Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of April 30,October 31, 2017 there were 21,571,83121,793,131 shares of common stock outstanding.
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 are the property of their respective owners.
Part I. Financial Information
Earnings per share for the periods indicated were as follows ($ in thousands, except per share amounts):
We have agreements with key personnel that provide for severance payments to them in the event of a change in control 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 $1.9$2.0 million.
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 both the 2017 quarter and 2016 quarter, we earned approximately 14% and 17%, respectively, of our revenue from such sales through our largest, third-party channel distributor. During the 2017 nine months and 2016 nine months, we earned approximately 14% of our revenue from such sales through our largest, third party,third-party channel distributor. As of March 31,September 30, 2017, approximately 16%15% of our accounts receivable were due from this channel distributor with payment for substantially all such amounts having been received subsequent to that date.
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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q 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, and Section 21E of the Securities and Exchange Act of 1934, as amended. “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 20152016 Form 10-K10-K/A and other documents filed with the Securities and Exchange Commission. 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 2017 quarter and the 2016 quarter refer to the three months ended March 31,September 30, 2017 and 2016, respectively. Our references to the 2017 nine months and the 2016 nine months refer to the nine months ended September 30, 2017 and 2016, 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 overmore than twenty years and havehaving sold our products to thousands of enterprises and more than one million individual consumers throughout the world.globally.
Our primary business is selling and supporting managed file transfer, or MFT, software for enterprises. The brand name of our MFT product platform is Enhanced File Transfer, or EFT. 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.
We earn most of our revenue from the sale of EFT and products that are part of our EFT platform. We earn revenue from the sale of perpetual software licenses, providing products under software-as-a-service, or SaaS subscriptions, providing maintenance and support services, or M&S, and offering professional services for product customizationimplementation, integration and integration.training.
We also sell other products that are synergistic to EFT including Mail Express, WAFS, and CuteFTP. Collectively, these products constitute less than 10% of our total revenue.
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 our EFT platform products. We expect to expend minimal resources developing and selling our other products. We believe our EFT platform products and business capabilities are well-positioned to compete effectively in the market for MFTthese products. For a more comprehensive discussion of the products we sell and the services we offer, see Software Products and Services below.
As a corporation, we have won multiple awards for performance and reputation, including:
- | Named to the CRN 2017 Cloud Partner Program Guide which recognizes partner programs with distinguished margins, sales support and cloud resources |
- | Received three awards from the 2017 Golden Bridge Awards for distinguished technology achievements which included: |
§ | Cloud/SaaS Innovations (Gold Winner) – EFT on Amazon Web Services or Microsoft Azure |
§ | Managed File Transfer Innovations (Gold Winner) – The EFT Accelerate module |
§ | Governance, Risk and Compliance Innovations (Bronze Winner) – EFT platform |
- | Received two awards from the Network Product Guide 2017 IT World Awards for achievements in product excellence that included: |
- | Governance, Risk and Compliance (Gold Winner) – EFT. |
- | Cloud Security (Silver Winner) – EFT Cloud Services. |
- | Recognized as a Best Place to Work in IT by Computerworld for the fourth consecutive year and sixth time overall. |
- | Recognized for three Info Security Products Guide 2017 Global Excellence Awards for distinguished achievements in product innovation in categories that included: |
| - | Innovation in Compliance (Gold Winner) – Enhanced File TransferTransfer. |
| - | Cloud/SaaS Solutions (Gold Winner) – EFT Cloud ServicesServices. |
| - | BYOD Security (Bronze Winner) – EFT WorkspacesWorkspaces. |
- | Honored as a Best Company to Work for in Texas by Best Companies Group (BCG), Texas Monthly, the Texas Association of Businesses (TAB), and Texas SHRM. |
- | Received a 5-Star rating in The Channel Company’s CRN 2017 Partner Program Guide for the third year in a row. |
| - | Honored with the 2017 Total Rewards & Benefits Excellence Award by the HRO Today Services and Technology Association. |
| - | Selected as a finalist in the 2017 Cybersecurity Product Awards Secure File Transfer: EFT EnterpriseEnterprise. |
| - | Recognized as a 2016 Top Workplace by San Antonio Express-News, marking our sixth recognition as a Top Workplace in San Antonio. |
- | Earned awards from the Golden Bridge Awards for several categories, including: |
- | Enhanced File Transfer (EFT) – Gold Winner in Access Compliance and Risk Management. |
- | EFT Cloud Services – Gold Winner in Managed File Transfer. |
- | Selected for awards from Network Products Guide for the 2016 IT World Awards in several categories, including: |
- | EFT Workspaces module, a part of Enhanced File Transfer - Gold Winner in BYOD Security |
- | Enhanced File Transfer (EFT) - Bronze Winner in Compliance |
- | Mail Express - Bronze Winner in Email Security and Management |
- | Named as Leader in Secure Information Exchange Services 2016 – Texas by the Corp America 2016 Small Cap Awards. |
| - | Earned awards from Info Security Guide in several categories, including: |
| - | EFT Workspaces – Gold Winner in BYOD Security. |
| - | Enhanced File Transfer – Silver Winner in Compliance. |
| - | EFT Cloud Services – Bronze Winner in Cloud Security. |
| - | Mail Express – Bronze Winner in Email Security and Management. |
| - | Received a 5-Star rating in The Channel Company’s CRN 2016 Partner Program Guide for the second year in a row. |
| - | Named by Texas Monthly magazine as one of the best companies to work for in Texas for the sixth year in a row with a ranking of #16 in the medium size category. |
| - | Honored as the HR Employer of the Year and Excellence in Engagement Strategy in North America by the HRO Today Services and Technology Association. |
| - | Recognized by the San Antonio Business Journal as a 2016 Best Place to Work, making this the fifth time GlobalSCAPE has received this honor. |
| - | Named by Computerworld as one of the best companies to work for in IT for the third consecutive year with a ranking of #3 in the small company category. |
Key Business Metrics
We review a number of 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 are 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:
· | Ongoing innovation of our EFT platform to address the expanding needs of our existing customers and enhancingto enhance our products’ appeal to new customers. |
· | Licensing, developing and/or acquiring technologies with features and functions that are complementary to and synergistic with our EFT platform so as to expand the breadth of our products offerings. |
· | Enhancing our sales and marketing programs to improve identification of potential demand for our products and to increase the rate at which we are successful in selling our products. |
To support product innovation, we continue to enhance our software engineering group and our focus on optimizing the manner in which we assess the development of new technologies, our approach to managing those projects, and the timelines over which we do that work.
We remain alert for attractive opportunities to collaborate with others or perhaps combine other revenue-producing technologies with ours to expand our product offerings and reach. To that end, we continually assess products and services offered by others that might be synergistic with our existing products. We may elect to take advantage of those opportunities through cooperative marketing agreements or licensing arrangements or by acquiring an ownership position in the enterprise offering the opportunity.
In continuing to develop our demand generation activities, we have made and continue to make ongoing changes in sales and marketing including:
· | Increasing sales staff capacity as needed to address our markets. |
· | Aligning our sales group to enhance its industry and geographic focus. |
· | Implementing new sales and marketing campaigns. |
· | Using third partythird-party digital marketing experts with search engine optimization expertise to enhance our efforts in this area. |
· | Evolving our lead generation programs to increase our sales staff’s exposure to potential purchasers. |
· | Enhancing our support of channel partners and engaging them to sell our products through training, orientation and marketing programs. |
As part of growing revenue in total, we are focused on increasing license revenue both in terms of absolute dollars and as a percent of total revenue. When we sell our licensed products, we also typically create a recurring revenue stream from M&S since almost all purchasers of our licensed enterprise products also purchase an M&S contract. Most of our M&S contracts are for one year although we also sell multi-year contracts. The customer pays us the M&S fee for the entire term of the agreement at the time the contract begins. We recognize that amount as revenue ratably in future periods over the term of the contract.
We typically experience a high renewal rate for M&S services for our enterprise products so long as a customer continues using the licensed product they purchased from us. As a result, growing license revenue not only contributes to increasing revenue growth at the time the license is sold but also provides a foundation for future recurring revenue as the purchasers of our licensed products renew M&S contracts to support their ongoing product support needs. This pattern of activity can create a cumulative effect for M&S renewals as a result of the cumulative number of licensed software installations sold over multiple years that create M&S renewals in any single year predictably (and in line with our expectations) exceeding the number of new software licenses we sell in a single year. We expect this cumulative effect to continue to grow if we continue to increase enterprise software license revenue in future periods. For these reasons, we expect M&S revenue will remain a substantial part of our total revenue.
See Comparison of the Consolidated Statement of Operations for the Three Months Ended March 31,September 30, 2017 and 2016 and Comparison of the Consolidated Statement of Operations for the Nine Months Ended September 30, 2017 and 2016 for a discussion of trends in our revenue growth that we monitor using this metric.
Bookings
Bookings is a business metric we use to measure the success of our sales and marketing programs. For this purpose, we define bookings as the sum of the sales of:
· | M&S contracts sold with software licenses for which the M&S services will be delivered within the next year. |
· | SaaS arrangements for up to one year. |
Most of the resources we expend for sales and marketing are targeted toward increasing our revenue from the four sources listed above. M&S contract renewals bookings, which are an additional source of revenue for us, typically are not significantly dependent upon our sales and marketing programs to be successful. Based upon these factors, beginning in 2017, we revised the definition our bookings metric to exclude amounts related to renewals of M&S contracts so as to better measure the success of our sales and marketing programs.
Bookings is not a measure of financial performance under GAAP and should not be considered a substitute for revenue. Bookings has limitations as an analytical tool and when assessing our operating performance. Bookings should not be considered in isolation or as a substitute for revenue or other income statement data prepared in accordance with GAAP.
Our bookings trends and the reconciliation of bookings to revenue are as follows ($ in thousands):
| | Three Months Ending March 31, | |
| | 2017 | | | 2016 | |
| | | | | | |
Revenue | | $ | 8,317 | | | $ | 7,387 | |
| | | | | | | | |
Products and services sold for which we will recognize revenue at a future date when the goods and services are delivered to and accepted by the customer | | | 2,218 | | | | 1,773 | |
| | | | | | | | |
Products and services delivered to and accepted by the customer for which revenue recognition had been deferred in the past at the time of booking | | | (6,643 | ) | | | (5,534 | ) |
| | | | | | | | |
Bookings | | $ | 3,892 | | | $ | 3,626 | |
Our bookings increased 7.3%. This increase was a result of our continuing development and implementation of sales and marketing programs designed to increase the level of our sales of software licenses.
Amounts we previously reported as bookings reconcile to the bookings in the table above as follows:
| Three Months Ended | |
| March 31, 2016 | |
| | |
Bookings as previously reported | | $ | 7,779 | |
| | | | |
M&S renewals and M&S to be delivered beyond one year in the future not part of bookings | | | (4,153 | ) |
| | | | |
Bookings as now reported | | $ | 3,626 | |
While M&S renewals and M&S to be delivered beyond one year in the future are not part of bookings, we record and include these items in deferred revenue on our balance sheet at the time we record them as an account receivable.
In connection with the past, we reported bookings metric we previously reported, we also reportedand potential future revenue as a key business metric.metrics. With the refinement of our bookingsrevenue growth key business metric discussed above, we no longer rely on bookings or potential future revenue as a key business metricmetrics since we have determined that our revenue growth metric discussed above is the primary metric upon which we rely to measure the success of sales and marketing programs and our outlook for revenue in the future.
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 and cash flow from our operations that is supplemental and secondary to our primary assessment of net income as presented in our condensed consolidated statement of operations and comprehensive income and of cash flow from operating activities as presented on our condensed consolidated statement of cash flows.income. We use Adjusted EBITDA to provide another perspective for measuring profitability and cash flow from our core operating activities that does not include the effects of expenses that typically do not require us to pay them in the current period (such as depreciation, amortization and share-based compensation), the cost of financing our business, and the effects of income taxes, as well as the effects on our cash of changes in certain balance sheet items such as accounts receivable and accounts payable. following items:
· | Expenses that typically do not require us to pay them in cash in the current period (such as depreciation, amortization and share-based compensation); |
· | The cost of financing our business; |
· | The effects of income taxes. |
We monitor the components of Adjusted EBITDA to assess our actual performance relative to our plans, budgetsintended strategies, expected patterns of action, and expectations andbudgets. We use the results of that assessment to adjust our future activities to the extent we deem necessary. Our Adjusted EBITDA results indicate that we have been able to sustain consistently positive cash flow to help fund our future operations.
Adjusted EBITDA is not a measure of financial performance under GAAP. It should not be considered as a substitute for net income presented on our condensed consolidated statement of operations and comprehensive income or for net cash provided by operating activities presented on our condensed consolidated statement of cash flows.income. Adjusted EBITDA has limitations as an analytical tool and when assessing our operating performance. Adjusted EBITDA should not be considered in isolation or without a simultaneous reading and consideration of our consolidated financial statements prepared in accordance with GAAP.
We compute Adjusted EBITDA as follows ($ in thousands):
| | Three Months Ended | | | Three Months Ended | | | Nine Months Ended | |
| | March 31, | | | September 30, | | | September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Net Income | | $ | 751 | | | $ | 392 | | | $ | 276 | | | $ | 1,334 | | | $ | 1,564 | | | $ | 2,558 | |
Add (subtract) items to determine adjusted EBITDA: | | | | | | | | | |
Add (subtract) items to determine Adjusted EBITDA: | | | | | | | | | | | | | | | | | |
Income tax expense | | | 322 | | | | 174 | | | | 194 | | | | 705 | | | | 870 | | | | 1,397 | |
Interest (income) expense, net | | | (70 | ) | | | (33 | ) | | | (75 | ) | | | (28 | ) | | | (221 | ) | | | (88 | ) |
Depreciation and amortization: | | | | | | | | | | | | | | | | | | | | | | | | |
Total depreciation and amortization | | | 541 | | | | 501 | | | | 547 | | | | 513 | | | | 1,604 | | | | 1,522 | |
Amortization of capitalized software development costs | | | (474 | ) | | | (430 | ) | | | (484 | ) | | | (450 | ) | | | (1,404 | ) | | | (1,319 | ) |
Stock-based compensation expense | | | 324 | | | | 222 | | | | 381 | | | | 231 | | | | 1,053 | | | | 753 | |
Adjusted EBITDA | | $ | 1,394 | | | $ | 826 | | | $ | 839 | | | $ | 2,305 | | | $ | 3,466 | | | $ | 4,823 | |
See Comparison of the Consolidated Statement of Operations for the Three Months Ended March 31,September 30, 2017 and 2016 and Comparison of the Consolidated Statement of Operations for the Nine Months Ended September 30, 2017 and 2016 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, file transfer, and file sharing capabilities for enterprises and consumers. We have been in business for overmore than twenty years and havehaving sold our products to thousands of enterprises and more than one million individual consumers throughout the world.globally.
Our primary business is selling and supporting MFT software for enterprises. MFT software facilitates the transfer of data from one location to another across a computer network within a single enterprise or between multiple computer networks in multiple enterprises. These transfers may be ongoing, repetitive activities executed by automated software routines that occur without human intervention, or they may be transfers that people create and complete in the absence of automated routines or as a result of ad-hoc, special situations that arise from time-to-time. Examples of enterprise-level activities that rely on MFT software include:
· | Transfer of transactional information within an enterprise on a repetitive basis from one geographic location to another, such as a transfer of deposit and withdrawal information throughout the day from a branch of a bank to a central data processing center at another location. |
· | Movement of accumulated information within an enterprise from one data processing application to another on a periodic basis, such as a transfer of bi-weekly payroll information from a payroll system that is used to pay employees to a job cost system that is used to manage the cost of a project. |
· | Exchange of information between enterprises to facilitate the completion of one or more business transactions, such as a retailer transmitting inventory purchasing requirements produced by its material requirements planning system to an order entry system at a supplying vendor. |
We have multiple revenue streams from our MFTEFT Platform products that include:
· | Perpetual software licenses under which customers pay us a one-time fee for the right to install our products in their information systems environment on computers they manage and either own or otherwise procure from a cloud services provider, including deploying our products at a cloud services provider in a bring-your-own-license, or BYOL, environment. |
· | Cloud-based, hosted SaaS solutions that we sell on an ongoing subscription basis resulting in our earning a recurring, monthly subscription fee to access the service. |
· | Professional services for product customizationinstallation, integration and integration.training. |
In June 2017, we introduced a data integration product that we planned to sell under the brand name Kenetix. We licensed the technology for this product from a third-party. We 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 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 our EFT platform. We believe the EFT product platform and its business capabilities are well-positioned to compete effectively in the market for MFT products. For a more comprehensive discussion of the products we sell and the services we offer, see below.
We also sell products that can be synergistic to our MFT products.EFT platform. These products have capabilities that:
· | Support information sharing and exchange capabilities using traditional email systems. |
· | Enable enterprise file synchronization and sharing. |
· | Enhance the ability to replicate, share and backup files within a wide area network or local area network, thereby allowing users to access their data at higher speeds than possible with most alternate approaches. |
· | Support file transfers by individuals and small businesses. |
We earn most of our revenue from the sale of our MFTEFT Platform products that support business-to-business activities and are strategically focused on selling products in that environment. The
We intend to expend the majority of our resources that we will expend in the future for product research and development, marketing, and sales will concentratein a manner that concentrates on the MFT business-to-business market. We believe our products and business capabilities are well-positioned to compete effectively in that market.
Some of our products support consumer-oriented file transfers and file sharing. Even though these products are profitable on an overall basis, we anticipate the future resources we will expend related to products sold to consumers and the associated revenue we earn from those products will continue to be a minor part of our business.
The following discussion following presents a summary description of our specific products and solutions.
Managed File Transfer – Enhanced File Transfer Platform
Enhanced File Transfer, or EFT, is the brand name of our core MFT product platform. Our EFT was awardedplatform products received multiple industry awards in compliance categories in 20162017 including the 20162017 Golden Bridge awards, the Network Product Guide’s 20162017 IT World Awards, and the 20162017 Info Security Products Guide Global Excellence Awards.
The EFT platform provides users the ability to securely transmit data from one location to another using any number of files of any size or configuration. It facilitates management, monitoring, and reporting on file transfers and delivers advanced data transfer workflow capabilities to move data and information into, out of, and throughout an enterprise. Notable features and capabilities of the EFT platform include:
· | State-of-the-art, enterprise-level security when transferring information within or between computer networks as well as for collaboration with business partners, customers, and employees. EFT provides automation that supports effective integration of back-end systems. It has built-in regulatory compliance, governance, and visibility controls to provide a means of safely maintaining information. EFT offers a high level of performance and scalability to support operational efficiency and maintain business continuity. Administrative tools are provided at various levels of granularity to allow for complete control and monitoring of file transfer activities. |
· | 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 the secure, flexible transmission of critical information using servers, desktop, and notebook computers and a wide range of network-enabled mobile devices, our products also provide customers with the ability to monitor and audit file transfer activities. |
· | Compliance with government regulations and industry standards relating to the protection of information while allowing users to reduce information systems and technologies costs, increase efficiency, track and audit transactions, and automate processes. Our solutions also provide data replication, acceleration of file transfer, sharing/collaboration, and continuous data backup and recovery to our customers.recovery. |
The EFT platform provides a common, scalable MFT environment that accommodates a broad family of accompanying modules to provide enterprises with increased security, automation, and performance when compared to traditional FTP-based and e-mail delivery systems. Various optional modules allow users to select the solution configuration most applicable to their requirements for auditing and reporting, encryption, ad hoc and web-based file transfers, operability in or through a DMZ network, and integration with back-end business processes, including workflow automation capabilities.
Since 2015, we have released new versions of our EFT platform and new modules which added several enhancements and capabilities including:
· | Advanced Authentication Module (AAM) that increases the interoperability of EFT with multiple authentication methods. AAM provides a single source of authentication across a customer’s infrastructure. |
· | EFT Workspaces, which is a file-sharing module that allows employees to create their own groups and assign permissions for those groups, much like a virtual data room, to provide access to files for which they themselves have access on the EFT server. This functionality is accomplished without compromising the security, control, and governance of those files. |
· | AAn EFT Workspaces Microsoft® Outlook plugin that provides secure ad hoc file transfers via email, providing customers with the reporting features in EFT and combining them with the simplicity and security of sending files with Mail Express. The integration of these two products takes the best features in Mail Express and incorporates them into EFT. |
· | Accelerate, which is an accelerated file transfer module that boosts the speed and efficiency of secure data transfers and allows for the fast transfer of large files over disparate geographic distances. |
· | Enhanced compatibility of web transfer client file transfers through HTML5 support in addition to the existing Java Runtime Environment. |
· | Increased scalability and business continuity with more flexible, uninterrupted file transfer service. |
· | Improved facilitation of PCI DSS version 3.0 compliance with updates to data security components, such as PGP and AS2.protocols. |
· | Enhanced and expanded event rule functionality which improves the ability to integrate our products with client business processes and backend systems. |
· | Support for active-active high availability in Amazon Web Services.Services to accommodate for bursts or dips in network traffic, and provide improved resiliency, scalability and flexibility. |
· | Enhanced security features supporting improved compliance with HIPPAHealth Insurance Portability and Accountability Act of 1996 (or HIPAA) guidelines. |
· | EFT Insight, which is a new reporting platform that provides enhanced intelligence and analytics regarding file transfer activity that occurs within EFT. |
We expect to continue to enhance the EFT platform with capabilities that improve its speed and responsiveness of performance, provide additional administration flexibility supporting cross-platform implementation with our DMZ Gateway solution, offer business activity monitoring,more robust reporting capabilities, and provide additional language support.
Most EFT customers choose to purchase a perpetual software license for a one-time fee paid at the time of purchase and under which they install the software on equipment they own and/or manage. In almost all cases, they also purchase ongoing M&S for which they pay us a recurring, annual amount that typically is 20% to 30% of the price of the software license.
If a customer prefers to use the capabilities of EFT in a SaaS fashion, we offer EFT Cloud Services for a monthly subscription fee. The EFT platform delivered in this manner has the same features and functionality as our EFT platform installed at a customer site. EFT Cloud Services allows users to reduce their upfront cost and achieve other recognized benefits of cloud-based managed file transfer SaaS subscription solutions including strong service level agreements for information technologies infrastructure reliability and performance. EFT can also be deployed for customers, on a BYOL basis, in their infrastructures running through Amazon Web Services or Microsoft Azure. We have also initiated offering EFT Enterprise direct to buyers on a pre-deployed basis in the Amazon Web Services and Microsoft Azure Marketplaces.
EFT Cloud Services provides a flexible continuum of features and functions that gives the user the ability to pick and choose the extent to which they want to own or outsource the capabilities of our EFT platform. EFT Cloud Services gives organizations the flexibility of deploying on-premises, in the cloud or in a hybrid cloud environment with all of the security, compliance, scalability, and visibility features of an on-premises managed file transfer solution. Users of EFT Cloud Services have the option to work with a variety of top hosting providers that best fit their needs. We offer flexible subscription pricing under one, two, and three-year contracts that can help our customers minimize or eliminate upfront capital expenditures and possibly reduce their ongoing operating costs. Subscription revenue from EFT Cloud Services or EFT on AWS or Azure, which is on a BYOL basis or pre-deployed within either infrastructure provider’s marketplace, is increasing but is not yet a material portion of the total revenue from our EFT platform.
Secure Information Sharing and Exchange Solution – Mail Express
Mail Express is a solution that provides secure information sharing and exchange capabilities leveraging traditional email workflow. It is a stand-alone product installed in a client-server environment that allows users to send and receive secure, encrypted e-mail and attachments of virtually unlimited size. Mail Express was a Bronze Winner in Email Security and Management by Network Products Guide’s 2016 IT World Awards.
To broaden the appeal and capabilities of Mail Express, we are developingcontinue to develop and add functionality that integrates the features of Mail Express into the EFT platform.platform through the Workspaces Microsoft® Outlook Plugin. This integration will taketakes the superior control, visibility and monitoring capabilities of the EFT platform and makemakes them available to administrators and users in an email environment. This integrated product will improve operational efficiency by providing a coordinated user interface through which data movement activities using both our EFTThe Workspaces Microsoft® Outlook Plugin combines the technology and features available in Mail Express products can be managed.with the functionality of Workspaces and integrates them directly into EFT Enterprise.
Wide Area File Services Solution - WAFS
Our WAFS software product uses data synchronization to further enhance the ability to replicate, share and backup files within a wide area network or local area network thereby allowing users to access their data at higher speeds than possible with most alternate approaches. The software uses byte-level differencing technology to update changes to files with minimal impact on network bandwidth while also ensuring that files are never overwritten, even if opened by other remote users. Other key features of WAFS include native file locking, replication to multiple locations simultaneously, adherence to access control list file permissions, and full UTF-8 support.
We will continue to offer WAFS as a stand-alone product and provide M&S services to customers who purchased WAFS in the past and who purchase it in the future. We do not expect to expend significant resources in the future expanding the features and capabilities of WAFS.
File Transfer Solution for Consumers - CuteFTP
CuteFTP is our original product introduced in 1996. It is a file transfer program generally used by individuals and small businesses. It remains popular today and generates incremental revenue for us at a relatively low cost.
CuteFTP continues to have significant brand recognition in the market. Our current CuteFTP Version 9 introduced several notable new features including:
· | Support for Unicode (UTF-8) characters that allows greater international use. |
· | Web Distributed Authoring and Versioning (WebDAV) support to facilitate collaboration between users in editing and managing documents and files stored on World Wide Web servers. |
Version 9 simplified our CuteFTP product line by consolidating all the features of our previous multi-product CuteFTP product line for Windows operating systems into this single version. We continue to offer CuteFTP Version 3.1 software for Mac platforms. We believe current versions of CuteFTP appeal to users wanting features more robust than offered in free alternatives such that it will be a product competitive in the marketplace for the foreseeable future.
We will continue selling CuteFTP as a stand-alone product and providing M&S services to customers who purchased CuteFTP in the past and who purchase it in the future.future but we will not invest significantly in marketing the product. We do not expect to expend significant resources in the future expanding the features and capabilities of CuteFTP.
Professional Services
We offer a range of professional services to complement our on-premises and SaaS solutions. These professional services include product customization and system integration, solution “quickstart” implementations, business process and workflow, policy development, education and training, and solution health checks. In addition, we may provide longer-term engineering services, including supporting multi-year contracts, if necessary, to support certain solution implementations and integrations.
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 pay us a recurring, annual amount 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 employees is as follows:
| | March 31, | | | September 30, | |
Department | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Sales and Marketing | | | 52 | | | | 46 | | | | 56 | | | | 44 | |
Engineering | | | 36 | | | | 29 | | | | 30 | | | | 28 | |
Professional Services | | | 8 | | | | 14 | | | | 6 | | | | 12 | |
Customer Support | | | 21 | | | | 20 | | | | 23 | | | | 22 | |
Management and Administration | | | 19 | | | | 19 | | | | 19 | | | | 20 | |
Total | | | 136 | | | | 128 | | | | 134 | | | | 126 | |
Solution Perspective and Trends
The components of our revenue are as follows ($ in thousands):
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | Three Months Ended March 31 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
| | 2017 | | | 2016 | | | | | | Percent of | | | | | | Percent of | | | | | | Percent of | | | | | | Percent of | |
| | | | | Percent of | | | | | | Percent of | | | Amount | | | Total | | | Amount | | | Total | | | Amount | | | Total | | | Amount | | | Total | |
| | Amount | | | Total | | | Amount | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue By Type | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
License | | $ | 2,464 | | | | 29.6 | % | | $ | 2,299 | | | | 31.1 | % | | | 2,488 | | | | 30.3 | % | | | 3,322 | | | | 38.4 | % | | | 7,768 | | | | 30.9 | % | | | 8,381 | | | | 34.7 | % |
M&S | | | 5,121 | | | | 61.6 | % | | | 4,446 | | | | 60.2 | % | | | 5,360 | | | | 65.2 | % | | | 4,637 | | | | 53.5 | % | | | 15,702 | | | | 62.5 | % | | | 13,635 | | | | 56.5 | % |
Professional Services | | | 733 | | | | 8.8 | % | | | 642 | | | | 8.7 | % | | | 368 | | | | 4.5 | % | | | 702 | | | | 8.1 | % | | | 1,652 | | | | 6.6 | % | | | 2,107 | | | | 8.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Revenue | | $ | 8,318 | | | | 100.0 | % | | $ | 7,387 | | | | 100.0 | % | | $ | 8,216 | | | | 100.0 | % | | $ | 8,661 | | | | 100.0 | % | | $ | 25,122 | | | | 100.0 | % | | $ | 24,123 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue by Product Line | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
License | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
EFT Platform | | $ | 2,283 | | | | 92.7 | % | | $ | 1,995 | | | | 86.8 | % | | $ | 2,388 | | | | 96.0 | % | | $ | 3,060 | | | | 92.1 | % | | $ | 7,338 | | | | 94.5 | % | | $ | 7,579 | | | | 90.4 | % |
Other | | | 181 | | | | 7.3 | % | | | 304 | | | | 13.2 | % | | | 100 | | | | 4.0 | % | | | 262 | | | | 7.9 | % | | | 430 | | | | 5.5 | % | | | 802 | | | | 9.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total License Revenue | | | 2,464 | | | | 100.0 | % | | | 2,299 | | | | 100.0 | % | | | 2,488 | | | | 100.0 | % | | | 3,322 | | | | 100.0 | % | | | 7,768 | | | | 100.0 | % | | | 8,381 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
M&S | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
EFT Platform | | | 4,841 | | | | 94.5 | % | | | 4,125 | | | | 92.8 | % | | | 5,100 | | | | 95.1 | % | | | 4,329 | | | | 93.4 | % | | | 14,893 | | | | 94.8 | % | | | 12,695 | | | | 93.1 | % |
Other | | | 280 | | | | 5.5 | % | | | 321 | | | | 7.2 | % | | | 260 | | | | 4.9 | % | | | 308 | | | | 6.6 | % | | | 809 | | | | 5.2 | % | | | 940 | | | | 6.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total M&S Revenue | | | 5,121 | | | | 100.0 | % | | | 4,446 | | | | 100.0 | % | | | 5,360 | | | | 100.0 | % | | | 4,637 | | | | 100.0 | % | | | 15,702 | | | | 100.0 | % | | | 13,635 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Professional Services (all EFT Platform) | | | 733 | | | | 100.0 | % | | | 642 | | | | 100.0 | % | | | 368 | | | | 100.0 | % | | | 702 | | | | 100.0 | % | | | 1,652 | | | | 100.0 | % | | | 2,107 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
EFT Platform | | | 7,857 | | | | 94.5 | % | | | 6,762 | | | | 91.5 | % | | | 7,856 | | | | 95.6 | % | | | 8,091 | | | | 93.4 | % | | | 23,883 | | | | 95.1 | % | | | 22,381 | | | | 92.8 | % |
Other | | | 461 | | | | 5.5 | % | | | 625 | | | | 8.5 | % | | | 360 | | | | 4.4 | % | | | 570 | | | | 6.6 | % | | | 1,239 | | | | 4.9 | % | | | 1,742 | | | | 7.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Revenue | | $ | 8,318 | | | | 100.0 | % | | $ | 7,387 | | | | 100.0 | % | | $ | 8,216 | | | | 100.0 | % | | $ | 8,661 | | | | 100.0 | % | | $ | 25,122 | | | | 100.0 | % | | $ | 24,123 | | | | 100.0 | % |
Our total revenue increased 13% indecreased 5.1% for the 2017 quarter compared toand increased 4.1% for the 2016 quarter.2017 nine months. Revenue from our EFT platform products decreased 2.9% for the 2017 quarter and services increased 16% which consisted of EFT platform license revenue increasing 14%, EFT platform M&S revenue increasing 17%, and professional services revenue increasing 14%.6.7% for the 2017 nine months. Revenue from our other product lines decreased for both the 2017 quarter and the 2017 nine months, which is consistent with our expectations as discussed below. For a more completedetailed discussion of these revenue trends, see Comparison of the Consolidated Statement of Operations for the Three Months Ended March 31,September 30, 2017 and 2016 and Comparison of the Consolidated Statement of Operations for the Nine Months Ended September 30, 2017 and 2016.
We earn revenue primarily from the following activities:
· | License revenue from sales of our EFT platform products that we deliver as either perpetually-licensed software installed at the customer’s premises, for which we earn the full amount of the license revenue at the time the license is delivered, or as a cloud-based service under our EFT Cloud Services brand delivered using a SaaS model, for which we earn monthly subscription revenue as these services are delivered. |
License revenue from sales of our EFT platform products that we deliver as either perpetually-licensed software installed at the customer’s premises, for which we earn the full amount of the license revenue at the time the license is delivered, or as a cloud-based service under our EFT Cloud Services brand delivered using a SaaS model, for which we earn monthly subscription revenue as these services are delivered.
· | License revenue from sales of our Mail Express, WAFS and CuteFTP products that are installed at the customer’s premises under a perpetual license for which we earn the full amount of the license revenue at the time the license is delivered. |
License revenue from sales of our Mail Express, WAFS and CuteFTP products that are installed at the customer’s premises under a perpetual license for which we earn the full amount of the license revenue at the time the license is delivered.
· | M&S revenue under contracts to provide ongoing product support and software updates to our customers who have purchased license software which we recognize ratably over the contractual period, which is typically one year, but can be up to three years. |
M&S revenue under contracts to provide ongoing product support and software updates to our customers who have purchased license software which we recognize ratably over the contractual period, which is typically one year, but can be up to three years.
· | Professional services revenue from a variety of customization, implementation, and integration services, as well as delivery of education and training associated with our solutions, which we recognize as the services are performed and accepted by the client. |
Professional services revenue from a variety of implementation and integration services, as well as delivery of education and training associated with our solutions, which we recognize as the services are performed and accepted by the client.
We earn most of our revenue from the sale of our EFT platform products and the associated M&S and professional services related to those products. With our core competency being in products that address the MFT market, we believe our EFT platform products provide the best opportunity for our future growth. Accordingly, expansion of the capabilities of the EFT platform will be our primary focus in the future. While we will continue to sell and support our other products for the foreseeable future, they will not be an area of emphasis for us going forward.
We believe that continuing to offer licensed products installed on-premises for which we recognize revenue up-front and that carry with them a recurring M&S revenue stream is important to our future success. At the same time, we recognize that a migration of capabilities to a SaaS platform is attractive to a growing number of customers. We have, and have had for quite some time, the capabilities in place to deliver our EFT platform in that manner through our EFT Cloud products. While our SaaS revenue is not yet a material component of our total revenue, a migration by our customers to our EFT Cloud products could create some near-term decreases in the growth rate of license revenue, and may result in similar decreases in future periods, because it typically takes approximately 24 to 36 months of SaaS revenue to yield total revenue equivalent to that realized up-front from the sale of a license for an on-premise installation.
In mid-2016, we reviewed the allocation of our product research and development resources across all of our products. As a result of that review, we decided to adjust that allocation to focus most of our engineering resources involved in product research and development on our EFT platform products in order to expand their capabilities and to remain positioned to be responsive to the evolving needs of our customers.
Over the past few years, weWe have developed and offered individual product lines throughout our history that include EFT, Mail Express, WAFS, and CuteFTP. Each of these product lines addresses distinct needs in the marketplace. While some customers purchase products from more than one of these product lines, for the most part, customers in a particular market or vertical have needs that are addressed by only one of these products and, therefore, purchase only that product. With respect to Mail Express, whileWhile we will continue to offer themMail Express as a stand-alone productsproduct for the time being, the engineering resources we allocate to these technologiesthis technology will focus on migrating themit to becoming an integrated component of our EFT platform. We do not expect to expend significant resources in the future on expanding the features and capabilities of WAFS and CuteFTP although we will continue to sell those products and support them.
To support product innovation, we continue to enhance our software engineering group and our focus on optimizing the manner in which we assess the development of new technologies, our approach to managing those projects, and the timelines over which we do that work. In continuing to develop our demand generation activities, we have made and continue to make ongoing changes in sales and marketing including:
· | Increasing sales staffing and capabilities as needed to address our markets. |
· | Aligning our sales group to enhance its industry and geographic focus. |
· | Implementing new sales and marketing campaigns. |
· | Evolving our lead generation programs to increase our sales staff’s exposure to potential purchasers. |
· | Enhancing our support of channel partners and engaging them to sell our products through training, orientation and marketing programs. |
Liquidity and Capital Resources
Our total cash, cash equivalents, certificates of deposit and working capital positions were as follows ($ in thousands):
| | March 31, 2017 | | | December 31, 2016 | | | September 30, 2017 | | | December 31, 2016 | |
Cash and cash equivalents | | $ | 10,400 | | | $ | 8,895 | | | $ | 11,447 | | | $ | 8,895 | |
Certificates of deposit, current | | | 2,759 | | | | 2,754 | | |
Certificates of deposit, long term | | | 12,837 | | | | 12,779 | | |
Short term certificates of deposit | | | | 2,768 | | | | 2,754 | |
Long term certificates of deposit | | | | 12,960 | | | | 12,779 | |
Total cash, cash equivalents and certificates of deposit | | $ | 25,996 | | | $ | 24,428 | | | $ | 27,175 | | | $ | 24,428 | |
| | | | | | | | | | | | | | | | |
Current assets | | $ | 19,150 | | | $ | 19,303 | | | $ | 20,109 | | | $ | 18,760 | |
Current liabilities | | | (15,763 | ) | | | (16,367 | ) | | | (15,397 | ) | | | (16,188 | ) |
Working capital | | $ | 3,387 | | | $ | 2,936 | | | $ | 4,712 | | | $ | 2,572 | |
At March 31,September 30, 2017, our certificates of deposit in current assets mature on various dates through October 2017. Our long term certificates of deposit mature after March 31,June 30, 2018, on various dates through December 2021.
When assessing our liquidity and capital resources, we consider the following factors:
· | We may access and monetize our certificate depositscertificates of deposit at any time without risk of loss of the original amounts invested. If we were to redeem these certificates of deposit prior to their maturity, we may incur a penalty and forfeit certain amounts of accrued interest, but we view such amounts as not material. |
· | Deferred revenue, unlike the other liability components of our working capital, is an obligation we will satisfy by providing services in the future to our customers as part of our ongoing operating activities from which we have historically generated cash flow. Our deferred revenue does not involve a disbursement of cash as a direct payment of that liability although we will incur operating expenses in the future as we deliver those M&S services. |
Our capital requirements principally relate to our need to fund our ongoing operating expenditures, which are primarily related to employee salaries and benefits. We make these expenditures to enhance our existing products, develop new products, sell those products in the marketplace and support our customers after the sale.
We rely on cash and cash equivalents on hand and cash flows from operations to fund our operating activities and believe those items will be our principal sources of capital for the foreseeable future. If our revenue declines and/or our expenses increase, our cash flow from operations and cash on hand could decline.
We plan to expend significant resources in the future for research and development of our products and expansion and enhancement of our sales and marketing activities. If sales decline or if our liquidity is otherwise under duress, we could substantially reduce personnel and personnel-related costs, reduce or substantially eliminate capital expenditures and/or reduce or substantially eliminate certain research and development and sales and marketing expenditures. We may also sell equity or debt securities or enter into credit arrangements in order to finance future acquisitions or licensing activities, to the extent available.
Cash provided or used by our various activities consisted of the following ($ in thousands):
| | Cash Provided (Used) During the Three Months Ended March 31, | |
| | 2017 | | | 2016 | |
Operating activities | | $ | 2,389 | | | $ | 1,207 | |
Investing activities | | | (650 | ) | | | (578 | ) |
Financing activities | | | (234 | ) | | | (190 | ) |
| | Cash Provided (Used) During the Nine Months Ended September 30, | |
| | 2017 | | | 2016 | |
Operating activities | | $ | 4,773 | | | $ | 3,624 | |
Investing activities | | | (1,713 | ) | | | (1,466 | ) |
Financing activities | | | (508 | ) | | | (622 | ) |
Our cash provided by operating activities increased during the 2017 quarternine months compared to the 2016 quarternine months primarily due to the following factors:
· | Net income after considering items not involving cash at the time they are recorded in the statement of operations, as set forth on our Condensed Consolidated Statements of Cash Flow, increased $243,000. See the section below underComparison of the Statement of Operations for the Three Months Ended March 31, 2017 and 2016 for a discussion of the changes in the components of these amounts.
|
· | Cash flow from payments by customers resulted in accountsAccounts receivable decreasing $1.5decreased $1.8 million in the 2017 quarternine months compared to $916,000increasing $2.2 million in the 2016 quarter. This increased cash flownine months due in part to a large M&S renewal that was primarily due tostill outstanding at the increase in our revenue during the three months ended December 31, 2016, compared to the three months ended December 31, 2015, which in turn resulted in increased cash collections during the 2017 quarter when the accounts receivable from those sales were due. |
· | Payments to our vendors and service providers resulted in accounts payable decreasing $219,000 during the 2017 quarter compared to decreasing $925,000 duringend of the 2016 quarter. The change in the amount of the decrease was primarily due to: |
| o | The payment during the 2016 quarter of invoices for certain marketing expenses incurred in 2015 for initial expansion of certain sales and marketing programs which were expenses that did not have to be repeated in the 2016 quarter and paidnine months with no similar transaction in the 2017 quarter; and |
| o | Normal variations in the timing of payments to our vendors. |
· | Income tax receivable and payable decreased $643,000 in the 2017 quarter compared to decreasing $151,000 in the 2016 quarter primarily due to: |
| o | Receiving from the Internal Revenue Service during the 2017 quarter a refund of taxes paid in previous years as a result of favorable adjustments to our research and development tax credits previously claimed; and |
| o | Normal variations in the timing of our tax payments. |
Offset by:
· | Deferred revenue decreasing $1.1 million in the 2017 quarter compared to decreasing $416,000 in the 2016 quarter primarily as a result of our new emphasis on selling one year M&S contracts instead of multi-year agreements as discussed above.nine months. |
· | Accrued expenses increased $92,000Normal variations in our payments to vendors that contributed to our accounts payable increasing $448,000 in the 2017 quarternine months compared to increasing $303,000decreasing $237,000 in the 2016 quarter primarily due to normalnine months. |
· | Normal variations in the timing of our payroll payment dates relative to the date of the condensed consolidated balance sheet presented as a part of our condensed consolidated financial statements.statements that contributed to accrued expenses increasing $404,000 in the 2017 nine months compared to a decreasing $197,000 in the 2016 nine months. |
Offset by:
· | A decision by the U.S. Army to consolidate certain of their operations resulting in the non-renewal of their M&S contract combined with our transition during 2017 to emphasizing selling one-year instead of multi-year M&S contracts primarily due to our desire to reduce the effects of discounts that customers expect from a multi-year contract. Since our customers pay us for the full M&S term at the beginning of the contract, the up-front cash we receive at the time we sell a single-year contract is less than the up-front cash we receive when we sell a multi-year contract. At the same time, we potentially enhance our future M&S revenue due to less discounting. These factors contributed to our deferred revenue decreasing $1.5 million in the 2017 nine months compared to increasing $770,000 in the 2016 nine months. |
· | Higher payments for federal income taxes in the 2017 nine months as compared to the 2016 nine months. During the 2016 nine months, we did not make any federal income tax payments due to our application of overpayments from the 2015 tax year to 2016 tax year. We did not have overpayments in the 2016 tax year to apply to the 2017 tax year. As a result, we made federal income tax payments during the 2017 nine months for which there were no similar payments during the 2016 nine months. These factors contributed to our federal income taxes payable decreasing $759,000 during the 2017 nine months as compared to increasing $600,000 during the 2016 nine months. |
The amount of cash we used for investing activities during the 2017 quarternine months increased compared to the 2016 quarternine months due primarily to:
· | An increase in our work to develop new software products and services which resulted in the purchaseamount of property and equipment as a result of remodeling of our sales and engineering office spaces to improvesoftware development costs we capitalized being higher during the efficiency of these work environments; and2017 nine months than during the 2016 nine months. |
· | A decreaseAn increase in purchases of property and equipment resulting from a reconfiguration of certain of our software development costs capitalized due to it taking longer than expected to fill open engineering positions with the skillsets needed to support new product development as a result of competition in the marketplace for software engineers.office space. |
Our financingFinancing activities used moreless cash induring the 2017 quarternine months than during the 2016 quarternine months primarily due to an increase in the amount of dividends paid as a result of an increase in our outstanding shares of common stock offset by a decrease in proceeds from stock option exercises as a result of fewermore option holders electing to exercise their options.
Contractual Obligations and Commitments
As of March 31,September 30, 2017, 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 $16.3$15.9 million. Those future services primarily relate to our obligations under M&S contracts. We will recognize this deferred revenue as revenue over the remaining life of those contracts which generally ranges from one to three years. Deferred revenue, unlike the other liability components of our working capital, is an obligation we will satisfy 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. |
· | We have an obligation under a contract with a third party to prepay future minimum royalty payments in the amount of $800,000 in September 2018 and $1.2 million in November 2019. |
· | Trade accounts payable and accrued liabilities which include our contractual obligations to pay software royalties to third parties that vary in amount based on our sales volume of products upon which royalties are payable. |
· | Operating lease for our office space. |
· | Federal and state taxes. |
Our non-cancellable, contractual obligations at March 31,September 30, 2017 consisted primarily of the lease for our office space with amounts due as followsfollowing ($ in thousands):
| | Amounts Due for the Period | |
| | Nine Months Ending December 31, | | | Fiscal Years | |
| | 2017 | | | 2018 - 2019 | | | 2019 - 2020 | | | Thereafter | | | Total | |
| | | | | | | | | | | | | | | | | |
Operating leases | | $ | 270 | | | $ | 480 | | | $ | - | | | $ | - | | | $ | 750 | |
| | Amounts Due for the Period | |
| | Three Months Ending December 31, | | | Fiscal Years | |
| | 2017 | | | 2018 | | | 2019 | | | Thereafter | | | Total | |
| | | | | | | | | | | | | | | |
Prepaid royalty fees | | $ | - | | | $ | 800 | | | $ | 1,200 | | | $ | - | | | $ | 2,000 | |
Operating leases | | | 90 | | | | 360 | | | | 120 | | | | - | | | | 570 | |
Total | | $ | 90 | | | $ | 1,160 | | | $ | 1,320 | | | $ | - | | | $ | 2,570 | |
As of March 31,September 30, 2017, we had no interest-bearing obligations in the form of loans, notes payable or similar debt instruments.
We plan to continue to expend significant resources in the future on product development, sales and marketing which may require that we enter into additional contractual arrangements and use our cash to acquire or license technology, intellectual property, products, services or businesses related to our current business strategy.
Comparison of the Consolidated Statement of Operations for the Three Months Ended March 31,September 30, 2017 and 2016
| | Three Months Ended March 31, | | | | | | Three Months Ended September 30, | | | | |
| | 2017 | | | 2016 | | | $ Change | | | 2017 | | | 2016 | | | $ Change | |
| | $ in thousands | | | $ in thousands | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total revenues | | $ | 8,318 | | | $ | 7,387 | | | $ | 931 | | | $ | 8,216 | | | $ | 8,661 | | | $ | (445 | ) |
Total cost of revenues | | | 1,525 | | | | 1,446 | | | | 79 | | | | 1,573 | | | | 1,617 | | | | (44 | ) |
Gross profit | | | 6,793 | | | | 5,941 | | | | 852 | | | | 6,643 | | | | 7,044 | | | | (401 | ) |
Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Sales and marketing | | | 3,330 | | | | 3,048 | | | | 282 | | | | 3,079 | | | | 2,880 | | | | 199 | |
General and administrative | | | 1,721 | | | | 1,733 | | | | (12 | ) | | | 2,575 | | | | 1,634 | | | | 941 | |
Research and development | | | 739 | | | | 627 | | | | 112 | | | | 594 | | | | 519 | | | | 75 | |
Total operating expenses | | | 5,790 | | | | 5,408 | | | | 382 | | | | 6,248 | | | | 5,033 | | | | 1,215 | |
Income from operations | | | 1,003 | | | | 533 | | | | 470 | | | | 395 | | | | 2,011 | | | | (1,616 | ) |
Other income | | | 70 | | | | 33 | | | | 37 | | | | 75 | | | | 28 | | | | 47 | |
Income before income taxes | | | 1,073 | | | | 566 | | | | 507 | | | | 470 | | | | 2,039 | | | | (1,569 | ) |
Income tax expense | | | 322 | | | | 174 | | | | 148 | | | | 194 | | | | 705 | | | | (511 | ) |
Net income | | $ | 751 | | | $ | 392 | | | $ | 359 | | | $ | 276 | | | $ | 1,334 | | | $ | (1,058 | ) |
In the discussion below, we refer to the three months ended March 31,September 30, 2017, as the “2017 quarter” and the three months ended March 31,September 30, 2016, as the “2016 quarter”. The percentage changes cited in our discussions are based on the 2017 quarter amounts compared to the 2016 quarter amounts.
Revenue. The components of our revenues were as follows ($ in thousands):
| | Three Months Ended September 30, | |
| | 2017 | | | 2016 | |
| | | | | Percent of | | | | | | Percent of | |
| | Amount | | | Total | | | Amount | | | Total | |
| | | | | | | | | | | | |
Revenue By Type | | | | | | | | | | | | |
License | | | 2,488 | | | | 30.3 | % | | | 3,322 | | | | 38.4 | % |
M&S | | | 5,360 | | | | 65.2 | % | | | 4,637 | | | | 53.5 | % |
Professional Services | | | 368 | | | | 4.5 | % | | | 702 | | | | 8.1 | % |
| | | | | | | | | | | | | | | | |
Total Revenue | | $ | 8,216 | | | | 100.0 | % | | $ | 8,661 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | |
Revenue by Product Line | | | | | | | | | | | | | | | | |
License | | | | | | | | | | | | | | | | |
EFT Platform | | $ | 2,388 | | | | 96.0 | % | | $ | 3,060 | | | | 92.1 | % |
Other | | | 100 | | | | 4.0 | % | | | 262 | | | | 7.9 | % |
| | | | | | | | | | | | | | | | |
| | | 2,488 | | | | 100.0 | % | | | 3,322 | | | | 100.0 | % |
M&S | | | | | | | | | | | | | | | | |
EFT Platform | | | 5,100 | | | | 95.1 | % | | | 4,329 | | | | 93.4 | % |
Other | | | 260 | | | | 4.9 | % | | | 308 | | | | 6.6 | % |
| | | | | | | | | | | | | | | | |
| | | 5,360 | | | | 100.0 | % | | | 4,637 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | |
Professional Services (all EFT Platform) | | | 368 | | | | 100.0 | % | | | 702 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | |
Total Revenue | | | | | | | | | | | | | | | | |
EFT Platform | | | 7,856 | | | | 95.6 | % | | | 8,091 | | | | 93.4 | % |
Other | | | 360 | | | | 4.4 | % | | | 570 | | | | 6.6 | % |
| | | | | | | | | | | | | | | | |
| | $ | 8,216 | | | | 100.0 | % | | $ | 8,661 | | | | 100.0 | % |
| | Three Months Ended March 31 | |
| | 2017 | | | 2016 | |
| | | | | Percent of | | | | | | Percent of | |
| | Amount | | | Total | | | Amount | | | Total | |
| | | | | | | | | | | | |
Revenue By Type | | | | | | | | | | | | |
License | | $ | 2,464 | | | | 29.6 | % | | $ | 2,299 | | | | 31.1 | % |
M&S | | | 5,121 | | | | 61.6 | % | | | 4,446 | | | | 60.2 | % |
Professional Services | | | 733 | | | | 8.8 | % | | | 642 | | | | 8.7 | % |
| | | | | | | | | | | | | | | | |
Total Revenue | | $ | 8,318 | | | | 100.0 | % | | $ | 7,387 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | |
Revenue by Product Line | | | | | | | | | | | | | | | | |
License | | | | | | | | | | | | | | | | |
EFT Platform | | $ | 2,283 | | | | 92.7 | % | | $ | 1,995 | | | | 86.8 | % |
Other | | | 181 | | | | 7.3 | % | | | 304 | | | | 13.2 | % |
| | | | | | | | | | | | | | | | |
| | | 2,464 | | | | 100.0 | % | | | 2,299 | | | | 100.0 | % |
M&S | | | | | | | | | | | | | | | | |
EFT Platform | | | 4,841 | | | | 94.5 | % | | | 4,125 | | | | 92.8 | % |
Other | | | 280 | | | | 5.5 | % | | | 321 | | | | 7.2 | % |
| | | | | | | | | | | | | | | | |
| | | 5,121 | | | | 100.0 | % | | | 4,446 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | |
Professional Services (all EFT Platform) | | | 733 | | | | 100.0 | % | | | 642 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | |
Total Revenue | | | | | | | | | | | | | | | | |
EFT Platform | | | 7,857 | | | | 94.5 | % | | | 6,762 | | | | 91.5 | % |
Other | | | 461 | | | | 5.5 | % | | | 625 | | | | 8.5 | % |
| | | | | | | | | | | | | | | | |
| | $ | 8,318 | | | | 100.0 | % | | $ | 7,387 | | | | 100.0 | % |
Our total revenue increased 13%decreased 5.1%. This increase consisted of growth in total revenueRevenue from our EFT platform products and services of $1.1 million, or 16%, offset by a decrease in revenuedecreased 2.9%. Revenue from our other products that constitute less than 10% of our total revenue. These trends are in line with our expectations in light of our announcement in mid-2016 that our focus would be on our EFT platform products. At the same time, we announced that while we would continue selling our other products consistingconsist of Mail Express, WAFS, CuteFTP, and TappIn we would de-emphasizedecreased to comprise 4.4% of our total revenue which is a trend that is in line with our ongoing de-emphasis of those products in the future, not expend future significant product development and engineering resources to enhance those products, and not dedicate significant future sales and marketing activities to them. We intend to maintain our focus on our EFT platform for the foreseeable future such that we expect to see a continuing decline in revenue from our products other than those that are part of the EFT platform.products.
EFT Platform Products
License M&S and professional services revenue from our EFT platform products increased 14%, 17%decreased 22%. During the 2017 quarter, we were transitioning to new leadership of our sales team as a result of certain of our personnel being involved in improper arrangements with customers that have been the subject of the investigation by the Audit Committee of the Board of Directors that we first announced in August 2017. This transition caused a temporary loss in sales momentum while this new leadership became familiar with our existing sales programs and 14% respectively. The increases across these productsbegan to design and services were primarily due to continued enhancement in our product developmentimplement new and software engineering groups which allowed us to refine our process for identifying new product opportunities, to better focus our resources on products that would yield larger and more immediate revenue opportunities, and to optimize our project management and software engineering processes to reduce the time necessary to produce new or improved products.enhanced initiatives.
To improve our ability to successfully sell existing EFT platform products as well as new products produced by our software engineering team, we continued to make, and will continue to make, ongoing changes in sales and marketing personnel and activities including:
· | Increasing sales staffing and capabilities as needed to address our markets. |
· | Aligning our sales group to enhance its industry and geographic focus. |
· | Implementing new sales and marketing campaigns. |
· | Evolving our lead generation programs to increase our sales staff’s exposure to potential purchasers. |
· | Enhancing our support of channel partners and engaging them to sell our products through training, orientation and marketing programs. |
The 14% increase in licenseM&S revenue from our EFT platform products wasincreased 18% primarily due to:
· | The introduction of new products or new versions of products as described above underBusiness-Software Products and Services.
|
· | Our focus on leveraging the changes to our sales and marketing activities described above toward new customers who may not have previously used our products. While sales to existing customers often consist primarily of new modules added to existing software licenses, new customers present the potential for higher license sales since they typically need to purchase a license for our core products in addition to licenses for additional modules. |
The 17% increase in M&S revenue from our EFT platform products was also due to:
· | Ongoing and increased 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. As a result, growth in M&S revenue is typically tied to the license sales growth we experienced in earlier periods. |
· | Sustaining high renewal rates of M&S contracts by customers who initially purchased these services in earlier periods. We believe these renewals result from our programs designed to provide high-quality and responsive M&S services to our customers. |
The 14% increase inOur professional services revenue was primarily$334,000 less for the 2017 quarter compared to the 2016 quarter, which is a decrease of 48%. This decrease was partially related to the increaseddecreased license revenue from our EFT platform since there generally is a direct relationship between the demandlicenses our customers purchase and their need for our professional services is closely relatedservices. In addition, subsequent to purchases of licenses for our EFT platform products. The remaining increase was due to an enhanced focus on managing our queue of professional services projects to be delivered which resulted inthe 2016 quarter, we had a reduction in our backlog of professional services engagements that arose from software sales in previous periods. We worked down that backlog during the 2016 quarter which resulted in our professional services revenue being higher than typical for the 2016 quarter relative to software license revenue. During the 2017 quarter, we also began to focus more on selling pre-packaged professional services (as compared to customized services) which, while yielding lower total revenue from professional services, allowed us to deliver professional services more efficiently and without the unpredictability (and related to earlier EFT platform license sales.costs) that can arise with customized services.
When we sell our licensed products, we also typically create a recurring revenue stream from M&S since almost all purchasers of our licensed products also purchase an M&S contract. In general, and depending upon the level of M&S a customer purchases, this recurring revenue stream is 20% to 30% per year of the price of the underlying software license to which the M&S relates.
Our M&S contracts are typically for one year, with some customers buying two or three year contracts. The customer pays us the M&S fee for the entire term of the agreement at the time the contract begins. We recognize that amount as revenue ratably in future periods over the term of the contract.
We typically experience a high renewal rate for M&S services for our enterprise products so long as a customer continues using the licensed product they purchased from us. As a result, growing license revenue not only contributes to increasing revenue growth at the time the license is sold but also provides a foundation for future recurring revenue as the purchasers of our licensed products continually renew M&S contracts to support their ongoing product support needs. This pattern of activity can create a cumulative effect for M&S renewals as a result of the cumulative number of licensed software installations sold over multiple years that create M&S renewals in any single year predictably (and in line with our expectations) exceeding the number of new software licenses we sell in a single year. We expect this cumulative effect to continue to grow if we continue to increase enterprise software license revenue in future periods.
Even though we experienced growth in EFT platform license revenue, that revenue as a percent of our total EFT platform revenue was 29% in the 2017 quarter compared to 30% in the 2016 quarter. This decrease was due to the continuing accumulation of our recurring M&S revenue stream from prior license sales and the revenue produced by the reduction of our backlog of professional services.40
Other Products
In mid-2016, we announced that our focus would be on our EFT platform products. At the same time, we announced that while we would continue selling our Mail Express, WAFS, CuteFTP, and TappIn products that collectively constitute less than 10% of our total revenue, in the future we would de-emphasize these stand-alone products that are not part of our EFT platform. Accordingly, during the second half of 2016, we curtailedbegan to curtail our product development and engineering resources for these products and significantly reduced our sales and marketing activities supporting them. As a result, our license and M&S revenue from those products collectively declined 26%.36.8% in the 2017 quarter compared to the 2016 quarter. Our future focus will be on our EFT platform such that we expect to see a continuing decline in revenue from these other products although we do expect them to continue to produce a modest contribution margin that contributes to our future profitability.
Cost of Revenues. These expenses are associated with the production, delivery and support of our products and services. We believe it is most meaningful to view cost of revenues as a percent of the revenues to which those costs relate since many of those costs are variable relative to revenue.
Cost of license revenue consists primarily of:
· | Amortization of capitalized software development costs we incur when producing our software products. This amortization begins when a product is ready for general release to the public and generally is an expense that is not directly variable relative to revenue. |
· | Royalties we pay to use software developed by others for certain features of our products that is generally an expense that is variable relative to revenue. |
· | Fees we pay to third parties who provide services supporting our SaaS and cloud-based subscription solutions that generally have components that are both variable and not variable relative to revenue. |
Cost of M&S revenue and cost of professional services revenue consist primarily of salaries and related costs of our employees and third parties we use to deliver these services.
Cost of software license revenue increased 17%decreased 16% and as a percent of software license revenue was 30%29% in the 2017 quarter compared to 27%26% in the 2016 quarter. These increasesfluctuations were primarily due to:
· | An increaseA decrease in expense from the amortization of capitalized software development costs as a resultroyalties we pay to third-parties to use their technology for certain components of our releaseproducts. The amount of new softwareroyalties we pay relative to our aggregate revenue fluctuates based on the mix of products and new versionswe sell. During the 2017 quarter, more of existingthe products in periods subsequentwe sold were not subject to a royalty payment than was the case during the 2016 quarter. This product mix will cause the cost of software license revenue to ebb and flow based upon our customers’ unique demands such that we do not view this decrease in royalties as unusual or indicative of a long-term trend. |
· | An increaseA decrease in our royalties expense as a result of an increaserelated to two non-recurring engineering projects during the 2016 quarter with no similar transaction in sales volume of products that contain components on which we pay royalties.the 2017 quarter. |
Cost of M&S revenue as a percent of M&S revenue was substantially unchanged. Cost of revenue for M&S in absolute dollars increased by 5%23% due to an increase in M&S revenue. The cost of delivering M&S can vary slightly up or down from period-to-period, but we believe such changes are typically not indicative of long term trends or permanent changes in our cost of delivering M&S. Our gross margin on these services generally remains greater than 90% as a result of a consistent application of our customer support delivery protocols and practices.
Cost of professional services revenue exceeded revenue from professional services in the 2017 quarter due mainly to the one-time cost of extending the time allowed to exercise certain stock options to some of our former employees.
Sales and Marketing. We believe it most meaningful to view cost of sales and marketing as a percent of revenues since many of those costs, particularly sales commissions, are variable relative to revenue. These expenses were 37% of total revenue for the 2017 quarter compared to 33% of total revenue for the 2016 quarter. In absolute dollars these expenses increased 7%. These variations were primarily due to:
· | Increasing the size of our sales, marketing and product strategy teams and increased compensation rates due to competitive demands in the marketplace. |
· | Increased marketing activities related to competitive intelligence and channel development. |
· | Increased sales lead generation activities. |
General and Administrative. These expenses increased 58% primarily due to:
· | Increased professional fees and related expenses associated with the previously disclosed internal investigation, the restatement of certain of our financial statements and related litigation. |
· | Increased salaries and share-based compensation expense. |
Offset by:
· | A decrease in severance expense as a result of the 2016 quarter including severance expense related to the resignation of our chief executive officer during the second fiscal quarter of 2016, which is an expense we did not incur in the 2017 quarter. |
Research and Development. The overall profile of our research and development, or R&D, activities was as follows ($ in thousands):
| | Three Months Ended September 30, | |
| | 2017 | | | 2016 | |
R&D expenditures expensed | | $ | 594 | | | $ | 519 | |
R&D expenditures capitalized | | | 527 | | | | 452 | |
Total R&D expenditures (non-GAAP measurement) | | $ | 1,121 | | | $ | 971 | |
Our R&D expenditures expensed increased 14% and our R&D expenditures capitalized increased 17%. These results were due to our planned, continued increase in our capacity to develop new products as well as maintain our existing products and research technologies available from third-parties. We did this through a combination of increasing our engineering headcount and engaging additional third-party resources on a flexible basis as needed.
Total resources expended for R&D set forth above as total R&D expenditures serves to illustrate our total corporate efforts to improve our existing products and to develop new products regardless of whether or not our expenditures for those efforts were expensed or capitalized. Total resources expended for R&D is not a measure of financial performance under GAAP and should not be considered a substitute for R&D expense (set forth above as R&D expenditures expensed) and capitalized software development costs (set forth above as R&D expenditures capitalized) individually. While we believe the non-GAAP, total resources expended for R&D amount provides useful supplemental information regarding our overall corporate product improvement and new product creation activities, there are limitations associated with the use of this non-GAAP measurement. Total resources expended for R&D is a non-GAAP measure not prepared in accordance with GAAP and may not be comparable to similarly titled measures of other companies since there is no standard for preparing this non-GAAP measure. As a result, this non-GAAP measure of total resources expended for R&D has limitations and should not be considered in isolation from, or as a substitute for, R&D expense and capitalized software development cost individually.
Interest Income (Expense), Net. Interest income (expense), net consists primarily of interest income earned on certificates of deposit. The increase in this amount was due primarily to enhanced investment of our cash beginning in the second half of 2016 to earn a higher rate of interest.
Income Taxes. Our effective tax rate was 41% for the 2017 quarter and 35% for the 2016 quarter. These rates differed from a federal statutory tax rate of 34% primarily due to:
· | Certain expenses in our consolidated financial statements, such as incentive stock option compensation expense and a portion of meals and entertainment that are not deductible on our federal income tax return. |
· | A reduction in the amount of the domestic production activities deduction due to our estimated taxable income being lower than previously anticipated. |
· | State income taxes included in income tax expense in our consolidated financial statements. |
Offset by:
· | The research and development credit that is a tax incentive that serves to reduce the rate at which we pay federal income taxes in exchange for us conducting certain aspects of our business in a manner promoted the Internal Revenue Code. |
Comparison of the Consolidated Statement of Operations for the Nine Months Ended September 30, 2017 and 2016
| | Nine Months Ended September 30, | | | | |
| | 2017 | | | 2016 | | | $ Change | |
| | $ in thousands | |
| | | | | | | | | |
Total revenues | | $ | 25,122 | | | $ | 24,123 | | | $ | 999 | |
Total cost of revenues | | | 4,637 | | | | 4,695 | | | | (58 | ) |
Gross profit | | | 20,485 | | | | 19,428 | | | | 1,057 | |
Operating expenses | | | | | | | | | | | | |
Sales and marketing | | | 9,564 | | | | 8,765 | | | | 799 | |
General and administrative | | | 6,178 | | | | 5,046 | | | | 1,132 | |
Research and development | | | 2,530 | | | | 1,750 | | | | 780 | |
Total operating expenses | | | 18,272 | | | | 15,561 | | | | 2,711 | |
Income from operations | | | 2,213 | | | | 3,867 | | | | (1,654 | ) |
Other income | | | 221 | | | | 88 | | | | 133 | |
Income before income taxes | | | 2,434 | | | | 3,955 | | | | (1,521 | ) |
Income tax expense | | | 870 | | | | 1,397 | | | | (527 | ) |
Net income | | $ | 1,564 | | | $ | 2,558 | | | $ | (994 | ) |
In the discussion below, we refer to the nine months ended September 30, 2017, as the “2017 nine months” and the nine months ended September 30, 2016, as the “2016 nine months.” The percentage changes cited in our discussions are based on the 2017 nine month amounts compared to the 2016 nine month amounts.
Revenue. The components of our revenues were as follows ($ in thousands):
| | Nine Months Ended September 30, | |
| | 2017 | | | 2016 | |
| | | | | Percent of | | | | | | Percent of | |
| | Amount | | | Total | | | Amount | | | Total | |
| | | | | | | | | | | | |
Revenue By Type | | | | | | | | | | | | |
License | | | 7,768 | | | | 30.9 | % | | | 8,381 | | | | 34.7 | % |
M&S | | | 15,702 | | | | 62.5 | % | | | 13,635 | | | | 56.5 | % |
Professional Services | | | 1,652 | | | | 6.6 | % | | | 2,107 | | | | 8.7 | % |
| | | | | | | | | | | | | | | | |
Total Revenue | | $ | 25,122 | | | | 100.0 | % | | $ | 24,123 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | |
Revenue by Product Line | | | | | | | | | | | | | | | | |
License | | | | | | | | | | | | | | | | |
EFT Platform | | $ | 7,338 | | | | 94.5 | % | | $ | 7,579 | | | | 90.4 | % |
Other | | | 430 | | | | 5.5 | % | | | 802 | | | | 9.6 | % |
| | | | | | | | | | | | | | | | |
| | | 7,768 | | | | 100.0 | % | | | 8,381 | | | | 100.0 | % |
M&S | | | | | | | | | | | | | | | | |
EFT Platform | | | 14,893 | | | | 94.8 | % | | | 12,695 | | | | 93.1 | % |
Other | | | 809 | | | | 5.2 | % | | | 940 | | | | 6.9 | % |
| | | | | | | | | | | | | | | | |
| | | 15,702 | | | | 100.0 | % | | | 13,635 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | |
Professional Services (all EFT Platform) | | | 1,652 | | | | 100.0 | % | | | 2,107 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | |
Total Revenue | | | | | | | | | | | | | | | | |
EFT Platform | | | 23,883 | | | | 95.1 | % | | | 22,381 | | | | 92.8 | % |
Other | | | 1,239 | | | | 4.9 | % | | | 1,742 | | | | 7.2 | % |
| | | | | | | | | | | | | | | | |
| | $ | 25,122 | | | | 100.0 | % | | $ | 24,123 | | | | 100.0 | % |
Our total revenue increased 4.1%. Revenue from our EFT platform products and services increased 6.7% but was offset by a decrease in revenue from our other products. Revenue from those other products that consist of Mail Express, WAFS, CuteFTP, and TappIn decreased to comprising 4.9% of our total revenue. These trends were in line with our expectations in light of our announcement in mid-2016 that our focus would be on our EFT platform products. At the same time, we announced that while we would continue selling our other products, we would de-emphasize those products in the future, not expend future significant product development and engineering resources to enhance those products, and not dedicate significant future sales and marketing activities to them. We intend to maintain our focus on our EFT platform for the foreseeable future such that we expect to see a continuing decline in revenue from our products other than those that are part of the EFT platform.
EFT Platform Products
License revenue from our EFT platform products decreased 3.2%. During the latter half of 2017, we were transitioning to new leadership of our sales team as a result of certain of our personnel being involved in improper arrangements with customers that have been the subject of the investigation by the Audit Committee of the Board of Directors that we first announced in August 2017. This transition caused a temporary loss in sales momentum while this new leadership became familiar with our existing sales programs and began to design and implement new and enhanced initiatives.
To improve our ability to successfully sell existing EFT platform products as well as new products produced by our software engineering team, we continued to make and will continue to make ongoing changes in sales and marketing personnel and activities including:
· | Increasing sales staffing and capabilities as needed to address our markets. |
· | Aligning our sales group to enhance its industry and geographic focus. |
· | Implementing new sales and marketing campaigns. |
· | Evolving our lead generation programs to increase our sales staff’s exposure to potential purchasers. |
· | Enhancing our support of channel partners and engaging them to sell our products through training, orientation and marketing programs. |
The 17% increase in M&S revenue from our EFT platform products was due to:
· | Ongoing license sales since a majority of license sales are accompanied by an M&S contract. The change in M&S revenue typically lags behind the related change in license revenue because license sales are recognized as revenue in full in the period the license is delivered while the related M&S revenue is recognized in future periods as those services are delivered. |
· | Sustaining high renewal rates of M&S contracts by customers who initially purchased these services in earlier periods. We believe these renewals result from our programs designed to provide high-quality and responsive M&S services to our customers. |
Our professional services revenue decreased $455,000 which is a decrease of 22% in that revenue line item and a decrease of less than two percent of our total revenue. This decrease was partially a result of the overall 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. In addition, subsequent to the 2016 nine months, we worked down our backlog of professional services which we did not fully replace with the same level of new engagements primarily because we did not complete as many large EFT platform sales during the 2017 nine months which are the type of sales that tend to drive the demand for professional services.
When we sell our licensed products, we also typically create a recurring revenue stream from M&S since almost all purchasers of our licensed products also purchase an M&S contract. In general, and depending upon the level of M&S a customer purchases, this recurring revenue stream is 20% to 30% per year of the price of the underlying software license to which the M&S relates.
Our M&S contracts are typically for one year, with some customers buying two or three year contracts. The customer pays us the M&S fee for the entire term of the agreement at the time the contract begins. We recognize that amount as revenue ratably in future periods over the term of the contract.
We typically experience a high renewal rate for M&S services for our enterprise products so long as a customer continues using the licensed product they purchased from us. As a result, growing license revenue not only contributes to increasing revenue growth at the time the license is sold but also provides a foundation for future recurring revenue as the purchasers of our licensed products continually renew M&S contracts to support their ongoing product support needs. This pattern of activity can create a cumulative effect for M&S renewals as a result of the cumulative number of licensed software installations sold over multiple years that create M&S renewals in any single year predictably (and in line with our expectations) exceeding the number of new software licenses we sell in a single year. We expect this cumulative effect to continue to grow if we continue to increase enterprise software license revenue in future periods.
Other Products
In mid-2016, we announced that our focus would be on our EFT platform products. At the same time, we announced that while we would continue selling our Mail Express, WAFS, CuteFTP, and TappIn products that collectively constitute less than 10% of our total revenue, in the future we would de-emphasize these stand-alone products that are not part of our EFT platform. Accordingly, during the second half of 2016, we curtailed our product development and engineering resources for these products and significantly reduced our sales and marketing activities supporting them. As a result, our license and M&S revenue from those products collectively declined 29% in the 2017 nine months compared to the 2016 nine months. Our future focus will be on our EFT platform such that we expect to see a continuing decline in revenue from these other products although we do expect them to continue to produce a modest contribution margin that contributes to our future profitability.
Cost of Revenues. These expenses are associated with the production, delivery and support of our products and services. We believe it is most meaningful to view cost of revenues as a percent of the revenues to which those costs relate since many of those costs are variable relative to revenue.
Cost of license revenue consists primarily of:
· | Amortization of capitalized software development costs we incur when producing our software products. This amortization begins when a product is ready for general release to the public and generally is an expense that is not directly variable relative to revenue. |
· | Royalties we pay to use software developed by others for certain features of our products that is generally an expense that is variable relative to revenue. |
· | Fees we pay to third parties who provide services supporting our SaaS and cloud-based subscription solutions that generally have components that are both variable and not variable relative to revenue. |
Cost of M&S revenue and cost of professional services revenue consist primarily of salaries and related costs of our employees and third parties we use to deliver these services.
Cost of software license revenue decreased 2% and as a percent of software license revenue was 29% in the 2017 nine months and 27% in the 2016 nine months. These changes were primarily due:
· | A decrease in royalties we pay to third-parties to use their technology for certain components of our products. The amount of royalties we pay relative to our aggregate revenue fluctuates based on the mix of products we sell. During the 2017 nine months, more of the products we sold were not subject to a royalty payment than was the case during the 2016 nine months. This product mix will cause the cost of software license revenue to ebb and flow based upon our customers’ unique demands such that we do not view this decrease in royalties as unusual or indicative of a long-term trend. |
· | A decrease in expenses related to two non-recurring engineering projects during the 2016 nine months that were not repeated in the 2017 nine months. |
Offset by:
· | An increase in hosting fees paid to third parties to support the delivery of our EFT Cloud SaaS products. |
· | An increase in the amortization of capitalized software development costs due to the release of new features that are now being amortized. |
Cost of M&S revenue as a percent of M&S revenue was substantially unchanged. Cost of revenue for M&S in absolute dollars increased by 23% due to an increase in M&S revenue. The cost of delivering M&S can vary slightly up or down from period-to-period, but we believe such changes are typically not indicative of long term trends or permanent changes in our cost of delivering M&S. Our gross margin on these services generally remains greater than 90% as a result of a consistent application of our customer support delivery protocols and practices.
Cost of professional services revenue as a percent of that revenue was 51%68% in the 2017 quarternine months as compared to 66%60% in the 2016 quarter.nine months. This variation resulted from the varying scope and mix of the professional services we deliver that can change from period-to-period in response to the circumstances of the customer environments in which we are working. In addition, during the second half of 2016, we undertook a refinement of our professional services organization and the manner in which we manage and deliver these services which resulted in more efficient processes from which we began to realize the cost benefit in 2017. CostAlso, we incurred a one-time charge in the 2017 nine months related to extending the time allowed to exercise certain stock options to some of our former employees. Because the cost of revenue for professional services is highly variable relative to our revenue from our services, this cost in absolute dollars decreased 11%12% due to a decrease in our professional services revenue for the reasons discussed above.
Sales and Marketing. We believe it most meaningful to view cost of sales and marketing as a percent of revenues since many of those costs, particularly sales commissions, are variable relative to revenue. These expenses were 40%38% of total revenue for the 2017 quarternine months compared to 41%36% of total revenue for the 2016 quarter.nine months. In absolute dollars these expenses increased 9%. These variations were primarily due to:
· | Increasing the size of our sales, marketing and product strategy teams and increased compensation rates due to competitive demands in the marketplace. |
· | IncreasingIncreased marketing activities related to competitive intelligence and channel development. |
· | An increase in revenue which resulted in a higher absolute dollar amount ofIncreased sales commissions paid to employees although the commission rate as a percent of sales did not change materially.lead generation activities. |
General and Administrative. These expenses were substantially unchanged between periods. This consistent outcome was a result of our ongoing programs to manage these expenses.increased 22% primarily due to:
· | Increased professional fees and related expenses associated with the previously disclosed internal investigation, the restatement of certain of our consolidated financial statements and related litigation. |
· | Increased salaries and share-based compensation expense. |
Offset by:
· | A decrease in severance expense as a result of the 2016 nine months including severance expense related to the resignation of our chief executive officer during the second fiscal quarter of 2016, which is an expense we did not incur in the 2017 nine months. |
· | A decrease in bad debt expense as a result of an enhanced review of our accounts receivable during the 2016 nine months resulting in an increased write-off of accounts receivable in that period for which there was not a similar event during the 2017 nine months due to an improvement in our collections of accounts receivable. |
Research and Development. The overall profile of our research and development activities was as follows ($ in thousands):
| | Three Months Ended March 31, | | | Nine Months Ended September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
R&D expenditures expensed | | $ | 738 | | | $ | 627 | | | $ | 2,530 | | | $ | 1,750 | |
R&D expenditures capitalized | | | 462 | | | | 488 | | | | 1,464 | | | | 1,298 | |
Total R&D expenditures (non-GAAP measurement) | | $ | 1,200 | | | $ | 1,115 | | | $ | 3,994 | | | $ | 3,048 | |
Our R&D expenditures expensed increased 45% and our R&D expenditures capitalized increased 13%. These results were due to our planned, continued increase in our capacity to develop new products as well as maintain our existing products and research technologies available from third-parties. We did this through a combination of increasing our engineering headcount and engaging additional third-party resources on a flexible basis as needed.
Total R&D expenditures increased 8% primarily due to a planned increase in our software engineering headcount offset by a decrease in the cost of third-party software developers as a result of our efforts during 2016 to reduce our reliance on those outsourced services. Our R&D expense increased 18% as we continued our enhanced focus on our EFT platform and its installed customer base to ensure the products those customers are using remain optimized to meet their needs. Our R&D capitalized decreased 5% primarily due to those amounts in the 2016 quarter including higher cost, outsourced engineering work on products other than those that are part of our EFT platform which is work that did not occur in the 2017 quarter as a result of our focus on the development of our EFT platform primarily using our in-house personnel.
Total resources expended for R&D set(set forth above as total R&D expendituresexpenditures) serves to illustrate our total corporate efforts to improve our existing products and to develop new products regardless of whether or not our expenditures for those efforts were expensed or capitalized. Total resources expended for R&D is not a measure of financial performance under GAAP and should not be considered a substitute for R&D expense (set forth above as R&D expenditures expensed) and capitalized software development costs (set forth above as R&D expenditures capitalized) individually. While we believe the non-GAAP, total resources expended for R&D amount provides useful supplemental information regarding our overall corporate product improvement and new product creation activities, there are limitations associated with the use of this non-GAAP measurement. Total resources expended for R&D is a non-GAAP measure not prepared in accordance with GAAP and may not be comparable to similarly titled measures of other companies since there is no standard for preparing this non-GAAP measure. As a result, this non-GAAP measure of total resources expended for R&D has limitations and should not be considered in isolation from, or as a substitute for, R&D expense and capitalized software development cost individually.
Other Income. Other income consists primarily of interest income earned on certificates of deposit. The increase in this amount was due primarily to enhanced investment of our cash beginning in the second half of 2016 to earn a higher rate of interest.
Income Taxes. Our effective tax rate was 30%36% for the 2017 quarternine months and 31%35% for the 2016 quarter.nine months. These rates differed from a federal statutory tax rate of 34% primarily due to:
· | The domestic production activities deduction and the research and development credit that are tax credit incentives that serve to reduce the rate at which we pay federal income taxes in exchange for us conducting certain aspects of our business in a manner promoted by the Internal Revenue Code. |
Offset by:
· | Certain expenses in our consolidated financial statements, such as a portion of meals and entertainment expenses, that are not deductible on our federal income tax return. |
· | State income taxes included in income tax expense in our consolidated financial statements. |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have not utilized derivative financial instruments or derivative commodity instruments. We do not expect to employ these or other strategies to hedge market risk in the foreseeable future. We may invest our cash in money market funds which are subject to minimal credit and market risk. We believe that the interest rate risk and other relevant market risks associated with these financial instruments are immaterial.
During the 2017 quarter and 2016 quarter and the 2017 and 2016 nine months, we earned approximately 14% respectively, of our revenue from a single third partythird-party channel distributor who purchases products from us and resells them to their customers. Approximately 16%15% of our accounts receivable as of March 31,September 30, 2017 were due from this distributor. We have since received payment for substantially all of these accounts receivable.
We earned approximately 22%30% and 27%17% of our revenue from customers outside the United States during the 2017 quarter and the 2016 quarter, respectively, and 26% and 22% for the 2017 nine months and 2016 nine months, respectively. We receive all revenue in U.S. dollars, so we have no material exchange rate risk with regard to our sales. We charge Value Added Taxes to our non-business customers in the European Union. We remit these taxes periodically in pound sterling. The impact of this currency translation has not been material to our business.
Item 4. Controls and Procedures
AsEvaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the end ofExchange Act is recorded, processed, summarized and reported within the period covered by this report,time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, carried out anas appropriate, to allow timely decisions regarding required disclosure.
No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls are met. No evaluation of controls can provide absolute assurance that the effectivenesssystem of GlobalSCAPE’s “disclosurecontrols has operated effectively in all cases. Our disclosure controls and procedures” (as defined inprocedures are designed to provide reasonable assurance that the Securities Exchange Actobjectives of 1934 Rules 13a-15(e)disclosure controls and 15d-15(e))procedures are met.
Our management, including our President and Chief Executive Officer and our Interim Chief Financial Officer, evaluated our disclosure controls and procedures and concluded that theour disclosure controls and procedures were effective.not effective as of September 30, 2017 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
There were no changesMaterial Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. In connection with our management’s assessment of our internal control over financial reporting, our management has identified the following deficiencies that constituted individually, or in the aggregate, material weaknesses in our internal controls over financial reporting as of September 30, 2017.
We had material weaknesses in our control environment and monitoring:
· | We did not implement effective oversight of our finance and accounting processes (including organizational structure and reporting hierarchy), which impacted our ability to make appropriate decisions regarding revenue recognition. |
· | We did not effectively design and implement appropriate oversight controls over our period-end financial closing and reporting processes, and our review controls were not sufficient to ensure that errors regarding revenue recognition would be detected. |
· | We did not effectively monitor (review, evaluate and assess) the risks associated with key internal control activities that provide the revenue information contained in our financial statements. |
We had material weaknesses related to internal control monitoring and activities to support the financial reporting process:
· | We did not maintain effective controls over the invoicing process to ensure that proper supporting documentation was received prior to preparing invoices. |
· | We did not maintain effective controls over the revenue recognition process to ensure revenue was only recognized when all four criteria of our revenue recognition policy were met. |
Changes in Internal Control Over Financial Reporting
With the exception of the remediation efforts described below, there has been no change in our internal control over financial reporting that occurred during the three months ended March 31, 2017,quarterly period covered by this report and during the subsequent time period through the filing of this Form 10-Q that have materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
We designed a remediation plan to strengthen our internal control over financial reporting and haven taken, and will continue to take, remediation steps to address the material weaknesses described above. We also continue to take meaningful steps to enhance our disclosure controls and procedures and our internal controls over financial reporting.
Our remediation plan includes the following:
· | Clearly defining and communicating the management-approved, standard terms and conditions that may be offered to customers during the sales process and requiring appropriate management approval of requested deviations from these standard terms and conditions before a sale is consummated with a customer and a sales invoice is created. |
· | Creating and implementing a policy clearly stating that all terms and conditions of agreements with customers are to be recorded in writing, communicated to finance and accounting personnel, and recorded in our permanent records prior to the creation of a sales invoice. |
· | Conducting periodic training sessions and briefings to communicate our policies and procedures regarding our standard terms and conditions that we offer to customers and how we document and communicate approved deviations from those standard terms and conditions. |
· | Enhancing the breadth and depth of the review by finance and accounting personnel of sales invoices and underlying supporting documentation to ensure that unusual items are identified and considered when determining revenue recognition. |
· | Establishing a total invoice dollar amount threshold over which finance and accounting personnel must examine all actual invoices and supporting documentation to confirm the purchase by the customer and the appropriate revenue recognition profile. |
· | Publishing guidelines that personnel can reference which set forth the requirements to be met for revenue to be recognized from a sale transaction and conducting periodic meetings with personnel to educate and remind them of these guidelines. |
Our management is implementing and monitoring the effectiveness of these and other processes, procedures and controls and will make any further changes deemed appropriate. Our management believes the foregoing remedial efforts will effectively remediate the material weaknesses. As the Company continues to evaluate and work to improve its internal control over financial reporting, our management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan described above. If not remediated, these control deficiencies could result in further material misstatements to the Company’s consolidated financial statements.
Part II. Other Information
Item 1. Legal Proceedings
GlobalSCAPE had been named as oneThe information set forth under “Note 12 – Commitments and Contingencies – Legal and Regulatory Matters” to the condensed consolidated financial statements included in Part I, Item 1 of a number of defendants in a patent infringement suit filedthis Form 10-Q is incorporated herein by Digital Reg of Texas, LLC in the United States District Court for the Eastern District of Texas, Tyler Division. The complaint alleged that we infringed on a patent that regulates access to digital content. In February 2017, we settled this matter for an amount that was immaterial to our financial position and results of operations.reference.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2016 Form 10-K10-K/A filed with the Securities and Exchange Commission on March 27, 2017.June 14, 2018. These risk factors could materially affect our business, financial condition or future results, but they are not the only risks facing GlobalSCAPE. 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.
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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.
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| | | GLOBALSCAPE, INC. |
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May 26, 2017June 14, 2018 | | By: | /s/ James W. Albrecht, Jr.Karen J. Young |
Date | | | James W. Albrecht, Jr.Karen J. Young |
| | | Interim Chief Financial Officer |