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 endedJune 30, 2020 and 2019, respectively. Our references to the 2020 six months and the 2019 six months refer to the six months endedJune 30, 2020 and 2019, respectively. Overview We develop and sell computer software that provides secure information exchange, data transfer and sharing capabilities for enterprises and consumers. We have been in business for more than twenty years. Our primary business is selling and supporting managed file transfer ("MFT") software for enterprises. MFT software facilitates the transfer of data from one location to another across a computer network within a single enterprise or between multiple computer networks in multiple enterprises. Our MFT products are based upon our Enhanced File Transfer ("EFT") platform. This on-premise and cloud-based delivery platform emphasizes secure and efficient data exchange for virtually any organization. It enables business partners, clients and employees to share information safely and securely. The EFT platform provides enterprise-level security while automating the integration of back-end systems which are features often missing from traditional file transfer software. The EFT platform features built-in regulatory compliance, governance, and visibility controls to maintain data safety and security. It can replace legacy systems, homegrown servers, expensive leased lines and virtual area networks. The EFT platform promotes ease of administration while providing the detailed capabilities necessary for complete control of a file transfer system. We continue to explore all strategic alternatives to maximize value for shareholders, including without limitation to improve the market position and profitability of our product offerings in the marketplace, generate additional liquidity, and enhance our valuation. We may pursue our goals through organic growth or strategic or other alternatives. We will also continue to monitor capital markets for opportunities to repurchase shares, as well as consider other actions designed to enhance shareholder value. We earn most of our revenue from the sale of products and services that are part of our EFT platform. Clients can purchase the capabilities of our EFT platform in two ways:
? Under a perpetual software license for which they pay a one-time fee
and under which they typically install our product on computers that
they own and/or manage. Our brand name for this product is EFT.
Almost all clients who purchase EFT also purchase a maintenance and
support ("M&S") contract for which they pay us an annual recurring
fee. Most of the revenue we have earned from our EFT platform
products has been from sales of perpetual software licenses and
related M&S.
? As a software-as-a-service, or SaaS, under which they pay us ongoing
fees to access the capabilities of the EFT platform in the cloud. In
January 2018 , we introduced EFT Arcus, our SaaS offering of the EFT
platform for which users pay a base monthly subscription fee plus an
additional variable amount determined based upon their metered usage
of EFT Arcus resources.
We sell other products that are synergistic to our EFT platform including
CuteFTP. Collectively, these products constituted less than 2% of our total
revenue in the 2020 quarter and the 2020 six months. 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 .
28--------------------------------------------------------------------------------
Index
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 and the 2020 six months, license revenue from our EFT platform products decreased 21% and 23%, respectively. The decline is primarily attributable to a slowdown in deal velocity related to COVID-19. 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 EndedJune 30, 2020 and 2019" and "Comparison of the Condensed Consolidated Statement of Operations for the Six Months EndedJune 30, 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 under United States
generally accepted accounting principles ("GAAP"). It should not be considered
as a substitute for net income presented on our condensed consolidated statement
of operations and comprehensive income. Adjusted EBITDA has limitations as an
analytical tool and when assessing our operating performance. Adjusted EBITDA
should not be considered in isolation or without a simultaneous reading and
consideration of our condensed consolidated financial statements prepared in
accordance with GAAP.
29--------------------------------------------------------------------------------
Index
We compute Adjusted EBITDA as follows ($ in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Net Income $ 3,501 $ 3,633 $ 5,870 $ 6,053
Add (subtract) items to
determine Adjusted EBITDA:
Income tax expense (31 ) 926 430 1,673
Interest (income) expense, net 628 (30 ) 1,402 (54 )
Depreciation and amortization 476 506 917 916
Stock-based compensation
expense 412 574 909 1,449
Adjusted EBITDA $ 4,986 $ 5,609 $ 9,528 $ 10,037
See "Comparison of the Condensed Consolidated Statement of Operations for the
Three Months Ended June 30, 2020 and 2019" and "Comparison of the Condensed
Consolidated Statement of Operations for the Six Months Ended June 30, 2020 and
2019" for discussion of the variances between periods in the components
comprising Adjusted EBITDA.
Software Products and Services
We develop and sell computer software that provides secure information exchange,
data transfer, and data sharing capabilities for enterprises and consumers. We
have been in business for more than twenty years having sold our products to
thousands of enterprises and individual consumers globally.
Our primary business is selling and supporting MFT software for enterprises. MFT
software facilitates the transfer of data from one location to another across a
computer network within a single enterprise or between multiple computer
networks in multiple enterprises. Examples of enterprise-level activities that
rely on MFT software include:
? Transfer of transactional information within an enterprise on a
repetitive basis from one geographic location to another, such as a
transfer of deposit and withdrawal information throughout the day
from a branch of a bank to a central data processing center at
another location.
? Movement of accumulated information within an enterprise from one
data processing application to another on a periodic basis,such as a
transfer of bi-weekly payroll information from a payroll system that
is used to pay employees to a job cost system that is used to manage
the cost of a project.
? Exchange of information between enterprises to facilitate the
completion of one or more business transactions, such as aretailer
transmitting inventory purchasing requirements produced by its
material requirements planning system to an order entry system at a
supplying vendor.
We earn over 98% 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 abring-your-own-license, or
BYOL, environment. Our brand name for this product is EFT.
Historically, most of the revenue we have earned from our EFT
platform products has been from sales of EFT perpetual software
licenses and related M&S.
? Cloud-based, SaaS solutions that we sell on an ongoing subscription
basis. In January 2018 , we introduced EFT Arcus, our SaaSoffering of
the EFT platform going forward, for which users pay a base monthly
subscription fee plus an additional variable amount based upon their
metered usage of EFT Arcus resources.
? M&S.
? Professional services for product installation, integration and training.
30
--------------------------------------------------------------------------------
Index
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 andscalability
to support operational efficiency and maintain businesscontinuity.
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 automateprocesses. Our
solutions also provide data replication, acceleration of file
transfer, sharing and collaboration, and continuous data backup and
recovery.
31--------------------------------------------------------------------------------
Index
EFT Platform - Delivery Offerings
Our clients can purchase the capabilities of our EFT platform in two ways:
? Under a perpetual software license for which they pay a one-time fee
and under which they typically install our product on computers that
they own and or manage. The EFT platform purchased in this manner can
also be used in a bring-your-own-license environment hosted by major
cloud providers such as Amazon Web Services or Microsoft Azure.
Almost all clients who purchase a perpetual license to use the EFT
platform also purchase an M&S contract for which they pay us a
recurring fee that is typically 20% to 30% of the perpetual license
fee per year.
? As a SaaS under which the client pays us monthly subscription and
usage fees to access the capabilities of the EFT platform in the
cloud. Our brand name for this product is EFT Arcus. Weintroduced
this product in January 2018 . We have not yet earned significant
revenue from the SaaS offering of our EFT platform.
File Transfer Solution for Consumers - CuteFTP
CuteFTP is our original product introduced in 1996. It is a file transfer program generally used by individuals and small businesses. It generates incremental revenue for us at a relatively low cost. We will continue selling CuteFTP as a stand-alone product and providing M&S services to clients, but will not invest significantly in enhancing or marketing the product. Professional Services
We offer a wide range of professional services to complement our on-premises and SaaS solutions. These services can include:
? System integration and implementation
? Business process and workflow planning
? Policy development
? Education and training
? Solution health checks
Maintenance and Support
We offer M&S contracts to licensees of all of our software products. These M&S
contracts entitle the licensee to software upgrades and technical support
services in accordance with the terms of our M&S contract. Standard technical
support services are provided via email and telephone during our regular
business hours. For certain products, we offer a Platinum M&S contract which
provides access to emergency technical assistance 24 hours per day, 7 days a
week.
Most of our M&S contracts are for one year although we also sell multi-year
contracts. M&S is purchased by substantially all buyers of our EFT platform as
well as by many clients who purchase our other products. Clients with M&S
contracts pay us a recurring, annual fee that is typically 20% to 30% of the
software license price. A majority of our clients with M&S contracts renew them
each year.
32--------------------------------------------------------------------------------
Index Employees
Our workforce is organized as follows:
June 30,
Department 2020 2019
Sales and Marketing 45 43
Engineering 17 9
Professional Services 6 6
Customer Support 23 21
Management and Administration 18 17
Total 109 96
Solution Perspective and Trends
The components of our revenue are as follows ($ in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Percent of Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total
Revenue By Type
License $ 2,228 22.2 % $ 2,835 27.6 % $ 4,223 21.4 % $ 5,469 27.8 %
M&S 7,295 72.7 % 6,602 64.3 % 14,361 72.7 % 12,678 64.4 %
Professional
Services 508 5.1 % 832 8.1 % 1,159 5.9 % 1,535 7.8 %
Total Revenue $ 10,031 100.0 % $ 10,269 100.0 % $ 19,743 100.0 % $ 19,682 100.0 %
Revenue by
Product Line
License
EFT Platform $ 2,197 98.6 % $ 2,784 98.2 % $ 4,147 98.2 % $ 5,368 98.2 %
Other 31 1.4 % 51 1.8 % 76 1.8 % 101 1.8 %
Total License
Revenue 2,228 100.0 % 2,835 100.0 % 4,223 100.0 % 5,469 100.0 %
M&S
EFT Platform 7,178 98.4 % 6,394 96.8 % 14,108 98.2 % 12,262 96.7 %
Other 117 1.6 % 208 3.2 % 253 1.8 % 416 3.3 %
Total M&S
Revenue 7,295 100.0 % 6,602 100.0 % 14,361 100.0 % 12,678 100.0 %
Professional
Services (all
EFT Platform) 508 100.0 % 832 100.0 % 1,159 100.0 % 1,535 100.0 %
Total Revenue
EFT Platform 9,883 98.5 % 10,010 97.5 % 19,414 98.3 % 19,165 97.4 %
Other 148 1.5 % 259 2.5 % 329 1.7 % 517 2.6 %
Total Revenue $ 10,031 100.0 % $ 10,269 100.0 % $ 19,743 100.0 % $ 19,682 100.0 %
33--------------------------------------------------------------------------------
Index
Revenue from our EFT platform products decreased 1% for the 2020 quarter compared to the 2019 quarter and increased 1% for the 2020 six months compared to the 2019 six months. Revenue for our other product lines decreased 43% for the 2020 quarter compared to the 2019 quarter and 36% for the 2020 six months compared to the 2019 six months, 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 EndedJune 30, 2020 and 2019" and "Comparison of the Condensed Consolidated Statement of Operations for the Six Months EndedJune 30, 2020 and 2019".
Liquidity and Capital Resources
Our total cash, cash equivalents and working capital positions were as follows
($ in thousands):
June 30, 2020 December 31, 2019
Cash and cash equivalents $ 12,463 $ 4,702
Current assets $ 21,438 $ 15,066
Current liabilities (24,464 ) (22,602 )
Working capital $ (3,026 ) $ (7,536 )
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 incuroperating
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 Six Months
Ended June 30,
2020 2019
Operating activities $ 10,286 $ 10,261
Investing activities (828 ) (469 )
Financing activities (1,697 ) (9,094 )
Our cash provided by operating activities increased during the 2020 six months compared to the 2019 six months primarily due to the following factors:
? Accounts receivable decreasing
compared to decreasing $537,000 in the 2019 six months due primarily
to increased customer collections in the 2020 six monthscompared to
the 2019 six months.
? Deferred revenue increasing
to increasing $749,000 in the 2019 six months. The increase is due to
increasing the resources dedicated to securing M&S renewals and an
increase in multi-year renewals.
34--------------------------------------------------------------------------------
Index Offset by:
? Accrued expenses decreasing
to increasing $303,000 in the 2019 six months due primarily to the
accrual of two contingent liabilities in the 2019 six months where no
comparable event occurred in the 2020 six months.
? Federal income tax receivable decreasing $388,000 in the 2020 six
months compared to increasing $179,000 in the 2019 six months
primarily due to decreased estimated tax payments due to prior period
overpayments credit and receiving $263,000 of income tax refunds.
? Net income after considering items not involving cash at the time
they are recorded in the statement in the statement ofoperations and
comprehensive income, as set forth on our Condensed Consolidated
Statement of Cash Flows, decreased to $8.1 million for the 2020 six
months as compared to $8.3 million for the 2019 six months. See
"Comparison of the Consolidated Statement of Operations for the Six
Months Ended June 30, 2020 and 2019" for a discussion of thechanges
in the components of these amounts.
? Accounts payable decreasing
to increasing $63,000 in the 2019 six months due to normal variations
in the timing of payment to our vendors.
The amount of cash we used for investing activities during the 2020 six months
increased compared to the 2019 six months due primarily to an increase in our
capitalized software development costs.
Financing activities used less cash during the 2020 six months than during the
2019 six months primarily due to no dividend payment in the 2020 six months
compared to dividend payments of $9.0 million in the 2019 six months offset by
the principal loan payment of $2.5 million in the 2020 six months.
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. Following
receipt of the loan proceeds, we evaluated our access to credit through other
sources of funding and returned the funds on May 5, 2020 .
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.
35--------------------------------------------------------------------------------
Index
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 ofJune 30, 2020 , this debt service coverage ratio was 2.57x. ? We must maintain a Fixed Coverage Charge Ratio of 1.25x. This ratio is defined in the Loan Agreement as the ratio of consolidated EBITDA minus unfinanced capital expenditures to cash interest expense plus scheduled principal payments made plus taxes paid in cash plus restricted payments made in cash. As ofJune 30, 2020 , this debt to tangible net worth ratio was 2.69x. 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.
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 $19.2 million . Those future services
primarily relate 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 June 30,
2020 2019 $ Change
$ in thousands
Total revenues $ 10,031 $ 10,269 $ (238 )
Total cost of revenues 1,607 1,587 20
Gross profit 8,424 8,682 (258 )
Operating expenses
Sales and marketing 2,062 1,899 163
General and administrative 1,450 1,757 (307 )
Legal and professional 462 222 240
Research and development 352 275 77
Total operating expenses 4,326 4,153 173
Income from operations 4,098 4,529 (431 )
Other income (expense) (628 ) 30 (658 )
Income before income taxes 3,470 4,559 (1,089 )
Income tax expense (31 ) 926 (957 )
Net income $ 3,501 $ 3,633 $ (132 )
36--------------------------------------------------------------------------------
Index
In the discussion below, the percentage changes cited are based on the 2020 quarter amounts compared to the 2019 quarter amounts.
Revenue. The components of our revenues were as follows ($ in thousands):
Three Months Ended June 30,
2020 2019
Percent of Percent of
Amount Total Amount Total
Revenue By Type
License $ 2,228 22.2 % $ 2,835 27.6 %
M&S 7,295 72.7 % 6,602 64.3 %
Professional Services 508 5.1 % 832 8.1 %
Total Revenue $ 10,031 100.0 % $ 10,269 100.0 %
Revenue by Product Line
License
EFT Platform $ 2,197 98.6 % $ 2,784 98.2 %
Other 31 1.4 % 51 1.8 %
2,228 100.0 % 2,835 100.0 %
M&S
EFT Platform 7,178 98.4 % 6,394 96.8 %
Other 117 1.6 % 208 3.2 %
7,295 100.0 % 6,602 100.0 %
Professional Services (all EFT
Platform) 508 100.0 % 832 100.0 %
Total Revenue
EFT Platform 9,883 98.5 % 10,010 97.5 %
Other 148 1.5 % 259 2.5 %
$ 10,031 100.0 % $ 10,269 100.0 %
Our total revenue decreased 2%. Revenue from our EFT platform products and services decreased 1%. Revenue from our other products that consist of Mail Express, WAFS, and CuteFTP 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 21%. The decline is
primarily attributable to a slowdown in deal velocity related to COVID-19. 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.
37--------------------------------------------------------------------------------
Index
M&S revenue from our EFT platform products increased 12% 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 revenuetypically
lags behind the related change in license revenue becauselicense
sales are recognized as revenue in full in the period thelicense 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
initially purchased these services in earlier periods. Webelieve
these renewals are the result of clients recognizing the value
provided by our Maintenance and Support team.
Our professional services revenue was $324,000 less for the 2020 quarter
compared to the 2019 quarter, a decrease of 39%. 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 aproduct
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 was relatively flat and as a percent of software license revenue was 33% in the 2020 quarter compared to 26% in the 2019 quarter. Variable costs increased despite the decrease in license revenue due to the mix of products sold. Cost of M&S revenue as a percent of M&S revenue was 8% in the 2020 quarter and 9% in the 2019 quarter. Cost of revenue for M&S in absolute dollars increased by 7%. 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 53% in the 2020 quarter as compared to 35% in the 2019 quarter. The cost of revenue associated with professional services is mainly personnel related and a decrease in the associated revenue will cause a decrease in the gross margin. 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 18% of total revenue for the 2019 quarter. In absolute dollars these expenses increased 9% due primarily to an increase in personnel related expenses. General and Administrative. These expenses decreased 17% primarily due to a decrease in compensation expense related to the accelerated vesting of restricted stock granted to a former member of our Board of Directors inMay 2019 . The vesting acceleration was approved by the Compensation Committee of the Board of Directors.
Legal and Professional. These expenses increased 108% 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.
38--------------------------------------------------------------------------------
Index
Research and Development. The overall profile of our research and development ("R&D") activities was as follows ($ in thousands):
Three Months Ended June 30,
2020 2019
R&D expense $ 352 $ 275
Capitalized software development costs 404 236
Total resources expended for R&D $ 756 $ 511
Our total R&D expenditures increased 48% 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.
? 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 an ordinary loss under Section 165(g)(3) of the Internal
Revenue Code related to the worthlessness of the stock of our 100%
owned subsidiary TappIn, Inc. , which was dissolved on June 16, 2020 .
39--------------------------------------------------------------------------------
Index
Comparison of the Condensed Consolidated Statement of Operations for the Six
Months Ended
Six Months Ended June 30,
2020 2019 $ Change
$ in thousands
Total revenues $ 19,743 $ 19,682 $ 61
Total cost of revenues 3,189 3,021 168
Gross profit 16,554 16,661 (107 )
Operating expenses
Sales and marketing 4,137 3,815 322
General and administrative 2,974 3,776 (802 )
Legal and professional 1,077 798 279
Research and development 664 600 64
Total operating expenses 8,852 8,989 (137 )
Income from operations 7,702 7,672 30
Other income (expense) (1,402 ) 54 (1,456 )
Income before income taxes 6,300 7,726 (1,426 )
Income tax expense 430 1,673 (1,243 )
Net income $ 5,870 $ 6,053 $ (183 ) In the discussion below, the percentage changes cited are based on the 2020 six month amounts compared to the 2019 six month amounts.
Revenue. The components of our revenues were as follows ($ in thousands):
Six Months Ended June 30,
2020 2019
Percent of Percent of
Amount Total Amount Total
Revenue By Type
License $ 4,223 21.4 % $ 5,469 27.8 %
M&S 14,361 72.7 % 12,678 64.4 %
Professional Services 1,159 5.9 % 1,535 7.8 %
Total Revenue $ 19,743 100.0 % $ 19,682 100.0 %
Revenue by Product Line
License
EFT Platform $ 4,147 98.2 % $ 5,368 98.2 %
Other 76 1.8 % 101 1.8 %
4,223 100.0 % 5,469 100.0 %
M&S
EFT Platform 14,108 98.2 % 12,262 96.7 %
Other 253 1.8 % 416 3.3 %
14,361 100.0 % 12,678 100.0 %
Professional Services (all EFT
Platform) 1,159 100.0 % 1,535 100.0 %
Total Revenue
EFT Platform 19,414 98.3 % 19,165 97.4 %
Other 329 1.7 % 517 2.6 %
$ 19,743 100.0 % $ 19,682 100.0 %
40--------------------------------------------------------------------------------
Index
Our total revenue was relatively flat. Revenue from our EFT platform products and services increased 1%. Revenue from our other products that consist of Mail Express, WAFS, and CuteFTP 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 23%. The decline is primarily attributable to a slowdown in deal velocity related to COVID-19. 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.
M&S revenue from our EFT platform products increased 15% 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 revenuetypically
lags behind the related change in license revenue becauselicense
sales are recognized as revenue in full in the period thelicense 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
initially purchased these services in earlier periods. Webelieve
these renewals are the result of clients recognizing the value
provided by our Maintenance and Support team.
Our professional services revenue was $376,000 less for the 2020 six months
compared to the 2019 six months, a decrease of 24%. 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 aproduct
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 5% and as a percent of software license revenue was 33% in the 2020 six months compared to 25% in the 2019 six months. 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 8% in the 2020 six months and 9% in the 2019 six months. Cost of revenue for M&S in absolute dollars increased by 11%. The increase in absolute dollars was due primarily to an increase in personnel related expenses.
41--------------------------------------------------------------------------------
Index
Cost of professional services revenue as a percent of that revenue was 48% in the 2020 six months as compared to 38% in the 2019 six months. The cost of revenue associated with professional services is mainly personnel related and a decrease in the associated revenue will cause a decrease in the gross margin. 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 six months compared to 19% of total revenue for the 2019 six months. In absolute dollars these expenses increased 8% due primarily to an increase in personnel related expenses. General and Administrative. These expenses decreased 21% 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 and the accelerated vesting of restricted stock granted to a former member of our Board of Directors inMay 2019 . The vesting acceleration of the stock options was pursuant to the terms of the applicable option agreements and the vesting of the restricted stock grant was approved by the Compensation Committee of the Board of Directors.
Legal and Professional. These expenses increased 35% 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 R&D activities was as
follows ($ in thousands):
Six Months Ended June 30,
2020 2019
R&D expense $ 664 $ 600
Capitalized software development costs 768 437
Total resources expended for R&D
Our total R&D expenditures increased 38% between the 2020 and 2019 six months 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 six months and the 2019 six months 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.
? State income taxes included in income tax expense in our condensed
consolidated financial statements.
42--------------------------------------------------------------------------------
Index
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.
? For 2020 an ordinary loss under Section 165(g)(3) of the Internal
Revenue Code related to the worthlessness of the stock of our 100%
owned subsidiary TappIn, Inc. , which was dissolved on June 16, 2020 .© Edgar Online, source
