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-10.1 ex_184466.htm
EX-31.1 ex_184468.htm
EX-31.2 ex_184469.htm
EX-32.1 ex_184470.htm

Globalscape Earnings 2020-03-31

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

10-Q 1 globalscap20200331_10q.htm FORM 10-Q globalscap20200331_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 March 31, 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 ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

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

 

As of April 30, 2020 there were 18,710,314 shares of common stock outstanding.

 

 

 

GlobalSCAPE, Inc.

 

Quarterly Report on Form 10-Q

 

For the Quarter ended March 31, 2020

 

Index

 

 

 

Page

     

Part I.

Financial Information

 

     

Item 1.

Financial Statements

 

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations and Comprehensive Income  

4

 

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

5

 

Condensed Consolidated Statements of Cash Flows

6

 

Notes to Condensed Consolidated Financial Statements

7

     

Item 2.

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

23

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

     

Item 4.

Controls and Procedures

34

     

Part II.

Other Information

35

     

Item 1.

Legal Proceedings

35

     

Item 1A.

Risk Factors

35

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

     
Item 5. Other Information  
     

Item 6.

Exhibits

36

   

Signatures

37

 

 

 

 

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.

 

2

 

Part I. Financial Information

 

Item 1. Financial Statements

 

GlobalSCAPE, Inc.

Condensed Consolidated Balance Sheets

(in thousands except share amounts)

 

   

March 31,

   

December 31,

 
   

2020

   

2019

 
   

(Unaudited)

         

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 9,289     $ 4,702  

Accounts receivable, net

    5,581       7,239  

Federal income tax receivable

    1,241       1,759  

Prepaid and other current assets

    1,240       1,366  

Total current assets

    17,351       15,066  
                 

Capitalized software development costs, net

    2,609       2,650  

Goodwill

    12,712       12,712  

Deferred tax asset, net

    376       493  

Property and equipment, net

    282       274  

Right-of-use asset

    2,840       2,905  

Other assets

    437       459  

Total assets

  $ 36,607     $ 34,559  
                 

Liabilities and Stockholders’ Equity (Deficit)

               

Current liabilities:

               

Accounts payable

  $ 558     $ 746  

Accrued expenses

    1,457       1,598  

Deferred revenue

    15,659       15,683  

Long term debt, current portion

    5,200       4,575  

Total current liabilities

    22,874       22,602  
                 

Deferred revenue, non-current portion

    2,549       2,572  

Lease liability

    2,833       2,900  

Long term debt, non-current portion

    40,977       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, 24,089,814 and 23,890,890 shares issued:

18,710,314 and 18,511,390 outstanding at

March 31, 2020 and December 31, 2019, respectively

    24       24  

Additional paid-in capital

    33,421       32,156  

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

March 31, 2020 and December 31, 2019, respectively

    (23,087 )     (23,087 )

Retained earnings (deficit)

    (43,008 )     (45,377 )

Total stockholders’ equity (deficit)

    (32,650 )     (36,284 )

Total liabilities and stockholders’ equity (deficit)

  $ 36,607     $ 34,559  

 

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

 

3

 

GlobalSCAPE, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income

(In thousands, except per share amounts)

(Unaudited)

 

   

Three months ended March 31,

 
   

2020

   

2019

 
                 

Operating revenues:

               

Software licenses

  $ 1,995     $ 2,634  

Maintenance and support

    7,066       6,076  

Professional services

    651       703  

Total revenues

    9,712       9,413  

Cost of revenues:

               

Software licenses

    678       609  

Maintenance and support

    613       532  

Professional services

    291       293  

Total cost of revenues

    1,582       1,434  

Gross profit

    8,130       7,979  

Operating expenses:

               

Sales and marketing

    2,075       1,916  

General and administrative

    1,525       2,019  

Legal and professional

    615       576  

Research and development

    311       325  

Total operating expenses

    4,526       4,836  

Income from operations

    3,604       3,143  

Interest income (expense), net

    (774 )     24  

Income before income taxes

    2,830       3,167  

Income tax expense

    461       747  

Net income

  $ 2,369     $ 2,420  

Comprehensive income

  $ 2,369     $ 2,420  
                 

Net income per common share -

               

Basic

  $ 0.13     $ 0.14  

Diluted

  $ 0.12     $ 0.14  
                 

Weighted average shares outstanding:

               

Basic

    18,613       17,197  

Diluted

    19,026       17,664  
                 

Cash dividends declared per share

  $ -     $ 0.015  

 

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

 

4

 

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 )

 

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

 

5

 

GlobalSCAPE, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

   

For the Three Months Ended March 31,

 
   

2020

   

2019

 

Operating Activities:

               

Net income

  $ 2,369     $ 2,420  

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

               

Provision (recoveries) for doubtful accounts receivable

    4       9  

Depreciation and amortization

    441       410  

Share-based compensation

    497       875  

Amortization of debt issuance costs

    107       -  

Deferred taxes

    117       (15 )

Subtotal before changes in operating assets and liabilities

    3,535       3,699  

Changes in operating assets and liabilities:

               

Accounts receivable

    1,654       1,209  

Prepaid and other current assets

    126       51  

Deferred revenue

    (47 )     307  

Accounts payable

    (188 )     18  

Accrued expenses

    (141 )     66  

Operating lease right-of-use asset

    65       -  

Other assets

    22       38  

Operating lease liabilities

    (67 )     -  

Other long-term liabilities

    -       (3 )

Income tax payable (receivable)

    518       588  

Net cash provided by operating activities

    5,477       5,973  

Investing Activities:

               

Software development costs capitalized

    (364 )     (201 )

Purchase of property and equipment

    (44 )     (23 )

Net cash used in investing activities

    (408 )     (224 )

Financing Activities:

               

Proceeds from exercise of stock options

    768       519  

Stock option cash settlement

    -       (445 )

Purchase of Treasury Stock

    -       (375 )

Notes payable principle payments

    (1,250 )     -  

Dividends paid

    -       (259 )

Net cash used in financing activities

    (482 )     (560 )
                 

Net increase in cash

    4,587       5,189  

Cash at beginning of period

    4,702       9,173  

Cash at end of period

  $ 9,289     $ 14,362  
                 

Supplemental disclosure of cash flow information:

               

Cash paid during the period for:

               

Interest

  $ 804     $ -  

Income tax payments (refunds)

  $ (192 )   $ 16  

 

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

 

6

 

GlobalSCAPE, Inc.

 

Notes to Condensed Consolidated Financial Statements

 

As of March 31, 2020 and For the Three Months Then Ended

 

(Unaudited)

 

1.

Nature of Business

 

GlobalSCAPE, Inc., together with its wholly-owned subsidiary (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 March 31, 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.

 

7

 

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.

 

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.

 

8

 

The activity in our deferred revenue balances has been as follows ($ in thousands):

 

   

Three Months Ended March 31,

 
   

2020

   

2019

 

Deferred revenue, beginning of period

  $ 18,255     $ 16,237  

Deferred revenue resulting from new contracts with customers

    7,731       7,102  

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

    (6,821 )     (5,631 )

Deferred revenue arising during the period that was amortized to revenue

    (957 )     (1,164 )

Deferred revenue, end of period

  $ 18,208     $ 16,544  

 

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.

 

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.

 

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:

 

9

 

 

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 March 31,

 
   

2020

   

2019

 

Deferred expense, beginning of period

  $ 943     $ 1,009  

Deferred expense resulting from new contracts with customers

    218       179  

Deferred expense amortized to expense

    (228 )     (209 )

Deferred expense, end of period

  $ 933     $ 979  

 

At March 31, 2020, $582,000 was recorded in prepaid and current other assets and $351,000 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.

 

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.

 

10

 

As of March 31, 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 carrying amount of our notes payable, including the current portion, as of March 31, 2020 was $48,125,000. This carrying value 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 March 31, 2020 and December 31, 2019, this single reporting unit had a negative carrying value.

 

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.

 

11

 

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.

 

Advertising Expense

 

We expense advertising costs as incurred as a component of our sales and marketing expenses. Advertising expense was approximately $59,000 and $51,000 in the 2020 quarter and the 2019 quarter, 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.

 

12

 

Income Taxes

 

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

 

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

 

 

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

 

Earnings Per Share

 

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

 

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

 

Recent accounting pronouncements

 

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.

 

13

 

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.

 

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):

 

   

March 31,

2020

   

December 31,

2019

 

Total invoices issued and unpaid

  $ 6,760     $ 8,245  

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

    (1,079 )     (906 )

Gross accounts receivable

    5,681       7,339  

Allowance for doubtful accounts

    (100 )     (100 )

Accounts receivable, net

  $ 5,581     $ 7,239  

 

5

Capitalized Software Development Costs, Net

 

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

 

   

March 31,

   

December 31,

 
   

2020

   

2019

 

Gross capitalized cost

  $ 11,893     $ 11,529  

Accumulated amortization

    (9,284 )     (8,879 )

Capitalized software development costs, net

  $ 2,609     $ 2,650  

 

   

Three Months Ended March 31,

 
   

2020

   

2019

 

Amount capitalized

  $ 364     $ 201  

Amortization expense

    (405 )     (353 )

 

14

 

   

Released

   

Unreleased

 
   

Products

   

Products

 

Gross capitalized amount at March 31, 2020

  $ 11,493     $ 400  

Accumulated amortization

    (9,284 )     -  

Net capitalized cost at March 31, 2020

  $ 2,209     $ 400  

 

Future amortization expense:

               

Nine months ending December 31, 2020

    1,034          

Year ending December 31,

               

2021

    714          

2022

    424          

2023

    37          

Total

  $ 2,209          

 

The future amortization expense of the gross capitalized software development costs related to unreleased products will be determinable at a future date when those products are ready for general release to the public.

 

6.

Deferred Revenue

 

As described in Note 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):

 

   

March 31,

2020

   

December 31,

2019

 

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

  $ 19,287     $ 19,161  

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

    (1,079 )     (906 )

Total deferred revenue

  $ 18,208     $ 18,255  
                 

Deferred revenue, current portion

  $ 15,659     $ 15,683  

Deferred revenue, non-current portion

    2,549       2,572  

Total deferred revenue

  $ 18,208     $ 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”) (Note 16).

 

At March 31, 2020, the principal balance outstanding under the term note payable was $48.1 million and the balance of the revolving note payable was zero.

 

15

 

The aggregate maturities of our notes payable, as of March 31, 2020, are as follows: $3.8 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 March 31, 2020, this debt service coverage ratio was 2.54x.

 

●           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 March 31, 2020, this debt to tangible net worth ratio was 2.93x.

 

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 March 31, 2020.

 

   

March 31,

 
   

2020

 

Credit facility

  $ 48,125  

Unamortized debt issuance costs

    (1,948 )

Total long-term debt

    46,177  
         

Less current portion of long-term debt

    5,200  
         

Total long-term debt, non-current portion

  $ 40,977  
         

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 March 31, 2020, stock-based incentives for up to 80,000 and 2,587,259 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

    30,338  

2015 Directors Plan

    60,000  

2016 Employee LT Equity Incentive Plan

    1,566,091  

Total shares Outstanding at March 31, 2020

    1,656,429  

 

16

 

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 March 31,

 
   

2020

   

2019

 

Stock-based compensation expense

  $ 497     $ 875  

 

Stock Options

 

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

 

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

 

 

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

    126,000     $ 9.62                  

   Forfeited

    (17,331 )   $ 7.48                  

   Exercised

    (198,924 )   $ 3.86                  

Outstanding at March 31, 2020

    1,473,529     $ 6.35       8.67     $ 2,192  
                                 

Exercisable at March 31, 2020

    193,559     $ 3.96       7.35     $ 612  

 

Additional information about our stock options is as follows:

 

   

Three Months Ended March 31,

 
   

2020

   

2019

 

Weighted average fair value of options granted

  $ 3.94     $ 2.10  

Intrinsic value of options exercised

  $ 1,220,114     $ 258,101  

Cash received from stock options exercised

  $ 767,930     $ 519,184  
                 

Number of options that vested

    43,504       626,278  

Fair value of options that vested

  $ 71,727     $ 964,820  
                 

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

  $ 2,772,371     $ 1,112,499  

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

    2.81       2.16  

 

17

 

As of March 31, 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

 

$1.43 - $2.35

    8,004       3.18     $ 1.78       8,004     $ 1.78  

$2.39 - $3.59

    184,776       8.07     $ 3.49       48,813     $ 3.40  

$3.60 - $5.83

    464,249       8.07     $ 4.14       135,408     $ 4.27  

$5.90 - $8.85

    381,500       9.05     $ 7.13       1,334     $ 5.90  

$8.93 - $13.29

    435,000       9.33     $ 9.31       -     $ -  

Total options

    1,473,529                       193,559          

 

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

 

   

Three Months Ended March 31,

 
   

2020

   

2019

 

Expected volatility

    48 %     49 %

Expected annual dividend yield

    1.50 %     1.50 %

Risk free rate of return

    1.57 %     2.52 %

Expected option term (years)

    6.20       6.00  

 

Restricted Stock Awards

 

Prior to the fourth quarter of 2019 we issued restricted stock only from the 2015 Directors Plan. Beginning in the fourth quarter of 2019, shares of restricted stock were granted from the 2016 Employee Plan in addition to the 2015 Directors Plan. Provisions and characteristics of these plans include the following:

 

 

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

 

Restricted stock awards are initially issued as restricted shares with a legend restricting transferability of the shares until the recipient satisfies the vesting provision of the award, after which time the restrictive legend is removed from the shares.

 

Restricted shares participate in dividend payments and may be voted.

 

Our restricted stock awards activity has been as follows:

 

                   

Total

 
           

Grant Date

   

Fair Value of

 
   

Number of

   

Fair Value

   

Shares That

 
   

Shares

   

Per Share

   

Vested

 

Restricted shares outstanding at December 31, 2019

    184,079     $ 9.32          

Shares granted with restrictions

    -     $ -          

Shares forfeited

    (1,179 )   $ 9.54          

Shares vested and restrictions removed

    -     $ -     $ -  

Restricted shares outstanding at March 31, 2020

    182,900     $ 9.31          
                         

Unrecognized compensation expense for non-vested shares as of March 31, 2020

         

Expense to be recognized in future periods

  $ 1,140,678                  

Weighted average number of months over which expense is expected to be recognized

    42.4                  

 

18

 

9.

Income Taxes

 

The components of our income tax expense are as follows ($ in thousands):

 

   

Three months ended March 31,

 
   

2020

   

2019

 
   

Current

   

Deferred

   

Total

   

Current

   

Deferred

   

Total

 

Federal

  $ 253     $ 92     $ 345     $ 647     $ (10 )   $ 637  

State

    91       25       116       115       (5 )     110  

Total

  $ 344     $ 117     $ 461     $ 762     $ (15 )   $ 747  

 

Deferred income taxes on our consolidated balance sheet reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows ($ in thousands):

 

   

March 31,

   

December 31,

 
   

2020

   

2019

 

Deferred tax assets:

               

   Deferred revenue

  $ 545     $ 672  

   Right-of-use operating lease asset

    595       609  

   Share-based compensation

    254       200  

   Compensation and benefits

    87       123  

Texas franchise tax R&D credit

    136       150  

   Allowance for doubtful accounts

    37       37  

Deferred state income taxes

    35       45  

Tangible assets

    29       24  

   Accrued expenses not deducted for tax

    9       8  

Total deferred tax assets

    1,727       1,868  
                 

Deferred tax liabilities:

               

   Right-of-use operating lease liability

    597       610  

   Intangible assets

    558       567  

Deferred expenses

    196       198  

Total deferred tax liabilities

    1,351       1,375  
                 

Net deferred tax assets

  $ 376     $ 493  

 

In assessing the realizability of deferred tax assets, we consider whether it is more-likely-than-not that some portion or all the deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We have concluded it is more-likely-than-not that our ability to generate future taxable income will allow us to realize those deferred tax assets.

 

As of March 31, 2020, we had Texas Research and Development tax credit carryforwards of $136,000. These carryforwards expire in years 2034 through 2039.

 

The aggregate changes in the balance of our gross unrecognized tax benefits were as follows ($ in thousands):

 

   

Three Months Ended March 31,

 
   

2020

   

2019

 

Balance at beginning of period

  $ 24     $ 113  

Increases for tax positions related to the current year

    -       -  

Increases for tax positions related to prior years

    -       -  

Decreases for tax positions where the statue has expired

    -       -  

Balance at end of period

  $ 24     $ 113  

 

19

 

Our unrecognized tax benefit is related to research and development credits taken on our 2017 U.S. income tax return and the uncertainty related to the realization of a portion of those credits based on prior experience. If we realized and recognized any of our unrecognized tax benefits, such benefits would reduce our effective tax rate in the year of recognition.

 

We record interest and penalty expense related to income taxes as interest and other expense, respectively. At March 31, 2020, no interest or penalties had been or were required to be accrued. We file income tax returns in the US and in various state jurisdictions with varying statues of limitations. We are no longer subject to income tax examination by tax authorities for years prior to 2016 with respect to our federal income tax returns and years prior to 2015 with respect to most of our state income tax returns. We do not file, and are not required to file, any foreign income tax returns.

 

Our income tax expense reconciles to an income tax expense resulting from applying an assumed statutory federal income tax rate of 21% for the 2020 quarter and 2019 quarter to income before income taxes as follows ($ in thousands):

 

   

Three months ended March 31,

 
   

2020

   

2019

 

Income tax expense at federal statutory rate

  $ 594     $ 665  

Increase (decrease) in taxes resulting from:

               

State taxes, net of federal benefit

    97       86  

Stock based compensation

    (197 )     73  

Other

    3       14  

Research and development credit

    (9 )     (17 )

Foreign derived intangible income deduction

    (27 )     (74 )

Income tax expense per the statements of operations

  $ 461     $ 747  

 

10.

Earnings per Common Share

 

Earnings per share for the periods indicated were as follows ($ in thousands, except per share amounts):

 

   

Three Months Ended

 
   

March 31,

 
   

2020

   

2019

 

Numerators

               

Numerator for basic and diluted earnings per share:

         

Net income

  $ 2,369     $ 2,420  
                 

Denominators

               

Denominators for basic and diluted earnings per share:

 

Weighted average shares outstanding - basic

    18,613       17,197  
                 

Dilutive potential common shares

               

Stock options and awards

    413       467  

Denominator for diluted earnings per share

    19,026       17,664  
                 

Net income per common share - basic

  $ 0.13     $ 0.14  

Net income per common share – diluted

  $ 0.12     $ 0.14  

 

11.

Dividends

 

The Company did not pay dividends during the 2020 quarter. We paid dividends during the 2019 quarter as follows:

 

   

Three Months Ended

 
   

March 31, 2019

 

Dividend per share of common stock

  $ 0.015  

Dividend record date

 

March 11, 2019

 

Dividend payment date

 

March 25, 2019

 

 

20

 

12.

Commitments and Contingencies 

 

Severance Payments

 

We have agreements with key personnel that provide for severance payments to them in the event of a “change in control” of the Company, as defined in those agreements, and their employment is terminated in connection with that change in control. In such event, our aggregate severance payments to those employees would be between approximately $700,000 and $1.5 million depending upon the circumstances.

 

Legal and Regulatory Matters

 

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.

 

13.

Leases

 

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.

 

Our non-cancellable, contractual obligations at March 31, 2020 consisted primarily of the following ($ in thousands):

 

   

Operating Lease

 

2020 (remaining nine months)

  $ 317  

2021

    431  

2022

    442  

2023

    453  

2024

    464  

Thereafter

    2,133  

Total lease payments

  $ 4,240  

 

Supplemental other information related to leases:

 

   

Three Months Ended

March 31,

 
   

2019

 

Operating lease cost

  $ 101  

Weighted-average remaining lease term (years)

    9.1  

Weighted-average discount rate (%)

    5 %

Cash paid for amounts included in the measurement of lease liabilities:

       

Operating cash flows from operating leases

  $ 103  

 

21

 

14.

Concentration of Business Volume and Credit Risk

 

In order to leverage the resources of third parties, we make our products available for purchase by end users through third-party, channel distributors even though those end users can also purchase those products directly from us. In the 2020 quarter and 2019 quarter, we earned approximately 18% and 19%, respectively, of our revenue from such sales through our largest third-party channel distributor. As of March 31, 2020, approximately 23% of our accounts receivable were due from this channel distributor with payment for substantially all such amounts having been received subsequent to that date.

 

15.

Segment and Geographic Disclosures

 

In accordance with ASC 280, Segment Reporting, we view our operations and manage our business as principally one segment. As a result, the financial information disclosed herein represents all of the material financial information related to our principal operating segment.

 

Revenues derived from clients and partners located outside the United States accounted for approximately 23% and 28% of our total revenues in the 2020 quarter and 2019 quarter, respectively. Each individual foreign country accounts for less than 10% of total revenue in all periods.  We attribute revenues to countries based on the country in which the client or partner is located. We have no Company offices located in a foreign country and none of our property and equipment was located in a foreign country as of March 31, 2020.

 

16.

Subsequent Events

 

On April 7, 2020 we entered into an agreement with EastWest Bank to borrow $1,987,700 under the U.S. Small Business Administration Payroll Protection Program authorized by the CARES Act. Following receipt of the loan proceeds, we evaluated our access to credit through other sources of funding and determined to repay the funds borrowed under the CARES Act. On May 5, 2020, we returned the $1,987,700 in proceeds from the loan, which was not used by the Company.

 

 

 

22

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Quarterly Report on Form 10-Q (this “Quarterly Report”) of GlobalSCAPE, Inc. and its wholly-owned subsidiary (collectively referred to as “GlobalSCAPE”, the “Company”, “we” or “our”), and any documents incorporated by reference herein contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). “Forward-looking statements” are those statements that are not of historical fact but describe management’s beliefs and expectations. We have identified many of the forward-looking statements in this Quarterly Report by using words such as “anticipate,” “believe,” “could,” “estimate,” “may,” “expect,” “potentially” and “intend.” Although we believe these expectations are reasonable, our operations involve a number of risks and uncertainties, including those described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019 Form 10-K”) and other documents filed with the Securities and Exchange Commission (the “SEC”). Therefore, GlobalSCAPE’s actual results of operations and financial condition in the future could differ materially from those discussed in this Quarterly Report.

 

In the following discussion, our references to the 2020 quarter and the 2019 quarter refer to the three months ended March 31, 2020 and 2019, respectively.

 

Overview

 

We develop and sell computer software that provides secure information exchange, data transfer and sharing capabilities for enterprises and consumers. We have been in business for more than twenty years.

 

Our primary business is selling and supporting managed file transfer (“MFT”) software for enterprises. MFT software facilitates the transfer of data from one location to another across a computer network within a single enterprise or between multiple computer networks in multiple enterprises.

 

Our MFT products are based upon our Enhanced File Transfer (“EFT”) platform. This on-premise and cloud-based delivery platform emphasizes secure and efficient data exchange for virtually any organization. It enables business partners, clients and employees to share information safely and securely. The EFT platform provides enterprise-level security while automating the integration of back-end systems which are features often missing from traditional file transfer software. The EFT platform features built-in regulatory compliance, governance, and visibility controls to maintain data safety and security. It can replace legacy systems, homegrown servers, expensive leased lines and virtual area networks. The EFT platform promotes ease of administration while providing the detailed capabilities necessary for complete control of a file transfer system.

 

We continue to explore all strategic alternatives to maximize value for shareholders, including without limitation to improve the market position and profitability of our product offerings in the marketplace, generate additional liquidity, and enhance our valuation. We may pursue our goals through organic growth or strategic or other alternatives. We will also continue to monitor capital markets for opportunities to repurchase shares, as well as consider other actions designed to enhance shareholder value.

 

We earn most of our revenue from the sale of products and services that are part of our EFT platform. Clients can purchase the capabilities of our EFT platform in two ways:

 

 

Under a perpetual software license for which they pay a one-time fee and under which they typically install our product on computers that they own and/or manage. Our brand name for this product is EFT. Almost all clients who purchase EFT also purchase a maintenance and support (“M&S”) contract for which they pay us an annual recurring fee. Most of the revenue we have earned from our EFT platform products has been from sales of perpetual software licenses and related M&S.

 

 

As a software-as-a-service, or SaaS, under which they pay us ongoing fees to access the capabilities of the EFT platform in the cloud. In January 2018, we introduced EFT Arcus, our SaaS offering of the EFT platform for which users pay a base monthly subscription fee plus an additional variable amount determined based upon their metered usage of EFT Arcus resources.

 

We sell other products that are synergistic to our EFT platform including CuteFTP. Collectively, these products constituted less than 2% of our total revenue in the 2020 quarter. Clients pay a one-time fee to purchase these products under a perpetual software license. Some clients also purchase an M&S contract. We do not offer a SaaS version of these products and have no plans to do so. We continue to offer product support for Mail Express and WAFS, which we discontinued as products for sale as of January 1, 2019.

 

23

 

We focus on selling our EFT platform products in a business-to-business environment. The majority of the resources we will expend in the future for product research, development, marketing and sales will focus on this product line. We expect to expend minimal resources developing and selling our other products. We believe our EFT platform products and business capabilities are well-positioned to compete effectively in the market for these products. For a more comprehensive discussion of the products we sell and the services we offer, see “Software Products and Services below.

 

During the 2020 quarter, license revenue from our EFT platform products decreased 24%. The decline is primarily attributable to a slowdown in deal velocity as companies around the globe began to evaluate the effects of COVID-19 and started shifting to remote workforces.  We believe some clients and prospects decided to defer their buying decisions to a later period. Economic downturns or other adverse economic conditions, including but not limited to, public health crises that reduce economic activity (including the recent coronavirus COVID-19 outbreak) could have an adverse effect on spending on information technology projects since in such environments, prospects and clients may reduce, sometimes greatly, their discretionary spending to focus on preserving mandatory spending budgets.

 

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 (as defined and further described below).

 

Revenue Growth

 

We believe annual revenue growth is a key metric for monitoring our continued success in developing our business in future periods. Given our diverse solution portfolio, we regularly review our revenue mix and changes in revenue across all solutions to identify emerging trends.

 

See “Comparison of the Condensed Consolidated Statement of Operations for the Three Months Ended March 31, 2020 and 2019for a discussion of trends in our revenue growth that we monitor using this metric.

 

Adjusted EBITDA (Non-GAAP Measurement)

 

We utilize Adjusted EBITDA (Earnings Before Interest, Taxes, Total Other Income/Expense, Depreciation, Amortization, and Stock-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 condensed consolidated statement of operations and comprehensive income. We use Adjusted EBITDA to provide another perspective for measuring profitability that does not include the effects of the following items:

 

 

Expenses that typically do not require us to pay them in cash in the current period (such as depreciation, amortization and stock-based compensation);

 

The cost of financing our business; and

 

The effects of income taxes.

 

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 United States generally accepted accounting principles (“GAAP”). It should not be considered as a substitute for net income presented on our condensed consolidated statement of operations and comprehensive income. Adjusted EBITDA has limitations as an analytical tool and when assessing our operating performance. Adjusted EBITDA should not be considered in isolation or without a simultaneous reading and consideration of our condensed consolidated financial statements prepared in accordance with GAAP.

 

24

 

We compute Adjusted EBITDA as follows ($ in thousands):

 

   

Three Months Ended

 
   

March 31,

 
   

2020

   

2019

 

Net Income

  $ 2,369     $ 2,420  

Add (subtract) items to determine Adjusted EBITDA:

               

Income tax expense

    461       747  

Interest (income) expense, net

    774       (24 )

Depreciation and amortization:

               

Total depreciation and amortization

    441       410  

Stock-based compensation expense

    497       875  

Adjusted EBITDA

  $ 4,542     $ 4,428  

 

See “Comparison of the Condensed Consolidated Statement of Operations for the Three Months Ended March 31, 2020 and 2019” for discussion of the variances between periods in the components comprising Adjusted EBITDA. 

 

Software Products and Services

 

We develop and sell computer software that provides secure information exchange, data transfer, and data sharing capabilities for enterprises and consumers. We have been in business for more than twenty years having sold our products to thousands of enterprises and 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. Examples of enterprise-level activities that rely on MFT software include:

 

 

Transfer of transactional information within an enterprise on a repetitive basis from one geographic location to another, such as a transfer of deposit and withdrawal information throughout the day from a branch of a bank to a central data processing center at another location.

 

 

Movement of accumulated information within an enterprise from one data processing application to another on a periodic basis, such as a transfer of bi-weekly payroll information from a payroll system that is used to pay employees to a job cost system that is used to manage the cost of a project.

 

 

Exchange of information between enterprises to facilitate the completion of one or more business transactions, such as a retailer transmitting inventory purchasing requirements produced by its material requirements planning system to an order entry system at a supplying vendor.

 

We earn over 97% of our revenue from the sale of MFT products and services that are part of our EFT platform. We have multiple revenue streams from the EFT platform that include:

 

 

Perpetual software licenses under which clients pay a one-time fee for the right to install our products in their information systems environment on computers they manage and either own or otherwise procure from a cloud services provider, including deploying our products at a cloud services provider in a bring-your-own-license, or BYOL, environment. Our brand name for this product is EFT. Historically, most of the revenue we have earned from our EFT platform products has been from sales of EFT perpetual software licenses and related M&S.

 

 

Cloud-based, SaaS solutions that we sell on an ongoing subscription basis. In January 2018, we introduced EFT Arcus, our SaaS offering of the EFT platform going forward, for which users pay a base monthly subscription fee plus an additional variable amount based upon their metered usage of EFT Arcus resources.

 

 

M&S.

 

 

Professional services for product installation, integration and training.

 

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We focus on selling our EFT platform products in a business-to-business environment. The majority of the resources we will expend in the future for product research, development, marketing and sales will focus on this product line. We expect to expend minimal resources developing and selling our other products. We believe our EFT platform products and business capabilities are well-positioned to compete effectively in the market for these products. For a more comprehensive discussion of the products we sell and the services we offer, see below.

 

We sell other products that are synergistic to our EFT platform including CuteFTP. Collectively, these products constituted less than 2% of our total revenue in the 2020 quarter. Clients pay a one-time fee to purchase these products under a perpetual software license. Some clients also purchase an M&S contract. We do not offer a SaaS version of these products and have no plans to do so. We continue to offer product support for Mail Express and WAFS, which we discontinued as products for sale as of January 1, 2019.

 

We earn most of our revenue from the sale of our EFT platform products that support business-to-business activities and are strategically focused on selling products in that environment. We intend to expend the majority of our resources in the future for product research and development, marketing, and sales in a manner that concentrates on the business-to-business market. We believe our products and business capabilities are well-positioned to compete effectively in that market.

 

The following discussion presents a summary description of our specific products and solutions.

 

Managed File Transfer – Enhanced File Transfer Platform

 

EFT is the brand name of our core MFT product platform. 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, reporting, encryption, ad hoc and web-based file transfers, operability in or through a DMZ network, and integration with back-end business processes, including workflow automation capabilities.

 

General features and capabilities of the EFT platform include:

 

 

State-of-the-art, enterprise-level security when transferring information within or between computer networks as well as for collaboration with business partners, clients, and employees. EFT also provides automation that supports effective integration of back-end systems. It has built-in regulatory compliance, governance, and visibility controls to provide a means of safely maintaining information. EFT offers a high level of performance and scalability to support operational efficiency and maintain business continuity. Administrative tools provide for complete control and monitoring of file transfer activities.

 

 

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, compliance and security requirements. In addition to enabling the secure, flexible transmission of critical information using servers, 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.

 

 

Compliance with government regulations and industry standards relating to the protection of information while allowing users to reduce information systems and technologies costs, increase efficiency, track and audit transactions, and automate processes. Our solutions also provide data replication, acceleration of file transfer, sharing and collaboration, and continuous data backup and recovery.

 

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EFT Platform – Delivery Offerings

 

Our clients can purchase the capabilities of our EFT platform in two ways:

 

 

Under a perpetual software license for which they pay a one-time fee and under which they typically install our product on computers that they own and or manage. The EFT platform purchased in this manner can also be used in a bring-your-own-license environment hosted by major cloud providers such as Amazon Web Services or Microsoft Azure. Almost all clients who purchase a perpetual license to use the EFT platform also purchase an M&S contract for which they pay us a recurring fee that is typically 20% to 30% of the perpetual license fee per year.

 

 

As a SaaS under which the client pays us monthly subscription and usage fees to access the capabilities of the EFT platform in the cloud. Our brand name for this product is EFT Arcus. We introduced this product in January 2018. We have not yet earned significant revenue from the SaaS offering of our EFT platform.

 

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 generates incremental revenue for us at a relatively low cost. We will continue selling CuteFTP as a stand-alone product and providing M&S services to clients, but will not invest significantly in enhancing or marketing the product.

 

Professional Services

 

We offer a wide range of professional services to complement our on-premises and SaaS solutions. These services can include:

 

System integration and implementation

 

Business process and workflow planning

 

Policy development

 

Education and training

 

Solution health checks

 

Maintenance and Support

 

We offer M&S contracts to licensees of all of our software products. These M&S contracts entitle the licensee to software upgrades and technical support services in accordance with the terms of our M&S contract. Standard technical support services are provided via email and telephone during our regular business hours. For certain products, we offer a Platinum M&S contract which provides access to emergency technical assistance 24 hours per day, 7 days a week.

 

Most of our M&S contracts are for one year although we also sell multi-year contracts. M&S is purchased by substantially all buyers of our EFT platform as well as by many clients who purchase our other products. Clients with M&S contracts pay us a recurring, annual fee that is typically 20% to 30% of the software license price. A majority of our clients with M&S contracts renew them each year.

 

Employees

 

Our workforce is organized as follows:

 

   

March 31,

 

Department

 

2020

   

2019

 

Sales and Marketing

    44       39  

Engineering

    14       9  

Professional Services

    6       6  

Customer Support

    24       23  

Management and Administration

    18       15  

Total

    106       92  

 

 

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Solution Perspective and Trends

 

The components of our revenue are as follows ($ in thousands):

 

   

Three Months Ended March 31,

 
   

2020

   

2019

 
   

Amount

   

Percent of

Total

   

Amount

   

Percent of

Total

 
                                 

Revenue By Type

                               

License

  $ 1,995       20.5 %   $ 2,634       28.0 %

M&S

    7,066       72.8 %     6,076       64.5 %

Professional Services

    651       6.7 %     703       7.5 %
                                 

Total Revenue

  $ 9,712