The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
As of
September
30
, 2018
and For the Three
and
Nine
Months Then Ended
(Unaudited)
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, customer files, vendor files, personnel files, transaction activity, and other similar documents between diverse and geographically separated network infrastructures while supporting a range of information protection approaches to meet privacy and other security requirements. In addition to enabling secure, flexible transmission of critical information using servers, desktop and notebook computers, and a wide range of network-enabled mobile devices, our products also provide customers with the ability to monitor and audit file transfer activities. Our primary product is Enhanced File Transfer, or EFT. We have other products that complement our EFT product.
In June 2017, we introduced a data integration product that we planned to sell under the brand name Kenetix. We licensed the technology for this product from a third party. We experienced issues with the third-party technology and suspended marketing of the product. We have settled the dispute with the third-party and have accrued a liability in these financial statements in the amount of the settlement, including any anticipated settlement fees.
We also market other products that are synergistic to EFT including Mail Express, WAFS, and CuteFTP. Collectively, these products aimed at consumers and small businesses, constitute less than 5% of our total revenue.
Throughout these notes unless otherwise noted, our references to the 2018 quarter and the 2017 quarter refer to the three months ended September 30, 2018 and 2017, respectively. Our references to the 2018 nine months and the 2017 nine months refer to the nine months ended September 30, 2018 and 2017, respectively.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X, “Interim Financial Statements”, as prescribed by the United States Securities and Exchange Commission, or SEC. Accordingly, they do not include all information and footnotes required under United States generally accepted accounting principles, or GAAP, for complete financial statements. In the opinion of management, all accounting entries necessary for a fair presentation of our financial position and results of operations have been made. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q, or this Report, should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on June 14, 2018, which we refer to as the 2017 Form 10-K, as well as
Management’s Discussion and Analysis of Financial Condition and Results of Operations
also included in our 2017 Form 10-K and in this Report.
We follow accounting standards set by the Financial Accounting Standards Board, or FASB. This board sets GAAP, which we follow in preparing financial statements that report our financial position, results of operations, and sources and uses of cash. We also follow the reporting regulations of the SEC.
The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of our financial statements. It is possible the actual results could differ from these estimates and assumptions and could have a material effect on the reported amounts of our financial position and results of operations.
3.
|
Significant Accounting Policies
|
Principles of Consolidation
The accompanying condensed consolidated financial statements are prepared in conformity with GAAP. All intercompany accounts and transactions have been eliminated.
Reclassification of Expenses
We have revised the classification of certain of our operating expenses. To ensure comparability between periods, we revised the previous period financial statements presented to conform to the method of presentation in the current period financial statements. These reclassifications had no impact on the net income for the periods presented or total stockholders’ equity at September 30, 2018.
Revenue Recognition
Products
and Services
We earn revenue by delivering the following software products and services:
|
●
|
Perpetual software licenses under which customers install our products in their information systems environment on computers they manage, own or otherwise procure from a cloud services provider. Customers 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 customer. We measure revenue based upon the consideration set forth in an arrangement or contract with a customer. The revenue recognition criteria we apply to each of our software products and services are as follows:
|
●
|
Perpetual software licenses – These licenses grant a right to use our functional intellectual property. We recognize revenue at the point in time when we electronically deliver to our customer the software license key that provides the ability to access and use our product. If our customer is a reseller who will further transfer the ability to access and use our product to a third party under a separate arrangement that the reseller has with that third party, we recognize revenue at the time we deliver the software license key to the reseller since our contract is with the reseller.
|
|
●
|
Cloud-based, hosted SaaS solutions – These solutions grant a right to access our functional intellectual property. We recognize revenue over time on a monthly basis as we deliver the services to which our customers subscribe. Revenue can include basic monthly fees to access the software and usage fees based upon the volume of certain resources the customer consumes (such as volumes of storage or bandwidth). We are generally paid for these services on a month-to-month basis, but if a customer pays us in advance for services we will deliver in the future, we record as deferred revenue the amount of such payment related to services we have not yet delivered.
|
|
●
|
M&S – We provide these services to purchasers of perpetual software licenses under agreements with terms generally ranging from one to three years. We require up-front payment of our M&S fee in an amount that covers the entire term of the agreement. We record as deferred revenue amounts paid that relate to future periods during which we will provide the M&S service. We reduce deferred revenue and recognize revenue ratably in future periods as we deliver the M&S service.
|
|
●
|
Professional services – We recognize revenue from these services when the services are completed. If we are paid in advance for these services, we record such payment as deferred revenue until we complete the services.
|
The delivery of our software products and services generally does not involve any variable consideration, financing components or consideration payable to a customer such as rebates or other incentives that reduce amounts owed to us by customers.
Deferred Revenue
Classification and Activity
Deferred revenue related to services we will deliver within one year is presented as a current liability. Deferred revenue related to services that we will deliver more than one year into the future is presented as a non-current liability.
The activity in our deferred revenue balances has been as follows ($in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Deferred revenue, beginning of period
|
|
$
|
16,013
|
|
|
$
|
16,160
|
|
|
$
|
17,050
|
|
|
$
|
17,445
|
|
Deferred revenue resulting from new contracts with customers
|
|
|
4,764
|
|
|
|
4,769
|
|
|
|
14,321
|
|
|
|
14,214
|
|
Deferred revenue at the beginning of the period that was amortized to revenue
|
|
|
(5,113
|
)
|
|
|
(4,554
|
)
|
|
|
(14,727
|
)
|
|
|
(14,370
|
)
|
Deferred revenue arising during the period that was amortized to revenue
|
|
|
(528
|
)
|
|
|
(456
|
)
|
|
|
(1,508
|
)
|
|
|
(1,370
|
)
|
Deferred revenue, end of period
|
|
$
|
15,136
|
|
|
$
|
15,919
|
|
|
$
|
15,136
|
|
|
$
|
15,919
|
|
Multi-Element Transactions
At the time customers purchase perpetual software licenses, they also typically purchase M&S although it is not mandatory. We do not sell separate M&S to subscribers to our SaaS solutions as M&S is provided as part of their SaaS subscription. Customers may also purchase professional services at the time they purchase perpetual software licenses or a SaaS subscription. Each of the components of these multi-element transactions is a separately identifiable performance obligation.
For multi-element transactions, we allocate the transaction price to each performance obligation on a relative stand-alone selling price basis. We determine that stand-alone selling price for each item at the inception of the transaction involving these multiple elements.
We sell, as stand-alone transactions, renewals of pre-existing M&S contracts, professional services to customers seeking assistance with products they have previously purchased from us, or SaaS subscriptions to customers not requiring any of our other products or services. Accordingly, we are able to estimate the stand-alone selling price of these items based upon our observation of those transactions. Since most of our sales of perpetual software licenses are part of multi-element transactions that also involve M&S and/or professional services, and because the selling price of those licenses can vary significantly among customers, we use the residual approach under FASB Accounting Standards Codification Top 606, or ASC 606, to estimate the selling price of perpetual software licenses in a multi-element transaction by reference to the total transaction price less the sum of the observable stand-alone selling prices of M&S and/or professional services.
We allocate discounts proportionally to all of the components of a multi-element transaction.
Sale
s
Tax
We collect sales tax on many of our transactions with customers as required under applicable law. We do not include sales tax collected in our revenue. We record it as a liability payable to taxing authorities.
Allowance for Sales Returns
We provide an allowance for sales returns. We estimate this allowance based upon our historical experience and the nature of recent transactions with customers. This amount is included in accrued liabilities in our condensed consolidated balance sheet.
Contract Assets
We generally bill customers for professional services when we have fully delivered the services specified in the contract. We may incur costs in delivering the services prior to that time. Such costs are generally not material. Accordingly, we do not record a contract asset for professional service engagements in process but not yet billed.
Incremental Costs of Obtaining a Contract to Deliver Goods and Services
We incur incremental costs in the form of sales commissions paid to our sales personnel and royalties on certain products paid to third parties. These are costs we would not incur if we did not obtain a contract to deliver our goods and services. We account for these costs as follows:
|
●
|
If the costs are associated with products and services for which we recognize revenue at a fixed point in time (primarily sales of perpetual software licenses and professional services), we expense these costs in full at the time we recognize that revenue.
|
|
●
|
If the costs are associated with services for which we recognize revenue over time (primarily sales of M&S and SaaS subscriptions) for which we believe it is likely that the contract for those services will be renewed for additional terms in the future, provided we deem these costs to be recoverable, we record these costs as a deferred expense asset and amortize that cost to expense as follows:
|
|
o
|
For the portion of the cost that we determine benefits us primarily only over the term of the specific underlying contract currently in force (such as the term of an M&S contract), we recognize expense ratably each month over that term.
|
|
o
|
For the portion of the cost that we determine benefits us over an overall customer relationship that is likely to span a period of time that is longer than an initial contract term (for example, an M&S contract renewed for multiple terms in the future), we recognize expense ratably monthly over the estimated life of the customer relationship.
|
Our activity in deferred costs of obtaining a contract to deliver goods and services has been as follows ($in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2018
|
|
Deferred expense, beginning of period
|
|
$
|
1,172
|
|
|
$
|
1,240
|
|
Deferred expense resulting from new contracts with customers
|
|
|
149
|
|
|
|
496
|
|
Deferred expense amortized to expense
|
|
|
(216
|
)
|
|
|
(631
|
)
|
Deferred expense, end of period
|
|
$
|
1,105
|
|
|
$
|
1,105
|
|
At September 30, 2018, $598,000 was recorded in prepaid and current other assets and $507,000 was recorded in other assets in our condensed consolidated balance sheet.
The following tables present our reported results under ASC 606 and a reconciliation to results using the historical accounting method:
GlobalSCAPE, Inc.
|
Condensed Consolidated Balance Sheet
|
(in thousands)
|
As of September 30, 2018
|
(unaudited)
|
|
|
As Reported
|
|
|
Effect of ASC 606
|
|
|
ASC 605 Historical
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,630
|
|
|
|
|
|
|
$
|
9,630
|
|
Certificates of deposit, short term
|
|
|
1,530
|
|
|
|
|
|
|
|
1,530
|
|
Accounts receivable, net
|
|
|
4,853
|
|
|
|
(75
|
)
|
|
|
4,778
|
|
Federal income tax receivable
|
|
|
740
|
|
|
|
50
|
|
|
|
790
|
|
Prepaid and other current assets
|
|
|
3,173
|
|
|
|
(598
|
)
|
|
|
2,575
|
|
Total current assets
|
|
|
19,926
|
|
|
|
(623
|
)
|
|
|
19,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software development costs, net
|
|
|
3,384
|
|
|
|
|
|
|
|
3,384
|
|
Goodwill
|
|
|
12,712
|
|
|
|
|
|
|
|
12,712
|
|
Deferred tax asset, net
|
|
|
330
|
|
|
|
161
|
|
|
|
491
|
|
Property and equipment, net
|
|
|
442
|
|
|
|
|
|
|
|
442
|
|
Other assets
|
|
|
577
|
|
|
|
(508
|
)
|
|
|
69
|
|
Total assets
|
|
$
|
37,371
|
|
|
$
|
(970
|
)
|
|
$
|
36,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
1,982
|
|
|
|
|
|
|
|
1,982
|
|
Accrued expenses
|
|
|
3,378
|
|
|
|
(75
|
)
|
|
|
3,303
|
|
Deferred revenue
|
|
|
12,341
|
|
|
|
|
|
|
|
12,341
|
|
Total current liabilities
|
|
|
17,701
|
|
|
|
(75
|
)
|
|
|
17,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, non-current portion
|
|
|
2,795
|
|
|
|
|
|
|
|
2,795
|
|
Other long term liabilities
|
|
|
128
|
|
|
|
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Common stock
|
|
|
22
|
|
|
|
|
|
|
|
22
|
|
Additional paid-in capital
|
|
|
25,106
|
|
|
|
|
|
|
|
25,106
|
|
Treasury stock
|
|
|
(18,714
|
)
|
|
|
|
|
|
|
(18,714
|
)
|
Retained earnings
|
|
|
10,333
|
|
|
|
(895
|
)
|
|
|
9,438
|
|
Total stockholders’ equity
|
|
|
16,747
|
|
|
|
(895
|
)
|
|
|
15,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
37,371
|
|
|
$
|
(970
|
)
|
|
$
|
36,401
|
|
GlobalSCAPE, Inc.
|
Condensed Consolidated Statement of Operations and Comprehensive Income
|
(in thousands, except per share amounts)
|
For the Three Months Ended September 30, 2018
|
(unaudited)
|
|
|
As Reported
|
|
|
Effect of ASC 606
|
|
|
ASC 605 Historical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses
|
|
$
|
2,843
|
|
|
|
|
|
|
$
|
2,843
|
|
Maintenance and support
|
|
|
5,488
|
|
|
|
|
|
|
|
5,488
|
|
Professional services
|
|
|
649
|
|
|
|
|
|
|
|
649
|
|
Total revenues
|
|
|
8,980
|
|
|
|
-
|
|
|
|
8,980
|
|
Costs of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses
|
|
|
721
|
|
|
|
(28
|
)
|
|
|
693
|
|
Maintenance and support
|
|
|
514
|
|
|
|
|
|
|
|
514
|
|
Professional services
|
|
|
264
|
|
|
|
|
|
|
|
264
|
|
Total costs of revenues
|
|
|
1,499
|
|
|
|
(28
|
)
|
|
|
1,471
|
|
Gross Profit
|
|
|
7,481
|
|
|
|
28
|
|
|
|
7,509
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
2,261
|
|
|
|
(23
|
)
|
|
|
2,238
|
|
General and administrative
|
|
|
1,589
|
|
|
|
|
|
|
|
1,589
|
|
Legal and professional
|
|
|
1,510
|
|
|
|
|
|
|
|
1,510
|
|
Severance
|
|
|
381
|
|
|
|
|
|
|
|
381
|
|
Research and development
|
|
|
368
|
|
|
|
|
|
|
|
368
|
|
Total operating expenses
|
|
|
6,109
|
|
|
|
(23
|
)
|
|
|
6,086
|
|
Income from operations
|
|
|
1,372
|
|
|
|
51
|
|
|
|
1,423
|
|
Interest income (expense), net
|
|
|
(93
|
)
|
|
|
|
|
|
|
(93
|
)
|
Income before income taxes
|
|
|
1,279
|
|
|
|
51
|
|
|
|
1,330
|
|
Income tax expense
|
|
|
281
|
|
|
|
11
|
|
|
|
292
|
|
Net income
|
|
$
|
998
|
|
|
$
|
40
|
|
|
$
|
1,038
|
|
Comprehensive income
|
|
$
|
998
|
|
|
$
|
40
|
|
|
$
|
1,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - basic
|
|
$
|
0.05
|
|
|
$
|
0.00
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - diluted
|
|
$
|
0.05
|
|
|
$
|
0.00
|
|
|
$
|
0.05
|
|
GlobalSCAPE, Inc.
|
Condensed Consolidated Statement of Operations and Comprehensive Income
|
(in thousands, except per share amounts)
|
For the Nine Months Ended September 30, 2018
|
(unaudited)
|
|
|
As Reported
|
|
|
Effect of ASC 606
|
|
|
ASC 605 Historical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses
|
|
$
|
7,726
|
|
|
|
|
|
|
$
|
7,726
|
|
Maintenance and support
|
|
|
15,872
|
|
|
|
|
|
|
|
15,872
|
|
Professional services
|
|
|
1,549
|
|
|
|
|
|
|
|
1,549
|
|
Total revenues
|
|
|
25,147
|
|
|
|
-
|
|
|
|
25,147
|
|
Costs of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses
|
|
|
2,225
|
|
|
|
(42
|
)
|
|
|
2,183
|
|
Maintenance and support
|
|
|
1,574
|
|
|
|
|
|
|
|
1,574
|
|
Professional services
|
|
|
880
|
|
|
|
|
|
|
|
880
|
|
Total costs of revenues
|
|
|
4,679
|
|
|
|
(42
|
)
|
|
|
4,637
|
|
Gross Profit
|
|
|
20,468
|
|
|
|
42
|
|
|
|
20,510
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
8,229
|
|
|
|
(92
|
)
|
|
|
8,137
|
|
General and administrative
|
|
|
4,883
|
|
|
|
|
|
|
|
4,883
|
|
Legal and professional
|
|
|
4,235
|
|
|
|
|
|
|
|
4,235
|
|
Severance
|
|
|
488
|
|
|
|
|
|
|
|
488
|
|
Research and development
|
|
|
1,654
|
|
|
|
|
|
|
|
1,654
|
|
Total operating expenses
|
|
|
19,489
|
|
|
|
(92
|
)
|
|
|
19,397
|
|
Income from operations
|
|
|
979
|
|
|
|
134
|
|
|
|
1,113
|
|
Interest income (expense), net
|
|
|
63
|
|
|
|
|
|
|
|
63
|
|
Income before income taxes
|
|
|
1,042
|
|
|
|
134
|
|
|
|
1,176
|
|
Income tax expense
|
|
|
386
|
|
|
|
50
|
|
|
|
436
|
|
Net income
|
|
$
|
656
|
|
|
$
|
84
|
|
|
$
|
740
|
|
Comprehensive income
|
|
$
|
656
|
|
|
$
|
84
|
|
|
$
|
740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - basic
|
|
$
|
0.03
|
|
|
$
|
0.00
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - diluted
|
|
$
|
0.03
|
|
|
$
|
0.00
|
|
|
$
|
0.03
|
|
GlobalSCAPE, Inc.
|
Condensed Consolidated Statements of Cash Flows
|
(in thousands)
|
For the Nine Months Ended September 30, 2018
|
(unaudited)
|
|
|
As Reported
|
|
|
Effect of ASC 606
|
|
|
ASC 605 Historical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
656
|
|
|
|
84
|
|
|
$
|
740
|
|
Items not involving cash at the time they are recorded in the statement of operations:
|
|
Provision (recoveries) for doubtful accounts receivable
|
|
|
(64
|
)
|
|
|
|
|
|
|
(64
|
)
|
Depreciation and amortization
|
|
|
1,641
|
|
|
|
|
|
|
|
1,641
|
|
Share-based compensation
|
|
|
972
|
|
|
|
|
|
|
|
972
|
|
Deferred taxes
|
|
|
61
|
|
|
|
|
|
|
|
61
|
|
Subtotal before changes in operating assets and liabilities
|
|
|
3,266
|
|
|
|
84
|
|
|
|
3,350
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,136
|
|
|
|
(75
|
)
|
|
|
1,061
|
|
Prepaid and other current assets
|
|
|
(1,868
|
)
|
|
|
(134
|
)
|
|
|
(2,002
|
)
|
Deferred revenues
|
|
|
(1,914
|
)
|
|
|
|
|
|
|
(1,914
|
)
|
Accounts payable
|
|
|
82
|
|
|
|
|
|
|
|
82
|
|
Accrued expenses
|
|
|
1,707
|
|
|
|
75
|
|
|
|
1,782
|
|
Other assets
|
|
|
116
|
|
|
|
|
|
|
|
116
|
|
Accrued interest receivable
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Other long-term liabilities
|
|
|
(48
|
)
|
|
|
|
|
|
|
(48
|
)
|
Federal income tax receivable
|
|
|
82
|
|
|
|
50
|
|
|
|
132
|
|
Net cash provided by operating activities
|
|
|
2,559
|
|
|
|
-
|
|
|
|
2,559
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software development costs
|
|
|
(1,057
|
)
|
|
|
|
|
|
|
(1,057
|
)
|
Purchase of property and equipment
|
|
|
(143
|
)
|
|
|
|
|
|
|
(143
|
)
|
Redemption of Certificates of Deposit
|
|
|
14,264
|
|
|
|
|
|
|
|
14,264
|
|
Net cash provided by investing activities
|
|
|
13,064
|
|
|
|
-
|
|
|
|
13,064
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
341
|
|
|
|
|
|
|
|
341
|
|
Purchase of treasury stock
|
|
|
(17,262
|
)
|
|
|
|
|
|
|
(17,262
|
)
|
Dividends paid
|
|
|
(655
|
)
|
|
|
|
|
|
|
(655
|
)
|
Net cash used in financing activities
|
|
|
(17,576
|
)
|
|
|
-
|
|
|
|
(17,576
|
)
|
Net increase in cash
|
|
|
(1,953
|
)
|
|
|
|
|
|
|
(1,953
|
)
|
Cash at beginning of period
|
|
|
11,583
|
|
|
|
-
|
|
|
|
11,583
|
|
Cash at end of period
|
|
$
|
9,630
|
|
|
$
|
-
|
|
|
$
|
9,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
|
|
|
|
$
|
-
|
|
Income tax payments
|
|
$
|
238
|
|
|
|
|
|
|
$
|
238
|
|
Cash and cash equivalents
Cash and cash equivalents includes all cash and highly liquid investments with original maturities of three months or less.
Property and Equipment
Property and equipment is comprised of furniture and fixtures, software, computer equipment and leasehold improvements which are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Furniture, fixtures and equipment have a useful life of five to seven years, computer equipment and software have a useful life of three years and leasehold improvements have a useful life that is the shorter of the term of the lease under which the improvements were made or the estimated useful life of the asset.
Expenditures for maintenance and repairs are expensed as incurred.
Goodwill
Goodwill is not amortized. At least annually, we test goodwill for impairment at the reporting unit level using December 31 as the measurement date. We operate as a single reporting unit.
When testing goodwill, we first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of our reporting unit is less than its carrying amount, including goodwill. In performing this qualitative assessment, we assess events and circumstances relevant to us including, but not limited to:
|
•
|
Macroeconomic conditions.
|
|
•
|
Industry and market considerations.
|
|
•
|
Cost factors and trends for labor and other expenses of operating our business.
|
|
•
|
Our overall financial performance and outlook for the future.
|
|
•
|
Trends in the quoted market value and trading of our common stock.
|
In considering these and other factors, we consider the extent to which any adverse events and circumstances identified could affect the comparison of our reporting unit’s fair value with its carrying amount. We place more weight on events and circumstances that most affect our reporting unit’s fair value or the carrying amount of our net assets. We consider positive and mitigating events and circumstances that may affect our determination of whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. We evaluate, on the basis of the weight of the evidence, the significance of all identified events and circumstances in the context of determining whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount.
If, after assessing the totality of these qualitative events and circumstances, we determine it is not more likely than not that the fair value of our reporting unit is less than its carrying amount, we conclude there is no impairment of goodwill and perform no further testing, in accordance with GAAP. If we conclude otherwise, we proceed with performing the first step, and if necessary, the second step, of the two-step goodwill impairment test prescribed by GAAP.
As of December 31, 2017, after assessing the totality of the relevant events and circumstances, we determined it not more likely than not that the fair value of our reporting unit was less than its carrying amount. Accordingly, we concluded there was no impairment of goodwill as of that date. There have been no material events or changes in circumstances since that time indicating that the carrying amount of goodwill may exceed its fair market value and that interim testing needed to be performed.
Capitalized Software Development Costs
When we complete research and development for a software product, 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.
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 $172,000 and $480,000 in the 2018 quarter and the 2017 quarter, respectively, and $750,000 and $1,508,000 in the 2018 nine months and 2017 nine months, respectively.
Share-Based Compensation
We measure the cost of share-based payment transactions at the grant date based on the calculated fair value of the award. We recognize this cost as an expense ratably over the recipient’s requisite service period during which that award vests or becomes unrestricted.
For stock option awards, we estimate their fair value at the grant date using the Black-Scholes option-pricing model considering the following factors:
|
•
|
We estimate expected volatility based on historical volatility of our common stock.
|
|
•
|
We primarily use the simplified method to derive an expected term which represents an estimate of the time options are expected to remain outstanding. We use this method because our options are plain-vanilla options, and we believe our historical option exercise experience is not adequately indicative of our future expectations.
|
|
•
|
We base the risk-free rate for periods within the contractual life of the option on the U.S. treasury yield curve in effect at the time of grant.
|
|
•
|
We estimate a dividend yield based on our historical and expected future dividend payments.
|
For restricted stock awards, we use the quoted price of our common stock on the grant date as the fair value of the award.
Income Taxes
We account for income taxes using the asset and liability method. We record deferred tax assets and liabilities based on the difference between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes, as measured by the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets and liabilities are carried on the balance sheet with the presumption that they will be realizable in future periods in which we generate taxable income.
We assess the likelihood that deferred tax assets will be realized from future taxable income. Based on this assessment, we provide any necessary valuation allowance on our balance sheet with a corresponding increase in the tax provision on our statement of operations. Any valuation allowances we establish are determined based upon a number of assumptions, judgments, and estimates, including forecasted earnings, future taxable income, and the relative proportions of revenue and income before taxes in the various domestic jurisdictions in which we operate.
We account for uncertainty in income taxes using a two-step process to determine the amount of tax benefit to be recognized. First, we evaluate the tax position to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, we assess the tax position to determine the amount of benefit to recognize in the condensed consolidated financial statements. The amount of the benefit we recognize is the largest amount that we believe has a greater than 50 percent likelihood of being realized upon ultimate settlement. Unrecognized tax benefits represent tax positions for which reserves have been established.
Earnings Per Share
We compute basic earnings per share using the weighted-average number of common shares outstanding during the periods. We compute diluted earnings per share using the weighted-average number of common shares outstanding plus the number of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding.
Awards of non-vested restricted stock and options are considered potentially dilutive common shares for the purpose of computing earnings per common share. We apply the treasury stock method to non-vested options under which the assumed proceeds include the amount the employee must pay to exercise the option plus the amount of unrecognized cost attributable to future periods less any expected tax benefits.
Recently Issued Accounting Pronouncements
FASB has issued the Accounting Standard Updates, or ASU described below that we believe may be relevant to our business and to the preparation of our condensed consolidated financial statements.
ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (issued September 2017)
– This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. It states that in these situations, modification accounting should be applied unless the fair value of the modified award is the same as the fair value of the original award immediately before the original award was modified, the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award was modified, and the classification of the modified award as equity or a liability is the same as the classification of the original award immediately before the original award was modified. This update is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. We adopted this pronouncement in the first quarter of 2018 and do not expect this pronouncement to have a material effect on how we account for the changes to the terms or conditions of a share-based payment award.
ASU 2017-04, Intangibles – Goodwill and Other (issued January 2017) -
To simplify the subsequent measurement of goodwill, Step 2 was eliminated from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This update also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. A public business entity that is an SEC filer is required to adopt the amendments in this update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We expect that the application of ASU 2017-04 will not have a material effect on our condensed consolidated financial statements.
ASU 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments (issued June 2016) -
This pronouncement provides guidance as to the treatment of transactions in a statement of cash flows with respect to eight specific cash flow issues. During 2017 and the first nine months of 2018, we had no transactions of the type cited in our Condensed Consolidated Statement of Cash Flows and do not anticipate having any such transactions in the foreseeable future. Accordingly, we do not expect this pronouncement to have a material effect on how we present items in our consolidated statement of cash flows.
ASU 2016-13, Financial Instruments – Credit Losses (issued June 2016)
- Among the provisions of this ASU 2016-13 is a requirement that assets measured at amortized cost, which includes trade accounts receivable, be presented at the net amount expected to be collected. This pronouncement requires that an entity reflect all of its expected credit losses based on current estimates which will replace the current standard requiring that an entity need consider only past events and current conditions in measuring an incurred loss. We are subject to this guidance effective with consolidated financial statements we issue for the year ending December 31, 2020, and the quarterly periods during that year. We do not expect the amounts we report as accounts receivable in those future periods under this guidance to be materially affected relative to current guidance.
ASU 2016-02, Leases (issued February 2016) -
The main difference between existing GAAP and this ASU 2016-02 is the presentation by lessees on their financial statements of lease assets and lease liabilities arising from operating leases. Since this new standard retains the distinction between finance and operating leases, the effect of leases in the statement of operations and the statement of cash flows will be largely unchanged from existing GAAP. Our only lease of significance is our operating lease for our corporate office space for which we will present a right-to-use asset and a lease liability on our consolidated balance sheet when we implement this standard. We are in the process of determining those amounts. In accordance with this standard, we will implement it beginning with our interim and annual consolidated financial statements for 2019. The extent of the effect of this standard on our consolidated financial statements for 2019 and later will depend upon the leases, if any, that we have in effect at that date.
ASU 2014-09, Revenue from Contracts with Customers (issued May 2014)
- The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for those goods or services. We have implemented these new principles using the modified retrospective transition method and recorded an increase (tax effected) to retained earnings at January 1, 2018 of $979,000. We also recorded as an asset deferred expense of approximately $1.2 million. We are accounting for these costs we incur to obtain a contract as follows:
● If these costs are associated with products and services for which we recognize revenue at a point in time (primarily sales of perpetual software licenses and professional services), we expense these costs in full at the time we recognize that revenue.
● If these costs are associated with services for which we recognize revenue over time (primarily sales of M&S and SaaS subscriptions) for which we believe it is likely that the contract for those services will be renewed for additional terms in the future, provided we deem these costs to be recoverable, we record these costs as deferred expense asset and amortize that cost to expense as follows:
o For the portion of the cost that we determine benefits us primarily only over the term of the specific underlying contract currently in force (such as the term of an M&S contract), we will recognize expense ratably each month over that term.
o For the portion of the cost that we determine benefits us over an overall customer relationship that is likely to span a period of time that is longer than an initial contract term (for example, an M&S contract renewed for multiple terms in the future), we will recognize expense ratably monthly over the estimated life of the customer relationship.
We have reviewed all recently issued accounting pronouncements. The pronouncements that we have already adopted did not have a material effect on our financial condition, results of operations, cash flows or reporting thereof, and except as otherwise noted above, we do not believe that any of the pronouncements that we have not yet adopted will have a material effect upon our financial condition, results of operations, cash flows or reporting thereof.
4.
|
Certificates of Deposit
|
Our certificate of deposit is held at a bank and will mature in October 2018. Certificates of deposit with contractual maturity dates less than one year from the balance sheet date are presented as current assets. Certificates of deposit with contractual maturity dates beyond one year from the balance sheet date are presented as non-current assets.
We measure these investments on a recurring basis using Level 1 of the fair value hierarchy prescribed by GAAP which results in them being presented at original cost plus accrued interest earned. There is no amortization of original cost associated with our certificates of deposit.
5.
|
Accounts Receivable, Net
|
We bill customers and issue invoices when we have delivered goods or services. In addition, when customers agree to purchase or renew M&S services, we bill and invoice customers 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 3) 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 customer 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):
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Total invoices issued and unpaid
|
|
$
|
5,324
|
|
|
$
|
6,644
|
|
Less: Unpaid invoices relating to M&S contracts with a start date subsequent to the balance sheet date
|
|
|
(371
|
)
|
|
|
(441
|
)
|
Gross accounts receivable
|
|
|
4,953
|
|
|
|
6,203
|
|
Allowance for doubtful accounts
|
|
|
(100
|
)
|
|
|
(278
|
)
|
Accounts receivable, net
|
|
$
|
4,853
|
|
|
$
|
5,925
|
|
6. Capitalized Software Development Costs, Net
Our capitalized software development costs balances and activities were as follows ($ in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Gross capitalized cost
|
|
$
|
10,235
|
|
|
$
|
9,179
|
|
Accumulated amortization
|
|
|
(6,851
|
)
|
|
|
(5,393
|
)
|
Capitalized software development costs, net
|
|
$
|
3,384
|
|
|
$
|
3,786
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Amount capitalized
|
|
$
|
264
|
|
|
$
|
527
|
|
|
$
|
1,057
|
|
|
$
|
1,464
|
|
Amortization expense
|
|
|
(460
|
)
|
|
|
(484
|
)
|
|
|
(1,459
|
)
|
|
|
(1,404
|
)
|
|
|
Released
|
|
|
Unreleased
|
|
|
|
Products
|
|
|
Products
|
|
Gross capitalized amount at September 30, 2018
|
|
$
|
9,624
|
|
|
$
|
611
|
|
Accumulated amortization
|
|
|
(6,851
|
)
|
|
|
-
|
|
Net capitalized cost at September 30, 2018
|
|
$
|
2,773
|
|
|
$
|
611
|
|
Future amortization expense:
|
|
|
|
|
|
|
|
|
Three months ending December 31, 2018
|
|
|
431
|
|
|
|
|
|
Year ending December 31,
|
|
|
|
|
|
|
|
|
2019
|
|
|
1,367
|
|
|
|
|
|
2020
|
|
|
857
|
|
|
|
|
|
2021
|
|
|
118
|
|
|
|
|
|
Total
|
|
$
|
2,773
|
|
|
|
|
|
The future amortization expense of the gross capitalized software development costs related to unreleased products will be determinable at a future date when those products are ready for general release to the public.
7. Deferred Revenue
As described in Note 5 regarding accounts receivable, when customers agree to purchase or renew M&S services, we bill and invoice our customers 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 customer as of the date of our financial statements. Accordingly, we determine our deferred revenue as follows ($ in thousands):
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Total invoiced for M&S contracts for which revenue will be recognized in future periods
|
|
$
|
15,507
|
|
|
$
|
17,491
|
|
Less: Unpaid invoices relating to M&S contracts with a start date subsequent to the balance sheet date
|
|
|
(371
|
)
|
|
|
(441
|
)
|
Total deferred revenue
|
|
$
|
15,136
|
|
|
$
|
17,050
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, current portion
|
|
$
|
12,341
|
|
|
$
|
13,315
|
|
Deferred revenue, non-current portion
|
|
|
2,795
|
|
|
|
3,735
|
|
Total deferred revenue
|
|
$
|
15,136
|
|
|
$
|
17,050
|
|
8.
|
Stock Options, Restricted Stock and
Stock
-Based Compensation
|
We have stock-based compensation plans under which we have granted, and may grant in the future, incentive stock options, non-qualified stock options, and restricted stock to employees and non-employee members of our Board of Directors. Our stock-based compensation expense was as follows ($ in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Share-based compensation expense
|
|
$
|
110
|
|
|
$
|
381
|
|
|
$
|
972
|
|
|
$
|
1,053
|
|
Stock Options
We have granted stock options to our officers and employees under long-term equity incentive plans that originated in 2000, 2010 and 2016. During the 2018 quarter, we granted stock options only under the 2016 Employee Long-Term Equity Incentive Plan (the “2016 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, 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.
|
We currently issue stock-based awards to our officers and employees only under the 2016 Plan which authorizes the issuance of up to 5,000,000 shares of common stock for stock-based incentives including stock options and restricted stock awards. As of September 30, 2018, stock-based incentives for up to 3,955,830 shares remained available for issuance in the future under the 2016 Plan.
We have not previously issued any restricted stock under any of the Company’s plans.
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, 2017
|
|
|
2,585,210
|
|
|
$
|
3.34
|
|
|
|
6.77
|
|
|
$
|
1,015
|
|
Granted
|
|
|
504,737
|
|
|
$
|
3.67
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(809,142
|
)
|
|
$
|
3.56
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(146,150
|
)
|
|
$
|
2.34
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
2,134,655
|
|
|
$
|
3.40
|
|
|
|
6.59
|
|
|
$
|
1,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2018
|
|
|
1,163,958
|
|
|
$
|
3.09
|
|
|
|
4.60
|
|
|
$
|
1,115
|
|
Additional information about our stock options is as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Weighted average fair value of options granted
|
|
$
|
1.57
|
|
|
$
|
1.94
|
|
|
$
|
1.56
|
|
|
$
|
1.67
|
|
Intrinsic value of options exercised
|
|
$
|
205,111
|
|
|
$
|
9,284
|
|
|
$
|
205,111
|
|
|
$
|
351,893
|
|
Cash received from stock options exercised
|
|
$
|
341,489
|
|
|
$
|
13,440
|
|
|
$
|
341,489
|
|
|
$
|
471,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of options that vested
|
|
|
72,748
|
|
|
|
28,570
|
|
|
|
511,900
|
|
|
|
430,724
|
|
Fair value of options that vested
|
|
$
|
139,406
|
|
|
$
|
44,843
|
|
|
$
|
861,904
|
|
|
$
|
698,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized compensation expense related to non-vested options at end of period
|
|
$
|
1,286,260
|
|
|
$
|
1,994,289
|
|
|
$
|
1,286,260
|
|
|
$
|
1,994,289
|
|
Weighted average years over which non-vested option expense will be recognized
|
|
|
2.15
|
|
|
|
2.11
|
|
|
|
2.15
|
|
|
|
2.11
|
|
Plan
|
|
Shares outstanding
|
|
2000 Stock Option Plan
|
|
|
25,000
|
|
2010 Employee LT Equity Incentive Plan
|
|
|
1,066,319
|
|
2016 Employee LT Equity Incentive Plan
|
|
|
1,043,336
|
|
Total shares outstanding at September 30, 2018
|
|
|
2,134,655
|
|
As of September 30, 2018
|
|
|
|
|
|
|
|
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 - $2.32
|
|
|
289,350
|
|
|
|
2.14
|
|
|
$
|
1.86
|
|
|
|
289,350
|
|
|
$
|
1.86
|
|
$2.34 - $3.52
|
|
|
708,636
|
|
|
|
5.77
|
|
|
$
|
3.29
|
|
|
|
506,860
|
|
|
$
|
3.23
|
|
$3.53 - $5.30
|
|
|
1,135,002
|
|
|
|
8.25
|
|
|
$
|
3.86
|
|
|
|
366,081
|
|
|
$
|
3.85
|
|
$5.44 - $5.44
|
|
|
1,667
|
|
|
|
0.24
|
|
|
$
|
5.44
|
|
|
|
1,667
|
|
|
$
|
5.44
|
|
Total options
|
|
|
2,134,655
|
|
|
|
|
|
|
|
|
|
|
|
1,163,958
|
|
|
|
|
|
We used the following assumptions to determine compensation expense for our stock options using the Black-Scholes option-pricing model:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Expected volatility
|
|
|
48
|
%
|
|
|
50
|
%
|
|
|
48
|
%
|
|
|
49
|
%
|
Expected annual dividend yield
|
|
|
1.50
|
%
|
|
|
1.50
|
%
|
|
|
1.50
|
%
|
|
|
1.50
|
%
|
Risk free rate of return
|
|
|
2.80
|
%
|
|
|
1.95
|
%
|
|
|
2.75
|
%
|
|
|
1.94
|
%
|
Expected option term (years)
|
|
|
6.00
|
|
|
|
6.00
|
|
|
|
6.00
|
|
|
|
6.00
|
|
Restricted Stock Awards
Our 2015 Non-Employee Directors Long-Term Equity Incentive Plan (the “2015 Directors Plan”) provides for the issuance of either stock options or restricted stock awards for up to 500,000 shares of our common stock. Provisions and characteristics of this plan 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.
|
|
●
|
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, which is generally continuing service for one year subsequent to the date of the award, after which time the restrictive legend is removed from the shares.
|
|
●
|
Restricted shares participate in dividend payments and may be voted.
|
|
●
|
As of September 30, 2018, stock based incentives for up to 280,000 shares remained available for issuance in the future under the 2015 Directors Plan.
|
The components of our income tax expense (benefit) are as follows ($ in thousands):
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
Federal
|
|
$
|
166
|
|
|
$
|
43
|
|
|
$
|
209
|
|
|
$
|
29
|
|
|
$
|
146
|
|
|
$
|
175
|
|
|
$
|
243
|
|
|
$
|
51
|
|
|
$
|
294
|
|
|
$
|
733
|
|
|
$
|
33
|
|
|
$
|
766
|
|
State
|
|
|
67
|
|
|
|
5
|
|
|
|
72
|
|
|
|
10
|
|
|
|
9
|
|
|
|
19
|
|
|
|
82
|
|
|
|
10
|
|
|
|
92
|
|
|
|
109
|
|
|
|
(5
|
)
|
|
$
|
104
|
|
Total
|
|
$
|
233
|
|
|
$
|
48
|
|
|
$
|
281
|
|
|
$
|
39
|
|
|
$
|
155
|
|
|
$
|
194
|
|
|
$
|
325
|
|
|
$
|
61
|
|
|
$
|
386
|
|
|
$
|
842
|
|
|
$
|
28
|
|
|
$
|
870
|
|
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):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
829
|
|
|
$
|
775
|
|
Share-based compensation
|
|
|
302
|
|
|
|
351
|
|
Compensation and benefits
|
|
|
55
|
|
|
|
111
|
|
Texas franchise tax R&D credit
|
|
|
189
|
|
|
|
185
|
|
Prepaid expenses not deductible for tax
|
|
|
-
|
|
|
|
84
|
|
Allowance for doubtful accounts
|
|
|
37
|
|
|
|
58
|
|
Net operating loss carryforward
|
|
|
5
|
|
|
|
20
|
|
Deferred state income taxes
|
|
|
51
|
|
|
|
61
|
|
Federal R&D credits
|
|
|
-
|
|
|
|
-
|
|
Accrued expenses not deducted for tax
|
|
|
5
|
|
|
|
9
|
|
Valuation allowance
|
|
|
(189
|
)
|
|
|
(185
|
)
|
Total deferred tax assets
|
|
|
1,284
|
|
|
|
1,469
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
721
|
|
|
|
805
|
|
Book expenses deductible for tax purposes
|
|
|
232
|
|
|
|
-
|
|
Depreciable Assets
|
|
|
1
|
|
|
|
13
|
|
Total gross deferred tax liabilities
|
|
|
954
|
|
|
|
818
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
330
|
|
|
$
|
651
|
|
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 September 30, 2018, we had federal income tax net operating loss carryforwards of $23,000 available to offset future federal taxable income. We expect to fully utilize this net operating loss in 2018. If not used, this net operating loss expires in 2038.
As of September 30, 2018, we had Texas Research and Development tax credit carryforwards of $189,000. We believe it is uncertain that we will have sufficient Texas Franchise Tax in the future to support utilization of these carryforward credits. Accordingly, we have provided a valuation allowance for the full amount of these credit carryforwards. These carryforwards expire in years 2034 through 2038.
The aggregate changes in the balance of our gross unrecognized tax benefits were as follows ($ in thousands):
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Balance at beginning of period
|
|
$
|
158
|
|
|
$
|
121
|
|
Increases for tax positions related to the current year
|
|
|
10
|
|
|
|
16
|
|
Increases for tax positions related to prior years
|
|
|
-
|
|
|
|
16
|
|
Decreases for tax positions where the statue has expired
|
|
|
(48
|
)
|
|
|
-
|
|
Balance at end of period
|
|
$
|
120
|
|
|
$
|
153
|
|
Our unrecognized tax benefit is related to research and development credits taken on our U.S. income tax returns in 2012, 2013, 2015, 2016, and 2017 and the uncertainty related to the realization of a portion of those credits based on prior experience. We believe it reasonably possible that we will not recognize any of our unrecognized tax benefits at least through December 31, 2018. 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 September 30, 2018, 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 2011 with respect to our federal income tax returns and years prior to 2013 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 (benefit) reconciles to an income tax expense resulting from applying an assumed statutory federal income rate of 21% for the 2018 quarter and 2018 nine months and 34% for the 2017 quarter and 2017 nine months to income before income taxes as follows ($ in thousands):
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Income tax expense at federal statutory rate
|
|
$
|
269
|
|
|
$
|
160
|
|
|
$
|
219
|
|
|
$
|
828
|
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of federal benefit
|
|
|
58
|
|
|
|
16
|
|
|
|
89
|
|
|
|
67
|
|
Stock based compensation
|
|
|
14
|
|
|
|
37
|
|
|
|
164
|
|
|
|
121
|
|
Other
|
|
|
2
|
|
|
|
7
|
|
|
|
7
|
|
|
|
19
|
|
R&D tax credit uncertain tax position (net)
|
|
|
(45
|
)
|
|
|
6
|
|
|
|
(38
|
)
|
|
|
32
|
|
Research and development credit
|
|
|
(17
|
)
|
|
|
(30
|
)
|
|
|
(55
|
)
|
|
|
(177
|
)
|
Domestic production activities deduction
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
(20
|
)
|
Income tax expense per the statements of operations
|
|
$
|
281
|
|
|
$
|
194
|
|
|
$
|
386
|
|
|
$
|
870
|
|
On June 21, 2018, in
South Dakota v Wayfair Inc
.
, the United States Supreme Court held that states may charge sales tax on purchases made from out-of-state sellers, even if the seller does not have a physical presence in the taxing state. We are evaluating our state income tax filings with respect to the recent Wayfair decision. Currently, we file state income tax returns in those states in which we have a physical presence and/or are otherwise required by a state to register to do business.
10.
|
Earnings
per Common Share
|
Earnings per share for the periods indicated were as follows (in thousands, except per share amounts):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
998
|
|
|
$
|
276
|
|
|
$
|
656
|
|
|
$
|
1,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominators
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominators for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
21,688
|
|
|
|
21,792
|
|
|
|
21,746
|
|
|
|
21,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and awards
|
|
|
252
|
|
|
|
455
|
|
|
|
298
|
|
|
|
473
|
|
Denominator for diluted earnings per share
|
|
|
21,940
|
|
|
|
22,247
|
|
|
|
22,044
|
|
|
|
22,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - basic
|
|
$
|
0.05
|
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
|
$
|
0.07
|
|
Net income per common share – diluted
|
|
$
|
0.05
|
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
|
$
|
0.07
|
|
As a result of our implementation of
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (issued March 2016),
the estimated proceeds resulting from equity compensation deductible for federal income tax purposes being greater than the associated stock-based compensation expense are no longer considered as part of the treasury stock method used in computing diluted earnings per share. This change had no material effect on our earnings per share computations.
We paid dividends during the 2018 nine months and 2017 nine months as follows:
|
|
Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
September 30, 2017
|
|
Dividend per share of common stock
|
|
$
|
0.015
|
|
|
$
|
0.015
|
|
|
$
|
0.015
|
|
|
$
|
0.015
|
|
|
$
|
0.015
|
|
Dividend record date
|
|
March 9, 2018
|
|
|
February 23, 2017
|
|
|
June 8, 2018
|
|
|
May 23, 2017
|
|
|
August 23, 2017
|
|
Dividend payment date
|
|
March 23, 2018
|
|
|
March 8, 2017
|
|
|
June 22, 2018
|
|
|
June 8, 2017
|
|
|
September 8, 2017
|
|
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 approximately $1.3 million.
Legal
and Regulatory Matters
As previously disclosed in the Company’s Current Report on Form 8-K filed on November 15, 2017, on August 9, 2017, a securities class action complaint,
Anthony Giovagnoli v. GlobalSCAPE, Inc
., et. al., Case No. 5:17-cv-00753, was filed against the Company in the United States District Court for the Western District of Texas. On November 6, 2017, the Court appointed Irfan Rahman as lead plaintiff, and he filed the First Amended Complaint on July 26, 2018. The Amended Complaint names the Company, Matthew Goulet, James Albrecht, Thomas Brown, David Mann, Frank Morgan, and Thomas Hicks as defendants for allegedly making materially false and misleading statements regarding, inter alia, the Company’s previously reported financial statements. The Amended Complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder. The Amended Complaint seeks unspecified damages, costs, attorneys’ fees, and equitable relief. The parties reached a settlement and submitted a Stipulation of Settlement to the Court on September 13, 2018. Under this settlement, the Company’s and Individual Defendants’ insurance carrier will provide the Class with a cash payment of $1,400,000, which includes the cash amount of any attorney’s fees or litigation expenses that the Court may award Lead Plaintiff’s counsel and costs Lead Plaintiff may incur in administering and providing notice of the settlement. In exchange, Lead Plaintiff has agreed that the settlement will include a dismissal of the Class Action with prejudice and a release of all claims against the Company and the Individual Defendants by the Class. This settlement was preliminarily approved by the Court on October 2, 2018. The Court has scheduled a hearing on December 18, 2018 to determine whether an Order and Final Judgment of the settlement should be entered. The settlement will not become effective until finally approved by the Court. The Company has accrued the $1,400,000 expense in the third quarter of 2018 and has also accrued a receivable of $1,400,000 as this settlement will be funded by our insurance carrier.
On October 12, 2018, the Company received a letter from a stockholder demanding that the Company take action to remedy alleged harm caused to the Company, including to remedy alleged breaches of fiduciary duties by certain current and/or former directors and executive officers of the Company (“the Derivative Demand”). The stockholder alleges,
inter alia
, that certain current and former directors and executive officers violated their fiduciary duties beginning at least in July 2016, causing GlobalSCAPE to suffer damages by overstating financial results for the fourth quarter of 2016.
On October 20, 2017, the Company received a demand letter from a stockholder seeking the inspection of books and records of the Company pursuant to Section 220 of the Delaware General Corporation Law (the “Section 220 Demand”). This stockholder’s stated purpose for the demand is,
inter alia
, to investigate whether the Company’s Board of Directors and officers engaged in an illegal scheme to misrepresent the Company’s performance by falsely reporting accounts receivable, license revenue, total current assets and total assets, total stockholders’ equity, and total liabilities for the year ended December 31, 2016, as well as the Board’s independence to consider a stockholder derivative demand. The Company intends to fully respond to the Section 220 Demand to the extent required under Delaware law.
The Board has established a special litigation committee (“Special Litigation Committee”) consisting of Dr. Thomas Hicks and Frank Morgan to analyze and investigate claims that could potentially be asserted in stockholder derivative litigation related to facts connected to the claims and allegations asserted in the litigation related to the Restatement, the Section 220 Demand, and the Derivative Demand (the “Potential Derivative Litigation”). The Special Litigation Committee will determine what actions are appropriate and in the best interests of the Company, and decide whether it is in the best interests of the Company to pursue, dismiss, or consensually resolve any claims that may be asserted in the Potential Derivative Litigation. The Board determined that each member of the Special Litigation Committee is disinterested and independent with respect to the Potential Derivative Litigation. Among other things, the Special Litigation Committee has the power to retain counsel and advisors, as appropriate, to assist it in the investigation, to gather and review relevant documents relating to the claims, to interview persons who may have knowledge of the relevant information, to prepare a report setting forth its conclusions and recommended course of action with respect to the Potential Derivative Litigation, and to take any actions, including, without limitation, directing the filing and prosecution of litigation on behalf of the Company, as the Special Litigation Committee in its sole discretion deems to be in the best interests of the Company in connection with the Potential Derivative Litigation. The Special Litigation Committee’s findings and determinations shall be final and not subject to review by the Board and in all respects shall be binding upon the Company.
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.
|
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 2018 quarter and 2017 quarter, we earned approximately 12% and 14%, respectively, of our revenue from such sales through our largest third-party channel distributor. During the 2018 nine months and 2017 nine months, we earned approximately 13% and 14%, respectively, of our revenue from such sales through our largest, third-party channel distributor. As of September 30, 2018, approximately 17% of our accounts receivable were due from this channel distributor with payment for substantially all such amounts having been received subsequent to that date.
14. 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 customers and partners located outside the United States accounted for approximately 30% of our total revenues in the 2018 quarter and 2017 quarter, and 29% and 26% for the 2018 nine months and 2017 nine months, respectively. Revenue derived from customers and partners in the United Kingdom were 13% of our revenue in the 2017 quarter. Each individual foreign country accounts for less than 10% of total revenue in the 2018 quarter. We attribute revenues to countries based on the country in which the customer or partner is located. None of our property and equipment was located in a foreign country as of September 30, 2018.