GLOBALSCAPE, INC. This Quarterly Report on Form 10-Q (this "Quarterly Report") ofGlobalSCAPE, Inc. and its wholly-owned subsidiary (collectively referred to as "GlobalSCAPE", the "Company", "we" or "our"), and any documents incorporated by reference herein contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). "Forward-looking statements" are those statements that are not of historical fact but describe management's beliefs and expectations. We have identified many of the forward-looking statements in this Quarterly Report by using words such as "anticipate," "believe," "could," "estimate," "may," "expect," "potentially" and "intend." Although we believe these expectations are reasonable, our operations involve a number of risks and uncertainties, including those described in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 (the "2019 Form 10-K") and other documents filed with theSecurities and Exchange Commission (the "SEC"). Therefore,GlobalSCAPE's actual results of operations and financial condition in the future could differ materially from those discussed in this Quarterly Report.
In the following discussion, our references to the 2020 quarter and the 2019
quarter refer to the three months ended
Overview
We develop and sell computer software that provides secure information exchange,
data transfer and sharing capabilities for enterprises and consumers. We have
been in business for more than twenty years.
Our primary business is selling and supporting managed file transfer ("MFT")
software for enterprises. MFT software facilitates the transfer of data from one
location to another across a computer network within a single enterprise or
between multiple computer networks in multiple enterprises.
Our MFT products are based upon our Enhanced File Transfer ("EFT") platform.
This on-premise and cloud-based delivery platform emphasizes secure and
efficient data exchange for virtually any organization. It enables business
partners, clients and employees to share information safely and securely. The
EFT platform provides enterprise-level security while automating the integration
of back-end systems which are features often missing from traditional file
transfer software. The EFT platform features built-in regulatory compliance,
governance, and visibility controls to maintain data safety and security. It can
replace legacy systems, homegrown servers, expensive leased lines and virtual
area networks. The EFT platform promotes ease of administration while providing
the detailed capabilities necessary for complete control of a file transfer
system.
We continue to explore all strategic alternatives to maximize value for
shareholders, including without limitation to improve the market position and
profitability of our product offerings in the marketplace, generate additional
liquidity, and enhance our valuation. We may pursue our goals through organic
growth or strategic or other alternatives. We will also continue to monitor
capital markets for opportunities to repurchase shares, as well as consider
other actions designed to enhance shareholder value.
We earn most of our revenue from the sale of products and services that are part
of our EFT platform. Clients can purchase the capabilities of our EFT platform
in two ways:
? Under a perpetual software license for which they pay a one-time fee and under
which they typically install our product on computers that they own and/or
manage. Our brand name for this product is EFT. Almost all clients who
purchase EFT also purchase a maintenance and support ("M&S") contract for
which they pay us an annual recurring fee. Most of the revenue we have earned
from our EFT platform products has been from sales of perpetual software
licenses and related M&S.
? As a software-as-a-service, or SaaS, under which they pay us ongoing fees to
access the capabilities of the EFT platform in the cloud. In
introduced EFT Arcus, our SaaS offering of the EFT platform for which users
pay a base monthly subscription fee plus an additional variable amount
determined based upon their metered usage of EFT Arcus resources.
We sell other products that are synergistic to our EFT platform including
CuteFTP. Collectively, these products constituted less than 2% of our total
revenue in the 2020 quarter. Clients pay a one-time fee to purchase these
products under a perpetual software license. Some clients also purchase an M&S
contract. We do not offer a SaaS version of these products and have no plans to
do so. We continue to offer product support for Mail Express and WAFS, which we
discontinued as products for sale as of January 1, 2019 .
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We focus on selling our EFT platform products in a business-to-business environment. The majority of the resources we will expend in the future for product research, development, marketing and sales will focus on this product line. We expect to expend minimal resources developing and selling our other products. We believe our EFT platform products and business capabilities are well-positioned to compete effectively in the market for these products. For a more comprehensive discussion of the products we sell and the services we offer, see "Software Products and Services" below. During the 2020 quarter, license revenue from our EFT platform products decreased 24%. The decline is primarily attributable to a slowdown in deal velocity as companies around the globe began to evaluate the effects of COVID-19 and started shifting to remote workforces. We believe some clients and prospects decided to defer their buying decisions to a later period. Economic downturns or other adverse economic conditions, including but not limited to, public health crises that reduce economic activity (including the recent coronavirus COVID-19 outbreak) could have an adverse effect on spending on information technology projects since in such environments, prospects and clients may reduce, sometimes greatly, their discretionary spending to focus on preserving mandatory spending budgets. Key Business Metrics
We review two key business metrics on an ongoing basis to help us monitor our performance and to identify material trends which may affect our business: revenue growth and Adjusted EBITDA (as defined and further described below).
Revenue Growth We believe annual revenue growth is a key metric for monitoring our continued success in developing our business in future periods. Given our diverse solution portfolio, we regularly review our revenue mix and changes in revenue across all solutions to identify emerging trends. See "Comparison of the Condensed Consolidated Statement of Operations for the Three Months EndedMarch 31, 2020 and 2019" for a discussion of trends in our revenue growth that we monitor using this metric.
Adjusted EBITDA (Non-GAAP Measurement)
We utilize Adjusted EBITDA (Earnings Before Interest, Taxes, Total Other Income/Expense, Depreciation, Amortization, and Stock-Based Compensation Expense) to provide us a view of income and expenses that is supplemental and secondary to our primary assessment of net income as presented in our condensed consolidated statement of operations and comprehensive income. We use Adjusted EBITDA to provide another perspective for measuring profitability that does not include the effects of the following items:
? Expenses that typically do not require us to pay them in cash in the current
period (such as depreciation, amortization and stock-based compensation);
? The cost of financing our business; and ? The effects of income taxes. We monitor Adjusted EBITDA to assess our performance relative to our intended strategies, expected patterns of action, and budgets. We use the results of that assessment to adjust our future activities to the extent we deem necessary. Adjusted EBITDA is not a measure of financial performance underUnited States generally accepted accounting principles ("GAAP"). It should not be considered as a substitute for net income presented on our condensed consolidated statement of operations and comprehensive income. Adjusted EBITDA has limitations as an analytical tool and when assessing our operating performance. Adjusted EBITDA should not be considered in isolation or without a simultaneous reading and consideration of our condensed consolidated financial statements prepared in accordance with GAAP. 24
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We compute Adjusted EBITDA as follows ($ in thousands):
Three Months Ended
March 31,
2020 2019
Net Income $ 2,369 $ 2,420 Add (subtract) items to determine Adjusted EBITDA: Income tax expense
461 747
Interest (income) expense, net 774 (24 ) Depreciation and amortization: Total depreciation and amortization 441
410
Stock-based compensation expense 497 875 Adjusted EBITDA$ 4,542 $ 4,428
See "Comparison of the Condensed Consolidated Statement of Operations for the
Three Months Ended
Software Products and Services
We develop and sell computer software that provides secure information exchange, data transfer, and data sharing capabilities for enterprises and consumers. We have been in business for more than twenty years having sold our products to thousands of enterprises and individual consumers globally. Our primary business is selling and supporting MFT software for enterprises. MFT software facilitates the transfer of data from one location to another across a computer network within a single enterprise or between multiple computer networks in multiple enterprises. Examples of enterprise-level activities that rely on MFT software include:
? Transfer of transactional information within an enterprise on a repetitive
basis from one geographic location to another, such as a transfer of deposit
and withdrawal information throughout the day from a branch of a bank to a
central data processing center at another location.
? Movement of accumulated information within an enterprise from one dataprocessing application to another on a periodic basis, such as a transfer of
bi-weekly payroll information from a payroll system that is used to pay
employees to a job cost system that is used to manage the cost of a project.
? Exchange of information between enterprises to facilitate the completion of
one or more business transactions, such as a retailer transmitting inventory
purchasing requirements produced by its material requirements planning system
to an order entry system at a supplying vendor.
We earn over 97% of our revenue from the sale of MFT products and services that are part of our EFT platform. We have multiple revenue streams from the EFT platform that include:
? Perpetual software licenses under which clients pay a one-time fee for the
right to install our products in their information systems environment on
computers they manage and either own or otherwise procure from a cloud
services provider, including deploying our products at a cloud services
provider in a bring-your-own-license, or BYOL, environment. Our brand name for
this product is EFT. Historically, most of the revenue we have earned from our
EFT platform products has been from sales of EFT perpetual software licenses
and related M&S.
? Cloud-based, SaaS solutions that we sell on an ongoing subscription basis. In
going forward, for which users pay a base monthly subscription fee plus an
additional variable amount based upon their metered usage of EFT Arcus
resources.
? M&S.
? Professional services for product installation, integration and training.
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We focus on selling our EFT platform products in a business-to-business environment. The majority of the resources we will expend in the future for product research, development, marketing and sales will focus on this product line. We expect to expend minimal resources developing and selling our other products. We believe our EFT platform products and business capabilities are well-positioned to compete effectively in the market for these products. For a more comprehensive discussion of the products we sell and the services we offer, see below. We sell other products that are synergistic to our EFT platform including CuteFTP. Collectively, these products constituted less than 2% of our total revenue in the 2020 quarter. Clients pay a one-time fee to purchase these products under a perpetual software license. Some clients also purchase an M&S contract. We do not offer a SaaS version of these products and have no plans to do so. We continue to offer product support for Mail Express and WAFS, which we discontinued as products for sale as ofJanuary 1, 2019 . We earn most of our revenue from the sale of our EFT platform products that support business-to-business activities and are strategically focused on selling products in that environment. We intend to expend the majority of our resources in the future for product research and development, marketing, and sales in a manner that concentrates on the business-to-business market. We believe our products and business capabilities are well-positioned to compete effectively in that market.
The following discussion presents a summary description of our specific products and solutions.
Managed File Transfer - Enhanced File Transfer Platform
EFT is the brand name of our core MFT product platform. The EFT platform provides users the ability to securely transmit data from one location to another using any number of files of any size or configuration. It facilitates management, monitoring, and reporting on file transfers and delivers advanced data transfer workflow capabilities to move data and information into, out of, and throughout an enterprise. The EFT platform provides a common, scalable MFT environment that accommodates a broad family of accompanying modules to provide enterprises with increased security, automation, compliance and performance when compared to traditional FTP-based and email delivery systems. Various optional modules allow users to select the solution configuration most applicable to their requirements for auditing, reporting, encryption, ad hoc and web-based file transfers, operability in or through a DMZ network, and integration with back-end business processes, including workflow automation capabilities.
General features and capabilities of the EFT platform include:
? State-of-the-art, enterprise-level security when transferring information
within or between computer networks as well as for collaboration with business
partners, clients, and employees. EFT also provides automation that supports
effective integration of back-end systems. It has built-in regulatory
compliance, governance, and visibility controls to provide a means of safely
maintaining information. EFT offers a high level of performance and
scalability to support operational efficiency and maintain business
continuity. Administrative tools provide for complete control and monitoring
of file transfer activities.
? Transmission of critical information such as financial data, medical records,
client files, vendor files, personnel files, transaction activity, and other
similar documents between diverse and geographically separated network
infrastructures while supporting a range of information protection approaches
to meet privacy, compliance and security requirements. In addition to enabling
the secure, flexible transmission of critical information using servers,
computers and a wide range of network-enabled mobile devices, our products
also provide clients with the ability to monitor and audit file transfer
activities.
? Compliance with government regulations and industry standards relating to the
protection of information while allowing users to reduce information systems
and technologies costs, increase efficiency, track and audit transactions, and
automate processes. Our solutions also provide data replication, acceleration
of file transfer, sharing and collaboration, and continuous data backup and
recovery.
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EFT Platform - Delivery Offerings
Our clients can purchase the capabilities of our EFT platform in two ways:
? Under a perpetual software license for which they pay a one-time fee and under
which they typically install our product on computers that they own and or
manage. The EFT platform purchased in this manner can also be used in a
bring-your-own-license environment hosted by major cloud providers such as
perpetual license to use the EFT platform also purchase an M&S contract for
which they pay us a recurring fee that is typically 20% to 30% of the
perpetual license fee per year.
? As a SaaS under which the client pays us monthly subscription and usage fees
to access the capabilities of the EFT platform in the cloud. Our brand name
for this product is EFT Arcus. We introduced this product in
have not yet earned significant revenue from the SaaS offering of our EFT
platform.
File Transfer Solution for Consumers - CuteFTP
CuteFTP is our original product introduced in 1996. It is a file transfer program generally used by individuals and small businesses. It generates incremental revenue for us at a relatively low cost. We will continue selling CuteFTP as a stand-alone product and providing M&S services to clients, but will not invest significantly in enhancing or marketing the product. Professional Services
We offer a wide range of professional services to complement our on-premises and SaaS solutions. These services can include:
? System integration and implementation
? Business process and workflow planning
? Policy development ? Education and training ? Solution health checks Maintenance and Support We offer M&S contracts to licensees of all of our software products. These M&S contracts entitle the licensee to software upgrades and technical support services in accordance with the terms of our M&S contract. Standard technical support services are provided via email and telephone during our regular business hours. For certain products, we offer a Platinum M&S contract which provides access to emergency technical assistance 24 hours per day, 7 days a week. Most of our M&S contracts are for one year although we also sell multi-year contracts. M&S is purchased by substantially all buyers of our EFT platform as well as by many clients who purchase our other products. Clients with M&S contracts pay us a recurring, annual fee that is typically 20% to 30% of the software license price. A majority of our clients with M&S contracts renew them each year. Employees
Our workforce is organized as follows:
March 31,
Department 2020 2019
Sales and Marketing 44 39
Engineering 14 9
Professional Services 6 6
Customer Support 24 23
Management and Administration 18 15
Total 106 92
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Solution Perspective and Trends
The components of our revenue are as follows ($ in thousands):
Three Months Ended March 31,
2020 2019
Percent of Percent of
Amount Total Amount Total
Revenue By Type
License $ 1,995 20.5 % $ 2,634 28.0 %
M&S 7,066 72.8 % 6,076 64.5 %
Professional Services 651 6.7 % 703 7.5 %
Total Revenue $ 9,712 100.0 % $ 9,413 100.0 %
Revenue by Product Line
License
EFT Platform $ 1,950 97.7 % $ 2,584 98.1 %
Other 45 2.3 % 50 1.9 %
Total License Revenue 1,995 100.0 % 2,634 100.0 %
M&S
EFT Platform 6,930 98.1 % 5,868 96.6 %
Other 136 1.9 % 208 3.4 %
Total M&S Revenue 7,066 100.0 % 6,076 100.0 %
Professional Services (all EFT
Platform) 651 100.0 % 703 100.0 %
Total Revenue
EFT Platform 9,531 98.1 % 9,155 97.3 %
Other 181 1.9 % 258 2.7 %
Total Revenue $ 9,712 100.0 % $ 9,413 100.0 %
Revenue from our EFT platform products increased 4% for the 2020 quarter
compared to the 2019 quarter. Revenue for our other product lines decreased 30%
for the 2020 quarter compared to the 2019 quarter, which is consistent with our
expectations as discussed below. For a more detailed discussion of these revenue
trends, see "Comparison of the Condensed Consolidated Statement of Operations
for the Three Months Ended March 31, 2020 and 2019".
Liquidity and Capital Resources
Our total cash, cash equivalents and working capital positions were as follows
($ in thousands):
March 31, December 31,
2020 2019
Cash and cash equivalents $ 9,289 $ 4,702
Current assets $ 17,351 $ 15,066
Current liabilities (22,874 ) (22,602 )
Working capital $ (5,523 ) $ (7,536 )
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When assessing our liquidity and capital resources, we consider the following factor:
? Deferred revenue, unlike the other liability components of our working
capital, is an obligation we will satisfy by providing services in the future
to our clients as part of our ongoing operating activities from which we have
historically generated cash flow. Our deferred revenue does not involve a
disbursement of cash as a direct payment of that liability although we will
incur operating expenses in the future as we deliver those M&S services.
Our capital requirements principally relate to our need to fund our ongoing
operating expenditures, which are primarily related to employee salaries and
benefits. We make these expenditures to enhance our existing products, develop
new products, sell those products in the marketplace and support our customers
after the sale.
We rely on cash and cash equivalents on hand and cash flows from operations to
fund our operating activities and believe those items will be our principal
sources of capital for the foreseeable future. If our revenue declines and/or
our expenses increase, our cash flow from operations and cash on hand could
decline.
Cash provided or used by our various activities consisted of the following ($ in
thousands):
Cash Provided (Used)During the Three Months
Ended March 31,
2020 2019
Operating activities $ 5,477 $ 5,973
Investing activities (408 ) (224 )
Financing activities (482 ) (560 )
Our cash provided by operating activities decreased during the 2020 quarter compared to the 2019 quarter primarily due to the following factors:
? Stock-based compensation increasing
accelerated vesting of options granted to our former Chief Executive Officer
who passed away unexpectedly in
pursuant to the terms of the applicable option agreements.
? Deferred revenue decreasing
result of improved processes implemented to better capture M&S renewals. The
small decline in the 2020 quarter is due primarily to the completion of
certain efforts to improve operational processes.
? Accounts payable decreasing $188,000 in the 2020 quarter compared to
increasing
of payment to our vendors.
? Accrued expenses decreasing $141,000 in the 2020 quarter compared to
increasing
timing of our payroll related liabilities.
Offset by:
? Accounts receivable decreasing
decreasing $1.2 million in the 2019 quarter due primarily to increased
customer collections in the 2020 quarter compared to the 2019 quarter.
The amount of cash we used for investing activities during the 2020 quarter increased compared to the 2019 quarter due primarily to an increase in our capitalized software development costs.
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Financing activities used less cash during the 2020 quarter than during the 2019 quarter primarily due to:
? A one-time payment in the 2019 quarter of
former Chief Financial Officer to terminate certain stock option agreements
where no similar event occurred in the 2020 quarter.
? No stock repurchases in the 2020 quarter compared to the 2019 quarter.
? No dividend payment made in the 2020 quarter compared to the 2019 quarter.
? An increase in proceeds received from the exercise of stock options during the
2020 quarter compared to the 2019 quarter.
Offset by:
? The principal loan payment of $1.25 million made in the 2020 quarter.
Loan Agreement
In November 2019 , we entered into a credit facility with J.P. Morgan Chase Bank ,
N.A, as Administrative Agent and East West Bank as Syndication Agent consisting
of a $50.0 million term loan and a $5 million revolving agreement (the "Loan
Agreement"). Funds from the term loan were substantially used to fund a special
dividend of $3.35 to our common shareholders which was paid on December 5, 2019 .
The revolving loan may be accessed to fund working capital needs. The loans bear
a variable interest rate of LIBOR plus a Term Loan Spread between 3.75% and
2.25%. The amount of the Term Loan Spread is a function of the Company's
Leverage Ratio. Effective January 3, 2020 , the Company entered into an Amendment
and Waiver No. 1 to the Credit Agreement to increase the amount of the special
dividend permitted to be paid to stockholders on December 5, 2019 to accommodate
last minute option exercises and to exclude the May 28, 2019 special dividend
from the fixed charges calculation. Effective April 13, 2020 , the Company
entered into Amendment No. 2 to the Credit Agreement which provided formal
consent for the Company to borrow $2.0 million under the U.S. Small Business
Administration Payroll Protection Program authorized by the CARES Act.
As permitted by the above consent, we entered into an agreement with EastWest
Bank to borrow $1,987,700 under the U.S. Small Business Administration Payroll
Protection Program authorized by the CARES Act. Following receipt of the loan
proceeds, we evaluated our access to credit through other sources of funding and
determined to repay the funds borrowed under the CARES Act. On May 5, 2020 , we
returned the $1,987,700 in proceeds from the loan, which was not used by the
Company.
At
The aggregate maturities of our notes payable, as of
Interest payments under the credit facility are due monthly. Principal payments are due quarterly. The loans may be prepaid at any time without penalty.
The Loan Agreement contains the following financial covenants:
? We must not exceed a Total Leverage Ratio of 3.25x. This ratio decreases to 3.0x atSeptember 30, 2020 , 2.75x atMarch 31, 2021 and 2.25x atMarch 31, 2022 . This ratio is defined in the Loan Agreement as the ratio of (a) consolidated total funded indebtedness to consolidated EBITDA minus capitalized software expenditures for the period of the four most recent consecutive fiscal quarters. As ofMarch 31, 2020 , this debt service coverage ratio was 2.54x. ? We must maintain a Fixed Coverage Charge Ratio of 1.25x. This ratio is defined in the Loan Agreement as the ratio of consolidated EBITDA minus unfinanced capital expenditures to cash interest expense plus scheduled principal payments made plus taxes paid in cash plus restricted payments made in cash. As ofMarch 31, 2020 , this debt to tangible net worth ratio was 2.93x. The Loan Agreement contains customary covenants relating to maintaining legal existence and good standing, complying with applicable laws, delivery of financial statements, payment of taxes and maintaining insurance. The Loan Agreement also contains customary events of default including the failure to make payments of principal and interest, the breach of any covenants, the occurrence of a material adverse change, and certain bankruptcy and insolvency events. 30
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Contractual Obligations and Commitments
At
? Obligations outstanding under the Loan Agreement described above.
? An obligation to deliver services in the future to satisfy our right to earn
our deferred revenue of
to our obligations under M&S contracts. We will recognize this deferred
revenue as revenue over the remaining life of those contracts which generally
ranges from one to three years. Deferred revenue, unlike the other liability
components of our working capital, is an obligation we will satisfy through
providing services in the future to our clients as part of our ongoing
operating activities from which we have historically generated cash flow. Our
deferred revenue does not involve a disbursement of cash as a direct payment
of that liability.
? Trade accounts payable and accrued liabilities which include our contractual
obligations to pay software royalties to third parties that vary in amount
based on our sales volume of products upon which royalties are payable.
? Operating lease for our office space.
? Federal and state taxes.
Comparison of the Condensed Consolidated Statement of Operations for the Three
Months Ended
Three Months Ended March 31,
2020 2019 $ Change
$ in thousands
Total revenues $ 9,712 $ 9,413 $ 299
Total cost of revenues 1,582 1,434 148
Gross profit 8,130 7,979 151
Operating expenses
Sales and marketing 2,075 1,916 159
General and administrative 1,525 2,019 (494 )
Legal and professional 615 576 39
Research and development 311 325 (14 )
Total operating expenses 4,526 4,836 (310 )
Income from operations 3,604 3,143 461
Other income (expense) (774 ) 24 (798 )
Income before income taxes 2,830 3,167 (337 )
Income tax expense 461 747 (286 )
Net income $ 2,369 $ 2,420 $ (51 ) In the discussion below, the percentage changes cited are based on the 2020 quarter amounts compared to the 2019 quarter amounts.
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Revenue. The components of our revenues were as follows ($ in thousands):
Three Months Ended March 31,
2020 2019
Percent of Percent of
Amount Total Amount Total
Revenue By Type
License $ 1,995 20.5 % $ 2,634 28.0 %
M&S 7,066 72.8 % 6,076 64.5 %
Professional Services 651 6.7 % 703 7.5 %
Total Revenue $ 9,712 100.0 % $ 9,413 100.0 %
Revenue by Product Line
License
EFT Platform $ 1,950 97.7 % $ 2,584 98.1 %
Other 45 2.3 % 50 1.9 %
1,995 100.0 % 2,634 100.0 %
M&S
EFT Platform 6,930 98.1 % 5,868 96.6 %
Other 136 1.9 % 208 3.4 %
7,066 100.0 % 6,076 100.0 %
Professional Services (all EFT
Platform) 651 100.0 % 703 100.0 %
Total Revenue
EFT Platform 9,531 98.1 % 9,155 97.3 %
Other 181 1.9 % 258 2.7 %
$ 9,712 100.0 % $ 9,413 100.0 %
Our total revenue increased 3%. Revenue from our EFT platform products and services increased 4%. Revenue from our other products that consist of Mail Express, WAFS, CuteFTP, and TappIn decreased to less than 2% of our total revenue, which is a trend that is in line with our ongoing de-emphasis of those products.
We continue to offer product support for Mail Express and WAFS, which we
discontinued as products for sale as of
EFT Platform Products
License revenue from our EFT platform products decreased 24%. The decline is
primarily attributable to a slowdown in deal velocity as companies around the
globe began to evaluate the effects of COVID-19 and started shifting to remote
workforces. We believe some clients and prospects decided to defer their buying
decisions to a later period. Economic downturns or other adverse economic
conditions, including but not limited to, public health crises that reduce
economic activity (including the recent coronavirus COVID-19 outbreak) could
have an adverse effect on spending on information technology projects since in
such environments, prospects and clients may reduce, sometimes greatly, their
discretionary spending to focus on preserving mandatory spending budgets.
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M&S revenue from our EFT platform products increased 18% primarily due to:
? The addition of sales resources that are focused on (i) increasing the number
of clients who renew M&S and (ii) increasing annual contract prices to better
reflect the value provided by our support teams.
? Ongoing license sales since a majority of license sales are accompanied by an
M&S contract. The change in M&S revenue typically lags behind the related
change in license revenue because license sales are recognized as revenue in
full in the period the license is delivered while the related M&S revenue is
recognized in future periods as those services are delivered.
? Sustaining high renewal rates of M&S contracts by clients who initiallypurchased these services in earlier periods. We believe these renewals are the
result of clients recognizing the value provided by our Maintenance and
Support team.
Our professional services revenue was $52,000 less for the 2020 quarter compared
to the 2019 quarter, a decrease of 7%. This decrease was primarily due to the
decreased license revenue from our EFT platform since there generally is a
direct relationship between the licenses our customers purchase and their need
for professional services.
Cost of Revenues. These expenses are associated with the production, delivery
and support of our products and services. We believe it is meaningful to view
cost of revenues as a percent of the revenues to which those costs relate since
many of those costs are variable relative to revenue.
Cost of license revenue primarily consists of:
? Amortization of capitalized software development costs we incur when producing
our software products. Amortization begins when a product is ready for general
release to the public and generally is an expense that is not directly
variable relative to revenue.
? Royalties we pay to use software developed by others for certain features of
our products that is generally an expense that is variable relative to
revenue.
? Fees we pay to third parties who provide services supporting our SaaS and
cloud-based subscription solutions that generally have components that are
both variable and not variable relative to revenue.
Cost of M&S revenue and cost of professional services revenue consist primarily of salaries and related costs of our employees and third parties we use to deliver these services.
Cost of software license revenue increased 11% and as a percent of software license revenue was 34% in the 2020 quarter compared to 23% in the 2019 quarter. These increases were primarily due to an increase in amortization of capitalized software development costs. Cost of M&S revenue as a percent of M&S revenue was 9% in both the 2020 quarter and the 2019 quarter. Cost of revenue for M&S in absolute dollars increased by 15%. The increase in absolute dollars was due primarily to an increase in personnel related expenses. Cost of professional services revenue as a percent of that revenue was 45% in the 2020 quarter as compared to 42% in the 2019 quarter. This variation resulted from the varying scope and mix of the professional services we deliver that can change from period-to-period in response to the circumstances of the client environments in which we are working. Sales and Marketing. We believe it meaningful to view cost of sales and marketing as a percent of revenues since many of those costs, particularly sales commissions, are variable relative to revenue. These expenses were 21% of total revenue for the 2020 quarter compared to 20% of total revenue for the 2019 quarter. In absolute dollars these expenses increased 8% due primarily to an increase in personnel related expenses. General and Administrative. These expenses decreased 24% primarily due to a decrease in stock-based compensation expense related to the accelerated vesting of options granted to our former Chief Executive Officer who passed away unexpectedly inMarch 2019 . The vesting acceleration was pursuant to the terms of the applicable option agreements. 33
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Legal and Professional. These expenses increased 7% primarily due to an increase in professional fees and related expenses associated with the previously disclosed internal investigation, the restatement of certain of our financial statements and related litigation.
Research and Development. The overall profile of our research and development ("R&D") activities was as follows ($ in thousands):
Three Months Ended March 31,
2020 2019
R&D expense $ 311 $ 325
Capitalized software development costs 364 201
Total resources expended for R&D $ 675 $ 526
Our total R&D expenditures increased 28% between the 2020 and 2019 quarters mainly due to higher personnel related expenses.
Total resources expended for R&D serves to illustrate our total corporate efforts to improve our existing products and to develop new products regardless of whether or not our expenditures for those efforts were expensed or capitalized. Total resources expended for R&D is not a measure of financial performance under GAAP and should not be considered a substitute for R&D expense and capitalized software development costs individually. While we believe the non-GAAP total resources expended for R&D amount provides useful supplemental information regarding our overall corporate product improvement and new product creation activities, there are limitations associated with the use of this non-GAAP measurement. Total resources expended for R&D is a non-GAAP measure not prepared in accordance with GAAP and may not be comparable to similarly titled measures of other companies since there is no standard for preparing this non-GAAP measure. As a result, this non-GAAP measure of total resources expended for R&D has limitations and should not be considered in isolation from, or as a substitute for, R&D expense and capitalized software development costs individually. Other Income (Expense). Other income (expense) consists primarily of interest expense related to our credit facility more fully described in Note 7 of our financial statements.
Income Taxes. Our effective rate differed from the federal statutory tax rate of 21% in the 2020 quarter and 2019 quarter primarily due to:
? Certain expenses in our condensed consolidated financial statements, such as a
portion of meals and entertainment expenses that are not deductible on our
federal income tax return.
? For 2019 a portion of our stock based compensation that is not deductible on
our federal income tax return.
? State income taxes included in income tax expense in our condensed
consolidated financial statements.
Offset by:
? The research and development credit which is a tax credit incentive that
serves to reduce the rate at which we pay federal income taxes in exchange for
us conducting certain aspects of our business in a manner promoted by the
Internal Revenue Code.
? The foreign derived intangible income deduction which was a part of the 2017
Tax Cuts and Jobs Act that lowered the tax rate for US corporations' foreign
derived intangible income.
? For 2020 a deduction related to disqualifying disposition of incentive stock
options.
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