| Significant Accounting Policies [Text Block] | 2. Significant Accounting Policies Basis of Presentation We follow accounting standards set by the Financial Accounting Standards Board. This board sets GAAP, which we follow in preparing financial statements that report our financial position, results of operations, and sources and uses of cash. We also follow the reporting regulations of the SEC. The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of our financial statements. It is possible the actual results could differ from these estimates and assumptions and could have a material effect on the reported amounts of our financial position and results of operations. Principles of Consolidation The accompanying consolidated financial statements of GlobalSCAPE, Inc. and its wholly-owned subsidiary (collectively referred to as “GlobalSCAPE”, the “Company” or “we”) are prepared in conformity with GAAP. All intercompany accounts and transactions have been eliminated. Revenue Recognition Products and Services We earn revenue by delivering the following software products and services:
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Perpetual software licenses under which customers install our products in their information systems environment on computers they manage, own or otherwise procure from a cloud services provider. Customers also deploy our products with cloud services providers in a BYOL environment.
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Cloud-based, hosted SaaS solutions that we sell on an ongoing subscription basis resulting in our earning recurring, monthly subscription and usage fees to access the service.
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Maintenance and support services, or M&S, that generally consist of telephone support and access to unspecified future software upgrades.
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Professional services for product integration and configuration that generally do not significantly modify our software products. We earn the majority of our revenue from the sale of perpetual software licenses and associated contracts for M&S. We recognize revenue when we have satisfied a performance obligation by transferring control over a product or delivering a service to a customer. We measure revenue based upon the consideration set forth in an arrangement or contract with a customer. The revenue recognition criteria we apply to each of our software products and services are as follows:
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Perpetual software licenses – These licenses grant a right to use our functional intellectual property. We recognize revenue at the point in time when we electronically deliver to our customer the software license key that provides the ability to access and use our product. If our customer is a reseller who will further transfer the ability to access and use our product to a third party under a separate arrangement that the reseller has with that third party, we recognize revenue at the time we deliver the software license key to the reseller since our contract is with the reseller.
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Cloud-based, hosted SaaS solutions – These solutions grant a right to access our functional intellectual property. We recognize revenue over time on a monthly basis as we deliver the services to which our customers subscribe. Revenue can include basic monthly fees to access the software and usage fees based upon the volume of certain resources the customer consumes (such as volumes of storage or bandwidth). We are generally paid for these services on a month-to-month basis, but if a customer pays us in advance for services we will deliver in the future, we record as deferred revenue the amount of such payment related to services we have not yet delivered.
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M&S – We provide these services to purchasers of perpetual software licenses under agreements with terms generally ranging from one to three years. We require up-front payment of our M&S fee in an amount that covers the entire term of the agreement. We record as deferred revenue amounts paid that relate to future periods during which we will provide the M&S service. We reduce deferred revenue and recognize revenue ratably in future periods as we deliver the M&S service.
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Professional services – We recognize revenue from these services when the services are completed. If we are paid in advance for these services, we record such payment as deferred revenue until we complete the services. The delivery of our software products and services generally does not involve any variable consideration, financing components or consideration payable to a customer such as rebates or other incentives that reduce amounts owed to us by customers. Deferred Revenue Classification and Activity Deferred revenue related to services we will deliver within one year is presented as a current liability. Deferred revenue related to services that we will deliver more than one year into the future is presented as a non-current liability. The activity in our deferred revenue balances has been as follows ($in thousands):
Year Ended December 31,
2018
2017
Deferred revenue, beginning of period $ 17,050 $ 17,445
Deferred revenue resulting from new contracts with customers 21,577 20,451
Deferred revenue at the beginning of the period that was amortized to revenue (20,244 ) (19,248 )
Deferred revenue arising during the period that was amortized to revenue (2,146 ) (1,598 )
Deferred revenue, end of period $ 16,237 $ 17,050 Multi-Element Transactions At the time customers purchase perpetual software licenses, they also typically purchase M&S although it is not mandatory. We do not sell separate M&S to subscribers to our SaaS solutions as M&S is provided as part of their SaaS subscription. Customers may also purchase professional services at the time they purchase perpetual software licenses or a SaaS subscription. Each of the components of these multi-element transactions is a separately identifiable performance obligation. For multi-element transactions, we allocate the transaction price to each performance obligation on a relative stand-alone selling price basis. We determine that stand-alone selling price for each item at the inception of the transaction involving these multiple elements. We sell, as stand-alone transactions, renewals of pre-existing M&S contracts, professional services to customers seeking assistance with products they have previously purchased from us, or SaaS subscriptions to customers not requiring any of our other products or services. Accordingly, we are able to estimate the stand-alone selling price of these items based upon our observation of those transactions. Since most of our sales of perpetual software licenses are part of multi-element transactions that also involve M&S and/or professional services, and because the selling price of those licenses can vary significantly among customers, we use the residual approach under FASB Accounting Standards Codification Top 606, or ASC 606, to estimate the selling price of perpetual software licenses in a multi-element transaction by reference to the total transaction price less the sum of the observable stand-alone selling prices of M&S and/or professional services. We allocate discounts proportionally to all of the components of a multi-element transaction. Sales Tax We collect sales tax on many of our transactions with customers as required under applicable law. We do not include sales tax collected in our revenue. We record it as a liability payable to taxing authorities. Allowance for Sales Returns We provide an allowance for sales returns. We estimate this allowance based upon our historical experience and the nature of recent transactions with customers. This amount is included in accrued liabilities in our consolidated balance sheet. Contract Assets We generally bill customers for professional services when we have fully delivered the services specified in the contract. We may incur costs in delivering the services prior to that time. Such costs are generally not material. Accordingly, we do not record a contract asset for professional service engagements in process but not yet billed. Incremental Costs of Obtaining a Contract to Deliver Goods and Services We incur incremental costs in the form of sales commissions paid to our sales personnel and royalties on certain products paid to third parties. These are costs we would not incur if we did not obtain a contract to deliver our goods and services. We account for these costs as follows:
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If the costs are associated with products and services for which we recognize revenue at a fixed point in time (primarily sales of perpetual software licenses and professional services), we expense these costs in full at the time we recognize that revenue.
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If the costs are associated with services for which we recognize revenue over time (primarily sales of M&S and SaaS subscriptions) for which we believe it is likely that the contract for those services will be renewed for additional terms in the future, provided we deem these costs to be recoverable, we record these costs as a deferred expense asset and amortize that cost to expense as follows:
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For the portion of the cost that we determine benefits us primarily only over the term of the specific underlying contract currently in force (such as the term of an M&S contract), we recognize expense ratably each month over that term.
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For the portion of the cost that we determine benefits us over an overall customer relationship that is likely to span a period of time that is longer than an initial contract term (for example, an M&S contract renewed for multiple terms in the future), we recognize expense ratably monthly over the estimated life of the customer relationship. Our activity in deferred costs of obtaining a contract to deliver goods and services has been as follows ($in thousands):
Year Ended December 31,
2018
Deferred cost, beginning of period $ 1,240
Deferred cost resulting from new contracts with customers 674
Deferred cost amortized to expense (905 )
Deferred cost, end of period $ 1,009 At December 31, 2018, $571,000 was recorded in prepaid and other current assets and $438,000 was recorded in noncurrent other assets in our consolidated balance sheet. GlobalSCAPE, Inc. Condensed Consolidated Balance Sheet (in thousands) As of December 31, 2018 The following tables present our reported results under ASC 606 and a reconciliation to results using the historical accounting method:
As Reported
Effect of ASC 606
ASC 605 Historical
Assets
Current assets:
Cash and cash equivalents $ 9,173 $ 9,173
Certificates of deposit, short term - -
Accounts receivable, net 6,657 (75 ) 6,582
Federal income tax receivable - -
Prepaid and other current assets 1,521 (571 ) 950
Total current assets 17,351 (646 ) 16,705
Capitalized software development costs, net 3,133 3,133
Goodwill 12,712 12,712
Deferred tax asset, net 395 137 532
Property and equipment, net 399 399
Other assets 502 (438 ) 64
Total assets $ 34,492 $ (947 ) $ 33,545
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable 820 820
Accrued expenses 1,214 (75 ) 1,139
Federal income tax payable 148 (66 ) 82
Deferred revenue 13,301 13,301
Total current liabilities 15,483 (141 ) 15,342
Deferred revenue, non-current portion 2,936 2,936
Other long term liabilities 117 117
Stockholders' Equity:
Preferred stock - -
Common stock 22 22
Additional paid-in capital 25,584 25,584
Treasury stock (22,712 ) (22,712 )
Retained earnings 13,062 (806 ) 12,256
Total stockholders’ equity 15,956 (806 ) 15,150
Total liabilities and stockholders’ equity $ 34,492 $ (947 ) $ 33,545 GlobalSCAPE, Inc. Condensed Consolidated Statement of Operations and Comprehensive Income (in thousands, except per share amounts) For the Year Ended December 31, 2018
As Reported
Effect of ASC 606
ASC 605 Historical
Operating revenues:
Software licenses $ 10,512 $ 10,512
Maintenance and support 21,587 21,587
Professional services 2,317 2,317
Total revenues 34,416 - 34,416
Costs of revenues
Software licenses 2,978 (26 ) 2,952
Maintenance and support 2,093 2,093
Professional services 1,165 1,165
Total costs of revenues 6,236 (26 ) 6,210
Gross Profit 28,180 26 28,206
Operating expenses
Sales and marketing 10,009 (205 ) 9,804
General and administrative 6,382 6,382
Legal and professional 4,623 4,623
Severance 488 488
Research and development 1,883 1,883
Total operating expenses 23,385 (205 ) 23,180
Income from operations 4,795 231 5,026
Interest income (expense), net 86 86
Income before income taxes 4,881 231 5,112
Income tax expense 1,227 58 1,285
Net income $ 3,654 $ 173 $ 3,827
Comprehensive income $ 3,654 $ 173 $ 3,827
Net income per common share - basic $ 0.18 $ 0.01 $ 0.18
Net income per common share - diluted $ 0.17 $ 0.01 $ 0.18 GlobalSCAPE, Inc. Condensed Consolidated Statements of Cash Flows (in thousands) For the Year Ended December 31, 2018
As Reported
Effect of ASC 606
ASC 605 Historical
Operating Activities:
Net Income $ 3,654 173 $ 3,827
Items not involving cash at the time they are recorded in the statement of operations:
Provision (recoveries) for doubtful accounts receivable (88 ) (88 )
Depreciation and amortization 2,173 2,173
Share-based compensation 1,269 1,269
Deferred taxes (4 ) (4 )
Subtotal before changes in operating assets and liabilities 7,004 173 7,177
Changes in operating assets and liabilities:
Accounts receivable (644 ) (75 ) (719 )
Prepaid and other current assets (216 ) (107 ) (323 )
Deferred revenues (813 ) (813 )
Accounts payable (1,080 ) (1,080 )
Accrued expenses (457 ) 75 (382 )
Other assets 191 191
Accrued interest receivable - -
Other long-term liabilities (59 ) (59 )
Federal income tax payable 970 (66 ) 904
Net cash provided by operating activities 4,896 - 4,896
Investing Activities:
Software development costs (1,276 ) (1,276 )
Purchase of property and equipment (162 ) (162 )
Redemption of Certificates of Deposit 15,794 15,794
Net cash provided by investing activities 14,356 - 14,356
Financing Activities:
Proceeds from exercise of stock options 522 522
Purchase of treasury stock (21,260 ) (21,260 )
Dividends paid (924 ) (924 )
Net cash used in financing activities (21,662 ) - (21,662 )
Net increase in cash (2,410 ) (2,410 )
Cash at beginning of period 11,583 - 11,583
Cash at end of period $ 9,173 $ - $ 9,173
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ - $ -
Income tax payments $ 253 $ 253 Cash and cash equivalents Cash and cash equivalents includes all cash and highly liquid investments with original maturities of three months or less. Short Term Investments Short-term investments consist of certificates of deposit held with financial institutions with contractual maturity dates less than one year from the balance sheet date. These certificates of deposit are stated at amortized cost, which approximates fair value of these investments. In 2018, we redeemed our certificates to assist with funding the modified Dutch tender offer. Long-Term Investments Long-term investments consist of certificates of deposit held with financial institutions with contractual maturity dates greater than one year from the balance sheet date. These certificates of deposit are stated at amortized cost, which approximates the fair value of these investments. Fair Value of Financial Instruments For financial assets and liabilities recorded at fair value on a recurring or non-recurring basis, fair value is the price we would receive to sell an asset, or pay to transfer a liability, in an orderly transaction with a market participant at the measurement date. In the absence of such data, fair value is estimated using internal information consistent with what market participants would use in a hypothetical transaction. In determining fair value, observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions; preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3: Significant inputs to the valuation model are unobservable. As of December 31, 2018, we did not have any assets measured at fair value on a recurring basis that would require disclosure based on the fair value hierarchy of valuation techniques. In addition, certain non-financial assets and liabilities are to be initially measured at fair value on a non-recurring basis. This includes items such as non-financial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and non-financial, long-lived assets measured at fair value for an impairment assessment. In general, non-financial assets and liabilities including goodwill, capitalized software and property and equipment are measured at fair value using Level 3 inputs, which result in management’s best estimate of fair value from the perspective of a market participant, when there is an indication of impairment and are recorded at fair value only when impairment is recognized. Our financial instruments consist principally of cash and cash equivalents, certificates of deposit, accounts receivable and accounts payable. The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable, approximates fair value due to the short term maturity of these instruments, all of which mature within 12 months. The carrying amount of our certificates of deposit approximates fair value based on interest rates readily available in the market with similar terms. Property and Equipment Property and equipment is comprised of furniture and fixtures, software, computer equipment and leasehold improvements which are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Furniture, fixtures and equipment have a useful life of five to seven years, computer equipment and software have a useful life of three years and leasehold improvements have a useful life that is the shorter of the term of the lease under which the improvements were made or the estimated useful life of the asset. Expenditures for maintenance and repairs are expensed as incurred. Goodwill Goodwill is not amortized. On at least an annual basis, we test goodwill for impairment at the reporting unit level using December 31 as the measurement date. We operate as a single reporting unit. When testing goodwill, we first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of our reporting unit is less than its carrying amount, including goodwill. In performing this qualitative assessment, we assess events and circumstances relevant to us including, but not limited to:
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Macroeconomic conditions.
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Industry and market considerations.
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Cost factors and trends for labor and other expenses of operating our business.
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Our overall financial performance and outlook for the future.
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Trends in the quoted market value and trading of our common stock. In considering these and other factors, we consider the extent to which any adverse events and circumstances identified could affect the comparison of our reporting unit’s fair value with its carrying amount. We place more weight on events and circumstances that most affect our reporting unit’s fair value or the carrying amount of our net assets. We consider positive and mitigating events and circumstances that may affect our determination of whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. We evaluate, on the basis of the weight of the evidence, the significance of all identified events and circumstances in the context of determining whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. If, after assessing the totality of these qualitative events and circumstances, we determine it is not more likely than not that the fair value of our reporting unit is less than its carrying amount, we conclude there is no impairment of goodwill and perform no further testing in accordance with GAAP. If we conclude otherwise, we proceed with performing the first step, and if necessary, the second step, of the two-step goodwill impairment test prescribed by GAAP. As of December 31, 2018, after assessing the totality of the relevant events and circumstances, we determined it not more likely than not that the fair value of our reporting unit was less than its carrying amount. Accordingly, we concluded there was no impairment of goodwill as of that date. There have been no material events or changes in circumstances since that time indicating that the carrying amount of goodwill may exceed its fair market value and that interim testing needed to be performed. Capitalized Software Development Costs When we complete research and development for a software product and have in place a program plan and a detail program design or a working model of that software product, we capitalize production costs incurred for that software product from that point forward until it is ready for general release to the public. Thereafter, we amortize capitalized software production costs to expense using the straight-line method over the estimated useful life of that product, which is generally three years. We periodically assess the carrying value of capitalized software development costs and our method of amortizing them relative to our estimates of realizability through sales of products in the marketplace. Cost of revenue Cost of revenue consists of expenses associated with the production, delivery and support of the products and services we sell. Cost of license revenue consists primarily of amortization of the capitalized software development costs we incur when producing our software products, royalties we pay to use software developed by others for certain features of our products, and fees we pay to third parties who provide services supporting our SaaS solutions. Cost of M&S revenue and cost of professional services revenue consist primarily of salaries and related costs of our employees and third parties we use to deliver these services. Research and Development We expense research and development costs as incurred. Advertising Expense We expense advertising costs as incurred as a component of our sales and marketing expenses. Advertising expense was approximately $807,000 and $1.9 million 2018 and 2017, respectively. Share-Based Compensation We measure the cost of share-based payment transactions at the grant date based on the calculated fair value of the award. We recognize this cost as an expense ratably over the recipient’s requisite service period during which that award vests or becomes unrestricted. For stock option awards, we estimate their fair value at the grant date using the Black-Scholes option-pricing model considering the following factors:
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We estimate expected volatility based on historical volatility of our common stock.
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We use primarily the simplified method to derive an expected term which represents an estimate of the time options are expected to remain outstanding. We use this method because our options are plain-vanilla options, and we believe our historical option exercise experience is not adequately indicative of our future expectations.
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We base the risk-free rate for periods within the contractual life of the option on the U.S. treasury yield curve in effect at the time of grant.
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We estimate a dividend yield based on our historical and expected future dividend payments. For restricted stock awards, we use the quoted price of our common stock on the grant date as the fair value of the award. Income Taxes We account for income taxes using the asset and liability method. We record deferred tax assets and liabilities based on the difference between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes, as measured by the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets and liabilities are carried on the balance sheet with the presumption that they will be realizable in future periods in which we generate taxable income. We assess the likelihood that deferred tax assets will be realized from future taxable income. Based on this assessment, we provide any necessary valuation allowance on our consolidated balance sheet with a corresponding increase in the tax provision on our statement of operations. Any valuation allowances we establish are determined based upon a number of assumptions, judgments, and estimates, including forecasted earnings, future taxable income, and the relative proportions of revenue and income before taxes in the various domestic jurisdictions in which we operate. We account for uncertainty in income taxes using a two-step process to determine the amount of tax benefit to be recognized. First, we evaluate the tax position to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, we assess the tax position to determine the amount of benefit to recognize in the financial statements. The amount of the benefit we recognize is the largest amount that we believe has a greater than 50 percent likelihood of being realized upon ultimate settlement. Unrecognized tax benefits represent tax positions for which reserves have been established. We record the effects of new tax legislation in the period in which it is signed into law. Earnings Per Share We compute basic earnings per share using the weighted-average number of common shares outstanding during the periods. We compute diluted earnings per share using the weighted-average number of common shares outstanding plus the number of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding. Awards of non-vested restricted stock and options are considered potentially dilutive common shares for the purpose of computing earnings per common share. We apply the treasury stock method to non-vested options under which the assumed proceeds include the amount the employee must pay to exercise the option plus the amount of unrecognized cost attributable to future periods less any expected tax benefits. Changes in Accounting Methods, Reclassifications and Revisions As part of our ongoing enhancement and refinement of our financial reporting to fairly present our results of operations and financial position, we may make changes from time-to-time in accounting methods and in the classification and presentation of our business activities in our consolidated financial statements. To ensure comparability between periods, we revise previous period consolidated financial statements presented to conform them to the method of presentation in our current period consolidated financial statements. If the changes increase or decrease previously reported amounts of revenue or expenses, we adjust retained earnings as of the beginning of the earliest period presented for the cumulative effect, if any, on that balance. If these changes affect our financial statements for previously reported interim periods not presented herein, we present revised consolidated financial statements for those periods when they are reported in the future. Recent accounting pronouncements ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (issued September 2017) – ASU 2017-04, Intangibles – Goodwill and Other (issued January 2017) - ASU 2016-13, Financial Instruments – Credit Losses (issued June 2016) ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (issued March 2016) – This standard also permits an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures may be either estimated (as has been the requirement in the past) or recognized when they occur. We elected to continue estimating forfeitures consistent with our existing practices thereby resulting in no change to our application of GAAP for this aspect of computing share-based compensation. ASU 2016-02, Leases (issued February 2016) - ASU 2014-09, Revenue from Contracts with Customers (issued May 2014)
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If the costs are associated with products and services for which we recognize revenue at a fixed point in time (primarily sales of perpetual software licenses and professional services), we expense these costs in full at the time we recognize that revenue.
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If the costs are associated with services for which we recognize revenue over time (primarily sales of M&S and SaaS subscriptions) for which we believe it is likely that the contract for those services will be renewed for additional terms in the future, provided we deem these costs to be recoverable, we record these costs as a deferred expense asset and amortize that cost to expense as follows:
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For the portion of the cost that we determine benefits us primarily only over the term of the specific underlying contract currently in force (such as the term of an M&S contract), we recognize expense ratably each month over that term.
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For the portion of the cost that we determine benefits us over an overall customer relationship that is likely to span a period of time that is longer than an initial contract term (for example, an M&S contract renewed for multiple terms in the future), we recognize expense ratably monthly over the estimated life of the customer relationship. |
