Company Quick10K Filing
Globalscape
Price11.86 EPS1
Shares19 P/E23
MCap223 P/FCF16
Net Debt-13 EBIT12
TEV209 TEV/EBIT17
TTM 2019-09-30, in MM, except price, ratios
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8-K 2018-01-30

GSB 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 5. Other Information.
Item 6. Exhibits
EX-31.1 ex_197697.htm
EX-31.2 ex_197699.htm
EX-32.1 ex_197700.htm

Globalscape Earnings 2020-06-30

Balance SheetIncome StatementCash Flow
554433221102012201420172020
Assets, Equity
1511852-12012201420172020
Rev, G Profit, Net Income
1581-6-13-202012201420172020
Ops, Inv, Fin

globalscap20200630_10q.htm

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 June 30, 2020

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

 

                                                                                                                                           

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

 

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, par value $0.001 per share 

GSB

NYSE American, LLC

(Title of Class)

(Trading Symbol)

(Name of exchange on which registered)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer ☐ 

Smaller reporting company ☒

Emerging growth company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No

 

As of July 31, 2020 there were 18,782,318 shares of common stock outstanding.

 

 

 

GlobalSCAPE, Inc.

 

Quarterly Report on Form 10-Q

 

For the Quarter ended June 30, 2020

 

Index

 

 

 

 

 

 

Page

 

 

 

 

Explanatory Note

 

 

 

 

Part I.

Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

Condensed Consolidated Balance Sheets

5

 

Condensed Consolidated Statements of Operations and Comprehensive Income  

6

 

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

7

 

Condensed Consolidated Statements of Cash Flows

8

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

 

 

 

Item 4.

Controls and Procedures

43

 

 

 

Part II.

Other Information

44

 

 

 

Item 1.

Legal Proceedings

44

 

 

 

Item 1A.

Risk Factors

44

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

     

Item 5

Other Information

46

 

 

 

Item 6.

Exhibits

46

 

 

Signatures

47

 

 

 

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. 

 

Other trademarks and trade names in this Quarterly Report on Form 10-Q (this “Report”) are the property of their respective owners.

 

In this Report, we use the following terms:

 

“BYOL” means bring your own license.

 

“Cloud” or “cloud computing” refers to pooled computing resources, delivered on-demand, over the Internet. In the same manner that electricity is delivered on-demand from large scale power plants, cloud computing is delivered from centralized data centers to users all over the world.

 

“DMZ” or Demilitarized Zone refers to a computer host or perimeter network inserted between a trusted internal network and an untrusted public network such as the Internet.

 

“FTP” or File Transfer Protocol is a protocol used to exchange or manipulate files over a computer network such as the Internet.

 

“MFT” or Managed File Transfer refers to software solutions that facilitate the secure transfer of data from one computer to another through a network.

 

“SaaS” or Software-as-a-Service uses hosted, cloud computing approaches in which the client does not need to install the underlying software on its own computer systems to access the application.

 

 

 

EXPLANATORY NOTE

 

On July 19, 2020, GlobalSCAPE, Inc., a Delaware corporation (the “Company”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among Help/Systems, LLC, a Delaware limited liability company (“Parent”), Grail Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), and solely with respect to certain sections therein, HS Purchaser, LLC, a Delaware limited liability company and Help/Systems Holdings, Inc., a Delaware corporation. Pursuant to the Merger Agreement and upon the terms and subject to the conditions thereof, Merger Sub commenced a tender offer (the “Offer”) to purchase any and all of the outstanding shares (the “Shares”) of common stock of the Company, par value $0.001 per share, at a price of $9.50 per Share (the “Offer Price”), subject to any required withholding of taxes, net to the seller in cash without interest, on the terms and subject to the conditions set forth in the Merger Agreement.

 

Upon the terms and subject to the conditions of the Merger Agreement, Merger Sub commenced the Offer on July 31, 2020. Subject to the terms and conditions set forth in the Merger Agreement, Merger Sub shall, promptly after the expiration of the Offer, accept for payment all Shares validly tendered and not withdrawn pursuant to the Offer (the time at which Shares are first accepted for payment under the Offer, the “Acceptance Time”), and after the Acceptance Time, Merger Sub shall pay the Offer Price for such Shares.

 

Pursuant to the Merger Agreement, following the consummation of the Offer, and subject to the conditions set forth in the Merger Agreement, Merger Sub will be merged with and into the Company (the “Merger”), whereupon the separate existence of Merger Sub shall cease, and the Company shall be the surviving corporation of the Merger and a wholly owned subsidiary of Parent. The Merger shall be governed by and effected under Section 251(h) of the Delaware General Corporation Law (the “DGCL”), without a vote of the stockholders of the Company.

 

At the effective time of the Merger, all remaining outstanding Shares not tendered in the Offer (other than Shares held by Parent or any of its subsidiaries, including Merger Sub, or in the treasury of the Company, or Shares held by stockholders who are entitled to exercise, and properly exercise, appraisal rights with respect to such Shares pursuant to, and who comply in all respects with, the provisions of Section 262 of the DGCL) will be cancelled and converted into the right to receive cash in an amount equal to the Offer Price, without interest, subject to any required withholding of taxes.

 

The Merger Agreement is more fully described in a Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on July 20, 2020. A copy of the Merger Agreement was filed by the Company as an exhibit to that Current Report. The descriptions herein of the Offer, the Merger and the Merger Agreement do not purport to be complete and are subject to, and qualified in their entirety by, the full text of the Merger Agreement filed with that Current Report.

 

 

 

Part I. Financial Information

 

Item 1. Financial Statements

 

GlobalSCAPE, Inc.

Condensed Consolidated Balance Sheets

(in thousands except share amounts)

 

   

June 30,

   

December 31,

 
   

2020

   

2019

 
   

(Unaudited)

         

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 12,463     $ 4,702  

Accounts receivable, net

    6,308       7,239  

Federal income tax receivable

    1,371       1,759  

Prepaid and other current assets

    1,296       1,366  

Total current assets

    21,438       15,066  
                 

Capitalized software development costs, net

    2,570       2,650  

Goodwill

    12,712       12,712  

Deferred tax asset, net

    295       493  

Property and equipment, net

    265       274  

Right-of-use asset

    2,864       2,905  

Other assets

    421       459  

Total assets

  $ 40,565     $ 34,559  
                 

Liabilities and Stockholders’ Equity (Deficit)

               

Current liabilities:

               

Accounts payable

  $ 639     $ 746  

Accrued expenses

    1,500       1,598  

Deferred revenue

    16,500       15,683  

Long term debt, current portion

    5,825       4,575  

Total current liabilities

    24,464       22,602  
                 

Deferred revenue, non-current portion

    2,718       2,572  

Lease liability

    2,853       2,900  

Long term debt, non-current portion

    39,208       42,745  

Other long term liabilities

    24       24  
                 

Commitments and contingencies

   
 
     
 
 
                 

Stockholders’ equity (deficit):

               

Preferred stock, par value $0.001 per share, 10,000,000

authorized, no shares issued or outstanding

    -       -  

Common stock, par value $0.001 per share, 40,000,000

authorized, 24,161,818 and 23,890,890 shares issued:

18,782,318 and 18,511,390 outstanding at

June 30, 2020 and December 31, 2019, respectively

    24       24  

Additional paid-in capital

    33,868       32,156  

Treasury stock, 5,379,500 and 5,379,500 shares, at cost, at

June 30, 2020 and December 31, 2019, respectively

    (23,087 )     (23,087 )

Retained earnings (deficit)

    (39,507 )     (45,377 )

Total stockholders’ equity (deficit)

    (28,702 )     (36,284 )

Total liabilities and stockholders’ equity (deficit)

  $ 40,565     $ 34,559  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

 

GlobalSCAPE, Inc.

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,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Operating revenues:

                               

Software licenses

  $ 2,228     $ 2,835     $ 4,223     $ 5,469  

Maintenance and support

    7,295       6,602       14,361       12,678  

Professional services

    508       832       1,159       1,535  

Total revenues

    10,031       10,269       19,743       19,682  

Cost of revenues:

                               

Software licenses

    729       731       1,407       1,340  

Maintenance and support

    607       566       1,220       1,098  

Professional services

    271       290       562       583  

Total cost of revenues

    1,607       1,587       3,189       3,021  

Gross profit

    8,424       8,682       16,554       16,661  

Operating expenses:

                               

Sales and marketing

    2,062       1,899       4,137       3,815  

General and administrative

    1,450       1,757       2,974       3,776  

Legal and professional

    462       222       1,077       798  

Research and development

    352       275       664       600  

Total operating expenses

    4,326       4,153       8,852       8,989  

Income from operations

    4,098       4,529       7,702       7,672  

Interest income (expense), net

    (628 )     30       (1,402 )     54  

Income before income taxes

    3,470       4,559       6,300       7,726  

Income tax expense

    (31 )     926       430       1,673  

Net income

  $ 3,501     $ 3,633     $ 5,870     $ 6,053  

Comprehensive income

  $ 3,501     $ 3,633     $ 5,870     $ 6,053  
                                 

Net income per common share -

                               

Basic

  $ 0.19     $ 0.21     $ 0.31     $ 0.35  

Diluted

  $ 0.18     $ 0.20     $ 0.31     $ 0.33  
                                 

Weighted average shares outstanding:

                               

Basic

    18,750       17,268       18,681       17,233  

Diluted

    19,119       18,379       19,072       18,120  
                                 

Cash dividends declared per share

  $ -     $ 0.500     $ -     $ 0.515  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6

 

GlobalSCAPE, Inc.

Condensed Consolidated Statement of Stockholders' Equity (Deficit)

(in thousands, except number of shares)

(unaudited)

 

                   

Additional

                         
   

Common Stock

   

Paid-in

   

Treasury

   

Retained

         
   

Shares

   

Amount

   

Capital

   

Stock

   

Earnings

   

Total

 
                                                 

Balance at December 31, 2018

    22,441,860     $ 22     $ 25,584     $ (22,712 )   $ 13,062     $ 15,956  
                                                 

Purchase of Treasury Stock

                            (375 )             (375 )

Shares issued upon exercise of stock options

    156,489               519                       519  

Stock option cash settlement

                    (445 )                     (445 )

Stock-based compensation expense

                                               

       Stock options

                    775                       775  

       Restricted stock

                    100                       100  

Common stock cash dividends, $0.015 per share

                                    (259 )     (259 )

Net Income

                                    2,420       2,420  

Balance at March 31, 2019

    22,598,349     $ 22     $ 26,533     $ (23,087 )   $ 15,223     $ 18,691  
                                                 

Shares issued upon exercise of stock options

    55,520               179                       179  

Stock-based compensation expense

                                               

       Stock options

                    197                       197  

       Restricted stock

    40,000               377                       377  

Common stock cash dividends, $0.50 per share

                                    (8,713 )     (8,713 )

Net Income

                                    3,633       3,633  

Balance at June 30, 2019

    22,693,869     $ 22     $ 27,286     $ (23,087 )   $ 10,143     $ 14,364  
                                                 

Shares issued upon exercise of stock options

    57,006               176                       176  

Stock-based compensation expense

                                               

       Stock options

                    321                       321  

       Restricted stock

                    215                       215  

Common stock cash dividends, $0.015 per share

                                    (263 )     (263 )

Net Income

                                    3,580       3,580  

Balance at September 30, 2019

    22,750,875     $ 22     $ 27,998     $ (23,087 )   $ 13,460     $ 18,393  
                                                 

Shares issued upon exercise of stock options

    1,060,015       2       3,728                       3,730  

Stock-based compensation expense

                                               

       Stock options

                    288                       288  

       Restricted stock

    80,000               142                       142  

Common stock cash dividends, $3.365 per share

                                    (62,471 )     (62,471 )

Net Income

                                    3,634       3,634  

Balance at December 31, 2019

    23,890,890     $ 24     $ 32,156     $ (23,087 )   $ (45,377 )   $ (36,284 )
                                                 

Shares issued upon exercise of stock options

    198,924               768                       768  

Stock-based compensation expense

                                               

       Stock options

                    365                       365  

       Restricted stock

                    132                       132  

Net Income

                                    2,369       2,369  

Balance at March 31, 2020

    24,089,814     $ 24     $ 33,421     $ (23,087 )   $ (43,008 )   $ (32,650 )
                                                 

Shares issued upon exercise of stock options

    11,794               35                       35  

Stock-based compensation expense

                                               

       Stock options

                    356                       356  

       Restricted stock

    60,210               56                       56  

Net Income

                                    3,501       3,501  

Balance at June 30, 2020

    24,161,818     $ 24     $ 33,868     $ (23,087 )   $ (39,507 )   $ (28,702 )

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7

 

GlobalSCAPE, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

   

For the Six Months Ended June 30,

 
   

2020

   

2019

 

Operating Activities:

               

Net income

  $ 5,870     $ 6,053  

Items not involving cash at the time they are recorded in the statement of operations:

               

Provision for doubtful accounts receivable

    4       63  

Depreciation and amortization

    917       916  

Share-based compensation

    909       1,449  

Amortization of debt issuance costs

    213       -  

Deferred taxes

    198       (159 )

Subtotal before changes in operating assets and liabilities

    8,111       8,322  

Changes in operating assets and liabilities:

               

Accounts receivable

    927       537  

Prepaid and other current assets

    70       104  

Deferred revenue

    963       749  

Accounts payable

    (107 )     63  

Accrued expenses

    (98 )     303  

Operating lease right-of-use asset

    41       42  

Other assets

    38       9  

Operating lease liabilities

    (47 )     (43 )

Other long-term liabilities

    -       (4 )

Income tax payable (receivable)

    388       179  

Net cash provided by operating activities

    10,286       10,261  

Investing Activities:

               

Software development costs capitalized

    (768 )     (437 )

Purchase of property and equipment

    (60 )     (32 )

Net cash used in investing activities

    (828 )     (469 )

Financing Activities:

               

Proceeds from exercise of stock options

    803       698  

Stock option cash settlement

    -       (445 )

Purchase of Treasury Stock

    -       (375 )

Notes payable principle payments

    (2,500 )     -  

Dividends paid

    -       (8,972 )

Net cash used in financing activities

    (1,697 )     (9,094 )
                 

Net increase in cash

    7,761       698  

Cash at beginning of period

    4,702       9,173  

Cash at end of period

  $ 12,463     $ 9,871  
                 

Supplemental disclosure of cash flow information:

               

Cash paid during the period for:

               

Interest

  $ 1,436     $ -  

Income tax payments (refunds)

  $ (187 )   $ 1,491  
                 

Supplemental disclosure of noncash activities:

               

Right-of-use assets obtained in exchange for operating lease obligations

  $ -     $ 3,075  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

8

 

GlobalSCAPE, Inc.

 

Notes to Condensed Consolidated Financial Statements

 

As of June 30, 2020 and For the Three and Six

 

Months Then Ended

 

(Unaudited)

 

1.

Nature of Business

 

GlobalSCAPE, Inc., together with its wholly-owned subsidiary (TappIn, Inc., which was dissolved June 16, 2020) (collectively referred to as the “Company”, “GlobalSCAPE”, “we”, “us” or “our”), provides secure information exchange capabilities for enterprises and consumers through the development and distribution of software, delivery of managed and hosted solutions, and provisioning of associated services. Our solution portfolio facilitates transmission of critical information such as financial data, medical records, client files, vendor files, personnel files, transaction activity, and other similar documents between diverse and geographically separated network infrastructures while supporting a range of information protection approaches to meet privacy and other security requirements. In addition to enabling secure, flexible transmission of critical information using servers, desktop and notebook computers, and a wide range of network-enabled mobile devices, our products also provide clients with the ability to monitor and audit file transfer activities. Our primary product is Enhanced File Transfer, or EFT. We have other products that complement our EFT product.

 

We sell other products that are synergistic to EFT including CuteFTP. Collectively, these products aimed at consumers and small businesses constitute less than 2% of our total revenue. We continue to offer product support for Mail Express and WAFS, which we discontinued as products for sale as of January 1, 2019.

 

Throughout these notes unless otherwise noted, our references to the 2020 quarter and the 2019 quarter refer to the three months ended June 30, 2020 and 2019, respectively, and references to the 2020 six months and the 2019 six months refer to the six months ended June 30, 2020 and 2019, respectively.

 

2.

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X, “Interim Financial Statements”, as prescribed by the United States Securities and Exchange Commission, or the SEC. Accordingly, they do not include all information and footnotes required under United States generally accepted accounting principles, or GAAP, for complete financial statements. In the opinion of management, all accounting entries necessary for a fair presentation of our financial position and results of operations have been made. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. The information included in this 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, 2019, filed with the SEC on March 16, 2020, which we refer to as the 2019 Form 10-K, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations also included in our 2019 Form 10-K and in this Report.

 

We follow accounting standards set by the Financial Accounting Standards Board, or FASB. The FASB sets GAAP, which we follow in preparing financial statements that report our financial position, results of operations, and sources and uses of cash. We also follow the reporting regulations of the SEC.

 

The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of our financial statements. It is possible the actual results could differ from these estimates and assumptions and could have a material effect on the reported amounts of our financial position and results of operations.

 

9

 

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.

  

Revenue Recognition

 

Products and Services

  

We earn revenue by delivering the following software products and services:

 

 

Perpetual software licenses under which clients install our products in their information systems environment on computers they manage, own or otherwise procure from a cloud services provider. Clients also deploy our products with cloud services providers in a BYOL environment.

 

Cloud-based, hosted SaaS solutions that we sell on an ongoing subscription basis resulting in our earning recurring, monthly subscription and usage fees to access the service.

 

Maintenance and support services, or M&S, that generally consist of telephone support and access to unspecified future software upgrades.

 

Professional services for product integration and configuration that generally do not significantly modify our software products.

 

We earn the majority of our revenue from the sale of perpetual software licenses and associated contracts for M&S. 

 

We recognize revenue when we have satisfied a performance obligation by transferring control over a product or delivering a service to a client. We measure revenue based upon the consideration set forth in an arrangement or contract with a client. The revenue recognition criteria we apply to each of our software products 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 client the software license key that provides the ability to access and use our product. If our client is a reseller who will further transfer the ability to access and use our product to a third party under a separate arrangement that the reseller has with that third party, we recognize revenue at the time we deliver the software license key to the reseller since our contract is with the reseller.

 

 

Cloud-based, hosted SaaS solutions – These solutions grant a right to access our functional intellectual property. We recognize revenue over time on a monthly basis as we deliver the services to which our clients subscribe. Revenue can include basic monthly fees to access the software and usage fees based upon the volume of certain resources the client consumes (such as volumes of storage or bandwidth). We are generally paid for these services on a month-to-month basis, but if a client pays us in advance for services we will deliver in the future, we record as deferred revenue the amount of such payment related to services we have not yet delivered.

 

 

M&S – We provide these services to purchasers of perpetual software licenses under agreements with terms generally ranging from one to three years. We require up-front payment of our M&S fee in an amount that covers the entire term of the agreement.  We record as deferred revenue amounts paid that relate to future periods during which we will provide the M&S service. We reduce deferred revenue and recognize revenue ratably in future periods as we deliver the M&S service.

 

 

Professional services – We recognize revenue from these services when the services are completed. If we are paid in advance for these services, we record such payment as deferred revenue until we complete the services.

 

The delivery of our software products and services generally does not involve any variable consideration, financing components or consideration payable to a client such as rebates or other incentives that reduce amounts owed to us by clients.

 

10

 

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,

 
   

2020

   

2019

   

2020

   

2019

 

Deferred revenue, beginning of period

  $ 18,208     $ 16,544     $ 18,255     $ 16,237  

Deferred revenue resulting from new contracts with customers

    8,827       7,841       16,558       14,943  

Deferred revenue at the beginning of the period that was amortized to revenue

    (7,009 )     (6,164 )     (13,830 )     (11,796 )

Deferred revenue arising during the period that was amortized to revenue

    (808 )     (1,235 )     (1,765 )     (2,398 )

Deferred revenue, end of period

  $ 19,218     $ 16,986     $ 19,218     $ 16,986  

  

Multi-Element Transactions

 

At the time clients purchase perpetual software licenses, they also typically purchase M&S although it is not mandatory. We do not sell separate M&S to subscribers to our SaaS solutions as M&S is provided as part of their SaaS subscription. Clients 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 clients seeking assistance with products they have previously purchased from us, or SaaS subscriptions to clients 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 clients, we use the residual approach under FASB Accounting Standards Codification Topic 606, or ASC 606, to estimate the selling price of perpetual software licenses in a multi-element transaction by reference to the total transaction price less the sum of the observable stand-alone selling prices of M&S and/or professional services. 

 

We allocate discounts proportionally to all of the components of a multi-element transaction unless the entire discount relates to only one or more, but not all, performance obligations in a contract.

  

Sales Tax

 

We collect sales tax on many of our transactions with clients as required under applicable law. We do not include sales tax collected in our revenue. We record it as a liability payable to taxing authorities. 

 

Allowance for Sales Returns 

 

We provide an allowance for sales returns. We estimate this allowance based upon our historical experience and the nature of recent transactions with clients. This amount is included in accrued liabilities in our condensed consolidated balance sheets.

  

Contract Assets

 

We generally bill clients for professional services when we have fully delivered the services specified in the contract. We may incur costs in delivering the services prior to that time. Such costs are generally not material. Accordingly, we do not record a contract asset for professional service engagements in process but not yet billed.

 

11

 

Incremental Costs of Obtaining a Contract to Deliver Goods and Services

 

We incur incremental costs in the form of sales commissions paid to our sales personnel and royalties on certain products paid to third parties. These are costs we would not incur if we did not obtain a contract to deliver our goods and services. We account for these costs as follows:

 

 

If the costs are associated with products and services for which we recognize revenue at a fixed point in time (primarily sales of perpetual software licenses and professional services), we expense these costs in full at the time we recognize that revenue.

 

 

If the costs are associated with services for which we recognize revenue over time (primarily sales of M&S and SaaS subscriptions) for which we believe it is likely that the contract for those services will be renewed for additional terms in the future, provided we deem these costs to be recoverable, we record these costs as a deferred expense asset and amortize that cost to expense as follows:

  

 

o

For the portion of the cost that we determine benefits us primarily only over the term of the specific underlying contract currently in force (such as the term of an M&S contract), we recognize expense ratably each month over that term.

 

 

o

For the portion of the cost that we determine benefits us over an overall client relationship that is likely to span a period of time that is longer than an initial contract term (for example, an M&S contract renewed for multiple terms in the future), we recognize expense ratably monthly over the estimated life of the client relationship.

 

Our activity in deferred costs of obtaining a contract to deliver goods and services has been as follows ($ in thousands): 

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Deferred expense, beginning of period

  $ 933     $ 979     $ 943     $ 1,009  

Deferred expense resulting from new contracts with customers

    226       206       444       385  

Deferred expense amortized to expense

    (221 )     (222 )     (449 )     (431 )

Deferred expense, end of period

  $ 938     $ 963     $ 938     $ 963  

  

At June 30, 2020, $584,000 was recorded in prepaid and current other assets and $354,000 was recorded in noncurrent other assets in our condensed consolidated balance sheet. At December 31, 2019, we had $577,000 recorded in prepaid and other current assets and $366,000 recorded in noncurrent other assets in our condensed consolidated balance sheet.

 

Leases

 

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities on our condensed consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are generally accounted for separately. On April 18, 2019, the Company signed a new operating lease for our existing office space location. The lease is for a period of 10 years at an average annual rent of $462,000 beginning May 1, 2019. We recorded a right-of-use asset and lease liability of approximately $3 million at the commencement of the lease. 

 

Cash and cash equivalents

 

Cash and cash equivalents includes all cash and highly liquid investments with original maturities of three months or less.

 

12

 

Fair Value of Financial Instruments

 

For financial assets and liabilities recorded at fair value on a recurring or non-recurring basis, fair value is the price we would receive to sell an asset, or pay to transfer a liability, in an orderly transaction with a market participant at the measurement date. In the absence of such data, fair value is estimated using internal information consistent with what market participants would use in a hypothetical transaction. In determining fair value, observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions; preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:

 

Level 1: Quoted prices for identical instruments in active markets.

Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3: Significant inputs to the valuation model are unobservable.

 

As of June 30, 2020, we did not have any assets measured at fair value on a recurring basis that would require disclosure based on the fair value hierarchy of valuation techniques. In addition, certain non-financial assets and liabilities are to be initially measured at fair value on a nonrecurring basis. This includes items such as non-financial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and non-financial, long-lived assets measured at fair value for an impairment assessment. In general, non-financial assets and liabilities including goodwill, capitalized software and property and equipment are measured at fair value using Level 3 inputs, which result in management’s best estimate of fair value from the perspective of a market participant, when there is an indication of impairment and are recorded at fair value only when impairment is recognized.

 

Our financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable and notes payable. The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable, approximates fair value due to the short term maturity of these instruments, all of which mature within 12 months.

 

The principal amount of our notes payable, including the current portion, as of June 30, 2020 was $46,875,000. This carrying value, net of unamortized debt issuance costs, approximates fair value based on interest rates that are currently available to us for issuance of debt with similar terms and maturities.

 

Property and Equipment

 

Property and equipment is comprised of furniture and fixtures, software, computer equipment and leasehold improvements which are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Furniture, fixtures and equipment have a useful life of five to seven years, computer equipment and software have a useful life of three years and leasehold improvements have a useful life that is the shorter of the term of the lease under which the improvements were made or the estimated useful life of the asset.

 

Expenditures for maintenance and repairs are expensed as incurred.

 

Goodwill

 

We account for goodwill in accordance with FASB Accounting Standards Codification 350, or ASC 350, as amended by ASU 2017-04, Simplifying the Test for Goodwill Impairment (effective January 1, 2020, as described in recent accounting pronouncements below). Goodwill is not amortized. Annually, we test goodwill for impairment at the reporting unit level using December 31 as the measurement date, and will also evaluate throughout the year if any indicators of a potential impairment are identified. We operate as a single reporting unit with $12,712,000 of goodwill. As of June 30, 2020 and December 31, 2019, this single reporting unit had a negative carrying value.

 

13

 

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 to perform a quantitative goodwill impairment test to identify both the existence of impairment and the amount of impairment loss. In a quantitative test, the fair value of a reporting unit is compared to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered unimpaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. 

 

As of December 31, 2019, after assessing the totality of the relevant events and circumstances, we determined it not more likely than not that the fair value of our reporting unit was less than its carrying amount. Accordingly, we concluded there was no impairment of goodwill as of that date. There have been no material events (including the recent coronavirus COVID-19 outbreak), or changes in circumstances since that time indicating that the carrying amount of our reporting unit may exceed its fair market value and that interim testing needed to be performed. Additionally, because our single reporting unit has a negative carrying value, reasonable changes in the assumptions used would not indicate impairment

 

Capitalized Software Development Costs

 

When we complete research and development for a software product, have in place a program plan and a detailed program design or a working model of that software product, we capitalize production costs incurred for that software product from that point forward until it is ready for general release to the public. Thereafter, we amortize capitalized software production costs to expense using the straight-line method over the estimated useful life of that product, which is generally three years. We periodically assess the carrying value of capitalized software development costs and our method of amortizing them relative to our estimates of realizability through sales of products in the marketplace. 

 

Cost of revenue 

 

Cost of revenue consists of expenses associated with the production, delivery and support of the products and services we sell. Cost of license revenue consists primarily of amortization of the capitalized software development costs we incur when producing our software products, royalties we pay to use software developed by others for certain features of our products, and fees we pay to third parties who provide services supporting our SaaS solutions. Cost of M&S revenue and cost of professional services revenue consist primarily of salaries and related costs of our employees and third parties we use to deliver these services.

  

Research and Development 

 

We expense research and development costs as incurred

 

14

 

Advertising Expense

 

We expense advertising costs as incurred as a component of our sales and marketing expenses. Advertising expense was approximately $31,000 and $44,000 in the 2020 quarter and the 2019 quarter, respectively, and $90,000 and $95,000 in the 2020 six months and the 2019 six months, respectively.

 

Stock-Based Compensation

 

We measure the cost of stock-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 the simplified method to derive an expected term which represents an estimate of the time options are expected to remain outstanding. We use this method because our options are plain-vanilla options, and we believe our historical option exercise experience is not adequately indicative of our future expectations.

 

We base the risk-free rate for periods within the contractual life of the option on the U.S. treasury yield curve in effect at the time of grant.

  

We estimate a dividend yield based on our historical and expected future dividend payments. 

  

For restricted stock awards, we use the quoted price of our common stock on the grant date as the fair value of the award.

 

Income Taxes

 

We account for income taxes using the asset and liability method. We record deferred tax assets and liabilities based on the difference between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes, as measured by the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets and liabilities are carried on the balance sheet with the presumption that they will be realizable in future periods in which we generate taxable income.

 

We assess the likelihood that deferred tax assets will be realized from future taxable income. Based on this assessment, we provide any necessary valuation allowance on our balance sheet with a corresponding increase in the tax provision on our statement of operations. Any valuation allowances we establish are determined based upon a number of assumptions, judgments, and estimates, including forecasted earnings, future taxable income, and the relative proportions of revenue and income before taxes in the various domestic jurisdictions in which we operate. 

 

We account for uncertainty in income taxes using a two-step process to determine the amount of tax benefit to be recognized. First, we evaluate the tax position to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, we assess the tax position to determine the amount of benefit to recognize in the condensed consolidated financial statements. The amount of the benefit we recognize is the largest amount that we believe has a greater than 50 percent likelihood of being realized upon ultimate settlement. Unrecognized tax benefits represent tax positions for which reserves have been established.

 

Earnings Per Share

 

We compute basic earnings per share using the weighted-average number of common shares outstanding during the periods. We compute diluted earnings per share using the weighted-average number of common shares outstanding plus the number of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding.

 

Awards of non-vested restricted stock and options are considered potentially dilutive common shares for the purpose of computing earnings per common share. We apply the treasury stock method to non-vested options under which the assumed proceeds include the amount the employee must pay to exercise the option plus the amount of unrecognized cost attributable to future periods less any expected tax benefits.

 

15

 

Recent accounting pronouncements

 

Accounting Standards Update (“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. We adopted ASU 2017-04 effective January 1, 2020, and its adoption did not have material impact on our internal condensed consolidated financial statements.

  

ASU 2016-13, Financial Instruments – Credit Losses (issued June 2016) - Among the provisions of this ASU is a requirement that assets measured at amortized cost, which includes trade accounts receivable, be presented at the net amount expected to be collected. This pronouncement requires that an entity reflect all of its expected credit losses based on current estimates which will replace the current standard requiring that an entity need consider only past events and current conditions in measuring an incurred loss. We are subject to this guidance effective with the consolidated financial statements we issue for the year ending December 31, 2023, and the quarterly periods during that year. We do not expect the amounts we report as accounts receivable in those future periods under this guidance to be materially affected relative to current guidance. 

 

ASU 2016-02, Leases (Topic 842): In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We are also required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available. We adopted ASC 842 using the modified retrospective approach effective January 1, 2019. As leases in-place at the time of adoption were not material, no right-of-use assets or lease liabilities were recorded upon adoption. We elected the available practical expedients and implemented internal controls and key system functionality to enable the preparation of financial information on adoption. On April 18, 2019, the Company signed a new operating lease for our existing office space location. The lease is for a period of 10 years at an average annual rent of $462,000 beginning May 1, 2019. We recorded a right-of-use asset and lease liability of approximately $3 million at the commencement of the lease.

 

ASU 2018-15 Internal-Use Software. In August 2018, the FASB issued new guidance that clarifies the accounting for implementation costs in a cloud computing arrangement. The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard will be effective for us in the first quarter of fiscal 2021. We have evaluated the impact of the adoption of this guidance on our Consolidated Financial Statements and disclosures and have determined that it is not material.

 

ASU 2019-12 Income taxes. In December 2019, the FASB issued new guidance that simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The guidance also clarifies and amends existing guidance to improve consistent application. The standard will be effective for us in our first quarter of fiscal 2023, with early adoption permitted. We are currently evaluating the adoption date and the impact of the adoption of this guidance on our Consolidated Financial Statements and disclosures.

 

16

 

4.

Accounts Receivable, Net

 

We bill clients and issue invoices when we have delivered goods or services. In addition, when clients agree to purchase or renew M&S services, we bill and invoice clients at that time which could be before the date we begin delivering those services. In that event, we exclude from accounts receivable (and from the related deferred revenue, see Note 6) the invoices we have issued for which the M&S services commencement date is in the future and which have not been paid by the client as of the date of our condensed consolidated financial statements. We continually assess the collectability of our accounts receivable. If we deem it less than probable that we will collect an amount due us, we write-off that balance against our allowance for doubtful accounts. Accordingly, we determine our accounts receivable, net, as follows ($ in thousands):

 

   

June 30, 2020

   

December 31, 2019

 

Total invoices issued and unpaid

  $ 7,537     $ 8,245  

Less: Unpaid invoices relating to M&S contracts with a start date subsequent to the balance sheet date

    (1,129 )     (906 )

Gross accounts receivable

    6,408       7,339  

Allowance for doubtful accounts

    (100 )     (100 )

Accounts receivable, net

  $ 6,308     $ 7,239  

  

5.

Capitalized Software Development Costs, Net

 

Our capitalized software development costs balances and activities were as follows ($ in thousands): 

 

   

June 30, 2020

   

December 31, 2019

 

Gross capitalized cost

  $ 12,297     $ 11,529  

Accumulated amortization

    (9,727 )     (8,879 )

Capitalized software development costs, net

  $ 2,570     $ 2,650  

  

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Amount capitalized

  $ 404     $ 236     $ 768     $ 437  

Amortization expense

    (442 )     (453 )     (848 )     (806 )

  

   

Released

   

Unreleased

 
   

Products

   

Products

 

Gross capitalized amount at June 30, 2020

  $ 11,828     $ 469  

Accumulated amortization

    (9,727 )     -  

Net capitalized cost at June 30, 2020

  $ 2,101     $ 469  

 

Future amortization expense:

               

Six months ending December 31, 2020

    657          

Year ending December 31,

               

2021

    825          

2022

    535          

2023

    84          

Total

  $ 2,101          

  

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.

 

17

 

6.

Deferred Revenue

 

As described in Note 4 regarding accounts receivable, when clients agree to purchase or renew M&S services, we bill and invoice our clients at that time which could be before the date we begin delivering those services. In that event, we exclude from deferred revenue (and from the related accounts receivable) the invoices we have issued for which the M&S services commencement date is in the future and which have not been paid by the client as of the date of our financial statements. Accordingly, we determine our deferred revenue as follows ($ in thousands):

 

   

June 30, 2020

   

December 31, 2019

 

Total invoiced for M&S contracts for which revenue will be recognized in future periods

  $ 20,347     $ 19,161  

Less: Unpaid invoices relating to M&S contracts with a start date subsequent to the balance sheet date

    (1,129 )     (906 )

Total deferred revenue

  $ 19,218     $ 18,255  
                 

Deferred revenue, current portion

  $ 16,500     $ 15,683  

Deferred revenue, non-current portion

    2,718       2,572  

Total deferred revenue

  $ 19,218     $ 18,255  

 

7.

Notes Payable

 

In November 2019, we entered into a credit facility with J.P. Morgan Chase Bank, N.A, as Administrative Agent and East West Bank as Syndication Agent consisting of a $50.0 million term loan and a $5 million revolving agreement (the “Loan Agreement”), which is secured by substantially all of our assets. Funds from the term loan were substantially used to fund a special dividend of $3.35 to our common shareholders which was paid on December 5, 2019. The revolving loan may be accessed to fund working capital needs. The loans bear a variable interest rate of LIBOR plus a Term Loan Spread between 3.75% and 2.25%. The amount of the Term Loan Spread is a function of the Company’s Leverage Ratio. Effective January 3, 2020, the Company entered into an Amendment and Waiver No. 1 to the Credit Agreement to increase the amount of the special dividend permitted to be paid to stockholders on December 5, 2019 to accommodate last minute option exercises and to exclude the May 28, 2019 special dividend from the fixed charges calculation. Effective April 13, 2020 the Company entered into Amendment No. 2 to the Credit Agreement which provided consent for the Company to borrow $2.0 million under the U.S. Small Business Administration Payroll Protection Program authorized by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Following receipt of the loan proceeds, we evaluated our access to credit through other sources of funding and returned the funds on May 5, 2020.

 

At June 30, 2020, the principal balance outstanding under the term note payable was $46.9 million and the balance of the revolving note payable was zero.

 

The aggregate maturities of our notes payable, as of June 30, 2020, are as follows: $2.5 million in 2020, $7.5 million in 2021, $7.5 million in 2022, $10.0 million in 2023, and $19.4 million in 2024.

 

Interest payments under the credit facility are due monthly. Principal payments are due quarterly. The loans may be prepaid at any time without penalty.  

 

The Loan Agreement contains the following financial covenants:

 

●           We must not exceed a Total Leverage Ratio of 3.25x. This ratio decreases to 3.0x at September 30, 2020, 2.75x at March 31, 2021 and 2.25x at March 31, 2022. This ratio is defined in the Loan Agreement as the ratio of consolidated total funded indebtedness to consolidated EBITDA minus capitalized software expenditures for the period of the four most recent consecutive fiscal quarters. As of June 30, 2020, this debt service coverage ratio was 2.57x.

 

●           We must maintain a Fixed Coverage Charge Ratio of 1.25x. This ratio is defined in the Loan Agreement as the ratio of consolidated EBITDA minus unfinanced capital expenditures to cash interest expense plus scheduled principal payments made plus taxes paid in cash plus restricted payments made in cash. As of June 30, 2020, this debt to tangible net worth ratio was 2.69x.

 

18

 

The Loan Agreement contains customary covenants relating to maintaining legal existence and good standing, complying with applicable laws, delivery of financial statements, payment of taxes and maintaining insurance. The Loan Agreement also contains customary events of default including the failure to make payments of principal and interest, the breach of any covenants, the occurrence of a material adverse change, and certain bankruptcy and insolvency events. Additionally, we may be restricted from declaring dividends if an Event of Default exists, or if immediately prior to and after giving effect of such dividend it would cause us to exceed our maximum Total Leverage Ratio, or fall below our minimum Fixed Charge Coverage Ratio.

 

The following table represents the components of our long-term debt disclosed on the condensed consolidated balance sheet as of June 30, 2020.

 

   

June 30,

 
   

2020

 

Credit facility

  $ 46,875  

Unamortized debt issuance costs

    (1,842 )

Total long-term debt

    45,033  
         

Less current portion of long-term debt

    5,825  
         

Total long-term debt, non-current portion

  $ 39,208  
         

Interest rate

    5.4 %

 

8.

Stock Options, Restricted Stock and Stock-Based Compensation

 

We have granted stock-based incentive awards to our officers and employees under long-term equity incentive plans that originated in 2000, 2006, 2010, 2015 and 2016. We currently issue stock-based awards to our officers and employees under the 2015 Non-Employee Directors Long-Term Equity Incentive Plan (“2015 Directors Plan”) and 2016 Employee Long-Term Equity Incentive Plan (“2016 Employee Plan”). The 2015 Directors Plan and 2016 Employee Plan authorize the issuance of up to 500,000 and 5,000,000 shares of common stock for stock-based incentives, including stock options and restricted stock awards, respectively. As of June 30, 2020, stock-based incentives for up to 80,000 and 2,581,925 shares remained available for issuance in the future under these plans, respectively. The following shares are currently outstanding under our long-term equity incentive plans: 

 

Plan

 

Shares outstanding

 

2010 Employee LT Equity Incentive Plan

    23,207  

2015 Directors Plan

    -  

2016 Employee LT Equity Incentive Plan

    1,565,642  

Total shares Outstanding at June 30, 2020

    1,588,849  

 

Under these stock-based compensation plans 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 our Board of Directors. Our stock-based compensation expense was as follows ($ in thousands): 

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Stock-based compensation expense

  $ 412     $ 574     $ 909     $ 1,449  

 

Stock Options

 

During the 2020 six months, we granted stock options only under the 2016 Employee Plan.

 

19

 

Provisions and characteristics of the options granted to our officers and employees under our long-term equity incentive plans include the following:

 

 

The exercise price, term and other conditions applicable to each stock option or stock award granted are determined by the Compensation Committee of our Board of Directors.

 

The exercise price of stock options is set on the grant date and may not be less than the fair market value per share of our stock at market close on that date.

 

Stock options we issue generally become exercisable ratably over a three-year period or following a four-year period, expire ten years from the date of grant, and are exercisable for a period of ninety days after the end of employment.

 

Upon exercise of a stock option, we issue new shares from the shares of common stock we are authorized to issue.

 

Our stock option activity has been as follows:

 

           

Weighted

                 
           

Average

   

Weighted Average

   

Aggregate

 
           

Exercise

   

Remaining

   

Intrinsic

 
   

Number of

   

Price

   

Contractual

   

Value

 
   

Shares

   

Per Share

   

Term in Years

   

(000's)

 
                                 

Outstanding at December 31, 2019

    1,563,784     $ 5.78       8.69     $ 6,372  

   Granted

    132,000     $ 9.56                  

   Forfeited

    (18,668 )   $ 7.33                  

   Exercised

    (210,718 )   $ 3.81                  

Outstanding at June 30, 2020

    1,466,398     $ 6.38       8.45     $ 4,995  
                                 

Exercisable at June 30, 2020

    195,428     $ 4.14       7.30     $ 1,096  

  

Additional information about our stock options is as follows: 

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Weighted average fair value of options granted

  $ 3.72     $ 2.78     $ 3.93     $ 2.76  

Intrinsic value of options exercised

  $ 79,754     $ 297,289     $ 1,299,868     $ 555,390  

Cash received from stock options exercised

  $ 35,307     $ 178,541     $ 803,238     $ 697,725  
                                 

Number of options that vested

    14,334       19,669       57,838       645,947  

Fair value of options that vested

  $ 33,583     $ 32,982     $ 105,310     $ 997,803  
                                 

Unrecognized compensation expense related to non-vested options at end of period

  $ 2,511,397     $ 2,651,482     $ 2,511,397     $ 2,651,482  

Weighted average years over which non-vested option expense will be recognized

    2.61       3.20       2.61       3.20  

 

20

 

As of June 30, 2020

 
           

Options Outstanding

   

Options Exercisable

 
           

Weighted

                         
           

Average

   

Weighted

           

Weighted

 
   

Underlying

   

Remaining

   

Average

   

Number of

   

Average

 

Range of

 

Shares

   

Contractual

   

Exercise

   

Underlying

   

Exercise

 

Exercise Prices

 

Outstanding

   

Life

   

Price

   

Shares

   

Price

 

$2.35 - $3.53

    83,649       7.56     $ 3.35       25,355     $ 3.13  

$3.54 - $5.31

    556,916       7.83     $ 4.03       164,070     $ 4.14  

$5.34 - $8.01

    328,833       8.80     $ 6.81       2,001     $ 6.99  

$8.30 - $12.45

    491,000       9.06     $ 9.20       4,002     $ 9.26  

$13.07 - $19.61

    6,000       9.30     $ 13.21       -     $ -  

Total options

    1,466,398                       195,428          

 

We used the following assumptions to determine compensation expense for our stock options using the Black-Scholes option-pricing model:

  

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020