UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JuneSeptember 30, 2018.
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-33601
GlobalSCAPE, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 74-2785449 | |
State or Other Jurisdiction of |
| |
Incorporation or Organization | I.R.S. Employer Identification No. | |
4500 Lockhill-Selma, Suite 150 | ||
San Antonio, Texas | 78249 | |
Address of Principal Executive Offices | Zip Code |
210-308-8267
Registrant’s Telephone Number, Including Area Code
210-308-8267
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☒ |
Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Smaller reporting company |
Emerging growth company ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
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 ☐
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of July 31,September 30, 2018 there were 21,873,13117,968,268 shares of common stock outstanding.
GlobalSCAPE, Inc.
Quarterly Report on Form 10-Q
For the Quarter ended June September 30, 2018
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Part I. | Financial Information |
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Item 1. |
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| Condensed Consolidated Statements of Operations and Comprehensive Income | 3 |
| 4 | |
5 | ||
| 6 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Part II. | Other Information |
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Item 1. |
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Item 1A. |
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Item |
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Item 6. |
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Preliminary Notes
GlobalSCAPE®, CuteFTP®, CuteFTP Pro®, DMZ Gateway®, EFT Cloud Services®, GlobalSCAPE Securely Connected®, and Mail Express® are registered trademarks of GlobalSCAPE, Inc.
Secure FTP Server™, Wide Area File Services™, WAFS™, CDP™, Advanced Workflow Engine™, AWE™, EFT Server™, EFT Workspaces™, EFT Insight™, Enhanced File Transfer™, Enhanced File Transfer Server™, Secure Ad Hoc Transfer™, SAT™, EFT Server Enterprise™, Enhanced File Transfer Server Enterprise™, Desktop Transfer Client™, DTC™, Mobile Transfer Client™, MTC™, Web Transfer Client™, Workspaces™, Accelerate™, WTC™, Content Integrity Control™, Advanced Authentication™, AAM™ and scConnect™ are trademarks of GlobalSCAPE, Inc.
TappIn® and design are registered trademarks of TappIn, Inc., our wholly-owned subsidiary.
TappIn Secure Share™, Social Share™, Now Playing™, and Enhanced A La Carte Playlist™ are trademarks of TappIn, Inc., our wholly-owned subsidiary.
Other trademarks and trade names in this Quarterly Report are the property of their respective owners.
In this report,Report, we use the following terms:
“BYOL” means bring your own license.
“Cloud” or “cloud computing” refers to pooled computing resources, delivered on-demand, over the Internet. In the same manner that electricity is delivered on-demand from large scale power plants, cloud computing is delivered from centralized data centers to users all over the world.
“DMZ” or Demilitarized Zone refers to a computer host or perimeter network inserted between a trusted internal network and an untrusted public network such as the Internet.
“FTP” or File Transfer Protocol is a protocol used to exchange or manipulate files over a computer network such as the Internet.
“MFT” or Managed File Transfer refers to software solutions that facilitate the secure transfer of data from one computer to another through a network.
“SaaS” or Software-as-a-Service uses hosted, cloud computing approaches in which the customer does not need to install the underlying software on its own computer systems to access the application.
Part I. Financial Information
(in thousands except share amounts) |
June 30, | December 31, | September 30, | December 31, | |||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 11,914 | $ | 11,583 | $ | 9,630 | $ | 11,583 | ||||||||
Certificates of deposit, short term | 4,311 | 4,291 | 1,530 | 4,291 | ||||||||||||
Accounts receivable, net | 4,246 | 5,925 | 4,853 | 5,925 | ||||||||||||
Federal income tax receivable | 979 | 822 | 740 | 822 | ||||||||||||
Prepaid and other current assets | 1,694 | 675 | 3,173 | 675 | ||||||||||||
Total current assets | 23,144 | 23,296 | 19,926 | 23,296 | ||||||||||||
Certificates of deposit, long term | 11,617 | 11,503 | - | 11,503 | ||||||||||||
Capitalized software development costs, net | 3,580 | 3,786 | 3,384 | 3,786 | ||||||||||||
Goodwill | 12,712 | 12,712 | 12,712 | 12,712 | ||||||||||||
Deferred tax asset, net | 379 | 651 | 330 | 651 | ||||||||||||
Property and equipment, net | 464 | 481 | 442 | 481 | ||||||||||||
Other assets | 616 | 84 | 577 | 84 | ||||||||||||
Total assets | $ | 52,512 | $ | 52,513 | $ | 37,371 | $ | 52,513 | ||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 2,192 | $ | 1,900 | $ | 1,982 | $ | 1,900 | ||||||||
Accrued expenses | 1,571 | 1,671 | 3,378 | 1,671 | ||||||||||||
Deferred revenue | 13,022 | 13,315 | 12,341 | 13,315 | ||||||||||||
Total current liabilities | 16,785 | 16,886 | 17,701 | 16,886 | ||||||||||||
Deferred revenue, non-current portion | 2,991 | 3,735 | 2,795 | 3,735 | ||||||||||||
Other long term liabilities | 176 | 176 | 128 | 176 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Preferred stock, par value $0.001 per share, 10,000,000 authorized, no shares issued or outstanding | - | - | - | - | ||||||||||||
Common stock, par value $0.001 per share, 40,000,000 authorized, 22,276,712 and 22,196,712 shares issued at June 30, 2018 and December 31, 2017, respectively | 22 | 22 | ||||||||||||||
Common stock, par value $0.001 per share, 40,000,000 authorized, 22,382,862 and 22,196,712 shares issued: 17,968,268 and 21,793,131 outstanding at September 30, 2018 and December 31, 2017, respectively | 22 | 22 | ||||||||||||||
Additional paid-in capital | 24,655 | 23,793 | 25,106 | 23,793 | ||||||||||||
Treasury stock, 403,581 shares, at cost, at June 30, 2018 and December 31, 2017 | (1,452 | ) | (1,452 | ) | ||||||||||||
Treasury stock, 4,414,594 and 403,581 shares, at cost, at September 30, 2018 and December 31, 2017, respectively | (18,714 | ) | (1,452 | ) | ||||||||||||
Retained earnings | 9,335 | 9,353 | 10,333 | 9,353 | ||||||||||||
Total stockholders’ equity | 32,560 | 31,716 | 16,747 | 31,716 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 52,512 | $ | 52,513 | $ | 37,371 | $ | 52,513 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Operations and Comprehensive Income |
(In thousands, except per share amounts) |
(Unaudited) |
Three months ended June 30, | Six months ended June 30, | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Operating Revenues: | ||||||||||||||||||||||||||||||||
Software licenses | $ | 2,722 | $ | 2,700 | $ | 4,882 | $ | 5,279 | $ | 2,843 | $ | 2,488 | $ | 7,726 | $ | 7,768 | ||||||||||||||||
Maintenance and support | 5,285 | 5,222 | 10,385 | 10,343 | 5,488 | 5,360 | 15,872 | 15,702 | ||||||||||||||||||||||||
Professional services | 449 | 551 | 900 | 1,283 | 649 | 368 | 1,549 | 1,652 | ||||||||||||||||||||||||
Total Revenues | 8,456 | 8,473 | 16,167 | 16,905 | 8,980 | 8,216 | 25,147 | 25,122 | ||||||||||||||||||||||||
Cost of revenues | ||||||||||||||||||||||||||||||||
Cost of revenues: | ||||||||||||||||||||||||||||||||
Software licenses | 734 | 752 | 1,505 | 1,509 | 721 | 725 | 2,225 | 2,234 | ||||||||||||||||||||||||
Maintenance and support | 539 | 425 | 1,062 | 838 | 514 | 446 | 1,574 | 1,283 | ||||||||||||||||||||||||
Professional services | 292 | 353 | 616 | 717 | 264 | 402 | 880 | 1,120 | ||||||||||||||||||||||||
Total cost of revenues | 1,565 | 1,530 | 3,183 | 3,064 | 1,499 | 1,573 | 4,679 | 4,637 | ||||||||||||||||||||||||
Gross profit | 6,891 | 6,943 | 12,984 | 13,841 | 7,481 | 6,643 | 20,468 | 20,485 | ||||||||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Sales and marketing | 2,889 | 3,196 | 6,001 | 6,485 | 2,261 | 3,079 | 8,229 | 9,564 | ||||||||||||||||||||||||
General and administrative | 1,470 | 1,554 | 3,293 | 3,047 | 1,589 | 1,573 | 4,883 | 4,607 | ||||||||||||||||||||||||
Legal and professional | 1,046 | 335 | 2,725 | 556 | 1,510 | 1,002 | 4,235 | 1,550 | ||||||||||||||||||||||||
Severance | 381 | - | 488 | 21 | ||||||||||||||||||||||||||||
Research and development | 637 | 1,213 | 1,358 | 1,935 | 368 | 594 | 1,654 | 2,530 | ||||||||||||||||||||||||
Total operating expenses | 6,042 | 6,298 | 13,377 | 12,023 | 6,109 | 6,248 | 19,489 | 18,272 | ||||||||||||||||||||||||
Income (loss) from operations | 849 | 645 | (393 | ) | 1,818 | |||||||||||||||||||||||||||
Income from operations | 1,372 | 395 | 979 | 2,213 | ||||||||||||||||||||||||||||
Interest income (expense), net | 80 | 77 | 156 | 146 | (93 | ) | 75 | 63 | 221 | |||||||||||||||||||||||
Income (loss) before income taxes | 929 | 722 | (237 | ) | 1,964 | |||||||||||||||||||||||||||
Income before income taxes | 1,279 | 470 | 1,042 | 2,434 | ||||||||||||||||||||||||||||
Income tax expense | 336 | 265 | 105 | 676 | 281 | 194 | 386 | 870 | ||||||||||||||||||||||||
Net income (loss) | $ | 593 | $ | 457 | $ | (342 | ) | $ | 1,288 | |||||||||||||||||||||||
Comprehensive income (loss) | $ | 593 | $ | 457 | $ | (342 | ) | $ | 1,288 | |||||||||||||||||||||||
Net income | $ | 998 | $ | 276 | $ | 656 | $ | 1,564 | ||||||||||||||||||||||||
Comprehensive income | $ | 998 | $ | 276 | $ | 656 | $ | 1,564 | ||||||||||||||||||||||||
Net income (loss) per common share - | ||||||||||||||||||||||||||||||||
Net income per common share - | ||||||||||||||||||||||||||||||||
Basic | $ | 0.03 | $ | 0.02 | $ | (0.02 | ) | $ | 0.06 | $ | 0.05 | $ | 0.01 | $ | 0.03 | $ | 0.07 | |||||||||||||||
Diluted | $ | 0.03 | $ | 0.02 | $ | (0.02 | ) | $ | 0.06 | $ | 0.05 | $ | 0.01 | $ | 0.03 | $ | 0.07 | |||||||||||||||
Weighted average shares outstanding: | ||||||||||||||||||||||||||||||||
Basic | 21,838 | 21,675 | 21,816 | 21,610 | 21,688 | 21,792 | 21,746 | 21,672 | ||||||||||||||||||||||||
Diluted | 22,169 | 22,170 | 21,816 | 22,094 | 21,940 | 22,247 | 22,044 | 22,145 | ||||||||||||||||||||||||
Cash dividends declared per share | $ | 0.015 | $ | 0.015 | $ | 0.030 | $ | 0.030 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
(in thousands) |
(Unaudited) |
For the Six Months Ended June 30, | For the Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Operating Activities: | ||||||||||||||||
Net income (loss) | $ | (342 | ) | $ | 1,288 | |||||||||||
Net income | $ | 656 | $ | 1,564 | ||||||||||||
Items not involving cash at the time they are recorded in the statement of operations: | Items not involving cash at the time they are recorded in the statement of operations: | Items not involving cash at the time they are recorded in the statement of operations: | ||||||||||||||
Provision (recoveries) for doubtful accounts receivable | (64 | ) | 11 | (64 | ) | 15 | ||||||||||
Depreciation and amortization | 1,120 | 1,056 | 1,641 | 1,604 | ||||||||||||
Share-based compensation | 862 | 671 | 972 | 1,053 | ||||||||||||
Deferred taxes | 12 | (129 | ) | 61 | 28 | |||||||||||
Subtotal before changes in operating assets and liabilities | 1,588 | 2,897 | 3,266 | 4,264 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | 1,743 | 261 | 1,136 | 1,798 | ||||||||||||
Prepaid and other current assets | (389 | ) | 106 | (1,868 | ) | 163 | ||||||||||
Deferred revenue | (1,037 | ) | (1,284 | ) | (1,914 | ) | (1,526 | ) | ||||||||
Accounts payable | 292 | 18 | 82 | 448 | ||||||||||||
Accrued expenses | (100 | ) | (138 | ) | 1,707 | 404 | ||||||||||
Other assets | 77 | 143 | 116 | 154 | ||||||||||||
Accrued interest receivable | (134 | ) | (128 | ) | - | (195 | ) | |||||||||
Other long-term liabilities | - | 19 | (48 | ) | 22 | |||||||||||
Federal income tax receivable | (157 | ) | (669 | ) | 82 | (759 | ) | |||||||||
Net cash provided by operating activities | 1,883 | 1,225 | 2,559 | 4,773 | ||||||||||||
Investing Activities: | ||||||||||||||||
Software development costs capitalized | (793 | ) | (938 | ) | (1,057 | ) | (1,464 | ) | ||||||||
Purchase of property and equipment | (104 | ) | (231 | ) | (143 | ) | (249 | ) | ||||||||
Net cash (used in) investing activities | (897 | ) | (1,169 | ) | ||||||||||||
Redemption of Certificates of Deposit | 14,264 | - | ||||||||||||||
Net cash provided by (used in) investing activities | 13,064 | (1,713 | ) | |||||||||||||
Financing Activities: | ||||||||||||||||
Proceeds from exercise of stock options | - | 458 | 341 | 471 | ||||||||||||
Purchase of Treasury Stock | (17,262 | ) | - | |||||||||||||
Dividends paid | (655 | ) | (652 | ) | (655 | ) | (979 | ) | ||||||||
Net cash (used in) financing activities | (655 | ) | (194 | ) | ||||||||||||
Net cash used in financing activities | (17,576 | ) | (508 | ) | ||||||||||||
Net increase (decrease) in cash | 331 | (138 | ) | (1,953 | ) | 2,552 | ||||||||||
Cash at beginning of period | 11,583 | 8,895 | 11,583 | 8,895 | ||||||||||||
Cash at end of period | $ | 11,914 | $ | 8,757 | $ | 9,630 | $ | 11,447 | ||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||
Cash paid during the period for: | ||||||||||||||||
Interest | $ | - | $ | - | $ | - | $ | - | ||||||||
Income tax payments | $ | 213 | $ | 1,504 | $ | 238 | $ | 1,616 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
(in thousands, except number of shares) |
(unaudited) |
Additional | Additional | |||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Paid-in | Treasury | Retained | Common Stock | Paid-in | Treasury | Retained | |||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Stock | Earnings | Total | Shares | Amount | Capital | Stock | Earnings | Total | |||||||||||||||||||||||||||||||||||||
Balance at December 31, 2017 | 22,196,712 | $ | 22 | $ | 23,793 | $ | (1,452 | ) | $ | 9,353 | $ | 31,716 | ||||||||||||||||||||||||||||||||||||
Balance at December 31, 2016 | 21,920,912 | $ | 22 | $ | 21,756 | $ | (1,452 | ) | $ | 9,289 | 29,615 | |||||||||||||||||||||||||||||||||||||
Retained Earnings Adjustment due to ASC 606 | 979 | 979 | ||||||||||||||||||||||||||||||||||||||||||||||
Shares issued upon exercise of stock options | 191,500 | 458 | 458 | |||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | ||||||||||||||||||||||||||||||||||||||||||||||||
Stock options | 533 | 533 | ||||||||||||||||||||||||||||||||||||||||||||||
Restricted stock | 80,000 | 138 | 138 | |||||||||||||||||||||||||||||||||||||||||||||
Common stock cash dividends, $0.030 per share | (652 | ) | (652 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Net income | 1,288 | 1,288 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2017 | 22,192,412 | $ | 22 | $ | 22,885 | $ | (1,452 | ) | $ | 9,925 | $ | 31,380 | ||||||||||||||||||||||||||||||||||||
Shares issued upon exercise of stock options | 4,300 | 14 | 14 | |||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | ||||||||||||||||||||||||||||||||||||||||||||||||
Stock options | 296 | 296 | ||||||||||||||||||||||||||||||||||||||||||||||
Restricted stock | 85 | 85 | ||||||||||||||||||||||||||||||||||||||||||||||
Common stock cash dividends, $0.015 per share | (327 | ) | (327 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Net income | 276 | 276 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2017 | 22,196,712 | $ | 22 | $ | 23,280 | $ | (1,452 | ) | $ | 9,874 | $ | 31,724 | ||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | ||||||||||||||||||||||||||||||||||||||||||||||||
Stock options | 742 | 742 | 428 | 428 | ||||||||||||||||||||||||||||||||||||||||||||
Restricted stock | 80,000 | 120 | 120 | 85 | 85 | |||||||||||||||||||||||||||||||||||||||||||
Common stock cash dividends, $0.015 per share | (328 | ) | (328 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Net income | (193 | ) | (193 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2017 | 22,196,712 | $ | 22 | $ | 23,793 | $ | (1,452 | ) | $ | 9,353 | $ | 31,716 | ||||||||||||||||||||||||||||||||||||
Common stock cash dividends | (655 | ) | (655 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Retained Earnings Adjustment due to ASC 606 | 979 | 979 | ||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | ||||||||||||||||||||||||||||||||||||||||||||||||
Stock options | 742 | 742 | ||||||||||||||||||||||||||||||||||||||||||||||
Restricted stock | 80,000 | 120 | 120 | |||||||||||||||||||||||||||||||||||||||||||||
Common stock cash dividends, $0.030 per share | (655 | ) | (655 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Net Income | (342 | ) | (342 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2018 | 22,276,712 | $ | 22 | $ | 24,655 | $ | (1,452 | ) | $ | 9,335 | $ | 32,560 | ||||||||||||||||||||||||||||||||||||
Net loss | (342 | ) | (342 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2018 | 22,276,712 | $ | 22 | $ | 24,655 | $ | (1,452 | ) | $ | 9,335 | $ | 32,560 | ||||||||||||||||||||||||||||||||||||
Purchase of Treasury Stock | (17,262 | ) | (17,262 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Cancellation of Restricted Stock | (40,000 | ) | - | |||||||||||||||||||||||||||||||||||||||||||||
Shares issued upon exercise of stock options | 146,150 | 341 | 341 | |||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | ||||||||||||||||||||||||||||||||||||||||||||||||
Stock options | 110 | 110 | ||||||||||||||||||||||||||||||||||||||||||||||
Net Income | 998 | 998 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2018 | 22,382,862 | $ | 22 | $ | 25,106 | $ | (18,714 | ) | $ | 10,333 | $ | 16,747 | ||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
As of June September 30, 2018 and For the Three and SixNine
Months Then Ended
(Unaudited)
1. | Nature of Business |
GlobalSCAPE, Inc. and, together with its wholly-owned subsidiary (together(collectively referred to as the “Company”, “GlobalSCAPE”, “we”, “us” or “we”“our”) provide, provides secure information exchange capabilities for enterprises and consumers through the development and distribution of software, delivery of managed and hosted solutions, and provisioning of associated services. Our solution portfolio facilitates transmission of critical information such as financial data, medical records, customer files, vendor files, personnel files, transaction activity, and other similar documents between diverse and geographically separated network infrastructures while supporting a range of information protection approaches to meet privacy and other security requirements. In addition to enabling secure, flexible transmission of critical information using servers, desktop and notebook computers, and a wide range of network-enabled mobile devices, our products also provide customers with the ability to monitor and audit file transfer activities. Our primary product is Enhanced File Transfer, or EFT. We have other products that complement our EFT product.
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. This product is a cloud-based, integration-as-a-service, or iPaaS, solution used to connect applications, microservices, application program interfaces (or API’s), data and processes within and between organizations. We have experienced issues with the third-party technology and have determined to suspendsuspended marketing of the product as we evaluate optionsproduct. We have settled the dispute with the third-party and determine whetherhave accrued a liability in these financial statements in the licensor can effectively addressamount of the issues.settlement, including any anticipated settlement fees.
We also sellmarket other products that are synergistic to EFT including Mail Express, WAFS, and CuteFTP. Collectively, these products aimed at consumers and small businesses, constitute less than 5% of our total revenue.
Throughout these notes unless otherwise noted, our references to the 2018 quarter and the 2017 quarter refer to the three months ended JuneSeptember 30, 2018 and 2017, respectively. Our references to the 2018 sixnine months and the 2017 sixnine months refer to the sixnine months ended JuneSeptember 30, 2018 and 2017, respectively.
2. | Basis of Presentation |
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X, “Interim Financial Statements”, as prescribed by the United States Securities and Exchange Commission, or SEC. Accordingly, they do not include all information and footnotes required under United States generally accepted accounting principles, or GAAP, for complete financial statements. In the opinion of management, all accounting entries necessary for a fair presentation of our financial position and results of operations have been made. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q, or this Report, should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on June 14, 2018, which we refer to as the 2017 Form 10-K, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations also included in our 2017 Form 10-K and in this report.Report.
We follow accounting standards set by the Financial Accounting Standards Board, or FASB. 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.
3. | Significant Accounting Policies |
Principles of Consolidation
The accompanying condensed consolidated financial statements are prepared in conformity with GAAP. All intercompany accounts and transactions have been eliminated.
Reclassification of Expenses
We have revised the classification of certain of our operating expenses. To ensure comparability between periods, we revised the previous period financial statements presented to conform to the method of presentation in the current period financial statements. These reclassifications had no impact on the net income (loss) for the periods presented or total stockholders’ equity at JuneSeptember 30, 2018.
Revenue Recognition
Nature of Our Products and Services
We earn revenue by delivering the following software products and services:
● | Perpetual software licenses under which customers install our products in their information systems environment on computers they manage, |
● | Cloud-based, hosted SaaS solutions that we sell on an ongoing subscription basis resulting in our earning recurring, monthly subscription and usage fees to access the service. |
● | Maintenance and support services, |
● | Professional services for product integration and configuration that generally do not significantly modify our software products. |
We earn the majority of our revenue from the sale of perpetual software licenses and associated contracts for M&S.
We recognize revenue when we have satisfied a performance obligation by transferring control over a product or delivering a service to a customer. We measure revenue based upon the consideration set forth in an arrangement or contract with a customer. The revenue recognition criteria we apply to each of our software products and services are as follows:
● | Perpetual software licenses – These licenses grant a right to use our functional intellectual property. We recognize revenue at the point in time when we electronically deliver to our customer the software license key that provides the ability to access and use our product. If our customer is a reseller who will further transfer the ability to access and use our product to a third party under a separate arrangement that the reseller has with that third party, we recognize revenue at the time we deliver the software license key to the reseller since our contract is with the reseller. |
● | Cloud-based, hosted SaaS solutions – These solutions grant a right to access our functional intellectual property. We recognize revenue over time on a monthly basis as we deliver the services to which our customers subscribe. |
● | M&S – We provide these services to purchasers of perpetual software licenses under agreements with terms generally ranging from one to three years. We require up-front payment of our M&S fee in an amount that covers the entire term of the agreement. We record as deferred revenue amounts paid that relate to future periods during which we will provide the M&S service. We reduce deferred revenue and recognize revenue ratably in future periods as we deliver the M&S service. |
● | Professional services – We recognize revenue from these services when the services are completed. If we are paid in advance for these services, we record such payment as deferred revenue until we complete the services. |
The delivery of our software products and services generally does not involve any variable consideration, financing components or consideration payable to a customer such as rebates or other incentives that reduce amounts owed to us by customers.
Deferred Revenue Classification and Activity
Deferred revenue related to services we will deliver within one year is presented as a current liability. Deferred revenue related to services that we will deliver more than one year into the future is presented as a non-current liability.
The activity in our deferred revenue balances has been as follows ($in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Deferred revenue, beginning of period | $ | 15,733 | $ | 16,322 | $ | 17,050 | $ | 17,445 | $ | 16,013 | $ | 16,160 | $ | 17,050 | $ | 17,445 | ||||||||||||||||
Deferred revenue resulting from new contracts with customers | 5,659 | 5,228 | 9,557 | 9,445 | 4,764 | 4,769 | 14,321 | 14,214 | ||||||||||||||||||||||||
Deferred revenue at the beginning of the period that was amortized to revenue | (4,827 | ) | (4,897 | ) | (9,614 | ) | (9,816 | ) | (5,113 | ) | (4,554 | ) | (14,727 | ) | (14,370 | ) | ||||||||||||||||
Deferred revenue arising during the period that was amortized to revenue | (552 | ) | (493 | ) | (980 | ) | (914 | ) | (528 | ) | (456 | ) | (1,508 | ) | (1,370 | ) | ||||||||||||||||
Deferred revenue, end of period | $ | 16,013 | $ | 16,160 | $ | 16,013 | $ | 16,160 | $ | 15,136 | $ | 15,919 | $ | 15,136 | $ | 15,919 | ||||||||||||||||
Multi-Element Transactions
At the time our customers purchase perpetual software licenses, they also typically also purchase M&S although it is not mandatory that they do so to use the software.mandatory. We do not sell separate M&S to subscribers to our SaaS solutions as M&S is provided as part of their SaaS subscription. Our customersCustomers may also purchase professional services at the time they purchase perpetual software licenses or a SaaS subscription. Each of the components of these multi-element transactions is a separately identifiable performance obligation.
For multi-element transactions, we allocate the transaction price to each performance obligation on a relative stand-alone selling price basis. We determine that stand-alone selling price for each item at the inception of the transaction involving these multiple elements.
We sell, as stand-alone transactions, renewals of pre-existing M&S contracts, professional services to customers seeking assistance with products they have previously purchased from us, or SaaS subscriptions to customers not requiring any of our other products or services. Accordingly, we are able to estimate the stand-alone selling price of these items based upon our observation of those transactions. Since most of our sales of perpetual software licenses are part of multi-element transactions that also involve M&S and/or professional services, and because the selling price of those licenses can vary significantly among customers, we use the residual approach under FASB Accounting Standards Codification 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 condensed consolidated balance sheet.
Contract Assets
We generally bill our customers for professional services when we have fully delivered the services specified in the contract with the customer.contract. We may incur costs in delivering the services prior to that time. Such costs are generally not material. Accordingly, we do not record a contract asset for professional service engagements in process but not yet billed.
Incremental Costs of Obtaining a Contract to Deliver Goods and Services
We incur incremental costs in the form of sales commissions paid to our sales personnel and royalties on certain of our products paid to third parties. These are costs that we would not incur if we did not obtain a contract to deliver our goods and services. We account for these costs as follows:
● | If |
● | If |
o | For the portion of the cost that we determine benefits us primarily only over the term of the specific underlying contract currently in force (such as the term of an M&S contract), we recognize expense ratably each month over that term. |
o | For the portion of the cost that we determine benefits us over an overall customer relationship that is likely to span a period of time that is longer than an initial contract term (for example, an M&S contract renewed for multiple terms in the future), we recognize expense ratably monthly over the estimated life of the customer relationship. |
Our activity in deferred costs of obtaining a contract to deliver goods and services has been as follows ($in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
2018 | 2018 | 2018 | 2018 | |||||||||||||
Deferred expense, beginning of period | $ | 1,184 | $ | 1,240 | $ | 1,172 | $ | 1,240 | ||||||||
Deferred expense resulting from new contracts with customers | 198 | 347 | 149 | 496 | ||||||||||||
Deferred expense amortized to expense | (210 | ) | (415 | ) | (216 | ) | (631 | ) | ||||||||
Deferred expense, end of period | $ | 1,172 | $ | 1,172 | $ | 1,105 | $ | 1,105 | ||||||||
At JuneSeptember 30, 2018, $628,000$598,000 was recorded in prepaid and current other assets and $544,000$507,000 was recorded in other assets in our condensed consolidated balance sheet.
The following tables present our reported results under FASB Accounting Standards Codification Topic 606, or ASC 606 and a reconciliation to results using the historical accounting method:
GlobalSCAPE, Inc. |
Condensed Consolidated Balance Sheet |
(in thousands) |
As of |
(unaudited) |
As Reported | Effect of ASC 606 | ASC 605 Historical | As Reported | Effect of ASC 606 | ASC 605 Historical | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 11,914 | $ | 11,914 | $ | 9,630 | $ | 9,630 | ||||||||||||||||
Certificates of deposit, short term | 4,311 | 4,311 | 1,530 | 1,530 | ||||||||||||||||||||
Accounts receivable, net | 4,246 | (100 | ) | 4,146 | 4,853 | (75 | ) | 4,778 | ||||||||||||||||
Federal income tax receivable | 979 | 16 | 995 | 740 | 50 | 790 | ||||||||||||||||||
Prepaid and other current assets | 1,694 | (625 | ) | 1,069 | 3,173 | (598 | ) | 2,575 | ||||||||||||||||
Total current assets | 23,144 | (709 | ) | 22,435 | 19,926 | (623 | ) | 19,303 | ||||||||||||||||
Certificates of deposit, long term | 11,617 | 11,617 | ||||||||||||||||||||||
Capitalized software development costs, net | 3,580 | 3,580 | 3,384 | 3,384 | ||||||||||||||||||||
Goodwill | 12,712 | 12,712 | 12,712 | 12,712 | ||||||||||||||||||||
Deferred tax asset, net | 379 | 249 | 628 | 330 | 161 | 491 | ||||||||||||||||||
Property and equipment, net | 464 | 464 | 442 | 442 | ||||||||||||||||||||
Other assets | 616 | (544 | ) | 72 | 577 | (508 | ) | 69 | ||||||||||||||||
Total assets | $ | 52,512 | $ | (1,004 | ) | $ | 51,508 | $ | 37,371 | $ | (970 | ) | $ | 36,401 | ||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||
Accounts payable | 2,192 | 2,192 | 1,982 | 1,982 | ||||||||||||||||||||
Accrued expenses | 1,571 | (100 | ) | 1,471 | 3,378 | (75 | ) | 3,303 | ||||||||||||||||
Deferred revenue | 13,022 | 13,022 | 12,341 | 12,341 | ||||||||||||||||||||
Total current liabilities | 16,785 | (100 | ) | 16,685 | 17,701 | (75 | ) | 17,626 | ||||||||||||||||
Deferred revenue, non-current portion | 2,991 | 2,991 | 2,795 | 2,795 | ||||||||||||||||||||
Other long term liabilities | 176 | 176 | 128 | 128 | ||||||||||||||||||||
Stockholders' Equity: | ||||||||||||||||||||||||
Preferred stock | - | - | - | - | ||||||||||||||||||||
Common stock | 22 | 22 | 22 | 22 | ||||||||||||||||||||
Additional paid-in capital | 24,655 | 24,655 | 25,106 | 25,106 | ||||||||||||||||||||
Treasury stock | (1,452 | ) | (1,452 | ) | (18,714 | ) | (18,714 | ) | ||||||||||||||||
Retained earnings | 9,335 | (904 | ) | 8,431 | 10,333 | (895 | ) | 9,438 | ||||||||||||||||
Total stockholders’ equity | 32,560 | (904 | ) | 31,656 | 16,747 | (895 | ) | 15,852 | ||||||||||||||||
Total liabilities and stockholders’ equity | $ | 52,512 | $ | (1,004 | ) | $ | 51,508 | $ | 37,371 | $ | (970 | ) | $ | 36,401 | ||||||||||
GlobalSCAPE, Inc. |
Condensed Consolidated Statement of Operations and Comprehensive Income |
(in thousands, except per share amounts) |
For the Three Months Ended |
(unaudited) |
As Reported | Effect of ASC 606 | ASC 605 Historical | As Reported | Effect of ASC 606 | ASC 605 Historical | |||||||||||||||||||
Operating revenues: | ||||||||||||||||||||||||
Software licenses | $ | 2,722 | $ | 2,722 | $ | 2,843 | $ | 2,843 | ||||||||||||||||
Maintenance and support | 5,285 | 5,285 | 5,488 | 5,488 | ||||||||||||||||||||
Professional services | 449 | 449 | 649 | 649 | ||||||||||||||||||||
Total revenues | 8,456 | - | 8,456 | 8,980 | - | 8,980 | ||||||||||||||||||
Costs of revenues | ||||||||||||||||||||||||
Software licenses | 734 | 11 | 745 | 721 | (28 | ) | 693 | |||||||||||||||||
Maintenance and support | 539 | 539 | 514 | 514 | ||||||||||||||||||||
Professional services | 292 | 292 | 264 | 264 | ||||||||||||||||||||
Total costs of revenues | 1,565 | 11 | 1,576 | 1,499 | (28 | ) | 1,471 | |||||||||||||||||
Gross Profit | 6,891 | (11 | ) | 6,880 | 7,481 | 28 | 7,509 | |||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Sales and marketing | 2,889 | (23 | ) | 2,866 | 2,261 | (23 | ) | 2,238 | ||||||||||||||||
General and administrative | 1,470 | 1,470 | 1,589 | 1,589 | ||||||||||||||||||||
Legal and professional | 1,046 | 1,046 | 1,510 | 1,510 | ||||||||||||||||||||
Severance | 381 | 381 | ||||||||||||||||||||||
Research and development | 637 | 637 | 368 | 368 | ||||||||||||||||||||
Total operating expenses | 6,042 | (23 | ) | 6,019 | 6,109 | (23 | ) | 6,086 | ||||||||||||||||
Income (loss) from operations | 849 | 12 | 861 | |||||||||||||||||||||
Income from operations | 1,372 | 51 | 1,423 | |||||||||||||||||||||
Interest income (expense), net | 80 | 80 | (93 | ) | (93 | ) | ||||||||||||||||||
Income (loss) before income taxes | 929 | 12 | 941 | |||||||||||||||||||||
Income before income taxes | 1,279 | 51 | 1,330 | |||||||||||||||||||||
Income tax expense | 336 | 4 | 340 | 281 | 11 | 292 | ||||||||||||||||||
Net income | $ | 593 | $ | 8 | $ | 601 | $ | 998 | $ | 40 | $ | 1,038 | ||||||||||||
Comprehensive income | $ | 593 | $ | 8 | $ | 601 | $ | 998 | $ | 40 | $ | 1,038 | ||||||||||||
Net income per common share - basic | $ | 0.03 | $ | 0.00 | $ | 0.03 | $ | 0.05 | $ | 0.00 | $ | 0.05 | ||||||||||||
Net income per common share - diluted | $ | 0.03 | $ | 0.00 | $ | 0.03 | $ | 0.05 | $ | 0.00 | $ | 0.05 | ||||||||||||
GlobalSCAPE, Inc. |
Condensed Consolidated Statement of Operations and Comprehensive Income |
(in thousands, except per share amounts) |
For the |
(unaudited) |
As Reported | Effect of ASC 606 | ASC 605 Historical | As Reported | Effect of ASC 606 | ASC 605 Historical | |||||||||||||||||||
Operating revenues: | ||||||||||||||||||||||||
Software licenses | $ | 4,882 | $ | 4,882 | $ | 7,726 | $ | 7,726 | ||||||||||||||||
Maintenance and support | 10,385 | 10,385 | 15,872 | 15,872 | ||||||||||||||||||||
Professional services | 900 | 900 | 1,549 | 1,549 | ||||||||||||||||||||
Total revenues | 16,167 | - | 16,167 | 25,147 | - | 25,147 | ||||||||||||||||||
Costs of revenues | ||||||||||||||||||||||||
Software licenses | 1,505 | (14 | ) | 1,491 | 2,225 | (42 | ) | 2,183 | ||||||||||||||||
Maintenance and support | 1,062 | 1,062 | 1,574 | 1,574 | ||||||||||||||||||||
Professional services | 616 | 616 | 880 | 880 | ||||||||||||||||||||
Total costs of revenues | 3,183 | (14 | ) | 3,169 | 4,679 | (42 | ) | 4,637 | ||||||||||||||||
Gross Profit | 12,984 | 14 | 12,998 | 20,468 | 42 | 20,510 | ||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Sales and marketing | 6,001 | (54 | ) | 5,947 | 8,229 | (92 | ) | 8,137 | ||||||||||||||||
General and administrative | 3,293 | 3,293 | 4,883 | 4,883 | ||||||||||||||||||||
Legal and professional | 2,725 | 2,725 | 4,235 | 4,235 | ||||||||||||||||||||
Severance | 488 | 488 | ||||||||||||||||||||||
Research and development | 1,358 | 1,358 | 1,654 | 1,654 | ||||||||||||||||||||
Total operating expenses | 13,377 | (54 | ) | 13,323 | 19,489 | (92 | ) | 19,397 | ||||||||||||||||
Income (loss) from operations | (393 | ) | 68 | (325 | ) | |||||||||||||||||||
Income from operations | 979 | 134 | 1,113 | |||||||||||||||||||||
Interest income (expense), net | 156 | 156 | 63 | 63 | ||||||||||||||||||||
Income (loss) before income taxes | (237 | ) | 68 | (169 | ) | |||||||||||||||||||
Income before income taxes | 1,042 | 134 | 1,176 | |||||||||||||||||||||
Income tax expense | 105 | 16 | 121 | 386 | 50 | 436 | ||||||||||||||||||
Net income (loss) | $ | (342 | ) | $ | 52 | $ | (290 | ) | ||||||||||||||||
Comprehensive income (loss) | $ | (342 | ) | $ | 52 | $ | (290 | ) | ||||||||||||||||
Net income | $ | 656 | $ | 84 | $ | 740 | ||||||||||||||||||
Comprehensive income | $ | 656 | $ | 84 | $ | 740 | ||||||||||||||||||
Net income (loss) per common share - basic | $ | (0.02 | ) | $ | 0.00 | $ | (0.01 | ) | ||||||||||||||||
Net income per common share - basic | $ | 0.03 | $ | 0.00 | $ | 0.03 | ||||||||||||||||||
Net income (loss) per common share - diluted | $ | (0.02 | ) | $ | 0.00 | $ | (0.01 | ) | ||||||||||||||||
Net income per common share - diluted | $ | 0.03 | $ | 0.00 | $ | 0.03 | ||||||||||||||||||
GlobalSCAPE, Inc.
Cash and cash equivalents
Cash and cash equivalents includes all cash and highly liquid investments with original maturities of three months or less.
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.
When testing goodwill, we first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of our reporting unit is less than its carrying amount, including goodwill. In performing this qualitative assessment, we assess events and circumstances relevant to us including, but not limited to:
Macroeconomic conditions. Industry and market considerations. Cost factors and trends for labor and other expenses of operating our business. Our overall financial performance and outlook for the future. Trends in the quoted market value and trading of our common stock.
In considering these and other factors, we consider the extent to which any adverse events and circumstances identified could affect the comparison of our reporting unit’s fair value with its carrying amount. We place more weight on events and circumstances that most affect our reporting unit’s fair value or the carrying amount of our net assets. We consider positive and mitigating events and circumstances that may affect our determination of whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. We evaluate, on the basis of the weight of the evidence, the significance of all identified events and circumstances in the context of determining whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount.
If, after assessing the totality of these qualitative events and circumstances, we determine it is not more likely than not that the fair value of our reporting unit is less than its carrying amount, we conclude there is no impairment of goodwill and perform no further testing, in accordance with GAAP. If we conclude otherwise, we proceed with performing the first step, and if necessary, the second step, of the two-step goodwill impairment test prescribed by GAAP.
As of December 31, 2017, 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,
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
Share-Based Compensation
We measure the cost of share-based payment transactions at the grant date based on the calculated fair value of the award. We recognize this cost as an expense ratably over the recipient’s requisite service period during which that award vests or becomes unrestricted.
For stock option awards, we estimate their fair value at the grant date using the Black-Scholes option-pricing model considering the following factors:
We estimate expected volatility based on historical volatility of our common stock. We primarily use We base the risk-free rate for periods within the contractual life of the option on the U.S. treasury yield curve in effect at the time of grant. We estimate a dividend yield based on our historical and expected future dividend payments.
For restricted stock awards, we use the quoted price of our common stock on the grant date as the fair value of the award.
Income Taxes
We account for income taxes using the asset and liability method. We record deferred tax assets and liabilities based on the difference between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes, as measured by the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets and liabilities are carried on the balance sheet with the presumption that they will be realizable in future periods in which we generate taxable income.
We assess the likelihood that deferred tax assets will be realized from future taxable income. Based on this assessment, we provide any necessary valuation allowance on our balance sheet with a corresponding increase in the tax provision on our statement of operations. Any valuation allowances we establish are determined based upon a number of assumptions, judgments, and estimates, including forecasted earnings, future taxable income, and the relative proportions of revenue and income before taxes in the various domestic jurisdictions in which we operate.
We account for uncertainty in income taxes using a two-step process to determine the amount of tax benefit to be recognized. First, we evaluate the tax position to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, we assess the tax position to determine the amount of benefit to recognize in the condensed consolidated financial statements. The amount of the benefit we recognize is the largest amount that we believe has a greater than 50 percent likelihood of being realized upon ultimate settlement. Unrecognized tax benefits represent tax positions for which reserves have been established.
Earnings Per Share
We compute basic earnings per share using the weighted-average number of common shares outstanding during the periods. We compute diluted earnings per share using the weighted-average number of common shares outstanding plus the number of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding.
Awards of non-vested restricted stock and options are considered potentially dilutive common shares for the purpose of computing earnings per common share. We apply the treasury stock method to non-vested options under which the assumed proceeds include the amount the employee must pay to exercise the option plus the amount of unrecognized cost attributable to future periods less any expected tax benefits.
ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (issued September 2017) – This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. It states that in these situations, modification accounting should be applied unless the fair value of the modified award is the same as the fair value of the original award immediately before the original award was modified, the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award was modified, and the classification of the modified award as equity or a liability is the same as the classification of the original award immediately before the original award was modified. This update is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. We adopted this pronouncement in the first quarter of 2018 and do not expect this pronouncement to have a material effect on how we account for the changes to the terms or conditions of a share-based payment award.
ASU 2017-04, Intangibles – Goodwill and Other (issued January 2017) - To simplify the subsequent measurement of goodwill, Step 2 was eliminated from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This update also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. A public business entity that is
ASU 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments (issued June 2016) - This pronouncement provides guidance as to the treatment of transactions in a statement of cash flows with respect to eight specific cash flow issues. During 2017 and the first
ASU 2016-13, Financial Instruments – Credit Losses (issued June 2016) - Among the provisions of this ASU 2016-13 is a requirement that assets measured at amortized cost, which includes trade accounts receivable, be presented at the net amount expected to be collected. This pronouncement requires that an entity reflect all of its expected credit losses based on current estimates which will replace the current standard requiring that an entity need consider only past events and current conditions in measuring an incurred loss. We are subject to this guidance effective with consolidated financial statements we issue for the year ending December 31, 2020, and the quarterly periods during that year. We do not expect the amounts we report as accounts receivable in those future periods under this guidance to be materially affected relative to current guidance.
ASU 2016-02, Leases (issued February 2016) - The main difference between existing GAAP and this ASU 2016-02 is the presentation by lessees on their financial statements of lease assets and lease liabilities arising from operating leases. Since this new standard retains the distinction between finance and operating leases, the effect of leases in the statement of operations and the statement of cash flows will be largely unchanged from existing GAAP. Our only lease of significance is our operating lease for our corporate office space for which we will present a right-to-use asset and a lease liability on our consolidated balance sheet when we implement this standard. We are in the process of determining those amounts. In accordance with this standard, we will implement it beginning with our interim and annual consolidated financial statements for 2019. The extent of the effect of this standard on our consolidated financial statements for 2019 and later will depend upon the leases, if any, that we have in effect at that date.
ASU 2014-09, Revenue from Contracts with Customers (issued May 2014) - The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for those goods or services. We have implemented these new principles using the modified retrospective transition method and recorded an increase (tax effected) to retained earnings at January 1, 2018 of $979,000. We also recorded as an asset deferred expense of approximately $1.2 million. We are accounting for these costs we incur to obtain a contract as follows:
● If these costs are associated with products and services for which we recognize revenue at a point in time (primarily sales of perpetual software licenses and professional services), we expense these costs in full at the time we recognize that revenue. ● If these costs are associated with services for which we recognize revenue over time (primarily sales of M&S and SaaS subscriptions) for which we believe it is likely that the contract for those services will be renewed for additional terms in the future, provided we deem these costs to be recoverable, we record these costs as deferred expense asset and amortize that cost to expense as follows:
o For the portion of the cost that we determine benefits us primarily only over the term of the specific underlying contract currently in force (such as the term of an M&S contract), we will recognize expense ratably each month over that term. o For the portion of the cost that we determine benefits us over an overall customer relationship that is likely to span a period of time that is longer than an initial contract term (for example, an M&S contract renewed for multiple terms in the future), we will recognize expense ratably monthly over the estimated life of the customer relationship.
We have reviewed all recently issued accounting pronouncements. The pronouncements that we have already adopted did not have a material effect on our financial condition, results of operations, cash flows or reporting thereof, and except as otherwise noted above, we do not believe that any of the pronouncements that we have not yet adopted will have a material effect upon our financial condition, results of operations, cash flows or reporting thereof.
Our
We
We bill
Our capitalized software development costs balances and activities were as follows
The future amortization expense of the gross capitalized software development costs related to unreleased products will be determinable at a future date when those products are ready for general release to the public.
7. Deferred Revenue
As described in Note 5 regarding accounts receivable, when
We have stock-based compensation plans under which we have granted, and may grant in the future, incentive stock options, non-qualified stock options, and restricted stock to employees and non-employee members of
Stock Options
We have granted stock options to our officers and employees under long-term equity incentive plans that originated in 2000, 2010 and 2016. During the 2018 quarter, we granted stock options only under the 2016
Provisions and characteristics of the options granted to our officers and employees under our long-term equity incentive plans include the following:
We currently issue stock-based awards to our officers and employees only under the 2016
We have not previously issued any restricted stock under any of
Our stock option activity has been as follows:
Additional information about our stock options is as follows:
We used the following assumptions to determine compensation expense for our stock options using the Black-Scholes option-pricing model:
Restricted Stock Awards
Our 2015 Non-Employee Directors Long-Term Equity Incentive Plan
The components of our income tax expense (benefit) are as follows
Deferred income taxes on our consolidated balance sheet reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows
In assessing the realizability of deferred tax assets, we consider whether it is more-likely-than-not that some portion or all the deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We have concluded it is more-likely-than-not that our ability to generate future taxable income will allow us to realize those deferred tax assets.
As of
As of These carryforwards expire in years 2034 through 2038.
The aggregate changes in the balance of our gross unrecognized tax benefits were as follows
Our unrecognized tax benefit is related to research and development credits taken on our U.S. income tax returns
We record interest and penalty expense related to income taxes as interest and other expense, respectively. At
Our income tax expense (benefit) reconciles to an income tax expense resulting from applying an assumed statutory federal income rate of 21% for the 2018 quarter and 2018
On June 21, 2018, in South Dakota v Wayfair We are evaluating our state income tax filings with respect to the recent Wayfair decision. Currently, we file state income tax returns in those states in which we have a physical presence and/or are otherwise required by a state to register to do business.
Earnings
As a result of our implementation of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (issued March 2016), the estimated proceeds resulting from equity compensation deductible for federal income tax purposes being greater than the associated
We paid dividends during the 2018
Severance Payments We have agreements with key personnel that provide for severance payments to them in the event of a
Legal and Regulatory Matters As previously disclosed in the Company’s Current Report on Form 8-K filed on November 15, 2017, on August 9, 2017, a securities class action complaint, Anthony Giovagnoli v. GlobalSCAPE, On October 12, 2018, the Company received a letter from a stockholder demanding that the Company take action to remedy alleged harm caused to the Company, including to remedy alleged breaches of fiduciary duties by certain current and/or
On October 20, 2017, the Company received a demand letter from a stockholder seeking the inspection of books and records of the Company pursuant to Section 220 of the Delaware General Corporation Law (the “Section 220 Demand”). This stockholder’s stated purpose for the demand is, inter alia, to investigate whether the Company’s Board of Directors and officers engaged in an illegal scheme to misrepresent the Company’s performance by falsely reporting accounts receivable, license revenue, total current assets and total assets, total stockholders’ equity, and total liabilities for the year ended December 31, 2016, as well as the Board’s independence to consider a stockholder derivative demand. The Company intends to fully respond to the Section 220 Demand to the extent required under Delaware law.
The Board has established a special litigation committee (“Special Litigation Committee”) consisting of Dr. Thomas Hicks and Frank Morgan to analyze and investigate claims that could potentially be asserted in stockholder derivative litigation related to facts connected to the claims and allegations asserted in the litigation related to the Restatement,
As disclosed in a Current Report on Form 8-K filed on March 16, 2018, the Fort Worth, Texas Regional Office of the SEC has opened a formal investigation of issues relating to the Restatement, with which the Company is cooperating fully. At this time, the Company is unable to predict the duration, scope, result or related costs associated with the SEC’s investigation. The Company is also unable to predict what, if any, action may be taken by the SEC, or what penalties or remedial actions the SEC may seek. Any determination by the SEC that the Company’s activities were not in compliance with existing laws or regulations, however, could result in the imposition of fines, penalties, disgorgement, equitable relief, or other losses, which could have a material adverse effect on the Company’s financial position, liquidity, or results of operations.
On May 31, 2018, the Company was served with a subpoena issued by a grand jury sitting in the United States District Court for the Western District of Texas (the “Grand Jury Subpoena”). The Grand Jury Subpoena requests all documents and emails relating to the Company’s investigation of the potential improper recognition of software license revenue. The Company intends to fully cooperate with the Grand Jury Subpoena and related investigation being conducted by the United States Attorney’s Office for the Western District of Texas (the “U.S. Attorney’s Investigation”). At this time, the Company is unable to predict the duration, scope, result or related costs of the U.S. Attorney’s Investigation. The Company is also unable to predict what, if any, further action may be taken in connection with the Grand Jury Subpoena and the U.S. Attorney’s Investigation, or what, if any, penalties, sanctions or remedial actions may be sought. Any determination by the U.S. Attorney’s office that the Company’s activities were not in compliance with existing laws or regulations, however, could result in the imposition of fines, penalties, disgorgement, equitable relief, or other losses, which could have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations.
In order to leverage the resources of third parties, we make our products available for purchase by end users through third-party, channel distributors even though those end users can also purchase those products directly from us. In the 2018 quarter and 2017 quarter, we earned approximately
In accordance with
Revenues derived from customers and partners located outside the United States accounted for approximately
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q (this “Quarterly Report”), and any documents incorporated by reference herein contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securitas Exchange
In the following discussion, our references to the 2018 quarter and the 2017 quarter refer to the three months ended
Overview
Our primary business is selling and supporting managed file transfer
Our MFT products are based upon our Enhanced File Transfer
We earn most of our revenue from the sale of products and services that are part of our EFT platform.
We sell other products that are synergistic to our EFT platform including Mail Express, WAFS, and CuteFTP. Collectively, these products constituted less than 5% of our total revenue in the three months and
We focus on selling our EFT platform products in a business-to-business environment. The majority of the resources we will expend in the future for product research, development, marketing and sales will focus on this product line. We expect to expend minimal resources developing and selling our other products. We believe our EFT platform products and business capabilities are well-positioned to compete effectively in the market for these products. For a more comprehensive discussion of the products we sell and the services we offer, see
Key Business Metrics
We review two key business metrics on an ongoing basis to help us monitor our performance and to identify material trends which may affect our business: revenue growth and adjusted EBITDA.
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:
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:
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
See
In the past, we reported bookings and potential future revenue as key business metrics. With the refinement of our revenue growth key business metric discussed above, we no longer rely on bookings or potential future revenue as key business
Adjusted EBITDA (Non-GAAP Measurement)
We utilize Adjusted EBITDA (Earnings Before Interest, Taxes, Total Other Income/Expense, Depreciation, Amortization, other than amortization of capitalized software development costs, and Share-Based Compensation Expense) to provide us a view of income and expenses that is supplemental and secondary to our primary assessment of net income as presented in our consolidated statement of operations and comprehensive income (loss). We use Adjusted EBITDA to provide another perspective for measuring profitability that does not include the effects of the following items:
We monitor Adjusted EBITDA to assess our performance relative to our intended strategies, expected patterns of action, and budgets. We use the results of that assessment to adjust our future activities to the extent we deem necessary.
Adjusted EBITDA is not a measure of financial performance under
We compute Adjusted EBITDA as follows
See
Software Products and Services
We develop and sell computer software that provides secure information exchange, data transfer, and data sharing capabilities for enterprises and consumers. We have been in business for more than twenty years having sold our products to thousands of enterprises and more than one million individual consumers globally.
Our primary business is selling and supporting MFT software for enterprises. MFT software facilitates the transfer of data from one location to another across a computer network within a single enterprise or between multiple computer networks in multiple enterprises. These transfers may be ongoing, repetitive activities executed by automated software routines that occur without human intervention, or they may be transfers that people create and complete in the absence of automated routines or as a result of ad-hoc, special situations that arise from time-to-time. Examples of enterprise-level activities that rely on MFT software include:
We earn over 90% of our revenue from the sale of MFT products and services that are part of our EFT platform. We have multiple revenue streams from the EFT platform that include:
We focus on selling our EFT platform products in a business-to-business environment. The majority of the resources we will expend in the future for product research, development, marketing and sales will focus on this product line. We expect to expend minimal resources developing and selling our other products. We believe our EFT platform products and business capabilities are well-positioned to compete effectively in the market for these products. For a more comprehensive discussion of the products we sell and the services we offer, see below.
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
We earn less than 5% of our revenue from selling other products that can be synergistic to our EFT platform. These products have capabilities that:
We earn most of our revenue from the sale of our EFT platform products that support business-to-business activities and are strategically focused on selling products in that environment. We intend to expend the majority of our resources in the future for product research and development, marketing, and sales in a manner that concentrates on the business-to-business
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 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. 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.
The EFT platform provides a common, scalable MFT environment that accommodates a broad family of accompanying modules to provide enterprises with increased security, automation, compliance and performance when compared to traditional FTP-based and email delivery systems. Various optional modules allow users to select the solution configuration most applicable to their requirements for auditing,
General features and capabilities of the EFT platform include:
During 2017 and the
EFT Platform – Delivery Offerings
Our customers can purchase the capabilities of our EFT platform in two ways:
Secure Information Sharing and Exchange Solution – Mail Express
Mail Express is a solution that provides secure information sharing and exchange capabilities leveraging traditional email workflow. It is a stand-alone product installed in a client-server environment that allows users to send and receive secure, encrypted email and attachments of virtually unlimited size.
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.
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
We will continue selling CuteFTP as a stand-alone product and providing M&S services to customers,
Professional Services
We offer a wide range of professional services to complement our on-premises and SaaS solutions. These
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
Most of our M&S contracts are for one year although we also sell multi-year contracts. M&S is purchased by substantially all buyers of our EFT platform as well as by many customers who purchase our other products. Customers with M&S contracts pay us a recurring, annual
Employees
Our
On August 3, 2018, we implemented a plan to restructure our organization, which included a reduction in workforce of approximately 40 employees, representing approximately 30% of the Company’s total pre-restructuring workforce. We recorded a charge of $381,000 in the third quarter of 2018 relating to this reduction in force, consisting primarily of one-time severance payments and termination benefits. The Company’s goal in the restructuring is to better focus our workforce on retaining current customers, gaining incremental business from current customers, and winning new business in the market segments where we can leverage our expertise and long history as an EFT pioneer. The Company expects for the realignment to result in a significant reduction in total expenses. Furthermore, to the extent that it can be successfully implemented without negatively impacting revenues or growth opportunities, the realignment offers an opportunity for the Company to realize significant increases in operating earnings in future periods, although there can be no assurance that any such increase will occur.
Solution Perspective and Trends
The components of our revenue are as follows
Revenue from our EFT platform products increased
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 or EFT Arcus brands 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. M&S revenue under contracts to provide ongoing product support and software updates to our 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
We have developed and offered
In continuing to develop our demand generation activities, we have made and continue to make ongoing changes in sales and marketing including:
Liquidity and Capital Resources
Our total cash, cash equivalents, certificates of deposit and working capital positions were as follows
At
When assessing our liquidity and capital resources, we consider the following factors:
Our capital requirements principally relate to our need to fund our ongoing operating expenditures, which are primarily related to employee salaries and benefits. We make these expenditures to enhance our existing products, develop new products, sell those products in the marketplace and support our customers after the sale.
We rely on cash and cash equivalents on hand and cash flows from operations to fund our operating activities and believe those items will be our principal sources of capital for the foreseeable future. If our revenue declines and/or our expenses increase, our cash flow from operations and cash on hand could decline.
Cash provided or used by our various activities consisted of the following
Our cash provided by operating activities
Offset by:
The amount of cash we used for investing activities during the 2018
Offset by:
Financing activities used more cash during the 2018
Offset by:
Contractual Obligations and Commitments
As of
Our non-cancellable, contractual obligations at
As of
Comparison of the Condensed Consolidated Statement of Operations for the Three Months Ended
In the discussion below,
Revenue. The components of our revenues were as follows
Our total revenue
EFT Platform Products
License revenue from our EFT platform products increased
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:
M&S revenue from our EFT platform products increased
Our professional services revenue was
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,
Our M&S contracts are typically for one year, with some customers buying two or three year contracts.
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 Cost of Revenues. These expenses are associated with the production, delivery and support of our products and services. We believe it is
Cost of license revenue primarily consists
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
Cost of M&S revenue as a percent of M&S revenue was
Cost of professional services revenue as a percent of that revenue was
Sales and Marketing. We believe it
General and Administrative. These expenses
Legal and Professional. These expenses increased
Severance. These expenses increased $381,000 due to the one-time severance payments and termination benefits associated with the reduction in force.
Research and Development. The overall profile of our research and development
Our total R&D expenditures decreased
Total resources expended for R&D set forth above as total R&D expenditures serves to illustrate our total corporate efforts to improve our existing products and to develop new products regardless of whether or not our expenditures for those efforts were expensed or capitalized. Total resources expended for R&D is not a measure of financial performance under GAAP and should not be considered a substitute for R&D expense (set forth above as R&D expenditures expensed) and capitalized software development costs (set forth above as R&D expenditures capitalized) individually. While we believe the non-GAAP, total resources expended for R&D amount provides useful supplemental information regarding our overall corporate product improvement and new product creation activities, there are limitations associated with the use of this non-GAAP measurement. Total resources expended for R&D is a non-GAAP measure not prepared in accordance with GAAP and may not be comparable to similarly titled measures of other companies since there is no standard for preparing this non-GAAP measure. As a result, this non-GAAP measure of total resources expended for R&D has limitations and should not be considered in isolation from, or as a substitute for, R&D expense and capitalized software development costs individually.
Interest Income (Expense), Net. Interest income (expense), net
Income Taxes. Our effective rate differed from the federal statutory tax rate of 21% in the 2018 quarter and 34% in the 2017 quarter primarily due to:
Offset by:
Comparison of theCondensed Consolidated Statement of Operations for the
In the discussion below, Revenue. The components of our revenues were as follows
Our total revenue
EFT Platform Products
License revenue from our EFT platform products
M&S revenue from our EFT platform products increased
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.
Cost of Revenues. These expenses are associated with the production, delivery and support of our products and services. We believe it is
Cost of license revenue consists primarily of:
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 was relatively flat and as a percent of software license revenue was
Cost of M&S revenue as a percent of M&S revenue was
Cost of professional services revenue as a percent of that revenue was
Sales and Marketing. We believe it
General and Administrative. These expenses increased Legal and Professional. These expenses increased Severance. These expenses increased $467,000 due mainly to the one-time severance payments and termination benefits associated with the reduction in force. Research and Development. The overall profile of our research and development activities was as follows
Our total R&D expenditures decreased
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.
Income Taxes. Our effective tax rate differed from the federal statutory tax rate of 21% for the 2018
Offset by:
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 2018 quarter and 2017 quarter, we earned approximately
We earned approximately
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, including our President and Chief Executive Officer and our Chief Financial Officer, evaluated our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
As previously reported in our 2017 Form 10-K, filed with the
We had material weaknesses in our control environment and monitoring:
We had material weaknesses related to internal control monitoring and activities to support the financial reporting process:
This section of Item 4, “Controls and Procedures,” should be read in conjunction with Item 9A, “Controls and Procedures,” included in our 2017 Form 10-K, for additional information on Managements Report on Internal Control over Financial Reporting.
Status of Remediation Plan
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:
Our management is monitoring the effectiveness of these and other processes, procedures and controls and will make any further changes deemed appropriate. Our management believes the foregoing actions will effectively remediate the material weaknesses. However, our material weaknesses will not be considered remediated until the above controls are in place for a period of time, the controls are tested and management concludes that these controls are properly designed and operating effectively.
Changes in Internal Control over Financial Reporting
Except as described above with respect to our remediation plan, there have been no changes in our internal control over financial reporting during the quarter ended
Part II. Other Information
The 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 this Form 10-Q is incorporated herein by reference.
In addition to the other information set forth in this
On
The Company
shares from each tendering stockholder. The
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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