UNITEDSTATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
(MarkOne)
☒
QUARTERLYREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934ForthequarterlyperiodendedMarch 31, 2018.
or
☐ TRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934
For the transition period from to
Commissionfilenumber001-33601
GlobalSCAPE, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 74-2785449 |
State or Other Jurisdiction of Incorporation or Organization | I.R.S. Employer Identification No. |
4500 Lockhill-Selma, Suite 150 San Antonio, Texas | 78249 |
| Address of Principal Executive Offices | Zip Code |
Registrant’s Telephone Number, Including Area Code
210-308-8267
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 ☒
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 ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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 ☒
As of June 1, 2018April 30, 2019 there were 21,793,13117,218,849 shares of common stock outstanding.
Page | ||
Part I. | Financial Information | |
Item 1. | ||
2 | ||
3 | ||
4 | ||
5 | ||
6 | ||
Item 2. | 23 | |
Item 3. | 35 | |
Item 4. | 35 | |
Part II. | Other Information | 36 |
Item 1. | 36 | |
Item 1A. | 36 | |
Item | 36 | |
Item 6. | 37 | |
38 | ||
Preliminary Notes
GlobalSCAPE®, CuteFTP®, CuteFTP Pro®, DMZ Gateway®, EFT Cloud Services®, GlobalSCAPE Securely Connected®, and Mail Express® are registered trademarks of GlobalSCAPE, Inc.
Secure FTP Server™, Wide Area File Services™, WAFS™, CDP™, Advanced Workflow Engine™, AWE™, EFT 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™, Desktop Transfer Client™, DTC™, Mobile Transfer Client™, MTC™, Web Transfer Client™, Workspaces™, Accelerate™, WTC™, Content Integrity Control™, Advanced Authentication™, AAM™ and scConnect™ are trademarks of GlobalSCAPE, Inc.
TappIn® and design are registered trademarks of TappIn, Inc., our wholly-owned subsidiary.
TappIn Secure Share™, Social Share™, Now Playing™, and Enhanced A La Carte Playlist™ are trademarks of TappIn, Inc., our wholly-owned subsidiary.
Other trademarks and trade names in this Quarterly Report on Form 10-Q (this “Report”) are the property of their respective owners.
In
this“BYOL” means bring your own license.
“Cloud” or “cloud computing” refers to pooled computing resources, delivered on-demand, over the Internet. In the same manner that electricity is delivered on-demand from large scale power plants, cloud computing is delivered from centralized data centers to users all over the world.
“DMZ” or Demilitarized Zone refers to a computer host or perimeter network inserted between a trusted internal network and an untrusted public network such as the Internet.
“FTP” or File Transfer Protocol is a protocol used to exchange or manipulate files over a computer network such as the Internet.
“MFT” or Managed File Transfer refers to software solutions that facilitate the secure transfer of data from one computer to another through a network.
“SaaS” or Software-as-a-Service uses hosted, cloud computing approaches in which the customer does not need to install the underlying software on its own computer systems to access the application.
Part I. Financial Information
| March 31, | December 31, | |||||||
| 2018 | 2017 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 11,653 | $ | 11,583 | ||||
| Certificates of deposit, short term | 4,302 | 4,291 | ||||||
| Accounts receivable, net | 4,155 | 5,925 | ||||||
| Federal income tax receivable | 795 | 822 | ||||||
| Prepaid and other current assets | 1,394 | 675 | ||||||
| Total current assets | 22,299 | 23,296 | ||||||
| Certificates of deposit, long term | 11,558 | 11,503 | ||||||
| Capitalized software development costs, net | 3,654 | 3,786 | ||||||
| Goodwill | 12,712 | 12,712 | ||||||
| Deferred tax asset, net | 639 | 651 | ||||||
| Property and equipment, net | 448 | 481 | ||||||
| Other assets | 639 | 84 | ||||||
| Total assets | $ | 51,949 | $ | 52,513 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 2,102 | $ | 1,900 | ||||
| Accrued expenses | 1,834 | 1,671 | ||||||
| Deferred revenue | 12,681 | 13,315 | ||||||
| Total current liabilities | 16,617 | 16,886 | ||||||
| Deferred revenue, non-current portion | 3,052 | 3,735 | ||||||
| Other long term liabilities | 176 | 176 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
Preferred stock, par value $0.001 per share, 10,000,000 authorized, no shares issued or outstanding | - | - | ||||||
Common stock, par value $0.001 per share, 40,000,000 authorized, 22,196,712 shares issued at both March 31, 2018 and December 31, 2017 | 22 | 22 | ||||||
| Additional paid-in capital | 24,464 | 23,793 | ||||||
Treasury stock, 403,581 shares, at cost, at March 31, 2018 and December 31, 2017 | (1,452 | ) | (1,452 | ) | ||||
| Retained earnings | 9,070 | 9,353 | ||||||
| Total stockholders’ equity | 32,104 | 31,716 | ||||||
| Total liabilities and stockholders’ equity | $ | 51,949 | $ | 52,513 | ||||
GlobalSCAPE, Inc.
Condensed Consolidated Balance Sheets
(in thousands except share amounts)
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 14,362 | $ | 9,173 | ||||
Accounts receivable, net | 5,439 | 6,657 | ||||||
Prepaid and other current assets | 1,470 | 1,521 | ||||||
Total current assets | 21,271 | 17,351 | ||||||
Capitalized software development costs, net | 2,981 | 3,133 | ||||||
Goodwill | 12,712 | 12,712 | ||||||
Deferred tax asset, net | 410 | 395 | ||||||
Property and equipment, net | 365 | 399 | ||||||
Other assets | 464 | 502 | ||||||
Total assets | $ | 38,203 | $ | 34,492 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 838 | $ | 820 | ||||
Accrued expenses | 1,280 | 1,214 | ||||||
Income tax payable | 736 | 148 | ||||||
Deferred revenue | 13,980 | 13,301 | ||||||
Total current liabilities | 16,834 | 15,483 | ||||||
Deferred revenue, non-current portion | 2,564 | 2,936 | ||||||
Other long term liabilities | 114 | 117 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, par value $0.001 per share, 10,000,000 authorized, no shares issued or outstanding | - | - | ||||||
Common stock, par value $0.001 per share, 40,000,000 authorized, 22,598,349 and 22,441,860 shares issued: 17,218,849 and 17,130,918 outstanding at March 31, 2019 and December 31, 2018, respectively | 22 | 22 | ||||||
Additional paid-in capital | 26,533 | 25,584 | ||||||
Treasury stock, 5,379,500 and 5,310,942 shares, at cost, at March 31, 2019 and December 31, 2018, respectively | (23,087 | ) | (22,712 | ) | ||||
Retained earnings | 15,223 | 13,062 | ||||||
Total stockholders’ equity | 18,691 | 15,956 | ||||||
Total liabilities and stockholders’ equity | $ | 38,203 | $ | 34,492 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| Three months ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Operating Revenues: | ||||||||
| Software licenses | $ | 2,160 | $ | 2,578 | ||||
| Maintenance and support | 5,100 | 5,121 | ||||||
| Professional services | 451 | 733 | ||||||
| Total Revenues | 7,711 | 8,432 | ||||||
| Cost of revenues | ||||||||
| Software licenses | 771 | 758 | ||||||
| Maintenance and support | 522 | 413 | ||||||
| Professional services | 325 | 364 | ||||||
| Total cost of revenues | 1,618 | 1,535 | ||||||
| Gross profit | 6,093 | 6,897 | ||||||
| Operating expenses | ||||||||
| Sales and marketing | 3,113 | 3,289 | ||||||
| General and administrative | 3,501 | 1,714 | ||||||
| Research and development | 722 | 722 | ||||||
| Total operating expenses | 7,336 | 5,725 | ||||||
| Income (loss) from operations | (1,243 | ) | 1,172 | |||||
| Interest income (expense), net | 76 | 70 | ||||||
| Income (loss) before income taxes | (1,167 | ) | 1,242 | |||||
| Income tax expense (benefit) | (232 | ) | 411 | |||||
| Net income (loss) | $ | (935 | ) | $ | 831 | |||
| Comprehensive income (loss) | $ | (935 | ) | $ | 831 | |||
| Net income (loss) per common share - | ||||||||
| Basic | $ | (0.04 | ) | $ | 0.04 | |||
| Diluted | $ | (0.04 | ) | $ | 0.04 | |||
| Weighted average shares outstanding: | ||||||||
| Basic | 21,793 | 21,544 | ||||||
| Diluted | 21,793 | 22,023 | ||||||
| Cash dividends declared per share | $ | 0.015 | $ | 0.015 | ||||
GlobalSCAPE, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(In thousands, except per share amounts)
(Unaudited)
Three months ended March 31, | ||||||||
2019 | 2018 | |||||||
Operating Revenues: | ||||||||
Software licenses | $ | 2,634 | $ | 2,160 | ||||
Maintenance and support | 6,076 | 5,100 | ||||||
Professional services | 703 | 451 | ||||||
Total Revenues | 9,413 | 7,711 | ||||||
Cost of revenues: | ||||||||
Software licenses | 609 | 771 | ||||||
Maintenance and support | 532 | 520 | ||||||
Professional services | 293 | 325 | ||||||
Total cost of revenues | 1,434 | 1,616 | ||||||
Gross profit | 7,979 | 6,095 | ||||||
Operating expenses: | ||||||||
Sales and marketing | 1,916 | 3,107 | ||||||
General and administrative | 2,015 | 1,822 | ||||||
Legal and professional | 576 | 1,680 | ||||||
Severance | 4 | 11 | ||||||
Research and development | 325 | 718 | ||||||
Total operating expenses | 4,836 | 7,338 | ||||||
Income (loss) from operations | 3,143 | (1,243 | ) | |||||
Interest income, net | 24 | 76 | ||||||
Income (loss) before income taxes | 3,167 | (1,167 | ) | |||||
Income tax expense (benefit) | 747 | (232 | ) | |||||
Net income (loss) | $ | 2,420 | $ | (935 | ) | |||
Comprehensive income (loss) | $ | 2,420 | $ | (935 | ) | |||
Net income (loss) per common share - | ||||||||
Basic | $ | 0.14 | $ | (0.04 | ) | |||
Diluted | $ | 0.14 | $ | (0.04 | ) | |||
Weighted average shares outstanding: | ||||||||
Basic | 17,197 | 21,793 | ||||||
Diluted | 17,664 | 21,793 | ||||||
Cash dividends declared per share | $ | 0.015 | $ | 0.015 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| For the Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Operating Activities: | ||||||||
| Net income (loss) | $ | (935 | ) | $ | 831 | |||
| Items not involving cash at the time they are recorded in the statement of operations: | ||||||||
| Provision for doubtful accounts receivable | (75 | ) | 11 | |||||
| Depreciation and amortization | 594 | 541 | ||||||
| Share-based compensation | 671 | 337 | ||||||
| Deferred taxes | (248 | ) | (23 | ) | ||||
| Subtotal before changes in operating assets and liabilities | 7 | 1,697 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 1,845 | 1,332 | ||||||
| Prepaid expenses | (89 | ) | 39 | |||||
| Deferred revenue | (1,317 | ) | (1,123 | ) | ||||
| Accounts payable | 202 | (290 | ) | |||||
| Accrued expenses | 163 | 93 | ||||||
| Other assets | 54 | 181 | ||||||
| Accrued interest receivable | (66 | ) | (63 | ) | ||||
| Other long-term liabilities | - | 17 | ||||||
| Income tax receivable and payable | 27 | 507 | ||||||
| Net cash provided by operating activities | 826 | 2,390 | ||||||
| Investing Activities: | ||||||||
| Software development costs capitalized | (402 | ) | (462 | ) | ||||
| Purchase of property and equipment | (27 | ) | (188 | ) | ||||
| Net cash (used in) investing activities | (429 | ) | (650 | ) | ||||
| Financing Activities: | ||||||||
| Proceeds from exercise of stock options | - | 90 | ||||||
| Dividends paid | (327 | ) | (325 | ) | ||||
| Net cash (used in) financing activities | (327 | ) | (235 | ) | ||||
| Net increase in cash | 70 | 1,505 | ||||||
| Cash at beginning of period | 11,583 | 8,895 | ||||||
| Cash at end of period | $ | 11,653 | $ | 10,400 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | - | $ | - | ||||
| Income tax payments (refunds) | $ | 18 | $ | 15 | ||||
GlobalSCAPE, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
For the Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Operating Activities: | ||||||||
Net income (loss) | $ | 2,420 | $ | (935 | ) | |||
Items not involving cash at the time they are recorded in the statement of operations: | ||||||||
Provision (recoveries) for doubtful accounts receivable | 9 | (75 | ) | |||||
Depreciation and amortization | 410 | 594 | ||||||
Share-based compensation | 875 | 671 | ||||||
Deferred taxes | (15 | ) | (248 | ) | ||||
Subtotal before changes in operating assets and liabilities | 3,699 | 7 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 1,209 | 1,845 | ||||||
Prepaid and other current assets | 51 | (89 | ) | |||||
Deferred revenue | 307 | (1,317 | ) | |||||
Accounts payable | 18 | 202 | ||||||
Accrued expenses | 66 | 163 | ||||||
Other assets | 38 | 54 | ||||||
Accrued interest receivable | - | (66 | ) | |||||
Other long-term liabilities | (3 | ) | - | |||||
Income tax payable | 588 | 27 | ||||||
Net cash provided by operating activities | 5,973 | 826 | ||||||
Investing Activities: | ||||||||
Software development costs capitalized | (201 | ) | (402 | ) | ||||
Purchase of property and equipment | (23 | ) | (27 | ) | ||||
Net cash used in investing activities | (224 | ) | (429 | ) | ||||
Financing Activities: | ||||||||
Proceeds from exercise of stock options | 519 | - | ||||||
Stock option cash settlement | (445 | ) | ||||||
Purchase of Treasury Stock | (375 | ) | - | |||||
Dividends paid | (259 | ) | (327 | ) | ||||
Net cash used in financing activities | (560 | ) | (327 | ) | ||||
Net increase in cash | 5,189 | 70 | ||||||
Cash at beginning of period | 9,173 | 11,583 | ||||||
Cash at end of period | $ | 14,362 | $ | 11,653 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | - | $ | - | ||||
Income tax payments | $ | 16 | $ | 18 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| Additional | ||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury | Retained | |||||||||||||||||||||
| Shares | Amount | Capital | Stock | Earnings | Total | |||||||||||||||||||
| Balance at December 31, 2017 | 22,196,712 | $ | 22 | $ | 23,793 | $ | (1,452 | ) | $ | 9,353 | $ | 31,716 | ||||||||||||
| Retained Earnings Adjustment due to ASC 606 | 979 | 979 | ||||||||||||||||||||||
| Shares issued upon exercise of stock options | - | - | - | - | 0 | |||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||||||
| Stock options | 587 | 587 | ||||||||||||||||||||||
| Restricted stock | 84 | 84 | ||||||||||||||||||||||
| Common stock cash dividends | (327 | ) | (327 | ) | ||||||||||||||||||||
| Net loss | (935 | ) | (935 | ) | ||||||||||||||||||||
| Balance at March 31, 2018 | 22,196,712 | $ | 22 | $ | 24,464 | $ | (1,452 | ) | $ | 9,070 | $ | 32,104 | ||||||||||||
GlobalSCAPE, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(in thousands, except number of shares)
(unaudited)
Common Stock | Additional Paid-in | Treasury | Retained | |||||||||||||||||||||
Shares | Amount | Capital | Stock | Earnings | Total | |||||||||||||||||||
Balance at December 31, 2017 | 22,196,712 | $ | 22 | $ | 23,793 | $ | (1,452 | ) | $ | 9,353 | $ | 31,716 | ||||||||||||
Retained Earnings Adjustment due to ASC 606 | 979 | 979 | ||||||||||||||||||||||
Stock-based compensation expense | ||||||||||||||||||||||||
Stock options | 587 | 587 | ||||||||||||||||||||||
Restricted stock | 84 | 84 | ||||||||||||||||||||||
Common stock cash dividends, $0.015 per share | (327 | ) | (327 | ) | ||||||||||||||||||||
Net Income (loss) | (935 | ) | (935 | ) | ||||||||||||||||||||
Balance at March 31, 2018 | 22,196,712 | $ | 22 | $ | 24,464 | $ | (1,452 | ) | $ | 9,070 | $ | 32,104 | ||||||||||||
Stock-based compensation expense | ||||||||||||||||||||||||
Stock options | 155 | 155 | ||||||||||||||||||||||
Restricted stock | 80,000 | 36 | 36 | |||||||||||||||||||||
Common stock cash dividends, $0.015 per share | (328 | ) | (328 | ) | ||||||||||||||||||||
Net Income | 593 | 593 | ||||||||||||||||||||||
Balance at June 30, 2018 | 22,276,712 | $ | 22 | $ | 24,655 | $ | (1,452 | ) | $ | 9,335 | $ | 32,560 | ||||||||||||
Purchase of Treasury Stock | (17,262 | ) | (17,262 | ) | ||||||||||||||||||||
Cancellation of Restricted Stock | (40,000 | ) | - | |||||||||||||||||||||
Shares issued upon exercise of stock options | 146,150 | 341 | 341 | |||||||||||||||||||||
Stock-based compensation expense | ||||||||||||||||||||||||
Stock options | 110 | 110 | ||||||||||||||||||||||
Net Income | 998 | 998 | ||||||||||||||||||||||
Balance at September 30, 2018 | 22,382,862 | $ | 22 | $ | 25,106 | $ | (18,714 | ) | $ | 10,333 | $ | 16,747 | ||||||||||||
Purchase of Treasury Stock | (3,998 | ) | (3,998 | ) | ||||||||||||||||||||
Shares issued upon exercise of stock options | 58,998 | 181 | 181 | |||||||||||||||||||||
Stock-based compensation expense | ||||||||||||||||||||||||
Stock options | 205 | 205 | ||||||||||||||||||||||
Restricted stock | 92 | 92 | ||||||||||||||||||||||
Common stock cash dividends, $0.015 per share | (269 | ) | (269 | ) | ||||||||||||||||||||
Net Income | 2,998 | 2,998 | ||||||||||||||||||||||
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 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
GlobalSCAPE, Inc.
As of March 31, 201831, 2019 and For the Three
Months Then Ended
(Unaudited)
1. | Nature of Business |
GlobalSCAPE, Inc. and, together with its wholly-owned subsidiary (together(collectively referred to as the “Company”, “GlobalSCAPE”, “we”, “us” or “we”“our”), provides secure information exchange capabilities for enterprises and consumers through the development and distribution of software, delivery of managed and hosted solutions, and provisioning of associated services. Our solution portfolio facilitates transmission of critical information such as financial data, medical records, customer files, vendor files, personnel files, transaction activity, and other similar documents between diverse and geographically separated network infrastructures while supporting a range of information protection approaches to meet privacy and other security requirements. In addition to enabling secure, flexible transmission of critical information using servers, desktop and notebook computers, and a wide range of network-enabled mobile devices, our products also provide customers with the ability to monitor and audit file transfer activities. Our primary product is Enhanced File Transfer, or EFT. We have other products that complement our EFT product.
We licensed the technology for this product from a third party. This product is a cloud-based, integration-as-a-service, or iPaaS, solution used to connect applications, microservices, application program interfaces (or API’s), data and processes within and between organizations. We have experienced issues with the third-party technology and have determined to suspend marketing of the product as we evaluate options and determine whether the licensor can effectively address the issues.
Throughout these notes unless otherwise noted, our references to the 20182019 quarter and the 20172018 quarter refer to the three months ended March 31, 2019 and 2018, and 2017, respectively.
2. | Basis of Presentation |
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X, “Interim Financial Statements”, as prescribed by the United States Securities and Exchange Commission, or the SEC. Accordingly, they do not include all information and footnotes required under United States generally accepted accounting principles, 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, 2017,2018, filed with the SEC on June 14, 2018,March 18, 2019, which we refer to as the 20172018 Form 10-K, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations also included in our 20172018 Form 10-K and in this report.
We follow accounting standards set by the Financial Accounting Standards Board, or FASB. This boardThe FASB sets GAAP, which 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 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.
3. | Significant Accounting Policies |
Principles of Consolidation
The accompanying condensed consolidated financial statements are prepared in conformity with GAAP. All intercompany accounts and transactions have been eliminated.
Reclassification of Expenses
We have revised the classification of certain of our operating expenses. To ensure comparability between periods, we revised the previous period financial statements presented to conform to the method of presentation in the current period financial statements. These reclassifications had no impact on the net income (loss) for the periods presented or total stockholders’ equity at March 31, 2019.
Revenue Recognition
Nature of Our Products and Services
We earn revenue by delivering the following software products and services:
● | Perpetual software licenses under which customers install our products in their information systems environment on computers they manage, |
● | 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, |
● | Professional services for product integration and configuration that generally do not significantly modify our software products. |
We earn the majority of our revenue from the sale of perpetual software licenses and associated contracts for M&S.
We recognize revenue when we have satisfied a performance obligation by transferring control over a product or delivering a service to a customer. We measure revenue based upon the consideration set forth in an arrangement or contract with a customer. The revenue recognition criteria we apply to each of our software products and services are as follows:
● | Perpetual software licenses – These licenses grant a right to use our functional intellectual property. We recognize revenue at the point in time when we electronically deliver to our customer the software license key that provides the ability to access and use our product. If our customer is a reseller who will further transfer the ability to access and use our product to a third party under a separate arrangement that the reseller has with that third party, we recognize revenue at the time we deliver the software license key to the reseller since our contract is with the reseller. |
● | Cloud-based, hosted SaaS solutions – These solutions grant a right to access our functional intellectual property. We recognize revenue over time on a monthly basis as we deliver the services to which our customers subscribe. |
● | 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 products and services generally does not involve any variable consideration, financing components or consideration payable to a customer such as rebates or other incentives that reduce amounts owed to us by customers.
Deferred Revenue Classification and Activity
Deferred revenue related to services we will deliver within one year is presented as a current liability. Deferred revenue related to services that we will deliver more than one year into the future is presented as a non-current liability.
The activity in our deferred revenue balances has been as follows ($in thousands):
| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Deferred revenue, beginning of period | $ | 17,050 | $ | 17,445 | ||||
| Deferred revenue resulting from new contracts with customers | 3,898 | 4,216 | ||||||
| Deferred revenue at the beginning of the period that was amortized to revenue | (4,786 | ) | (4,919 | ) | ||||
| Deferred revenue arising during the period that was amortized to revenue | (429 | ) | (420 | ) | ||||
| Deferred revenue, end of period | $ | 15,733 | $ | 16,322 | ||||
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Deferred revenue, beginning of period | $ | 16,237 | $ | 17,050 | ||||
Deferred revenue resulting from new contracts with customers | 7,102 | 3,898 | ||||||
Deferred revenue at the beginning of the period that was amortized to revenue | (5,631 | ) | (4,786 | ) | ||||
Deferred revenue arising during the period that was amortized to revenue | (1,164 | ) | (429 | ) | ||||
Deferred revenue, end of period | $ | 16,544 | $ | 15,733 | ||||
Multi-Element Transactions
At the time our customers purchase perpetual software licenses, they also typically also purchase M&S although it is not mandatory that they do so to use the software.mandatory. We do not sell separate M&S to subscribers to our SaaS solutions as M&S is provided as part of their SaaS subscription. Our customersCustomers may also purchase professional services at the time they purchase perpetual software licenses or a SaaS subscription. Each of the components 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 transaction involving these multiple elements.
We sell, as stand-alone transactions, renewals of pre-existing M&S contracts, professional services to customers seeking assistance with products they have previously purchased from us, or SaaS subscriptions to customers not requiring any of our other products or services. Accordingly, we are able to estimate the stand-alone selling price of these items based upon our observation of those transactions. Since most of our sales of perpetual software licenses are part of multi-element transactions that also involve M&S and/or professional services, and because the selling price of those licenses can vary significantly among customers, we use the residual approach under FASB Accounting Standards Codification Topic 606, or ASC 606, to estimate the selling price of perpetual software licenses in a multi-element transaction by reference to the total transaction price less the sum of the observable stand-alone selling prices of M&S and/or professional services.
We allocate discounts proportionally to all of the components of a multi-element transaction.
SalesSales Tax
We collect sales tax on many of our transactions with customers as required under applicable law. We do not include sales tax collected in our revenue. We record it as a liability payable to taxing authorities.
Allowance for Sales Returns
We provide an allowance for sales returns. We estimate this allowance based upon our historical experience and the nature of recent transactions with customers. This amount is included in accrued liabilities in our condensed consolidated balance sheet.
We generally bill our customers for professional services when we have fully delivered the services specified in the contract with the customer.contract. 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 Services
We incur incremental costs in the form of sales commissions paid to our sales personnel and royalties on certain of our products paid to third parties. These are costs that we would not incur if we did not obtain a contract to deliver our goods and services. We account for these costs as follows:
● | If |
● | If |
o | For the portion of the cost that we determine benefits us primarily only over the term of the specific underlying contract currently in force (such as the term of an M&S contract), we recognize expense ratably each month over that term. |
o | For the portion of the cost that we determine benefits us over an overall customer relationship that is likely to span a period of time that is longer than an initial contract term (for example, an M&S contract renewed for multiple terms in the future), we recognize expense ratably monthly over the estimated life of the customer relationship. |
Our activity in deferred costs of obtaining a contract to deliver goods and services has been as follows ($in thousands):
Three Months Ended March 31, | ||||
| 2018 | ||||
| Deferred expense, beginning of period | $ | 1,239 | ||
| Deferred expense resulting from new contracts with customers | 149 | |||
| Deferred expense amortized to expense | (204 | ) | ||
| Deferred expense, end of period | $ | 1,184 | ||
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Deferred expense, beginning of period | $ | 1,009 | $ | 1,239 | ||||
Deferred expense resulting from new contracts with customers | 179 | 149 | ||||||
Deferred expense amortized to expense | (209 | ) | (204 | ) | ||||
Deferred expense, end of period | $ | 979 | $ | 1,184 | ||||
At March 31, 2108, $616,000 is2019, $577,000 was recorded in prepaid and current other assets and $568,000 is$402,000 was recorded in 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 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.
We have computed the impact of the new lease standard and due to the immateriality of the impact on our existing leases as of and for the period ending March 31, 2019, we have not recorded ROU assets or lease liabilities at March 31, 2019.
As Reported | Effect of ASC 606 | ASC 605 Historical | ||||||||||
| Assets | ||||||||||||
| Current assets: | ||||||||||||
| Cash and cash equivalents | $ | 11,653 | $ | 11,653 | ||||||||
| Certificates of deposit, short term | 4,302 | 4,302 | ||||||||||
| Accounts receivable, net | 4,155 | (100 | ) | 4,055 | ||||||||
| Federal income tax receivable | 795 | 12 | 807 | |||||||||
| Prepaid and other assets | 1,394 | (616 | ) | 778 | ||||||||
| Total current assets | 22,299 | (704 | ) | 21,595 | ||||||||
| Certificates of deposit, long term | 11,558 | 11,558 | ||||||||||
| Capitalized software development costs, net | 3,654 | 3,654 | ||||||||||
| Goodwill | 12,712 | 12,712 | ||||||||||
| Deferred tax asset, net | 639 | 260 | 899 | |||||||||
| Property and equipment, net | 448 | 448 | ||||||||||
| Other assets | 639 | (568 | ) | 71 | ||||||||
| Total assets | $ | 51,949 | $ | (1,012 | ) | $ | 50,937 | |||||
| Liabilities and Stockholders' Equity | ||||||||||||
| Current liabilities: | ||||||||||||
| Accounts payable | 2,102 | 2,102 | ||||||||||
| Accrued expenses | 1,834 | (100 | ) | 1,734 | ||||||||
| Deferred revenue | 12,681 | 12,681 | ||||||||||
| Total current liabilities | 16,617 | (100 | ) | 16,517 | ||||||||
| Deferred revenue, non-current portion | 3,052 | 3,052 | ||||||||||
| Other long term liabilities | 176 | 176 | ||||||||||
| Stockholders' Equity: | ||||||||||||
| Preferred stock | - | - | ||||||||||
| Common stock | 22 | 22 | ||||||||||
| Additional paid-in capital | 24,464 | 24,464 | ||||||||||
| Treasury stock | (1,452 | ) | (1,452 | ) | ||||||||
| Retained earnings | 9,070 | (912 | ) | 8,158 | ||||||||
| Total stockholders' equity | 32,104 | (912 | ) | 31,192 | ||||||||
| Total liabilities and stockholders' equity | $ | 51,949 | $ | (1,012 | ) | $ | 50,937 | |||||
As Reported | Effect of ASC 606 | ASC 605 Historical | ||||||||||
| Operating revenues: | ||||||||||||
| Software licenses | $ | 2,160 | $ | 2,160 | ||||||||
| Maintenance and support | 5,100 | 5,100 | ||||||||||
| Professional services | 451 | 451 | ||||||||||
| Total revenues | 7,711 | - | 7,711 | |||||||||
| Costs of revenues | ||||||||||||
| Software licenses | 771 | (25 | ) | 746 | ||||||||
| Maintenance and support | 522 | 522 | ||||||||||
| Professional services | 325 | 325 | ||||||||||
| Total costs of revenues | 1,618 | (25 | ) | 1,593 | ||||||||
| Gross Profit | 6,093 | 25 | 6,118 | |||||||||
| Operating expenses | ||||||||||||
| Sales and marketing | 3,113 | (31 | ) | 3,082 | ||||||||
| General and administrative | 3,501 | 3,501 | ||||||||||
| Research and development | 722 | 722 | ||||||||||
| Total operating expenses | 7,336 | (31 | ) | 7,305 | ||||||||
| Income (loss) from operations | (1,243 | ) | 56 | (1,187 | ) | |||||||
| Interest income (expense), net | 76 | 76 | ||||||||||
| Income (loss) before income taxes | (1,167 | ) | 56 | (1,111 | ) | |||||||
| Income tax expense (benefit) | (232 | ) | 12 | (220 | ) | |||||||
| Net income (loss) | $ | (935 | ) | $ | 44 | $ | (891 | ) | ||||
| Comprehensive income (loss) | $ | (935 | ) | $ | 44 | $ | (891 | ) | ||||
| Net income (loss) per common share - basic | $ | (0.04 | ) | $ | 0.00 | $ | (0.04 | ) | ||||
| Net income (loss) per common share - diluted | $ | (0.04 | ) | $ | 0.00 | $ | (0.04 | ) | ||||
As Reported | Effect of ASC 606 | ASC 605 Historical | ||||||||||
| Operating Activities: | ||||||||||||
| Net loss | $ | (935 | ) | 44 | $ | (891 | ) | |||||
| Items not involving cash at the time they are recorded in the statement of operations: | ||||||||||||
| Provision for doubtful accounts receivable | (75 | ) | (75 | ) | ||||||||
| Depreciation and amortization | 594 | 594 | ||||||||||
| Share-based compensation | 671 | 671 | ||||||||||
| Deferred taxes | (248 | ) | (248 | ) | ||||||||
| Subtotal before changes in operating assets and liabilities | 7 | 44 | 51 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | 1,845 | (100 | ) | 1,745 | ||||||||
| Prepaid expenses | (89 | ) | (56 | ) | (145 | ) | ||||||
| Deferred revenues | (1,317 | ) | (1,317 | ) | ||||||||
| Accounts payable | 202 | 202 | ||||||||||
| Accrued expenses | 163 | 100 | 263 | |||||||||
| Other assets | 54 | 54 | ||||||||||
| Accrued interest receivable | (66 | ) | (66 | ) | ||||||||
| Other long-term liabilities | - | - | ||||||||||
| Income tax receivable and payable | 27 | 12 | 39 | |||||||||
| Net cash provided by operating activities | 826 | - | 826 | |||||||||
| Investing Activities: | ||||||||||||
| Software development costs | (402 | ) | (402 | ) | ||||||||
| Purchase of property and equipment | (27 | ) | (27 | ) | ||||||||
| Net cash (used in) investing activities | (429 | ) | - | (429 | ) | |||||||
| Financing Activities: | ||||||||||||
| Proceeds from exercise of stock options | - | - | ||||||||||
| Dividends paid | (327 | ) | (327 | ) | ||||||||
| Net cash (used in) financing activities | (327 | ) | - | (327 | ) | |||||||
| Net increase in cash | 70 | 70 | ||||||||||
| Cash at beginning of period | 11,583 | - | 11,583 | |||||||||
| Cash at end of period | $ | 11,653 | $ | - | $ | 11,653 | ||||||
| Supplemental disclosure of cash flow information: | ||||||||||||
| Cash paid during the period for: | ||||||||||||
| Interest | $ | - | $ | - | ||||||||
| Income taxes | $ | 18 | $ | 18 | ||||||||
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 Financial Instruments
For financial assets and liabilities recorded at 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 such data, fair value is estimated using internal information consistent with what market participants would use in a hypothetical transaction. In determining fair value, observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions; preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3: Significant inputs to the valuation model are unobservable.
As of March 31, 2019, 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 and accounts 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.
Property and Equipment
Property and equipment is comprised of furniture and fixtures, software, computer equipment and leasehold improvements which are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Furniture, fixtures and equipment have a useful life of five to seven years, computer equipment and software have a useful life of three years and leasehold improvements have a useful life that is the shorter of the term of the lease under which the improvements were made or the estimated useful life of the asset.
Expenditures for maintenance and repairs are expensed as incurred.
Goodwill
Goodwill is not amortized. On atAt least an annual basis,annually, we test goodwill for impairment at the reporting unit level using December 31 as the measurement date. We operate as a single reporting unit.
When testing goodwill, we first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of our reporting unit is less than its carrying amount, including goodwill. In performing this qualitative assessment, we assess events and circumstances relevant to us including, but not limited to:
Macroeconomic conditions.
Industry and market considerations.
Cost factors and trends for labor and other expenses of operating our business.
Our overall financial performance and outlook for the future.
Trends in the quoted market value and trading of our common stock.
In considering these and other factors, we consider the extent to which any adverse events and circumstances identified could affect the comparison of our reporting unit’s fair value with its carrying amount. We place more weight on events and circumstances that most affect our reporting unit’s fair value or the carrying amount of our net assets. We consider positive and mitigating events and circumstances that may affect our determination of whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. We evaluate, on the basis of the weight of the evidence, the significance of all identified events and circumstances in the context of determining whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount.
If, after assessing the totality of these qualitative events and circumstances, we determine it is not more likely than not that the fair value of our reporting unit is less than its carrying amount, we conclude there is no impairment of goodwill and perform no further testing, in accordance with GAAP. If we conclude otherwise, we proceed with performing the first step, and if necessary, the second step, of the two-step goodwill impairment test prescribed by GAAP.
As of December 31, 2017,2018, after assessing the totality of the relevant events and circumstances, we determined it not more likely than not that the fair value of our reporting unit was less than its carrying amount. Accordingly, we concluded there was no impairment of goodwill as of that date. There have been no material events or changes in circumstances since that time indicating that the carrying amount of goodwill may exceed its fair market value and that interim testing needed to be performed.
Capitalized Software Development Costs
When we complete research and development for a software product, and have in place a program 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 approximately $51,000 and $324,000 in the 2019 quarter and $420,000 in the 2018 quarter, and the 2017 quarter, respectively.
Share-Based Compensation
We measure the cost of share-based payment transactions at the grant date based on the calculated fair value of the award. We recognize this cost as an expense ratably over the recipient’s requisite service period during which that award vests or becomes unrestricted.
For stock option awards, we estimate their fair value at the grant date using the Black-Scholes option-pricing model considering the following factors:
We estimate expected volatility based on historical volatility of our common stock.
We primarily use primarily the simplified method to derive an expected term which represents an estimate of the time options are expected to remain outstanding. We use this method because our options are plain-vanilla options, and we believe our historical option exercise experience is not adequately indicative of our future expectations.
We base the risk-free rate for periods within the contractual life of the option on the U.S. treasury yield curve in effect at the time of grant.
We estimate a dividend yield based on our historical and expected future dividend payments.
For restricted stock awards, we use the quoted price of our common stock on the grant date as the fair value of the award.
Income Taxes
We account for income taxes using the asset and liability method. We record deferred tax assets and liabilities based on the difference between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes, as measured by the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets and liabilities are carried on the balance sheet with the presumption that they will be realizable in future periods in which we generate taxable income.
We assess the likelihood that deferred tax assets will be realized from future taxable income. Based on this assessment, we provide any necessary valuation allowance on our balance sheet with a corresponding increase in the tax provision on our statement of operations. Any valuation allowances we establish are determined based upon a number of assumptions, judgments, and estimates, including forecasted earnings, future taxable income, and the relative proportions of revenue and income before taxes in the various domestic jurisdictions in which we operate.
We account for uncertainty in income taxes using a two-step process to determine the amount of tax benefit to be recognized. First, we evaluate the tax position to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, we assess the tax position to determine the amount of benefit to recognize in the condensed consolidated financial statements. The amount of the benefit we recognize is the largest amount that we believe has a greater than 50 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
ASU 2017-04, Intangibles – Goodwill and Other (issued January 2017) -
To simplify the subsequent measurement of goodwill, Step 2 was eliminated from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This update also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. A public business entity that isASU 2016-13, Financial Instruments – Credit Losses (issued June 2016)
- Among the 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 condensed consolidated financial statements we issue for the year ending December 31, 2020, and the quarterly periods during that year. We do not expect the amounts we report as accounts receivable in those future periods under this guidance to be materially affected relative to current guidance.ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (issued March 2016) –
ASU 2014-09, Revenue from Contracts with Customers (issued May 2014)
- The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for those goods or services. We have implemented these new principles using the modified retrospective transition method and recorded an increase (tax effected) to retained earnings at January 1, 2018 of $979,000. We also recorded as an asset deferred expense of approximately $1.2 million. We are accounting for these costs we incur to obtain a contract as follows:● | If these costs are associated with products and services for which we recognize revenue at a point in time (primarily sales of perpetual software licenses and professional services), we expense these costs in full at the time we recognize that revenue. |
● | If these costs are associated with services for which we recognize revenue over time (primarily sales of M&S and SaaS subscriptions) for which we believe it is likely that the 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 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 will recognize expense ratably each month over that term. |
o | For the portion of the cost that we determine benefits us over an overall customer relationship that is likely to span a period of time that is longer than an initial contract term (for example, an M&S contract renewed for multiple terms in the future), we will recognize expense ratably monthly over the estimated life of the customer relationship. |
4. | Accounts Receivable, Net |
We bill our customers and issue them an invoiceinvoices when we have delivered our goods or services to them.services. In addition, when our customers agree to purchase or renew M&S services, we bill and invoice our customers at that time which could be before the date we begin delivering those services. In that event, we exclude from accounts receivable (and from the related deferred revenue, see Note 3) the invoices we have issued for which the M&S services commencement date is in the future and which have not been paid by the customer as of the date of our condensed consolidated financial statements. We continually assess the collectability of our accounts receivable. If we deem it less than probable that we will collect an amount due us, we write-off that balance against our allowance for doubtful accounts. Accordingly, we determine our accounts receivable, net, as follows ($ in thousands):
March 31, 2018 | December 31, 2017 | |||||||
| Total invoices issued and unpaid | $ | 5,099 | $ | 6,644 | ||||
| Less: Unpaid invoices relating to M&S contracts with a start date subsequent to the balance sheet date | (844 | ) | (441 | ) | ||||
| Gross accounts receivable | 4,255 | 6,203 | ||||||
| Allowance for doubtful accounts | (100 | ) | (278 | ) | ||||
| Accounts receivable, net | $ | 4,155 | $ | 5,925 | ||||
March 31, 2019 | December 31, 2018 | |||||||
Total invoices issued and unpaid | $ | 6,039 | $ | 7,990 | ||||
Less: Unpaid invoices relating to M&S contracts with a start date subsequent to the balance sheet date | (500 | ) | (1,233 | ) | ||||
Gross accounts receivable | 5,539 | 6,757 | ||||||
Allowance for doubtful accounts | (100 | ) | (100 | ) | ||||
Accounts receivable, net | $ | 5,439 | $ | 6,657 | ||||
5. | Capitalized Software Development Costs, Net |
Our capitalized software development costs balances and activities were as follows ($ in thousands):
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Gross capitalized cost | $ | 10,655 | $ | 10,454 | ||||
Accumulated amortization | (7,674 | ) | (7,321 | ) | ||||
Capitalized software development costs, net | $ | 2,981 | $ | 3,133 | ||||
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Amount capitalized | $ | 201 | $ | 402 | ||||
Amortization expense | (353 | ) | (534 | ) | ||||
Released | Unreleased | |||||||
Products | Products | |||||||
Gross capitalized amount at March 31, 2019 | $ | 9,817 | $ | 839 | ||||
Accumulated amortization | (7,675 | ) | - | |||||
Net capitalized cost at March 31, 2019 | $ | 2,142 | $ | 839 | ||||
Future amortization expense: | ||||||||
Nine months ending December 31, 2019 | 1,028 | |||||||
Year ending December 31, | ||||||||
2020 | 921 | |||||||
2021 | 182 | |||||||
2022 | 11 | |||||||
Total | $ | 2,142 |
| March 31, | December 31, | |||||||
| 2018 | 2017 | |||||||
| Gross capitalized cost | $ | 9,581 | $ | 9,179 | ||||
| Accumulated amortization | (5,927 | ) | (5,393 | ) | ||||
| Capitalized software development costs, net | $ | 3,654 | $ | 3,786 | ||||
| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Amount capitalized | $ | 402 | $ | 462 | ||||
| Amortization expense | (534 | ) | (474 | ) | ||||
| Released | Unreleased | |||||||
| Products | Products | |||||||
| Gross capitalized amount at March 31, 2018 | $ | 9,059 | $ | 522 | ||||
| Accumulated amortization | (5,927 | ) | - | |||||
| Net capitalized cost at March 31, 2018 | $ | 3,132 | $ | 522 | ||||
| Future amortization expense: | ||||||||
| Nine months ending December 31, 2018 | 1,255 | |||||||
| Year ending December 31, | ||||||||
| 2019 | 1,178 | |||||||
| 2020 | 669 | |||||||
| 2021 | 30 | |||||||
| Total | $ | 3,132 |
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. | Deferred Revenue |
As described in Note 54 regarding accounts receivable, when our customers agree to purchase or renew M&S services, we bill and invoice our customers at that time which could be before the date we begin delivering those services. In that event, we exclude from deferred revenue (and from the related accounts receivable) the invoices we have issued for which the M&S services commencement date is in the future and which have not been paid by the customer as of the date of our financial statements. Accordingly, we determine our deferred revenue as follows ($ in thousands):
March 31, 2018 | December 31, 2017 | |||||||
| Total invoiced for M&S contracts for which revenue will be recognized in future periods | $ | 16,577 | $ | 17,491 | ||||
Less: Unpaid invoices relating to M&S contracts with a start date subsequent to the balance sheet date | (844 | ) | (441 | ) | ||||
| Total deferred revenue | $ | 15,733 | $ | 17,050 | ||||
| Deferred revenue, current portion | $ | 12,681 | $ | 13,315 | ||||
| Deferred revenue, non-current portion | 3,052 | 3,735 | ||||||
| Total deferred revenue | $ | 15,733 | $ | 17,050 | ||||
March 31, 2019 | December 31, 2018 | |||||||
Total invoiced for M&S contracts for which revenue will be recognized in future periods | $ | 17,044 | $ | 17,470 | ||||
Less: Unpaid invoices relating to M&S contracts with a start date subsequent to the balance sheet date | (500 | ) | (1,233 | ) | ||||
Total deferred revenue | $ | 16,544 | $ | 16,237 | ||||
Deferred revenue, current portion | $ | 13,980 | $ | 13,301 | ||||
Deferred revenue, non-current portion | 2,564 | 2,936 | ||||||
Total deferred revenue | $ | 16,544 | $ | 16,237 | ||||
7. | Stock Options, Restricted Stock and Stock-Based Compensation |
We have stock-based compensation plans under which we have granted, and may grant in the future, incentive stock options, non-qualified stock options, and restricted stock to employees and non-employee members of theour Board of Directors. Our share-basedstock-based compensation expense was as follows ($ in thousands):
| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Share-based compensation expense | $ | 671 | $ | 337 | ||||
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Stock-based compensation expense | $ | 875 | $ | 671 | ||||
Stock Options
We have granted stock options to our officers and employees under long-term equity incentive plans that originated in 2000, 2010 and 2016. During the 20182019 quarter, we granted stock options only under the 2016 plan.
Provisions and characteristics of the 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, expire ten years from the date of grant, and are exercisable for a period of ninety days after the end of employment. |
● | Upon exercise of a stock option, we issue new shares from the shares of common stock we are authorized to issue. |
We currently issue stock-based awards to our officers and employees only under the 2016 planPlan which authorizes the issuance of up to 5,000,000 shares of common stock for stock-based incentives including stock options and restricted stock awards. As of March 31, 2018,2019, stock-based incentives for up to 4,146,5003,498,842 shares remained available for issuance in the future under this plan.the 2016 Plan.
Our stock option activity has been as follows:
| Weighted | ||||||||||||||||
| Average | Weighted Average | Aggregate | ||||||||||||||
| Exercise | Remaining | Intrinsic | ||||||||||||||
| Number of | Price | Contractual | Value | |||||||||||||
| Shares | Per Share | Term in Years | (000’s) | |||||||||||||
| Outstanding at December 31, 2017 | 2,585,210 | $ | 3.34 | 7.24 | $ | 1,015 | ||||||||||
| Granted | 76,000 | $ | 3.55 | |||||||||||||
| Forfeited | (271,840 | ) | $ | 3.86 | ||||||||||||
| Exercised | - | $ | - | |||||||||||||
| Outstanding at March 31,2018 | 2,389,370 | $ | 3.28 | 6.64 | $ | 1,209 | ||||||||||
| Exercisable at March 31, 2018 | 1,351,583 | $ | 2.86 | 4.99 | $ | 1,128 | ||||||||||
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, 2018 | 2,536,320 | $ | 3.53 | 6.77 | $ | 2,464 | ||||||||||
Granted | 16,000 | $ | 5.08 | |||||||||||||
Forfeited | (336,341 | ) | $ | 2.85 | ||||||||||||
Exercised | (156,489 | ) | $ | 3.32 | ||||||||||||
Outstanding at March 31, 2019 | 2,059,490 | $ | 3.67 | 4.93 | $ | 5,492 | ||||||||||
Exercisable at March 31, 2019 | 1,247,743 | $ | 3.50 | 2.19 | $ | 3,543 | ||||||||||
Additional information about our stock options is as follows:
| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Weighted average fair value of options granted | $ | 1.52 | $ | 1.57 | ||||
| Intrinsic value of options exercised | $ | - | $ | 100,386 | ||||
| Cash received from stock options exercised | $ | - | $ | 90,114 | ||||
| Number of options that vested | 360,074 | 295,124 | ||||||
| Fair value of options that vested | $ | 570,552 | $ | 479,742 | ||||
| Unrecognized compensation expense related to non-vested options at end of period | $ | 1,393,633 | $ | 2,383,732 | ||||
| Weighted average years over which non-vested option expense will be recognized | 1.85 | 2.34 | ||||||
| As of March 31, 2018 | ||||||||||||||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Weighted | ||||||||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||||||||
| Underlying | Remaining | Average | Number of | Average | ||||||||||||||||||
| Range of | Shares | Contractual | Exercise | Underlying | Exercise | |||||||||||||||||
| Exercise Prices | Outstanding | Life | Price | Shares | Price | |||||||||||||||||
| $ | 0.85 - $1.43 | 54,700 | 2.12 | $ | 1.05 | 54,700 | $ | 1.05 | ||||||||||||||
| $ | 1.47 - $2.32 | 386,070 | 1.99 | $ | 1.86 | 386,070 | $ | 1.86 | ||||||||||||||
| $ | 2.34 - $3.52 | 824,450 | 6.11 | $ | 3.29 | 619,588 | $ | 3.24 | ||||||||||||||
| $ | 3.53 - $5.30 | 1,119,150 | 8.85 | $ | 3.86 | 291,225 | $ | 3.70 | ||||||||||||||
| $ | 5.44 - $5.44 | 5,000 | 9.30 | $ | 5.44 | - | $ | - | ||||||||||||||
| Total options | 2,389,370 | 1,351,583 | ||||||||||||||||||||
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Weighted average fair value of options granted | $ | 2.10 | $ | 1.52 | ||||
Intrinsic value of options exercised | $ | 258,101 | $ | - | ||||
Cash received from stock options exercised | $ | 519,184 | $ | - | ||||
Number of options that vested | 626,278 | 360,074 | ||||||
Fair value of options that vested | $ | 964,820 | $ | 570,552 | ||||
Unrecognized compensation expense related to non-vested options at end of period | $ | 1,112,499 | $ | 1,393,633 | ||||
Weighted average years over which non-vested option expense will be recognized | 2.16 | 1.85 | ||||||
Plan | Shares outstanding | |||
2000 Stock Option Plan | 10,000 | |||
2010 Employee LT Equity Incentive Plan | 568,989 | |||
2016 Employee LT Equity Incentive Plan | 1,480,501 | |||
Total shares Outstanding at March 31, 2019 | 2,059,490 | |||
As of March 31, 2019 | ||||||||||||||||||||
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 | 153,354 | 1.70 | $ | 1.77 | 153,354 | $ | 1.76 | |||||||||||||
$2.39 - $3.59 | 629,301 | 4.60 | $ | 3.44 | 405,303 | $ | 3.39 | |||||||||||||
$3.60 - $5.90 | 1,274,835 | 5.48 | $ | 4.02 | 689,086 | $ | 3.95 | |||||||||||||
$6.15 - $6.15 | 2,000 | 9.95 | $ | 6.15 | - | $ | - | |||||||||||||
Total options | 2,059,490 | 1,247,743 | ||||||||||||||||||
We used the following assumptions to determine compensation expense for our stock options using the Black-Scholes option-pricing model:
| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Expected volatility | 49 | % | 49 | % | ||||
| Expected annual dividend yield | 1.50 | % | 1.50 | % | ||||
| Risk free rate of return | 2.49 | % | 1.94 | % | ||||
| Expected option term (years) | 6.00 | 6.00 | ||||||
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Expected volatility | 49 | % | 49 | % | ||||
Expected annual dividend yield | 1.50 | % | 1.50 | % | ||||
Risk free rate of return | 2.52 | % | 2.49 | % | ||||
Expected option term (years) | 6.00 | 6.00 | ||||||
Restricted Stock Awards
Our 2015 Non-Employee Directors Long-Term Equity Incentive Plan (“2015(the “2015 Directors Plan”) provides for the issuance of either stock options or restricted stock awards for up to 500,000 shares of our common stock. Provisions and characteristics of this plan2015 Directors Plan include the following:
● | The exercise price, term and other conditions applicable to each stock option or stock award granted are determined by the Compensation Committee of |
● | Restricted stock awards are initially issued as restricted shares with a legend restricting transferability of the shares until the recipient satisfies the vesting provision of the award, which is generally continuing service for one year subsequent to the date of the award, after which time the restrictive legend is removed from the shares. |
● | Restricted shares participate in dividend payments and may be voted. |
● | As of March 31, |
| Total | ||||||||||||
| Grant Date | Fair Value of | |||||||||||
| Number of | Fair Value | Shares That | ||||||||||
| Shares | Per Share | Vested | ||||||||||
| Restricted shares outstanding at December 31, 2017 | 80,000 | $ | 4.24 | |||||||||
| Shares granted with restrictions | - | $ | - | |||||||||
| Shares vested and restrictions removed | - | $ | - | $ | - | |||||||
| Restricted shares outstanding at March 31, 2018 | 80,000 | $ | 4.24 | |||||||||
| Unrecognized compensation expense for non-vested shares as of March 31, 2018 | ||||||||||||
| Expense to be recognized in future periods | $ | 37,071 | ||||||||||
| Weighted average number of months over which expense is expected to be recognized | 1.3 | |||||||||||
Total | ||||||||||||
Grant Date | Fair Value of | |||||||||||
Number of | Fair Value | Shares That | ||||||||||
Shares | Per Share | Vested | ||||||||||
Restricted shares outstanding at December 31, 2018 | 100,000 | $ | 4.06 | |||||||||
Shares granted with restrictions | - | $ | - | |||||||||
Shares vested and restrictions removed | - | $ | - | $ | - | |||||||
Restricted shares outstanding at March 31, 2019 | 100,000 | $ | 4.06 | |||||||||
Unrecognized compensation expense for non-vested shares as of March 31, 2019 | ||||||||||||
Expense to be recognized in future periods | $ | 214,093 | ||||||||||
Weighted average number of months over which expense is expected to be recognized | 0.5 | |||||||||||
8. | Income Taxes |
The components of our income tax expense (benefit) are as follows ($ in thousands):
| Three months ended March 31, | ||||||||||||||||||||||||
| 2018 | 2017 | |||||||||||||||||||||||
| Current | Deferred | Total | Current | Deferred | Total | |||||||||||||||||||
| Federal | $ | 40 | $ | (258 | ) | $ | (218 | ) | $ | 390 | $ | (22 | ) | $ | 368 | |||||||||
| State | (24 | ) | 10 | (14 | ) | 44 | (1 | ) | 43 | |||||||||||||||
| Total | $ | 16 | $ | (248 | ) | $ | (232 | ) | $ | 434 | $ | (23 | ) | $ | 411 | |||||||||
Three months ended March 31, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Current | Deferred | Total | Current | Deferred | Total | |||||||||||||||||||
Federal | $ | 647 | $ | (10 | ) | $ | 637 | $ | 40 | $ | (258 | ) | $ | (218 | ) | |||||||||
State | 115 | (5 | ) | 110 | (24 | ) | 10 | (14 | ) | |||||||||||||||
Total | $ | 762 | $ | (15 | ) | $ | 747 | $ | 16 | $ | (248 | ) | $ | (232 | ) | |||||||||
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):
| March 31, | December 31, | |||||||
| 2018 | 2017 | |||||||
| Deferred tax assets: | ||||||||
| Deferred revenue | $ | 783 | $ | 775 | ||||
| Share-based compensation | 462 | 351 | ||||||
| Compensation and benefits | 119 | 111 | ||||||
| Texas franchise tax R&D credit | 190 | 185 | ||||||
| Prepaid expenses not deductible for tax | - | 84 | ||||||
| Allowance for doubtful accounts | 42 | 58 | ||||||
| Net operating loss carryforward | 183 | 20 | ||||||
| Deferred state income taxes | 51 | 61 | ||||||
| Federal R&D credits | 17 | - | ||||||
| Accrued expenses not deducted for tax | 11 | 9 | ||||||
| Valuation allowance | (190 | ) | (185 | ) | ||||
| Total deferred tax assets | 1,668 | 1,469 | ||||||
| Deferred tax liabilities: | ||||||||
| Intangible assets | 778 | 805 | ||||||
| Book expenses deductible for tax purposes | 248 | - | ||||||
| Depreciation | 3 | 13 | ||||||
| Total gross deferred tax liabilities | 1,029 | 818 | ||||||
| Net deferred tax assets | $ | 639 | $ | 651 | ||||
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Deferred tax assets: | ||||||||
Deferred revenue | $ | 715 | $ | 809 | ||||
Share-based compensation | 352 | 329 | ||||||
Compensation and benefits | 81 | 49 | ||||||
Texas franchise tax R&D credit | 210 | 194 | ||||||
Allowance for doubtful accounts | 37 | 37 | ||||||
Deferred state income taxes | 49 | 45 | ||||||
Accrued expenses not deducted for tax | 5 | 6 | ||||||
Valuation allowance | (210 | ) | (194 | ) | ||||
Total deferred tax assets | 1,239 | 1,275 | �� | |||||
Deferred tax liabilities: | ||||||||
Intangible assets | 623 | 667 | ||||||
Deferred expenses | 206 | 213 | ||||||
Total gross deferred tax liabilities | 829 | 880 | ||||||
Net deferred tax assets | $ | 410 | $ | 395 | ||||
In assessing the realizability of deferred tax assets, we consider whether it is more-likely-than-not that some portion or all the deferred tax asset will not be realized. The ultimate realization of deferred tax assets is 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 our ability to generate future taxable income will allow us to realize those deferred tax assets.
As of March 31, 2018, we have federal income tax net operating loss carryforwards of $872,000 available to offset future federal taxable income. We expect to fully utilize this net operating loss in 2018. The net operating loss expires in 2038.
The aggregate changes in the balance of our gross unrecognized tax benefits were as follows ($ in thousands):
| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Balance at beginning of period | $ | 158 | $ | 121 | ||||
| Increases for tax positions related to the current year | 4 | 15 | ||||||
| Increases for tax positions related to prior years | - | 6 | ||||||
| Balance at end of period | $ | 162 | $ | 142 | ||||
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Balance at beginning of period | $ | 113 | $ | 158 | ||||
Increases for tax positions related to the current year | - | 4 | ||||||
Increases for tax positions related to prior years | - | - | ||||||
Decreases for tax positions where the statue has expired | - | - | ||||||
Balance at end of period | $ | 113 | $ | 162 | ||||
Our unrecognized tax benefit is related to research and development credits taken on our U.S. income tax returns from 2011 toin 2012, 2013, 2015, 2016, and 2017 and the uncertainty related to the realization of a portion of those credits based on prior experience. We believe it reasonably possible that we will not recognize any of our unrecognized tax benefits at least through December 31, 2018.2019. 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 expense related to income taxes as interest and other expense, respectively. At March 31, 2018,2019, no interest or penalties havehad been or arewere required to be accrued. Our openWe file income tax returns in the US and in various state jurisdictions with varying statues of limitations. We are no longer subject to income tax examination by tax authorities for years areprior to 2011 and forward forwith respect to our federal income tax returns and years prior to 2013 and forward forwith respect to most of our state income tax returns. We do not file, and are not required to file, any foreign income tax returns.
Our income tax expense (benefit) reconciles to an income tax expense resulting from applying an assumed statutory federal income tax rate of 21% for the 2018 quarter2019 and 34% for the 20172018 quarter to income (loss) before income taxes as follows ($ in thousands):
| Three months ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Income tax expense (benefit) at federal statutory rate | $ | (245 | ) | $ | 422 | |||
| Increase (decrease) in taxes resulting from: | ||||||||
| State taxes, net of federal benefit | 5 | 28 | ||||||
| Stock based compensation | 30 | 60 | ||||||
| Other | (6 | ) | 7 | |||||
| R&D tax credit uncertain tax position (net) | 3 | (65 | ) | |||||
| Research and development credit | (19 | ) | (30 | ) | ||||
| Domestic production activities deduction | 0 | (11 | ) | |||||
| Income tax expense (benefit) per the statements of operations | $ | (232 | ) | $ | 411 | |||
Three months ended March 31, | ||||||||
2019 | 2018 | |||||||
Income tax expense (benefit) at federal statutory rate | $ | 665 | $ | (245 | ) | |||
Increase (decrease) in taxes resulting from: | ||||||||
State taxes, net of federal benefit | 86 | 5 | ||||||
Stock based compensation | 73 | 30 | ||||||
Other | 14 | (6 | ) | |||||
R&D tax credit uncertain tax position (net) | - | 3 | ||||||
Research and development credit | (17 | ) | (19 | ) | ||||
Foreign derived intangible income deduction | (74 | ) | - | |||||
Income tax expense (benefit) per the statements of operations | $ | 747 | $ | (232 | ) | |||
On June 21, 2018, in South Dakota v Wayfair Inc., the United States Supreme Court held that states may charge sales tax on purchases made from out-of-state sellers, even if the seller does not have a physical presence in the taxing state. We are evaluating our state income tax filings with respect to the recent Wayfair decision. Currently, we file state income tax returns in those states in which we have a physical presence and/or are otherwise required by a state to register to do business.
9. | Earnings (Loss)per Common Share |
Earnings (Loss) per Common Share
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2018 | 2017 | |||||||
| Numerators | ||||||||
| Numerator for basic and diluted earnings per share: | ||||||||
| Net income (loss) | $ | (935 | ) | $ | 831 | |||
| Denominators | ||||||||
| Denominators for basic and diluted earnings (loss) per share: | ||||||||
| Weighted average shares outstanding - basic | 21,793 | 21,544 | ||||||
| Dilutive potential common shares | ||||||||
| Stock options and awards | - | 479 | ||||||
| Denominator for diluted earnings (loss) per share | 21,793 | 22,023 | ||||||
| Net income (loss) per common share - basic | $ | (0.04 | ) | $ | 0.04 | |||
| Net income (loss) per common share – diluted | $ | (0.04 | ) | $ | 0.04 | |||
Three Months Ended | |||||||||
March 31, | |||||||||
2019 | 2018 | ||||||||
Numerators | |||||||||
Numerator for basic and diluted earnings per share: | |||||||||
Net income (loss) | $ | 2,420 | $ | (935 | ) | ||||
Denominators | |||||||||
Denominators for basic and diluted earnings per share: | |||||||||
Weighted average shares outstanding - basic | 17,197 | 21,793 | |||||||
Dilutive potential common shares | |||||||||
Stock options and awards | 467 | - | |||||||
Denominator for diluted earnings per share | 17,664 | 21,793 | |||||||
Net income (loss) per common share - basic | $ | 0.14 | $ | (0.04 | ) | ||||
Net income (loss) per common share – diluted | $ | 0.14 | $ | (0.04 | ) | ||||
10. | Dividends |
We paid dividends during the 20182019 quarter and 20172018 quarter as follows:
| Three Months Ended | ||||||||
| March 31, 2018 | March 31, 2017 | |||||||
| Dividend per share of common stock | $ | 0.015 | $ | 0.015 | ||||
| Dividend record date | March 9, 2018 | February 23, 2017 | ||||||
| Dividend payment date | March 23, 2018 | March 8, 2017 | ||||||
Three Months Ended | ||||||||
March 31, 2019 | March 31, 2018 | |||||||
Dividend per share of common stock | $ | 0.015 | $ | 0.015 | ||||
Dividend record date | March 11, 2019 | March 9, 2018 | ||||||
Dividend payment date | March 25, 2019 | March 23, 2018 | ||||||
On April 29, 2019 the Board of Directors announced a special dividend of $.50 per share of common stock. The dividend is payable on May 28, 2019 to shareholders of record at the close of business at 5 p.m. Eastern Time on May 13, 2019.
11. | 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 previously disclosed in the Company’s Current Report on Form 8-K filed on November 15, 2017, on August 9, 2017, a securities class action complaint, Anthony Giovagnoli v. GlobalSCAPE, Inc., et. al., Case No. 5:17-cv-00753, was filed against the Company in the United States District Court for the Western District of Texas. On November 6, 2017, the Court appointed Irfan Rahman as lead plaintiff (the “Lead Plaintiff”), and he filed the First Amended Complaint (the “Amended Complaint”) on July 26, 2018. The complaint namesAmended Complaint named the Company and each of Matthew Goulet, James Albrecht, Thomas Brown, David Mann, Frank Morgan, and Thomas Hicks (the “Individual Defendants”) as defendants the Company, Matthew Goulet, and James Albrecht for allegedly making materially false and misleading statements regarding, inter alia,, the Company’s previously reported financial statements. The complaint allegesAmended Complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder. The complaint seeksAmended Complaint sought unspecified damages, costs, attorneys’ fees, and equitable relief. On November 6, 2017,The parties reached a settlement and submitted a Stipulation of Settlement to the Court appointedon September 13, 2018. Under this settlement, the Company’s and Individual Defendants’ insurance carrier has provided the Class with a lead plaintiff, whocash payment of $1,400,000, which includes the cash amount of any attorney’s fees or litigation expenses that the Court may award Lead Plaintiff’s counsel and costs Lead Plaintiff may incur in administering and providing notice of the settlement. In exchange, Lead Plaintiff has agreed to file an amended complaint followingthat the completionsettlement will include a dismissal of the previously disclosed restatementClass Action with prejudice and a release of certainall claims against the Company and the Individual Defendants by the Class. The Court entered an Order and Final Judgment approving the settlement on December 18, 2018. On December 18, 2018, the Court also awarded Plaintiff’s Lead Counsel and Liaison Counsel 25% of the Company’s consolidated financial statements (the “Restatement”). Management intends to vigorously defend against this action. At this time,settlement fund ($350,000) in fees and $12,721 in reimbursement of expenses, which was paid from the Company cannot predict how the courts will rule on the merits of the claims and/or the scope of the potential loss in the event of an adverse outcome. Should the Company ultimately be found liable, the resulting damages could have a material adverse effect on its financial position, liquidity, or results of operations.
On October 20, 2017, the Company received a demand letter from a stockholder seeking the inspection of books and records of the Company pursuant to Section 220 of the Delaware General Corporation Law (the “Section 220 Demand”). This stockholder’s stated purpose for the demand is, inter alia, to investigate whether the Company’s Board of Directors and officers engaged in an illegal scheme to misrepresent the Company’s performance by falsely reporting accounts receivable, license revenue, total current assets and total assets, total stockholders’ equity, and total liabilities for the year ended December 31, 2016, as well as the Board’sBoard of Director’s independence to consider a stockholder derivative demand. The Company intends to fully respond to the Section 220 Demand to the extent required under Delaware law.
On October 12, 2018, and November 30, 2018 the Company received letters from stockholders (the “Stockholder Demands”) demanding that the Company take action to remedy alleged harm caused to the Company, including to remedy alleged breaches of fiduciary duties by certain current and/or former directors and executive officers of the Company. The stockholders allege, inter alia, that certain current and former directors and executive officers violated their fiduciary duties beginning at least in July 2016, causing the Company to suffer damages by overstating financial results for the fourth quarter of 2016.
The Board of Directors has established a special litigation committee (“Special Litigation Committee”) consisting of Dr. Thomas Hicks and Frank Morgan to analyze and investigate claims that could potentially be asserted in stockholder derivative litigation related to facts connected to the claims and allegations asserted in the litigation related to the Restatementrestatement of (i) our condensed consolidated financial statements as of and for the years ended December 31, 2016 and 2015 and (ii) our consolidated financial statements as of and for the three months ended March 31, 2017 (the “Restatement”) and the Section 220 Demand (the “Potential Derivative Litigation”). The Special Litigation Committee will determine what actions are appropriate and in the best interests of the Company, and decide whether it is in the best interests of the Company to pursue, dismiss, or consensually resolve any claims that may be asserted in the Potential Derivative Litigation. The Board of Directors determined that each member of the Special Litigation Committee is disinterested and independent with respect to the Potential Derivative Litigation. Among other things, the Special Litigation Committee has the power to retain counsel and advisors, as appropriate, to assist it in the investigation, to gather and review relevant documents relating to the claims, to interview persons who may have knowledge of the relevant information, to prepare a report setting forth its conclusions and recommended course of action with respect to the Potential Derivative Litigation, and to take any actions, including, without limitation, directing the filing and prosecution of litigation on behalf of the Company, as the Special Litigation Committee in its sole discretion deems to be in the best interests of the Company in connection with the Potential Derivative Litigation. The Special Litigation Committee’s findings and determinations shall be final and not subject to review by the Board of Directors and in all respects shall be binding upon the Company.
As disclosed in a Current Report on Form 8-K filed on March 16, 2018, the Fort Worth, Texas Regional Office of the SEC has opened a formal investigation of issues relating to the Restatement, with which the Company is cooperating fully. At this time, the Company is unable to predict the duration, scope, result or related costs associated with the SEC’s investigation. The Company is also unable to predict what, if any, action may be taken by the SEC, or what penalties or remedial actions the SEC may seek. Any determination by the SEC that the Company’s activities were not in compliance with existing laws or regulations, however, could result in the imposition of fines, penalties, disgorgement, equitable relief, or other losses, which could have a material adverse effect on the Company’s financial position, liquidity, or results of operations.
On May 31, 2018, the Company was served with a subpoena issued by a grand jury sitting in the United States District Court for the Western District of Texas (the “Grand Jury Subpoena”). The Grand Jury Subpoena requests all documents and emails relating to the Company’s investigation of the potential improper recognition of software license revenue. The Company intends to fully cooperate with the Grand Jury Subpoena and related investigation being conducted by the United States Attorney’s Office for the Western District of Texas (the “U.S. Attorney’s Investigation”). At this time, the Company is unable to predict the duration, scope, result or related costs of the U.S. Attorney’s Investigation. The Company is also unable to predict what, if any, further action may be taken in connection with the Grand Jury Subpoena and the U.S. Attorney’s Investigation, or what, if any, penalties, sanctions or remedial actions may be sought. Any determination by the U.S. Attorney’s office that the Company’s activities were not in compliance with existing laws or regulations, however, could result in the imposition of fines, penalties, disgorgement, equitable relief, or other losses, which could have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations.
Leases
Subsequent to March 31, 2019, we have signed a new operating lease for our existing office space location. The lease is for a period of Business Volume10 years at an average annual rent of $462,000 beginning May 1, 2019. We estimate that this will result in a Right-of-Use Asset and Credit Risk
12. | 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. In the 20182019 quarter and 20172018 quarter, we earned approximately 12%19% and 14%12%, respectively, of our revenue from such sales through our largest third-party channel distributor. As of March 31, 2018,2019, approximately 15%26% of our accounts receivable were due from this channel distributor with payment for substantially all such amounts having been received subsequent to that date.
13. | Segment and Geographic Disclosures |
In accordance with FASB ASC Topic 280, Segment Reporting, we view our operations and manage our business as principally one segment. As a result, the financial information disclosed herein represents all of the material financial information related to our principal operating segment.
Revenues derived from customers and partners located outside the United States accounted for approximately 30%28% and 22%30% of our total revenues in the 20182019 quarter and the 20172018 quarter, respectively. Each individual foreign country accounts for less than 10% of total revenuesrevenue in all periods.the 2019 quarter and 2018 quarter. We attribute revenues to countries based on the country in which the customer or partner is located. None of our property and equipment was located in a foreign country as of March 31, 2018.
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 Securitas Exchange Act.Act of 1934, as 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 2017Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “2018 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 20182019 quarter and the 20172018 quarter refer to the three months ended March 31, 2019 and 2018, and 2017, 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 more than twenty years having sold our products to thousands of enterprises and more than one million individual consumers globally.
Our primary business is selling and supporting managed file transfer or MFT,(“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.
Our MFT products are based upon our Enhanced File Transfer or EFT,(“EFT”) platform. This on-premise and cloud-based delivery platform emphasizes secure and efficient data exchange for virtually any organization. It enables business partners, customers 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, all of which can be insecure, with a top-performing, scalable alternative.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 strategic alternatives 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 other alternatives.
We earn most of our revenue from the sale of products and services that are part of our EFT platform. Our customersCustomers can purchase the capabilities of our EFT platform in two ways:
● | Under a perpetual software license for which they pay a one-time fee and under which they typically install our product on computers that they own and/or manage. Our brand name for this product is EFT. Almost all customers who purchase EFT also purchase a maintenance and support |
● | 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. |
We sell other products that are synergistic to our EFT platform including Mail Express, WAFS, and CuteFTP. Collectively, these products constituted less than 5%3% of our total revenue in the three months ended March 31, 2018.2019 quarter. Customers pay a one-time fee to purchase these products under a perpetual software license. Some customers also purchase an M&S contract. We do not offer a SaaS version of these products and have no plans to do so. We plan to phase out Mail Express and WAFS in 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, 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 Software“Software Products and Services” below.
Appointment of new Interim Chief Executive Officer
As previously disclosed, the Company’s President and Chief Executive Officer, Matthew Goulet, unexpectedly passed away on March 30, 2019. On March 31, 2019, the Board of Directors named Robert Alpert, Chairman of the Board of Directors, as Interim CEO while the search for a corporation, we have won multiple awards for performance 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 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 to identify emerging trends. We believe our revenue growth is primarily dependent upon executing our business strategies which include:
See “Comparison of the Consolidated Statement of Operations for the Three Months Ended March 31, 2018 2019 and 2017 2018” for a discussion of trends in our revenue growth that we monitor using this metric.
Adjusted EBITDA (Non-GAAP Measurement)
We utilize Adjusted EBITDA (Earnings Before Interest, Taxes, Total Other Income/Expense, Depreciation, Amortization, other than amortization of capitalized software development costs, and Share-Based Compensation Expense) to provide us a view of income and expenses that is supplemental and secondary to our primary assessment of net income (loss) as presented in our consolidated statement of operations and comprehensive income (loss). We use Adjusted EBITDA to provide another perspective for measuring profitability that does not include the effects of the following items:
● | Expenses that typically do not require us to pay them in cash in the current period (such as depreciation, amortization and share-based compensation); |
● | The cost of financing our business; and |
● | The effects of income taxes. |
Prior to 2018, we did not add back the amortization of capitalized software development costs in our Adjusted EBITDA computation. In 2018, after researching the methods used by other software companies, we changed our method of computing Adjusted EBITDA to include the amortization of capitalized software development cost in order to enhance the comparability of the computation to that of our peers.
We monitor Adjusted EBITDA to assess our performance relative to our intended strategies, expected patterns of action, and budgets. We use the results of that assessment to adjust our future activities to the extent we deem necessary.
Adjusted EBITDA is not a measure of financial performance under GAAP.United States generally accepted accounting principles (“GAAP”). It should not be considered as a substitute for net income (loss) presented on our condensed consolidated statement of operations and comprehensive income.income (loss). Adjusted EBITDA has limitations as an analytical tool and when assessing our operating performance. Adjusted EBITDA should not be considered in isolation or without a simultaneous reading and consideration of our condensed consolidated financial statements prepared in accordance with GAAP.
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2018 | 2017 | |||||||
| Net Income (loss) | $ | (935 | ) | $ | 831 | |||
| Add (subtract) items to determine Adjusted EBITDA: | ||||||||
| Income tax expense (benefit) | (232 | ) | 411 | |||||
| Interest (income) expense, net | (76 | ) | (70 | ) | ||||
| Depreciation and amortization: | ||||||||
| Total depreciation and amortization | 594 | 541 | ||||||
| Amortization of capitalized software development costs | (534 | ) | (474 | ) | ||||
| Share-based compensation expense | 671 | 337 | ||||||
| Adjusted EBITDA | $ | (512 | ) | $ | 1,576 | |||
Three Months Ended | ||||||||
March 31, | ||||||||
2019 | 2018 | |||||||
Net Income (loss) | $ | 2,420 | $ | (935 | ) | |||
Add (subtract) items to determine Adjusted EBITDA: | ||||||||
Income tax expense (benefit) | 747 | (232 | ) | |||||
Interest (income) expense, net | (24 | ) | (76 | ) | ||||
Depreciation and amortization: | ||||||||
Total depreciation and amortization | 410 | 594 | ||||||
Share-based compensation expense | 875 | 671 | ||||||
Adjusted EBITDA | $ | 4,428 | $ | 22 | ||||
Amounts we previously reported as Adjusted EBITDA reconcile to the metric in the table above as follows:
Three Months Ended | ||||
March 31, | ||||
2018 | ||||
Adjusted EBITDA as previously reported | $ | (512 | ) | |
Amortization of capitalized software development costs | 534 | |||
Adjusted EBITDA as now reported | $ | 22 | ||
See Comparison“Comparison of the Consolidated Statement of Operations for the Three Months Ended March 31, 20182019 and 2017 2018” for discussion of the variances between periods in the components comprising Adjusted EBITDA.
Software Products and Services
We develop and sell computer software that provides secure information exchange, data transfer, and data sharing capabilities for enterprises and consumers. We have been in business for more than twenty years having sold our products to thousands of enterprises and more than one million individual consumers globally.
Our primary business is selling and supporting MFT software for enterprises. MFT software facilitates the transfer of data from one location to another across a computer network within a single enterprise or between multiple computer networks in multiple enterprises. These transfers may be ongoing, repetitive activities executed by automated software routines that occur without human intervention, or they may be transfers that people create and complete in the absence of automated routines or as a result of ad-hoc, special situations that arise from time-to-time. Examples of enterprise-level activities that rely on MFT software include:
● | Transfer of transactional information within an enterprise on a repetitive basis from one geographic location to another, such as a transfer of deposit and withdrawal information throughout the day from a branch of a bank to a central data processing center at another location. |
● | Movement of accumulated information within an enterprise from one data processing application to another on a periodic basis, such as a transfer of bi-weekly payroll information from a payroll system that is used to pay employees to a job cost system that is used to manage the cost of a project. |
● | Exchange of information between enterprises to facilitate the completion of one or more business transactions, such as a retailer transmitting inventory purchasing requirements produced by its material requirements planning system to an order entry system at a supplying vendor. |
We earn over 90%95% of our revenue from the sale of MFT products and services that are part of our EFT platform. We have multiple revenue streams from the EFT platform that include:
● | Perpetual software licenses under which customers pay |
● | Cloud-based, SaaS solutions that we sell on an ongoing subscription basis. |
● | M&S. |
● | Professional services for product installation, integration and training. |
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, 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 under the brand name Kenetix. We licensed the technology for this product from a third party. We have experienced issues with the third-party technology and have determined to suspend marketing of the product as we evaluate options and determine whether the licensor can effectively address the issues.
We earn most of our revenue from the sale of our EFT platform products that support business-to-business activities and are strategically focused on selling products in that environment. We intend to expend the majority of our resources in the future for product research and development, marketing, and sales in a manner that concentrates on the business-to-business market. We believe our products and business capabilities are well-positioned to compete effectively in that market.
The following discussion 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. Our EFT platform products received multiple industry awards in compliance categories in 2018 and 2017, including the 2018 and 2017 Info Security Products Guide Global Excellence Awards, the 2017 Golden Bridge awards and the Network Product Guide’s 2017 IT World 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, 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.
● | State-of-the-art, enterprise-level security when transferring information within or between computer networks as well as for collaboration with business partners, customers, and employees. EFT also provides automation that supports effective integration of back-end systems. It has built-in regulatory compliance, governance, and visibility controls to provide a means of safely maintaining information. EFT offers a high level of performance and scalability to support operational efficiency and maintain business continuity. Administrative tools |
● | Transmission of critical information such as financial data, medical records, customer files, vendor files, personnel files, transaction activity, and other similar documents between diverse and geographically separated network infrastructures while supporting a range of information protection approaches to meet privacy, compliance and |
● | Compliance with government regulations and industry standards relating to the protection of information while allowing users to reduce information systems and technologies costs, increase efficiency, track and audit transactions, and automate processes. Our solutions also provide data replication, acceleration of file transfer, |
EFT Platform – Delivery Offerings
Our customers can purchase the capabilities of our EFT platform in two ways:
● | Under a perpetual software license for which they pay a one-time fee and under which they typically install our product on computers that they own |
● | As a |
Secure Information Sharing and Exchange Solution – Mail Express
Mail Express is a solution that provides secure information sharing and exchange capabilities leveraging traditional email workflow. It is a stand-alone product installed in a client-server environment that allows users to send and receive secure, encrypted email and attachments of virtually unlimited size. As of January 1, 2019, Mail Express was a Bronze Winner in Email Security and Management by Network Products Guide’s 2016 IT World Awards.
Wide Area File Services Solution - WAFS
Our WAFS software product uses data synchronization to further enhance the ability to replicate, share and backup files within a wide area network or local area network thereby allowing users to access their data at higher speeds than possible with most alternate approaches. The software uses byte-level differencing technology to update changes to files with minimal impact on network bandwidth while also ensuring that files are never overwritten, even if opened by other remote users. Other key featuresAs of January 1, 2019, WAFS include native file locking, replication to multiple locations simultaneously, adherence to access control list file permissions, and full UTF-8 support.
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.
We offer a wide range of professional services to complement our on-premises and SaaS solutions. These professional services include system integration, solution “quickstart” implementations, business process and workflow, policy development, education and training, and solution health checks. In addition, we may provide longer-term engineering services, including supporting multi-year contracts, if necessary, to support certain solution implementations and integrations.
● | System integration and implantation |
● | Business process and workflow planning |
● | Policy development |
● | Education and training |
● | Solution health checks |
Maintenance and Support
We offer M&S contracts to licensees of all of our software products. These M&S contracts entitle the licensee to software upgrades and technical support services in accordance with the terms of our M&S contract. Standard technical support services are provided via email and telephone during our regular business hours. For certain of our products, we offer a Platinum M&S contract which provides access to emergency technical assistance 24 hours per day, 7 days a week.
Most of our M&S contracts are for one year although we also sell multi-year contracts. M&S is purchased by substantially all buyers of our EFT platform as well as by many customers who purchase our other products. Customers with M&S contracts pay us a recurring, annual amountfee that is typically 20% to 30% of the software license price. A majority of our customers with M&S contracts renew them each year.
Employees
Our number of employeesworkforce is organized as follows:
| March 31, | ||||||||
Department | 2018 | 2017 | ||||||
| Sales and Marketing | 57 | 52 | ||||||
| Engineering | 30 | 36 | ||||||
| Professional Services | 6 | 8 | ||||||
| Customer Support | 23 | 21 | ||||||
| Management and Administration | 19 | 19 | ||||||
| Total | 135 | 136 | ||||||
March 31, | ||||||||
Department | 2019 | 2018 | ||||||
Sales and Marketing | 39 | 57 | ||||||
Engineering | 9 | 30 | ||||||
Professional Services | 6 | 6 | ||||||
Customer Support | 23 | 23 | ||||||
Management and Administration | 15 | 19 | ||||||
Total | 92 | 135 | ||||||
On August 3, 2018, we implemented a plan to restructure our organization, which included a reduction in workforce of approximately 40 employees, representing approximately 30% of the Company’s total pre-restructuring workforce. We recorded a charge of $381,000 in the third quarter of 2018 relating to this reduction in force, consisting primarily of one-time severance payments and termination benefits. The Company’s goal in the restructuring was to better focus our workforce on retaining current customers, gaining incremental business from current customers, and winning new business in the market segments where we can leverage our expertise and long history as an EFT pioneer.
Through the first quarter of 2019, the realignment has resulted in a significant reduction in total operating expenses and a significant increase in operating income. No assurance can be provided that operating expenses will continue to decline or that operating income will continue to increase. Please see the Company’s discussion of “Risk Factors – Risks Related to Our Operations” in our 2018 Form 10-K filed with the SEC on March 18, 2019.
Solution Perspective and Trends
The components of our revenue are as follows ($ in thousands):
| Three Months Ended March 31, | ||||||||||||||||
| 2018 | 2017 | |||||||||||||||
| Percent of | Percent of | |||||||||||||||
| Amount | Total | Amount | Total | |||||||||||||
Revenue By Type | ||||||||||||||||
| License | 2,160 | 28.0 | % | 2,578 | 30.6 | % | ||||||||||
| M&S | 5,100 | 66.1 | % | 5,121 | 60.7 | % | ||||||||||
| Professional Services | 451 | 5.8 | % | 733 | 8.7 | % | ||||||||||
| Total Revenue | $ | 7,711 | 100.0 | % | $ | 8,432 | 100.0 | % | ||||||||
Revenue by Product Line | ||||||||||||||||
| License | ||||||||||||||||
| EFT Platform | $ | 2,076 | 96.1 | % | $ | 2,397 | 93.0 | % | ||||||||
| Other | 84 | 3.9 | % | 181 | 7.0 | % | ||||||||||
| Total License Revenue | 2,160 | 100.0 | % | 2,578 | 100.0 | % | ||||||||||
| M&S | ||||||||||||||||
| EFT Platform | 4,870 | 95.5 | % | 4,841 | 94.5 | % | ||||||||||
| Other | 230 | 4.5 | % | 280 | 5.5 | % | ||||||||||
| Total M&S Revenue | 5,100 | 100.0 | % | 5,121 | 100.0 | % | ||||||||||
| Professional Services (all EFT Platform) | 451 | 100.0 | % | 733 | 100.0 | % | ||||||||||
| Total Revenue | ||||||||||||||||
| EFT Platform | 7,397 | 95.9 | % | 7,971 | 94.5 | % | ||||||||||
| Other | 314 | 4.1 | % | 461 | 5.5 | % | ||||||||||
| Total Revenue | $ | 7,711 | 100.0 | % | $ | 8,432 | 100.0 | % | ||||||||
Three Months Ended March 31, | ||||||||||||||||
2019 | 2018 | |||||||||||||||
Percent of | Percent of | |||||||||||||||
Amount | Total | Amount | Total | |||||||||||||
Revenue By Type | ||||||||||||||||
License | $ | 2,634 | 28.0 | % | $ | 2,160 | 28.0 | % | ||||||||
M&S | 6,076 | 64.5 | % | 5,100 | 66.1 | % | ||||||||||
Professional Services | 703 | 7.5 | % | 451 | 5.8 | % | ||||||||||
Total Revenue | $ | 9,413 | 100.0 | % | $ | 7,711 | 100.0 | % | ||||||||
Revenue by Product Line | ||||||||||||||||
License | ||||||||||||||||
EFT Platform | $ | 2,584 | 98.1 | % | $ | 2,076 | 96.1 | % | ||||||||
Other | 50 | 1.9 | % | 84 | 3.9 | % | ||||||||||
Total License Revenue | 2,634 | 100.0 | % | 2,160 | 100.0 | % | ||||||||||
M&S | ||||||||||||||||
EFT Platform | 5,868 | 96.6 | % | 4,870 | 95.5 | % | ||||||||||
Other | 208 | 3.4 | % | 230 | 4.5 | % | ||||||||||
Total M&S Revenue | 6,076 | 100.0 | % | 5,100 | 100.0 | % | ||||||||||
Professional Services (all EFT Platform) | 703 | 100.0 | % | 451 | 100.0 | % | ||||||||||
Total Revenue | ||||||||||||||||
EFT Platform | 9,155 | 97.3 | % | 7,397 | 95.9 | % | ||||||||||
Other | 258 | 2.7 | % | 314 | 4.1 | % | ||||||||||
Total Revenue | $ | 9,413 | 100.0 | % | $ | 7,711 | 100.0 | % | ||||||||
Revenue from our EFT platform products decreased 7.2%increased 24% for the 20182019 quarter compared to the 20172018 quarter. Revenue fromfor our other product lines decreased 31.9%18% for the 20182019 quarter compared to the 20172018 quarter, which is consistent with our expectations as discussed below. For a more detailed discussion of these revenue trends, see Comparison“Comparison of the Condensed Consolidated Statement of Operations for the Three Months Ended March 31, 20182019 and 2017.
Liquidity and Capital Resources
Our total cash, cash equivalents certificates of deposit and working capital positions were as follows ($ in thousands):
| March 31, 2018 | December 31, 2017 | |||||||
| Cash and cash equivalents | $ | 11,653 | $ | 11,583 | ||||
| Short term certificates of deposit | 4,302 | 4,291 | ||||||
| Long term certificates of deposit | 11,558 | 11,503 | ||||||
| Total cash, cash equivalents and certificates of deposit | $ | 27,513 | $ | 27,377 | ||||
| Current assets | $ | 22,299 | $ | 23,296 | ||||
| Current liabilities | (16,617 | ) | (16,886 | ) | ||||
| Working capital | $ | 5,682 | $ | 6,410 | ||||
March 31, 2019 | December 31, 2018 | |||||||
Cash and cash equivalents | $ | 14,362 | $ | 9,173 | ||||
Current assets | $ | 21,271 | $ | 17,351 | ||||
Current liabilities | (16,834 | ) | (15,483 | ) | ||||
Working capital | $ | 4,437 | $ | 1,868 | ||||
When assessing our liquidity and capital resources, we consider the following factors:
● | Deferred revenue, unlike the other liability components of our working capital, is an obligation we will satisfy by providing services in the future to our customers as part of our ongoing operating activities from which we have historically generated cash flow. Our deferred revenue does not involve a disbursement of cash as a direct payment of that liability although we will incur operating expenses in the future as we deliver those M&S services. |
Our capital requirements principally relate to our need to fund our ongoing operating expenditures, which are primarily related to employee salaries and benefits. We make these expenditures to enhance our existing products, develop new products, sell those products in the marketplace and support our customers after the sale.
We rely on cash and cash equivalents on hand and cash flows from operations to fund our operating activities and believe those items will be our principal sources of capital for the foreseeable future. If our revenue declines and/or our expenses increase, our cash flow from operations and cash on hand could decline.
Cash provided or used by our various activities consisted of the following ($ in thousands):
Cash Provided (Used) During the Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Operating activities | $ | 826 | $ | 2,390 | ||||
| Investing activities | (429 | ) | (650 | ) | ||||
| Financing activities | (327 | ) | (235 | ) | ||||
Cash Provided (Used) During the Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Operating activities | $ | 5,973 | $ | 826 | ||||
Investing activities | (224 | ) | (429 | ) | ||||
Financing activities | (560 | ) | (327 | ) | ||||
Our cash provided by operating activities decreasedincreased during the 20182019 quarter compared to the 20172018 quarter primarily due to the following factors:
● | Accounts receivable decreasing $1.2 million during the |
● | Deferred revenue increasing $307,000 during the |
● | Federal income tax payable increasing $588,000 in the |
The amount of cash we used for investing activities during the 20182019 quarter decreased compared to the 20172018 quarter due primarily to:
Financing activities used more cash during the 20182019 quarter than during the 20172018 quarter primarily due to a moratorium on issuing shares of our common stock in connection with stock option exercises in the 2018 quarter that did not exist in the 2017 quarter.to:
● | The purchase of $375,000 of our common stock through open market stock repurchases. |
● | A one-time payment of $445,000 (net of tax benefit) to our former Chief Financial Officer to terminate certain stock option agreements. |
● | Lower dividend payments as a result of an increase in treasury shares due to our tender offer and open market share repurchase program. |
Offset by:
● | An increase in proceeds received from the exercise of stock options during the 2019 quarter compared to the 2018 quarter as a result of the moratorium on issuing shares of common stock in 2018, which was lifted in August of 2018. |
Contractual Obligations and Commitments
As of March 31, 2018,2019, our contractual obligations and commitments consisted primarily of the following items:
● | An obligation to deliver services in the future to satisfy our right to earn our deferred revenue of |
● | Trade accounts payable and accrued liabilities which include our contractual obligations to pay software royalties to third parties that vary in amount based on our sales volume of products upon which royalties are payable. |
● | Operating lease for our office space. |
● | Federal and state taxes. |
Subsequent to March 31, 2018, consisted primarily2019, we have 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 estimate that this will result in a Right-of-Use Asset and Lease Lability of approximately $3 million being recorded upon the commencement of the following ($ in thousands):
| Amounts Due for the Period | ||||||||||||||||||||
Nine Months Ending December 31, | Fiscal Years | |||||||||||||||||||
| 2018 | 2019 | 2020 | Thereafter | Total | ||||||||||||||||
| Prepaid royalty fees | $ | 800 | $ | 1,200 | $ | - | $ | - | $ | 2,000 | ||||||||||
| Operating leases | 270 | 120 | - | - | 390 | |||||||||||||||
| Total | $ | 1,070 | $ | 1,320 | $ | - | $ | - | $ | 2,390 | ||||||||||
As of March 31, 2018,2019, we had no interest-bearing obligations in the form of loans, notes payable or similar debt instruments.
Comparison of the Condensed Consolidated Statement of Operations for the Three Months Ended March 31, 20182019 and 20172018
Three Months Ended March 31, | ||||||||||||
2019 | 2018 | $ Change | ||||||||||
$ in thousands | ||||||||||||
Total revenues | $ | 9,413 | $ | 7,711 | $ | 1,702 | ||||||
Total cost of revenues | 1,434 | 1,616 | (182 | ) | ||||||||
Gross profit | 7,979 | 6,095 | 1,884 | |||||||||
Operating expenses | ||||||||||||
Sales and marketing | 1,916 | 3,107 | (1,191 | ) | ||||||||
General and administrative | 2,015 | 1,822 | 193 | |||||||||
Legal and professional | 576 | 1,680 | (1,104 | ) | ||||||||
Severance | 4 | 11 | (7 | ) | ||||||||
Research and development | 325 | 718 | (393 | ) | ||||||||
Total operating expenses | 4,836 | 7,338 | (2,502 | ) | ||||||||
Income (loss) from operations | 3,143 | (1,243 | ) | 4,386 | ||||||||
Other income | 24 | 76 | (52 | ) | ||||||||
Income (loss) before income taxes | 3,167 | (1,167 | ) | 4,334 | ||||||||
Income tax expense (benefit) | 747 | (232 | ) | 979 | ||||||||
Net income (loss) | $ | 2,420 | $ | (935 | ) | $ | 3,355 | |||||
| Three Months Ended March 31, | ||||||||||||
| 2018 | 2017 | $ Change | ||||||||||
| $ in thousands | ||||||||||||
| Total revenues | $ | 7,711 | $ | 8,432 | $ | (721 | ) | |||||
| Total cost of revenues | 1,618 | 1,535 | 83 | |||||||||
| Gross profit | 6,093 | 6,897 | (804 | ) | ||||||||
| Operating expenses | ||||||||||||
| Sales and marketing | 3,113 | 3,289 | (176 | ) | ||||||||
| General and administrative | 3,501 | 1,714 | 1,787 | |||||||||
| Research and development | 722 | 722 | - | |||||||||
| Total operating expenses | 7,336 | 5,725 | 1,611 | |||||||||
| Income (loss) from operations | (1,243 | ) | 1,172 | (2,415 | ) | |||||||
| Other income | 76 | 70 | 6 | |||||||||
| Income (loss) before income taxes | (1,167 | ) | 1,242 | (2,409 | ) | |||||||
| Income tax expense (benefit) | (232 | ) | 411 | (643 | ) | |||||||
| Net income (loss) | $ | (935 | ) | $ | 831 | $ | (1,766 | ) | ||||
In the discussion below, we refer to the three months ended March 31, 2018 as the “2018 quarter” and the three months ended March 31, 2017 as the “2017 quarter”. The percentage changes cited in our discussions are based on the 20182019 quarter amounts compared to the 20172018 quarter amounts.
Revenue.
The components of our revenues were as follows ($ in thousands):| Three Months Ended March 31, | ||||||||||||||||
| 2018 | 2017 | |||||||||||||||
| Percent of | Percent of | |||||||||||||||
| Amount | Total | Amount | Total | |||||||||||||
| Revenue By Type | ||||||||||||||||
| License | 2,160 | 28.0 | % | 2,578 | 30.6 | % | ||||||||||
| M&S | 5,100 | 66.1 | % | 5,121 | 60.7 | % | ||||||||||
| Professional Services | 451 | 5.8 | % | 733 | 8.7 | % | ||||||||||
| Total Revenue | $ | 7,711 | 100.0 | % | $ | 8,432 | 100.0 | % | ||||||||
| Revenue by Product Line | ||||||||||||||||
| License | ||||||||||||||||
| EFT Platform | $ | 2,076 | 96.1 | % | $ | 2,397 | 93.0 | % | ||||||||
| Other | 84 | 3.9 | % | 181 | 7.0 | % | ||||||||||
| 2,160 | 100.0 | % | 2,578 | 100.0 | % | |||||||||||
| M&S | ||||||||||||||||
| EFT Platform | 4,870 | 95.5 | % | 4,841 | 94.5 | % | ||||||||||
| Other | 230 | 4.5 | % | 280 | 5.5 | % | ||||||||||
| 5,100 | 100.0 | % | 5,121 | 100.0 | % | |||||||||||
| Professional Services (all EFT Platform) | 451 | 100.0 | % | 733 | 100.0 | % | ||||||||||
| Total Revenue | ||||||||||||||||
| EFT Platform | 7,397 | 95.9 | % | 7,971 | 94.5 | % | ||||||||||
| Other | 314 | 4.1 | % | 461 | 5.5 | % | ||||||||||
| $ | 7,711 | 100.0 | % | $ | 8,432 | 100.0 | % | |||||||||
Three Months Ended March 31, | ||||||||||||||||
2019 | 2018 | |||||||||||||||
Percent of | Percent of | |||||||||||||||
Amount | Total | Amount | Total | |||||||||||||
Revenue By Type | ||||||||||||||||
License | $ | 2,634 | 28.0 | % | $ | 2,160 | 28.0 | % | ||||||||
M&S | 6,076 | 64.5 | % | 5,100 | 66.1 | % | ||||||||||
Professional Services | 703 | 7.5 | % | 451 | 5.8 | % | ||||||||||
Total Revenue | $ | 9,413 | 100.0 | % | $ | 7,711 | 100.0 | % | ||||||||
Revenue by Product Line | ||||||||||||||||
License | ||||||||||||||||
EFT Platform | $ | 2,584 | 98.1 | % | $ | 2,076 | 96.1 | % | ||||||||
Other | 50 | 1.9 | % | 84 | 3.9 | % | ||||||||||
| 2,634 | 100.0 | % | 2,160 | 100.0 | % | |||||||||||
M&S | ||||||||||||||||
EFT Platform | 5,868 | 96.6 | % | 4,870 | 95.5 | % | ||||||||||
Other | 208 | 3.4 | % | 230 | 4.5 | % | ||||||||||
| 6,076 | 100.0 | % | 5,100 | 100.0 | % | |||||||||||
Professional Services (all EFT Platform) | 703 | 100.0 | % | 451 | 100.0 | % | ||||||||||
Total Revenue | ||||||||||||||||
EFT Platform | 9,155 | 97.3 | % | 7,397 | 95.9 | % | ||||||||||
Other | 258 | 2.7 | % | 314 | 4.1 | % | ||||||||||
| $ | 9,413 | 100.0 | % | $ | 7,711 | 100.0 | % | |||||||||
Our total revenue decreased 8.6%increased 22%. Revenue from our EFT platform products and services decreased 7.2%increased 24%. Revenue from our other products that consist of Mail Express, WAFS, CuteFTP, and TappIn decreased to comprising 4.1%less than 3% of our total revenue, which is a trend that is in line with our ongoing de-emphasis of those products.
As of January 1, 2019, Mail Express and WAFS are no longer being offered for sale, however we will continue to offer product support
EFT Platform Products
License revenue from our EFT platform products decreased 13.4%increased 24%. Historically, we have been ableThis increase was primarily due to close several large EFT platform sales each quarter. During the 2018 quarter, we did not achieve our typical level of success in doing so. There was no single common factor that caused large deals in our sales pipeline not to close. We do not believe there has been any fundamental decline in demand for our productsan increase in the markets we serve. Instead, we believe we encountered a situation where an unusually large number of those potential customers deferred their buying decisionslarge transactions, including transactions that were expected to later periods as a result of their assessment of business factors unique to each of them. In addition, we changed our lead generation strategy toward the end of 2017 which lead to a temporary drop in selling opportunitiesoriginally close in the 2018previous quarter. We do not believe the decrease in license revenue from our EFT platform products is indicative of a long-term trend.
M&S revenue from our EFT platform products increased 1%20% primarily due to:
● | The addition of sales resources that are focused on (i) increasing the number of customers 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 customers who initially purchased these services in earlier periods. We believe these renewals are the result |
Our professional services revenue was $282,000 less$252,000 more for the 20182019 quarter compared to the 20172018 quarter which is a decreasean increase of 38%56%. This decreaseincrease was primarily relateddue to the decreased license revenue from our EFT platform since there generally is a direct relationship between the licenses our customers purchase and their need for professional services.
Cost of Revenues.
These expenses are associated with the production, delivery and support of our products and services. We believe it isCost 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 products that is generally an expense that is variable relative to revenue. |
● | Fees we pay to third parties who provide services supporting our SaaS and cloud-based subscription solutions that generally have components that are both variable and not variable relative to revenue. |
Cost of M&S revenue and cost of professional services revenue consist primarily of salaries and related costs of our employees and third parties we use to deliver these services.
Cost of software license revenue increased 1.7%decreased 21% and as a percent of software license revenue was 35.7%23% in the 2019 quarter compared to 36% in the 2018 quarter compared to 29.4% in the 2017 quarter. While the change in absolute dollars is relatively flat, the cost as a percent of the related revenue increasedThese decreases were primarily due to thea decrease in amortization of capitalized software development costs which is a cost that does not fluctuate based upon the number of units sold.
Cost of M&S revenue as a percent of M&S revenue was 10.2%9% in the 20182019 quarter as compared to 8.1%10% in the 20172018 quarter. Cost of revenue for M&S in absolute dollars increased by 26.4%2%. These increases were a combination ofdue to increasing our headcount in our customer support department and the decision by the U.S. Army to consolidate certain of their operations resulting in the non-renewal of their M&S contract.
Cost of professional services revenue as a percent of that revenue was 72.1%42% in the 20182019 quarter as compared to 50.0%72% in the 20172018 quarter. This variation resulted from the varying scope and mix of the professional services we deliver that can change from period-to-period in response to the circumstances of the customer environments in which we are working. Because the cost of revenue for professional services is highly variable relative to our revenue from our services, this cost in absolute dollars decreased 10.7%10% primarily due to a decrease in ouroutsourced professional services revenue for the reasons discussed above.
Sales and Marketing.
We believe itGeneral and Administrative.
These expenses increasedLegal and Professional. These expenses decreased 66% primarily due to decreases in professional fees and related expenses associated with the previously disclosed internal investigation, the restatement of certain of our financial statements and related litigation described in Note 11 of the notes to our condensed consolidated financial statements.
Research and Development.
The overall profile of our research and development| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| R&D expenditures expensed | $ | 722 | $ | 722 | ||||
| R&D expenditures capitalized | 402 | 462 | ||||||
| Total R&D expenditures (non-GAAP measurement) | $ | 1,124 | $ | 1,184 | ||||
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
R&D expenditures expensed | $ | 325 | $ | 718 | ||||
R&D expenditures capitalized | 201 | 402 | ||||||
Total R&D expenditures (non-GAAP measurement) | $ | 526 | $ | 1,120 | ||||
Our total R&D expenditures decreased 5%53% during the 2019 quarter as compared with the 2018 quarter primarily due to shortages of qualifiedfewer employed software engineers and technical personnel that caused some of our open positions that arise during the normal course of business to take longer to fill.
Total resources expended for R&D set forth above as total R&D expenditures serves to illustrate our total corporate efforts to improve our existing products and to develop new products regardless of whether or not our expenditures for those efforts were expensed or capitalized. Total resources expended for R&D is not a measure of financial performance under GAAP and should not be considered a substitute for R&D expense (set forth above as R&D expenditures expensed) and capitalized software development costs (set forth above as R&D expenditures capitalized) individually. While we believe the non-GAAP total resources expended for R&D amount provides useful supplemental information regarding our overall corporate product improvement and new product creation activities, there are limitations associated with the use of this non-GAAP measurement. Total resources expended for R&D is a non-GAAP measure not prepared in accordance with GAAP and may not be comparable to similarly titled measures of other companies since there is no standard for preparing this non-GAAP measure. As a result, this non-GAAP measure of total resources expended for R&D has limitations and should not be considered in isolation from, or as a substitute for, R&D expense and capitalized software development costs individually.
Interest Income (Expense), Net.
Interest income (expense), netIncome Taxes.
Our effective● | Certain expenses in our condensed consolidated financial statements, such as a portion of meals and |
● | State income taxes included in income tax expense in our condensed consolidated financial statements. |
Offset by:
● | The research and development credit which |
● | The foreign derived intangible income deduction which was a |
Not Applicable.
Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report, our Chairman of the Board and procedures designed to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our President andInterim Chief Executive Officer and our Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Overover Financial Reporting
There have been no changechanges in our internal control over financial reporting that occurred during the quarterly period covered by this report and during the subsequent time period through the filing of this Form 10-Qquarter ended March 31, 2019 that have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
The information set forth under “Note 1211 – Commitments and Contingencies – Legal and Regulatory Matters” to the notes to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-QQuarterly Report is incorporated herein by reference.
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 20172018 Form 10-K filed with the SecuritiesSEC on March 18, 2019. Except as set forth in this Quarterly Report, the risks and Exchange Commission on June 14, 2018.uncertainties described in “Item 1A. Risk Factors” of our 2018 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.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share repurchase activity during the three months ended March 31, 2019 was as follows
Total number of | Maximum | |||||||||||||||
Total | shares purchased | dollar value | ||||||||||||||
number of | Average | as part of publicly | of shares | |||||||||||||
shares | price per | announced plans | that may yet | |||||||||||||
purchased | share | or programs | be purchased | |||||||||||||
January 1 - | ||||||||||||||||
January 31, 2019 | 12,097 | 4.49 | 12,097 | $ | 963,287 | |||||||||||
February 1 - | ||||||||||||||||
February 28, 2019 | 7,735 | 4.51 | 7,735 | $ | 928,408 | |||||||||||
March 1 - | ||||||||||||||||
March 31, 2019 | 48,726 | 5.49 | 48,726 | $ | 641,945 | |||||||||||
Total | 68,558 | 68,558 | 641,945 | |||||||||||||
On October 29, 2018, the Company announced that its Board of Directors had authorized a stock repurchase program. Under the date for our 2018 annual meetingprogram, the Company may purchase up to $5,000,000 of stockholders (the “2018 Annual Meeting”). Becauseits outstanding common stock. Under the 2018 Annual Meeting date will represent a changestock repurchase program, the Company intends to repurchase shares through authorized Rule 10b5-1 plans (which permits the Company to repurchase shares when the Company might otherwise be precluded from doing so under insider trading laws), open market purchases, privately-negotiated transactions, block purchases or otherwise in accordance with applicable federal securities laws including Rule 10b-18 of more than thirty days from the anniversary of our 2017 annual meeting of stockholders held on May 10, 2017,Exchange Act. The $641,945 above represents the deadline forfunds remaining available to repurchase shares under the receipt of stockholder proposals for the 2018 Annual Meeting will change. When we set the date for our 2018 Annual Meeting, we will publicly announce such date and deadlines for the receipt of stockholder proposals.current plan at March 31, 2019.
(a) | Exhibits |
10.1 | ||
31.1* | ||
31.2* | ||
32.1* | ||
101 | Interactive Data File. | |
* | Filed herewith. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GLOBALSCAPE, INC. | |||
May 10, 2019 | By: | ||
/s/ Karen J. Young | |||
Date | Karen J. Young | ||
Chief Financial Officer |