible. Acquisition costs associated with this transaction totaled $1.6 million and were expensed as incurred.
Purchase Consideration and Purchase Price Allocations
The estimated fair values of assets acquired and liabilities assumed are provisional and are based primarily on the information available as of the acquisition date. We believe this information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but we are awaiting additional information necessary to finalize those values. Therefore, the provisional measurements of fair value are subject to change, and such changes could be significant. We expect to finalize the valuation of these assets and liabilities as soon as practicable, but no later than one year from the acquisition date. The components of the purchase consideration and the preliminary allocation of each purchase price, including the effects of measurement period adjustments recorded as of September 30, 2018, are as follows:
 
 
 
 
 
ClickPay
 
BluTrend
 
LeaseLabs
 
 
 
 
 
(in thousands)
Fair value of total purchase consideration:
 
 
 
 
 
 
 
 
 
Cash, net of cash acquired
 
 
 
 
$
138,787

 
$
8,500

 
$
84,500

Common stock issued at closing
 
 
 
 
48,034

 

 
5,300

Deferred obligations, net
 
 
 
 
9,821

 

 
15,888

Noncontrolling interest financing
 
 
 
 
24,369

 

 

Contingent consideration
 
 
 
 

 

 
7,000

Total purchase consideration
 
 
 
 
$
221,011

 
$
8,500

 
$
112,688

 
 
 
 
 
 
 
 
 
 
Fair value of net assets acquired:
 
 
 
 
 
 
 
 
 
Restricted cash
 
 
 
 
$
1,313

 
$

 
$

Accounts receivable
 
 
 
 
2,288

 
226

 
2,625

Property, equipment, and software
 
 
 
 
89

 

 
865

Intangible assets:
 
 
 
 
 
 
 
 
 
Developed product technologies
 
 
 
 
29,100

 
730

 
8,300

Client relationships
 
 
 
 
20,700

 
3,510

 
17,800

Trade names
 
 
 
 
2,900

 
30

 
1,100

Goodwill
 
 
 
 
172,618

 
3,887

 
84,127

Other assets
 
 
 
 
443

 
122

 
363

Accounts payable and accrued liabilities
 
 
 
 
(2,697
)
 
(5
)
 
(167
)
Client deposits held in restricted accounts
 
 
 
 
(1,313
)
 

 

Deferred revenue
 
 
 
 

 

 
(2,325
)
Deferred tax liability, net
 
 
 
 
(4,430
)
 

 

Total fair value of net assets acquired

 

 
$
221,011

 
$
8,500

 
$
112,688

2017 Acquisitions
Lease Rent Options
In February 2017, we entered into an agreement with The Rainmaker Ventures, LLC (“Rainmaker”) to acquire substantially all of the assets and liabilities that comprised Rainmaker’s multifamily revenue optimization business (“LRO”).

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The transaction closed in December 2017 for purchase consideration of $299.9 million.
PEX Software
In October 2017, we acquired all of the issued and outstanding shares of PEX Software Limited (“PEX”) based in the United Kingdom, for purchase consideration of $6.0 million.
On-Site
In September 2017, we acquired certain assets of On-Site Manager, Inc., including its majority ownership interest in its subsidiary, DepositIQ & RentersIQ Insurance Agency, LLC (“DIQ”). We also acquired the remaining minority interest in DIQ (collectively, “On-Site”). We acquired On-Site for aggregate purchase consideration of $251.1 million.
American Utility Management
In June 2017, we acquired substantially all of the assets of American Utility Management, Inc. (“AUM”) for purchase consideration of $69.4 million.
Axiometrics LLC
In January 2017, we acquired substantially all of the assets of Axiometrics LLC (“Axiometrics”) for purchase consideration of $73.8 million.
We recorded the purchase of the acquisitions described above using the acquisition method of accounting and, accordingly, recognized the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. Tangible assets were valued at their respective carrying amounts, which approximated their estimated fair value. The valuation of identified intangible assets reflects management’s estimates based on, among other factors, use of established valuation methods. Acquisition costs were expensed as incurred. These acquisitions were financed using cash on hand, and in the case of LRO, funds available under our credit facility. For more information regarding these acquisitions, refer to our 2017 Form 10-K.

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Purchase Price Allocations
For certain of the acquisitions in the table below, the estimated fair values of assets acquired and liabilities assumed are provisional and are based primarily on the information available as of the acquisition dates. The allocation of each purchase price, including the effects of measurement period adjustments recorded as of September 30, 2018, was as follows:
 
Axiometrics
 
AUM
 
On-Site
 
PEX
 
LRO
 
(Final)
 
(Final)
 
(Final)
 
(Provisional)
 
(Provisional)
 
(in thousands)
Fair value of total purchase consideration:
 
 
 
 
 
 
 
 
 
Cash, net of cash acquired
$
66,050

 
$
64,775

 
$
225,300

 
$
5,103

 
$
298,040

Liabilities assumed

 

 

 

 
377

Deferred cash obligations, net
6,895

 
4,637

 
25,809

 
928

 
1,506

Contingent consideration
812

 

 

 

 

Total purchase consideration
$
73,757

 
$
69,412

 
$
251,109

 
$
6,031

 
$
299,923

 
 
 
 
 
 
 
 
 
 
Fair value of net assets acquired:
 
 
 
 
 
 
 
 
 
Restricted cash
$

 
$
5,954

 
$
3,458

 
$

 
$

Accounts receivable
1,620

 
2,409

 
4,484

 
107

 
4,460

Property, equipment, and software
400

 
319

 
789

 

 
1,507

Intangible assets:
 
 
 
 
 
 
 
 
 
Developed product technologies
15,500

 
10,800

 
16,960

 
2,350

 
42,000

Client relationships
6,830

 
7,470

 
41,360

 
590

 
49,000

Trade names
3,200

 
208

 
7,000

 
160

 
666

Non-compete agreements

 
3,920

 

 

 

Goodwill
54,190

 
45,907

 
182,592

 
3,300

 
202,868

Other assets
273

 
850

 
853

 
95

 
475

Accounts payable and accrued liabilities
(367
)
 
(2,150
)
 
(1,124
)
 
(242
)
 
(192
)
Client deposits held in restricted accounts

 
(5,954
)
 
(3,458
)
 

 

Deferred revenue
(7,115
)
 
(321
)
 
(565
)
 
(221
)
 
(861
)
Other long-term liabilities
(774
)
 

 

 

 

Deferred tax liability

 

 
(1,240
)
 
(108
)
 

Total fair value of net assets acquired
$
73,757

 
$
69,412

 
$
251,109

 
$
6,031

 
$
299,923



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Deferred Obligations and Contingent Consideration Activity
The following table presents changes in the Company’s deferred cash and stock obligations and contingent consideration for the nine months ended September 30, 2018 and the year ended December 31, 2017:
 
Deferred Cash and Stock Obligations
 
Contingent Consideration
 
Total
 
(in thousands)
Balance at January 1, 2017
$
14,150

 
$
541

 
$
14,691

Additions, net of fair value discount
42,104

 
812

 
42,916

Cash payments
(8,215
)
 
(700
)
 
(8,915
)
Accretion expense
1,049

 

 
1,049

Change in fair value

 
(239
)
 
(239
)
Indemnification claims and other adjustments
(2,072
)
 

 
(2,072
)
Balance at December 31, 2017
47,016

 
414

 
47,430

Additions, net of fair value discount
25,709

 
7,000

 
32,709

Cash payments
(26,734
)
 
(247
)
 
(26,981
)
Accretion expense
1,491

 

 
1,491

Change in fair value

 
(167
)
 
(167
)
Indemnification claims and other adjustments
(2,753
)
 

 
(2,753
)
Balance at September 30, 2018
$
44,729

 
$
7,000

 
$
51,729

Pro Forma Results of Acquisitions
The following table presents unaudited pro forma results of operations for the three and nine months ended September 30, 2018 and 2017, as if the aforementioned 2018 and 2017 acquisitions had occurred as of January 1, 2017 and January 1, 2016, respectively. The pro forma information includes the business combination accounting effects resulting from these acquisitions, including interest expense, tax expense or benefit, issuance of our common shares, and additional amortization resulting from the valuation of amortizable intangible assets. We prepared the pro forma financial information for the combined entities for comparative purposes only, and it is not indicative of what actual results would have been if the acquisitions had occurred at the beginning of the periods presented, or of future results.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
Pro Forma
 
2017
Pro Forma
 
2018
Pro Forma
 
2017
Pro Forma
 
(unaudited)
 
(in thousands, except per share amounts)
Total revenue
$
228,588

 
$
202,957

 
$
667,668

 
$
598,560

Net income
$
9,072

 
$
7,221

 
$
26,431

 
$
11,132

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.10

 
$
0.09

 
$
0.31

 
$
0.14

Diluted
$
0.09

 
$
0.09

 
$
0.29

 
$
0.13

4. Revenue Recognition
On January 1, 2018, we adopted the new revenue standard using the modified retrospective method for those contracts with remaining service obligations as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue standard, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period.
We recorded a net increase to opening equity of $2.2 million as of January 1, 2018 as the cumulative effect of adopting the new revenue standard. The effect on revenues of adopting the new revenue standard for the three and nine months ended September 30, 2018 is presented in the “Impact on Consolidated Financial Statements” section below.

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Disaggregation of Revenue
The following table presents our revenues disaggregated by major revenue source. Sales and usage-based taxes are excluded from revenues.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
On demand
 
 
 
 
 
 
 
Property management
$
47,307

 
$
42,175

 
$
139,149

 
$
123,921

Resident services
94,085

 
70,527

 
256,592

 
196,356

Leasing and marketing
41,842

 
29,334

 
124,099

 
86,474

Asset optimization
32,179

 
19,542

 
95,818

 
55,767

Total on demand revenue
215,413

 
161,578

 
615,658

 
462,518

 
 
 
 
 
 
 
 
Professional and other
9,540

 
7,480

 
26,848

 
20,765

Total revenue
$
224,953

 
$
169,058

 
$
642,506

 
$
483,283

On Demand Revenue
We generate the majority of our on demand revenue by licensing software-as-a-service (“SaaS”) solutions to our clients on a subscription basis. Our SaaS solutions are provided pursuant to contractual commitments that typically include a promise that we will stand ready, on a monthly basis, to deliver access to our technology platform over defined service delivery periods. These solutions represent a series of distinct services that are substantially the same and have the same pattern of transfer to the client. Revenue from our SaaS solutions is generally recognized ratably over the term of the arrangement.
Consideration for our on demand subscription services consist of fixed, variable and usage-based fees. We invoice a portion of our fees at the initial order date and then monthly or annually thereafter. Subscription fees are generally fixed based on the number of sites and the level of services selected by the client.
We sell certain usage-based services, primarily within our property management, resident services and leasing and marketing solutions, to clients based on a fixed rate per transaction. Revenues are calculated based on the number of transactions processed monthly and will vary from month to month based on actual usage of these transaction-based services over the contract term, which is typically one year in duration. The fees for usage-based services are not associated with every distinct service promised in the series of distinct services we provide our clients. As a result, we allocate variable usage-based fees only to the related transactions and recognize them in the month that usage occurs.
As part of our resident services offerings, we offer risk mitigation services to our clients by acting as an insurance agent and derive commission revenue from the sale of insurance products to our clients’ residents. The commissions are based upon a percentage of the premium that the insurance company underwriting partners charge to the policyholder and are subject to forfeiture in instances where a policyholder cancels prior to the end of the policy. The overall insurance services we provide represent a single performance obligation that qualifies as a separate series in accordance with the new revenue standard. Our contracts with our underwriting partners also provide for contingent commissions to be paid to us in accordance with the agreements. The contingent commissions are not associated with every distinct service promised in the series of distinct insurance services we provide. We generally accrue and recognize contingent commissions monthly based on estimates of the variable factors identified in the terms of the applicable agreements.
Professional Services and Other Revenues
Professional services and other revenues generally consist of the fees we receive for providing implementation and consulting services, submeter equipment and ongoing maintenance of our existing on premise licenses.
Professional services revenues primarily consist of fees for implementation services, consulting services and training. Professional services are billed either on a fixed rate per hour (time) and materials basis or on a fixed price basis. Professional services are typically sold bundled in a contract with other on demand solutions but may be sold separately. For bundled arrangements, we allocate the transaction price to separate services based on their relative standalone selling prices if a service is separately identifiable from other items in the bundled arrangement and if a client can benefit from it on its own or with other resources readily available to the client.
Other revenues consist of submeter equipment sales that include related installation services, sales of other equipment and on premise software sales. Submeter hardware and installation services are considered to be part of a single performance obligation due to the significance of the integration and interdependency of the installation services with the meter equipment.

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Our typical payment terms for submeter installations require a percentage of the overall transaction price to be paid upfront, with the remainder billed as progress payments. We recognize submeter revenue in proportion to the number of fully installed units completed to date as compared to the total contracted number of units to be provided and installed. For all other equipment sales, we generally recognize revenue when control of the hardware has transferred to our client, which occurs at a point in time, typically upon delivery to the client.
The majority of on premise revenue consists of maintenance renewals from clients who renew for an additional one-year term. Maintenance renewal revenue is recognized ratably over the service period based upon the standalone selling price of that service obligation.
Contract Balances
Contract assets generally consist of amounts recognized as revenue before they can be invoiced to clients or amounts invoiced to clients prior to the period in which the service is provided where the right to payment is subject to conditions other than just the passage of time. These contract assets are included in “Accounts receivable” in the accompanying Condensed Consolidated Financial Statements and related disclosures. Contract liabilities are comprised of billings or payments received from our clients in advance of performance under the contract. We refer to these contract liabilities as “Deferred revenue” in the accompanying Condensed Consolidated Financial Statements and related disclosures. We recognized $102.9 million of on demand revenue during the nine months ended September 30, 2018, which was included in the line “Deferred revenue” in the accompanying Condensed Consolidated Balance Sheet as of the beginning of the period.
Contract Acquisition Costs
We capitalize certain commissions as incremental costs of obtaining a contract with a client if we expect to recover those costs. The commissions are capitalized and amortized over a period of benefit determined to be three years. As of September 30, 2018, the current and noncurrent balance of capitalized commissions costs recorded in the lines “Other current assets” and “Other assets” in the accompanying Condensed Consolidated Balance Sheet was $5.8 million and $7.5 million, respectively. During the three and nine months ended September 30, 2018, we amortized commission costs totaling $1.3 million and $3.0 million, respectively. No impairment loss was recognized in relation to these capitalized costs.
Remaining Performance Obligations
Certain clients commit to purchase our solutions for terms ranging from two to seven years. We expect to recognize approximately $385.6 million of revenue in the future related to performance obligations for on demand contracts with an original duration greater than one year that were unsatisfied or partially unsatisfied as of September 30, 2018. Our estimate does not include amounts related to:
professional and usage-based services that are billed and recognized based on services performed in a certain period;
amounts attributable to unexercised contract renewals that represent a material right; or
amounts attributable to unexercised client options to purchase services that do not represent a material right.
We expect to recognize revenue on approximately 67.0% of the remaining performance obligations over the next 24 months, with the remainder recognized thereafter. Revenue from remaining performance obligations for professional service contracts as of September 30, 2018 was immaterial.

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Impact on Consolidated Financial Statements
The following tables summarize the effects of the adoption of ASU 2014-09 on selected unaudited line items within our Condensed Consolidated Statements of Operations and Balance Sheet:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
As reported
 
Balances without adoption of ASU 2014-09
 
Effect of Change
on Net Income
Higher/(Lower)
 
As reported
 
Balances without adoption of ASU 2014-09
 
Effect of Change
on Net Income
Higher/(Lower)
 
(in thousands)
Revenue
 
 
 
 
 
 
 
 
 
 
 
On demand
$
215,413

 
$
215,912

 
$
(499
)
 
$
615,658

 
$
616,788

 
$
(1,130
)
Professional and other
9,540

 
8,644

 
896

 
26,848

 
24,739

 
2,109

Total revenue
$
224,953

 
$
224,556

 
$
397

 
$
642,506

 
$
641,527

 
$
979

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
$
43,179

 
$
45,213

 
$
2,034

 
$
121,523

 
$
127,714

 
$
6,191

 
 
 
 
 
 
 
 
 
 
 
 
Net income before income taxes
$
9,756

 
$
7,325

 
$
2,431

 
$
28,646

 
$
21,476

 
$
7,170

Income tax expense (benefit)
683

 
(216
)
 
(899
)
 
193

 
(2,459
)
 
(2,652
)
Net income
$
9,073

 
$
7,541

 
$
1,532

 
$
28,453

 
$
23,935

 
$
4,518

 
Balances at September 30, 2018 - as reported
 
Balances at September 30, 2018 without adoption of ASU 2014-09
 
Effect of Change
Higher/(Lower)
 
(in thousands)
Assets
 
 
 
 
 
Accounts receivable, less allowance for doubtful accounts
$
114,441

 
$
121,816

 
$
(7,375
)
Other current assets
$
17,834

 
$
11,997

 
$
5,837

Other assets
$
18,992

 
$
11,446

 
$
7,546

Liabilities
 
 
 
 
 
Current portion of deferred revenue
$
110,507

 
$
114,779

 
$
(4,272
)
Deferred revenue
$
5,079

 
$
5,079

 
$

The adoption of ASU 2014-09 had no net effect on the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2018.

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5. Property, Equipment, and Software
Property, equipment, and software consisted of the following at September 30, 2018 and December 31, 2017:
 
September 30, 2018
 
December 31, 2017
 
(in thousands)
Leasehold improvements
$
61,879

 
$
59,179

Data processing and communications equipment
66,528

 
83,922

Furniture, fixtures, and other equipment
33,532

 
28,752

Software
125,616

 
107,924

Property, equipment, and software, gross
287,555

 
279,777

Less: Accumulated depreciation and amortization
(136,342
)
 
(131,349
)
Property, equipment, and software, net
$
151,213

 
$
148,428

Depreciation and amortization expense for property, equipment, and purchased software was $6.9 million for both of the three month periods ended September 30, 2018 and 2017, and $21.3 million and $20.4 million for the nine months ended September 30, 2018 and 2017, respectively.
The carrying amount of capitalized software development costs was $89.0 million and $73.4 million at September 30, 2018 and December 31, 2017, respectively. Total accumulated amortization related to these assets was $36.5 million and $27.8 million at September 30, 2018 and December 31, 2017, respectively. Amortization expense related to capitalized software development costs totaled $3.2 million and $2.2 million for the three months ended, and $8.7 million and $5.7 million for the nine months ended September 30, 2018 and 2017, respectively.
6. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill during the nine months ended September 30, 2018 were as follows, in thousands:
Balance as of December 31, 2017
$
751,052

Goodwill acquired
260,632

Measurement period adjustments
(2,222
)
Balance as of September 30, 2018
$
1,009,462

Identified intangible assets consisted of the following at September 30, 2018 and December 31, 2017:
 
 
September 30, 2018
 
December 31, 2017
 
 
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
 
(in thousands)
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Developed technologies
 
$
203,686

 
$
(94,230
)
 
$
109,456

 
$
164,640

 
$
(76,577
)
 
$
88,063

Client relationships
 
255,728

 
(99,405
)
 
156,323

 
213,728

 
(78,390
)
 
135,338

Vendor relationships
 
5,650

 
(5,650
)
 

 
5,650

 
(5,650
)
 

Trade names
 
21,536

 
(9,042
)
 
12,494

 
17,556

 
(4,325
)
 
13,231

Non-compete agreements
 
4,173

 
(1,198
)
 
2,975

 
4,173

 
(605
)
 
3,568

Total finite-lived intangible assets
 
490,773

 
(209,525
)
 
281,248

 
405,747

 
(165,547
)
 
240,200

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
 
12,134

 

 
12,134

 
12,137

 

 
12,137

Total intangible assets
 
$
502,907

 
$
(209,525
)
 
$
293,382

 
$
417,884

 
$
(165,547
)
 
$
252,337

Amortization expense related to finite-lived intangible assets was $15.5 million and $7.1 million for the three months ended September 30, 2018 and 2017, respectively. For the nine months ended September 30, 2018 and 2017, amortization expense related to finite-lived intangible assets was $44.0 million and $19.7 million, respectively.

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7Debt
Credit Facility
On September 30, 2014, we entered into an agreement for a secured credit facility to refinance our outstanding revolving loans. The credit facility agreement was subsequently amended during the years ended 2016 and 2017, and was further amended in March 2018 by the Seventh Amendment, discussed below (inclusive of these amendments, the “Credit Facility”). For more information regarding these amendments, refer to our 2017 Form 10-K. The Credit Facility matures on February 27, 2022, and includes the following:
Revolving Facility: The Credit Facility provides $350.0 million in aggregate commitments for revolving loans, with sublimits of $10.0 million for the issuance of letters of credit and $20.0 million for swingline loans (“Revolving Facility”).
Term Loan: In February 2016, we originated a term loan in the original principal amount of $125.0 million under the Credit Facility (“Term Loan”). We made quarterly principal payments of $0.8 million through March 31, 2018, which increased to $1.5 million beginning on June 30, 2018, and will increase again to $3.1 million beginning on June 30, 2020.
Delayed Draw Term Loan: In December 2017, we drew funds of $200.0 million available under the delayed draw term loan (“Delayed Draw Term Loan”). Subsequent to disbursal of the Delayed Draw Term Loan funds, we began making quarterly principal payments on the Delayed Draw Term Loan equal to an initial amount of $1.3 million through March 31, 2018. The quarterly principal payments increased to $2.5 million beginning on June 30, 2018, and will increase again to $5.0 million beginning on June 30, 2020.
Revolving loans under the Credit Facility may be voluntarily prepaid and re-borrowed. Principal payments on the Term Loan and Delayed Draw Term Loan (collectively, the “Term Loans”) are due in quarterly installments, as described above, and may not be re-borrowed. All outstanding principal and accrued but unpaid interest is due on the maturity date. The Term Loans are subject to mandatory repayment requirements in the event of certain asset sales or if certain insurance or condemnation events occur, subject to customary reinvestment provisions. The Company may prepay the Term Loans in whole or in part at any time, without premium or penalty, with prepayment amounts to be applied to remaining scheduled principal amortization payments as specified by the Company.
Accordion Feature: The Credit Facility also allows us, subject to certain conditions, to request additional term loans or revolving commitments up to an aggregate principal amount of $150.0 million, plus an amount that would not cause our Senior Leverage Ratio, as defined below, to exceed 3.50 to 1.00.
At our option, amounts outstanding under the Credit Facility accrue interest at a per annum rate equal to either LIBOR, plus a margin ranging from 1.25% to 2.25%, or the Base Rate, plus a margin ranging from 0.25% to 1.25% (“Applicable Margin”). The base LIBOR is, at our discretion, equal to either one, two, three, or six month LIBOR. The Base Rate is defined as the greater of Wells Fargo's prime rate, the Federal Funds Rate plus 0.50%, or one month LIBOR plus 1.00%. In each case, the Applicable Margin is determined based upon our Net Leverage Ratio, as defined below. Accrued interest on amounts outstanding under the Credit Facility is due and payable quarterly, in arrears, for loans bearing interest at the Base Rate and at the end of the applicable interest period in the case of loans bearing interest at the adjusted LIBOR.
Certain of our existing and future material domestic subsidiaries are required to guarantee our obligations under the Credit Facility, and the obligations under the Credit Facility are secured by substantially all of our assets and the assets of the subsidiary guarantors. The Credit Facility contains customary covenants, subject in each case to customary exceptions and qualifications. Our covenants include, among other limitations, a requirement that we comply with a maximum Consolidated Net Leverage Ratio, a minimum Consolidated Interest Coverage Ratio, and a maximum Consolidated Senior Secured Net Leverage Ratio.
Consolidated Net Leverage Ratio: The Consolidated Net Leverage Ratio (“Net Leverage Ratio”) is the ratio of consolidated funded indebtedness, as defined in the Credit Facility, on the last day of each fiscal quarter to the sum of the four previous consecutive fiscal quarters’ consolidated EBITDA, as defined in the Credit Facility. As modified by the Seventh Amendment, this ratio generally may not exceed 5.00 to 1.00. The Net Leverage Ratio may increase, at our option, to 5.50 to 1.00 following an acquisition having aggregate consideration greater than $150.0 million and occurring within a specified time period following the Seventh Amendment Effective Date, defined below. The option to increase this ratio may be elected no more than one time during any consecutive 24 month period over the term of the Credit Facility, and lasts for four consecutive fiscal quarters. As of September 30, 2018, we had not exercised our option to increase the Net Leverage Ratio.
Consolidated Interest Coverage Ratio: The Consolidated Interest Coverage Ratio (“Interest Coverage Ratio”) is the ratio of the sum of our four previous fiscal quarters’ consolidated EBITDA to consolidated interest expense, as defined in the Credit Facility, for the same period. The Interest Coverage Ratio must not be less than 3.00 to 1.00 on the last day of each fiscal quarter. The Interest Coverage Ratio excludes non-cash interest attributable to the Convertible Notes (see Convertible Notes below).

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Consolidated Senior Secured Net Leverage Ratio: The Consolidated Senior Secured Net Leverage Ratio (“Senior Leverage Ratio”) is the ratio of consolidated senior secured indebtedness, as defined in the Credit Facility, on the last day of each fiscal quarter to the sum of the four previous consecutive fiscal quarters’ consolidated EBITDA and, as modified by the Seventh Amendment, may not exceed 3.75 to 1.00. At our option, this ratio may be increased to 4.25 to 1.00 for four consecutive fiscal quarters following the completion of an acquisition having aggregate consideration greater than $150.0 million and occurring within a specified time period following the Seventh Amendment Effective Date, defined below. We are not permitted to exercise this option more than one time during any consecutive 24 month period. As of September 30, 2018, we had not exercised our option to increase the Senior Leverage Ratio.
As of September 30, 2018, we were in compliance with the covenants under our Credit Facility.
Seventh Amendment: On March 12, 2018 (“Seventh Amendment Effective Date”), we entered into the seventh amendment (“Seventh Amendment”) to the Credit Facility. This amendment allowed for an increase of $150.0 million in available credit under our Revolving Facility, consequently providing aggregate commitments for revolving loans up to $350.0 million. Among other modifications, the Seventh Amendment provided for an increase in the maximum Net Leverage Ratio and Senior Leverage Ratio to 5.00 to 1.00 and 3.75 to 1.00, respectively. The Seventh Amendment also modified the Accordion Feature definition to allow for incremental commitments which would not cause our Senior Leverage Ratio to exceed 3.50 to 1.00. We incurred debt issuance costs in the amount of $1.1 million related to the execution of this amendment.
As of September 30, 2018, we had $350.0 million of available credit under our Revolving Facility. Principal outstanding for the Revolving Facility was $50.0 million at December 31, 2017. No principal remained outstanding for the Revolving Facility at September 30, 2018. We incur commitment fees on the unused portion of the Revolving Facility.
Principal outstanding, and unamortized debt issuance costs for the Term Loans, were as follows at September 30, 2018 and December 31, 2017:
 
September 30, 2018
 
December 31, 2017
 
Term Loan
 
Delayed Draw Term Loan
 
Term Loan
 
Delayed Draw Term Loan
 
(in thousands)
Principal outstanding
$
116,524

 
$
192,500

 
$
120,356

 
$
198,750

Unamortized issuance costs
(186
)
 
(659
)
 
(233
)
 
(821
)
Unamortized discount
(149
)
 
(393
)
 
(185
)
 
(490
)
Carrying value
$
116,189

 
$
191,448

 
$
119,938

 
$
197,439

Unamortized debt issuance costs for the Revolving Facility were $1.4 million and $0.6 million at September 30, 2018 and December 31, 2017, respectively, and are included in the line “Other assets” in the Condensed Consolidated Balance Sheets.
Future maturities of principal under the Term Loans are as follows for the years ending December 31, in thousands:
 
Term Loans
2018
$
4,033

2019
16,133

2020
28,232

2021
32,266

2022
228,360

 
$
309,024

Convertible Notes
In May 2017, we issued convertible senior notes with aggregate principal of $345.0 million (including the underwriters’ exercise in full of their over-allotment option of $45.0 million) which mature on November 15, 2022 (“Convertible Notes”). The Convertible Notes were issued under an indenture dated May 23, 2017 (“Indenture”), by and between the Company and Wells Fargo Bank, N.A., as Trustee. We received net proceeds from the offering of approximately $304.2 million after adjusting for debt issuance costs, including the underwriting discount, the net cash used to purchase the Note Hedges and the proceeds from the issuance of the Warrants which are discussed below.
The Convertible Notes accrue interest at a rate of 1.50%, payable semi-annually on May 15 and November 15 of each year beginning on November 15, 2017. On or after May 15, 2022, and until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Convertible Notes at their option. The Convertible Notes are convertible at an initial rate of 23.84 shares per $1,000 of principal (equivalent to an initial conversion

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price of approximately $41.95 per share of our common stock). The conversion rate is subject to customary adjustments for certain events as described in the Indenture. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. It is our current intent to settle conversions of the Convertible Notes through combination settlement, which involves repayment of the principal portion in cash and any excess of the conversion value over the principal amount in shares of our common stock. Based on our closing stock price of $65.90 on September 30, 2018, the if-converted value exceeded the aggregate principal amount of the Convertible Notes by $197.0 million. As described below, we entered into convertible note hedge transactions, which are expected to reduce the potential dilution with respect to our common stock upon conversion of the Convertible Notes.
Holders may convert their Convertible Notes, at their option, prior to May 15, 2022 only under the following circumstances:
during any calendar quarter commencing after the calendar quarter ending on June 30, 2017 (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, and including, 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 such trading day; or
upon the occurrence of specified corporate events, as defined in the Indenture.
We may not redeem the Convertible Notes prior to their maturity date, and no sinking fund is provided for them. 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 any portion of their Convertible Notes. The fundamental change repurchase price is equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. If holders elect to convert their Convertible Notes in connection with a make-whole fundamental change, as described in the Indenture, we will, to the extent provided in the Indenture, increase the conversion rate applicable to the Convertible Notes.
The Convertible Notes are senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Convertible Notes and equal in right of payment to any of our existing and future unsecured indebtedness that is not subordinated. The Convertible 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. The Indenture does not limit the amount of debt that we or our subsidiaries may incur. The Convertible Notes are not guaranteed by any of our subsidiaries.
The Indenture does not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness, or the issuance or repurchase of securities by us or any of our subsidiaries. The Indenture contains customary events of default with respect to the Convertible Notes and provides that upon certain events of default occurring and continuing, the Trustee may, and the Trustee at the request of holders of at least 25% in principal amount of the Convertible Notes shall, declare all of principal and accrued and unpaid interest, if any, of the Convertible Notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization, involving us or a significant subsidiary, all of the principal of and accrued and unpaid interest on the Convertible Notes will automatically become due and payable.
In accounting for the issuance of the Convertible Notes, we separated the Convertible Notes into liability and equity components. We allocated $282.5 million of the Convertible Notes to the liability component, and $62.5 million to the equity component. The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the term of the Convertible Notes using the effective interest method. The equity component will not be remeasured as long as it continues to meet the conditions for equity classification.
We incurred issuance costs of $9.8 million related to the Convertible Notes. Issuance costs were allocated to the liability and equity components based on their relative values. Issuance costs attributable to the liability component are being amortized to interest expense over the term of the Convertible Notes, and issuance costs attributable to the equity component are included along with the equity component in stockholders' equity.
During the second and third quarters of 2018, the closing price of our common stock exceeded 130% of the conversion price of the Convertible Notes for more than 20 trading days during the last 30 consecutive trading days of the quarter, thereby satisfying one of the early conversion events. As a result, the Convertible Notes are convertible at any time during the fourth quarter of 2018.

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Accordingly, as of September 30, 2018, the carrying amount of the Convertible Notes of $289.9 million was classified as a current liability in the accompanying Condensed Consolidated Balance Sheets. No gain or loss was recognized when the debt became convertible.
The net carrying amount of the Convertible Notes at September 30, 2018 and December 31, 2017, was as follows:
 
September 30, 2018
 
December 31, 2017
 
(in thousands)
Liability component:
 
 
 
Principal amount
$
345,000

 
$
345,000

Unamortized discount
(48,872
)
 
(56,557
)
Unamortized debt issuance costs
(6,260
)
 
(7,244
)
 
$
289,868

 
$
281,199

 
 
 
 
Equity component, net of issuance costs and deferred tax:
$
61,390

 
$
61,390

The following table sets forth total interest expense related to the Convertible Notes for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Contractual interest expense
$
1,294

 
$
1,265

 
$
3,881

 
$
1,826

Amortization of debt discount
2,599

 
2,451

 
7,685

 
3,503

Amortization of debt issuance costs
333

 
313

 
984

 
447

 
$
4,226

 
$
4,029

 
$
12,550

 
$
5,776

The effective interest rate of the liability component for the three and nine months ended September 30, 2018 and 2017 was 5.87%.
Convertible Note Hedges and Warrants
On May 23, 2017, we entered into privately negotiated transactions to purchase hedge instruments (“Note Hedges”), covering approximately 8.2 million shares of our common stock at a cost of $62.5 million. The Note Hedges are subject to anti-dilution provisions substantially similar to those of the Convertible Notes, have a strike price of approximately $41.95 per share, are exercisable by us upon any conversion under the Convertible Notes, and expire on November 15, 2022.
The Note Hedges are generally expected to reduce the potential dilution to our common stock (or, in the event the conversion 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 Convertible Notes. The cost of the Note Hedges is expected to be tax deductible as an original issue discount over the life of the Convertible Notes, as the Convertible Notes and the Note Hedges represent an integrated debt instrument for tax purposes. The cost of the Note Hedges was recorded as a reduction of our additional paid-in capital in the accompanying Condensed Consolidated Financial Statements.
On May 23, 2017, we also sold warrants for the purchase of up to 8.2 million shares of our common stock for aggregate proceeds of $31.5 million (“Warrants”). The Warrants have a strike price of $57.58 per share and are subject to customary anti-dilution provisions. The Warrants will expire in ratable portions on a series of expiration dates commencing on February 15, 2023. The proceeds from the issuance of the Warrants were recorded as an increase to our additional paid-in capital in the accompanying Condensed Consolidated Financial Statements.
The Note Hedges are transactions that are separate from the terms of the Convertible Notes and the Warrants, and holders of the Convertible Notes and the Warrants have no rights with respect to the Note Hedges. The Warrants are similarly separate in both terms and rights from the Note Hedges and the Convertible Notes. As of September 30, 2018, no Note Hedges or Warrants had been exercised.

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8. Stock-based Expense
During the three and nine months ended September 30, 2018, we made the following grants of time-based restricted stock:
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
Vesting
62,196

 
1,040,640

 
Shares vest ratably over a period of twelve quarters beginning on the first day of the second calendar quarter immediately following the grant date.

 
3,600

 
Shares fully vested on the first day of the calendar quarter immediately following the grant date.
1,500

 
35,346

 
Shares vest ratably over a period of four quarters beginning on the first day of the calendar quarter immediately following the grant date.
During the nine months ended September 30, 2018, we granted 517,364 shares of restricted stock that become eligible to vest based on the achievement of certain market-based conditions, as described below:
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
Condition to Become Eligible to Vest

 
129,341

 
After the grant date and prior to July 1, 2021, the average closing price per share of our common stock equals or exceeds $60.89 for twenty consecutive trading days.

 
129,341

 
After the grant date and prior to July 1, 2021, the average closing price per share of our common stock equals or exceeds $66.98 for twenty consecutive trading days.

 
129,341

 
After the grant date and prior to July 1, 2021, the average closing price per share of our common stock equals or exceeds $73.07 for twenty consecutive trading days.

 
129,341

 
After the grant date and prior to July 1, 2021, the average closing price per share of our common stock equals or exceeds $85.24 for twenty consecutive trading days.
Shares that become eligible to vest, if any, become Eligible Shares. These awards vest ratably over four calendar quarters beginning on the first day of the next calendar quarter immediately following the date on which they become Eligible Shares. Vesting is conditional upon the recipient remaining a service provider, as defined in the plan document, to the Company through each applicable vesting date.
Grants of restricted stock may be fulfilled through the issuance of previously authorized but unissued common stock shares, or the reissuance of shares held in treasury. All awards were granted under the Amended and Restated 2010 Equity Incentive Plan.
We capitalized stock-based expense for software development costs of $0.4 million and $0.2 million for the three months ended, and $0.9 million and $0.2 million for the nine months ended September 30, 2018 and 2017, respectively.
9. Commitments and Contingencies
Lease Commitments
We lease office facilities and equipment for various terms under long-term, non-cancellable operating lease agreements. The leases expire at various dates through 2028 and provide for renewal options. The agreements generally require us to pay for executory costs such as real estate taxes, insurance, and repairs. At September 30, 2018, minimum annual rental commitments under non-cancellable operating leases were as follows for the years ending December 31, in thousands:
2018
$
4,259

2019
15,318

2020
12,932

2021
12,031

2022
10,172

Thereafter
47,291

 
$
102,003

Guarantor Arrangements
We have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving at our request in such capacity. The term of the indemnification period is for the officer or

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director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a director and officer insurance policy that limits our exposure and enables us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. Accordingly, we had no liabilities recorded for these agreements as of September 30, 2018 or December 31, 2017.
In the ordinary course of our business, we include standard indemnification provisions in our agreements with clients. Pursuant to these provisions, we indemnify our clients for losses suffered or incurred in connection with third-party claims that our products infringed upon any U.S. patent, copyright, trademark, or other intellectual property right. Where applicable, we generally limit such infringement indemnities to those claims directed solely to our products and not in combination with other software or products. With respect to our products, we also generally reserve the right to resolve any such claims by designing a non-infringing alternative, by obtaining a license on reasonable terms, or by terminating our relationship with the client and refunding the client’s fees.
The potential amount of future payments to defend lawsuits or settle indemnified claims under these indemnification provisions is unlimited in certain agreements; however, we believe the estimated fair value of these indemnification provisions is minimal, and, accordingly, we had no liabilities recorded for these agreements as of September 30, 2018 or December 31, 2017.
Litigation
From time to time, in the normal course of our business, we are a party to litigation matters and claims. Litigation can be expensive and disruptive to our normal business operations. Moreover, the results of complex legal proceedings are difficult to predict, and our view of these matters may change in the future as the litigation and events related thereto unfold. We expense legal fees as incurred. Insurance recoveries associated with legal costs incurred are recorded when they are deemed probable of recovery.
On February 23, 2015, we received from the Federal Trade Commission (“FTC”) a Civil Investigative Demand consisting of interrogatories and a request to produce documents relating to our compliance with the Fair Credit Reporting Act (“FCRA”). We responded to the request and requests for additional information by the FTC. On November 2, 2017, the FTC staff informed us of its belief that there was a basis for claims that could include monetary and injunctive relief against us for failing to follow reasonable procedures to assure maximum possible accuracy of our tenant screening reports. We believe that our business practices did not, and do not, violate the FCRA or any other laws.
In October 2018, we reached a settlement with the FTC resolving all issues raised by the FTC related to this matter. Under the settlement, we paid $3.0 million to the FTC and agreed to continue to comply with the FCRA. The settlement does not require any changes to our current business practices. We previously recognized an accrual of $1.9 million during the three months ended March 31, 2018, and as a result of this settlement, we recognized an additional accrual of $1.1 million during the three months ended September 30, 2018. The accrual is included in the line “Accrued expenses and other current liabilities” in the accompanying Condensed Consolidated Balance Sheet.
At September 30, 2018 and December 31, 2017, we had accrued amounts for estimated settlement losses related to legal matters. The Company does not believe there is a reasonable possibility that a material loss exceeding amounts already recognized may have been incurred as of the date of the balance sheets presented herein.
We are involved in other litigation matters, including purported class action lawsuits, not described above that are not likely to be material either individually or in the aggregate based on information available at this time. Our view of these matters may change as the litigation and events related thereto unfold.
10Net Income per Share
Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by using the weighted average number of common shares outstanding, after giving effect to all potential dilutive common shares outstanding during the period. Included within diluted net income per share is the dilutive effect of outstanding stock options and restricted stock using the treasury stock method. Weighted average shares from common share equivalents in the amount of 15,137 and 36,028 for the three months ended, and 193,498 and 245,009 for the nine months ended September 30, 2018 and 2017, respectively, were excluded from the dilutive shares outstanding because their effect was anti-dilutive.
For purposes of considering the Convertible Notes in determining diluted net income per share, it is our current intent to settle conversions of the Convertible Notes through combination settlement, which involves repayment of the principal portion in cash and any excess of the conversion value over the principal amount (the “conversion premium”) in shares of our common stock. Therefore, only the impact of the conversion premium is included in total dilutive weighted average shares outstanding using the treasury stock method. The dilutive effect of the conversion premium for the three and nine month periods ended September 30, 2018 is shown in the table below.

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The Warrants sold in connection with the issuance of the Convertible Notes are considered to be dilutive when the average price of our common stock during the period exceeds the Warrants’ strike price of $57.58 per share, as described in Note 7. The effect of the additional shares that may be issued upon exercise of the Warrants is included in total dilutive weighted average shares outstanding using the treasury stock method and is shown in the table below. The Note Hedges purchased in connection with the issuance of the Convertible Notes are considered to be anti-dilutive and therefore do not impact our calculation of diluted net income per share. Refer to Note 7 for further discussion regarding the Convertible Notes.
We exclude common shares subject to a holdback pursuant to business combinations from the calculation of basic weighted average shares outstanding where the release of such shares is contingent upon an event not solely subject to the passage of time. As of September 30, 2018, there were 196,439 contingently returnable shares related to our acquisitions of ClickPay and BluTrend, which were excluded from the computation of basic net income per share as these shares are subject to sellers’ indemnification obligations and are subject to a holdback. There were no contingently returnable shares as of September 30, 2017. Dilutive common shares outstanding include the weighted average contingently issuable shares discussed above that are subject to a holdback, as well as the weighted average contingently issuable shares to be issued subject to a holdback on the first anniversary dates of the ClickPay and BluTrend acquisitions. These shares are subject to release to the sellers on the first and second anniversary date of the acquisitions which are contingent on the sellers’ indemnification obligations. Refer to Note 3 for further discussion regarding the ClickPay and BluTrend acquisitions.
The following table presents the calculation of basic and diluted net income per share:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net income
$
9,073

 
$
6,834

 
$
28,453

 
$
21,242

Denominator: