Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
This document contains various forward-looking statements and information that are based on management's beliefs, assumptions made by management and information currently available to management. Such statements are subject to various risks and uncertainties, which could cause actual results to vary materially from those contained in such forward-looking statements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected or projected. Certain of these, as well as other risks and uncertainties are described in more detail herein and in Astea International Inc.'s ("Astea or the Company") Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
Astea is a global provider of service management software that addresses the unique needs of companies who manage capital equipment, mission critical assets and human capital. Clients include Fortune 500 to mid-size companies which Astea services through company facilities in the United States, United Kingdom, Australia, Japan, the Netherlands and Israel. Since its inception in 1979, Astea has licensed applications to companies in a wide range of sectors including information technology, telecommunications, instruments and controls, business systems, and medical devices.
Astea Alliance, the Company's service management suite of solutions, supports the complete service lifecycle, from lead generation and project quotation to service and billing through asset retirement. It integrates and optimizes critical business processes for Campaigns, Call Center, Depot Repair, Field Service, Logistics, Projects and Sales, and Order Processing applications. Astea extends its application suite with mobile workforce management, dynamic scheduling optimization, third party vendor and customer self-service portals, and business intelligence. In order to ensure customer satisfaction, Astea also offers infrastructure tools and services. Astea Alliance provides service organizations with technology-enabled business solutions that improve profitability, stabilize cash-flows, and reduce operational costs through automating and integrating key service, sales and marketing processes.
The FieldCentrix Enterprise is a service management solution that runs on a wide range of mobile devices (handheld computers, laptops and PCs, and Pocket PC devices), and integrates seamlessly with popular customer relationship management ("CRM") and ERP applications. Add-on features include a web-based customer self-service portal, workforce optimization capabilities, and equipment-centric functionality. FieldCentrix has licensed applications to companies in a wide range of sectors including HVAC, building and real estate services, manufacturing and process instruments and controls, and medical equipment.
The Company's sales and marketing efforts are primarily focused on new software licensing (on premise and cloud solutions) and support services for its latest generation of Astea Alliance and FieldCentrix products.
Critical Accounting Policies and Estimates
The Company's significant accounting policies are described in Management's Discussion and Analysis of Financial Condition and Results of Operations and the Summary of Accounting Policies, Note 2, in the Company's 2015 Annual Report on Form 10-K. The preparation of financial statements in conformity with accounting principles generally accepted within the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related notes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below; however, application of these accounting policies involves the exercise of judgments and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Revenue Recognition
Astea's revenue is principally recognized from three sources: (i) licensing arrangements, (ii) subscription services and (iii) services and maintenance.
The Company markets its products primarily through its direct sales force and resellers. License agreements do not provide for a right of return, and historically, product returns have not been significant.
The Company recognizes revenue from license sales when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the license fee is fixed and determinable and the collection of the fee is probable. The Company utilizes written contracts as a means to establish the terms and conditions by which our products, support and services are sold to our customers. Delivery is considered to have occurred when title and risk of loss have been transferred to the customer, which generally occurs after a license key has been delivered electronically to the customer. Revenue for arrangements with extended payment terms in excess of one year is recognized when the payments become due, provided all other recognition criteria are satisfied. If collectability is not considered probable, revenue is recognized when the fee is collected. Our typical end user license agreements do not contain acceptance clauses. However, if acceptance criteria are required, revenues are deferred until customer acceptance has occurred.
If these criteria are not met, then revenue is deferred until such criteria are met or until the period(s) over which the last undelivered element is delivered. If there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit's relative fair value. There may be cases, however, in which there is objective and reliable evidence of fair value of the undelivered item(s) but no such evidence for the delivered item(s). In those cases, the residual method is used to allocate the arrangement consideration. Under the residual method, the amount of consideration allocated to the delivered item(s) equals the total arrangement consideration less the aggregate fair value of the undelivered item(s). We apply the revenue recognition policies discussed below to each separate unit of accounting.
Astea allocates revenue to each element in a multiple-element arrangement based on the elements' respective fair value, determined by the price charged when the element is sold separately. Specifically, Astea determines the fair value of the maintenance portion of the arrangement based on the price, at the date of sale, if sold separately, which is generally a fixed percentage of the software license selling price. The professional services portion of the arrangement is based on hourly rates which the Company charges for those services when sold separately from software. If evidence of fair value of all undelivered elements exists, but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. If an undelivered element for which evidence of fair value does not exist, all revenue in an arrangement is deferred until the undelivered element is delivered or fair value can be determined. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. The proportion of the revenue recognized upon delivery can vary from quarter-to-quarter depending upon the determination of vendor-specific objective evidence (VSOE) of fair value of undelivered elements. The residual value, after allocation of the fee to the undelivered elements based on VSOE of fair value, is then allocated to the perpetual software license for the software products being sold.
When appropriate, the Company may allocate a portion of its software revenue to post-contract support activities or to other services or products provided to the customer free of charge or at non-standard rates when provided in conjunction with the licensing arrangement. Amounts allocated are based upon standard prices charged for those services or products which, in the Company's opinion, approximate fair value. Software license fees for resellers or other members of the indirect sales channel are based on a fixed percentage of the Company's standard prices. The Company recognizes software license revenue for such contracts based upon the terms and conditions provided by the reseller to its customer. The Company regularly communicates with its resellers and recognizes revenue based on information from its resellers regarding possible returns and collectability. However, the Company does not have a history of returns from the resellers.
In subscription based arrangements, even though customers use the software element, they generally do not have a contractual right to take possession of the software at any time during the hosting period without significant penalty to either run the software on its own hardware or contract with an unrelated third party to host the software. Accordingly, these software as a service (SaaS) arrangements, including the software license fees within the arrangements, are accounted for as subscription services provided all other revenue recognition criteria have been met. The subscription revenue is recognized on a straight-line basis over the service period. A SaaS contract is generally 1 to 3 years in duration. In accordance with generally accepted accounting principles, the Company may not recognize any SaaS revenue before the customer goes live, to ensure that the revenue will match the use of services. The implementation period is typically between 6 and 10 months. When upfront implementation, consulting and training services are bundled with the subscription based arrangement, these services are recognized over the life of the initial contract, once the project goes live.
The post-contract support on perpetual licenses provides for technical support and unspecified updates to the Company's software products. Post-contract support is charged separately for renewals of annual maintenance in subsequent years. Fair value for maintenance is based upon either renewal rates stated in the contracts or separate sales of renewals to customers. Revenue is recognized ratably, or monthly, over the term of the maintenance period, which is typically one year.
Consulting and training service revenue are generally unbundled and, therefore, recognized at the time the services are performed except as noted above, when these services are bundled with subscription revenues. If the Company enters into a fixed-price arrangement for services, the revenue is recognized using the proportional performance method based on direct labor hours incurred to date as a percentage of total estimated direct labor hours required to complete the project. Fees from licenses sold together with consulting services are generally recognized upon shipment, provided that the contract has been executed, delivery of the software has occurred, fees are fixed and determinable and collection is probable.
The Company offers a variety of consulting services that include project management, implementation, data conversion, integration, custom report writing and training. Our professional services are generally billed on a time and materials basis using hourly rates together with reimbursement for travel and accommodation expenses. We recognize revenue as these professional services are performed. On rare occasions these consulting service arrangements involve acceptance criteria. In such cases, revenue is recognized upon acceptance.
We believe that our accounting estimates used in applying our revenue recognition are critical because:
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the determination that it is probable that the customer will pay for the products and services purchased is inherently judgmental;
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the allocation of proceeds to certain elements in multiple-element arrangements is complex;
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the determination of whether a service is essential to the functionality of the software is complex;
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establishing company-specific fair values of elements in multiple-element arrangements requires adjustments from time-to-time to reflect recent prices charged when each element is sold separately; and
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the determination of the stage of completion for certain consulting arrangements is complex.
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Changes in the aforementioned items could have a material effect on the type and timing of revenue recognized.
For the six months ended June 30, 2016 and 2015, the Company recognized $11,034,000 and $12,399,000, respectively, of revenue related to software license fees, subscription revenue, and services and maintenance.
We present taxes assessed by a governmental authority including sales, use, value added and excise taxes on a net basis and therefore the presentation of these taxes is excluded from our revenues and is included in accrued expenses in the accompanying consolidated balance sheets until such amounts are remitted to the taxing authority.
Capitalized Software Research and Development Costs
The Company capitalizes software development costs incurred during the period subsequent to the establishment of technological feasibility through the product's availability for general release. Costs incurred prior to the establishment of technological feasibility are charged to product development expense as they are incurred. Product development expense includes payroll, employee benefits, other headcount-related costs associated with product development and any related costs to third parties under sub-contracting agreements.
Capitalized software development costs are amortized on a product-by-product basis over the greater of the ratio of current revenues to total anticipated revenues or on a straight-line basis over the estimated useful lives of the products beginning with the initial release to customers. The Company's estimated life for its capitalized software products is two years based on current sales trends and the rate of product release. The Company continually evaluates whether events or circumstances have occurred that indicate that the remaining useful life of the capitalized software development costs should be revised or that the remaining balance of such assets may not be recoverable. The Company evaluates the recoverability of capitalized software based on the net realizable value of each product, which includes the estimated future gross revenues from that product reduced by the estimated future costs of completing and disposing of that product, including the costs of performing maintenance and customer support required to satisfy the Company's responsibility set forth at the time of sale. As of June 30, 2016, management believes that no revisions to the remaining useful lives or write-downs of capitalized software development costs are required.
Currency Translation
The international subsidiaries and branch operations translate their assets and liabilities by using the exchange rate in effect at the balance sheet date. The results of operations are translated at average exchange rates during the period. The effects of exchange rate fluctuations in translating assets and liabilities of our international operations into U.S. dollars are accumulated and reflected as a currency translation adjustment as a component of other comprehensive loss in the accompanying consolidated statements of changes in stockholders' deficit. Foreign exchange transaction gains and losses are included in general and administrative expense. For the six months ended June 30, 2016 foreign exchange transactions generated a gain of $59,000 and for the six months ended June 30, 2015 foreign exchange transactions generated a loss of $70,000.
Results of Operations
Comparison of Three Months Ended June 30, 2016 and 2015
Revenues
Total revenues decreased by $853,000 or 13%, to $5,686,000 for the three months ended June 30, 2016 from $6,539,000 for the three months ended June 30, 2015. Software license fee revenues decreased $1,931,000, or 89%, from the same quarter in 2015. Subscription revenues increased $832,000 or 356% to $1,066,000 from $234,000 from the same period last year. Services and maintenance revenue for the three months ended June 30, 2016 increased $246,000 or 6% from the same quarter in 2015.
Software license fee revenue, consisting entirely of Astea Alliance sales, decreased 89% to $248,000 in the second quarter of 2016 from $2,179,000 in the second quarter of 2015. The decrease was primarily due to a significant sale that closed in the second quarter of 2015 for an existing U.S. customer that was not repeated in 2016. In addition, a number of sales that had been expected to close in the second quarter of 2016 slipped into the third quarter of 2016. There were no FieldCentrix license fee revenues in the second quarter of 2016 and 2015.
Subscription revenue increased 356% to $1,066,000 in the second quarter of 2016 from $234,000 in the second quarter of 2015. The primary reason for the increase resulted from a hosted customer who went live in the second quarter of 2016 for which the annual hosting revenue had been deferred since 2014. The extended implementation period was due to certain functionality requirements of the customer that lengthened the time required for this customer to go-live. Future subscription revenue will not continue at this same level as when the customer went live in the second quarter of 2016, the previously deferred annual hosting revenues were recognized as the service periods for those hosting services had lapsed. This implementation was more complex than most, as typically customers go live in 6 to 10 months. The Company continues to sell Software as a Service (SaaS) for which hosting revenue may not be recognized until the customers go-live.
Services and maintenance revenues increased by 6% to $4,372,000 in the second quarter of 2016 compared to $4,126,000 in the second quarter of 2015. Astea Alliance service and maintenance revenues increased by $265,000 or 7% compared to the second quarter of 2015. The increase was mainly attributable to deferred
services revenues recognized on a customer that went live this quarter. At the time a hosted customer goes live, deferred services revenue starts to be recognized ratably over the remaining life of the initial contract.
Service and maintenance revenues generated by FieldCentrix decreased by $19,000 or 3% to $573,000 in the second quarter of 2016 compared to $592,000 during the same period in 2015. T
he decrease is due to a reduction in upgrade projects compared to the second quarter in 2015.
Costs of Revenues
Cost of software license fees decreased 50% to $585,000 in the second quarter of 2016 from $1,177,000 in the second quarter of 2015. Included in the cost of software license fees are the costs of capitalized software amortization and the cost of all third party software embedded in the Company's software licenses which are sold to customers. Amortization of capitalized software development costs was $565,000 for the quarter ended June 30, 2016 compared to $1,127,000 for the same quarter in 2015. This decrease primarily resulted from Version 11 being fully amortized as of September 30, 2015. The gross margin percentage on software license sales was (136%) in the second quarter of 2016 compared to 46% in the second quarter of 2015. The decline in the license margin resulted primarily from the significant decrease in software license fees revenue partially offset by a 50% decrease in capitalized software development cost amortization.
Cost of subscriptions increased 2% to $242,000 in the second quarter of 2016 from $238,000 in the second quarter of 2015. The increase in cost of subscriptions is mainly attributed to increased
costs from a growing customer base
. The gross margin percentage was 77% in the second quarter of 2016 compared to (2%) in the second quarter of 2015. The improved gross margin is mainly due to the increase in customers that have gone live compared to the same quarter of 2015. As more customers go-live, we expect the margins to improve as the fixed costs of hosting are shared by a growing revenue base.
Cost of services and maintenance increased 16% to $3,712,000 in the second quarter of 2016 from $3,211,000 in the second quarter of 2015. The increase in cost of service and maintenance is mainly attributed to increased headcount and travel
expenses in all regions.
The gross margin percentage was 15% in the second quarter of 2016 compared to 26% in the second quarter of 2015. The decrease in services and maintenance gross margin was primarily due to the increased service and maintenance costs in all regions offset by an increase in service revenue in Europe and an increase in maintenance revenue in the U.S.
Gross Profit
Gross profit decreased 40% to $1,147,000 in the second quarter of 2016 from $1,913,000 in the second quarter of 2015 primarily due to a decrease in license revenues and an increase in the cost of services and maintenance partially offset by a 50% decrease in amortization of capitalized software development costs and an increase in subscription revenue.
As a percentage of revenue, gross profit in the second quarter of 2016 was 20% compared to 29% in the second quarter of 2015. The quarter-over-quarter decrease in gross profit was largely driven by a decrease of $853,000 in revenues primarily resulting from decreased license revenue and increased cost of services and maintenance, partially offset by a decrease in capitalized software development costs amortization.
Operating Expenses
Product Development
Product development expenses decreased 24% to $267,000 in the second quarter of 2016 from $353,000 in the second quarter of 2015.
Fluctuations in product development expense from period to period result from the amount of product development expense that is capitalized. Development costs of $760,000 were capitalized in the second quarter of 2016 compared to $596,000 during the same period in 2015. Gross product development expense was $1,027,000 in the quarter ended June 30, 2016 which is 8% higher than $949,000 during the same quarter in 2015.
The increase was primarily due to additional headcount. Most of the Company's development occurs in Israel.
Product development expense as a percentage of revenues was 5% in the second quarters of 2016 and 2015.
Sales and Marketing
Sales and marketing expense increased 3% to $1,178,000 in the second quarter of 2016 from $1,143,000 in the second quarter of 2015. The increase in sales and marketing expense is attributable to increased marketing costs in Europe as the Company
continues to focus on expanding its market presence in all regions by expanding awareness of the Company's products, which occurs through the use of Webinars focused in the vertical industries in which the Company operates, attendance at selected trade shows, and increased efforts in lead generation for its sales force.
As a percentage of revenues, sales and marketing expense was 21% in the second quarter of 2016 compared to 17% in the same period of 2015. The increase is sales and marketing expense as a percentage of revenue is due to the increase in Europe's external marketing costs.
General and Administrative
General and administrative expenses consist of salaries, benefits and related costs for the Company's finance, administrative and executive management personnel, legal costs, accounting costs, bad debt expense and various costs associated with the Company's status as a public company.
General and administrative expenses increased 10% to $717,000 during the second quarter of 2016 from $649,000 in the second quarter of 2015. The increase is due to additional headcount in Europe. As a percentage of revenue, general and administrative expenses was 13% in the second quarter of 2016 compared to 10% in the second quarter of 2015.
Net Interest Expense
Net interest expense was $21,000 in the second quarter of 2016 compared to $31,000 in the second quarter of 2015. The Company incurred interest expense resulting from borrowing against its line of credit with SVB Bank. The decrease is due to reduced amortization of loan acquisition costs paid to obtain and amend the line of credit with SVB.
Income Tax Expense
The Company reported a provision for income tax of $12,000 for the second quarter of 2016 compared to $10,000 during the second quarter of 2015. The tax expense results from to a tax provision in Israel.
International Operations
The Company's international operations generated revenues of $2,211,000 in the second quarter of 2016, an increase of 20% over the same quarter in 2015. Revenues from international operations comprised 39% of the Company's total revenue for the second quarter in 2016, compared to 28% of total revenues for the same quarter in 2015. The increase in international revenues compared to the same period in 2015 is primarily due to an increase in European hosting and service revenue offset by a decline in license revenues in Europe and a decline in license and service revenue in the Asia Pacific Region in the second quarter of 2016. The increase in European subscription and services revenue resulted from customers going live on hosted projects.
Net Loss
Net loss for the quarter ended June 30, 2016 was $1,048,000 compared to a net loss of $273,000 for the second quarter of 2015. The increase in net loss was primarily related to lower license sales and higher costs of services and maintenance partially offset by a decrease in
capitalized software development cost
amortization and a decrease in product development costs in the second quarter of 2016.
Comparison of Six Months Ended June 30, 2016 and 2015
Revenues
Total revenues decreased $1,365,000, or 11%, to $11,034,000 for the six months ended June 30, 2015 from $12,399,000 for the six months ended June 30, 2015. Software license revenues decreased 67% from the same period last year. Subscription revenue increased 220% from the same period last year and service and maintenance fees for the six months ended June 30, 2016 amounted to $8,374,000, a 3% decrease from the same period in 2015.
Software license fees revenue decreased 67% to $1,092,000 in the first six months of 2016 from $3,319,000 in the first six months of 2015. Astea Alliance license revenues decreased $2,258,000 to $1,037,000 or 69% in the first six months of 2016 from $3,295,000 in the first six months of 2015. The decrease resulted from a decline in Astea license sales in the U.S. and Europe.
Subscription revenue increased 220% to $1,568,000 in the first six months of 2016 from $490,000 in the first six months of 2015.
The increase was primarily due to completion of the implementation process for certain customers which allowed them to go live on the SaaS solution. There was one customer who went live during this period in 2016 that contributed significantly to the revenue increase as when the customer went live in the second quarter of 2016, the previously deferred annual hosting revenues were recognized as the service periods for those hosting services had lapsed. Because of the extended implementation period for this customer, future hosting revenue from this customer will not be the same magnitude it was during the six month period in 2016. Revenue for subscription services may not be recognized until the customers go-live. The implementation period is typically between 6 to 10 months.
Services and maintenance revenues decreased 3% to $8,374,000 in the first six months of 2016 from $8,590,000 in the first six months of 2015. Astea Alliance service and maintenance revenues were $7,218,000 for the first six months of 2016 a decrease of 1% from $7,309,000 in Alliance service and maintenance revenue for the six months ended June 30, 2015.
The decrease was attributable to less new implementation projects in the U.S. resulting from a decline in U.S. license sales partially offset by services in both U.S. and Australia resulting from SaaS sales, which generated additional revenue as more projects went live. The Company must defer subscription based implementation services until the customer goes live. At the time customers go-live, the deferred services revenue will be recognized ratably over the remaining life of the initial contract. In addition, there was a slight increase in maintenance revenues.
S
ervice and maintenance revenues generated by FieldCentrix decreased by $126,000 or 10% to $1,156,000 in the first six months of 2016 compared to $1,281,000 during the same period in 2015. The decrease in service and maintenance revenue is due to a reduction in upgrade projects compared to the same period in 2015 as well as certain customers transitioning from FieldCentrix to Alliance.
Costs of Revenues
Cost of software license fees decreased 47% to $1,168,000 in the first six months of 2016 from $2,208,000 in the first six months of 2015.
Included in the cost of software license fees are the costs of capitalized software amortization and all third party software embedded in the Company's software licenses which are sold to customers.
Amortization of capitalized software development costs was $1,129,000 for the six months ended June 30, 2016, a decrease of 47% compared to the same period in 2015.
The decrease resulted primarily from Version 11 being fully amortized as of September 30, 2015.
The gross margin percentage on software licenses was (7%) in the first six months of 2016 compared to 33% in the first six months of 2015. The decrease in gross margin is a reflection of the decreased license revenue, partially offset by a decrease in amortization costs.
Cost of subscriptions increased 54% to $469,000 in the first six months of 2016 from $305,000 in the first six months of 2015. The increase in cost of subscriptions is mainly attributed to increased
costs from a growing customer base
. The gross margin percentage was 70% in the first six months of 2016 compared to 38% in the first six months of 2015. The improved gross margin is mainly due to the growing number of SaaS subscribers partially offset by additional costs from the growing customer base.
Cost of services and maintenance increased 9% to $6,903,000 in the first six months of 2016 from $6,315,000 in the first six months of 2015.
The increase in cost of service and maintenance is attributed primarily to increases in headcount and travel expenses in all regions.
The services and maintenance gross margin percentage was 18% in 2016 and 27% in 2015. The decline in the gross margin is due to additional head count and travel expenses, as well as revenue deferred for hosting contracts that have not gone live but the Company is still incurring the expense attributable to these SaaS services.
Gross Profit
Gross profit decreased 30% to $2,494,000 in the first six months of 2016 from $3,571,000 in the first six months of 2015. As a percentage of revenue, gross profit was 23% in the first six months of 2016 compared to 29% in the first six months of 2015. The year-over-year decrease in gross profit was largely driven by the decrease in license revenue as well as service and maintenance revenue, the increase in cost of subscriptions and cost of services and maintenance. Partially offsetting these components was an increase in subscription revenue and a decline in the cost of software license fees.
Operating Expenses
Product Development
Product development expense decreased 54% to $394,000 in the first six months of 2016 from $856,000 in the first six months of 2015. Fluctuations in product development expense from period to period can vary due to the amount of development expense which is capitalized. Software development costs of $1,592,000 were capitalized in the first six months of 2016 compared to $1,022,000 during the same period in 2015, an increase of $570,000. Gross development expense was $1,986,000 during the first six months of 2016, an increase of 5%, compared to $1,878,000 for the same period in 2015. The increase was primarily due to additional headcount. Product development expense as a percentage of revenues was 4% in first six months of 2016 compared to 7% during the same period in 2015.
Sales and Marketing
Sales and marketing expense increased 5% to $2,218,000 in the first six months of 2016 from $2,118,000 in the first six months of 2015.
The increase in sales and marketing expense is attributable to an increase in
marketing costs compared to the prior year offset by
a decrease in sales headcount and commissions related to the decline in license deals
.
The Company continues to focus on expanding its market presence through intensified marketing efforts to increase awareness of the Company's products, including its newest product, SaaS and its subscription services. This occurs through the use of Webinars focused in the vertical industries in which the Company operates, attendance at selected trade shows, and increased efforts in lead generation for its sales force.
As a percentage of revenues, sales and marketing expenses was 20% in the first six months of 2016 compared with 17% in the first six months of 2015. The increase in costs relative to revenues is due to higher revenues in the first six months of 2015.
General and Administrative
General and administrative expenses consist of salaries, benefits and related costs for the Company's finance, administrative and executive management personnel, legal costs, accounting costs, bad debt expense and various costs associated with the Company's status as a public company. General and administrative expenses decreased 1% to $1,557,000 in the first six months of 2016 from $1,568,000 in the first six months of 2015. As a percentage of revenues, general and administrative expenses were 14% for the six months ended June 30, 2016 and 13% in the first six months of 2015. The increase in costs relative to revenues is due to lower revenues in the first six months of 2016. The overall decrease in cost is also attributable to the Company moving to the OTC Market Group which has lower costs associated with this exchange listing.
Interest Expense, Net
Interest expense was $46,000 in the first six months of 2016 compared to $73,000 of interest expense in the first six months of 2015. The Company incurred interest expense resulting from borrowing against its line of credit with SVB Bank. The decrease is due to reduced amortization of loan acquisition costs paid to obtain and amend the line of credit with SVB.
Income Tax Expense
The Company recorded income tax expense of $24,000 for the six months ended June 30, 2016 compared to $22,000 for the six months ended June 30, 2015.
The tax expense resulted from the tax provision in Israel.
Net Loss
Net loss for the six months ended June 30, 2016 was $1,745,000 compared to a net loss of $1,066,000 for the six months ended June 30, 2015. The increase in the net loss of $679,000 is primarily the result of decreased license fees revenue and increased subscription, services, and maintenance costs partially offset by a decrease in amortization of capitalized software costs and an increase in subscription revenue.
Liquidity and Capital Resources
Operating Activities
The Company generated $1,362,000 of cash from operating activities in the first six months of 2016 compared to $1,166,000 for the first six months of 2015. The increase in operating cash flows of $196,000 was due to an increase in cash provided by accounts receivable of $2,937,000 offset by a decrease in cash provided by deferred revenues of $452,000, an increase in net loss of $679,000, a decrease in cash provided by accounts payable and accrued expenses of $379,000, an increase in cash used for prepaid expenses of $75,000 and an increase in cash used for other assets of $46,000. In addition, for the six months ended June 30, 2016, there was a decrease in adjustments for non-cash items of $1,110,000.
Investing Activities
The Company used $1,571,000 for investing activities in the first six months of 2016 compared to $1,062,000 used in the first six months of 2015. The increase in cash used for investing activities of $509,000 is principally attributable to an increase of $570,000 in cash used for capitalized software development costs due the Company's focused development effort of its newest version of Alliance offset by a decrease in restricted cash of $55,000 and a decrease in cash used for capital expenditures of $6,000.
Financing Activities
The Company used $68,000 of cash in financing activities in the first six months of 2016 compared to generating $200,000 in the first six months of 2015. Payments of preferred stock dividends were $220,000 in the first six months of 2016 and 2015. The Company borrowed $200,000 during the first six months of 2016 compared to borrowings of $420,000 in the same quarter last year. The Company paid $48,000 to reduce its SVB line of credit during the first six months ended June 30, 2016.
The effect of exchange rates on cash related to the U.S. dollar exchange rates for most other currencies in which the Company operates, primarily the Australian dollar, Japanese yen, the Euro, the British pound sterling and Israel shekel, which resulted in an increase of cash of $20,000 in 2016 compared to a decrease of $129,000 in 2015.
At June 30, 2016, the Company had a working capital ratio of approximately .57:1 compared to .58:1 at December 31, 2015. The Company had $1,419,000 in cash and investments available for sale at June 30, 2016, compared to $1,676,000 at December 31, 2015.
The Company has projected revenues for 2016 that management believes will provide sufficient funds to sustain its continuing operations for at least the next twelve months. However, the Company expects to continue to incur additional operating expenses for research and development and invest in software development costs to achieve its projected revenue growth. We continually evaluate our operating cash flows which can vary subject to the actual timing of new sales closing compared to our projection of those sales closing and are sensitive to many factors, including changes in working capital and our net loss. The projections of future cash needs and cash flows are subject to substantial uncertainty. As of June 30, 2016, the Company owed $1,526,000 against the line of credit from Silicon Valley Bank ("SVB") which is not due to be repaid until April 2018. The availability under the SVB line of credit is tied to a borrowing base formula that is based on 80% of the Company's eligible domestic accounts receivable. As of June 30, 2016, the availability under the SVB line of credit was $188,000.
The Company does not plan any significant capital expenditures in 2016 other than to support its operations. The Company's plans for continued investment in product development and capitalized software costs are expected to be similar to prior years.
Off-Balance Sheet Arrangement Transactions
The Company is not involved in off-balance sheet arrangements that have or are reasonably likely to have a material current or future impact on our financial condition, changes in financial condition, revenues or expenses result in operations, liquidity, capital expenditures or capital resources.