UNITEDSTATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM10-Q


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

(MarkOne)

☒     QUARTERLYREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934

Forthe Quarterly Period quarterlyperiodended September 30, 2016


March 31, 2020

or

☐     TRANSITIONREPORTPURSUANTTOSECTION13OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
15(d)OFTHESECURITIESEXCHANGEACTOF1934

For the transition period fromto .


Commission File No. filenumber001-33601


GlobalSCAPE, Inc.

(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)


Charter)

Delaware
74-2785449
(

State or other jurisdictionOther Jurisdiction of

incorporation

Incorporation or organization)

Organization

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

4500 Lockhill-Selma, Suite 150

San Antonio, Texas

78249
(Address of Principal Executive Office)Offices   (Zip Code)Code

(210) 308-8267210-308-8267

(

Registrant’s Telephone Number, Including Area Code)


Code

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

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

Common Stock, par value $0.001 per share

GSB

NYSE American, LLC

(Title of Class)

(Trading Symbol)

(Name of exchange on which registered)

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):

Act.

Large accelerated filer ☐

Accelerated filer

 ☒

Non-accelerated filer ☐ 

  (Do not check if a smaller reporting company)

Smaller reporting company ☒

Emerging growth company ☐


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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


As of October 31, 2016,April 30, 2020 there were 21,145,02118,710,314 shares of common stock outstanding.

 


GlobalSCAPE, Inc.

Quarterly Report on Form 10-Q

For the Quarter ended September 30, 2016

March 31, 2020

Index

Page

   

Part I.

Financial Information

   

Item 1.

3

4

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

5

 

5

6

6

7

   

Item 2.

19

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4.

Controls and Procedures

34

Part II.

Other Information

35

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

   
Item 3.5.39
   
Item 4.40
Part II.Other Information41
Item 1.41
Item1A.41

Item 6.

41

36

  

42

37



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 TappIn® and design are registered trademarks of TappIn, Inc., our wholly-owned subsidiary. 

TappIn Secure Share ™, Social Share ™, Now Playing ™, and Enhanced A La Carte Playlist ™, are trademarks of TappIn, Inc., our wholly-owned subsidiary. 

Other trademarks and trade names in this Quarterly Report on Form 10-Q (this “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 client does not need to install the underlying software on its own computer systems to access the application.

2

Part I. Financial Information

Item 1. Financial Statements

GlobalSCAPE, Inc.
Condensed Consolidated Balance Sheets
(in thousands except share amounts)

  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 

GlobalSCAPE, Inc.

Condensed Consolidated Balance Sheets

(in thousands except share amounts)

  

March 31,

  

December 31,

 
  

2020

  

2019

 
  

(Unaudited)

     

Assets

        

Current assets:

        

Cash and cash equivalents

 $9,289  $4,702 

Accounts receivable, net

  5,581   7,239 

Federal income tax receivable

  1,241   1,759 

Prepaid and other current assets

  1,240   1,366 

Total current assets

  17,351   15,066 
         

Capitalized software development costs, net

  2,609   2,650 

Goodwill

  12,712   12,712 

Deferred tax asset, net

  376   493 

Property and equipment, net

  282   274 

Right-of-use asset

  2,840   2,905 

Other assets

  437   459 

Total assets

 $36,607  $34,559 
         

Liabilities and Stockholders’ Equity (Deficit)

        

Current liabilities:

        

Accounts payable

 $558  $746 

Accrued expenses

  1,457   1,598 

Deferred revenue

  15,659   15,683 

Long term debt, current portion

  5,200   4,575 

Total current liabilities

  22,874   22,602 
         

Deferred revenue, non-current portion

  2,549   2,572 

Lease liability

  2,833   2,900 

Long term debt, non-current portion

  40,977   42,745 

Other long term liabilities

  24   24 
         

Commitments and contingencies

        
         

Stockholders’ equity (deficit):

        

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, 24,089,814 and 23,890,890 shares issued:

18,710,314 and 18,511,390 outstanding at

March 31, 2020 and December 31, 2019, respectively

  24   24 

Additional paid-in capital

  33,421   32,156 

Treasury stock, 5,379,500 and 5,379,500 shares, at cost, at

March 31, 2020 and December 31, 2019, respectively

  (23,087)  (23,087)

Retained earnings (deficit)

  (43,008)  (45,377)

Total stockholders’ equity (deficit)

  (32,650)  (36,284)

Total liabilities and stockholders’ equity (deficit)

 $36,607  $34,559 

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


3

3


GlobalSCAPE, Inc.
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, 
  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 

GlobalSCAPE, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income

(In thousands, except per share amounts)

(Unaudited)

  

Three months ended March 31,

 
  

2020

  

2019

 
         

Operating revenues:

        

Software licenses

 $1,995  $2,634 

Maintenance and support

  7,066   6,076 

Professional services

  651   703 

Total revenues

  9,712   9,413 

Cost of revenues:

        

Software licenses

  678   609 

Maintenance and support

  613   532 

Professional services

  291   293 

Total cost of revenues

  1,582   1,434 

Gross profit

  8,130   7,979 

Operating expenses:

        

Sales and marketing

  2,075   1,916 

General and administrative

  1,525   2,019 

Legal and professional

  615   576 

Research and development

  311   325 

Total operating expenses

  4,526   4,836 

Income from operations

  3,604   3,143 

Interest income (expense), net

  (774)  24 

Income before income taxes

  2,830   3,167 

Income tax expense

  461   747 

Net income

 $2,369  $2,420 

Comprehensive income

 $2,369  $2,420 
         

Net income per common share -

        

Basic

 $0.13  $0.14 

Diluted

 $0.12  $0.14 
         

Weighted average shares outstanding:

        

Basic

  18,613   17,197 

Diluted

  19,026   17,664 
         

Cash dividends declared per share

 $-  $0.015 

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


4

4

GlobalSCAPE, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)

  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 

GlobalSCAPE, Inc.

Condensed Consolidated Statement of Stockholders' Equity (Deficit)

(in thousands, except number of shares)

(unaudited)

          

Additional

             
  

Common Stock

  

Paid-in

  

Treasury

  

Retained

     
  

Shares

  

Amount

  

Capital

  

Stock

  

Earnings

  

Total

 
                         
                         

Balance at December 31, 2018

  22,441,860  $22  $25,584  $(22,712) $13,062  $15,956 
                         

Purchase of Treasury Stock

              (375)      (375)

Shares issued upon exercise of stock options

  156,489       519           519 

Stock option cash settlement

          (445)          (445)

Stock-based compensation expense

                        

       Stock options

          775           775 

       Restricted stock

          100           100 

Common stock cash dividends, $0.015 per share

                  (259)  (259)

Net Income

                  2,420   2,420 

Balance at March 31, 2019

  22,598,349  $22  $26,533  $(23,087) $15,223  $18,691 
                         

Shares issued upon exercise of stock options

  55,520       179           179 

Stock-based compensation expense

                        

       Stock options

          197           197 

       Restricted stock

  40,000       377           377 

Common stock cash dividends, $0.50 per share

                  (8,713)  (8,713)

Net Income

                  3,633   3,633 

Balance at June 30, 2019

  22,693,869  $22  $27,286  $(23,087) $10,143  $14,364 
                         

Shares issued upon exercise of stock options

  57,006       176           176 

Stock-based compensation expense

                        

       Stock options

          321           321 

       Restricted stock

          215           215 

Common stock cash dividends, $0.015 per share

                  (263)  (263)

Net Income

                  3,580   3,580 

Balance at September 30, 2019

  22,750,875  $22  $27,998  $(23,087) $13,460  $18,393 
                         

Shares issued upon exercise of stock options

  1,060,015   2   3,728           3,730 

Stock-based compensation expense

                        

       Stock options

          288           288 

       Restricted stock

  80,000       142           142 

Common stock cash dividends, $3.365 per share

                  (62,471)  (62,471)

Net Income

                  3,634   3,634 

Balance at December 31, 2019

  23,890,890  $24  $32,156  $(23,087) $(45,377) $(36,284)
                         

Shares issued upon exercise of stock options

  198,924       768           768 

Stock-based compensation expense

                        

       Stock options

          365           365 

       Restricted stock

          132           132 

Net Income

                  2,369   2,369 

Balance at March 31, 2020

  24,089,814  $24  $33,421  $(23,087) $(43,008) $(32,650)

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

5

GlobalSCAPE, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

  

For the Three Months Ended March 31,

 
  

2020

  

2019

 

Operating Activities:

        

Net income

 $2,369  $2,420 

Items not involving cash at the time they are recorded in the statement of operations:

        

Provision (recoveries) for doubtful accounts receivable

  4   9 

Depreciation and amortization

  441   410 

Share-based compensation

  497   875 

Amortization of debt issuance costs

  107   - 

Deferred taxes

  117   (15)

Subtotal before changes in operating assets and liabilities

  3,535   3,699 

Changes in operating assets and liabilities:

        

Accounts receivable

  1,654   1,209 

Prepaid and other current assets

  126   51 

Deferred revenue

  (47)  307 

Accounts payable

  (188)  18 

Accrued expenses

  (141)  66 

Operating lease right-of-use asset

  65   - 

Other assets

  22   38 

Operating lease liabilities

  (67)  - 

Other long-term liabilities

  -   (3)

Income tax payable (receivable)

  518   588 

Net cash provided by operating activities

  5,477   5,973 

Investing Activities:

        

Software development costs capitalized

  (364)  (201)

Purchase of property and equipment

  (44)  (23)

Net cash used in investing activities

  (408)  (224)

Financing Activities:

        

Proceeds from exercise of stock options

  768   519 

Stock option cash settlement

  -   (445)

Purchase of Treasury Stock

  -   (375)

Notes payable principle payments

  (1,250)  - 

Dividends paid

  -   (259)

Net cash used in financing activities

  (482)  (560)
         

Net increase in cash

  4,587   5,189 

Cash at beginning of period

  4,702   9,173 

Cash at end of period

 $9,289  $14,362 
         

Supplemental disclosure of cash flow information:

        

Cash paid during the period for:

        

Interest

 $804  $- 

Income tax payments (refunds)

 $(192) $16 

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

GlobalSCAPE,
6

GlobalSCAPE, Inc.

Notes to Condensed Consolidated Financial Statements

As of September 30, 2016March 31, 2020 and For the Three and Nine Months Then Ended

(Unaudited)


1.

1.

Nature of Business


We develop and sell computer software that

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, client 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 clients 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 alsohave other products that complement our EFT product.

We sell other products that are synergistic to EFT including CuteFTP. Collectively, these products aimed at consumers and small businesses constitute less than 2% of our total revenue. We continue to offer product support for Mail Express scConnect,and WAFS, and CuteFTP.


We earn mostwhich we discontinued as products for sale as of our revenue from the sale of EFT and products that are part of our EFT platform. We earn revenue from the sale 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.

January 1, 2019.

Throughout these notes unless otherwise noted, our references to the 20162020 quarter and the 20152019 quarter refer to the three months ended September 30, 2016March 31, 2020 and 2015,2019, respectively.  Our references to the 2016 nine months and the 2015 nine months refer to the nine months ended September 30, 2016 and 2015, respectively.


2.

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 the 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 Form 10-QReport 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, 2015,2019, filed with the SEC on March 16, 2020, which we refer to as the 20152019 Form 10-K, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations also included in our 20152019 Form 10-K and in this report.

Report.

We follow accounting standards set by the Financial Accounting Standards Board. This boardBoard, or FASB. The FASB 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.

7

3.

3.

Significant Accounting Policies


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.


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:


·Persuasive evidence of an arrangement exists.
·Delivery has occurred or services have been rendered.
·The amount of the sale is fixed or determinable.
·Collection of the sale amount is reasonably assured.

6


For a sale transaction not meeting any one of these four criteria, we defer recognition of revenue related to that transaction until all the criteria are met.

software products and services:

Perpetual software licenses under which clients install our products in their information systems environment on computers they manage, own or otherwise procure from a cloud services provider. Clients 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 client. We measure revenue based upon the consideration set forth in an arrangement or contract with a client. 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 client the software license key that provides the ability to access and use our product. If our client 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 clients subscribe. Revenue can include basic monthly fees to access the software and usage fees based upon the volume of certain resources the client consumes (such as volumes of storage or bandwidth). We are generally paid for these services on a month-to-month basis, but if a client 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 client such as rebates or other incentives that reduce amounts owed to us by clients.

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 March 31,

 
  

2020

  

2019

 

Deferred revenue, beginning of period

 $18,255  $16,237 

Deferred revenue resulting from new contracts with customers

  7,731   7,102 

Deferred revenue at the beginning of the period that was amortized to revenue

  (6,821)  (5,631)

Deferred revenue arising during the period that was amortized to revenue

  (957)  (1,164)

Deferred revenue, end of period

 $18,208  $16,544 

Multi-Element Transactions

At the time clients purchase 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 customers purchase these products, they typicallySaaS solutions as M&S is provided as part of their SaaS subscription. Clients 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.

Our deferred revenue consists primarilystand-alone transactions, renewals of revenue to be earned in the future as we deliver services underpre-existing M&S agreements. We bill our customers in advance for M&S services and record accounts receivable and deferred revenue in the same amount at the time we issue an invoice. We commence recognition of the deferred revenue as revenue only after the M&S period begins.
For our products licensed and delivered under a SaaS transaction on a monthly or other periodic subscription basis, we recognize subscription revenue, including initial setup fees, on a monthly basis over the contractual term of the customer contract as we deliver our products and services. Amounts invoiced or paid prior to this revenue recognition are presented as deferred revenue until earned.
We providecontracts, professional services to clients seeking assistance with products they have previously purchased from us, or SaaS subscriptions to clients not requiring any of our customers consisting primarilyother products or services. Accordingly, we are able to estimate the stand-alone selling price of these items based upon our observation of those transactions. Since most of our sales of perpetual software installation support, operations supportlicenses are part of multi-element transactions that also involve M&S and/or professional services, and training. We recognize revenue from these services as they are completed and acceptedbecause the selling price of those licenses can vary significantly among clients, we use the residual approach under FASB Accounting Standards Codification Topic 606, or ASC 606, to estimate the selling price of perpetual software licenses in a multi-element transaction by our customers.
reference to the total transaction price less the sum of the observable stand-alone selling prices of M&S and/or professional services.

Sales Tax

We collect sales tax on many of our sales.transactions with clients 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.


Reclassification of Expenses

In preparing

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 clients. This amount is included in accrued liabilities in our business andcondensed consolidated balance sheets.

Contract Assets

We generally bill clients 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.


Cost of Revenue

Cost of revenue was expanded from one line to three lines to correspond with the associated revenue classifications.  Amortization of capitalized software developmentServices

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 of our employees who deliver 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.


Selling, General and Administrative

We separated selling, general and administrative expenses into two line items – sales and marketing and general and administrative.

Depreciation and Amortization

After reclassifying amortization of capitalized software development costs to cost of license revenue, the remaining depreciation and amortization costs were included in general and administrative expense and the depreciation and amortization line on our statement of operations was removed.

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:

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7


Effect

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 client 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 client relationship.

Our activity in deferred costs of the reclassifications


The reclassifications were between cost of revenuesobtaining a contract to deliver goods and operating expenses and had no effect on revenue, income from operations, net income or earnings per share.  The following tables illustrate the effects of these reclassifications on previously reported amounts for the quarter and the nine months ended September 30, 2015services has been as follows ($ in thousands):
  Quarter Ended September 30, 2015 
     Reclassification of Previously Reported Amounts    
  
As
Previously
Reported
  
Cost
of
Revenues
  
Capitalized
Software Cost
Amortization
  
Personnel
Costs
  Depreciation  
Selling,
General
& Administrative
  
As
Now
Reported
 
                      
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 
  Nine Months Ended September 30, 2015 
     Reclassification of Previously Reported Amounts    
  
As
Previously
Reported
  
Cost
of
Revenues
  
Capitalized
Software Cost
Amortization
  
Personnel
Costs
  Depreciation  
Selling,
General
& Administrative
  
As
Now
Reported
 
                      
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 

  

Three Months Ended March 31,

 
  

2020

  

2019

 

Deferred expense, beginning of period

 $943  $1,009 

Deferred expense resulting from new contracts with customers

  218   179 

Deferred expense amortized to expense

  (228)  (209)

Deferred expense, end of period

 $933  $979 

At March 31, 2020, $582,000 was recorded in prepaid and current other assets and $351,000 was recorded in noncurrent other assets in our condensed consolidated balance sheet. At December 31, 2019, we had $577,000 recorded in prepaid and other current assets and $366,000 recorded in noncurrent other assets in our condensed consolidated balance sheet.

Leases

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities on our condensed consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are generally accounted for separately. On April 18, 2019, the Company signed a new operating lease for our existing office space location. The lease is for a period of 10 years at an average annual rent of $462,000 beginning May 1, 2019. We recorded a right-of-use asset and lease liability of approximately $3 million at the commencement of the lease.

Cash and cash equivalents


Cash and cash equivalents includes all cash and highly liquid investments with original maturities of three months or less.


Short Term Investments

Short-term investments consist

Fair Value of certificates of deposit held withFinancial Instruments

For financial institutions with contractual maturity dates less than one year from the balance sheet date.  The Company has the intentassets and ability to hold these investments until their maturity dates and therefore accounts for them as held-to-maturity. These certificates of deposit are statedliabilities recorded at amortized cost, which approximates the fair value on a recurring or non-recurring basis, fair value is the price we would receive to sell an asset, or pay to transfer a liability, in an orderly transaction with a market participant at the measurement date. In the absence of these investments.


such data, fair value is estimated using internal information consistent with what market participants would use in a hypothetical transaction. In determining fair value, observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions; preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:

Level 1: Quoted prices for identical instruments in active markets.

Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3: Significant inputs to the valuation model are unobservable.

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9

As of March 31, 2020, we did not have any assets measured at fair value on a recurring basis that would require disclosure based on the fair value hierarchy of valuation techniques. In addition, certain non-financial assets and liabilities are to be initially measured at fair value on a nonrecurring basis. This includes items such as non-financial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and non-financial, long-lived assets measured at fair value for an impairment assessment. In general, non-financial assets and liabilities including goodwill, capitalized software and property and equipment are measured at fair value using Level 3 inputs, which result in management’s best estimate of fair value from the perspective of a market participant, when there is an indication of impairment and are recorded at fair value only when impairment is recognized.

Our financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable and notes payable. The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable, approximates fair value due to the short term maturity of these instruments, all of which mature within 12 months.

The carrying amount of our notes payable, including the current portion, as of March 31, 2020 was $48,125,000. This carrying value approximates fair value based on interest rates that are currently available to us for issuance of debt with similar terms and maturities.

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


We account for goodwill in accordance with FASB Accounting Standards Codification 350, or ASC 350, as amended by ASU 2017-04, Simplifying the Test for Goodwill Impairment (effective January 1, 2020, as described in recent accounting pronouncements below). Goodwill is not amortized. On at least an annual basis,Annually, we test goodwill for impairment at the reporting unit level.level using December 31 as the measurement date, and will also evaluate throughout the year if any indicators of a potential impairment are identified. We operate as a single reporting unit.

unit with $12,712,000 of goodwill. As of March 31, 2020 and December 31, 2019, this single reporting unit had a negative carrying value.

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.

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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-stepto perform a quantitative goodwill impairment test prescribed by GAAP.


to identify both the existence of impairment and the amount of impairment loss. In a quantitative test, the fair value of a reporting unit is compared to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered unimpaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

As of December 31, 2015,2019, 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 (including the recent coronavirus COVID-19 outbreak), or changes in circumstances since that time indicating that the carrying amount of goodwillour reporting unit may exceed its fair market value and that interim testing needed to be performed.


Additionally, because our single reporting unit has a negative carrying value, reasonable changes in the assumptions used would not indicate impairment.

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.


Cost of revenue

Cost of revenue consists of expenses associated with the production, delivery and support of the products and services we sell. Cost of license revenue consists primarily of amortization of the 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 products, and fees we pay to third parties who provide services supporting our SaaS solutions. 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.

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 $59,000 and $334,352$51,000 in the 20162020 quarter and the 20152019 quarter, respectively, and $1,447,078 and $1,116,894 in the 2016 nine months and 2015 nine months, respectively.

Share-Based

Stock-Based Compensation


We measure the cost of share-basedstock-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.

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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.



Recent accounting pronouncements


In June 2016, the Financial

Accounting Standards Board, or FASB, issued Accounting Standard Update (ASU) 2016-15, Statement(“ASU”) 2017-04, Intangibles – Goodwill and Other (issued January 2017) - To simplify the subsequent measurement of Cash Flows – Classificationgoodwill, Step 2 was eliminated from the goodwill impairment test. In computing the implied fair value of Certain Cash Receiptsgoodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and Cash Payments. This pronouncement provides guidance as toliabilities (including unrecognized assets and liabilities) following the treatmentprocedure that would be required in determining the fair value of transactionsassets acquired and liabilities assumed in a statementbusiness 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 cash flowsa reporting unit with respectits 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 eight specific cash flow issues. During 2015 and 2016, we had no transactionsthat reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the type cited inreporting unit when measuring the statementgoodwill 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, doif 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. We adopted ASU 2017-04 effective January 1, 2020, and its adoption did not anticipate having any such transactions in the foreseeable future. Accordingly we do not expect this pronouncement to have a material effectimpact on how we present items in our statement of cash flows.


In June 2016, the FASB issued internal condensed consolidated financial statements.

ASU 2016-13, Financial Instruments – Credit Losses. (issued June 2016) - Among itsthe provisions of this ASU 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 the consolidated financial statements we issue for the year ending December 31, 2020,2023, 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.

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In March 2016, the FASB issued

ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. When implemented, this standard will discontinue the recording in equity of tax benefits or tax deficiencies that arise from differences between share-based payment compensation expense recorded for financial statement purposes and that expense deductible for tax purposes. This new standard requires that the tax effect of all such differences be recorded and reported in the statement of operations. This standard also requires that tax-related cash flows resulting from share-based payments be reported as operating activities in the statement of cash flows which is a change from the current requirement to present such tax-related items as an inflow from financing activities and an outflow from operating activities. In accordance with this standard, we will implement it beginning with our interim and annual financial statements for 2017. The extent of the effect of this standard on our financial statements for 2017 and later depends upon the level of stock option exercise activity we experience in 2017 and later. The amounts involved in accounting for tax benefits or deficiencies from share-based compensation that are the subject of ASU 2016-09 are presented in our 2016 and earlier consolidated statements of cash flows and consolidated statements of stockholders’ equity on lines that are captioned tax benefit or tax deficiency from share-based compensation.


2016-02, Leases (Topic 842): In February 2016, the FASB issued ASU 2016-02, Leases. The main difference between existing GAAPa new standard related to leases to increase transparency and this ASU 2016-02 iscomparability among organizations by requiring the presentation by lessees on their financial statementsrecognition of leaseROU assets and lease liabilities arising fromon the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Since this newUnder the standard, retainsdisclosures are required to meet the distinction between financeobjective of enabling users of financial statements to assess the amount, timing, and operating leases, the effect of leases in the statement of operations and the statementuncertainty of cash flows will be largely unchangedarising from leases. We are also required to recognize and measure leases existing GAAP. Our onlyat, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available. We adopted ASC 842 using the modified retrospective approach effective January 1, 2019. As leases in-place at the time of adoption were not material, no right-of-use assets or lease liabilities were recorded upon adoption. We elected the available practical expedients and implemented internal controls and key system functionality to enable the preparation of significance is ourfinancial information on adoption. On April 18, 2019, the Company signed a new operating lease for our corporateexisting office space location. The lease is for which we will present a right-to-useperiod of 10 years at an average annual rent of $462,000 beginning May 1, 2019. We recorded a right-of-use asset and a lease liability on our balance sheetof approximately $3 million at the commencement of the lease.

4.

Accounts Receivable, Net

We bill clients and issue invoices 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 financial statements for 2019. The extent of the effect of this standard on our financial statements for 2019 and later will depend upon the leases, if any, that we have in effect at that date.


In November 2015, the FASB, issued 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.

In May 2014, FASB issued ASU No. 2014-09 entitled Revenue from Contracts with Customers (Topic 606). The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for thosedelivered goods or services. We are subjectIn addition, when clients agree to this guidance effective with financial statementspurchase or renew M&S services, we issuebill and invoice clients 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 6) the invoices we have issued for which the year ending December 31, 2018,M&S services commencement date is in the future and which have not been paid by the quarterly periods during that year. We do not expect the amounts or timing of revenue we report in those future periods under this guidance to be materially affected relative to current guidance.


Use of Estimates

The preparation of consolidated 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 existclient 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 the Company’sour condensed consolidated financial statements. It is possibleWe continually assess the collectability of our accounts receivable. If we deem it less than probable that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of the Company’s financial position and results of operation.

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):

  

March 31,

2020

  

December 31,

2019

 

Total invoices issued and unpaid

 $6,760  $8,245 

Less: Unpaid invoices relating to M&S contracts with a start date subsequent to the balance sheet date

  (1,079)  (906)

Gross accounts receivable

  5,681   7,339 

Allowance for doubtful accounts

  (100)  (100)

Accounts receivable, net

 $5,581  $7,239 

5

4.

Capitalized Software Development Costs, Net


Our capitalized software development costs profile wasbalances and activities were as follows:follows ($ in thousands):

  

March 31,

  

December 31,

 
  

2020

  

2019

 

Gross capitalized cost

 $11,893  $11,529 

Accumulated amortization

  (9,284)  (8,879)

Capitalized software development costs, net

 $2,609  $2,650 

  

Three Months Ended March 31,

 
  

2020

  

2019

 

Amount capitalized

 $364  $201 

Amortization expense

  (405)  (353)

14

  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     

  

Released

  

Unreleased

 
  

Products

  

Products

 

Gross capitalized amount at March 31, 2020

 $11,493  $400 

Accumulated amortization

  (9,284)  - 

Net capitalized cost at March 31, 2020

 $2,209  $400 

Future amortization expense:

        

Nine months ending December 31, 2020

  1,034     

Year ending December 31,

        

2021

  714     

2022

  424     

2023

  37     

Total

 $2,209     

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.


6.

5.Deferred Revenue

As described in Note 4 regarding accounts receivable, when clients agree to purchase or renew M&S services, we bill and invoice our clients 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 client as of the date of our financial statements. Accordingly, we determine our deferred revenue as follows ($ in thousands):

  

March 31,

2020

  

December 31,

2019

 

Total invoiced for M&S contracts for which revenue will be recognized in future periods

 $19,287  $19,161 

Less: Unpaid invoices relating to M&S contracts with a start date subsequent to the balance sheet date

  (1,079)  (906)

Total deferred revenue

 $18,208  $18,255 
         

Deferred revenue, current portion

 $15,659  $15,683 

Deferred revenue, non-current portion

  2,549   2,572 

Total deferred revenue

 $18,208  $18,255 

7.

Notes Payable

In November 2019, we entered into a credit facility with J.P. Morgan Chase Bank, N.A, as Administrative Agent and East West Bank as Syndication Agent consisting of a $50.0 million term loan and a $5 million revolving agreement (the “Loan Agreement”), which is secured by substantially all of our assets. Funds from the term loan were substantially used to fund a special dividend of $3.35 to our common shareholders which was paid on December 5, 2019. The revolving loan may be accessed to fund working capital needs. The loans bear a variable interest rate of LIBOR plus a Term Loan Spread between 3.75% and 2.25%. The amount of the Term Loan Spread is a function of the Company’s Leverage Ratio. Effective January 3, 2020, the Company entered into an Amendment and Waiver No. 1 to the Credit Agreement to increase the amount of the special dividend permitted to be paid to stockholders on December 5, 2019 to accommodate last minute option exercises and to exclude the May 28, 2019 special dividend from the fixed charges calculation. Effective April 13, 2020 the Company entered into Amendment No. 2 to the Credit Agreement which provided consent for the Company to borrow $2.0 million under the U.S. Small Business Administration Payroll Protection Program authorized by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (Note 16).

At March 31, 2020, the principal balance outstanding under the term note payable was $48.1 million and the balance of the revolving note payable was zero.

The aggregate maturities of our notes payable, as of March 31, 2020, are as follows: $3.8 million in 2020, $7.5 million in 2021, $7.5 million in 2022, $10.0 million in 2023, and $19.4 million in 2024.

Interest payments under the credit facility are due monthly. Principal payments are due quarterly. The loans may be prepaid at any time without penalty. 

The Loan Agreement contains the following financial covenants:

●     We must not exceed a Total Leverage Ratio of 3.25x. This ratio decreases to 3.0x at September 30, 2020, 2.75x at March 31, 2021 and 2.25x at March 31, 2022. This ratio is defined in the Loan Agreement as the ratio of consolidated total funded indebtedness to consolidated EBITDA minus capitalized software expenditures for the period of the four most recent consecutive fiscal quarters. As of March 31, 2020, this debt service coverage ratio was 2.54x.

●           We must maintain a Fixed Coverage Charge Ratio of 1.25x. This ratio is defined in the Loan Agreement as the ratio of consolidated EBITDA minus unfinanced capital expenditures to cash interest expense plus scheduled principal payments made plus taxes paid in cash plus restricted payments made in cash. As of March 31, 2020, this debt to tangible net worth ratio was 2.93x.

The Loan Agreement contains customary covenants relating to maintaining legal existence and good standing, complying with applicable laws, delivery of financial statements, payment of taxes and maintaining insurance. The Loan Agreement also contains customary events of default including the failure to make payments of principal and interest, the breach of any covenants, the occurrence of a material adverse change, and certain bankruptcy and insolvency events. Additionally, we may be restricted from declaring dividends if an Event of Default exists, or if immediately prior to and after giving effect of such dividend it would cause us to exceed our maximum Total Leverage Ratio, or fall below our minimum Fixed Charge Coverage Ratio.

The following table represents the components of our long-term debt disclosed on the condensed consolidated balance sheet as of March 31, 2020.

  

March 31,

 
  

2020

 

Credit facility

 $48,125 

Unamortized debt issuance costs

  (1,948)

Total long-term debt

  46,177 
     

Less current portion of long-term debt

  5,200 
     

Total long-term debt, non-current portion

 $40,977 
     

Interest rate

  5.4%

8.

Stock Options, Restricted Stock and Share-BasedStock-Based Compensation


We have granted stock-based incentive awards to our officers and employees under long-term equity incentive plans that originated in 2000, 2006, 2010, 2015 and 2016. We currently issue stock-based awards to our officers and employees under the 2015 Non-Employee Directors Long-Term Equity Incentive Plan (“2015 Directors Plan”) and 2016 Employee Long-Term Equity Incentive Plan (“2016 Employee Plan”). The 2015 Directors Plan and 2016 Employee Plan authorize the issuance of up to 500,000 and 5,000,000 shares of common stock for stock-based incentives, including stock options and restricted stock awards, respectively. As of March 31, 2020, stock-based incentives for up to 80,000 and 2,587,259 shares remained available for issuance in the future under these plans, respectively. The following shares are currently outstanding under our long-term equity incentive plans:

Plan

Shares outstanding

2010 Employee LT Equity Incentive Plan

30,338

2015 Directors Plan

60,000

2016 Employee LT Equity Incentive Plan

1,566,091

Total shares Outstanding at March 31, 2020

1,656,429

Under these 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 March 31,

 
  

2020

  

2019

 

Stock-based compensation expense

 $497  $875 

Stock Options

The GlobalSCAPE, Inc. 2010

During the 2020 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.  Plan.

Provisions and characteristics of this planthe options granted to our officers and employees under our long-term equity incentive plans include the following:


·It authorizes the issuance of up to three million shares of common stock for stock-based incentives including stock options and restricted stock awards.
·

The exercise price, term and other conditions applicable to each stock option or stock award granted are determined by the Compensation Committee of theour Board of Directors.

·

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 andor following a four-year period, expire ten years from the date of grant.grant, and are exercisable for a period of ninety days after the end of employment.

·We issued no restricted

Upon exercise of a stock awards under this plan duringoption, we issue new shares from the 2016 or 2015 periods.shares of common stock we are authorized to issue.

·As of September 30, 2016, stock-based incentives for up to 167,335 shares remained available for issuance in the future under this plan.

Our stock option activity has been as follows:


     
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 

      

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, 2019

  1,563,784  $5.78   8.69  $6,372 

   Granted

  126,000  $9.62         

   Forfeited

  (17,331) $7.48         

   Exercised

  (198,924) $3.86         

Outstanding at March 31, 2020

  1,473,529  $6.35   8.67  $2,192 
                 

Exercisable at March 31, 2020

  193,559  $3.96   7.35  $612 

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 

  

Three Months Ended March 31,

 
  

2020

  

2019

 

Weighted average fair value of options granted

 $3.94  $2.10 

Intrinsic value of options exercised

 $1,220,114  $258,101 

Cash received from stock options exercised

 $767,930  $519,184 
         

Number of options that vested

  43,504   626,278 

Fair value of options that vested

 $71,727  $964,820 
         

Unrecognized compensation expense related to non-vested options at end of period

 $2,772,371  $1,112,499 

Weighted average years over which non-vested option expense will be recognized

  2.81   2.16 

17

14


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     

As of March 31, 2020

 
      

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 - $2.35

  8,004   3.18  $1.78   8,004  $1.78 

$2.39 - $3.59

  184,776   8.07  $3.49   48,813  $3.40 

$3.60 - $5.83

  464,249   8.07  $4.14   135,408  $4.27 

$5.90 - $8.85

  381,500   9.05  $7.13   1,334  $5.90 

$8.93 - $13.29

  435,000   9.33  $9.31   -  $- 

Total options

  1,473,529           193,559     

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 

Based upon our dividend payment activity in recent years, beginning with

  

Three Months Ended March 31,

 
  

2020

  

2019

 

Expected volatility

  48%  49%

Expected annual dividend yield

  1.50%  1.50%

Risk free rate of return

  1.57%  2.52%

Expected option term (years)

  6.20   6.00 

Restricted Stock Awards

Prior to the firstfourth quarter of 2015,2019 we added an expected annual dividend yield to these assumptions.


Restricted Stock Awards
In May 2015, we adoptedissued restricted stock only from the 2015 Non-Employee Directors Long Term IncentivePlan. Beginning in the fourth quarter of 2019, shares of restricted stock were granted from the 2016 Employee Plan (“in addition to 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.Plan. Provisions and characteristics of this planthese 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 theour Board of Directors.

·

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, after which time the restrictive legend is generally continuing service for one year subsequent toremoved from the date of the award.shares.

·As of September 30, 2016, stock based incentives for up to 340,000

Restricted shares remained available for issuanceparticipate in the future under this plan.dividend payments and may be voted.


Our restricted stock awards activity has been as follows:

 
 
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         

          

Total

 
      

Grant Date

  

Fair Value of

 
  

Number of

  

Fair Value

  

Shares That

 
  

Shares

  

Per Share

  

Vested

 

Restricted shares outstanding at December 31, 2019

  184,079  $9.32     

Shares granted with restrictions

  -  $-     

Shares forfeited

  (1,179) $9.54     

Shares vested and restrictions removed

  -  $-  $- 

Restricted shares outstanding at March 31, 2020

  182,900  $9.31     
             

Unrecognized compensation expense for non-vested shares as of March 31, 2020

     

Expense to be recognized in future periods

 $1,140,678         

Weighted average number of months over which expense is expected to be recognized

  42.4         

15
18


9.

6.

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) $1,585 
Current taxes per our federal income tax return are presented in these financial statements as follows ($ in thousands):
  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 March 31,

 
  

2020

  

2019

 
  

Current

  

Deferred

  

Total

  

Current

  

Deferred

  

Total

 

Federal

 $253  $92  $345  $647  $(10) $637 

State

  91   25   116   115   (5)  110 

Total

 $344  $117  $461  $762  $(15) $747 

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 


As of September 30, 2016, we had federal income tax net operating loss carryforwards of $312,000 available to offset future federal taxable income, if any. These carryforwards became available through our acquisition of TappIn, Inc. in 2011.  These carryforwards expire in 2030 and 2031.

As of September 30, 2016, we had federal income tax capital loss carryforwards of $1,100,000 (tax effected) which resulted from the reduction of our investments in and notes receivable from CoreTrace Corporation in 2012.  We can realize capital loss carryforwards to the extent we have capital gains in future periods against which this capital loss can be deducted.  We believe it uncertain that we will have sufficient capital gains in the future to support this deduction and accordingly have not reflected this item as a deferred tax asset in the schedule above.  This carryforward expires in 2017.

  

March 31,

  

December 31,

 
  

2020

  

2019

 

Deferred tax assets:

        

   Deferred revenue

 $545  $672 

   Right-of-use operating lease asset

  595   609 

   Share-based compensation

  254   200 

   Compensation and benefits

  87   123 

Texas franchise tax R&D credit

  136   150 

   Allowance for doubtful accounts

  37   37 

Deferred state income taxes

  35   45 

Tangible assets

  29   24 

   Accrued expenses not deducted for tax

  9   8 

Total deferred tax assets

  1,727   1,868 
         

Deferred tax liabilities:

        

   Right-of-use operating lease liability

  597   610 

   Intangible assets

  558   567 

Deferred expenses

  196   198 

Total deferred tax liabilities

  1,351   1,375 
         

Net deferred tax assets

 $376  $493 

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 the likelihood of having sufficient taxable income in the future to support deduction or utilization of the items giving rise to our deferred tax assets indicatesis dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We have concluded it is more-likely-than-not that weour ability to generate future taxable income will allow us to realize thethose deferred tax assets listedassets.

As of March 31, 2020, we had Texas Research and Development tax credit carryforwards of $136,000. These carryforwards expire in the table above.


We claim research and experimentation tax credits, or R&D tax credits, on certain of our tax returns and have included the effect of those credits in our provision for income taxes. Because our 2008, 2009 and 2010 tax returns were under routine examination by the Internal Revenue Service and because we believed it more-likely-than-not the examination could result in $125,000 of such credits we claimed not being allowed by the Internal Revenue Service, we recorded a reserve for an uncertain tax position in the amount of $125,000 in 2012 related to this item.  The Internal Revenue Service completed its routine examination of our 2008, 2009 and 2010 income tax returns in 2015 and those results have been included in our provision for income taxes in 2015. We continue to maintain a reserve for an uncertain tax position in the amount of $110,000 for our 2011years 2034 through 2016 tax returns related to the R&D tax credit.

2039.

The aggregate changes in the balance of our gross unrecognized tax benefits were as follows ($ in thousands):

  

Three Months Ended March 31,

 
  

2020

  

2019

 

Balance at beginning of period

 $24  $113 

Increases for tax positions related to the current year

  -   - 

Increases for tax positions related to prior years

  -   - 

Decreases for tax positions where the statue has expired

  -   - 

Balance at end of period

 $24  $113 

19


  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 

To

Our unrecognized tax benefit is related to research and development credits taken on our 2017 U.S. income tax return and the extent they arise,uncertainty related to the realization of a portion of those credits based on prior experience. 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 March 31, 2020, no such expenses in 2016, 2015interest or 2014.


penalties had been or were required to be accrued. We file stateincome tax returns in the US and in various states.  The taxes resulting from these filingsstate jurisdictions with varying statues of limitations. We are included inno longer subject to income tax expense.

examination by tax authorities for years prior to 2016 with respect to our federal income tax returns and years prior to 2015 with respect to most of our state income tax returns. We do not file, and are not required to file, any foreign income tax returns.

Our income tax expense (benefit) reconciles to an income tax expense resulting from applying an assumed statutory federal income tax rate of 34%21% for the 2020 quarter and 2019 quarter 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 



In November 2015, the FASB issued Accounting Standards Update (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. This implementation resulted in the previously reported current deferred tax asset of $313,000 as of September 30, 2015, being reclassified and combined with the previously reported non-current deferred asset of $699,000 as of that date to yield a non-current deferred tax asset balance of $1,012,000 being reported as of September 30, 2015, in the accompanying financial statements.

  

Three months ended March 31,

 
  

2020

  

2019

 

Income tax expense at federal statutory rate

 $594  $665 

Increase (decrease) in taxes resulting from:

        

State taxes, net of federal benefit

  97   86 

Stock based compensation

  (197)  73 

Other

  3   14 

Research and development credit

  (9)  (17)

Foreign derived intangible income deduction

  (27)  (74)

Income tax expense per the statements of operations

 $461  $747 

10.

7.

Earnings per Common Share


Earnings per share for the periods indicated were as follows ($ 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

 
  

March 31,

 
  

2020

  

2019

 

Numerators

        

Numerator for basic and diluted earnings per share:

     

Net income

 $2,369  $2,420 
         

Denominators

        

Denominators for basic and diluted earnings per share:

 

Weighted average shares outstanding - basic

  18,613   17,197 
         

Dilutive potential common shares

        

Stock options and awards

  413   467 

Denominator for diluted earnings per share

  19,026   17,664 
         

Net income per common share - basic

 $0.13  $0.14 

Net income per common share – diluted

 $0.12  $0.14 

11.

8.

Dividends


During 2016, our Board of Directors declared quarterly

The Company did not pay dividends during the 2020 quarter. We paid dividends during the 2019 quarter as follows:

  

Three Months Ended

 
  

March 31, 2019

 

Dividend per share of common stock

 $0.015 

Dividend record date

 

March 11, 2019

 

Dividend payment date

 

March 25, 2019

 

20

 
 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 

12.

9.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 $1.6 million.


between approximately $700,000 and $1.5 million depending upon the circumstances.

Legal and Regulatory Matters

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.

10.

Leases

On April 18, 2019, the Company signed a new operating lease for our existing office space location. The lease is for a period of 10 years at an average annual rent of $462,000 beginning May 1, 2019. We recorded a right-of-use asset and lease liability of approximately $3 million at the commencement of the lease.

Our non-cancellable, contractual obligations at March 31, 2020 consisted primarily of the following ($ in thousands):

  

Operating Lease

 

2020 (remaining nine months)

 $317 

2021

  431 

2022

  442 

2023

  453 

2024

  464 

Thereafter

  2,133 

Total lease payments

 $4,240 

Supplemental other information related to leases:

  

Three Months Ended

March 31,

 
  

2019

 

Operating lease cost

 $101 

Weighted-average remaining lease term (years)

  9.1 

Weighted-average discount rate (%)

  5%

Cash paid for amounts included in the measurement of lease liabilities:

    

Operating cash flows from operating leases

 $103 

14.

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 20162020 quarter and 2019 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 months18% and 2015 nine months, we earned approximately 14% and 10%19%, respectively, of our revenue from such sales through our largest third party,third-party channel distributor.

As of September 30, 2016,March 31, 2020, approximately 40%23% of our accounts receivable were due from this third party, channel distributor discussed above and from one other customer, the latter of which did not constitute more than 10% of our revenue for any of the periods presented.  Paymentwith payment for substantially all such amounts hashaving been received subsequent to that date.

  11.

15.

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 customersclients and partners located inoutside the United States accounted for approximately 83%23% and 78%28% of our total revenues in 2016the 2020 quarter and 20152019 quarter, respectively, and 78% and 76% of our total revenues for both the 2016 and 2015 nine months.  The remaining revenues were from customers and partners located in foreign countries with eachrespectively. Each individual foreign country accountingaccounts for less than 10% of total revenuesrevenue in all periods.  We attribute revenues to countries based on the country in which the customerclient or partner is located. NoneWe have no Company offices located in a foreign country and none of our property and equipment was located in a foreign country as of September 30, 2016March 31, 2020.

16.

Subsequent Events

On April 7, 2020 we entered into an agreement with EastWest Bank to borrow $1,987,700 under the U.S. Small Business Administration Payroll Protection Program authorized by the CARES Act. Following receipt of the loan proceeds, we evaluated our access to credit through other sources of funding and 2015.


determined to repay the funds borrowed under the CARES Act. On May 5, 2020, we returned the $1,987,700 in proceeds from the loan, which was not used by the Company.

22

18


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


This Quarterly Report on Form 10-Q (this “Quarterly Report”) of GlobalSCAPE, Inc. and its wholly-owned subsidiary (collectively referred to as “GlobalSCAPE”, the “Company”, “we” or “our”), 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 and 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, 2019 (the “2019 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 20162020 quarter and the 20152019 quarter refer to the three months ended September 30, 2016March 31, 2020 and 2015,2019, respectively.  Our references to the 2016 nine months and the 2015 nine months refer to the nine months ended September 30, 2016 and 2015, respectively.


Overview


We develop and sell computer software that provides secure information exchange, data transfer and sharing capabilities for enterprises and consumers. We have been in business for twenty years and have sold our products to thousands of enterprises and more than one million individual consumers throughout the world.


twenty years.

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 (“EFT”) platform. This on-premise and cloud-based delivery platform emphasizes secure and efficient data exchange for virtually any organization. It enables business partners, clients and employees to share information safely and securely. The EFT platform provides enterprise-level security while automating the integration of back-end systems which are features often missing from traditional file transfer software. The EFT platform features built-in regulatory compliance, governance, and visibility controls to maintain data safety and security. It can replace legacy systems, homegrown servers, expensive leased lines and virtual area networks. The EFT platform promotes ease of administration while providing the detailed capabilities necessary for complete control of a file transfer system.

We continue to explore all strategic alternatives to maximize value for shareholders, including without limitation to improve the market position and profitability of our product offerings in the marketplace, generate additional liquidity, and enhance our valuation. We may pursue our goals through organic growth or EFT.


strategic or other alternatives. We will also continue to monitor capital markets for opportunities to repurchase shares, as well as consider other actions designed to enhance shareholder value.

We earn most of our revenue from the sale of EFTproducts and productsservices that are part of our EFT platform. We earn revenue fromClients 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.


our EFT platform in two ways:

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 clients 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, or SaaS, under which they pay us ongoing fees to access the capabilities of the EFT platform in the cloud. In January 2018, we introduced EFT Arcus, our SaaS offering of the EFT platform for which users pay a base monthly subscription fee plus an additional variable amount determined 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%2% of our total revenue.revenue in the 2020 quarter. Clients pay a one-time fee to purchase these products under a perpetual software license. Some clients also purchase an M&S contract. We do not offer a SaaS version of these products and have no plans to do so. We continue to offer product support for Mail Express and WAFS, which we discontinued as products for sale as of January 1, 2019.

23

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.


As

During the 2020 quarter, license revenue from our EFT platform products decreased 24%. The decline is primarily attributable to a corporation, weslowdown in deal velocity as companies around the globe began to evaluate the effects of COVID-19 and started shifting to remote workforces.  We believe some clients and prospects decided to defer their buying decisions to a later period. Economic downturns or other adverse economic conditions, including but not limited to, public health crises that reduce economic activity (including the recent coronavirus COVID-19 outbreak) could have won multiple awards for performancean adverse effect on spending on information technology projects since in such environments, prospects and reputation, including:

·In 2016:
-Recognized as a 2016 Top Workplace by San Antonio Express-News, marking Globalscape’s sixth recognition as a Top Workplace in San Antonio.
-Named as Leader in Secure Information Exchange Services 2016 – Texas by the Corp America 2016 Small Cap Awards.
-
Earned awards from Info Security Guide in several categories, including:
oEFT Workspaces – Gold Winner in BYOD Security.
oEnhanced File Transfer – Silver Winner in Compliance.
oEFT Cloud Services – Bronze Winner in Cloud Security.
oMail Express – Bronze Winner in Email Security and Management.
-Received a 5-Star rating in The Channel Company’s CRN 2016 Partner Program Guide for the second year in a row.
-
Named by Texas Monthly magazine as one of the best companies to work for in Texas for the sixth year in a row with a ranking of #16 in the medium size category.
-Honored as the HR Employer of the Year and Excellence in Engagement Strategy in North America by the HRO Today Services and Technology Association.

-
Recognized by the San Antonio Business Journal as a 2016 Best Place to Work, making this the fifth time GlobalSCAPE has received this honor.
-
Named by Computerworld as one of the best companies to work for in IT for the third consecutive year with a ranking of #3 in the small company category.
·In 2015:
-Listed as a Champion in the Ad-Hoc Mid-Market category and a Leader in the Ad-Hoc Enterprise use case by Info-Tech Research Group within its Managed File Transfer Vendor Landscape report. This is the second consecutive time that Info-Tech Research Group has named GlobalSCAPE a Champion within this report.
-
Named one of the best places to work in the information technologies small business category by Computerworld for the fourth time.
-
Named as one of San Antonio’s best places to work by the San Antonio Business Journal for the fifth time in the medium size category.
-Received a 5-Star rating in The Channel Company’s CRN 2015 Partner Program Guide.
-
Named by Texas Monthly magazine as one of the best companies to work for in Texas for the fifth year in a row with a ranking of #3 in the medium size category.
-
Named to the San Antonio Business Journal’s 2015 Fast Track list for companies with $10 million or more in revenue.
-
Named by the San Antonio Express News as the #1 Top Workplace for 2015 in the small company category, and recognized as one of the Top Workplaces for the fifth time.
-
Two members of the channel leadership team recognized as The Channel Company’s 2015 CRN Channel Chiefs.
-
Two channel team members named to The Channel Company’s 2015 CRN Women of the Channel list.
-Recognized by the Golden Bridge Business and Innovation Awards as a Gold Winner in the Managed File Transfer – Innovations category for EFT Workspaces.
-Recognized by the Info Security Products Guide’s Global Excellence Awards as a Gold Winner within the Compliance category for Enhanced File Transfer (EFT) and as a Bronze Winner within the Email Security and Management category for Mail Express.
-Recognized by the Network Products Guide awards as a Gold Winner in Compliance Data Centers for EFT v7.0 and a Silver Winner in Email, Security and Management with Mail Express v4.

clients may reduce, sometimes greatly, their discretionary spending to focus on preserving mandatory spending budgets.

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 arebusiness: revenue growth and Adjusted EBITDA (as defined and further described below.


below).

Revenue Growth


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, and focus on, our core EFT platform and its expansion into broader segments of the market.
·Developing emerging technologies and/or acquiring products with features that build upon and add capabilities to our EFT platform.
·Continuing the evolution of enhanced demand generation activities including marketing, customer-focused, and partner-focused programs. 

To support product innovation, we continue to enhance our software engineering group and our focus on optimizing the manner in which we assess 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:
·Increasing sales staff capacity as needed to address our markets.
·Aligning our sales group to enhance its industry and geographic focus.
·Implementing new sales and marketing campaigns.
·Using third party digital marketing experts with search engine optimization expertise to enhance our efforts in this area.
·Evolving our lead generation programs to increase our sales staff’s exposure to potential purchasers.
·Enhancing our support of channel partners and engaging them to sell our products through training, orientation and marketing programs.

As part of growing revenue in total, we are focused on increasing license revenue both in terms of absolute dollars and as a percent of total 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 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 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. For these reasons, we expect M&S revenue will remain a substantial part of our total revenue.

See Comparison of theCondensed Consolidated Statement of Operations for the Three Months Ended September 30, 2016 March 31, 2020 and 2015 and Comparison of the Statement of Operations for the Nine Months Ended September 30, 2016 and 2015 2019for a discussion of trends in our revenue growth that we monitor using this metric.


Bookings

Adjusted EBITDA (Non-GAAP Measurement)


Bookings is a business metric we use 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 customers for purchases of software licenses, software-as-a-service, M&S, and professional services. Our bookings consist of:

·Invoiced amounts for products and services we have delivered and for which we recognize revenue currently.
·Invoiced amounts for products and services we will deliver in the future and for which we will recognize revenue in those future periods.
·Arrangements to provide customers with software-as-a-service for which we will invoice over the course of an agreed-upon period of time in the future.
·Statements of work under which customers have engaged us to deliver professional services for which we will invoice in the future as we complete that work.

Bookings is not a measure of financial performance under generally accepted accounting principles, or GAAP, and should not be considered a substitute for revenue. Bookings has limitations as an analytical tool and when assessing our operating performance. Bookings should not be considered in isolation or as a substitute for revenue or other income statement data prepared in accordance with GAAP.


Our bookings trends and the reconciliation of bookings to revenue are as follows ($ in thousands):

  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 

Bookings increased during the 2016 quarter compared to the 2015 quarter and during the 2016 nine months compared to the 2015 nine months primarily as a result of our product development and sales and marketing activities discussed above under Revenue Growth.

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-BasedStock-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.income. 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 stock-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 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.income. 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.

24


Previously, this key business metric was named Adjusted EBITDA Excluding Infrequent Items. We have not had any infrequent items in recent periods and do not expect any in the foreseeable future. As a result, we have removed the infrequent item component from this key business metric.

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 
Adjusted EBITDA reconciles as follows to net cash provided by operating activities on our condensed consolidated statement

  

Three Months Ended

 
  

March 31,

 
  

2020

  

2019

 

Net Income

 $2,369  $2,420 

Add (subtract) items to determine Adjusted EBITDA:

        

Income tax expense

  461   747 

Interest (income) expense, net

  774   (24)

Depreciation and amortization:

        

Total depreciation and amortization

  441   410 

Stock-based compensation expense

  497   875 

Adjusted EBITDA

 $4,542  $4,428 

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 
See the section below comparing our resultsCondensed Consolidated Statement of operationsOperations for the 2016 quarter Three Months Ended March 31, 2020and the 2015 quarter and the 2016 nine months and 2015 nine months2019 for discussion of the variances between periods in the components comprising Adjusted EBITDA.

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.


globally.

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 97% 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 customersclients 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 hosted solutions tothat we sell on an ongoing subscription basis. In January 2018, we introduced EFT Arcus, our SaaS offering of the EFT platform going forward, for which our customers subscribe andusers pay us a recurring,base monthly subscription fee to access the service.plus an additional variable amount based upon their metered usage of EFT Arcus resources.

·

M&S.

·

Professional services for product customizationinstallation, integration and integration.training.


25

23

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.

We sell other products that can beare synergistic to our MFT products. TheseEFT platform including CuteFTP. Collectively, these products constituted less than 2% of our total revenue in the 2020 quarter. Clients pay a one-time fee to purchase these products under a perpetual software license. Some clients also purchase an M&S contract. We do not offer a SaaS version of these products and 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.

no plans to do so. We continue to offer product support for Mail Express and WAFS, which we discontinued as products for sale as of January 1, 2019.

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 users the ability to securely transmit data and information from one location to another using any number of files of any size or configuration. It facilitates management, monitoring, and reporting on file transfers and delivers advanced data transfer workflow capabilities to move data and information into, out of, and throughout an enterprise. Notable

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,clients, 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 are provided at various levels of granularity to allowprovide for complete control and monitoring of file transfer activities.

·

Transmission of critical information such as financial data, medical records, customerclient 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 other security requirements. In addition to enabling the 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 customersclients with the ability to monitor and audit file transfer activities.

·

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, sharing/sharing and collaboration, and continuous data backup and recovery to our customers.recovery.

26

24


The

EFT platform provides a common, scalable MFT environment that accommodates a broad family 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.


During the past several quarters, we have released new versions of our EFT platform and new modules which added several enhancements and capabilities including:
·Accelerate, which is an accelerated file transfer module that boosts the speed and efficiency of secure data transfers and allows for the fast transfer of large files over disparate geographic distances.
·Workspaces, which is a file-sharing module that allows employees to create their own groups and assign permissions for those groups, much like a virtual data room, to provide access to files for which they themselves have access on the EFT server.  This functionality is accomplished without compromising the security, control, and governance of those files.
·Active-active high availability, or HA, which maximizes uptime and performance of critical information technology systems.
·Enhanced compatibility of web transfer client file transfers through HTML5 support in addition to the existing Java Runtime Environment.
·Increased scalability and business continuity with more flexible, uninterrupted file transfer service.
·Improved facilitation of PCI DSS version 3.0 compliance with updates to security components, such as PGP and AS2.
·Addition of new Content Integrity Control providing an Internet Content Adaptation Protocol (ICAP) connector to anti-malware scanners and data loss prevention (DLP) solutions.
·Integration with SMS PASSCODE for Mobile-Based 2 Factor Authentication.
·Enhanced and expanded event rule functionality which improves the ability to integrate our products with client business processes and backend systems
We continue to enhance the 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.

Most EFT customers choose toPlatform – Delivery Offerings

Our clients can 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.


If a customer prefers to use the capabilities of EFT in a SaaS fashion, we offer EFT Cloud Services. The EFT platform delivered in this manner has the same features and functionality as our EFT platform installed at a customer site. EFT Cloud Services allows users to reduce their upfront cost and achieve other recognized benefits of cloud-based managed file transfer SaaS subscription solutions, including strong service level agreements for information technologies infrastructure reliability and performance.  

EFT Cloud Services provides a flexible continuum of features and functions that gives the user the ability to pick and choose the extent to which they want to own or outsource the capabilities of our EFT platform. EFT Cloud Services gives organizations the flexibility of either a hybrid cloud or virtual environment with the security of an on-premises managed file transfer solution. Users of EFT Cloud Services have the option to work with a variety of top hosting providers that best fit their needs. We offer flexible subscription pricing under one, two, and three-year contracts that can help our customers minimize or eliminate upfront capital expenditures and possibly reduce their ongoing operating costs.

We earn most of our revenue from our products and services related to our EFT platform. Currently, most of this revenue is from sales of perpetual software licenses, paid as a one-time fee, along with an M&S contract that creates recurring revenue. Subscription revenue from EFT Cloud Services is increasing but is not yet a material portion of the total revenue from our EFT platform. Most of the resources we expend, and expect to expend in the future, relate to development, marketing, sales and support of the EFT platform in a business-to-business environment.


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-mail 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.

To broaden the appeal and capabilities of Mail Express, we are developing functionality that integrates the features of Mail Express into the EFT platform. This integration will take the superior control, visibility and monitoring capabilities of the EFT platform and make them available to administrators and users in an email environment.  This integrated product will improve operational efficiency by providing a coordinated user interface through which data movement activities using both our EFT and Mail Express products can be managed.

File Synchronization and Sharing Solution - scConnect
scConnect, is our on-premises, enterprise file synchronization and sharing solution. It provides users with the ability to share and access data anytime on any device, while providing information technology department administrators with the tools necessary to maintain the security of sensitive enterprise information and to control and monitor user access and activity. scConnect enables secure collaboration without involving third-party servers.

We continue to develop the features and functions of scConnect. As part of our development of this product, we intend to eventually integrate its capabilities into the functionality of our EFT platform.
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 selling WAFS as a stand-alone product and providing 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.

two ways:

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 clients 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 SaaS under which the client 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.

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.

CuteFTP continues to have significant brand recognition in the market.  Our current CuteFTP Version 9 introduced several notable new features including:

·Support for Unicode (UTF-8) characters that allows greater international use.
·Web Distributed Authoring and Versioning (WebDAV) support to facilitate collaboration between users in editing and managing documents and files stored on World Wide Web servers.

Version 9 simplified our CuteFTP product line by consolidating all the features of our previous multi-product CuteFTP product line for Windows operating systems into this single version. We continue to offer CuteFTP Version 3.1 software for Mac platforms. We believe current versions of CuteFTP appeal to users wanting features more robust than offered in free alternatives such that it will be a product competitive in the marketplace for the foreseeable future.
We will continue selling CuteFTP as a stand-alone product and providing M&S services to customers who purchased CuteFTPclients, but will not invest significantly in enhancing or marketing 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 CuteFTP.


product.

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. 


can include:

System integration and implementation

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 customersclients who purchase our other products. CustomersClients 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 customersclients with M&S contracts renew them each year.


Employees


As of October 31, 2016, we had 126 full-time employees

Our workforce is organized as follows:

  

March 31,

 

Department

 

2020

  

2019

 

Sales and Marketing

  44   39 

Engineering

  14   9 

Professional Services

  6   6 

Customer Support

  24   23 

Management and Administration

  18   15 

Total

  106   92 

27


Number of
DepartmentEmployees
Sales and Marketing44
Engineering28
Professional Services12
Customer Support22
Management and Administration20
Total126

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%

We earn revenue primarily

  

Three Months Ended March 31,

 
  

2020

  

2019

 
  

Amount

  

Percent of

Total

  

Amount

  

Percent of

Total

 
                 

Revenue By Type

                

License

 $1,995   20.5% $2,634   28.0%

M&S

  7,066   72.8%  6,076   64.5%

Professional Services

  651   6.7%  703   7.5%
                 

Total Revenue

 $9,712   100.0% $9,413   100.0%
                 

Revenue by Product Line

                

License

                

EFT Platform

 $1,950   97.7% $2,584   98.1%

Other

  45   2.3%  50   1.9%
                 

Total License Revenue

  1,995   100.0%  2,634   100.0%
                 

M&S

                

EFT Platform

  6,930   98.1%  5,868   96.6%

Other

  136   1.9%  208   3.4%
                 

Total M&S Revenue

  7,066   100.0%  6,076   100.0%
                 

Professional Services (all EFT Platform)

  651   100.0%  703   100.0%
                 

Total Revenue

                

EFT Platform

  9,531   98.1%  9,155   97.3%

Other

  181   1.9%  258   2.7%
                 

Total Revenue

 $9,712   100.0% $9,413   100.0%

Revenue from the following activities:


License revenue from sales of our EFT and Mail Express products that we deliver as either 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 brand 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 WAFS and CuteFTP products that are installed at the customer’s premises 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 we recognize 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.

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 transfer 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 productsincreased 4% 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, this migration 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.

In mid-2016, we reviewed the allocation of our product research and development resources across all of our products. As a result of that review, we decided to adjust that allocation to focus most of our engineering resources involved in product research and development on our EFT platform products in order to expand their capabilities and to remain positioned to be responsive to the evolving needs of our customers.

Over the past few years, we have developed and offered individual product lines 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 them as stand-alone products for the time being, the engineering resources we allocate to these technologies will focus on migrating them 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.

To support product innovation, we continue to enhance our software engineering group and our focus on optimizing the manner in which we assess 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:
·Increasing sales staffing and capabilities as needed to address our markets.
·Aligning our sales group to enhance its industry and geographic focus.
·Implementing new sales and marketing campaigns.
·Evolving our lead generation programs to increase our sales staff’s exposure to potential purchasers.
·Enhancing our support of channel partners and engaging them to sell our products through training, orientation and marketing programs.


Our total revenue increased 15% in the 20162020 quarter compared to the 20152019 quarter. Revenue for our other product lines decreased 30% for the 2020 quarter and 9% in the 2016 nine months compared to the 2015 nine months.2019 quarter, which is consistent with our expectations as discussed below. For a more completedetailed discussion of these revenue trends, see Comparison“Comparison of the Condensed Consolidated Statement of Operations for the Three Months Ended September 30, 2016March 31, 2020 and 2015 and Comparison of the Statement of Operations for the Nine Months Ended September 30, 2016 and 2015.

2019”.

Liquidity and Capital Resources


Our total cash, cash equivalents and working capital positions were as follows ($ in thousands):

  

March 31,

2020

  

December 31,

2019

 

Cash and cash equivalents

 $9,289  $4,702 
         

Current assets

 $17,351  $15,066 

Current liabilities

  (22,874)  (22,602)

Working capital

 $(5,523) $(7,536)

28

 
 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 
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. 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 when

When assessing our financial positionliquidity and should not be considered a substitute for working capital computed in accordance with GAAP.


resources, we consider the following factor:

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 clients 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 Three Months Ended March 31,

 
  

2020

  

2019

 

Operating activities

 $5,477  $5,973 

Investing activities

  (408)  (224)

Financing activities

  (482)  (560)

Our cash provided by operating activities increaseddecreased during the 2016 nine months2020 quarter compared to the 2015 nine months2019 quarter primarily due to the following factors:


·Accounts payable decreased $217,000 during

Stock-based compensation increasing $497,000 in the 2016 nine months2020 quarter compared to decreasing $757,000$875,000 in the 2015 nine months. The change in the amount of the decrease was2019 quarter primarily due to the payment duringexpense related to the 2015 nine monthsaccelerated vesting of options granted to our former Chief Executive Officer who passed away unexpectedly in March 2019. The vesting acceleration was pursuant to the terms of the applicable option agreements.

Deferred revenue decreasing $47,000 in the 2020 quarter compared to increasing $307,000 in the 2019. The increase in the 2019 quarter was primarily the result of improved processes implemented to better capture M&S renewals. The small decline in the 2020 quarter is due primarily to the completion of certain large obligationsefforts to third-party software developers which was not repeatedimprove operational processes.

Accounts payable decreasing $188,000 in the 2016 nine months as a result of our increased use of internal resources2020 quarter compared to develop our products andincreasing $18,000 in the 2019 quarter due to normal variations in the timing of paymentspayment to our vendors.

·Income tax receivable and payable increased $571,000

Accrued expenses decreasing $141,000 in the 2016 nine months2020 quarter compared to increasing $403,000$66,000 in the 2015 nine months. The change in the amount of the increase was a result of changes in the level of our taxable income between periods and normal2019 quarter due primarily to variations in the timing of our tax payments.payroll related liabilities.

Offset by:

·
Net income after considering adjustments to reconcile net income to net cash provided by operating activities, as set forth on our Condensed Consolidated Statements of Cash Flow, decreased $609,000. See the section below under Comparison of the Statement of Operations for the Nine Months Ended September 30, 2016 and 2015 for a discussion of the changes in the components of these amounts.
·

Accounts receivable increased $2.8decreasing $1.7 million in the 2016 nine months which provided less cash than the $1.72020 quarter compared to decreasing $1.2 million increase in the 2015 nine months.  This increase was2019 quarter due primarily to an increaseincreased customer collections in software licenses sold and bookings of multi-year M&S contracts during the 2016 nine months as2020 quarter compared to the 2015 nine months.2019 quarter.


The amount of cash we used for investing activities during the 2016 nine months decreased2020 quarter increased compared to the 2015 nine months with the primary component of that decrease relating2019 quarter due primarily to an increase in our capitalized software development costs that were capitalized. This decrease wascosts.

Financing activities used less cash during the 2020 quarter than during the 2019 quarter primarily due to:


·Increased use of our employees as an internal resource to do this work

A one-time payment in the 2016 nine months2019 quarter of $445,000 (net of tax benefit) to our former Chief Financial Officer to terminate certain stock option agreements where no similar event occurred in the 2020 quarter.

No stock repurchases in the 2020 quarter compared to the 2015 nine months when we relied more on2019 quarter.

No dividend payment made in the use2020 quarter compared to the 2019 quarter.

An increase in proceeds received from the exercise of higher cost, third-party software developers.

·Enhancement of relationships with those third-party developers we continue to use by replacing legacy arrangements carrying higher costs with more cost effective and efficient arrangements.
·Shortages of qualified software engineers and qualified technical personnel that caused some of our open positions that arisestock options during the normal course2020 quarter compared to the 2019 quarter.

Offset by:

The principal loan payment of business to take longer to fill.$1.25 million made in the 2020 quarter.


Our financing activities

Loan Agreement

In November 2019, we entered into a credit facility with J.P. Morgan Chase Bank, N.A, as Administrative Agent and East West Bank as Syndication Agent consisting of a $50.0 million term loan and a $5 million revolving agreement (the “Loan Agreement”). Funds from the term loan were substantially used more cashto fund a special dividend of $3.35 to our common shareholders which was paid on December 5, 2019. The revolving loan may be accessed to fund working capital needs. The loans bear a variable interest rate of LIBOR plus a Term Loan Spread between 3.75% and 2.25%. The amount of the Term Loan Spread is a function of the Company’s Leverage Ratio. Effective January 3, 2020, the Company entered into an Amendment and Waiver No. 1 to the Credit Agreement to increase the amount of the special dividend permitted to be paid to stockholders on December 5, 2019 to accommodate last minute option exercises and to exclude the May 28, 2019 special dividend from the fixed charges calculation. Effective April 13, 2020, the Company entered into Amendment No. 2 to the Credit Agreement which provided formal consent for the Company to borrow $2.0 million under the U.S. Small Business Administration Payroll Protection Program authorized by the CARES Act.

As permitted by the above consent, we entered into an agreement with EastWest Bank to borrow $1,987,700 under the U.S. Small Business Administration Payroll Protection Program authorized by the CARES Act. Following receipt of the loan proceeds, we evaluated our access to credit through other sources of funding and determined to repay the funds borrowed under the CARES Act. On May 5, 2020, we returned the $1,987,700 in proceeds from the loan, which was not used by the Company.

At March 31, 2020, the principal balance outstanding under the term note payable was $48.1 million and the balance of the revolving note payable was zero.

The aggregate maturities of our notes payable, as of March 31, 2020, are as follows: $3.8 million in 2020, $7.5 million in 2021, $7.5 million in 2022, $10.0 million in 2023, and $19.4 million in 2024.

Interest payments under the credit facility are due monthly. Principal payments are due quarterly. The loans may be prepaid at any time without penalty. 

The Loan Agreement contains the following financial covenants:

●     We must not exceed a Total Leverage Ratio of 3.25x. This ratio decreases to 3.0x at September 30, 2020, 2.75x at March 31, 2021 and 2.25x at March 31, 2022. This ratio is defined in the 2015 nine months thanLoan Agreement as the 2016 nine months primarily dueratio of (a) consolidated total funded indebtedness to consolidated EBITDA minus capitalized software expenditures for the period of the four most recent consecutive fiscal quarters. As of March 31, 2020, this debt service coverage ratio was 2.54x.

●           We must maintain a Fixed Coverage Charge Ratio of 1.25x. This ratio is defined in the Loan Agreement as the ratio of consolidated EBITDA minus unfinanced capital expenditures to cash interest expense plus scheduled principal payments made plus taxes paid in cash plus restricted payments made in cash. As of March 31, 2020, this debt to tangible net worth ratio was 2.93x.

The Loan Agreement contains customary covenants relating to maintaining legal existence and good standing, complying with applicable laws, delivery of financial statements, payment of three cash dividends intaxes and maintaining insurance. The Loan Agreement also contains customary events of default including the 2016 nine months comparedfailure to make payments of principal and interest, the paymentbreach of two cash dividends inany covenants, the 2015 nine months.occurrence of a material adverse change, and certain bankruptcy and insolvency events.

30

Contractual Obligations and Commitments


At September 30, 2016,March 31, 2020, our contractual obligations and commitments consisted primarily of the following items:


·

Obligations outstanding under the Loan Agreement described above.

An obligation to deliver services in the future to satisfy our right to earn our deferred revenue of $16.7$18.2 million. Those future services primarily relate to our obligations under M&S contracts for which we have invoiced our customers.contracts. We will recognize this deferred revenue as revenue over the remaining life of those contracts which generally ranges from one to three years. Deferred revenue, unlike the other liability components of our working capital, is an obligation we will satisfy through providing services in the future to our customersclients 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.

·

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, consisted primarily of the lease for our office space with amounts due as follows ($ 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
 
As of September 30, 2016, we had no interest-bearing obligations in the form of loans, notes payable or similar debt instruments.

We plan to continue to expend significant resources in the future on product development, sales and marketing which may require that we enter into additional contractual arrangements and use our cash to acquire or license technology, intellectual property, products, services or businesses related to our current business strategy.

Comparison of the Condensed Consolidated Statement of Operations for the Three Months Ended September 30, 2016March 31, 2020 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 
2019

  

Three Months Ended March 31,

     
  

2020

  

2019

  

$ Change

 
  

$ in thousands

 
             

Total revenues

 $9,712  $9,413  $299 

Total cost of revenues

  1,582   1,434   148 

Gross profit

  8,130   7,979   151 

Operating expenses

            

Sales and marketing

  2,075   1,916   159 

General and administrative

  1,525   2,019   (494)

Legal and professional

  615   576   39 

Research and development

  311   325   (14)

Total operating expenses

  4,526   4,836   (310)

Income from operations

  3,604   3,143   461 

Other income (expense)

  (774)  24   (798)

Income before income taxes

  2,830   3,167   (337)

Income tax expense

  461   747   (286)

Net income

 $2,369  $2,420  $(51)

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 20162020 quarter amounts compared to the 20152019 quarter amounts.


31

31


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%

Trends in Revenue by Type

Software Licenses -

  

Three Months Ended March 31,

 
  

2020

  

2019

 
      

Percent of

      

Percent of

 
  

Amount

  

Total

  

Amount

  

Total

 
                 

Revenue By Type

                

License

 $1,995   20.5% $2,634   28.0%

M&S

  7,066   72.8%  6,076   64.5%

Professional Services

  651   6.7%  703   7.5%
                 

Total Revenue

 $9,712   100.0% $9,413   100.0%
                 

Revenue by Product Line

                

License

                

EFT Platform

 $1,950   97.7% $2,584   98.1%

Other

  45   2.3%  50   1.9%
                 
   1,995   100.0%  2,634   100.0%

M&S

                

EFT Platform

  6,930   98.1%  5,868   96.6%

Other

  136   1.9%  208   3.4%
                 
   7,066   100.0%  6,076   100.0%
                 

Professional Services (all EFT Platform)

  651   100.0%  703   100.0%
                 

Total Revenue

                

EFT Platform

  9,531   98.1%  9,155   97.3%

Other

  181   1.9%  258   2.7%
                 
  $9,712   100.0% $9,413   100.0%

Our software licensetotal revenue increased 18.3%3%. Most of this increase cameRevenue from our sales of our EFT platform products and was a resultservices increased 4%. Revenue from our other products that consist of the following factors:


·In mid-2016, we reviewed how we were allocating our resources across all of our product lines. Based on that review, we initiated changes that were in place throughout the 2016 quarter to enhance our focus on our EFT platform that is our flagship product and from which we earn a substantial portion of our revenue. While these changes initially prioritized attention to our product research and development activities, we identified corporate-wide synergies from a similar focus on how we were expending resources in our marketing and sales activities. As a result, the attention we paid to our EFT platform gained momentum across all departments resulting in our overall resources being more optimally used to translate sales leads into completed transactions and revenue for that product line. As a result, we realized 25.1% growth in revenue from our EFT platform perpetual license sales.

·Revenue from delivery of our EFT platform through a cloud-based SaaS solution grew 52.8%. We achieved this growth by promoting our ability to offer the features and functions of our EFT platform through a SaaS delivery method without materially impacting our perpetual license sales. We believe this flexibility allows us to address the full range of users, whether they prefer a SaaS solution or an on-premises solution, without negatively compromising our ability to earn revenue from both.

·We made an investment in early 2016 to enhance the talent level of our sales force. During the 2016 quarter, we began to realize the benefits of them completing their first full sales cycles of substance and converting our sales pipeline into revenue. These efforts, combined with the refocus on our EFT platform discussed above, allowed our sales and marketing teams to achieve greater efficiencies that led to increased revenue.

M&S Revenue – When we sell our licensed products, we also typically create a recurring revenue stream from M&S since almost all purchasersMail Express, WAFS, CuteFTP, and TappIn decreased to less than 2% of our licensed products also purchase an M&S contract. In general and depending upon the level of M&Stotal revenue, which is a customer purchases, this recurring revenue streamtrend that is 20% to 30% per year of the price of the underlying software license to which the M&S relates.


M&S revenue increased 13.8% primarily as a result of ongoing license sales for EFT Enterprise and Standard that are almost always accompanied by an M&S contract and sustained high renewal rates of M&S contracts by customers who initially purchased these services 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. Ongoing license revenue provides a foundation for future recurring revenue as the purchasers of our licensed products continually 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 sold over multiple years that create M&S renewals in any single year predictably (and in line with our expectations) exceeding the numberongoing de-emphasis of new software licenses we sell in a single year. those products.

We expect this cumulative effect to continue yielding sustainable M&S revenue as we continue to sell our enterprise softwareoffer product support for Mail Express and WAFS, which we discontinued as products in future periods.


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 termsale as 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.

Professional Services Revenue - Professional services revenue increased 2.1%. This increase was due to our sales and marketing programs designed to increase the frequency of sales of professional services  and our enhanced focus on managing our queue of professional services projects so as to deliver our work product to our customers sooner and in-turn accelerate our ability to recognize revenue from these projects.

Trends in Revenue by Product

January 1, 2019.

EFT Enterprise and Standard - We earn a substantial portion of our revenue selling our EFT platform products and providing M&S and professional services related to those products. We believe these products present the best opportunity for increasing our revenue. Our software license, M&S and professional servicesPlatform Products

License revenue from our EFT platform increased 18.9% forproducts decreased 24%. The decline is primarily attributable to a slowdown in deal velocity as companies around the reasons discussed above under Trendsglobe began to evaluate the effects of COVID-19 and started shifting to remote workforces. We believe some clients and prospects decided to defer their buying decisions to a later period. Economic downturns or other adverse economic conditions, including but not limited to, public health crises that reduce economic activity (including the recent coronavirus COVID-19 outbreak) could have an adverse effect on spending on information technology projects since in Revenue by Type.


WAFS, CuteFTPsuch environments, prospects and Other - The total of license and clients may reduce, sometimes greatly, their discretionary spending to focus on preserving mandatory spending budgets.

M&S revenue from WAFS decreased 11.4%, from CuteFTP decreased 48.3% and from other products decreased 21.8%. Revenue from these products is less than 10% of our total revenue, and we earn no significant professional services revenue from these products. These decreases in revenue were a result of our primary focus being on the development, marketing and sales of our EFT platform products as discussed above under Solution Perspectiveincreased 18% primarily due to:

The addition of sales resources that are focused on (i) increasing the number of clients who renew M&S and (ii) increasing annual contract prices to better reflect the value provided by our support teams.

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 clients who initially purchased these services in earlier periods. We believe these renewals are the result of clients recognizing the value provided by our Maintenance and Support team.

Our professional services revenue was $52,000 less for the 2020 quarter compared to the 2019 quarter, a decrease of 7%. This decrease was primarily due to the decreased license revenue from our EFT platform since there generally is a direct relationship between the licenses our customers purchase and Trends.


their need for professional services.

Cost of Revenues. These expenses are associated with the production, delivery and support of our products and services. We believe it mostis 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 primarily consists primarily of:


·

Amortization of capitalized software development costs we incur when producing our software products. This amortizationAmortization begins when a product is ready for general release to the public.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.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.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 increased 11% and as a percent of software license revenue was 26%34% in the 20162020 quarter compared to 20%23% in the 20152019 quarter. ThisThese increases were primarily due to an increase was the resultin amortization of our release of new software products and new versions 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.



costs.

Cost of M&S revenue as a percent of M&S revenue was substantially unchanged.9% in both the 2020 quarter and the 2019 quarter. Cost of revenue for M&S in absolute dollars increased by 6%15%. The increase in absolute dollars was due primarily to an increase 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 protocols and practices.


personnel related expenses.

Cost of professional services revenue as a percent of that revenue was 80%45% in the 20162020 quarter as compared to 93%42% in the 20152019 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 customerclient 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 in 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 in absolute dollars decreased 12% for the reasons discussed above.


Sales and Marketing.  We believe it most 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 31.5%21% of total revenue for the 20162020 quarter compared to 29.9%20% of total revenue for the 20152019 quarter. In absolute dollars these expenses increased 21%. These variations were8% due primarily due to:


·Increasing the size of our sales, marketing and product strategy teams and increased compensation rates due to competitive demands in the marketplace.
·Increasing marketing activities related to competitive intelligence and channel development.
·An increase in revenue which resulted in a higher absolute dollar amount of sales commissions paid to employees although the commission rate as a percent of sales did not change materially.

to an increase in personnel related expenses.

General and Administrative. These expenses increased 13%decreased 24% primarily due to a continuing severance obligationdecrease in stock-based compensation expense related to the accelerated vesting of options granted to our former chief executive officer and legal fees relatedChief Executive Officer who passed away unexpectedly in March 2019. The vesting acceleration was pursuant to the matter discussed belowterms of the applicable option agreements.

Legal and Professional. These expenses increased 7% primarily due to an increase in Part II. Other Information Item 1. Legal Proceedings.


professional fees and related expenses associated with the previously disclosed internal investigation, the restatement of certain of our financial statements and related litigation.

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 
Total research

  

Three Months Ended March 31,

 
  

2020

  

2019

 

R&D expense

 $311  $325 

Capitalized software development costs

  364   201 

Total resources expended for R&D

 $675  $526 

Our total R&D expenditures increased 28% between the 2020 and development expenditures decreased 14.9%2019 quarters mainly due to:


·Increased use of our employees as an internal resource to do this work in the 2016 quarter compared to the 2015 quarter when we relied more on the use of higher cost, third-party software developers.
·Enhancement of relationships with those third-party developers we continue to use by replacing legacy arrangements carrying higher costs with more cost effective and efficient arrangements.
·Shortages of qualified software engineers and qualified technical personnel that caused some of our open positions that arise during the normal course of business to take longer to fill.


to higher personnel related expenses.

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 and capitalized software development costs 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 costcosts individually.


Other Income (Expense), Net.  The other expense (net) in both quarters(Expense). Other income (expense) consists primarily of interest income earned on long and short term investments.


expense related to our credit facility more fully described in Note 7 of our financial statements.

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 34%21% in the 2020 quarter and 2019 quarter primarily due to:


·The domestic production activities deduction in both quarters, and the research and development credit, that are items considered in our federal income tax return that are not part of our income before taxes on our financial statements.

Offset by:

·

Certain expenses in our condensed consolidated financial statements, such as a portion of meals and entertainment expenses that are not deductible on our federal income tax return.

·

For 2019 a portion of our stock based compensation that is not deductible on our federal income tax return.

State income taxes included in income tax expense in our condensed consolidated financial statements.


Our effective rate was higher in the 2016 quarter compared to the 2015 quarter primarily due to the research and development tax credit being lower in 2016 than 2015 and also the granting of only incentive stock options in 2016, for which we generally do not ever take a deduction on the tax return, as compared to the granting of only non-qualified stock options in 2015 for which we take a deduction on the tax return when the option is exercised.

Comparison of the Statement of Operations for the Nine Months Ended September 30, 2016 and 2015
  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)

In the discussions below, we refer to the nine months ended September 30, 2016, as the “2016 nine months” and the nine months ended September 30, 2015, as the “2015 nine months”. The percentage changes cited in our discussions are based on the 2016 nine month amounts compared to the 2015 nine month amounts.

The components of our revenues were as follows ($ in thousands):

  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%

Trends in Revenue by Type

Software Licenses - Software license revenue decreased 0.3%. Most of this change was driven by our sales of our EFT platform products and was a result of the following factors

Offset by:

·During the six months ended June 30, 2016, we reviewed how we had been allocating our product research and development resources across all of our products. We determined that we had been allocating resources to the development of our EFT platform at a level less than that necessary to allow our sales and marketing activities to continue to yield growth in license revenue from that product during the six months ended June 30, 2016. As a result, software license revenue decreased 9.5% for this period as compared to the six months ended June 30, 2015.

·

Based on the review described above, we initiated changes that were in place throughout the 2016 quarter to enhance our focus on our EFT platform that is our flagship product and from which we earn a substantial portion of our revenue. While these changes initially prioritized attention to our product research and development activities, we identified corporate-wide synergies from a similar focus on how we were expending resources in our marketing and sales activities. Our enhanced attention to our EFT platform gained momentum across all departments resulting in our overall resources being more optimally used to translate sales leads into completed transactions and revenue for that product line. As a result, we realized 25.1% growth in revenue from our EFT platform perpetual license sales during the 2016 quarter which substantially offset the decrease in software license revenue for first six months of 2016 yielding the 0.3% decrease in software license revenue for the 2016 nine months.

·Revenue from delivery of our EFT platform through a cloud-based SaaS solution grew 39.3%.

The dollar amount of this revenue is not yet material to our total revenue. We achieved this growth by promoting our ability to offer the features and functions of our EFT platform through a SaaS delivery method without materially impacting our perpetual license sales. We believe this flexibility allows us to address the full range of users, whether they prefer a SaaS solution or an on-premises solution, without negatively compromising our ability to earn revenue from both.

·We made an investment in early 2016 to enhance the talent level of our sales force. During the 2016 nine months, we began to realize the benefits of them completing their first full sales cycles of substance and converting our sales pipeline into revenue. These efforts, combined with the refocus on our EFT platform discussed above, allowed our sales and marketing teams to achieve greater efficiencies that led to increased revenue.

M&S 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.

M&S revenue increased 12.8% primarily as a result of ongoing license sales for EFT Enterprise and Standard that are almost always accompanied by an M&S contract and sustained high renewal rates of M&S contracts by customers who initially purchased these services 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. Ongoing license revenue provides a foundation for future recurring revenue as the purchasers of our licensed products continually 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 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 as we continue to sell our enterprise software products in future periods.

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.

Professional Services Revenue - Professional services revenue increased 31.5% due to our sales and marketing programs designed to increase the frequency of sales of professional services and our enhanced focus on managing our queue of professional services projects so as to deliver our work product to our customers sooner and in-turn accelerate our ability to recognize revenue from these projects.

Trends in Revenue by Product

EFT Enterprise and Standard - We earn a substantial portion of our revenue from selling our EFT platform products and providing M&S and professional services related to those products. We believe these products present the best opportunity for increasing our revenue. Our software license, M&S and professional services revenue from our EFT platform increased 13.5% for the reasons discussed above under Trends in Revenue by Type.

WAFS, CuteFTP and Other - The total of license and M&S revenue from WAFS decreased 13.9%, from CuteFTP decreased 27.8% and from other products decreased 38.1%. Revenue from these products is less than 10% of our total revenue, and we earn no significant professional services revenue from these products. These decreases in revenue were a result of our primary focus being on the development, marketing and sales of our EFT platform products as discussed above under Solution Perspective and Trends.

Cost of Revenues.  These expenses are associated with the production, delivery and support of the products and services we sell. We believe it most 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. This amortization begins when a product is ready for general release to the public.
·Royalties we pay to use software developed by others for certain features of our products.
·Fees we pay to third parties who provide services supporting our SaaS and cloud-based subscription solutions.


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 as a percent of software license revenue was 27% in the 2016 nine months compared to 19% in the 2015 nine months.  This increase were a result of our release of new software products and new versions of existing products in periods subsequent to the 2015 nine months and the commencement of amortizing the capitalized software development costs for those products. This additional expense amortization that began subsequent to the 2015 nine months increased cost of revenue in the 2016 nine months as compared to the 2015 nine months.  On an absolute dollar basis, cost of revenue for software licenses increased 39% 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. Cost of revenue for M&S in absolute dollars increased by 8% due to an increase 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 protocols and practices.

Cost of professional services revenue as a percent of that revenue was 84% in the 2016 nine months as compared to 82% in the 2015 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. 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 in the 2016 nine months compared to the 2015 nine months for which the cost is higher than the cost of using our own personnel. Cost of revenue for professional services in absolute dollars decreased 34% for the reasons discussed above.

Sales and Marketing.  We believe it most 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 35% of total revenue for the 2016 nine months compared to 32% of total revenue for the 2015 nine months. In absolute dollars these expenses increased 20%. These variations were primarily due to:

·Increasing the size of our sales, marketing and product strategy teams and increased compensation rates due to competitive demands in the marketplace.
·Increasing marketing activities related to competitive intelligence and channel development.
·An increase in revenue which resulted in a higher absolute dollar amount of sales commissions paid to employees although the commission rate as a percent of sales did not change materially.

General and Administrative.  These expenses increased 10%. Our chief executive officer resigned during the 2016 nine months. The severance arrangement related to this resignation included a modification of certain stock options held by him to accelerate their vesting and to extend the period during which they can be exercised and also ongoing severance payments.  The stock option modification resulted in a one-time share-based compensation expense.  That expense and the ongoing severance payments and legal costs was the primary cause of the increase in this expense. Our legal fees also increased due to the matter discussed below in Part II. Other Information Item 1. Legal Proceedings.

Research and Development.  The overall profile of our research and development activities was as follows ($ in thousands):
  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 

Total research and development expenditures decreased 12.2% due to:

·Increased use of our employees as an internal resource to do this work in the 2016 nine months compared to the 2015 nine months when we relied more on the use of higher cost, third-party software developers.
·Enhancement of relationships with those third-party developers we continue to use by replacing legacy arrangements carrying higher costs with more cost effective and efficient arrangements.
·Shortages of qualified software engineers and qualified technical personnel that caused some of our open positions that arise during the normal course of business to take longer to fill.

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 and capitalized software development costs 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.

Other Income (Expense), Net.  The other expense (net) in both quarters consists primarily of interest income earned on long and short term investments.

Income Taxes.  Our effective tax rate was 32.8% for the 2016 nine months and 32.0% for the 2015 nine months. These rates differed from a federal statutory tax rate of 34% primarily due to:

·The domestic production activities deduction in both quarters, and the research and development credit inwhich is a tax credit incentive that serves to reduce the 2016 nine months only, that are items considered in ourrate at which we pay federal income tax return that are nottaxes in exchange for us conducting certain aspects of our business in a manner promoted by the Internal Revenue Code.

The foreign derived intangible income deduction which was a part of our income before taxes on our financial statements.the 2017 Tax Cuts and Jobs Act that lowered the tax rate for US corporations’ foreign derived intangible income.


Offset by:

·Certain expenses in our financial statements, such as

For 2020 a portiondeduction related to disqualifying disposition of meals and entertainment expenses, that are not deductible on our federal income tax return.incentive stock options.

·State income taxes included in income tax expense in our financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk


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, 2016 we earned approximately 17% of our revenue from a single 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 the nine months ended September 30, 2016, and the nine months ended September 30, 2015, we earned approximately 14% and 10%, respectively, of our revenue from a single third party, channel distributor who purchases products from us and resells them to their customers. Approximately 40% of our accounts receivable as of September 30, 2016, were due from this customer and from one other customer, the latter of which did not constitute more than 10% of our revenue. Payment for substantially all such amounts has been received subsequent to that date.
We earned approximately 17% and 22% of our revenue from customers outside the United States during the three months ended September 30, 2016, and the three months ended September 30, 2015 respectively. We earned approximately 22% and 24% of our revenue from customers outside the United States during the nine months ended September 30, 2016, and the 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 the 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.


Not Applicable.

Item 4. Controls and Procedures


Disclosure Controls and Procedures

As of the end of the period covered by this report,Quarterly Report, our PresidentChairman of the Board and Chief Executive Officer and our Chief Financial Officer carried out an evaluation of the effectiveness of GlobalSCAPE’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) and concluded that the disclosure controls and procedures were effective.


There were

Changes in Internal Control over Financial Reporting

We transitioned to a remote work force effective March 16, 2020 due to the coronavirus COVID-19 outbreak. This transition had no effect on our internal control procedures and there have been no other changes in our internal controlscontrol over financial reporting during the nine monthsquarter ended September 30, 2016,March 31, 2020 that could have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information


Item 1. Legal Proceedings


GlobalSCAPE has been named as one of a number of defendants

The information set forth under “Note 11 – Commitments and Contingencies – Legal and Regulatory Matters” to the notes to our 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 itQuarterly Report 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.  


incorporated herein by reference.

Item 1A. Risk Factors.


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 20152019 Form 10-K filed with the Securities and Exchange CommissionSEC on March 3, 2016.16, 2020. Except as set forth in this Quarterly Report, the risks and uncertainties described in “Item 1A. Risk Factors” of our 2019 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.

Our results of operations may be negatively impacted by the coronavirus outbreak.

We are closely monitoring the impact of the 2019 novel coronavirus, or COVID-19, on all aspects of our business. In March 2020, the World Health Organization characterized COVID-19 as a pandemic and the President of the United States declared the COVID-19 outbreak a national emergency. Since then, the COVID-19 pandemic has rapidly spread across the globe and has already resulted in significant volatility, uncertainty and economic disruption. The outbreak of COVID-19 has caused and may continue to cause travel bans or disruptions, and in some cases, prohibitions of non-essential activities, disruption and shutdown of businesses and greater uncertainty in global financial markets. The impact of COVID-19 is fluid and uncertain, but it has caused and may continue to cause various negative effects, including an inability to meet with actual or potential customers, our end customers deciding to delay or abandon their planned purchases or failing to make payments, the Company to delay, cancel, or withdraw from user and industry conferences and other marketing events, and delays or disruptions in our or our partners’ supply chains. As a result, we may experience extended sales cycles, our ability to close transactions with new and existing customers and partners may be negatively impacted, our ability to recognize revenue from software transactions we do close may be negatively impacted, our demand generation activities, and the efficiency and effect of those activities, may be negatively affected, our ability to provide 24x7 worldwide support to our end customers may be effected, and it has been and, until the COVID-19 outbreak is contained, will continue to be more difficult for us to forecast our operating results. These macroeconomic challenges and uncertainties, including the COVID-19 outbreak, have, and may continue to, put pressure on global economic conditions and overall IT spending and may cause our end customers to modify spending priorities or delay or abandon purchasing decisions, thereby lengthening sales cycles and potentially lowering prices for our solutions, and may make it difficult for us to forecast our sales and operating results and to make decisions about future investments, any of which could materially harm our business, operating results and financial condition.

The COVID-19 pandemic may prevent us from conducting business activities at full capacity for an indefinite period of time, including due to spread of the disease or due to shutdowns that are requested or mandated by governmental authorities. For example, we have taken precautionary measures intended to help minimize the risk of the virus to our employees which may disrupt our operations, including temporarily closing our offices and requiring all employees to work remotely, suspending all non-essential travel worldwide for our employees, and discouraging employee attendance at in-person work-related meetings. An extended period of remote work arrangements could strain our business continuity plans, introduce operational risk, including, but not limited to, cybersecurity risks, and impair our ability to effectively manage our business.

Further, our management team is focused on addressing the impacts of COVID-19 on our business, which has required and will continue to require, a large investment of their time and resources and may distract our management team or disrupt our 2020 operating plans. The extent to which COVID-19 ultimately impacts our results of operations, cash flow and financial position will depend on future developments, which are uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions taken by governments and authorities to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of its global economic impact, including as a result of any recession that may occur.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 5. Other Information.

On April 7, 2020, we entered into an agreement with EastWest Bank to borrow $1,987,700 under the U.S. Small Business Administration Payroll Protection Program authorized by the CARES Act. Effective April 13, 2020, the Company entered into Amendment No. 2 to the Credit Agreement which provided consent for the Company to borrow such funds under the U.S. Small Business Administration Payroll Protection Program authorized by the CARES Act. Following receipt of the loan proceeds, we evaluated our access to credit through other sources of funding and determined to repay the funds borrowed under the CARES Act. On May 5, 2020, we returned the $1,987,700 in proceeds from the loan, which was not used by the Company.

Item 6. Exhibits


(a)

(a)

Exhibits

 31.1

10.1*

31.1*

Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

31.2

31.2*

   

32.1

32.1*

101

Interactive Data File.

   
 101

*

Interactive Data File.

Filed herewith.

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Signatures

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 10, 2016

May 11, 2020

By:

/s/ James W. Albrecht, Jr.Karen J. Young

Date

James W. Albrecht, Jr.

Karen J. Young

Chief Financial Officer


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