UNITEDSTATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
(MarkOne)
☒ QUARTERLYREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934
Forthe Quarterly Period quarterlyperiodended September 30, 2016
or
☐ TRANSITIONREPORTPURSUANTTOSECTION13OR
For the transition period fromto .
Commission File No. filenumber001-33601
GlobalSCAPE, Inc.
(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)
Delaware | 74-2785449 |
State or Incorporation or | Identification No. |
4500 Lockhill-Selma, Suite 150 San Antonio, Texas | 78249 |
(210) 308-8267210-308-8267
Registrant’s Telephone Number, Including Area Code)
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
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):
Large accelerated filer ☐ | Accelerated filer | ||
Non-accelerated filer ☐ | Smaller reporting company ☒ | ||
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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
Page | ||
Part I. | Financial Information | |
Item 1. | ||
3 | ||
4 | ||
Condensed Consolidated Statements of Stockholders’ Equity (Deficit) | 5 | |
6 | ||
7 | ||
Item 2. | 23 | |
Item 3. | 34 | |
Item 4. | 34 | |
Part II. | Other Information | 35 |
Item 1. | 35 | |
Item 1A. | 35 | |
Item 2. | 36 | |
Item | ||
Item 6. | 36 | |
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.
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.
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. |
(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.
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.
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.
GlobalSCAPE, Inc. |
(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, Inc.
As of September 30, 2016March 31, 2020 and For the Three and Nine Months Then Ended
(Unaudited)
1. | Nature of Business |
GlobalSCAPE, Inc., together with its wholly-owned subsidiary (collectively referred to as the “Company”, “GlobalSCAPE”, “we”, “us” or “our”), provides secure information exchange file transfer and file sharing capabilities for enterprises and consumers.consumers through the development and distribution of software, delivery of managed and hosted solutions, and provisioning of associated services. Our solution portfolio facilitates transmission of critical information such as financial data, medical records, 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.
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. | 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.
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.
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:
● | 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.
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.
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.
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.
● | If the costs are associated with products and services for which we recognize revenue at a fixed point in time (primarily sales of perpetual software licenses and professional services), we expense these costs in full at the time we recognize that revenue. |
● | If the costs are associated with services for which we recognize revenue over time (primarily sales of M&S and SaaS subscriptions) for which we believe it is likely that the contract for those services will be renewed for additional terms in the future, provided we deem these costs to be recoverable, we record these costs as a deferred expense asset and amortize that cost to expense as follows: |
o | For the portion of the cost that we determine benefits us primarily only over the term of the specific underlying contract currently in force (such as the term of an M&S contract), we recognize expense ratably each month over that term. |
o | For the portion of the cost that we determine benefits us over an overall 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
Quarter Ended September 30, 2015 | ||||||||||||||||||||||||||||
Reclassification of Previously Reported Amounts | ||||||||||||||||||||||||||||
As Previously | Cost of | Capitalized Software Cost | Personnel Costs | Depreciation | Selling, General | As Now | ||||||||||||||||||||||
Operating Revenues: | ||||||||||||||||||||||||||||
Software licenses | $ | 2,852 | $ | 2,852 | ||||||||||||||||||||||||
Maintenance and support | 4,142 | 4,142 | ||||||||||||||||||||||||||
Professional services | 653 | 653 | ||||||||||||||||||||||||||
Total revenues | 7,647 | 7,647 | ||||||||||||||||||||||||||
Cost of Revenues: | ||||||||||||||||||||||||||||
Software licenses | 195 | 367 | 562 | |||||||||||||||||||||||||
Maintenance and support | 341 | 341 | ||||||||||||||||||||||||||
Professional services | 263 | 342 | 605 | |||||||||||||||||||||||||
Total cost of revenues | - | 1,508 | ||||||||||||||||||||||||||
Gross profit | - | 6,139 | ||||||||||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||||||
Sales and marketing | - | 2,289 | 2,289 | |||||||||||||||||||||||||
General and administrative | - | 1,449 | 1,449 | |||||||||||||||||||||||||
Cost of Revenues | 458 | (458 | ) | - | ||||||||||||||||||||||||
Selling, general and administrative | 4,355 | (683 | ) | 66 | (3,738 | ) | - | |||||||||||||||||||||
Research and development | 646 | 646 | ||||||||||||||||||||||||||
Depreciation and amortization | 433 | (367 | ) | (66 | ) | - | ||||||||||||||||||||||
Total operating expenses | 5,892 | 4,384 | ||||||||||||||||||||||||||
Income from operations | 1,755 | 1,755 | ||||||||||||||||||||||||||
Other income (expense), net | 17 | 17 | ||||||||||||||||||||||||||
Income before income taxes | 1,772 | 1,772 | ||||||||||||||||||||||||||
Income tax expense | 542 | 542 | ||||||||||||||||||||||||||
Net income | $ | 1,230 | $ | 1,230 | ||||||||||||||||||||||||
Comprehensive income | $ | 1,230 | $ | 1,230 | ||||||||||||||||||||||||
Net income per common share - | ||||||||||||||||||||||||||||
Basic | $ | 0.06 | $ | 0.06 | ||||||||||||||||||||||||
Diluted | $ | 0.06 | $ | 0.06 |
Nine Months Ended September 30, 2015 | ||||||||||||||||||||||||||||
Reclassification of Previously Reported Amounts | ||||||||||||||||||||||||||||
As Previously | Cost of | Capitalized Software Cost | Personnel Costs | Depreciation | Selling, General | As Now | ||||||||||||||||||||||
Operating Revenues: | ||||||||||||||||||||||||||||
Software licenses | $ | 8,590 | $ | 8,590 | ||||||||||||||||||||||||
Maintenance and support | 12,269 | 12,269 | ||||||||||||||||||||||||||
Professional services | 1,531 | 1,531 | ||||||||||||||||||||||||||
Total revenues | 22,390 | 22,390 | ||||||||||||||||||||||||||
Cost of Revenues: | ||||||||||||||||||||||||||||
Software licenses | 739 | 912 | 1,651 | |||||||||||||||||||||||||
Maintenance and support | 1,057 | 1,057 | ||||||||||||||||||||||||||
Professional services | 327 | 930 | 1,257 | |||||||||||||||||||||||||
Total cost of revenues | - | 3,965 | ||||||||||||||||||||||||||
Gross profit | - | 18,425 | ||||||||||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||||||
Sales and marketing | - | 7,060 | 7,060 | |||||||||||||||||||||||||
General and administrative | - | 4,629 | 4,629 | |||||||||||||||||||||||||
Cost of Revenues | 1,066 | (1,066 | ) | - | ||||||||||||||||||||||||
Selling, general and administrative | 13,472 | (1,987 | ) | 204 | (11,689 | ) | - | |||||||||||||||||||||
Research and development | 1,832 | 1,832 | ||||||||||||||||||||||||||
Depreciation and amortization | 1,116 | (912 | ) | (204 | ) | - | ||||||||||||||||||||||
Total operating expenses | 17,486 | 13,521 | ||||||||||||||||||||||||||
Income from operations | 4,904 | 4,904 | ||||||||||||||||||||||||||
Other income (expense), net | 51 | 51 | ||||||||||||||||||||||||||
Income before income taxes | 4,955 | 4,955 | ||||||||||||||||||||||||||
Income tax expense | 1,585 | 1,585 | ||||||||||||||||||||||||||
Net income | $ | 3,370 | $ | 3,370 | ||||||||||||||||||||||||
Comprehensive income | $ | 3,370 | $ | 3,370 | ||||||||||||||||||||||||
Net income per common share - | ||||||||||||||||||||||||||||
Basic | $ | 0.16 | $ | 0.16 | ||||||||||||||||||||||||
Diluted | $ | 0.16 | $ | 0.16 |
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.
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.
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.
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.
When testing goodwill, we first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of our reporting unit is less than its carrying amount, including goodwill. In performing this qualitative assessment, we assess events and circumstances relevant to us including, but not limited to:
Macroeconomic conditions.
Industry and market considerations.
Cost factors and trends for labor and other expenses of operating our business.
Our overall financial performance and outlook for the future.
Trends in the quoted market value and trading of our common stock.
In considering these and other factors, we consider the extent to which any adverse events and circumstances identified could affect the comparison of our reporting unit’s fair value with its carrying amount. We place more weight on events and circumstances that most affect our reporting unit’s fair value or the carrying amount of our net assets. We consider positive and mitigating events and circumstances that may affect our determination of whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. We evaluate, on the basis of the weight of the evidence, the significance of all identified events and circumstances in the context of determining whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount.
If, after assessing the totality of these qualitative events and circumstances, we determine it is not more likely than not that the fair value of our reporting unit is less than its carrying amount, we conclude there is no impairment of goodwill and perform no further testing, in accordance with GAAP. If we conclude otherwise, we proceed with performing the first step, and if necessary, the second step, of the two-stepto perform a quantitative goodwill impairment test prescribed by GAAP.
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.
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.
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.
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
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.
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.
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.
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.
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 | 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 | ) |
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. |
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 |
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
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:
● | The exercise price, term and other conditions applicable to each stock option or stock award granted are determined by the Compensation Committee of |
● | The exercise price of stock options is set on the grant date and may not be less than the fair market value per share of our stock at market close on that date. |
● | Stock options we issue generally become exercisable ratably over a three-year period |
● | Upon exercise of a stock |
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 |
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 |
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.
● | The exercise price, term and other conditions applicable to each stock |
● | 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 |
● | Restricted shares |
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 |
9. | Income Taxes |
The components of our income tax expense (benefit) are as follows ($ in thousands):
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||||||||||||||||||||||
Current | Deferred | Total | Current | Deferred | Total | Current | Deferred | Total | Current | Deferred | Total | |||||||||||||||||||||||||||||||||||||
Federal | $ | 688 | $ | (81 | ) | $ | 607 | $ | 797 | $ | (254 | ) | $ | 543 | $ | 1,214 | $ | (21 | ) | $ | 1,193 | $ | 1,812 | $ | (313 | ) | $ | 1,499 | ||||||||||||||||||||
Foreign | 12 | - | 12 | 6 | - | 6 | 37 | $ | 22 | 33 | - | $ | 33 | |||||||||||||||||||||||||||||||||||
State | 72 | (4 | ) | 68 | (4 | ) | (3 | ) | (7 | ) | 133 | (15 | ) | $ | 133 | 60 | (7 | ) | $ | 53 | ||||||||||||||||||||||||||||
Total | $ | 772 | $ | (85 | ) | $ | 687 | $ | 799 | $ | (257 | ) | $ | 542 | $ | 1,384 | $ | (36 | ) | $ | 1,348 | $ | 1,905 | $ | (320 | ) | $ | 1,585 |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Current federal income tax expense in the statement of operations | $ | 687 | $ | 542 | $ | 1,348 | $ | 1,585 | ||||||||
Tax (deficiency) from stock-based compensation recorded in additional paid-in capital | (13 | ) | (15 | ) | (26 | ) | (59 | ) | ||||||||
Current taxes per our federal income tax return | $ | 674 | $ | 527 | $ | 1,322 | $ | 1,526 |
Three months ended 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 |
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 $136,000. These carryforwards expire in the table above.
The aggregate changes in the balance of our gross unrecognized tax benefits were as follows ($ 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 |
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 |
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.
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 |
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. | 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. | Dividends |
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 |
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. | 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.
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. | 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.
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.
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.
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.
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.
● | 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.
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.
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:
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.
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:
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 2019” for a discussion of trends in our revenue growth that we monitor using this metric.
Adjusted EBITDA (Non-GAAP Measurement)
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 |
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.
We compute Adjusted EBITDA as follows ($ in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net Income | $ | 1,399 | $ | 1,230 | $ | 2,761 | $ | 3,370 | ||||||||
Add (subtract) items to determine adjusted EBITDA: | ||||||||||||||||
Income tax expense | 687 | 542 | 1,348 | 1,585 | ||||||||||||
Interest (income) expense, net | (28 | ) | (17 | ) | (88 | ) | (51 | ) | ||||||||
Depreciation and amortization: | ||||||||||||||||
Total depreciation and amortization | 513 | 433 | 1,522 | 1,116 | ||||||||||||
Amortization of capitalized software development costs | (450 | ) | (367 | ) | (1,319 | ) | (912 | ) | ||||||||
Stock-based compensation expense | 221 | 167 | 721 | 482 | ||||||||||||
Adjusted EBITDA | $ | 2,342 | $ | 1,988 | $ | 4,945 | $ | 5,590 |
Three Months Ended | ||||||||
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 |
Software Products and Services
We develop and sell computer software that provides secure information exchange, filedata transfer, and filedata sharing capabilities for enterprises and consumers. We have been in business for more than twenty years and havehaving sold our products to thousands of enterprises and more than one million individual consumers throughout the world.
Our primary business is selling and supporting MFT software for enterprises. MFT software facilitates the transfer of data from one location to another across a computer network within a single enterprise or between multiple computer networks in multiple enterprises. These transfers may be ongoing, repetitive activities executed by automated software routines that occur without human intervention, or they may be transfers that people create and complete in the absence of automated routines or as a result of ad-hoc, special situations that arise from time-to-time. Examples of enterprise-level activities that rely on MFT software include:
● | Transfer of transactional information within an enterprise on a repetitive basis from one geographic location to another, such as a transfer of deposit and withdrawal information throughout the day from a branch of a bank to a central data processing center at another location. |
● | Movement of accumulated information within an enterprise from one data processing application to another on a periodic basis, such as a transfer of bi-weekly payroll information from a payroll system that is used to pay employees to a job cost system that is used to manage the cost of a project. |
● | Exchange of information between enterprises to facilitate the completion of one or more business transactions, such as a retailer transmitting inventory purchasing requirements produced by its material requirements planning system to an order entry system at a supplying vendor. |
We earn over 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 |
● | Cloud-based, SaaS |
● | M&S. |
● | Professional services for product |
We alsofocus on selling our EFT platform products in a business-to-business environment. The majority of the resources we will expend in the future for product research, development, marketing and sales will focus on this product line. We expect to expend minimal resources developing and selling our other products. We believe our EFT platform products and business capabilities are well-positioned to compete effectively in the market for these products. For a more comprehensive discussion of the products we sell and the services we offer, see below.
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:
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.
The following isdiscussion presents a summary description of our specific products and solutions.
Managed File Transfer – Enhanced File Transfer Platform
EFT is the brand name of our core MFT product platform. EFT was a Silver Winner in the Compliance category and Gold Winner in the BYOD category of the 2016 Info Security Products Guide Global Excellence Awards.
The EFT platform provides a common, scalable MFT environment that accommodates a broad family of accompanying modules to provide enterprises with increased security, automation, compliance and performance when compared to traditional FTP-based and email delivery systems. Various optional modules allow users to select the solution configuration most applicable to their requirements for auditing, reporting, encryption, ad hoc and web-based file transfers, operability in or through a DMZ network, and integration with back-end business processes, including workflow automation capabilities.
General features and capabilities of the EFT platform include:
● | State-of-the-art, enterprise-level security when transferring information within or between computer networks as well as for collaboration with business partners, |
● | Transmission of critical information such as financial data, medical records, |
● | 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, |
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.
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.
● | 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.
Professional Services
We offer a wide range of professional services to complement our on-premises and SaaS cloud-based solutions. These professional services include product customization and system integration, solution “quickstart” implementations, business process and workflow, policy development, education and training, and solution health checks. In addition, we may provide longer-term engineering services, including supporting multi-year contracts, if necessary, to support certain solution implementations and integrations.
● | System integration and 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
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 |
Solution Perspective and Trends
The components of our revenue are as follows ($ in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||||||
Amount | % of Total Revenue | Amount | % of Total Revenue | Amount | % of Total Revenue | Amount | % of Total Revenue | |||||||||||||||||||||||||
Revenue by Type | ||||||||||||||||||||||||||||||||
Software licenses | $ | 3,373 | 38.6 | % | $ | 2,852 | 37.3 | % | $ | 8,565 | 35.1 | % | $ | 8,590 | 38.4 | % | ||||||||||||||||
Maintenance and support | 4,713 | 53.8 | % | 4,142 | 54.2 | % | 13,843 | 56.7 | % | 12,269 | 54.8 | % | ||||||||||||||||||||
Professional services | 667 | 7.6 | % | 653 | 8.5 | % | 2,013 | 8.2 | % | 1,531 | 6.8 | % | ||||||||||||||||||||
Total Revenue | $ | 8,753 | 100.0 | % | $ | 7,647 | 100.0 | % | $ | 24,421 | 100.0 | % | $ | 22,390 | 100.0 | % | ||||||||||||||||
Revenue by Product | ||||||||||||||||||||||||||||||||
EFT Enterprise and Standard | $ | 8,212 | 93.8 | % | $ | 6,905 | 90.3 | % | $ | 22,678 | 92.9 | % | $ | 19,983 | 89.2 | % | ||||||||||||||||
Wide Area File Services | 209 | 2.4 | % | 236 | 3.1 | % | 658 | 2.7 | % | 764 | 3.4 | % | ||||||||||||||||||||
CuteFTP | 124 | 1.4 | % | 240 | 3.1 | % | 480 | 2.0 | % | 665 | 3.0 | % | ||||||||||||||||||||
Other | 208 | 2.4 | % | 266 | 3.5 | % | 605 | 2.4 | % | 978 | 4.4 | % | ||||||||||||||||||||
Total Revenue | $ | 8,753 | 100.0 | % | $ | 7,647 | 100.0 | % | $ | 24,421 | 100.0 | % | $ | 22,390 | 100.0 | % |
Three Months Ended 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:
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 | ) |
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 |
When assessing our financial positionliquidity and should not be considered a substitute for working capital computed in accordance with GAAP.
● | 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:
● | Stock-based compensation increasing $497,000 in the |
● | 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 |
● | Accounts payable decreasing $188,000 in the |
● | Accrued expenses decreasing $141,000 in the |
Offset by:
● | Accounts receivable |
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:
● | A one-time payment in the |
● | No stock repurchases in the 2020 quarter compared to the |
● | No dividend payment made in the |
● | An increase in proceeds received from the exercise of |
Offset by:
● | The principal loan payment of |
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.
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 |
● | 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. |
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 |
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 |
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.
Revenue.
The components of our revenues were as follows ($ in thousands):Three Months Ended September 30, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
$ in thousands | ||||||||||||||||
Amount | % of Total Revenue | Amount | % of Total Revenue | |||||||||||||
Revenue by Type | ||||||||||||||||
Software licenses | $ | 3,373 | 38.6 | % | $ | 2,852 | 37.3 | % | ||||||||
Maintenance and support | 4,713 | 53.8 | % | 4,142 | 54.2 | % | ||||||||||
Professional services | 667 | 7.6 | % | 653 | 8.5 | % | ||||||||||
Total Revenue | $ | 8,753 | 100.0 | % | $ | 7,647 | 100.0 | % | ||||||||
Revenue by Product | ||||||||||||||||
EFT Enterprise and Standard | $ | 8,212 | 93.8 | % | $ | 6,905 | 90.3 | % | ||||||||
Wide Area File Services | 209 | 2.4 | % | 236 | 3.1 | % | ||||||||||
CuteFTP | 124 | 1.4 | % | 240 | 3.1 | % | ||||||||||
Other | 208 | 2.4 | % | 266 | 3.5 | % | ||||||||||
Total Revenue | $ | 8,753 | 100.0 | % | $ | 7,647 | 100.0 | % |
Three Months Ended 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:
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.
EFT Enterprise and Standard
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.
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.
Cost of Revenues.
These expenses are associated with the production, delivery and support of our products and services. We believe itCost of license revenue primarily consists primarily of:
● | Amortization of capitalized software development costs we incur when producing our software products. |
● | Royalties we pay to use software developed by others for certain features of our |
● | Fees we pay to third parties who provide services supporting our SaaS and cloud-based subscription |
Cost of M&S revenue and cost of professional services revenue consist primarily of salaries and related costs of our employees and third parties we use to deliver these services.
Cost of software license revenue 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.
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.
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 itGeneral and Administrative.
These expensesLegal and Professional. These expenses increased 7% primarily due to an increase in Part II. Other Information Item 1. Legal Proceedings.
Research and Development.
The overall profile of our research and development (“R&D”) activities was as follows ($ in thousands):Three Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
R&D expenditures capitalized | $ | 452 | $ | 506 | ||||
R&D expenditures expensed | 528 | 646 | ||||||
Total R&D expenditures (non-GAAP measurement) | $ | 980 | $ | 1,152 |
Three Months Ended 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:
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.
Income Taxes.
Our effective● | 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. |
Nine Months Ended September 30, | ||||||||||||
2016 | 2015 | $ Change | ||||||||||
$ in thousands | ||||||||||||
Total revenues | $ | 24,421 | $ | 22,390 | $ | 2,031 | ||||||
Total cost of revenues | 5,137 | 3,965 | 1,172 | |||||||||
Gross profit | 19,284 | 18,425 | 859 | |||||||||
Operating expenses | ||||||||||||
Sales and marketing | 8,453 | 7,060 | 1,393 | |||||||||
General and administrative | 5,083 | 4,629 | 454 | |||||||||
Research and development | 1,727 | 1,832 | (105 | ) | ||||||||
Total operating expenses | 15,263 | 13,521 | 1,742 | |||||||||
Income from operations | 4,021 | 4,904 | (883 | ) | ||||||||
Other income (expense), net | 88 | 51 | 37 | |||||||||
Income before income taxes | 4,109 | 4,955 | (846 | ) | ||||||||
Income tax expense | 1,348 | 1,585 | (237 | ) | ||||||||
Net income | $ | 2,761 | $ | 3,370 | $ | (609 | ) |
Nine Months Ended September 30, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
$ in thousands | ||||||||||||||||
Amount | % of Total Revenue | Amount | % of Total Revenue | |||||||||||||
Revenue by Type | ||||||||||||||||
Software licenses | $ | 8,565 | 35.1 | % | $ | 8,590 | 38.4 | % | ||||||||
Maintenance and support | 13,843 | 56.7 | % | 12,269 | 54.8 | % | ||||||||||
Professional services | 2,013 | 8.2 | % | 1,531 | 6.8 | % | ||||||||||
Total Revenue | $ | 24,421 | 100.0 | % | $ | 22,390 | 100.0 | % | ||||||||
Revenue by Product | ||||||||||||||||
EFT Enterprise and Standard | $ | 22,678 | 92.9 | % | $ | 19,983 | 89.2 | % | ||||||||
Wide Area File Services | 658 | 2.7 | % | 764 | 3.4 | % | ||||||||||
CuteFTP | 480 | 2.0 | % | 665 | 3.0 | % | ||||||||||
Other | 605 | 2.4 | % | 978 | 4.4 | % | ||||||||||
Total Revenue | $ | 24,421 | 100.0 | % | $ | 22,390 | 100.0 | % |
Offset by:
● |
The |
Nine Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
R&D expenditures capitalized | $ | 1,298 | $ | 1,613 | ||||
R&D expenditures expensed | 1,727 | 1,832 | ||||||
Total R&D expenditures (non-GAAP measurement) | $ | 3,025 | $ | 3,445 |
● | The foreign derived intangible income deduction which was a part of |
● | For 2020 a |
Not Applicable.
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.
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.
Part II. Other Information
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.
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.
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.
(a) | Exhibits |
10.1* | ||
31.1* | Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | ||
32.1* | ||
101 | Interactive Data File. | |
* | Filed herewith. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GLOBALSCAPE, INC. | |||
May 11, 2020 | By: | /s/ | |
Date | Karen J. Young | ||
Chief Financial Officer |