UNITEDSTATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
(MarkOne)
☒ QUARTERLYREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934
Forthe Quarterly Period quarterlyperiodendedSeptember 30 2016
or
☐ TRANSITIONREPORTPURSUANTTOSECTION13OR
For the transition period fromto .
Commission File No. filenumber001-33601
GlobalSCAPE, Inc.
(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)
Delaware | 74-2785449 | |
State or Incorporation or | I.R.S. Employer Identification No. | |
4500 Lockhill-Selma, Suite 150 San Antonio, Texas | 78249 | |
Zip |
(210) 308-8267210-308-8267
Registrant’s Telephone Number, Including Area Code)
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☒ No ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒Yes ☒ No ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer ☐ | Accelerated filer | ||
Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting company ☒ | |
Emerging growth company ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐Yes ☐ No ☒ No
As of October 31, 2016,September 30, 2018 there were 21,145,02117,968,268 shares of common stock outstanding.
GlobalSCAPE, Inc.
Quarterly Report on Form 10-Q
For the Quarter ended September 30 2016
Page | ||
Part I. | Financial Information | |
Item 1. | ||
2 | ||
3 | ||
4 | ||
5 | ||
6 | ||
Item 2. | 26 | |
Item 3. | 45 | |
Item 4. | 45 | |
Part II. | Other Information | 48 |
Item 1. | 48 | |
Item 1A. | 48 | |
Item 2. | 48 | |
Item 6. | 49 | |
50 |
Preliminary Notes
GlobalSCAPE®, CuteFTP®, CuteFTP Pro®, CuteBackup®, DMZ Gateway®, Enhanced File Transfer®, Enhanced File Transfer Server®EFT Cloud Services®, GlobalSCAPE Securely Connected®, CuteSendIt®, and Mail Express® are registered trademarks of GlobalSCAPE, Inc.
Secure FTP Server™, Wide Area File Services™, WAFS™, CDP™, Advanced Workflow Engine™, AWE™, EFT Cloud Services™Server™, EFT Workspaces™, EFT Insight™, Enhanced File Transfer™, Enhanced File Transfer Server™, Secure Ad Hoc Transfer™, SAT™, EFT Server Enterprise™, Enhanced File Transfer Server Enterprise ™,Enterprise™, Desktop Transfer Client™, DTC™, Mobile Transfer Client™, MTC™, Web Transfer Client™, Workspaces™, Accelerate™, WTC™, Content Integrity Control™, Advanced Authentication™, AAM™ and scConnect™ are trademarks of GlobalSCAPE, Inc.
TappIn® and design are registered trademarks of TappIn, Inc., our wholly-owned subsidiary.
TappIn Secure Share ™,Share™, Social Share ™,Share™, Now Playing ™,Playing™, and Enhanced A La Carte Playlist ™,Playlist™ are trademarks of TappIn, Inc., our wholly-owned subsidiary.
Other trademarks and trade names in this Quarterly Report are the property of their respective owners.
In this Report, we use the following terms:
“BYOL” means bring your own license.
“Cloud” or “cloud computing” refers to pooled computing resources, delivered on-demand, over the Internet. In the same manner that electricity is delivered on-demand from large scale power plants, cloud computing is delivered from centralized data centers to users all over the world.
“DMZ” or Demilitarized Zone refers to a computer host or perimeter network inserted between a trusted internal network and an untrusted public network such as the Internet.
“FTP” or File Transfer Protocol is a protocol used to exchange or manipulate files over a computer network such as the Internet.
“MFT” or Managed File Transfer refers to software solutions that facilitate the secure transfer of data from one computer to another through a network.
“SaaS” or Software-as-a-Service uses hosted, cloud computing approaches in which the customer does not need to install the underlying software on its own computer systems to access the application.
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
(Unaudited) | (Audited) | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 17,421 | $ | 15,885 | ||||
Short term investments | 3,303 | 3,254 | ||||||
Accounts receivable (net of allowance for doubtful accounts of $335 and $325 in 2016 and 2015, respectively) | 8,870 | 6,081 | ||||||
Federal income tax receivable | 104 | 290 | ||||||
Prepaid and other expenses | 425 | 511 | ||||||
Total current assets | 30,123 | 26,021 | ||||||
Property and equipment, net | 463 | 498 | ||||||
Capitalized software development costs, net | 3,961 | 3,982 | ||||||
Goodwill | 12,712 | 12,712 | ||||||
Deferred tax asset, net | 976 | 940 | ||||||
Other assets | 30 | 60 | ||||||
Total assets | $ | 48,265 | $ | 44,213 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 622 | $ | 839 | ||||
Accrued expenses | 1,841 | 1,893 | ||||||
Deferred revenue | 13,005 | 12,000 | ||||||
Income taxes payable | 517 | 127 | ||||||
Total current liabilities | 15,985 | 14,859 | ||||||
Deferred revenue, non-current portion | 3,688 | 3,612 | ||||||
Other long term liabilities | 34 | 44 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, par value $0.001 per share, 10,000,000 authorized, no shares issued or outstanding | - | - | ||||||
Common stock, par value $0.001 per share, 40,000,000 authorized, 21,548,602 and 21,383,467 shares issued at September 30, 2016, and December 31, 2015, respectively | 21 | 21 | ||||||
Additional paid-in capital | 20,632 | 19,583 | ||||||
Treasury stock, 403,581 shares, at cost, at September 30, 2016 and December 31, 2015 | (1,452 | ) | (1,452 | ) | ||||
Retained earnings | 9,357 | 7,546 | ||||||
Total stockholders’ equity | 28,558 | 25,698 | ||||||
Total liabilities and stockholders’ equity | $ | 48,265 | $ | 44,213 |
Condensed Consolidated Balance Sheets |
(in thousands except share amounts) |
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 9,630 | $ | 11,583 | ||||
Certificates of deposit, short term | 1,530 | 4,291 | ||||||
Accounts receivable, net | 4,853 | 5,925 | ||||||
Federal income tax receivable | 740 | 822 | ||||||
Prepaid and other current assets | 3,173 | 675 | ||||||
Total current assets | 19,926 | 23,296 | ||||||
Certificates of deposit, long term | - | 11,503 | ||||||
Capitalized software development costs, net | 3,384 | 3,786 | ||||||
Goodwill | 12,712 | 12,712 | ||||||
Deferred tax asset, net | 330 | 651 | ||||||
Property and equipment, net | 442 | 481 | ||||||
Other assets | 577 | 84 | ||||||
Total assets | $ | 37,371 | $ | 52,513 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,982 | $ | 1,900 | ||||
Accrued expenses | 3,378 | 1,671 | ||||||
Deferred revenue | 12,341 | 13,315 | ||||||
Total current liabilities | 17,701 | 16,886 | ||||||
Deferred revenue, non-current portion | 2,795 | 3,735 | ||||||
Other long term liabilities | 128 | 176 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, par value $0.001 per share, 10,000,000 authorized, no shares issued or outstanding | - | - | ||||||
Common stock, par value $0.001 per share, 40,000,000 authorized, 22,382,862 and 22,196,712 shares issued: 17,968,268 and 21,793,131 outstanding at September 30, 2018 and December 31, 2017, respectively | 22 | 22 | ||||||
Additional paid-in capital | 25,106 | 23,793 | ||||||
Treasury stock, 4,414,594 and 403,581 shares, at cost, at September 30, 2018 and December 31, 2017, respectively | (18,714 | ) | (1,452 | ) | ||||
Retained earnings | 10,333 | 9,353 | ||||||
Total stockholders’ equity | 16,747 | 31,716 | ||||||
Total liabilities and stockholders’ equity | $ | 37,371 | $ | 52,513 |
The accompanying notes are an integral part of these condensed and consolidated financial statements.
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Operating Revenues: | ||||||||||||||||
Software licenses | $ | 3,373 | $ | 2,852 | $ | 8,565 | $ | 8,590 | ||||||||
Maintenance and support | 4,713 | 4,142 | 13,843 | 12,269 | ||||||||||||
Professional services | 667 | 653 | 2,013 | 1,531 | ||||||||||||
Total Revenues | 8,753 | 7,647 | 24,421 | 22,390 | ||||||||||||
Cost of revenues | ||||||||||||||||
Software licenses | 873 | 562 | 2,303 | 1,651 | ||||||||||||
Maintenance and support | 363 | 341 | 1,145 | 1,057 | ||||||||||||
Professional services | 534 | 605 | 1,689 | 1,257 | ||||||||||||
Total cost of revenues | 1,770 | 1,508 | 5,137 | 3,965 | ||||||||||||
Gross profit | 6,983 | 6,139 | 19,284 | 18,425 | ||||||||||||
Operating expenses | ||||||||||||||||
Sales and marketing | 2,759 | 2,289 | 8,453 | 7,060 | ||||||||||||
General and administrative | 1,638 | 1,449 | 5,083 | 4,629 | ||||||||||||
Research and development | 528 | 646 | 1,727 | 1,832 | ||||||||||||
Total operating expenses | 4,925 | 4,384 | 15,263 | 13,521 | ||||||||||||
Income from operations | 2,058 | 1,755 | 4,021 | 4,904 | ||||||||||||
Other income | 28 | 17 | 88 | 51 | ||||||||||||
Income before income taxes | 2,086 | 1,772 | 4,109 | 4,955 | ||||||||||||
Income tax expense | 687 | 542 | 1,348 | 1,585 | ||||||||||||
Net income | $ | 1,399 | $ | 1,230 | $ | 2,761 | $ | 3,370 | ||||||||
Comprehensive income | $ | 1,399 | $ | 1,230 | $ | 2,761 | $ | 3,370 | ||||||||
Net income per common share - | ||||||||||||||||
Basic | $ | 0.07 | $ | 0.06 | $ | 0.13 | $ | 0.16 | ||||||||
Diluted | $ | 0.06 | $ | 0.06 | $ | 0.13 | $ | 0.16 | ||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 21,122 | 20,892 | 21,061 | 20,782 | ||||||||||||
Diluted | 21,674 | 21,440 | 21,640 | 21,294 | ||||||||||||
Cash dividends declared per share | $ | 0.015 | $ | 0.015 | $ | 0.045 | $ | 0.030 |
Condensed Consolidated Statements of Operations and Comprehensive Income |
(In thousands, except per share amounts) |
(Unaudited) |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Operating Revenues: | ||||||||||||||||
Software licenses | $ | 2,843 | $ | 2,488 | $ | 7,726 | $ | 7,768 | ||||||||
Maintenance and support | 5,488 | 5,360 | 15,872 | 15,702 | ||||||||||||
Professional services | 649 | 368 | 1,549 | 1,652 | ||||||||||||
Total Revenues | 8,980 | 8,216 | 25,147 | 25,122 | ||||||||||||
Cost of revenues: | ||||||||||||||||
Software licenses | 721 | 725 | 2,225 | 2,234 | ||||||||||||
Maintenance and support | 514 | 446 | 1,574 | 1,283 | ||||||||||||
Professional services | 264 | 402 | 880 | 1,120 | ||||||||||||
Total cost of revenues | 1,499 | 1,573 | 4,679 | 4,637 | ||||||||||||
Gross profit | 7,481 | 6,643 | 20,468 | 20,485 | ||||||||||||
Operating expenses: | ||||||||||||||||
Sales and marketing | 2,261 | 3,079 | 8,229 | 9,564 | ||||||||||||
General and administrative | 1,589 | 1,573 | 4,883 | 4,607 | ||||||||||||
Legal and professional | 1,510 | 1,002 | 4,235 | 1,550 | ||||||||||||
Severance | 381 | - | 488 | 21 | ||||||||||||
Research and development | 368 | 594 | 1,654 | 2,530 | ||||||||||||
Total operating expenses | 6,109 | 6,248 | 19,489 | 18,272 | ||||||||||||
Income from operations | 1,372 | 395 | 979 | 2,213 | ||||||||||||
Interest income (expense), net | (93 | ) | 75 | 63 | 221 | |||||||||||
Income before income taxes | 1,279 | 470 | 1,042 | 2,434 | ||||||||||||
Income tax expense | 281 | 194 | 386 | 870 | ||||||||||||
Net income | $ | 998 | $ | 276 | $ | 656 | $ | 1,564 | ||||||||
Comprehensive income | $ | 998 | $ | 276 | $ | 656 | $ | 1,564 | ||||||||
Net income per common share - | ||||||||||||||||
Basic | $ | 0.05 | $ | 0.01 | $ | 0.03 | $ | 0.07 | ||||||||
Diluted | $ | 0.05 | $ | 0.01 | $ | 0.03 | $ | 0.07 | ||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 21,688 | 21,792 | 21,746 | 21,672 | ||||||||||||
Diluted | 21,940 | 22,247 | 22,044 | 22,145 |
The accompanying notes are an integral part of these condensed and consolidated financial statements.
For the Nine Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
Operating Activities: | ||||||||
Net income | $ | 2,761 | $ | 3,370 | ||||
Items not involving cash at the time they are recorded in the statement of operations: | ||||||||
Bad debt expense | 67 | 147 | ||||||
Depreciation and amortization | 1,522 | 1,116 | ||||||
Share-based compensation | 721 | 482 | ||||||
Deferred taxes | (36 | ) | (320 | ) | ||||
Excess tax benefit from share-based compensation | 5 | (49 | ) | |||||
Subtotal before changes in operating assets and liabilities | 5,040 | 4,746 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (2,856 | ) | (1,690 | ) | ||||
Prepaid expenses | 86 | 154 | ||||||
Deferred revenue | 1,081 | 531 | ||||||
Accounts payable | (217 | ) | (757 | ) | ||||
Accrued expenses | (52 | ) | 10 | |||||
Other Assets | 30 | 37 | ||||||
Other long-term liabilities | (10 | ) | (5 | ) | ||||
Income tax receivable and payable | 571 | 403 | ||||||
Net cash provided by operating activities | 3,673 | 3,429 | ||||||
Investing Activities: | ||||||||
Software development costs capitalized | (1,298 | ) | (1,613 | ) | ||||
Purchase of property and equipment | (168 | ) | (108 | ) | ||||
Interest reinvested in short and long term investments | (49 | ) | (48 | ) | ||||
Net cash (used in) investing activities | (1,515 | ) | (1,769 | ) | ||||
Financing Activities: | ||||||||
Proceeds from exercise of stock options | 333 | 417 | ||||||
Excess tax benefit from share-based compensation | (5 | ) | 49 | |||||
Dividends paid | (950 | ) | (626 | ) | ||||
Net cash (used in) financing activities | (622 | ) | (160 | ) | ||||
Net increase in cash | 1,536 | 1,500 | ||||||
Cash at beginning of period | 15,885 | 11,358 | ||||||
Cash at end of period | $ | 17,421 | $ | 12,858 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | - | $ | - | ||||
Income taxes | $ | 776 | $ | 1,341 |
Condensed Consolidated Statements of Cash Flows |
(in thousands) |
(Unaudited) |
For the Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
Operating Activities: | ||||||||
Net income | $ | 656 | $ | 1,564 | ||||
Items not involving cash at the time they are recorded in the statement of operations: | ||||||||
Provision (recoveries) for doubtful accounts receivable | (64 | ) | 15 | |||||
Depreciation and amortization | 1,641 | 1,604 | ||||||
Share-based compensation | 972 | 1,053 | ||||||
Deferred taxes | 61 | 28 | ||||||
Subtotal before changes in operating assets and liabilities | 3,266 | 4,264 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 1,136 | 1,798 | ||||||
Prepaid and other current assets | (1,868 | ) | 163 | |||||
Deferred revenue | (1,914 | ) | (1,526 | ) | ||||
Accounts payable | 82 | 448 | ||||||
Accrued expenses | 1,707 | 404 | ||||||
Other assets | 116 | 154 | ||||||
Accrued interest receivable | - | (195 | ) | |||||
Other long-term liabilities | (48 | ) | 22 | |||||
Federal income tax receivable | 82 | (759 | ) | |||||
Net cash provided by operating activities | 2,559 | 4,773 | ||||||
Investing Activities: | ||||||||
Software development costs capitalized | (1,057 | ) | (1,464 | ) | ||||
Purchase of property and equipment | (143 | ) | (249 | ) | ||||
Redemption of Certificates of Deposit | 14,264 | - | ||||||
Net cash provided by (used in) investing activities | 13,064 | (1,713 | ) | |||||
Financing Activities: | ||||||||
Proceeds from exercise of stock options | 341 | 471 | ||||||
Purchase of Treasury Stock | (17,262 | ) | - | |||||
Dividends paid | (655 | ) | (979 | ) | ||||
Net cash used in financing activities | (17,576 | ) | (508 | ) | ||||
Net increase (decrease) in cash | (1,953 | ) | 2,552 | |||||
Cash at beginning of period | 11,583 | 8,895 | ||||||
Cash at end of period | $ | 9,630 | $ | 11,447 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | - | $ | - | ||||
Income tax payments | $ | 238 | $ | 1,616 |
The accompanying notes are an integral part of these condensed and consolidated financial statements.
Condensed Consolidated Statement of Stockholders' Equity |
(in thousands, except number of shares) |
(unaudited) |
Additional | ||||||||||||||||||||||||
Common Stock | Paid-in | Treasury | Retained | |||||||||||||||||||||
Shares | Amount | Capital | Stock | Earnings | Total | |||||||||||||||||||
Balance at December 31, 2016 | 21,920,912 | $ | 22 | $ | 21,756 | $ | (1,452 | ) | $ | 9,289 | 29,615 | |||||||||||||
Shares issued upon exercise of stock options | 191,500 | 458 | 458 | |||||||||||||||||||||
Stock-based compensation expense | ||||||||||||||||||||||||
Stock options | 533 | 533 | ||||||||||||||||||||||
Restricted stock | 80,000 | 138 | 138 | |||||||||||||||||||||
Common stock cash dividends, $0.030 per share | (652 | ) | (652 | ) | ||||||||||||||||||||
Net income | 1,288 | 1,288 | ||||||||||||||||||||||
Balance at June 30, 2017 | 22,192,412 | $ | 22 | $ | 22,885 | $ | (1,452 | ) | $ | 9,925 | $ | 31,380 | ||||||||||||
Shares issued upon exercise of stock options | 4,300 | 14 | 14 | |||||||||||||||||||||
Stock-based compensation expense | ||||||||||||||||||||||||
Stock options | 296 | 296 | ||||||||||||||||||||||
Restricted stock | 85 | 85 | ||||||||||||||||||||||
Common stock cash dividends, $0.015 per share | (327 | ) | (327 | ) | ||||||||||||||||||||
Net income | 276 | 276 | ||||||||||||||||||||||
Balance at September 30, 2017 | 22,196,712 | $ | 22 | $ | 23,280 | $ | (1,452 | ) | $ | 9,874 | $ | 31,724 | ||||||||||||
Stock-based compensation expense | ||||||||||||||||||||||||
Stock options | 428 | 428 | ||||||||||||||||||||||
Restricted stock | 85 | 85 | ||||||||||||||||||||||
Common stock cash dividends, $0.015 per share | (328 | ) | (328 | ) | ||||||||||||||||||||
Net income | (193 | ) | (193 | ) | ||||||||||||||||||||
Balance at December 31, 2017 | 22,196,712 | $ | 22 | $ | 23,793 | $ | (1,452 | ) | $ | 9,353 | $ | 31,716 | ||||||||||||
Retained Earnings Adjustment due to ASC 606 | 979 | 979 | ||||||||||||||||||||||
Stock-based compensation expense | ||||||||||||||||||||||||
Stock options | 742 | 742 | ||||||||||||||||||||||
Restricted stock | 80,000 | 120 | 120 | |||||||||||||||||||||
Common stock cash dividends, $0.030 per share | (655 | ) | (655 | ) | ||||||||||||||||||||
Net Income | (342 | ) | (342 | ) | ||||||||||||||||||||
Balance at June 30, 2018 | 22,276,712 | $ | 22 | $ | 24,655 | $ | (1,452 | ) | $ | 9,335 | $ | 32,560 | ||||||||||||
Purchase of Treasury Stock | (17,262 | ) | (17,262 | ) | ||||||||||||||||||||
Cancellation of Restricted Stock | (40,000 | ) | - | |||||||||||||||||||||
Shares issued upon exercise of stock options | 146,150 | 341 | 341 | |||||||||||||||||||||
Stock-based compensation expense | ||||||||||||||||||||||||
Stock options | 110 | 110 | ||||||||||||||||||||||
Net Income | 998 | 998 | ||||||||||||||||||||||
Balance at September 30, 2018 | 22,382,862 | $ | 22 | $ | 25,106 | $ | (18,714 | ) | $ | 10,333 | $ | 16,747 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
As of September 30 2016, 2018 and For the Three and Nine
Months Then Ended
(Unaudited)
1. | Nature of Business |
GlobalSCAPE, Inc., together with its wholly-owned subsidiary (collectively referred to as the “Company”, “GlobalSCAPE”, “we”, “us” or “our”), provides secure information exchange file transfer and file sharing capabilities for enterprises and consumers.consumers through the development and distribution of software, delivery of managed and hosted solutions, and provisioning of associated services. Our solution portfolio facilitates transmission of critical information such as financial data, medical records, customer files, vendor files, personnel files, transaction activity, and other similar documents between diverse and geographically separated network infrastructures while supporting a range of information protection approaches to meet privacy and other security requirements. In addition to enabling secure, flexible transmission of critical information using servers, desktop and notebook computers, and a wide range of network-enabled mobile devices, our products also provide customers with the ability to monitor and audit file transfer activities. Our primary business is selling and supporting managed file transfer, or MFT, software for enterprises. The brand name of our MFT product platform is Enhanced File Transfer, or EFT. We have other products that complement our EFT product.
In June 2017, we introduced a data integration product that we planned to sell under the brand name Kenetix. We licensed the technology for this product from a third party. We experienced issues with the third-party technology and suspended marketing of the product. We have settled the dispute with the third-party and have accrued a liability in these financial statements in the amount of the settlement, including any anticipated settlement fees.
We also sellmarket other products that are synergistic to EFT including Mail Express, scConnect, WAFS, and CuteFTP.
Throughout these notes unless otherwise noted, our references to the 20162018 quarter and the 20152017 quarter refer to the three months ended September 30, 20162018 and 2015,2017, respectively. Our references to the 20162018 nine months and the 20152017 nine months refer to the nine months ended September 30, 20162018 and 2015,2017, respectively.
2. | Basis of Presentation |
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X, “Interim Financial Statements”, as prescribed by the United States Securities and Exchange Commission, or SEC. Accordingly, they do not include all information and footnotes required under United States generally accepted accounting principles, in the United States, or GAAP, for complete financial statements. In the opinion of management, all accounting entries necessary for a fair presentation of our financial position and results of operations have been made. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q, or this Report, should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015,2017, filed with the SEC on June 14, 2018, which we refer to as the 20152017 Form 10-K, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations also included in our 20152017 Form 10-K and in this report.
We follow accounting standards set by the Financial Accounting Standards Board.Board, or FASB. This board sets GAAP, thatwhich we follow in preparing financial statements that report our financial position, results of operations, and sources and uses of cash. We also follow the reporting regulations of the United States Securities and Exchange Commission, or SEC.
The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of our financial statements. It is possible the actual results could differ from these estimates and assumptions and could have a material effect on the reported amounts of our financial position and results of operations.
Principles of Consolidation
The accompanying condensed consolidated financial statements of GlobalSCAPE, Inc. and its wholly-owned subsidiary (collectively referred to as the “Company” or “we”) are prepared in conformity with GAAP. All intercompany accounts and transactions have been eliminated.
Reclassification of Expenses
We have revised the classification of certain of our operating expenses. To ensure comparability between periods, we revised the previous period financial statements presented to conform to the method of presentation in the current period financial statements. These reclassifications had no impact on the net income for the periods presented or total stockholders’ equity at September 30, 2018.
Revenue Recognition
Products and Services
We develop, market and sell software products. We recognizeearn revenue from a sale transaction whenby delivering the following conditions are met:
● | Perpetual software licenses under which customers install our products in their information systems environment on computers they manage, own or otherwise procure from a cloud services provider. Customers also deploy our products with cloud services providers in a BYOL environment. |
● | Cloud-based, hosted SaaS solutions that we sell on an ongoing subscription basis resulting in our earning recurring, monthly subscription and usage fees to access the service. |
● | Maintenance and support services, or M&S, that generally consist of telephone support and access to unspecified future software upgrades. |
● | Professional services for product integration and configuration that generally do not significantly modify our software products. |
We earn the majority of our software license revenue from the sale of perpetual software licenses and associated contracts for M&S.
We recognize revenue when we have satisfied a performance obligation by transferring control over a product or delivering a service to a customer. We measure revenue based upon the consideration set forth in an arrangement or contract with a customer. The revenue recognition criteria we apply to each of our software products soldand services are as follows:
● | Perpetual software licenses – These licenses grant a right to use our functional intellectual property. We recognize revenue at the point in time when we electronically deliver to our customer the software license key that provides the ability to access and use our product. If our customer is a reseller who will further transfer the ability to access and use our product to a third party under a separate arrangement that the reseller has with that third party, we recognize revenue at the time we deliver the software license key to the reseller since our contract is with the reseller. |
● | Cloud-based, hosted SaaS solutions – These solutions grant a right to access our functional intellectual property. We recognize revenue over time on a monthly basis as we deliver the services to which our customers subscribe. Revenue can include basic monthly fees to access the software and usage fees based upon the volume of certain resources the customer consumes (such as volumes of storage or bandwidth). We are generally paid for these services on a month-to-month basis, but if a customer pays us in advance for services we will deliver in the future, we record as deferred revenue the amount of such payment related to services we have not yet delivered. |
● | M&S – We provide these services to purchasers of perpetual software licenses under agreements with terms generally ranging from one to three years. We require up-front payment of our M&S fee in an amount that covers the entire term of the agreement. We record as deferred revenue amounts paid that relate to future periods during which we will provide the M&S service. We reduce deferred revenue and recognize revenue ratably in future periods as we deliver the M&S service. |
● | Professional services – We recognize revenue from these services when the services are completed. If we are paid in advance for these services, we record such payment as deferred revenue until we complete the services. |
The delivery of our software license agreements. products and services generally does not involve any variable consideration, financing components or consideration payable to a customer such as rebates or other incentives that reduce amounts owed to us by customers.
Deferred Revenue Classification and Activity
Deferred revenue related to services we will deliver within one year is presented as a current liability. Deferred revenue related to services that we will deliver more than one year into the future is presented as a non-current liability.
The activity in our deferred revenue balances has been as follows ($in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Deferred revenue, beginning of period | $ | 16,013 | $ | 16,160 | $ | 17,050 | $ | 17,445 | ||||||||
Deferred revenue resulting from new contracts with customers | 4,764 | 4,769 | 14,321 | 14,214 | ||||||||||||
Deferred revenue at the beginning of the period that was amortized to revenue | (5,113 | ) | (4,554 | ) | (14,727 | ) | (14,370 | ) | ||||||||
Deferred revenue arising during the period that was amortized to revenue | (528 | ) | (456 | ) | (1,508 | ) | (1,370 | ) | ||||||||
Deferred revenue, end of period | $ | 15,136 | $ | 15,919 | $ | 15,136 | $ | 15,919 |
Multi-Element Transactions
At the time our customers purchase these products,perpetual software licenses, they also typically purchase M&S although it is not mandatory. We do not sell separate M&S to subscribers to our SaaS solutions as M&S is provided as part of their SaaS subscription. Customers may also purchase a product maintenance and support, or M&S, agreement. These transactions are multiple element software sales for which we assess the presence of vendor specific objective evidence (“VSOE”) of the fair value of the undelivered elements to determine the portion of these sales to recognize as revenue upon delivery of the software product and the portion of these sales to record as deferred revenueprofessional services at the time the product is delivered. We amortize the deferred revenue component to revenue in future periods as we deliver the related future services to the customer. For transactions, if any, for which we cannot establish VSOEthey purchase perpetual software licenses or a SaaS subscription. Each of the fair valuecomponents of these multi-element transactions is a separately identifiable performance obligation.
For multi-element transactions, we allocate the transaction price to each performance obligation on a relative stand-alone selling price basis. We determine that stand-alone selling price for each item at the inception of the undelivered elements, we initially record the entire transaction involving these multiple elements.
We sell, as deferred revenue and amortize that amount to revenue in future periods as we deliver the related future services to the customer.
We recognize revenue from these services as they are completed and accepted by our customers.
Sales Tax
We collect sales tax on many of our sales.transactions with customers as required under applicable law. We do not include sales tax collected in our revenue. We record it as a liability payable to taxing authorities.
Allowance for Sales Returns
We provide an allowance for sales returns. We estimate this allowance based upon our financial statements forhistorical experience and the year ended December 31, 2015, we revised the manner in which we present cost of revenues and other elements of our statement of operations in response to the changing nature of recent transactions with customers. This amount is included in accrued liabilities in our business andcondensed consolidated balance sheet.
Contract Assets
We generally bill customers for professional services when we have fully delivered the resulting differencesservices specified in the scopecontract. We may incur costs in delivering the services prior to that time. Such costs are generally not material. Accordingly, we do not record a contract asset for professional service engagements in process but not yet billed.
Incremental Costs of Obtaining a Contract to Deliver Goods and nature of certain expenses we incur.
We incur incremental costs was moved from depreciation and amortization and included in the costform of license revenue. Other costs included in cost of license revenue aresales commissions paid to our sales personnel and royalties we pay to use technology in ouron certain products that is developed by others and fees paid to third party service providers who supportparties. These are costs we would not incur if we did not obtain a contract to deliver our cloud basedgoods and SaaS solutions. Cost of M&S revenue and cost of professional services revenue consist primarily of salaries and related personnelservices. We account for these costs as follows:
● | If the costs are associated with products and services for which we recognize revenue at a fixed point in time (primarily sales of perpetual software licenses and professional services), we expense these costs in full at the time we recognize that revenue. |
● | If the costs are associated with services for which we recognize revenue over time (primarily sales of M&S and SaaS subscriptions) for which we believe it is likely that the contract for those services will be renewed for additional terms in the future, provided we deem these costs to be recoverable, we record these costs as a deferred expense asset and amortize that cost to expense as follows: |
o | For the portion of the cost that we determine benefits us primarily only over the term of the specific underlying contract currently in force (such as the term of an M&S contract), we recognize expense ratably each month over that term. |
o | For the portion of the cost that we determine benefits us over an overall customer relationship that is likely to span a period of time that is longer than an initial contract term (for example, an M&S contract renewed for multiple terms in the future), we recognize expense ratably monthly over the estimated life of the customer relationship. |
Our activity in deferred costs of obtaining a contract to deliver goods and services has been as follows ($in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
2018 | 2018 | |||||||
Deferred expense, beginning of period | $ | 1,172 | $ | 1,240 | ||||
Deferred expense resulting from new contracts with customers | 149 | 496 | ||||||
Deferred expense amortized to expense | (216 | ) | (631 | ) | ||||
Deferred expense, end of period | $ | 1,105 | $ | 1,105 |
At September 30, 2018, $598,000 was recorded in prepaid and current other assets and $507,000 was recorded in other assets in our employees who delivercondensed consolidated balance sheet.
The following tables present our reported results under ASC 606 and a reconciliation to results using the related service to our clients. These costs were previously included in the general and administrative classification. Also included in the cost of professional services revenue are the fees of third party service providers.
Quarter Ended September 30, 2015 | ||||||||||||||||||||||||||||
Reclassification of Previously Reported Amounts | ||||||||||||||||||||||||||||
As Previously | Cost of | Capitalized Software Cost | Personnel Costs | Depreciation | Selling, General | As Now | ||||||||||||||||||||||
Operating Revenues: | ||||||||||||||||||||||||||||
Software licenses | $ | 2,852 | $ | 2,852 | ||||||||||||||||||||||||
Maintenance and support | 4,142 | 4,142 | ||||||||||||||||||||||||||
Professional services | 653 | 653 | ||||||||||||||||||||||||||
Total revenues | 7,647 | 7,647 | ||||||||||||||||||||||||||
Cost of Revenues: | ||||||||||||||||||||||||||||
Software licenses | 195 | 367 | 562 | |||||||||||||||||||||||||
Maintenance and support | 341 | 341 | ||||||||||||||||||||||||||
Professional services | 263 | 342 | 605 | |||||||||||||||||||||||||
Total cost of revenues | - | 1,508 | ||||||||||||||||||||||||||
Gross profit | - | 6,139 | ||||||||||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||||||
Sales and marketing | - | 2,289 | 2,289 | |||||||||||||||||||||||||
General and administrative | - | 1,449 | 1,449 | |||||||||||||||||||||||||
Cost of Revenues | 458 | (458 | ) | - | ||||||||||||||||||||||||
Selling, general and administrative | 4,355 | (683 | ) | 66 | (3,738 | ) | - | |||||||||||||||||||||
Research and development | 646 | 646 | ||||||||||||||||||||||||||
Depreciation and amortization | 433 | (367 | ) | (66 | ) | - | ||||||||||||||||||||||
Total operating expenses | 5,892 | 4,384 | ||||||||||||||||||||||||||
Income from operations | 1,755 | 1,755 | ||||||||||||||||||||||||||
Other income (expense), net | 17 | 17 | ||||||||||||||||||||||||||
Income before income taxes | 1,772 | 1,772 | ||||||||||||||||||||||||||
Income tax expense | 542 | 542 | ||||||||||||||||||||||||||
Net income | $ | 1,230 | $ | 1,230 | ||||||||||||||||||||||||
Comprehensive income | $ | 1,230 | $ | 1,230 | ||||||||||||||||||||||||
Net income per common share - | ||||||||||||||||||||||||||||
Basic | $ | 0.06 | $ | 0.06 | ||||||||||||||||||||||||
Diluted | $ | 0.06 | $ | 0.06 |
GlobalSCAPE, Inc. |
Condensed Consolidated Balance Sheet |
(in thousands) |
As of September 30, 2018 |
(unaudited) |
As Reported | Effect of ASC 606 | ASC 605 Historical | ||||||||||
Assets | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 9,630 | $ | 9,630 | ||||||||
Certificates of deposit, short term | 1,530 | 1,530 | ||||||||||
Accounts receivable, net | 4,853 | (75 | ) | 4,778 | ||||||||
Federal income tax receivable | 740 | 50 | 790 | |||||||||
Prepaid and other current assets | 3,173 | (598 | ) | 2,575 | ||||||||
Total current assets | 19,926 | (623 | ) | 19,303 | ||||||||
Capitalized software development costs, net | 3,384 | 3,384 | ||||||||||
Goodwill | 12,712 | 12,712 | ||||||||||
Deferred tax asset, net | 330 | 161 | 491 | |||||||||
Property and equipment, net | 442 | 442 | ||||||||||
Other assets | 577 | (508 | ) | 69 | ||||||||
Total assets | $ | 37,371 | $ | (970 | ) | $ | 36,401 | |||||
Liabilities and Stockholders’ Equity | ||||||||||||
Current liabilities: | ||||||||||||
Accounts payable | 1,982 | 1,982 | ||||||||||
Accrued expenses | 3,378 | (75 | ) | 3,303 | ||||||||
Deferred revenue | 12,341 | 12,341 | ||||||||||
Total current liabilities | 17,701 | (75 | ) | 17,626 | ||||||||
Deferred revenue, non-current portion | 2,795 | 2,795 | ||||||||||
Other long term liabilities | 128 | 128 | ||||||||||
Stockholders' Equity: | ||||||||||||
Preferred stock | - | - | ||||||||||
Common stock | 22 | 22 | ||||||||||
Additional paid-in capital | 25,106 | 25,106 | ||||||||||
Treasury stock | (18,714 | ) | (18,714 | ) | ||||||||
Retained earnings | 10,333 | (895 | ) | 9,438 | ||||||||
Total stockholders’ equity | 16,747 | (895 | ) | 15,852 | ||||||||
Total liabilities and stockholders’ equity | $ | 37,371 | $ | (970 | ) | $ | 36,401 |
GlobalSCAPE, Inc. |
Condensed Consolidated Statement of Operations and Comprehensive Income |
(in thousands, except per share amounts) |
For the Three Months Ended September 30, 2018 |
(unaudited) |
As Reported | Effect of ASC 606 | ASC 605 Historical | ||||||||||
Operating revenues: | ||||||||||||
Software licenses | $ | 2,843 | $ | 2,843 | ||||||||
Maintenance and support | 5,488 | 5,488 | ||||||||||
Professional services | 649 | 649 | ||||||||||
Total revenues | 8,980 | - | 8,980 | |||||||||
Costs of revenues | ||||||||||||
Software licenses | 721 | (28 | ) | 693 | ||||||||
Maintenance and support | 514 | 514 | ||||||||||
Professional services | 264 | 264 | ||||||||||
Total costs of revenues | 1,499 | (28 | ) | 1,471 | ||||||||
Gross Profit | 7,481 | 28 | 7,509 | |||||||||
Operating expenses | ||||||||||||
Sales and marketing | 2,261 | (23 | ) | 2,238 | ||||||||
General and administrative | 1,589 | 1,589 | ||||||||||
Legal and professional | 1,510 | 1,510 | ||||||||||
Severance | 381 | 381 | ||||||||||
Research and development | 368 | 368 | ||||||||||
Total operating expenses | 6,109 | (23 | ) | 6,086 | ||||||||
Income from operations | 1,372 | 51 | 1,423 | |||||||||
Interest income (expense), net | (93 | ) | (93 | ) | ||||||||
Income before income taxes | 1,279 | 51 | 1,330 | |||||||||
Income tax expense | 281 | 11 | 292 | |||||||||
Net income | $ | 998 | $ | 40 | $ | 1,038 | ||||||
Comprehensive income | $ | 998 | $ | 40 | $ | 1,038 | ||||||
Net income per common share - basic | $ | 0.05 | $ | 0.00 | $ | 0.05 | ||||||
Net income per common share - diluted | $ | 0.05 | $ | 0.00 | $ | 0.05 |
Nine Months Ended September 30, 2015 | ||||||||||||||||||||||||||||
Reclassification of Previously Reported Amounts | ||||||||||||||||||||||||||||
As Previously | Cost of | Capitalized Software Cost | Personnel Costs | Depreciation | Selling, General | As Now | ||||||||||||||||||||||
Operating Revenues: | ||||||||||||||||||||||||||||
Software licenses | $ | 8,590 | $ | 8,590 | ||||||||||||||||||||||||
Maintenance and support | 12,269 | 12,269 | ||||||||||||||||||||||||||
Professional services | 1,531 | 1,531 | ||||||||||||||||||||||||||
Total revenues | 22,390 | 22,390 | ||||||||||||||||||||||||||
Cost of Revenues: | ||||||||||||||||||||||||||||
Software licenses | 739 | 912 | 1,651 | |||||||||||||||||||||||||
Maintenance and support | 1,057 | 1,057 | ||||||||||||||||||||||||||
Professional services | 327 | 930 | 1,257 | |||||||||||||||||||||||||
Total cost of revenues | - | 3,965 | ||||||||||||||||||||||||||
Gross profit | - | 18,425 | ||||||||||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||||||
Sales and marketing | - | 7,060 | 7,060 | |||||||||||||||||||||||||
General and administrative | - | 4,629 | 4,629 | |||||||||||||||||||||||||
Cost of Revenues | 1,066 | (1,066 | ) | - | ||||||||||||||||||||||||
Selling, general and administrative | 13,472 | (1,987 | ) | 204 | (11,689 | ) | - | |||||||||||||||||||||
Research and development | 1,832 | 1,832 | ||||||||||||||||||||||||||
Depreciation and amortization | 1,116 | (912 | ) | (204 | ) | - | ||||||||||||||||||||||
Total operating expenses | 17,486 | 13,521 | ||||||||||||||||||||||||||
Income from operations | 4,904 | 4,904 | ||||||||||||||||||||||||||
Other income (expense), net | 51 | 51 | ||||||||||||||||||||||||||
Income before income taxes | 4,955 | 4,955 | ||||||||||||||||||||||||||
Income tax expense | 1,585 | 1,585 | ||||||||||||||||||||||||||
Net income | $ | 3,370 | $ | 3,370 | ||||||||||||||||||||||||
Comprehensive income | $ | 3,370 | $ | 3,370 | ||||||||||||||||||||||||
Net income per common share - | ||||||||||||||||||||||||||||
Basic | $ | 0.16 | $ | 0.16 | ||||||||||||||||||||||||
Diluted | $ | 0.16 | $ | 0.16 |
GlobalSCAPE, Inc. |
Condensed Consolidated Statement of Operations and Comprehensive Income |
(in thousands, except per share amounts) |
For the Nine Months Ended September 30, 2018 |
(unaudited) |
As Reported | Effect of ASC 606 | ASC 605 Historical | ||||||||||
Operating revenues: | ||||||||||||
Software licenses | $ | 7,726 | $ | 7,726 | ||||||||
Maintenance and support | 15,872 | 15,872 | ||||||||||
Professional services | 1,549 | 1,549 | ||||||||||
Total revenues | 25,147 | - | 25,147 | |||||||||
Costs of revenues | ||||||||||||
Software licenses | 2,225 | (42 | ) | 2,183 | ||||||||
Maintenance and support | 1,574 | 1,574 | ||||||||||
Professional services | 880 | 880 | ||||||||||
Total costs of revenues | 4,679 | (42 | ) | 4,637 | ||||||||
Gross Profit | 20,468 | 42 | 20,510 | |||||||||
Operating expenses | ||||||||||||
Sales and marketing | 8,229 | (92 | ) | 8,137 | ||||||||
General and administrative | 4,883 | 4,883 | ||||||||||
Legal and professional | 4,235 | 4,235 | ||||||||||
Severance | 488 | 488 | ||||||||||
Research and development | 1,654 | 1,654 | ||||||||||
Total operating expenses | 19,489 | (92 | ) | 19,397 | ||||||||
Income from operations | 979 | 134 | 1,113 | |||||||||
Interest income (expense), net | 63 | 63 | ||||||||||
Income before income taxes | 1,042 | 134 | 1,176 | |||||||||
Income tax expense | 386 | 50 | 436 | |||||||||
Net income | $ | 656 | $ | 84 | $ | 740 | ||||||
Comprehensive income | $ | 656 | $ | 84 | $ | 740 | ||||||
Net income per common share - basic | $ | 0.03 | $ | 0.00 | $ | 0.03 | ||||||
Net income per common share - diluted | $ | 0.03 | $ | 0.00 | $ | 0.03 |
GlobalSCAPE, Inc. |
Condensed Consolidated Statements of Cash Flows |
(in thousands) |
For the Nine Months Ended September 30, 2018 |
(unaudited) |
As Reported | Effect of ASC 606 | ASC 605 Historical | ||||||||||
Operating Activities: | ||||||||||||
Net Income | $ | 656 | 84 | $ | 740 | |||||||
Items not involving cash at the time they are recorded in the statement of operations: | ||||||||||||
Provision (recoveries) for doubtful accounts receivable | (64 | ) | (64 | ) | ||||||||
Depreciation and amortization | 1,641 | 1,641 | ||||||||||
Share-based compensation | 972 | 972 | ||||||||||
Deferred taxes | 61 | 61 | ||||||||||
Subtotal before changes in operating assets and liabilities | 3,266 | 84 | 3,350 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | 1,136 | (75 | ) | 1,061 | ||||||||
Prepaid and other current assets | (1,868 | ) | (134 | ) | (2,002 | ) | ||||||
Deferred revenues | (1,914 | ) | (1,914 | ) | ||||||||
Accounts payable | 82 | 82 | ||||||||||
Accrued expenses | 1,707 | 75 | 1,782 | |||||||||
Other assets | 116 | 116 | ||||||||||
Accrued interest receivable | - | - | ||||||||||
Other long-term liabilities | (48 | ) | (48 | ) | ||||||||
Federal income tax receivable | 82 | 50 | 132 | |||||||||
Net cash provided by operating activities | 2,559 | - | 2,559 | |||||||||
Investing Activities: | ||||||||||||
Software development costs | (1,057 | ) | (1,057 | ) | ||||||||
Purchase of property and equipment | (143 | ) | (143 | ) | ||||||||
Redemption of Certificates of Deposit | 14,264 | 14,264 | ||||||||||
Net cash provided by investing activities | 13,064 | - | 13,064 | |||||||||
Financing Activities: | ||||||||||||
Proceeds from exercise of stock options | 341 | 341 | ||||||||||
Purchase of treasury stock | (17,262 | ) | (17,262 | ) | ||||||||
Dividends paid | (655 | ) | (655 | ) | ||||||||
Net cash used in financing activities | (17,576 | ) | - | (17,576 | ) | |||||||
Net increase in cash | (1,953 | ) | (1,953 | ) | ||||||||
Cash at beginning of period | 11,583 | - | 11,583 | |||||||||
Cash at end of period | $ | 9,630 | $ | - | $ | 9,630 | ||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid during the period for: | ||||||||||||
Interest | $ | - | $ | - | ||||||||
Income tax payments | $ | 238 | $ | 238 |
Cash and cash equivalents
Cash and cash equivalents includes all cash and highly liquid investments with original maturities of three months or less.
Property and Equipment
Property and equipment is comprised of furniture and fixtures, software, computer equipment and leasehold improvements which are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Furniture, fixtures and equipment have a useful life of five to seven years, computer equipment and software have a useful life of three years and leasehold improvements have a useful life that is the shorter of the term of the lease under which the improvements were made or the estimated useful life of the asset.
Expenditures for maintenance and repairs are expensed as incurred.
Goodwill
Goodwill is not amortized. On atAt least an annual basis,annually, we test goodwill for impairment at the reporting unit level.level using December 31 as the measurement date. We operate as a single reporting unit.
When testing goodwill, we first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of our reporting unit is less than its carrying amount, including goodwill. In performing this qualitative assessment, we assess events and circumstances relevant to us including, but not limited to:
Macroeconomic conditions.
Industry and market considerations.
Cost factors and trends for labor and other expenses of operating our business.
Our overall financial performance and outlook for the future.
Trends in the quoted market value and trading of our common stock.
In considering these and other factors, we consider the extent to which any adverse events and circumstances identified could affect the comparison of our reporting unit’s fair value with its carrying amount. We place more weight on events and circumstances that most affect our reporting unit’s fair value or the carrying amount of our net assets. We consider positive and mitigating events and circumstances that may affect our determination of whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. We evaluate, on the basis of the weight of the evidence, the significance of all identified events and circumstances in the context of determining whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount.
If, after assessing the totality of these qualitative events and circumstances, we determine it is not more likely than not that the fair value of our reporting unit is less than its carrying amount, we conclude there is no impairment of goodwill and perform no further testing, in accordance with GAAP. If we conclude otherwise, we proceed with performing the first step, and if necessary, the second step, of the two-step goodwill impairment test prescribed by GAAP.
As of December 31, 2015,2017, after assessing the totality of the relevant events and circumstances, we determined it not more likely than not that the fair value of our reporting unit was less than its carrying amount. Accordingly, we concluded there was no impairment of goodwill as of that date. There have been no material events or changes in circumstances since that time indicating that the carrying amount of goodwill may exceed its fair market value and that interim testing needed to be performed.
Capitalized Software Development Costs
When we complete research and development for a software product, and have in place a detailprogram plan and a detailed program design or a working model of that software product, we capitalize production costs incurred for that software product from that point forward until it is ready for general release to the public. Thereafter, we amortize capitalized software production costs to expense using the straight-line method over the estimated useful life of that product, which is generally three years. We periodically assess the carrying value of capitalized software development costs and our method of amortizing them relative to our estimates of realizability through sales of products in the marketplace.
Research and Development
We expense research and development costs as incurred.
Advertising Expense
We expense advertising costs as incurred as a component of our sales and marketing expenses. Advertising expense was $480,315approximately $172,000 and $334,352$480,000 in the 20162018 quarter and the 20152017 quarter, respectively, and $1,447,078$750,000 and $1,116,894$1,508,000 in the 20162018 nine months and 20152017 nine months, respectively.
Share-Based Compensation
We measure the cost of share-based payment transactions at the grant date based on the calculated fair value of the award. We recognize this cost as an expense ratably over the recipient’s requisite service period during which that award vests or becomes unrestricted.
For stock option awards, we estimate their fair value at the grant date using the Black-Scholes option-pricing model considering the following factors:
We estimate expected volatility based on historical volatility of our common stock.
We primarily use primarily the simplified method to derive an expected term which represents an estimate of the time options are expected to remain outstanding. We use this method because our options are plain-vanilla options, and we believe our historical option exercise experience is not adequately indicative of our future expectations.
We base the risk-free rate for periods within the contractual life of the option on the U.S. treasury yield curve in effect at the time of grant.
We estimate a dividend yield based on our historical and expected future dividend payments.
For restricted stock awards, we use the quoted price of our common stock on the grant date as the fair value of the award.
Income Taxes
We account for income taxes using the asset and liability method. We record deferred tax assets and liabilities based on the difference between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes, as measured by the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets and liabilities are carried on the balance sheet with the presumption that they will be realizable in future periods in which we generate taxable income.
We assess the likelihood that deferred tax assets will be realized from future taxable income. Based on this assessment, we provide any necessary valuation allowance on our balance sheet with a corresponding increase in the tax provision on our statement of operations. Any valuation allowances we establish are determined based upon a number of assumptions, judgments, and estimates, including forecasted earnings, future taxable income, and the relative proportions of revenue and income before taxes in the various domestic jurisdictions in which we operate.
We account for uncertainty in income taxes using a two-step process to determine the amount of tax benefit to be recognized. First, we evaluate the tax position to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, we assess the tax position to determine the amount of benefit to recognize in the condensed consolidated financial statements. The amount of the benefit we recognize is the largest amount that we believe has a greater than 50%50 percent likelihood of being realized upon ultimate settlement. Unrecognized tax benefits represent tax positions for which reserves have been established.
Earnings Per Share
We compute basic earnings per share using the weighted-average number of common shares outstanding during the periods. We compute diluted earnings per share using the weighted-average number of common shares outstanding plus the number of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding.
Awards of non-vested restricted stock and options are considered potentially dilutive common shares for the purpose of computing earnings per common share. We apply the treasury stock method to non-vested options under which the assumed proceeds include the amount the employee must pay to exercise the option plus the amount of unrecognized cost attributable to future periods less any expected tax benefits.
Recently Issued Accounting Pronouncements
FASB has issued the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update (ASU)Updates, or ASU described below that we believe may be relevant to our business and to the preparation of our condensed consolidated financial statements.
ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (issued September 2017) – This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. It states that in these situations, modification accounting should be applied unless the fair value of the modified award is the same as the fair value of the original award immediately before the original award was modified, the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award was modified, and the classification of the modified award as equity or a liability is the same as the classification of the original award immediately before the original award was modified. This update is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. We adopted this pronouncement in the first quarter of 2018 and do not expect this pronouncement to have a material effect on how we account for the changes to the terms or conditions of a share-based payment award.
ASU 2017-04, Intangibles – Goodwill and Other (issued January 2017) - To simplify the subsequent measurement of goodwill, Step 2 was eliminated from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This update also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. A public business entity that is an SEC filer is required to adopt the amendments in this update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We expect that the application of ASU 2017-04 will not have a material effect on our condensed consolidated financial statements.
ASU 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments. Payments (issued June 2016) - This pronouncement provides guidance as to the treatment of transactions in a statement of cash flows with respect to eight specific cash flow issues. During 20152017 and 2016,the first nine months of 2018, we had no transactions of the type cited in the statementour Condensed Consolidated Statement of Cash Flows and do not anticipate having any such transactions in the foreseeable future. Accordingly, we do not expect this pronouncement to have a material effect on how we present items in our consolidated statement of cash flows.
ASU 2016-13, Financial Instruments – Credit Losses. (issued June 2016) - Among itsthe provisions of this ASU 2016-13 is a requirement that assets measured at amortized cost, which includes trade accounts receivable, be presented at the net amount expected to be collected. This pronouncement requires that an entity reflect all of its expected credit losses based on current estimates which will replace the current standard requiring that an entity need consider only past events and current conditions in measuring an incurred loss. We are subject to this guidance effective with consolidated financial statements we issue for the year ending December 31, 2020, and the quarterly periods during that year. We do not expect the amounts we report as accounts receivable in those future periods under this guidance to be materially affected relative to current guidance.
ASU 2016-02, Leases. (issued February 2016) - The main difference between existing GAAP and this ASU 2016-02 is the presentation by lessees on their financial statements of lease assets and lease liabilities arising from operating leases. Since this new standard retains the distinction between finance and operating leases, the effect of leases in the statement of operations and the statement of cash flows will be largely unchanged from existing GAAP. Our only lease of significance is our operating lease for our corporate office space for which we will present a right-to-use asset and a lease liability on our consolidated balance sheet when we implement this standard. We are in the process of determining those amounts. In accordance with this standard, we will implement it beginning with our interim and annual consolidated financial statements for 2019. The extent of the effect of this standard on our consolidated financial statements for 2019 and later will depend upon the leases, if any, that we have in effect at that date.
ASU No. 2015-17, Income Tax: Balance Sheet Classification of Deferred Taxes. ASU 2015-07 requires that all deferred tax assets and liabilities for a tax jurisdiction, along with any related valuation allowance, be classified as noncurrent on the balance sheet. We have implemented this ASU in the accompanying financial statements in the manner described in the Note 6 below.
● If these costs are associated with financial statementsproducts and services for which we issuerecognize revenue at a point in time (primarily sales of perpetual software licenses and professional services), we expense these costs in full at the time we recognize that revenue.
● If these costs are associated with services for which we recognize revenue over time (primarily sales of M&S and SaaS subscriptions) for which we believe it is likely that the year ending December 31, 2018, andcontract for those services will be renewed for additional terms in the quarterly periods during that year. We do not expect the amounts or timing of revenuefuture, provided we report in those future periods under this guidancedeem these costs to be materially affected relativerecoverable, we record these costs as deferred expense asset and amortize that cost to current guidance.
o For the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist asportion of the datecost that we determine benefits us primarily only over the financial statements are published, andterm of the reported amountsspecific underlying contract currently in force (such as the term of revenues and expenses duringan M&S contract), we will recognize expense ratably each month over that term.
o For the reporting period. Uncertainties with respectportion of the cost that we determine benefits us over an overall customer relationship that is likely to such estimates and assumptions are inherentspan a period of time that is longer than an initial contract term (for example, an M&S contract renewed for multiple terms in the preparationfuture), we will recognize expense ratably monthly over the estimated life of the Company’s financial statements. It is possiblecustomer relationship.
We have reviewed all recently issued accounting pronouncements. The pronouncements that the actual results could differ from these estimates and assumptions, which couldwe have already adopted did not have a material effect on the reported amountsour financial condition, results of operations, cash flows or reporting thereof, and except as otherwise noted above, we do not believe that any of the Company’spronouncements that we have not yet adopted will have a material effect upon our financial position andcondition, results of operation.
4. | Certificates of Deposit |
Our certificate of deposit is held at a bank and will mature in October 2018. Certificates of deposit with contractual maturity dates less than one year from the balance sheet date are presented as current assets. Certificates of deposit with contractual maturity dates beyond one year from the balance sheet date are presented as non-current assets.
We measure these investments on a recurring basis using Level 1 of the fair value hierarchy prescribed by GAAP which results in them being presented at original cost plus accrued interest earned. There is no amortization of original cost associated with our certificates of deposit.
5. | Accounts Receivable, Net |
We bill customers and issue invoices when we have delivered goods or services. In addition, when customers agree to purchase or renew M&S services, we bill and invoice customers at that time which could be before the date we begin delivering those services. In that event, we exclude from accounts receivable (and from the related deferred revenue, see Note 3) the invoices we have issued for which the M&S services commencement date is in the future and which have not been paid by the customer as of the date of our condensed consolidated financial statements. We continually assess the collectability of our accounts receivable. If we deem it less than probable that we will collect an amount due us, we write-off that balance against our allowance for doubtful accounts. Accordingly, we determine our accounts receivable, net, as follows ($ in thousands):
September 30, 2018 | December 31, 2017 | |||||||
Total invoices issued and unpaid | $ | 5,324 | $ | 6,644 | ||||
Less: Unpaid invoices relating to M&S contracts with a start date subsequent to the balance sheet date | (371 | ) | (441 | ) | ||||
Gross accounts receivable | 4,953 | 6,203 | ||||||
Allowance for doubtful accounts | (100 | ) | (278 | ) | ||||
Accounts receivable, net | $ | 4,853 | $ | 5,925 |
6. Capitalized Software Development Costs, Net
Our capitalized software development costs profile wasbalances and activities were as follows:follows ($ in thousands):
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
Gross capitalized cost | $ | 7,012 | $ | 5,714 | ||||
Accumulated amortization | (3,051 | ) | (1,732 | ) | ||||
Net balance | $ | 3,961 | $ | 3,982 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Amount capitalized | $ | 452 | $ | 506 | $ | 1,298 | $ | 1,613 | ||||||||
Amortization expense | (450 | ) | (367 | ) | (1,319 | ) | (912 | ) |
Released | Unreleased | |||||||
Products | Products | |||||||
Gross capitalized amount at September 30, 2016 | $ | 5,700 | $ | 1,312 |
Future amortization expense: | ||||||||
Three months ending December 31, 2016 | 452 | |||||||
Year ending December 31, | ||||||||
2017 | 1,433 | |||||||
2018 | 699 | |||||||
2019 | 65 | |||||||
Total | $ | 2,649 |
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Gross capitalized cost | $ | 10,235 | $ | 9,179 | ||||
Accumulated amortization | (6,851 | ) | (5,393 | ) | ||||
Capitalized software development costs, net | $ | 3,384 | $ | 3,786 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Amount capitalized | $ | 264 | $ | 527 | $ | 1,057 | $ | 1,464 | ||||||||
Amortization expense | (460 | ) | (484 | ) | (1,459 | ) | (1,404 | ) |
Released | Unreleased | |||||||
Products | Products | |||||||
Gross capitalized amount at September 30, 2018 | $ | 9,624 | $ | 611 | ||||
Accumulated amortization | (6,851 | ) | - | |||||
Net capitalized cost at September 30, 2018 | $ | 2,773 | $ | 611 |
Future amortization expense: | ||||||||
Three months ending December 31, 2018 | 431 | |||||||
Year ending December 31, | ||||||||
2019 | 1,367 | |||||||
2020 | 857 | |||||||
2021 | 118 | |||||||
Total | $ | 2,773 |
The future amortization expense of the gross capitalized software development costs related to unreleased products will be determinable at a future date when those products are ready for general release to the public.
7. Deferred Revenue
As described in Note 5 regarding accounts receivable, when customers agree to purchase or renew M&S services, we bill and invoice our customers at that time which could be before the date we begin delivering those services. In that event, we exclude from deferred revenue (and from the related accounts receivable) the invoices we have issued for which the M&S services commencement date is in the future and which have not been paid by the customer as of the date of our financial statements. Accordingly, we determine our deferred revenue as follows ($ in thousands):
September 30, 2018 | December 31, 2017 | |||||||
Total invoiced for M&S contracts for which revenue will be recognized in future periods | $ | 15,507 | $ | 17,491 | ||||
Less: Unpaid invoices relating to M&S contracts with a start date subsequent to the balance sheet date | (371 | ) | (441 | ) | ||||
Total deferred revenue | $ | 15,136 | $ | 17,050 | ||||
Deferred revenue, current portion | $ | 12,341 | $ | 13,315 | ||||
Deferred revenue, non-current portion | 2,795 | 3,735 | ||||||
Total deferred revenue | $ | 15,136 | $ | 17,050 |
We have stock-based compensation plans under which we have granted, and may grant in the future, incentive stock options, non-qualified stock options, and restricted stock to employees and non-employee members of theour Board of Directors. Our share-basedstock-based compensation expense was as follows ($ in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Share-based compensation expense | $ | 221 | $ | 167 | $ | 721 | $ | 482 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Share-based compensation expense | $ | 110 | $ | 381 | $ | 972 | $ | 1,053 |
Stock Options
We have granted stock options to our officers and employees under long-term equity incentive plans that originated in 2000, 2010 and 2016. During the 2018 quarter, we granted stock options only under the 2016 Employee Long-Term Equity Incentive Plan is our current stock-based incentive plan for our employees. (the “2016 Plan”).
Provisions and characteristics of this planthe options granted to our officers and employees under our long-term equity incentive plans include the following:
● | The exercise price, term and other conditions applicable to each stock option or stock award granted are determined by the Compensation Committee of |
● | The exercise price of stock options is set on the grant date and may not be less than the fair market value per share of our stock at market close on that date. |
● | Stock options we issue generally become exercisable ratably over a three-year period, |
● | Upon exercise of a stock |
We currently issue stock-based awards to our officers and employees only under the 2016 Plan which authorizes the issuance of up to 5,000,000 shares of common stock for stock-based incentives including stock options and restricted stock awards. As of September 30, 2018, stock-based incentives for up to 3,955,830 shares remained available for issuance in the future under the 2016 Plan.
We have not previously issued any restricted stock under any of the Company’s plans.
Our stock option activity has been as follows:
Weighted | ||||||||||||||||
Average | Weighted Average | Aggregate | ||||||||||||||
Exercise | Remaining | Intrinsic | ||||||||||||||
Number of | Price | Contractual | Value | |||||||||||||
Shares | Per Share | Term in Years | (000's) | |||||||||||||
Outstanding at December 31, 2017 | 2,585,210 | $ | 3.34 | 6.77 | $ | 1,015 | ||||||||||
Granted | 504,737 | $ | 3.67 | |||||||||||||
Forfeited | (809,142 | ) | $ | 3.56 | ||||||||||||
Exercised | (146,150 | ) | $ | 2.34 | ||||||||||||
Outstanding at September 30, 2018 | 2,134,655 | $ | 3.40 | 6.59 | $ | 1,413 | ||||||||||
Exercisable at September 30, 2018 | 1,163,958 | $ | 3.09 | 4.60 | $ | 1,115 |
Number of Shares | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Term in Years | Aggregate Intrinsic Value (000's) | |||||||||||||
Outstanding at December 31, 2015 | 2,091,325 | $ | 2.45 | 6.09 | $ | 3,277 | ||||||||||
Granted | 1,055,300 | $ | 3.58 | |||||||||||||
Forfeited | (372,045 | ) | $ | 3.14 | ||||||||||||
Exercised | (165,135 | ) | $ | 2.02 | ||||||||||||
Outstanding at September 30, 2016 | 2,609,445 | $ | 2.83 | 6.29 | $ | 2,015 | ||||||||||
Exercisable at September 30, 2016 | 1,351,760 | $ | 2.26 | 3.59 | $ | 1,814 |
Additional information about our stock options is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Weighted average fair value of options granted | $ | 1.61 | $ | 1.42 | $ | 1.63 | $ | 1.38 | ||||||||
Intrinsic value of options exercised | $ | 78,607 | $ | 105,450 | $ | 261,061 | $ | 386,408 | ||||||||
Cash received from stock options exercised | $ | 70,320 | $ | 98,706 | $ | 333,329 | $ | 416,680 | ||||||||
Number of options that vested | 42,390 | 93,290 | 308,736 | 274,824 | ||||||||||||
Fair value of options that vested | $ | 42,565 | $ | 97,679 | $ | 418,877 | $ | 296,886 | ||||||||
Unrecognized compensation expense related to non-vested options at end of period | $ | 1,609,593 | $ | 753,846 | $ | 1,609,593 | $ | 753,846 | ||||||||
Weighted average years over which non-vested option expense will be recognized | 2.3 | 2.0 | 2.3 | 2.0 |
As of September 30, 2016 | ||||||||||||||||||||||
Range of Exercise Prices | Underlying Shares Outstanding | Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number of Underlying Shares | Weighted Average Exercise Price | |||||||||||||||||||
$ | 0.85 - $1.43 | 168,600 | 3.16 | $ | 1.16 | 168,600 | $ | 1.16 | ||||||||||||||
$ | 1.47 - $2.32 | 612,995 | 4.05 | $ | 1.82 | 607,255 | $ | 1.82 | ||||||||||||||
$ | 2.34 - $3.52 | 1,319,850 | 7.29 | $ | 3.13 | 445,905 | $ | 2.74 | ||||||||||||||
$ | 3.53 - $4.21 | 508,000 | 7.44 | $ | 3.83 | 130,000 | $ | 4.10 | ||||||||||||||
Total options | 2,609,445 | 1,351,760 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Weighted average fair value of options granted | $ | 1.57 | $ | 1.94 | $ | 1.56 | $ | 1.67 | ||||||||
Intrinsic value of options exercised | $ | 205,111 | $ | 9,284 | $ | 205,111 | $ | 351,893 | ||||||||
Cash received from stock options exercised | $ | 341,489 | $ | 13,440 | $ | 341,489 | $ | 471,789 | ||||||||
Number of options that vested | 72,748 | 28,570 | 511,900 | 430,724 | ||||||||||||
Fair value of options that vested | $ | 139,406 | $ | 44,843 | $ | 861,904 | $ | 698,442 | ||||||||
Unrecognized compensation expense related to non-vested options at end of period | $ | 1,286,260 | $ | 1,994,289 | $ | 1,286,260 | $ | 1,994,289 | ||||||||
Weighted average years over which non-vested option expense will be recognized | 2.15 | 2.11 | 2.15 | 2.11 |
Plan | Shares outstanding | |||
2000 Stock Option Plan | 25,000 | |||
2010 Employee LT Equity Incentive Plan | 1,066,319 | |||
2016 Employee LT Equity Incentive Plan | 1,043,336 | |||
Total shares outstanding at September 30, 2018 | 2,134,655 |
As of September 30, 2018 | ||||||||||||||||||||
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted | ||||||||||||||||||||
Average | Weighted | Weighted | ||||||||||||||||||
Underlying | Remaining | Average | Number of | Average | ||||||||||||||||
Range of | Shares | Contractual | Exercise | Underlying | Exercise | |||||||||||||||
Exercise Prices | Outstanding | Life | Price | Shares | Price | |||||||||||||||
$1.43 - $2.32 | 289,350 | 2.14 | $ | 1.86 | 289,350 | $ | 1.86 | |||||||||||||
$2.34 - $3.52 | 708,636 | 5.77 | $ | 3.29 | 506,860 | $ | 3.23 | |||||||||||||
$3.53 - $5.30 | 1,135,002 | 8.25 | $ | 3.86 | 366,081 | $ | 3.85 | |||||||||||||
$5.44 - $5.44 | 1,667 | 0.24 | $ | 5.44 | 1,667 | $ | 5.44 | |||||||||||||
Total options | 2,134,655 | 1,163,958 |
We used the following assumptions to determine compensation expense for our stock options using the Black-Scholes option-pricing model:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Expected volatility | 54 | % | 56 | % | 55 | % | 57 | % | ||||||||
Expected annual dividend yield | 1.50 | % | 2.40 | % | 1.50 | % | 2.40 | % | ||||||||
Risk free rate of return | 1.18 | % | 1.75 | % | 1.46 | % | 1.59 | % | ||||||||
Expected option term (years) | 6.00 | 6.00 | 6.00 | 6.00 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Expected volatility | 48 | % | 50 | % | 48 | % | 49 | % | ||||||||
Expected annual dividend yield | 1.50 | % | 1.50 | % | 1.50 | % | 1.50 | % | ||||||||
Risk free rate of return | 2.80 | % | 1.95 | % | 2.75 | % | 1.94 | % | ||||||||
Expected option term (years) | 6.00 | 6.00 | 6.00 | 6.00 |
Restricted Stock Awards
Our 2015 Non-Employee Directors Long TermLong-Term Equity Incentive Plan (“2015(the “2015 Directors Plan”). This plan provides for the issuance of either stock options or restricted stock awards for up to 500,000 shares of our common stock. Provisions and characteristics of this plan include the following:
● | The exercise price, term and other conditions applicable to each stock option or stock award granted are determined by the Compensation Committee of |
● | Restricted stock awards are initially issued as restricted shares with a legend restricting transferability of the shares until the recipient satisfies the vesting provision of the award, which is generally continuing service for one year subsequent to the date of the |
● | Restricted shares participate in dividend payments and may be voted. |
● | As of September 30, |
Number of Shares | Grant Date Fair Value Per Share | Total Fair Value of Shares That Vested | ||||||||||
Restricted Shares Outstanding at December 31, 2015 | 80,000 | $ | 3.34 | |||||||||
Shares granted with restrictions | 80,000 | $ | 3.31 | |||||||||
Shares vested and restrictions removed | (80,000 | ) | $ | 3.34 | $ | 276,000 | ||||||
Restricted Shares Outstanding at September 30, 2016 | 80,000 | $ | 3.31 | |||||||||
Unrecognized compensation expense for non-vested shares as of September 30,2016 | ||||||||||||
Expense to be recognized in future periods | $ | 156,999 | ||||||||||
Weighted average number of months over which expense is expected to be recognized | 7 |
9. | Income Taxes |
The components of our income tax expense (benefit) are as follows ($ in thousands):
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||||||||||||||||||||||
Current | Deferred | Total | Current | Deferred | Total | Current | Deferred | Total | Current | Deferred | Total | |||||||||||||||||||||||||||||||||||||
Federal | $ | 688 | $ | (81 | ) | $ | 607 | $ | 797 | $ | (254 | ) | $ | 543 | $ | 1,214 | $ | (21 | ) | $ | 1,193 | $ | 1,812 | $ | (313 | ) | $ | 1,499 | ||||||||||||||||||||
Foreign | 12 | - | 12 | 6 | - | 6 | 37 | $ | 22 | 33 | - | $ | 33 | |||||||||||||||||||||||||||||||||||
State | 72 | (4 | ) | 68 | (4 | ) | (3 | ) | (7 | ) | 133 | (15 | ) | $ | 133 | 60 | (7 | ) | $ | 53 | ||||||||||||||||||||||||||||
Total | $ | 772 | $ | (85 | ) | $ | 687 | $ | 799 | $ | (257 | ) | $ | 542 | $ | 1,384 | $ | (36 | ) | $ | 1,348 | $ | 1,905 | $ | (320 | ) | $ | 1,585 |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Current federal income tax expense in the statement of operations | $ | 687 | $ | 542 | $ | 1,348 | $ | 1,585 | ||||||||
Tax (deficiency) from stock-based compensation recorded in additional paid-in capital | (13 | ) | (15 | ) | (26 | ) | (59 | ) | ||||||||
Current taxes per our federal income tax return | $ | 674 | $ | 527 | $ | 1,322 | $ | 1,526 |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||||
Current | Deferred | Total | Current | Deferred | Total | Current | Deferred | Total | Current | Deferred | Total | |||||||||||||||||||||||||||||||||||||
Federal | $ | 166 | $ | 43 | $ | 209 | $ | 29 | $ | 146 | $ | 175 | $ | 243 | $ | 51 | $ | 294 | $ | 733 | $ | 33 | $ | 766 | ||||||||||||||||||||||||
State | 67 | 5 | 72 | 10 | 9 | 19 | 82 | 10 | 92 | 109 | (5 | ) | $ | 104 | ||||||||||||||||||||||||||||||||||
Total | $ | 233 | $ | 48 | $ | 281 | $ | 39 | $ | 155 | $ | 194 | $ | 325 | $ | 61 | $ | 386 | $ | 842 | $ | 28 | $ | 870 |
Deferred income taxes on our consolidated balance sheet reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows ($ in thousands):
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
Deferred tax assets: | ||||||||
Share-based compensation | $ | 718 | $ | 677 | ||||
Deferred revenue | 1,185 | 1,154 | ||||||
Net operating loss carryforward | 106 | 151 | ||||||
Compensation and benefits | 164 | 168 | ||||||
Allowance for doubtful accounts | 114 | 111 | ||||||
Other | 52 | 33 | ||||||
Total deferred tax assets | 2,339 | 2,294 | ||||||
Deferred tax liabilities: | ||||||||
Intangible assets | 1,356 | 1,339 | ||||||
Depreciation | 7 | 15 | ||||||
Total gross deferred tax liabilities | 1,363 | 1,354 | ||||||
Net deferred tax assets | $ | 976 | $ | 940 |
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Deferred tax assets: | ||||||||
Deferred revenue | $ | 829 | $ | 775 | ||||
Share-based compensation | 302 | 351 | ||||||
Compensation and benefits | 55 | 111 | ||||||
Texas franchise tax R&D credit | 189 | 185 | ||||||
Prepaid expenses not deductible for tax | - | 84 | ||||||
Allowance for doubtful accounts | 37 | 58 | ||||||
Net operating loss carryforward | 5 | 20 | ||||||
Deferred state income taxes | 51 | 61 | ||||||
Federal R&D credits | - | - | ||||||
Accrued expenses not deducted for tax | 5 | 9 | ||||||
Valuation allowance | (189 | ) | (185 | ) | ||||
Total deferred tax assets | 1,284 | 1,469 | ||||||
Deferred tax liabilities: | ||||||||
Intangible assets | 721 | 805 | ||||||
Book expenses deductible for tax purposes | 232 | - | ||||||
Depreciable Assets | 1 | 13 | ||||||
Total gross deferred tax liabilities | 954 | 818 | ||||||
Net deferred tax assets | $ | 330 | $ | 651 |
In assessing the realizability of deferred tax assets, we consider whether it is more-likely-than-not that asome portion or all the deferred tax asset will not be realized. Our assessmentThe ultimate realization of deferred tax assets is dependent upon the likelihoodgeneration of having sufficientfuture taxable income during the periods in which those temporary differences become deductible. We have concluded it is more-likely-than-not that our ability to generate future taxable income will allow us to realize those deferred tax assets.
As of September 30, 2018, we had federal income tax net operating loss carryforwards of $23,000 available to offset future federal taxable income. We expect to fully utilize this net operating loss in 2018. If not used, this net operating loss expires in 2038.
As of September 30, 2018, we had Texas Research and Development tax credit carryforwards of $189,000. We believe it is uncertain that we will have sufficient Texas Franchise Tax in the future to support deduction or utilization of these carryforward credits. Accordingly, we have provided a valuation allowance for the items giving rise to our deferred tax assets indicates it is more-likely-than-not that we will realize the deferred tax assets listed in the table above.
The aggregate changes in the balance of our gross unrecognized tax benefits were as follows ($ in thousands):
2016 | 2015 | |||||||
Balance at beginning of year | $ | 90 | $ | 125 | ||||
Increases for tax positions related to the current year | 9 | - | ||||||
Increases for tax positions related to prior years | 11 | 48 | ||||||
Decreases for tax positions related to prior years | - | (51 | ) | |||||
Decreases due to settlements related to prior years | - | (32 | ) | |||||
Balance at September 30 and December 31, respectively | $ | 110 | $ | 90 |
Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
Balance at beginning of period | $ | 158 | $ | 121 | ||||
Increases for tax positions related to the current year | 10 | 16 | ||||||
Increases for tax positions related to prior years | - | 16 | ||||||
Decreases for tax positions where the statue has expired | (48 | ) | - | |||||
Balance at end of period | $ | 120 | $ | 153 |
Our unrecognized tax benefit is related to research and development credits taken on our U.S. income tax returns in 2012, 2013, 2015, 2016, and 2017 and the extent they arise,uncertainty related to the realization of a portion of those credits based on prior experience. We believe it reasonably possible that we will not recognize any of our unrecognized tax benefits at least through December 31, 2018. If we realized and recognized any of our unrecognized tax benefits, such benefits would reduce our effective tax rate in the year of recognition.
We record interest and penalty expensesexpense related to income taxes as components ofinterest and other expense, in our statement of operations. We incurredrespectively. At September 30, 2018, no such expenses in 2016, 2015interest or 2014.
Our income tax expense (benefit) reconciles to an income tax expense resulting from applying an assumed statutory federal income rate of 21% for the 2018 quarter and 2018 nine months and 34% for the 2017 quarter and 2017 nine months to income before income taxes as follows ($ in thousands):
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Income tax expense (benefit) at federal statutory rate | $ | 710 | $ | 603 | $ | 1,397 | $ | 1,685 | ||||||||
Increase (decrease) in taxes resulting from: | ||||||||||||||||
State taxes, net of federal benefit | 44 | (5 | ) | 72 | 33 | |||||||||||
Incentive stock options | 25 | 0 | 60 | 0 | ||||||||||||
Other | (1 | ) | (13 | ) | 20 | 8 | ||||||||||
R&D tax credit uncertain tax position (net) | 10 | 110 | 21 | 59 | ||||||||||||
Research and development credit | (55 | ) | (123 | ) | (119 | ) | (123 | ) | ||||||||
Domestic production activities deduction | (46 | ) | (30 | ) | (103 | ) | (77 | ) | ||||||||
Income tax expense (benefit) per the statement of operations | $ | 687 | $ | 542 | $ | 1,348 | $ | 1,585 |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Income tax expense at federal statutory rate | $ | 269 | $ | 160 | $ | 219 | $ | 828 | ||||||||
Increase (decrease) in taxes resulting from: | ||||||||||||||||
State taxes, net of federal benefit | 58 | 16 | 89 | 67 | ||||||||||||
Stock based compensation | 14 | 37 | 164 | 121 | ||||||||||||
Other | 2 | 7 | 7 | 19 | ||||||||||||
R&D tax credit uncertain tax position (net) | (45 | ) | 6 | (38 | ) | 32 | ||||||||||
Research and development credit | (17 | ) | (30 | ) | (55 | ) | (177 | ) | ||||||||
Domestic production activities deduction | - | (2 | ) | - | (20 | ) | ||||||||||
Income tax expense per the statements of operations | $ | 281 | $ | 194 | $ | 386 | $ | 870 |
On June 21, 2018, in South Dakota v Wayfair Inc., the United States Supreme Court held that states may charge sales tax on purchases made from out-of-state sellers, even if the seller does not have a physical presence in the taxing state. We are evaluating our state income tax filings with respect to the recent Wayfair decision. Currently, we file state income tax returns in those states in which we have a physical presence and/or are otherwise required by a state to register to do business.
10. | Earningsper Common Share |
Earnings per share for the periods indicated were as follows ($ in(in thousands, except per share amounts):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net income | $ | 1,399 | $ | 1,230 | $ | 2,761 | $ | 3,370 | ||||||||
Weighted average shares outstanding - basic | 21,122 | 20,892 | 21,061 | 20,782 | ||||||||||||
Stock options | 552 | 548 | 579 | 512 | ||||||||||||
Weighted average shares outstanding - diluted | 21,674 | 21,440 | 21,640 | 21,294 | ||||||||||||
Net income per common share - basic | $ | 0.07 | $ | 0.06 | $ | 0.13 | $ | 0.16 | ||||||||
Net income per common share - diluted | $ | 0.06 | $ | 0.06 | $ | 0.13 | $ | 0.16 |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Numerator for basic and diluted earnings per share: | ||||||||||||||||
Net income | $ | 998 | $ | 276 | $ | 656 | $ | 1,564 | ||||||||
Denominators | ||||||||||||||||
Denominators for basic and diluted earnings per share: | ||||||||||||||||
Weighted average shares outstanding - basic | 21,688 | 21,792 | 21,746 | 21,672 | ||||||||||||
Dilutive potential common shares | ||||||||||||||||
Stock options and awards | 252 | 455 | 298 | 473 | ||||||||||||
Denominator for diluted earnings per share | 21,940 | 22,247 | 22,044 | 22,145 | ||||||||||||
Net income per common share - basic | $ | 0.05 | $ | 0.01 | $ | 0.03 | $ | 0.07 | ||||||||
Net income per common share – diluted | $ | 0.05 | $ | 0.01 | $ | 0.03 | $ | 0.07 |
As a result of our implementation of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (issued March 2016), the estimated proceeds resulting from equity compensation deductible for federal income tax purposes being greater than the associated stock-based compensation expense are no longer considered as part of the treasury stock method used in computing diluted earnings per share. This change had no material effect on our earnings per share computations.
11. | Dividends |
We paid dividends during the 2018 nine months and 2017 nine months as follows:
March 31, 2016 | June 30, 2016 | September 30, 2016 | ||||||||||
Dividend per share of common stock | $ | 0.015 | $ | 0.015 | $ | 0.015 | ||||||
Dividend record date | February 23, 2016 | May 23, 2016 | August 23, 2016 | |||||||||
Dividend payment date | March 3, 2016 | June 1, 2016 | September 9, 2016 |
Three Months Ended | ||||||||||||||||||||
March 31, 2018 | March 31, 2017 | June 30, 2018 | June 30, 2017 | September 30, 2017 | ||||||||||||||||
Dividend per share of common stock | $ | 0.015 | $ | 0.015 | $ | 0.015 | $ | 0.015 | $ | 0.015 | ||||||||||
Dividend record date | March 9, 2018 | February 23, 2017 | June 8, 2018 | May 23, 2017 | August 23, 2017 | |||||||||||||||
Dividend payment date | March 23, 2018 | March 8, 2017 | June 22, 2018 | June 8, 2017 | September 8, 2017 |
12. | Commitments and Contingencies |
Severance Payments
We have agreements with key personnel that provide for severance payments to them in the event of a change“change in controlcontrol” of the Company, as defined in those agreements, and their employment is terminated in connection with that change in control. In such event, our aggregate severance payments to those employees would be $1.6approximately $1.3 million.
Legal and Regulatory Matters
As previously disclosed in the Company’s Current Report on Form 8-K filed on November 15, 2017, on August 9, 2017, a securities class action complaint, Anthony Giovagnoli v. GlobalSCAPE, Inc., et. al., Case No. 5:17-cv-00753, was filed against the Company in the United States District Court for the Western District of Texas. On November 6, 2017, the Court appointed Irfan Rahman as lead plaintiff, and he filed the First Amended Complaint on July 26, 2018. The Amended Complaint names the Company, Matthew Goulet, James Albrecht, Thomas Brown, David Mann, Frank Morgan, and Thomas Hicks as defendants for allegedly making materially false and misleading statements regarding, inter alia, the Company’s previously reported financial statements. The Amended Complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder. The Amended Complaint seeks unspecified damages, costs, attorneys’ fees, and equitable relief. The parties reached a settlement and submitted a Stipulation of Settlement to the Court on September 13, 2018. Under this settlement, the Company’s and Individual Defendants’ insurance carrier will provide the Class with a cash payment of $1,400,000, which includes the cash amount of any attorney’s fees or litigation expenses that the Court may award Lead Plaintiff’s counsel and costs Lead Plaintiff may incur in administering and providing notice of the settlement. In exchange, Lead Plaintiff has agreed that the settlement will include a dismissal of the Class Action with prejudice and a release of all claims against the Company and the Individual Defendants by the Class. This settlement was preliminarily approved by the Court on October 2, 2018. The Court has scheduled a hearing on December 18, 2018 to determine whether an Order and Final Judgment of the settlement should be entered. The settlement will not become effective until finally approved by the Court. The Company has accrued the $1,400,000 expense in the third quarter of 2018 and has also accrued a receivable of $1,400,000 as this settlement will be funded by our insurance carrier.
On October 12, 2018, the Company received a letter from a stockholder demanding that the Company take action to remedy alleged harm caused to the Company, including to remedy alleged breaches of fiduciary duties by certain current and/or former directors and executive officers of the Company (“the Derivative Demand”). The stockholder alleges, inter alia, that certain current and former directors and executive officers violated their fiduciary duties beginning at least in July 2016, causing GlobalSCAPE to suffer damages by overstating financial results for the fourth quarter of 2016.
On October 20, 2017, the Company received a demand letter from a stockholder seeking the inspection of books and records of the Company pursuant to Section 220 of the Delaware General Corporation Law (the “Section 220 Demand”). This stockholder’s stated purpose for the demand is, inter alia, to investigate whether the Company’s Board of Directors and officers engaged in an illegal scheme to misrepresent the Company’s performance by falsely reporting accounts receivable, license revenue, total current assets and total assets, total stockholders’ equity, and total liabilities for the year ended December 31, 2016, as well as the Board’s independence to consider a stockholder derivative demand. The Company intends to fully respond to the Section 220 Demand to the extent required under Delaware law.
The Board has established a special litigation committee (“Special Litigation Committee”) consisting of Dr. Thomas Hicks and Frank Morgan to analyze and investigate claims that could potentially be asserted in stockholder derivative litigation related to facts connected to the claims and allegations asserted in the litigation related to the Restatement, the Section 220 Demand, and the Derivative Demand (the “Potential Derivative Litigation”). The Special Litigation Committee will determine what actions are appropriate and in the best interests of the Company, and decide whether it is in the best interests of the Company to pursue, dismiss, or consensually resolve any claims that may be asserted in the Potential Derivative Litigation. The Board determined that each member of the Special Litigation Committee is disinterested and independent with respect to the Potential Derivative Litigation. Among other things, the Special Litigation Committee has the power to retain counsel and advisors, as appropriate, to assist it in the investigation, to gather and review relevant documents relating to the claims, to interview persons who may have knowledge of the relevant information, to prepare a report setting forth its conclusions and recommended course of action with respect to the Potential Derivative Litigation, and to take any actions, including, without limitation, directing the filing and prosecution of litigation on behalf of the Company, as the Special Litigation Committee in its sole discretion deems to be in the best interests of the Company in connection with the Potential Derivative Litigation. The Special Litigation Committee’s findings and determinations shall be final and not subject to review by the Board and in all respects shall be binding upon the Company.
As disclosed in a Current Report on Form 8-K filed on March 16, 2018, the Fort Worth, Texas Regional Office of the SEC has opened a formal investigation of issues relating to the Restatement, with which the Company is cooperating fully. At this time, the Company is unable to predict the duration, scope, result or related costs associated with the SEC’s investigation. The Company is also unable to predict what, if any, action may be taken by the SEC, or what penalties or remedial actions the SEC may seek. Any determination by the SEC that the Company’s activities were not in compliance with existing laws or regulations, however, could result in the imposition of fines, penalties, disgorgement, equitable relief, or other losses, which could have a material adverse effect on the Company’s financial position, liquidity, or results of operations.
On May 31, 2018, the Company was served with a subpoena issued by a grand jury sitting in the United States District Court for the Western District of Texas (the “Grand Jury Subpoena”). The Grand Jury Subpoena requests all documents and emails relating to the Company’s investigation of the potential improper recognition of software license revenue. The Company intends to fully cooperate with the Grand Jury Subpoena and related investigation being conducted by the United States Attorney’s Office for the Western District of Texas (the “U.S. Attorney’s Investigation”). At this time, the Company is unable to predict the duration, scope, result or related costs of the U.S. Attorney’s Investigation. The Company is also unable to predict what, if any, further action may be taken in connection with the Grand Jury Subpoena and the U.S. Attorney’s Investigation, or what, if any, penalties, sanctions or remedial actions may be sought. Any determination by the U.S. Attorney’s office that the Company’s activities were not in compliance with existing laws or regulations, however, could result in the imposition of fines, penalties, disgorgement, equitable relief, or other losses, which could have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations.
13. | Concentration of Business Volume and Credit Risk |
In order to leverage the resources of third parties, we make our products available for purchase by end users through third-party, channel distributors even though those end users can also purchase those products directly from us. DuringIn the 20162018 quarter and 2017 quarter, we earned approximately 17% of our revenue from such sales through our largest, third party, channel distributor. During the 2015 quarter there was no single customer that exceeded 10% of sales. During the 2016 nine months12% and 2015 nine months, we earned approximately 14% and 10%, respectively, of our revenue from such sales through our largest third party,third-party channel distributor.
14. Segment and Geographic Disclosures
In accordance with ASC 280, Segment Reporting, we view our operations and manage our business as principally one segment. As a result, the financial information disclosed herein represents all of the material financial information related to our principal operating segment.
Revenues derived from customers and partners located inoutside the United States accounted for approximately 83% and 78%30% of our total revenues in 2016the 2018 quarter and 20152017 quarter, respectively, and 78%29% and 76% of our total revenues26% for both the 20162018 nine months and 20152017 nine months. The remaining revenues weremonths, respectively. Revenue derived from customers and partners located in foreign countries with eachthe United Kingdom were 13% of our revenue in the 2017 quarter. Each individual foreign country accountingaccounts for less than 10% of total revenuesrevenue in all periods.the 2018 quarter. We attribute revenues to countries based on the country in which the customer or partner is located. None of our property and equipment was located in a foreign country as of September 30, 2016 and 2015.
This Quarterly Report on Form 10-Q (this “Quarterly Report”), and any documents incorporated by reference herein contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities andSecuritas Exchange Act of 1934, as amended.amended (the “Exchange Act”). “Forward-looking statements” are those statements that are not of historical fact but describe management’s beliefs and expectations. We have identified many of the forward-looking statements in this Quarterly Report by using words such as “anticipate,” “believe,” “could,” “estimate,” “may,” “expect,” “potentially” and “intend.” Although we believe these expectations are reasonable, our operations involve a number of risks and uncertainties, including those described in the “Risk Factors” section of our 2015Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the “2017 Form 10-K”) and other documents filed with the Securities and Exchange Commission.Commission (the “SEC”). Therefore, GlobalSCAPE’s actual results of operations and financial condition in the future could differ materially from those discussed in this Quarterly Report.
In the following discussion, our references to the 20162018 quarter and the 20152017 quarter refer to the three months ended September 30, 20162018 and 2015,2017, respectively. Our references to the 20162018 nine months and the 20152017 nine months refer to the nine months ended September 30, 20162018 and 2015,2017, respectively.
Overview
GlobalSCAPE, Inc., together with its wholly-owned subsidiary (collectively referred to as the “Company”, “GlobalSCAPE”, “we”, “us” or “our”), develops and sellsells computer software that provides secure information exchange, data transfer and sharing capabilities for enterprises and consumers. We have been in business for more than twenty years and havehaving sold our products to thousands of enterprises and more than one million individual consumers throughout the world.
Our primary business is selling and supporting managed file transfer or MFT,(“MFT”) software for enterprises. The brand nameMFT software facilitates the transfer of ourdata from one location to another across a computer network within a single enterprise or between multiple computer networks in multiple enterprises.
Our MFT product platform isproducts are based upon our Enhanced File Transfer or EFT.
We earn most of our revenue from the sale of EFTproducts and productsservices that are part of our EFT platform. We earn revenue fromCustomers can purchase the salecapabilities of perpetual software licenses, providing products under software-as-a-service, or SaaS, subscriptions, providing maintenance and support services, or M&S, and offering professional services for product customization and integration.
● | Under a perpetual software license for which they pay a one-time fee and under which they typically install our product on computers that they own and/or manage. Our brand name for this product is EFT. Almost all customers who purchase EFT also purchase a maintenance and support (“M&S”), contract for which they pay us an annual recurring fee. Most of the revenue we have earned from our EFT platform products has been from sales of perpetual software licenses and related M&S. |
● | As a software-as-a-service (“SaaS”), under which they pay us ongoing fees to access the capabilities of the EFT platform in the cloud. Through 2017, EFT Cloud was our SaaS offering of the EFT platform which users accessed for a flat monthly subscription fee. In January 2018, we introduced EFT Arcus, our SaaS offering for which users pay a base monthly subscription fee plus an additional variable amount based upon their metered usage of EFT Arcus resources. |
We also sell other products that are synergistic to our EFT platform including Mail Express, scConnect, WAFS, and CuteFTP. Collectively, these products constituteconstituted less than 10%5% of our total revenue.revenue in the three months and nine months ended September 30, 2018. Customers pay a one-time fee to purchase these products under a perpetual software license. Some customers also purchase an M&S contract. We do not offer a SaaS version of these products and have no plans to do so.
We focus on selling our EFT platform products in a business-to-business environment. The majority of the resources we will expend in the future for product research, and development, marketing and sales will focus on that environment.this product line. We expect to expend minimal resources developing and selling our other products. We believe our EFT platform products and business capabilities are well-positioned to compete effectively in the market for MFTthese products. For a more comprehensive discussion of the products we sell and the services we offer, see Software“Software Products and Services” below.
We have won multiple awards for performance and reputation, including:
● | In |
- | Gold winner in the IT World Network Product Guide Awards |
- | Recognized for two Info Security Products Guide 2018 Global Excellence Awards for distinguished achievements in product innovation in categories that included: |
■ | BYOD/Security Category (Gold Winner) – EFT Workspaces v 7.4.2. |
■ | Innovations in Compliance Category (Bronze Winner) – EFT v 7.4.2. |
- | Named to The Channel Company’s list of CRN Channel Chiefs as top leaders in the IT channel for the 5th consecutive year. |
- | Awarded a 5-star rating in The Channel Company’s 2018 CRN Partner Program Guide for the 4th consecutive year. |
● | In 2017: |
- | Named to the CRN 2017 Cloud Partner Program Guide which recognizes partner programs with distinguished margins, sales support and cloud resources |
- | Received three awards from the 2017 Golden Bridge Awards for distinguished technology achievements which included: |
■ | Cloud/SaaS Innovations (Gold Winner) – EFT on Amazon Web Services or Microsoft Azure. |
■ | Managed File Transfer Innovations (Gold Winner) – The EFT Accelerate module. |
■ | Governance, Risk and Compliance Innovations (Bronze Winner) – EFT platform. |
- | Received two awards from the Network Product Guide 2017 IT World Awards for achievements in product excellence that included: |
■ | Governance, Risk and Compliance (Gold Winner) – EFT. |
■ | Cloud Security (Silver Winner) – EFT Cloud Services. |
- | Recognized as a |
- | Recognized for three Info Security Products Guide 2017 Global Excellence Awards for distinguished achievements in product innovation in categories that included: |
■ | Innovation in Compliance (Gold Winner) – Enhanced File Transfer. |
■ | Cloud/SaaS Solutions (Gold Winner) – EFT Cloud Services. |
■ | BYOD Security (Bronze Winner) – EFT Workspaces. |
- | Honored as a |
- |
Received a 5-Star rating in The Channel Company’s CRN |
- | Honored with the |
- | Selected as a |
Key Business Metrics
We review a number oftwo key business metrics on an ongoing basis to help us monitor our performance and to identify material trends which may materially affect our business. The significant metrics we review are described below.business: revenue growth and adjusted EBITDA.
We believe annual revenue growth is a key metric for monitoring our continued success in developing our business in future periods. Given our diverse solution portfolio, we regularly review our revenue mix and changes in revenue across all solutions on a regular basis to identify keyemerging trends. We believe our revenue growth is primarily dependent upon executing our business strategies which include:
● | Ongoing innovation of |
● | Licensing, developing and/or acquiring |
● | Enhancing our sales and marketing programs to improve identification of potential demand for our products and to increase the |
We remain alert for attractive opportunities to collaborate with others or perhaps combine other revenue-producing technologies with ours to expand our product offerings and reach. To support product innovation,that end, we continuecontinually assess products and services offered by others that might be synergistic with our existing products. We may elect to enhance our software engineering group and our focus on optimizingtake advantage of those opportunities through cooperative marketing agreements or licensing arrangements or by acquiring an ownership position in the manner in which we assessenterprise offering the development of new technologies, our approach to managing those projects, and the timelines over which we do that work.
In continuing to develop our demand generation activities, we have made and continue to make ongoing changes in sales and marketing including:
● | Aligning our sales group to enhance its industry and geographic focus. |
● | Implementing new sales and marketing campaigns. |
● |
Enhancing our support of channel partners and engaging them to sell our products through training, orientation and marketing programs. |
When we sell our licensed products, we also typically create a recurring revenue stream from M&S since almost all purchasers of our licensed enterprise products also purchase an M&S contract. Most of our M&S contracts are for one year although we also sell multi-year contracts. The customer pays us the M&S fee for the entire term of the agreement at the time the contract begins. We recognize that amount as revenue ratably in future periods over the term of the contract.
We typically experience a high renewal rate for M&S services for our enterprise products so long as a customer continues using the licensed product they purchased from us. As a result, growing license revenue not only contributes to increasing revenue growth at the time the license is sold but also provides a foundation for future recurring revenue as the purchasers of our licensed products renew M&S agreements to support their ongoing product support needs. This pattern of activity can create a cumulative effect for M&S renewals as a result of the cumulative number of licensed software installations soldcontracts are renewed over multiple years that create M&S renewals in any single year predictably (and in line with our expectations) exceeding the number of new software licenses we sell in a single year.successive years. We expect this cumulative effect to continue to grow if we continue to increase enterprise software license revenue in future periods. For these reasons, we expect M&S revenue will remain a substantial part of our total revenue.
See Comparison“Comparison of the Consolidated Statement of Operations for the Three Months Ended September 30, 20162018 and 2015 2017” and Comparison“Comparison of the Consolidated Statement of Operations for the Nine Months Ended September 30, 20162018 and 2015 2017”for a discussion of trends in our revenue growth that we monitor using this metric.
In the past, we reported bookings and potential future revenue as key business metrics. With the refinement of our revenue growth key business metric discussed above, we useno longer rely on bookings or potential future revenue as key business metrics. We have determined that our revenue growth metric is the primary metric upon which we rely to measure the success of our sales and marketing programs and the effectiveness of our sales and marketing teams. Bookings are a measure of the value of our arrangements with customersoutlook for purchases of software licenses, software-as-a-service, M&S, and professional services. Our bookings consist of:
Three Months Ending September 30, | Nine Months Ending September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Bookings | $ | 10,296 | $ | 9,869 | $ | 26,256 | $ | 24,011 | ||||||||
Products and services sold for which we will recognize revenue at a future date when the goods and services are delivered to and accepted by the customer | (8,967 | ) | (6,772 | ) | (20,945 | ) | (15,455 | ) | ||||||||
Products and services delivered to and accepted by the customer for which revenue recognition had been deferred at the time of booking | 7,424 | 4,550 | 19,110 | 13,834 | ||||||||||||
Revenue | $ | 8,753 | $ | 7,647 | $ | 24,421 | $ | 22,390 |
Adjusted EBITDA
We utilize Adjusted EBITDA (Earnings Before Interest, Taxes, Total Other Income/Expense, Depreciation, Amortization, other than amortization of capitalized software development costs, and Share-Based Compensation Expense) to provide us a view of income and expenses and cash flow from our operations that is supplemental and secondary to our primary assessment of net income as presented in our condensed consolidated statement of operations and comprehensive income and of cash flow from operating activities as presented on our condensed consolidated statement of cash flows.(loss). We use Adjusted EBITDA to provide another perspective for measuring profitability and cash flow from our core operating activities that is before consideringdoes not include the effects of expenses that typically do not require us to pay them in the current period (such as depreciation, amortization and share-based compensation), that is prior to considering the cost of financing our business and the effects of income taxes, and that is prior to the effects on our cash of changes in certain balance sheet items such as accounts receivable and accounts payable. following items:
● | Expenses that typically do not require us to pay them in cash in the current period (such as depreciation, amortization and share-based compensation); |
● | The cost of financing our business; and |
● | The effects of income taxes. |
We monitor the components ofAdjusted EBITDA to assess our actual performance relative to our plans, budgetsintended strategies, expected patterns of action, and expectations andbudgets. We use the results of that assessment to adjust our future activities to the extent we deem necessary.
Adjusted EBITDA is not a measure of financial performance under GAAP.United States generally accepted accounting principles (“GAAP”). It should not be considered as a substitute for net income (loss) presented on our condensed consolidated statement of operations and comprehensive income or for net cash provided by operating activities presented on our condensed consolidated statement of cash flows.(loss). Adjusted EBITDA has limitations as an analytical tool and when assessing our operating performance. Adjusted EBITDA should not be considered in isolation or without a simultaneous reading and consideration of our condensed consolidated financial statements prepared in accordance with GAAP.
We compute Adjusted EBITDA as follows ($ in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net Income | $ | 1,399 | $ | 1,230 | $ | 2,761 | $ | 3,370 | ||||||||
Add (subtract) items to determine adjusted EBITDA: | ||||||||||||||||
Income tax expense | 687 | 542 | 1,348 | 1,585 | ||||||||||||
Interest (income) expense, net | (28 | ) | (17 | ) | (88 | ) | (51 | ) | ||||||||
Depreciation and amortization: | ||||||||||||||||
Total depreciation and amortization | 513 | 433 | 1,522 | 1,116 | ||||||||||||
Amortization of capitalized software development costs | (450 | ) | (367 | ) | (1,319 | ) | (912 | ) | ||||||||
Stock-based compensation expense | 221 | 167 | 721 | 482 | ||||||||||||
Adjusted EBITDA | $ | 2,342 | $ | 1,988 | $ | 4,945 | $ | 5,590 |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net Income | $ | 998 | $ | 276 | $ | 656 | $ | 1,564 | ||||||||
Add (subtract) items to determine Adjusted EBITDA: | ||||||||||||||||
Income tax expense | 281 | 194 | 386 | 870 | ||||||||||||
Interest (income) expense, net | 93 | (75 | ) | (63 | ) | (221 | ) | |||||||||
Depreciation and amortization: | ||||||||||||||||
Total depreciation and amortization | 522 | 547 | 1,641 | 1,604 | ||||||||||||
Amortization of capitalized software development costs | (460 | ) | (484 | ) | (1,459 | ) | (1,404 | ) | ||||||||
Share-based compensation expense | 110 | 381 | 972 | 1,053 | ||||||||||||
Adjusted EBITDA | $ | 1,544 | $ | 839 | $ | 2,133 | $ | 3,466 |
See “Comparison of cash flow:
Nine Months Ended | ||||||||
September 30, | ||||||||
2016 | 2015 | |||||||
Adjusted EBITDA | $ | 4,945 | $ | 5,590 | ||||
Add (subtract) items to reconcile to cash flow from operations: | ||||||||
Income tax expense | (1,348 | ) | (1,585 | ) | ||||
Interest income (expense), net | 88 | 51 | ||||||
Amortization of capitalized software development costs | 1,319 | 912 | ||||||
Bad debt expense | 67 | 147 | ||||||
Deferred taxes | (36 | ) | (320 | ) | ||||
Excess tax benefit from share-based comp | 5 | (49 | ) | |||||
Accounts receivable | (2,856 | ) | (1,690 | ) | ||||
Prepaid expenses | 86 | 154 | ||||||
Other Assets | 30 | 37 | ||||||
Accounts payable | (217 | ) | (757 | ) | ||||
Accrued expenses | (52 | ) | 10 | |||||
Deferred revenue | 1,081 | 531 | ||||||
Other long term liabilities | (10 | ) | (5 | ) | ||||
Income tax receivable and payable | 571 | 403 | ||||||
Net cash provided by operating activities | $ | 3,673 | $ | 3,429 |
Software Products and Services
We develop and sell computer software that provides secure information exchange, filedata transfer, and filedata sharing capabilities for enterprises and consumers. We have been in business for more than twenty years and havehaving sold our products to thousands of enterprises and more than one million individual consumers throughout the world.
Our primary business is selling and supporting MFT software for enterprises. MFT software facilitates the transfer of data from one location to another across a computer network within a single enterprise or between multiple computer networks in multiple enterprises. These transfers may be ongoing, repetitive activities executed by automated software routines that occur without human intervention, or they may be transfers that people create and complete in the absence of automated routines or as a result of ad-hoc, special situations that arise from time-to-time. Examples of enterprise-level activities that rely on MFT software include:
● | Transfer of transactional information within an enterprise on a repetitive basis from one geographic location to another, such as a transfer of deposit and withdrawal information throughout the day from a branch of a bank to a central data processing center at another location. |
● | Movement of accumulated information within an enterprise from one data processing application to another on a periodic basis, such as a transfer of bi-weekly payroll information from a payroll system that is used to pay employees to a job cost system that is used to manage the cost of a project. |
● | Exchange of information between enterprises to facilitate the completion of one or more business transactions, such as a retailer transmitting inventory purchasing requirements produced by its material requirements planning system to an order entry system at a supplying vendor. |
We earn over 90% of our revenue from the sale of MFT products and services that are part of our EFT platform. We have multiple revenue streams from our MFT productsthe EFT platform that include:
● | Perpetual software licenses under which customers pay a one-time fee for the right to install our products in their information systems environment on computers they manage and either own or otherwise procure from a cloud services provider, including deploying our products at a cloud services provider in a bring-your-own-license, or BYOL, environment. Our brand name for this product is EFT. Historically, most of the revenue we have earned from our EFT platform products has been from sales of EFT perpetual software licenses and related M&S. |
● | Cloud-based, SaaS |
● | M&S. |
● | Professional services for product |
We alsofocus on selling our EFT platform products in a business-to-business environment. The majority of the resources we will expend in the future for product research, development, marketing and sales will focus on this product line. We expect to expend minimal resources developing and selling our other products. We believe our EFT platform products and business capabilities are well-positioned to compete effectively in the market for these products. For a more comprehensive discussion of the products we sell and the services we offer, see below.
In June 2017, we introduced a data integration product that we planned to sell under the brand name Kenetix. We licensed the technology for this product from a third party. We experienced issues with the third-party technology and suspended marketing of the product. We have settled the dispute with the third-party and have accrued a liability in these financial statements in the amount of the settlement, including any anticipated settlement fees.
We earn less than 5% of our revenue from selling other products that can be synergistic to our MFT products.EFT platform. These products have capabilities that:
● | Support information sharing and exchange capabilities using traditional email systems. |
● | Enable enterprise file synchronization and sharing. |
● | Enhance the ability to replicate, share and backup files within a wide area network or local area network, thereby allowing users to access their data at higher speeds than possible with most alternate approaches. |
● | Support file transfers by individuals and small businesses. |
We earn most of our revenue from the sale of our MFTEFT platform products tothat support business-to-business activities. Weactivities and are strategically focused on selling products in that environment such thatenvironment. We intend to expend the majority of our resources that we will expend in the future for product research and development, marketing, and sales will concentratein a manner that concentrates on the MFT business-to-business market. We believe our products and business capabilities are well-positioned to compete effectively in that market.
Some of our products support consumer-oriented file transfers and file sharing. Even though these products are profitable on an overall basis, we anticipate the future resources we will expend related to products sold to consumers and the associated revenue we earn from those products will continue to be a minor part of our business.
The following isdiscussion presents a summary description of our specific products and solutions.
Managed File Transfer – Enhanced File Transfer Platform
Enhanced File Transfer, or EFT, is the brand name of our core MFT product platform. EFT was a Silver Winner in the Compliance category and Gold Winner in the BYOD category of the 2016 Info Security Products Guide Global Excellence Awards.
The EFT platform provides a common, scalable MFT environment that accommodates a broad family of accompanying modules to provide enterprises with increased security, automation, compliance and performance when compared to traditional FTP-based and email delivery systems. Various optional modules allow users to select the solution configuration most applicable to their requirements for auditing, reporting, encryption, ad hoc and web-based file transfers, operability in or through a DMZ network, and integration with back-end business processes, including workflow automation capabilities.
General features and capabilities of the EFT platform include:
● | State-of-the-art, enterprise-level security when transferring information within or between computer networks as well as for collaboration with business partners, customers, and employees. EFT also provides automation that supports effective integration of back-end systems. It has built-in regulatory compliance, governance, and visibility controls to provide a means of safely maintaining information. EFT offers a high level of performance and scalability to support operational efficiency and maintain business continuity. Administrative tools |
● | Transmission of critical information such as financial data, medical records, customer files, vendor files, personnel files, transaction activity, and other similar documents between diverse and geographically separated network infrastructures while supporting a range of information protection approaches to meet privacy, compliance and |
● | Compliance with government regulations and industry standards relating to the protection of information while allowing users to reduce information systems and technologies costs, increase efficiency, track and audit transactions, and automate processes. Our solutions also provide data replication, acceleration of file transfer, |
During 2017 and the 2018 nine months, we continued to improve the features and capabilities of accompanying modules to provide enterprises with increased security, automation, and performance when compared to traditional FTP-based and e-mail delivery systems. Various, optional modules allow users to select the solution configuration most applicable to their requirements for auditing and reporting, encryption, ad hoc and web-based file transfers, operability in or through a DMZ network, and integration with back-end business processes, including workflow automation capabilities.
● | EFT Insight, a new reporting platform to strengthen data governance and |
● | Cloud storage support capabilities with the Cloud Connector Module. |
● | Remote Agent Module for streamlining and centrally managing the data exchanges with branch offices and remote locations. |
● | Major enhancements for clustering and High Availability configuration. |
● | Over a dozen major features in the Workspaces |
● | Enhanced Web Transfer Client user access to |
● | Improved SFTP security |
● | Major update to the |
● | New security features, including DMZ Gateway module enhancements and |
EFT platform with capabilities that improve its speed and responsiveness of performance, provide additional administration flexibility supporting cross-platform implementation with our DMZ Gateway solution, offer business activity monitoring, and provide additional language support.
Our customers choose tocan purchase a perpetual software license for a one-time fee paid at the time of purchase and under which they install the software on equipment they own and/or manage. In almost all cases, they also purchase ongoing M&S for which they pay us a recurring, annual amount that typically is 20% to 30% of the price of the software license.
● | Under a perpetual software license for which they pay a one-time fee and under which they typically install our product on computers that they own and or manage. The EFT platform purchased in this manner can also be used in a bring-your-own-license environment hosted by major cloud providers such as Amazon Web Services or Microsoft Azure. Almost all customers who purchase a perpetual license to use the EFT platform also purchase an M&S contract for which they pay us a recurring fee that is typically 20% to 30% of the perpetual license fee per year. |
● | As a software-as-a-service, or SaaS, under which the customer pays us monthly subscription and usage fees to access the capabilities of the EFT platform in the cloud. Our brand name for this product is EFT Arcus. We introduced this product in January 2018. We have not yet earned significant revenue from the SaaS offering of our EFT platform. |
Secure Information Sharing and Exchange Solution – Mail Express
Mail Express is a solution that provides secure information sharing and exchange capabilities leveraging traditional email workflow. It is a stand-alone product installed in a client-server environment that allows users to send and receive secure, encrypted e-mailemail and attachments of virtually unlimited size. Mail Express was a Bronze Winner in the Email Security and Management category of the 2015 Info Security Products Guide Global Excellence Awards.
Wide Area File Services Solution - WAFS
Our WAFS software product uses data synchronization to further enhance the ability to replicate, share and backup files within a wide area network or local area network thereby allowing users to access their data at higher speeds than possible with most alternate approaches. The software uses byte-level differencing technology to update changes to files with minimal impact on network bandwidth while also ensuring that files are never overwritten, even if opened by other remote users. Other key features of WAFS include native file locking, replication to multiple locations simultaneously, adherence to access control list file permissions, and full UTF-8 support.
We will continue sellingto offer WAFS as a stand-alone product and providingprovide M&S services to customers who purchased WAFS in the past and who purchase it in the future. We do not expect to expend significant resources in the future expanding the features and capabilities of WAFS.
File Transfer Solution for Consumers - CuteFTP
CuteFTP is our original product introduced in 1996. It is a file transfer program generally used by individuals and small businesses. It remains popular today and generates incremental revenue for us at a relatively low cost.
Professional Services
We offer a wide range of professional services to complement our on-premises and SaaS cloud-based solutions. These professional services include product customization and system integration, solution “quickstart” implementations, business process and workflow, policy development, education and training, and solution health checks. In addition, we may provide longer-term engineering services, including supporting multi-year contracts, if necessary, to support certain solution implementations and integrations.
● | System integration and implantation |
● | Business process and workflow planning |
● | Policy development |
● | Education and training |
● | Solution health checks |
Maintenance and Support
We offer M&S contracts to licensees of all of our software products. These M&S contracts entitle the licensee to software upgrades and technical support services in accordance with the terms of our M&S contract. Standard technical support services are provided via email and telephone during our regular business hours. For certain of our products, we offer a Platinum M&S contract which provides access to emergency technical assistance 24 hours per day, 7 days a week.
Most of our M&S contracts are for one year although we also sell multi-year contracts. M&S is purchased by substantially all buyers of our EFT platform as well as by many customers who purchase our other products. Customers with M&S contracts pay us a recurring, annual amountfee that is typically 20% to 30% of the software license price. A majority of our customers with M&S contracts renew them each year.
Employees
Our workforce is organized as follows:
September 30, | ||||||||
Department | 2018 | 2017 | ||||||
Sales and Marketing | 36 | 56 | ||||||
Engineering | 9 | 30 | ||||||
Professional Services | 5 | 6 | ||||||
Customer Support | 24 | 23 | ||||||
Management and Administration | 16 | 19 | ||||||
Total | 90 | 134 |
On August 3, 2018, we implemented a plan to restructure our organization, which included a reduction in workforce of approximately 40 employees, representing approximately 30% of the Company’s total pre-restructuring workforce. We recorded a charge of $381,000 in the third quarter of 2018 relating to this reduction in force, consisting primarily of one-time severance payments and termination benefits. The Company’s goal in the restructuring is to better focus our workforce on retaining current customers, gaining incremental business from current customers, and winning new business in the market segments where we can leverage our expertise and long history as an EFT pioneer.
The Company expects for the realignment to result in a significant reduction in total expenses. Furthermore, to the extent that it can be successfully implemented without negatively impacting revenues or growth opportunities, the realignment offers an opportunity for the Company to realize significant increases in operating earnings in future periods, although there can be no assurance that any such increase will occur.
Solution Perspective and Trends
The components of our revenue are as follows ($ in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||||||
Amount | % of Total Revenue | Amount | % of Total Revenue | Amount | % of Total Revenue | Amount | % of Total Revenue | |||||||||||||||||||||||||
Revenue by Type | ||||||||||||||||||||||||||||||||
Software licenses | $ | 3,373 | 38.6 | % | $ | 2,852 | 37.3 | % | $ | 8,565 | 35.1 | % | $ | 8,590 | 38.4 | % | ||||||||||||||||
Maintenance and support | 4,713 | 53.8 | % | 4,142 | 54.2 | % | 13,843 | 56.7 | % | 12,269 | 54.8 | % | ||||||||||||||||||||
Professional services | 667 | 7.6 | % | 653 | 8.5 | % | 2,013 | 8.2 | % | 1,531 | 6.8 | % | ||||||||||||||||||||
Total Revenue | $ | 8,753 | 100.0 | % | $ | 7,647 | 100.0 | % | $ | 24,421 | 100.0 | % | $ | 22,390 | 100.0 | % | ||||||||||||||||
Revenue by Product | ||||||||||||||||||||||||||||||||
EFT Enterprise and Standard | $ | 8,212 | 93.8 | % | $ | 6,905 | 90.3 | % | $ | 22,678 | 92.9 | % | $ | 19,983 | 89.2 | % | ||||||||||||||||
Wide Area File Services | 209 | 2.4 | % | 236 | 3.1 | % | 658 | 2.7 | % | 764 | 3.4 | % | ||||||||||||||||||||
CuteFTP | 124 | 1.4 | % | 240 | 3.1 | % | 480 | 2.0 | % | 665 | 3.0 | % | ||||||||||||||||||||
Other | 208 | 2.4 | % | 266 | 3.5 | % | 605 | 2.4 | % | 978 | 4.4 | % | ||||||||||||||||||||
Total Revenue | $ | 8,753 | 100.0 | % | $ | 7,647 | 100.0 | % | $ | 24,421 | 100.0 | % | $ | 22,390 | 100.0 | % |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||
Percent of | Percent of | Percent of | Percent of | |||||||||||||||||||||||||||||
Amount | Total | Amount | Total | Amount | Total | Amount | Total | |||||||||||||||||||||||||
Revenue By Type | ||||||||||||||||||||||||||||||||
License | $ | 2,843 | 31.7 | % | $ | 2,488 | 30.3 | % | $ | 7,726 | 30.7 | % | $ | 7,768 | 30.9 | % | ||||||||||||||||
M&S | 5,488 | 61.1 | % | 5,360 | 65.2 | % | 15,872 | 63.1 | % | 15,702 | 62.5 | % | ||||||||||||||||||||
Professional Services | 649 | 7.2 | % | 368 | 4.5 | % | 1,549 | 6.2 | % | 1,652 | 6.6 | % | ||||||||||||||||||||
Total Revenue | $ | 8,980 | 100.0 | % | $ | 8,216 | 100.0 | % | $ | 25,147 | 100.0 | % | $ | 25,122 | 100.0 | % | ||||||||||||||||
Revenue by Product Line | ||||||||||||||||||||||||||||||||
License | ||||||||||||||||||||||||||||||||
EFT Platform | $ | 2,767 | 97.3 | % | $ | 2,388 | 96.0 | % | $ | 7,479 | 96.8 | % | $ | 7,338 | 94.5 | % | ||||||||||||||||
Other | 76 | 2.7 | % | 100 | 4.0 | % | 247 | 3.2 | % | 430 | 5.5 | % | ||||||||||||||||||||
Total License Revenue | 2,843 | 100.0 | % | 2,488 | 100.0 | % | 7,726 | 100.0 | % | 7,768 | 100.0 | % | ||||||||||||||||||||
M&S | ||||||||||||||||||||||||||||||||
EFT Platform | 5,270 | 96.0 | % | 5,100 | 95.1 | % | 15,202 | 95.8 | % | 14,893 | 94.8 | % | ||||||||||||||||||||
Other | 218 | 4.0 | % | 260 | 4.9 | % | 670 | 4.2 | % | 809 | 5.2 | % | ||||||||||||||||||||
Total M&S Revenue | 5,488 | 100.0 | % | 5,360 | 100.0 | % | 15,872 | 100.0 | % | 15,702 | 100.0 | % | ||||||||||||||||||||
Professional Services (all EFT Platform) | 649 | 100.0 | % | 368 | 100.0 | % | 1,549 | 100.0 | % | 1,652 | 100.0 | % | ||||||||||||||||||||
Total Revenue | ||||||||||||||||||||||||||||||||
EFT Platform | 8,686 | 96.7 | % | 7,856 | 95.6 | % | 24,230 | 96.4 | % | 23,883 | 95.1 | % | ||||||||||||||||||||
Other | 294 | 3.3 | % | 360 | 4.4 | % | 917 | 3.6 | % | 1,239 | 4.9 | % | ||||||||||||||||||||
Total Revenue | $ | 8,980 | 100.0 | % | $ | 8,216 | 100.0 | % | $ | 25,147 | 100.0 | % | $ | 25,122 | 100.0 | % |
Revenue from our EFT platform products increased 10.6% for the 2018 quarter compared to the 2017 quarter and 1.5% for the 2018 nine months compared to the 2017 nine months. Revenue for our other product lines decreased 18.3% for the 2018 quarter compared to the 2017 quarter and 26.0% for the 2018 nine months compared to the 2017 nine months, which is consistent with our expectations as discussed below. For a more detailed discussion of these revenue trends, see “Comparison of the Consolidated Statement of Operations for the Three Months Ended September 30, 2018 and 2017” and “Comparison of the Consolidated Statement of Operations for the Nine Months Ended September 30, 2018 and 2017”.
We earn revenue primarily from the following activities:
License revenue from sales of our EFT and Mail Expressplatform products that we deliver as either perpetually-licensed software installed at the customer’s premises, for which we earn the full amount of the license revenue at the time the license is delivered, or as a cloud-based service under our EFT Cloud Services brandor EFT Arcus brands delivered using a SaaS model, for which we earn monthly subscription revenue as these services are delivered over a contract period that is typically one year.
License revenue from sales of our Mail Express, WAFS and CuteFTP products that are installed at the customer’s premises under a perpetual license for which we earn the full amount of the license revenue at the time the license is delivered.
M&S revenue under contracts to provide ongoing product support and software updates to our customers who have purchased license software which wecustomers. We recognize revenue ratably over the contractual period, which is typically one year, but can be up to three years.
Professional services revenue from a variety of customization, implementation and integration services, as well as delivery of education and training associated with our solutions, which we recognize as the services are performed and accepted by the client.client.
We earn most of our revenue from the sale of our EFT platform products and the associated M&S and professional services related to those products. With our core competency being in products that address the managed file transferMFT market, we believe our EFT platform products provide the best opportunity for our future growth. Accordingly, expansion of the capabilities of the EFT platform will be our primary focus in the future. While we will continue to sell and support our other products for the foreseeable future, they will not be an area of emphasis for us going forward.
We believe that continuing to offer licensed products installed on-premises for which we recognize revenue up-front and that carry with them a recurring M&S revenue stream is important to our future success. At the same time, we recognize that a migration of capabilities to a SaaS platform is attractive to a growing number of customers. We have, and have had for quite some time, the capabilities in place to deliver our EFT platform in that manner. However, thismanner through our EFT Cloud and Arcus products. While our SaaS revenue is not yet a material component of total revenue, a migration by customers to our EFT Cloud and Arcus products could create some near-term decreases in the growth rate of license revenue, and may result in similar decreases in future periods, because it typically takes approximately 24 to 36 months of SaaS revenue to yield total revenue equivalent to that realized up-front from the sale of a license for an on-premise installation.
We have developed and offered individualconsumer product lines throughout our history that include EFT, Mail Express, WAFS, scConnect and CuteFTP. Each of these product lines addresses distinct needs in the marketplace. While some customers purchase products from more than one of these product lines, for the most part, customers in a particular market or vertical have needs that are addressed by only one of these products and, therefore, purchase only that product. With respect to Mail Express and scConnect, while we will continue to offer themMail Express as a stand-alone productsproduct for the time being, the engineering resources we allocate to these technologiesthis technology will focus on migrating themit to becoming an integrated component of our EFT platform. We do not expect to expend significant resources in the future on expanding the features and capabilities of WAFS and CuteFTP although we will continue to sell those products and support them.
In continuing to develop our demand generation activities, we have made and continue to make ongoing changes in sales and marketing including:
● | Aligning our sales group to enhance its industry and geographic focus. |
● | Implementing new sales and marketing campaigns. |
● | Enhancing our support of channel partners and engaging them to sell our products through training, orientation and marketing programs. |
Liquidity and Capital Resources
Our total cash, cash equivalents, certificates of deposit and working capital positions were as follows ($ in thousands):
September 30, 2016 | December 31, 2015 | September 30, 2015 | ||||||||||
Cash and cash equivalents | $ | 17,421 | $ | 15,885 | $ | 12,858 | ||||||
Short term investments | 3,303 | 3,254 | 3,233 | |||||||||
Total cash, cash equivalents and long term investments | $ | 20,724 | $ | 19,139 | $ | 16,091 | ||||||
Working capital | $ | 14,138 | $ | 11,162 | $ | 6,515 | ||||||
Deferred revenue, current portion | 13,005 | 12,000 | 11,848 | |||||||||
Working capital plus current deferred revenue (non-GAAP presentation) | $ | 27,143 | $ | 23,162 | $ | 18,363 |
September 30, 2018 | December 31, 2017 | |||||||
Cash and cash equivalents | $ | 9,630 | $ | 11,583 | ||||
Short term certificates of deposit | 1,530 | 4,291 | ||||||
Long term certificates of deposit | - | 11,503 | ||||||
Total cash, cash equivalents and certificates of deposit | $ | 11,160 | $ | 27,377 | ||||
Current assets | $ | 19,926 | $ | 23,296 | ||||
Current liabilities | (17,701 | ) | (16,886 | ) | ||||
Working capital | $ | 2,225 | $ | 6,410 |
At September 30, 2018, our certificate of our working capital, is an obligation we will satisfy by providing servicesdeposit in the future to our customers as part of our ongoing operating activities from which we have historically generated cash flow. Our deferred revenue does not involve a disbursement of cash as a direct payment of that liability. Accordingly, we assess our working capital using both the GAAP computation that includes all current liabilities as well as assessing it excluding the current portion of deferred revenue. Working capital plus the current portion of deferred revenue is not a measure of financial position under GAAP, has limitations as an analytical tool and whenassets matures in October 2018.
When assessing our financial positionliquidity and should not be considered a substitute for working capital computed in accordance with GAAP.
● | We may access and monetize our certificates of deposit at any time without risk of loss of the original amounts invested. If we were to redeem these certificates of deposit prior to their maturity, we may incur a penalty and forfeit certain amounts of accrued interest, but we view such amounts as not material. |
● | Deferred revenue, unlike the other liability components of our working capital, is an obligation we will satisfy by providing services in the future to our customers as part of our ongoing operating activities from which we have historically generated cash flow. Our deferred revenue does not involve a disbursement of cash as a direct payment of that liability although we will incur operating expenses in the future as we deliver those M&S services. |
Our capital requirements principally relate to our need to fund our ongoing operating expenditures, which are primarily related to employee salaries and benefits. We make these expenditures to enhance our existing products, develop new products, sell those products in the marketplace and support our customers after the sale.
We rely on cash and cash equivalents on hand and cash flows from operations to fund our operating activities and believe those items will be our principal sources of capital for the foreseeable future. If our revenue declines and/or our expenses increase, our cash flow from operations and cash on hand could decline. We plan to expend significant resources in the future for research and development of our products and expansion and enhancement of our sales and marketing activities. If sales decline or if our liquidity is otherwise under duress, we could substantially reduce personnel and personnel-related costs, reduce or substantially eliminate capital expenditures and/or reduce or substantially eliminate certain research and development and sales and marketing expenditures. We may also sell equity or debt securities or enter into credit arrangements in order to finance future acquisitions or licensing activities, to the extent available.
Cash provided or used by our various activities consisted of the following ($ in thousands):
Cash Provided (Used) During the Nine Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
Operating activities | $ | 3,673 | $ | 3,429 | ||||
Investing activities | (1,515 | ) | (1,769 | ) | ||||
Financing activities | (622 | ) | (160 | ) |
Cash Provided (Used) During the Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
Operating activities | $ | 2,559 | $ | 4,773 | ||||
Investing activities | 13,064 | (1,713 | ) | |||||
Financing activities | (17,576 | ) | (508 | ) |
Our cash provided by operating activities increaseddecreased during the 20162018 nine months compared to the 20152017 nine months primarily due to the following factors:
● | Accounts |
● | Accounts payable increasing $82,000 during the 2018 nine months compared to |
● | Deferred revenue decreasing $1.9 million during the |
● | Prepaid and other current assets increasing |
● | Net income after considering |
Offset by:
● | Accrued expenses increasing $1.7 million in the |
● | Federal income tax receivable decreasing $82,000 in the 2018 nine months compared to increasing $759,000 in the 2017 nine months due primarily to paying $1.3 million more in income tax payments in the 2017 nine months as compared to the |
The amount of cash we used for investing activities during the 20162018 nine months decreasedincreased compared to the 20152017 nine months withdue primarily to:
● | The redemption of the majority of our certificates of deposit which caused an increase of $14.3 million in the 2018 nine months, for which no comparable event in the 2017 nine months occurred. |
Offset by:
● | A decrease in the purchase of property and equipment as a result of remodeling of our sales and engineering office spaces in the 2017 nine months, for which there was no comparable event in the 2018 nine months. |
● | A decrease in our software development costs capitalized due to the reduction in force which significantly reduced the headcount in our engineering department. |
Financing activities used more cash during the primary component of that decrease relating to software development costs that were capitalized. This decrease was2018 nine months than during the 2017 nine months primarily due to:
● | The purchase of $17.2 million of our |
● | A decrease in proceeds received from the |
Offset by:
● | No dividend payment in the third quarter of |
Contractual Obligations and Commitments
As of September 30, 2016,2018, our contractual obligations and commitments consisted primarily of the following items:
● | An obligation to deliver services in the future to satisfy our right to earn our deferred revenue of |
�� | Trade accounts payable and accrued liabilities which include our contractual obligations to pay software royalties to third parties that vary in amount based on our sales volume of products upon which royalties are payable. |
● | Operating lease for our office space. |
● | Federal and state taxes. |
Our non-cancellable, contractual obligations at September 30, 2016,2018, consisted primarily of the lease for our office space with amounts due as followsfollowing ($ in thousands):
Amounts Due for the Period | ||||||||||||||||||||
Three Months Ending December 31, 2016 | Fiscal Years | |||||||||||||||||||
2017 - 2018 | 2019 - 2020 | Thereafter | Total | |||||||||||||||||
Operating leases | $ | 90 | $ | 720 | $ | 120 | $ | - | $ | 930 |
Amounts Due for the Period | ||||||||||||||||||||
Three Months Ending December 31, | Fiscal Years | |||||||||||||||||||
2018 | 2019 | 2020 | Thereafter | Total | ||||||||||||||||
Operating leases | $ | 90 | $ | 120 | $ | 0 | $ | 0 | $ | 210 |
As of September 30, 2016,2018, we had no interest-bearing obligations in the form of loans, notes payable or similar debt instruments.
Comparison of the Condensed Consolidated Statement of Operations for the Three Months Ended September 30 2016, 2018 and 2015
Three Months Ended September 30, | ||||||||||||
2016 | 2015 | $ Change | ||||||||||
$ in thousands | ||||||||||||
Total revenues | $ | 8,753 | $ | 7,647 | $ | 1,106 | ||||||
Total cost of revenues | 1,770 | 1,508 | 262 | |||||||||
Gross profit | 6,983 | 6,139 | 844 | |||||||||
Operating expenses | ||||||||||||
Sales and marketing | 2,759 | 2,289 | 470 | |||||||||
General and administrative | 1,638 | 1,449 | 189 | |||||||||
Research and development | 528 | 646 | (118 | ) | ||||||||
Total operating expenses | 4,925 | 4,384 | 541 | |||||||||
Income from operations | 2,058 | 1,755 | 303 | |||||||||
Other income (expense), net | 28 | 17 | 11 | |||||||||
Income before income taxes | 2,086 | 1,772 | 314 | |||||||||
Income tax expense | 687 | 542 | 145 | |||||||||
Net income | $ | 1,399 | $ | 1,230 | $ | 169 |
Three Months Ended September 30, | ||||||||||||
2018 | 2017 | $ Change | ||||||||||
$ in thousands | ||||||||||||
Total revenues | $ | 8,980 | $ | 8,216 | $ | 764 | ||||||
Total cost of revenues | 1,499 | 1,573 | (74 | ) | ||||||||
Gross profit | 7,481 | 6,643 | 838 | |||||||||
Operating expenses | ||||||||||||
Sales and marketing | 2,261 | 3,079 | (818 | ) | ||||||||
General and administrative | 1,589 | 1,573 | 16 | |||||||||
Legal and professional | 1,510 | 1,002 | 508 | |||||||||
Severance | 381 | - | 381 | |||||||||
Research and development | 368 | 594 | (226 | ) | ||||||||
Total operating expenses | 6,109 | 6,248 | (139 | ) | ||||||||
Income from operations | 1,372 | 395 | 977 | |||||||||
Other income | (93 | ) | 75 | (168 | ) | |||||||
Income before income taxes | 1,279 | 470 | 809 | |||||||||
Income tax expense | 281 | 194 | 87 | |||||||||
Net income | $ | 998 | $ | 276 | $ | 722 |
In the discussion below, we refer to the three months ended September 30, 2016, as the “2016 quarter” and the three months ended September 30, 2015, as the “2015 quarter”. The percentage changes cited in our discussions are based on the 20162018 quarter amounts compared to the 20152017 quarter amounts.
Revenue.
The components of our revenues were as follows ($ in thousands):Three Months Ended September 30, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
$ in thousands | ||||||||||||||||
Amount | % of Total Revenue | Amount | % of Total Revenue | |||||||||||||
Revenue by Type | ||||||||||||||||
Software licenses | $ | 3,373 | 38.6 | % | $ | 2,852 | 37.3 | % | ||||||||
Maintenance and support | 4,713 | 53.8 | % | 4,142 | 54.2 | % | ||||||||||
Professional services | 667 | 7.6 | % | 653 | 8.5 | % | ||||||||||
Total Revenue | $ | 8,753 | 100.0 | % | $ | 7,647 | 100.0 | % | ||||||||
Revenue by Product | ||||||||||||||||
EFT Enterprise and Standard | $ | 8,212 | 93.8 | % | $ | 6,905 | 90.3 | % | ||||||||
Wide Area File Services | 209 | 2.4 | % | 236 | 3.1 | % | ||||||||||
CuteFTP | 124 | 1.4 | % | 240 | 3.1 | % | ||||||||||
Other | 208 | 2.4 | % | 266 | 3.5 | % | ||||||||||
Total Revenue | $ | 8,753 | 100.0 | % | $ | 7,647 | 100.0 | % |
Three Months Ended September 30, | ||||||||||||||||
2018 | 2017 | |||||||||||||||
Percent of | Percent of | |||||||||||||||
Amount | Total | Amount | Total | |||||||||||||
Revenue By Type | ||||||||||||||||
License | $ | 2,843 | 31.7 | % | $ | 2,488 | 30.3 | % | ||||||||
M&S | 5,488 | 61.1 | % | 5,360 | 65.2 | % | ||||||||||
Professional Services | 649 | 7.2 | % | 368 | 4.5 | % | ||||||||||
Total Revenue | $ | 8,980 | 100.0 | % | $ | 8,216 | 100.0 | % | ||||||||
Revenue by Product Line | ||||||||||||||||
License | ||||||||||||||||
EFT Platform | $ | 2,767 | 97.3 | % | $ | 2,388 | 96.0 | % | ||||||||
Other | 76 | 2.7 | % | 100 | 4.0 | % | ||||||||||
2,843 | 100.0 | % | 2,488 | 100.0 | % | |||||||||||
M&S | ||||||||||||||||
EFT Platform | 5,269 | 96.0 | % | 5,100 | 95.1 | % | ||||||||||
Other | 219 | 4.0 | % | 260 | 4.9 | % | ||||||||||
5,488 | 100.0 | % | 5,360 | 100.0 | % | |||||||||||
Professional Services (all EFT Platform) | 649 | 100.0 | % | 368 | 100.0 | % | ||||||||||
Total Revenue | ||||||||||||||||
EFT Platform | 8,685 | 96.7 | % | 7,856 | 95.6 | % | ||||||||||
Other | 295 | 3.3 | % | 360 | 4.4 | % | ||||||||||
$ | 8,980 | 100.0 | % | $ | 8,216 | 100.0 | % |
Our software licensetotal revenue increased 18.3%9.3%. Most of this increase cameRevenue from our sales of our EFT platform products and services increased 10.6%. Revenue from our other products that consist of Mail Express, WAFS, CuteFTP, and TappIn decreased to comprising 3.3% of our total revenue, which is a trend that is in line with our ongoing de-emphasis of those products.
EFT Platform Products
License revenue from our EFT platform products increased 15.9%. This increase was a resultprimarily due to an increase in the number of large transactions, including transactions that were expected to originally close in the following factors:previous quarter.
To improve our ability to successfully sell existing EFT platform products as well as new products produced by our software engineering team, we continued to make, and will continue to make, ongoing changes in sales and marketing personnel and activities including:
● | Aligning our |
● | Implementing new sales and marketing |
● | Enhancing our support of channel partners and engaging them to |
M&S revenue from our EFT platform products increased 3.3% primarily due to:
● | Ongoing license sales since a majority of license sales are accompanied by an M&S contract. The change in M&S revenue typically lags behind the related change in license revenue because license sales are recognized as revenue in full in the period the license is delivered while the related M&S revenue is recognized in future periods as those services are delivered. |
● | Sustaining high renewal rates of M&S contracts by customers who initially purchased these services in earlier periods. We believe these renewals result from our programs designed to |
Our professional services revenue was $281,000 more for the 2018 quarter compared to the 2017 quarter which is an increase of 76.4%. This increase was primarily due an increase in software license sales, which typically results in higher professional service revenue.
When we sell our licensed products, we also typically create a recurring revenue stream from M&S since almost all purchasers of our licensed products also purchase an M&S contract. In general, and depending upon the level of M&S a customer purchases, this recurring revenue stream is 20% to 30% per year of the price of the underlying software license to which the M&S relates.
Our M&S contracts byare typically for one year, with some customers who initially purchased these servicesbuying two or three year contracts. Customers pay the M&S fee for the entire term of the agreement at the time the contract begins. We recognize that amount as revenue ratably in earlier periods. We believe these renewal rates result from our programs designed to provide high-quality and responsive M&S service to our customers.
We typically experience a high renewal rate for M&S services for our enterprise products so long as a customer continues using the licensed product they purchased from us. OngoingAs a result, growing license revenue not only contributes to increasing revenue growth at the time the license is sold but also provides a foundation for future recurring revenue as the purchasers of our licensed products continually renew M&S agreementscontracts to support their ongoing product support needs. This pattern of activity can create a cumulative effect for M&S renewals as a result of the cumulative number of licensed software installations sold over multiple years that create M&S renewals in any single year predictably (and in line with our expectations) exceeding the number of new software licenses we sell in a single year. We expect this cumulative effect to continue yielding sustainable M&S revenue asto grow if we continue to sell ourincrease enterprise software productslicense revenue in future periods.
Other Products
In mid-2016, we announced that our focus would be on our EFT platform products. At the same time, we announced that while we would continue selling our Mail Express, WAFS, CuteFTP, and TappIn products that collectively constitute less than 3.3% of our total revenue in the quarter, in the future we would de-emphasize these stand-alone products that are typicallynot part of our EFT platform. Accordingly, during the second half of 2016, we began to curtail our product development and engineering resources for one year, with some customers buying two or three year contracts. The customer pays us the M&S fee for the entire term of the agreement at the time the contract begins. We recognize that amount as revenue ratably in future periods over the term of the contract.
Cost of Revenues.
These expenses are associated with the production, delivery and support of our products and services. We believe it● | Amortization of capitalized software development costs we incur when producing our software products. |
● | Royalties we pay to use software developed by others for certain features of our |
● | Fees we pay to third parties who provide services supporting our SaaS and cloud-based subscription |
Cost of M&S revenue and cost of professional services revenue consist primarily of salaries and related costs of our employees and third parties we use to deliver these services.
Cost of software license revenue decreased 0.6% and as a percent of software license revenue was 26%25.4% in the 20162018 quarter compared to 20%29.1% in the 20152017 quarter. This increase wasThese decreases were primarily due to lower royalty expense, which can fluctuate based upon the resultmix of products sold, offset by slight increases in third-party hosting fees for our release of new softwareSaaS products and new versionsan increase in amortization of existing products in periods subsequent to the 2015 quarter and the resulting commencement of amortizing the capitalized software development costs for those products. This additional expense amortization that began subsequent to the 2015 quarter increased cost of revenue in the 2016 quarter as compared to the 2015 quarter. On an absolute dollar basis, cost of revenue for software licenses increased 55% during the 2016 quarter due to the factors cited above and due to higher software license revenue.
Cost of M&S revenue as a percent of M&S revenue was substantially unchanged.9.4% in the 2018 quarter as compared to 8.3% in the 2017 quarter. Cost of revenue for M&S in absolute dollars increased by 6% due to an increase15.2%. These increases were a combination of increasing our headcount in M&S revenue. The cost of delivering M&S can vary slightly up or down from period-to-period, but we believe such changes are typically not indicative of long term trends or permanent changes in our cost of delivering M&S. Our gross margin on these services generally remains greater than 90% as a result of a consistent application of our customer support delivery protocolsdepartment and practices.
Cost of professional services revenue as a percent of that revenue was 80%40.6% in the 20162018 quarter as compared to 93%109.2% in the 20152017 quarter. This variation resulted from the varying scope and mix of the professional services we deliver that can change from period-to-period in response to the circumstances of the customer environments in which we are working. Varying customer requirements for our professional services, combined with our desire to ensure that we maintain our high standard of delivering quality, timely services, caused us to engage third-party service providers to a greater extent inBecause the 2015 quarter compared to the 2016 quarter, for which the cost is higher than the cost of using our own personnel. Cost of revenue for professional services is highly variable relative to our revenue from our services, this cost in absolute dollars decreased 12% for the reasons discussed above.
Sales and Marketing.
We believe itGeneral and Administrative.
These expenses increasedLegal and Professional. These expenses increased 50.7% primarily due to increases in professional fees and related expenses associated with the matter discussed belowpreviously disclosed internal investigation, the restatement of certain of our financial statements and related litigation described in Part II. Other Information Item 1. Legal Proceedings.
Severance. These expenses increased $381,000 due to the one-time severance payments and termination benefits associated with the reduction in force.
Research and Development.
The overall profile of our research and development “R&D” activities was as follows ($ in thousands):Three Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
R&D expenditures capitalized | $ | 452 | $ | 506 | ||||
R&D expenditures expensed | 528 | 646 | ||||||
Total R&D expenditures (non-GAAP measurement) | $ | 980 | $ | 1,152 |
Three Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
R&D expenditures expensed | $ | 368 | $ | 594 | ||||
R&D expenditures capitalized | 264 | 527 | ||||||
Total R&D expenditures (non-GAAP measurement) | $ | 632 | $ | 1,121 |
Our total R&D expenditures decreased 43.6% during the 2018 quarter as compared with the 2017 quarter primarily due fewer employed software engineers and technical personnel.
Total resources expended for R&D set forth above as total R&D expenditures serves to illustrate our total corporate efforts to improve our existing products and to develop new products regardless of whether or not our expenditures for those efforts were expensed or capitalized. Total resources expended for R&D is not a measure of financial performance under GAAP and should not be considered a substitute for R&D expense (set forth above as R&D expenditures expensed) and capitalized software development costs (set forth above as R&D expenditures capitalized) individually. While we believe the non-GAAP, total resources expended for R&D amount provides useful supplemental information regarding our overall corporate product improvement and new product creation activities, there are limitations associated with the use of this non-GAAP measurement. Total resources expended for R&D is a non-GAAP measure not prepared in accordance with GAAP and may not be comparable to similarly titled measures of other companies since there is no standard for preparing this non-GAAP measure. As a result, this non-GAAP measure of total resources expended for R&D has limitations and should not be considered in isolation from, or as a substitute for, R&D expense and capitalized software development costs individually.
Interest Income (Expense), Net. Interest income (expense), net has historically consisted primarily of interest income earned on certificates of deposit. In the 2018 quarter the amount is an expense due to the forfeiture of approximated $155,000 in accrued interest. This forfeiture was the result of redeeming a long term certificate of deposit before its scheduled maturity date in order to fund the purchase of shares related to the tender offer.
Income Taxes. Our effective rate differed from the federal statutory tax rate of 21% in the 2018 quarter and 34% in the 2017 quarter primarily due to:
● | Certain expenses in our consolidated financial statements, such as a portion of meals and entertainment expenses and stock based compensation that are not deductible on our federal income tax return. |
● | State income taxes included in income tax expense in our consolidated financial statements. |
Offset by:
● | The domestic production activities deduction (in the 2017 quarter) and the research and development credit which are tax credit incentives that serve to reduce the rate at which we pay federal income taxes in exchange for us conducting certain aspects of our business in a manner promoted by the Internal Revenue Code. |
Comparison of the Condensed Consolidated Statement of Operations for the NineMonths Ended September 30, 2018 and 2017
Nine Months Ended September 30, | ||||||||||||
2018 | 2017 | $ Change | ||||||||||
$ in thousands | ||||||||||||
Total revenues | $ | 25,147 | $ | 25,122 | $ | 25 | ||||||
Total cost of revenues | 4,679 | 4,637 | 42 | |||||||||
Gross profit | 20,468 | 20,485 | (17 | ) | ||||||||
Operating expenses | ||||||||||||
Sales and marketing | 8,229 | 9,564 | (1,335 | ) | ||||||||
General and administrative | 4,883 | 4,607 | 276 | |||||||||
Legal and professional | 4,235 | 1,550 | 2,685 | |||||||||
Severance | 488 | 21 | 467 | |||||||||
Research and development | 1,654 | 2,530 | (876 | ) | ||||||||
Total operating expenses | 19,489 | 18,272 | 1,217 | |||||||||
Income from operations | 979 | 2,213 | (1,234 | ) | ||||||||
Other income | 63 | 221 | (158 | ) | ||||||||
Income before income taxes | 1,042 | 2,434 | (1,392 | ) | ||||||||
Income tax expense | 386 | 870 | (484 | ) | ||||||||
Net income | $ | 656 | $ | 1,564 | $ | (908 | ) |
In the discussion below, the percentage changes cited are based on the 2018 nine month amounts compared to the 2017 nine month amounts.
Revenue. The components of our revenues were as follows ($ in thousands):
Nine Months Ended September 30, | ||||||||||||||||
2018 | 2017 | |||||||||||||||
Percent of | Percent of | |||||||||||||||
Amount | Total | Amount | Total | |||||||||||||
Revenue By Type | ||||||||||||||||
License | $ | 7,726 | 30.7 | % | $ | 7,768 | 30.9 | % | ||||||||
M&S | 15,872 | 63.1 | % | 15,702 | 62.5 | % | ||||||||||
Professional Services | 1,549 | 6.2 | % | 1,652 | 6.6 | % | ||||||||||
Total Revenue | $ | 25,147 | 100.0 | % | $ | 25,122 | 100.0 | % | ||||||||
Revenue by Product Line | ||||||||||||||||
License | ||||||||||||||||
EFT Platform | $ | 7,479 | 96.8 | % | $ | 7,338 | 94.5 | % | ||||||||
Other | 247 | 3.2 | % | 430 | 5.5 | % | ||||||||||
7,726 | 100.0 | % | 7,768 | 100.0 | % | |||||||||||
M&S | ||||||||||||||||
EFT Platform | 15,202 | 95.8 | % | 14,893 | 94.8 | % | ||||||||||
Other | 670 | 4.2 | % | 809 | 5.2 | % | ||||||||||
15,872 | 100.0 | % | 15,702 | 100.0 | % | |||||||||||
Professional Services (all EFT Platform) | 1,549 | 100.0 | % | 1,652 | 100.0 | % | ||||||||||
Total Revenue | ||||||||||||||||
EFT Platform | 24,230 | 96.4 | % | 23,883 | 95.1 | % | ||||||||||
Other | 917 | 3.6 | % | 1,239 | 4.9 | % | ||||||||||
$ | 25,147 | 100.0 | % | $ | 25,122 | 100.0 | % |
Our total revenue was relatively flat for the 2018 nine months as compared to the 2017 nine months. Revenue from our EFT platform products and services increased 1.5%. Revenue from our other products that consist of Mail Express, WAFS, CuteFTP, and TappIn decreased to comprising 3.6% of our total revenue, which is a trend that is in line with our ongoing de-emphasis of those products.
EFT Platform Products
License revenue from our EFT platform products increased 1.9%. This increase was primarily due to an increase in the number of large transactions, including transactions that were expected to close in 2017.
M&S revenue from our EFT platform products increased 2.1% primarily due to:
● | Ongoing license sales since a majority of license sales are accompanied by an M&S contract. The change in M&S revenue typically lags behind the related change in license revenue because license sales are recognized as revenue in full in the period the license is delivered. The related M&S revenue is recognized in future periods as those services are delivered. |
● | Sustaining high renewal rates of M&S contracts by customers who initially purchased these services in earlier periods. We believe these renewals result from our programs designed to provide high-quality and responsive M&S services to customers. |
Professional services revenue decreased $103,000 primarily due to a lower headcount in our professional services department which resulted in fewer resources available to deliver services.
When we sell our licensed products, we also typically create a recurring revenue stream from M&S since almost all purchasers of our licensed products also purchase an M&S contract. In general, and depending upon the level of M&S a customer purchases, this recurring revenue stream is 20% to 30% per year of the price of the underlying software license to which the M&S relates.
Our M&S contracts are typically for one year, with some customers buying two or three year contracts. The customer pays us the M&S fee for the entire term of the agreement at the time the contract begins. We recognize that amount as revenue ratably in future periods over the term of the contract.
We typically experience a high renewal rate for M&S services for our enterprise products so long as a customer continues using the licensed product they purchased from us. As a result, growing license revenue not only contributes to increasing revenue growth at the time the license is sold but also provides a foundation for future recurring revenue as the purchasers of our licensed products continually renew M&S contracts to support their ongoing product support needs. This pattern of activity can create a cumulative effect for M&S renewals as a result of the cumulative number of licensed software installations sold over multiple years that create M&S renewals in any single year predictably (and in line with our expectations) exceeding the number of new software licenses we sell in a single year. We expect this cumulative effect to continue to grow if we continue to increase enterprise software license revenue in future periods.
Cost of Revenues. These expenses are associated with the production, delivery and support of our products and services. We believe it is meaningful to view cost of revenues as a percent of the revenues to which those costs relate since many of those costs are variable relative to revenue.
Cost of license revenue consists primarily of:
● | Amortization of capitalized software development costs we incur when producing our software products. Amortization begins when a product is ready for general release to the public and generally is an expense that is not directly variable relative to revenue. |
● | Royalties we pay to use software developed by others for certain features of our products that is generally an expense that is variable relative to revenue. |
● | Fees we pay to third parties who provide services supporting our SaaS and cloud-based subscription solutions that generally have components that are both variable and not variable relative to revenue. |
Cost of M&S revenue and cost of professional services revenue consist primarily of salaries and related costs of our employees and third parties we use to deliver these services.
Cost of software license revenue was relatively flat and as a percent of software license revenue was 28.8% in the 2018 nine months and 2017 nine months. An increase in amortization of capitalized software development cost and third-party hosting fees for our SaaS products was offset by lower royalty expense.
Cost of M&S revenue as a percent of M&S revenue was 9.9% in the 2018 nine months as compared to 8.2% in the 2017 nine months. Cost of revenue for M&S in absolute dollars increased by 22.7%. These increases were a combination of increasing our headcount in our customer support department and the decision by the U.S. Army to consolidate certain of their operations resulting in the non-renewal of their M&S contract in September of 2017.
Cost of professional services revenue as a percent of that revenue was 56.8% in the 2018 nine months as compared to 67.8% in the 2017 nine months. This variation resulted from the varying scope and mix of the professional services we deliver that can change from period-to-period in response to the circumstances of the customer environments in which we are working. Because the cost of revenue for professional services is highly variable relative to our revenue from our services, this cost in absolute dollars decreased 21.4% due to a decrease in our professional services revenue for the reasons discussed above.
Sales and Marketing. We believe it meaningful to view cost of sales and marketing as a percent of revenues since many of those costs, particularly sales commissions, are variable relative to revenue. These expenses were 32.7% of total revenue for the 2018 nine months compared to 38.1% of total revenue for the 2017 nine months. In absolute dollars these expenses decreased 14.0%, due primarily to a decrease in the headcount of our sales representatives, a change in the way in which we compensate our sales people and decreased marketing expenses due to a decrease in our spending for content.
General and Administrative. These expenses increased 6.0% primarily due to a one-time share based compensation expense related to modification of certain stock options of our former Chief Financial Officer, offset by a credit to bad debt expense as a result of reducing the balance in our allowance for doubtful accounts to better reflect our potential exposure.
Legal and Professional.These expenses increased 173.2% or $2.7 million due to an increase of professional fees and related expenses associated with the previously disclosed internal investigation, the restatement of certain of our financial statements and related litigation described in note 12 of the notes to our condensed consolidated financial statements
Severance. These expenses increased $467,000 due mainly to the one-time severance payments and termination benefits associated with the reduction in force.
Research and Development. The overall profile of our research and development activities was as follows ($ in thousands):
Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
R&D expenditures expensed | $ | 1,654 | $ | 2,530 | ||||
R&D expenditures capitalized | 1,057 | 1,464 | ||||||
Total R&D expenditures (non-GAAP measurement) | $ | 2,711 | $ | 3,994 |
Our total R&D expenditures decreased 32.1% primarily due to a reduction of expenses related to fewer software engineers and technical personnel.
Total resources expended for R&D set forth above as total R&D expenditures serves to illustrate our total corporate efforts to improve our existing products and to develop new products regardless of whether or not our expenditures for those efforts were expensed or capitalized. Total resources expended for R&D is not a measure of financial performance under GAAP and should not be considered a substitute for R&D expense (set forth above as R&D expenditures expensed) and capitalized software development costs (set forth above as R&D expenditures capitalized) individually. While we believe the non-GAAP, total resources expended for R&D amount provides useful supplemental information regarding our overall corporate product improvement and new product creation activities, there are limitations associated with the use of this non-GAAP measurement. Total resources expended for R&D is a non-GAAP measure not prepared in accordance with GAAP and may not be comparable to similarly titled measures of other companies since there is no standard for preparing this non-GAAP measure. As a result, this non-GAAP measure of total resources expended for R&D has limitations and should not be considered in isolation from, or as a substitute for, R&D expense and capitalized software development cost individually.
Interest Income (Expense), Net.
Income Taxes. Our effective tax rate was 32.9% for the 2016 quarter and 30.6% for the 2015 quarter. These rates differed from athe federal statutory tax rate of 21% for the 2018 nine months and 34% for the 2017 nine months primarily due to:
● | Certain expenses in our consolidated financial statements, such as a portion of meals and entertainment expenses and stock based compensation that are not deductible on our federal income tax return. |
● | State income taxes included in income tax expense in our financial statements. |
Nine Months Ended September 30, | ||||||||||||
2016 | 2015 | $ Change | ||||||||||
$ in thousands | ||||||||||||
Total revenues | $ | 24,421 | $ | 22,390 | $ | 2,031 | ||||||
Total cost of revenues | 5,137 | 3,965 | 1,172 | |||||||||
Gross profit | 19,284 | 18,425 | 859 | |||||||||
Operating expenses | ||||||||||||
Sales and marketing | 8,453 | 7,060 | 1,393 | |||||||||
General and administrative | 5,083 | 4,629 | 454 | |||||||||
Research and development | 1,727 | 1,832 | (105 | ) | ||||||||
Total operating expenses | 15,263 | 13,521 | 1,742 | |||||||||
Income from operations | 4,021 | 4,904 | (883 | ) | ||||||||
Other income (expense), net | 88 | 51 | 37 | |||||||||
Income before income taxes | 4,109 | 4,955 | (846 | ) | ||||||||
Income tax expense | 1,348 | 1,585 | (237 | ) | ||||||||
Net income | $ | 2,761 | $ | 3,370 | $ | (609 | ) |
Nine Months Ended September 30, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
$ in thousands | ||||||||||||||||
Amount | % of Total Revenue | Amount | % of Total Revenue | |||||||||||||
Revenue by Type | ||||||||||||||||
Software licenses | $ | 8,565 | 35.1 | % | $ | 8,590 | 38.4 | % | ||||||||
Maintenance and support | 13,843 | 56.7 | % | 12,269 | 54.8 | % | ||||||||||
Professional services | 2,013 | 8.2 | % | 1,531 | 6.8 | % | ||||||||||
Total Revenue | $ | 24,421 | 100.0 | % | $ | 22,390 | 100.0 | % | ||||||||
Revenue by Product | ||||||||||||||||
EFT Enterprise and Standard | $ | 22,678 | 92.9 | % | $ | 19,983 | 89.2 | % | ||||||||
Wide Area File Services | 658 | 2.7 | % | 764 | 3.4 | % | ||||||||||
CuteFTP | 480 | 2.0 | % | 665 | 3.0 | % | ||||||||||
Other | 605 | 2.4 | % | 978 | 4.4 | % | ||||||||||
Total Revenue | $ | 24,421 | 100.0 | % | $ | 22,390 | 100.0 | % |
Offset by:
● |
Nine Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
R&D expenditures capitalized | $ | 1,298 | $ | 1,613 | ||||
R&D expenditures expensed | 1,727 | 1,832 | ||||||
Total R&D expenditures (non-GAAP measurement) | $ | 3,025 | $ | 3,445 |
The domestic production activities deduction |
We have not utilized derivative financial instruments or derivative commodity instruments. We do not expect to employ these or other strategies to hedge market risk in the foreseeable future. We may invest our cash in money market funds which are subject to minimal credit and market risk. We believe that the interest rate risk and other relevant market risks associated with these financial instruments are immaterial.
During the three months ended September 30, 20162018 quarter and 2017 quarter, we earned approximately 17%12% and 14%, respectively, of our revenue from a single third party,third-party channel distributor who purchases products from us and resells them to their customers. During the three months ended September 30, 2015 there was no single customer that exceeded 10% of sales. During the2018 nine months ended September 30, 2016, and the2017 nine months, ended September 30, 2015, we earned approximately 14%13% and 10%14%, respectively, of our revenue from a single third party,the same third-party channel distributor who purchases products from us and resells them to their customers.distributor. Approximately 40%17% of our accounts receivable as of September 30, 2016,2018 were due from this customer and from one other customer, the latter of which did not constitute more than 10% of our revenue. Paymentdistributor. We have since received payment for substantially all such amounts has been received subsequent to that date.
We earned approximately 17% and 22%30% of our revenue from customers outside the United States during the three months ended September 30, 2016,2018 and 2017 quarter, and 29% and 26% for the three months ended September 30, 2015 respectively. We earned approximately 22% and 24% of our revenue from customers outside the United States during the2018 nine months ended September 30, 2016, and the2017 nine months, ended September 30, 2015 respectively. We receive all revenue in U.S. dollars, so we have no material exchange rate risk with regard to theour sales. We charge Value Added Taxes to our non-business customers in the European Union. We remit these taxes periodically in pound sterling. The impact of this currency translation has not been material to our business.
Disclosure Controls and Procedures
Our management, including our President and Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of GlobalSCAPE’s “disclosureevaluated our disclosure controls and procedures”procedures (as such term is defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) under the Exchange Act as of the end of the period covered by this report. Based on this evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that thedue to material weaknesses in our internal control over financial reporting, our disclosure controls and procedures were effective.not effective as of September 30, 2018.
As previously reported in our 2017 Form 10-K, filed with the SEC on June 14, 2018, in connection with our assessment of the effectiveness of our internal control over financial reporting at the end of our last fiscal year, management identified the following material weaknesses in our internal control over financial reporting as of December 31, 2017 and is in the process of remediation as of September 30, 2018.
We had material weaknesses in our control environment and monitoring:
● | We did not implement effective oversight of our finance and accounting processes (including organizational structure and reporting hierarchy), which impacted our ability to make appropriate decisions regarding revenue recognition. |
● | We did not effectively design and implement appropriate oversight controls over our period-end financial closing and reporting processes, and our review controls were not sufficient to ensure that errors regarding revenue recognition would be detected. |
● | We did not effectively monitor (review, evaluate and assess) the risks associated with key internal control activities that provide the revenue information contained in our financial statements. |
We had material weaknesses related to internal control monitoring and activities to support the financial reporting process:
● | We did not maintain effective controls over the invoicing process to ensure that proper supporting documentation was received prior to preparing invoices. |
● | We did not maintain effective controls over the revenue recognition process to ensure revenue was only recognized when all four criteria of our revenue recognition policy were met. |
This section of Item 4, “Controls and Procedures,” should be read in conjunction with Item 9A, “Controls and Procedures,” included in our 2017 Form 10-K, for additional information on Managements Report on Internal Control over Financial Reporting.
Status of Remediation Plan
We designed a remediation plan to strengthen our internal control over financial reporting and haven taken, and will continue to take, remediation steps to address the material weaknesses described above. We also continue to take meaningful steps to enhance our disclosure controls and procedures and our internal controls over financial reporting.
Our remediation plan includes the following:
● | We have clearly defined and communicated to the sales and finance teams the management-approved, standard terms and conditions that may be offered to customers during the sales process and require appropriate management approval of requested deviations from these standard terms and conditions before a sale is consummated with a customer and a sales invoice is created. |
● | We have created and implemented a policy communicated to the sales and finance teams clearly stating that all terms and conditions of agreements with customers are to be recorded in writing, communicated to finance and accounting personnel, and recorded in our permanent records prior to the creation of a sales invoice. |
● | Beginning in September 2018, we began conducting periodic training sessions and briefings on a quarterly basis to communicate to our sales and finance teams our policies and procedures regarding our standard terms and conditions that we offer to customers and our policies and procedures related to documentation and approval on any deviations from those standard terms and conditions. |
● | We have enhanced the breadth and depth of our review of all sales invoices and their underlying supporting documentation. We have performed extensive training sessions with our finance and accounting personnel to review all sales invoices and their underlying supporting documentation to help identify any unusual items which may need further analysis to determine appropriate revenue recognition. We have ensured that all finance and accounting personnel are involved in the recognition of revenue to promote transparency and accuracy. |
● | We have established a total invoice dollar amount threshold over which finance and accounting personnel must examine all actual invoices and underlying supporting documentation to confirm the purchase by the customer and the appropriate revenue recognition profile. |
● | We have published guidelines that personnel can reference which set forth the requirements to be met for revenue to be recognized from a sale transaction and will be conducting periodic meetings on a quarterly basis, beginning in the third quarter with the sales and finance teams to educate and remind them of these guidelines. |
Our management is monitoring the effectiveness of these and other processes, procedures and controls and will make any further changes deemed appropriate. Our management believes the foregoing actions will effectively remediate the material weaknesses. However, our material weaknesses will not be considered remediated until the above controls are in place for a period of time, the controls are tested and management concludes that these controls are properly designed and operating effectively.
Changes in Internal Control over Financial Reporting
Except as described above with respect to our remediation plan, there have been no changes in our internal controlscontrol over financial reporting during the nine monthsquarter ended September 30, 2016,2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
The information set forth under “Note 12 – Commitments and Contingencies – Legal and Regulatory Matters” to the condensed consolidated financial statements included in a patent infringement suit filed by Digital Reg of Texas, LLC in the United States District Court for the Eastern District of Texas. The complaint alleges that we infringed a patent that regulates access to digital content. In a previous lawsuit this plaintiff brought asserting infringementPart I, Item 1 of this patent against Adobe Systems Inc., several of the claims of this patent were found to be invalid, a decision which Digital Reg appealed to the Federal Circuit. The case against us was stayed until resolution of that appeal. On April 8, 2016, the Federal Circuit confirmed the prior finding that several of the claims of Digital Reg’s patent were invalid. The stay has now been lifted in the suit against us and we have filed a Motion to Dismiss the case based on the findings of the Federal Circuit. We are currently waiting on the court to rule on our Motion to Dismiss. While we are early in this process such that itForm 10-Q is not possible to reasonably determine the outcome of this lawsuit with any certainty, we believe any loss we could incur would be immaterial to our financial position and results of operations.
In addition to the other information set forth in this report,Quarterly Report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 20152017 Form 10-K filed with the SecuritiesSEC on June 14, 2018. Except as set forth in this Quarterly Report and Exchange Commission on March 3, 2016.as provided below, the risks and uncertainties described in “Item 1A. Risk Factors” of our 2017 Form 10-K have not materially changed. These risk factors could materially affect our business, financial condition or future results, but they are not the only risks facing GlobalSCAPE.the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results.
We face risks related to an ongoing investigation by the United States Attorney’s Office for the Western District of Texas.
On May 31, 2018, we were served with a subpoena issued by a grand jury sitting in the United States District Court for the Western District of Texas (the “Grand Jury Subpoena”). The Grand Jury Subpoena requests all documents and emails relating to the Company’s investigation of the potential improper recognition of software license revenue. We intend to fully cooperate with the Grand Jury Subpoena and related investigation being conducted by the United States Attorney’s Office for the Western District of Texas (the “U.S. Attorney’s Investigation”). At this time, we are unable to predict the duration, scope, result or related costs of the U.S. Attorney’s Investigation. We are also unable to predict what, if any, further action may be taken in connection with the Grand Jury Subpoena and the U.S. Attorney’s Investigation, or what, if any, penalties, sanctions or remedial actions may be sought. Any determination by the U.S. Attorney’s office that the Company’s activities were not in compliance with existing laws or regulations, however, could result in the imposition of fines, penalties, disgorgement, equitable relief, or other losses, which could have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Period | (a) Total number of shares (or units) purchased | (b) Average price paid per share (or unit) | (c) Total number of shares (or units) purchased as part of publicly accounced plans or programs | (d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs | ||||||||||||
September 1, 2018 - September 30, 2018 | 4,011,013 | $ | 4.20 | - | - | |||||||||||
Total | 4,011,013 | $ | 4.20 | - | - |
The Company commenced on August 22, 2018 a modified dutch tender offer to purchase $15,000,000 of shares of our common stock at a price not greater than $4.50 nor less than $4.00 per share, to expire on September 19, 2018. Based on the final count by American Stock Transfer & Trust Company, the Depositary for the Tender Offer, the Company accepted for purchase 4,011,013 common shares at a purchase price of $4.20 per share, for an aggregate cost of approximately $16.8 million, excluding fees and expenses relating to the Tender Offer. Included within the shares accepted for purchase are 439,585 shares that we elected to purchase pursuant to our right to increase the size of the Tender Offer by up to 2.0% of the Company’s outstanding common stock. As such, the Company used a proration factor of approximately 77.1% of shares from each tendering stockholder. The common shares purchased represent approximately 18.2% of our common stock issued and outstanding as of September 24, 2018. Following consummation of the Tender Offer, we had 17,968,268 common shares outstanding.
(a) | Exhibits |
31.1* | ||
31.2* | ||
32.1* | ||
101 | Interactive Data File. | |
* | Filed herewith. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GLOBALSCAPE, INC. | |||
November | By: | /s/ | |
Date | Karen J. Young | ||
Chief Financial Officer |