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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

 

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(Mark One)

☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018.

or

 

☐     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to           

 

Commission file number    001-33601 

 

GlobalSCAPE, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware		74-2785449
State or Other Jurisdiction of Incorporation or Organization		I.R.S. Employer Identification No.
4500 Lockhill-Selma, Suite 150  San Antonio, Texas		78249
Address of Principal Executive Offices		Zip Code

 

210-308-8267

Registrant’s Telephone Number, Including Area Code

 

                                                                                                        

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☒
Emerging growth company ☐

 

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

 

As of September 30, 2018 there were 17,968,268 shares of common stock outstanding.

 

 

GlobalSCAPE, Inc.

 

Quarterly Report on Form 10-Q

 

For the Quarter ended September 30, 2018

 

Index

 

		Page
Part I.	Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Operations and Comprehensive Income	3
	Condensed Consolidated Statements of Cash Flows	4
	Condensed Consolidated Statement of Stockholders’ Equity	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	45
Part II.	Other Information	48
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 6.	Exhibits	49
Signatures		50

 

 

 

Preliminary Notes

 

GlobalSCAPE®, CuteFTP®, CuteFTP Pro®, DMZ Gateway®, EFT Cloud Services®, GlobalSCAPE Securely Connected®, and Mail Express® are registered trademarks of GlobalSCAPE, Inc.  

 

Secure FTP Server™, Wide Area File Services™, WAFS™, CDP™, Advanced Workflow Engine™, AWE™, EFT Server™, EFT Workspaces™, EFT Insight™, Enhanced File Transfer™, Enhanced File Transfer Server™, Secure Ad Hoc Transfer™, SAT™, EFT Server Enterprise™, Enhanced File Transfer Server Enterprise™, Desktop Transfer Client™, DTC™, Mobile Transfer Client™, MTC™, Web Transfer Client™, Workspaces™, Accelerate™, WTC™, Content Integrity Control™, Advanced Authentication™, AAM™ and scConnect™ are trademarks of GlobalSCAPE, Inc. 

 

TappIn® and design are registered trademarks of TappIn, Inc., our wholly-owned subsidiary. 

 

TappIn Secure Share™, Social Share™, Now Playing™, and Enhanced A La Carte Playlist™ are trademarks of TappIn, Inc., our wholly-owned subsidiary. 

 

Other trademarks and trade names in this Quarterly Report are the property of their respective owners.

 

In this Report, we use the following terms:

 

“BYOL” means bring your own license.

 

“Cloud” or “cloud computing” refers to pooled computing resources, delivered on-demand, over the Internet. In the same manner that electricity is delivered on-demand from large scale power plants, cloud computing is delivered from centralized data centers to users all over the world.

 

“DMZ” or Demilitarized Zone refers to a computer host or perimeter network inserted between a trusted internal network and an untrusted public network such as the Internet.

 

“FTP” or File Transfer Protocol is a protocol used to exchange or manipulate files over a computer network such as the Internet.

 

“MFT” or Managed File Transfer refers to software solutions that facilitate the secure transfer of data from one computer to another through a network.

 

“SaaS” or Software-as-a-Service uses hosted, cloud computing approaches in which the customer does not need to install the underlying software on its own computer systems to access the application.

 

 

Part I. Financial Information

 

Item 1. Financial Statements

 

GlobalSCAPE, Inc.

Condensed Consolidated Balance Sheets

(in thousands except share amounts)

 

		September 30,				December 31,
		2018				2017
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	9,630			$	11,583
Certificates of deposit, short term			1,530				4,291
Accounts receivable, net			4,853				5,925
Federal income tax receivable			740				822
Prepaid and other current assets			3,173				675
Total current assets			19,926				23,296
Certificates of deposit, long term			-				11,503
Capitalized software development costs, net			3,384				3,786
Goodwill			12,712				12,712
Deferred tax asset, net			330				651
Property and equipment, net			442				481
Other assets			577				84
Total assets		$	37,371			$	52,513
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	1,982			$	1,900
Accrued expenses			3,378				1,671
Deferred revenue			12,341				13,315
Total current liabilities			17,701				16,886
Deferred revenue, non-current portion			2,795				3,735
Other long term liabilities			128				176
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $0.001 per share, 10,000,000 authorized, no shares issued or outstanding			-				-
Common stock, par value $0.001 per share, 40,000,000 authorized, 22,382,862 and 22,196,712 shares issued: 17,968,268 and 21,793,131 outstanding at September 30, 2018 and December 31, 2017, respectively			22				22
Additional paid-in capital			25,106				23,793
Treasury stock, 4,414,594 and 403,581 shares, at cost, at September 30, 2018 and December 31, 2017, respectively			(18,714	)			(1,452	)
Retained earnings			10,333				9,353
Total stockholders’ equity			16,747				31,716
Total liabilities and stockholders’ equity		$	37,371			$	52,513

 

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

 

 

GlobalSCAPE, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income

(In thousands, except per share amounts)

(Unaudited)

 

		Three months ended September 30,								Nine months ended September 30,
		2018				2017				2018				2017
Operating Revenues:
Software licenses		$	2,843			$	2,488			$	7,726			$	7,768
Maintenance and support			5,488				5,360				15,872				15,702
Professional services			649				368				1,549				1,652
Total Revenues			8,980				8,216				25,147				25,122
Cost of revenues:
Software licenses			721				725				2,225				2,234
Maintenance and support			514				446				1,574				1,283
Professional services			264				402				880				1,120
Total cost of revenues			1,499				1,573				4,679				4,637
Gross profit			7,481				6,643				20,468				20,485
Operating expenses:
Sales and marketing			2,261				3,079				8,229				9,564
General and administrative			1,589				1,573				4,883				4,607
Legal and professional			1,510				1,002				4,235				1,550
Severance			381				-				488				21
Research and development			368				594				1,654				2,530
Total operating expenses			6,109				6,248				19,489				18,272
Income from operations			1,372				395				979				2,213
Interest income (expense), net			(93	)			75				63				221
Income before income taxes			1,279				470				1,042				2,434
Income tax expense			281				194				386				870
Net income		$	998			$	276			$	656			$	1,564
Comprehensive income		$	998			$	276			$	656			$	1,564
Net income per common share -
Basic		$	0.05			$	0.01			$	0.03			$	0.07
Diluted		$	0.05			$	0.01			$	0.03			$	0.07
Weighted average shares outstanding:
Basic			21,688				21,792				21,746				21,672
Diluted			21,940				22,247				22,044				22,145

 

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

 

 

GlobalSCAPE, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

		For the Nine Months Ended September 30,
		2018				2017
Operating Activities:
Net income		$	656			$	1,564
Items not involving cash at the time they are recorded in the statement of operations:
Provision (recoveries) for doubtful accounts receivable			(64	)			15
Depreciation and amortization			1,641				1,604
Share-based compensation			972				1,053
Deferred taxes			61				28
Subtotal before changes in operating assets and liabilities			3,266				4,264
Changes in operating assets and liabilities:
Accounts receivable			1,136				1,798
Prepaid and other current assets			(1,868	)			163
Deferred revenue			(1,914	)			(1,526	)
Accounts payable			82				448
Accrued expenses			1,707				404
Other assets			116				154
Accrued interest receivable			-				(195	)
Other long-term liabilities			(48	)			22
Federal income tax receivable			82				(759	)
Net cash provided by operating activities			2,559				4,773
Investing Activities:
Software development costs capitalized			(1,057	)			(1,464	)
Purchase of property and equipment			(143	)			(249	)
Redemption of Certificates of Deposit			14,264				-
Net cash provided by (used in) investing activities			13,064				(1,713	)
Financing Activities:
Proceeds from exercise of stock options			341				471
Purchase of Treasury Stock			(17,262	)			-
Dividends paid			(655	)			(979	)
Net cash used in financing activities			(17,576	)			(508	)
Net increase (decrease) in cash			(1,953	)			2,552
Cash at beginning of period			11,583				8,895
Cash at end of period		$	9,630			$	11,447
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	-			$	-
Income tax payments		$	238			$	1,616

 

 

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

 

 

GlobalSCAPE, Inc.

Condensed Consolidated Statement of Stockholders' Equity

(in thousands, except number of shares)

(unaudited)

 

										Additional
		Common Stock								Paid-in				Treasury				Retained
		Shares				Amount				Capital				Stock				Earnings				Total
Balance at December 31, 2016			21,920,912			$	22			$	21,756			$	(1,452	)		$	9,289				29,615
Shares issued upon exercise of stock options			191,500								458												458
Stock-based compensation expense
Stock options											533												533
Restricted stock			80,000								138												138
Common stock cash dividends, $0.030 per share																			(652	)			(652	)
Net income																			1,288				1,288
Balance at June 30, 2017			22,192,412			$	22			$	22,885			$	(1,452	)		$	9,925			$	31,380
Shares issued upon exercise of stock options			4,300								14												14
Stock-based compensation expense
Stock options											296												296
Restricted stock											85												85
Common stock cash dividends, $0.015 per share																			(327	)			(327	)
Net income																			276				276
Balance at September 30, 2017			22,196,712			$	22			$	23,280			$	(1,452	)		$	9,874			$	31,724
Stock-based compensation expense
Stock options											428												428
Restricted stock											85												85
Common stock cash dividends, $0.015 per share																			(328	)			(328	)
Net income																			(193	)			(193	)
Balance at December 31, 2017			22,196,712			$	22			$	23,793			$	(1,452	)		$	9,353			$	31,716
Retained Earnings Adjustment due to ASC 606																			979				979
Stock-based compensation expense
Stock options											742												742
Restricted stock			80,000								120												120
Common stock cash dividends, $0.030 per share																			(655	)			(655	)
Net Income																			(342	)			(342	)
Balance at June 30, 2018			22,276,712			$	22			$	24,655			$	(1,452	)		$	9,335			$	32,560
Purchase of Treasury Stock															(17,262	)							(17,262	)
Cancellation of Restricted Stock			(40,000	)																			-
Shares issued upon exercise of stock options			146,150								341												341
Stock-based compensation expense
Stock options											110												110
Net Income																			998				998
Balance at September 30, 2018			22,382,862			$	22			$	25,106			$	(18,714	)		$	10,333			$	16,747

 

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

 

 

GlobalSCAPE, Inc.

 

Notes to Condensed Consolidated Financial Statements

 

As of September 30, 2018 and For the Three and Nine

 

Months Then Ended

 

(Unaudited)

 

1.	Nature of Business

 

GlobalSCAPE, Inc., together with its wholly-owned subsidiary (collectively referred to as the “Company”, “GlobalSCAPE”, “we”, “us” or “our”), provides secure information exchange capabilities for enterprises and consumers through the development and distribution of software, delivery of managed and hosted solutions, and provisioning of associated services. Our solution portfolio facilitates transmission of critical information such as financial data, medical records, 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.

 

2.	Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X, “Interim Financial Statements”, as prescribed by the United States Securities and Exchange Commission, or 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.

 

Sales 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.

 

 

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Restricted shares participate in dividend payments and may be voted.

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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.

 

9.	Income Taxes

 

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