Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q 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, and Section 21E of the Securities and Exchange Act of 1934, as amended. “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 2015 Form 10-K and other documents filed with the Securities and Exchange Commission. 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 2017 quarter and the 2016 quarter refer to the three months ended March 31, 2017 and 2016, 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 over twenty years and have sold our products to thousands of enterprises and more than one million individual consumers throughout the world.
Our primary business is selling and supporting managed file transfer, or MFT, software for enterprises. The brand name of our MFT product platform is Enhanced File Transfer, or EFT.
We earn most of our revenue from the sale of EFT and products that are part of our EFT platform. We earn revenue from the sale of perpetual software licenses, providing products under software-as-a-service, or SaaS, subscriptions, providing maintenance and support services, or M&S, and offering professional services for product customization and integration.
We also sell other products that are synergistic to EFT including Mail Express, WAFS, and CuteFTP. Collectively, these products constitute less than 10% of our total revenue.
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 our EFT platform products. We believe our products and business capabilities are well-positioned to compete effectively in the market for MFT products. For a more comprehensive discussion of the products we sell and the services we offer, see
Software Products and Services
below.
As a corporation, we have won multiple awards for performance and reputation, including:
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Recognized for three Info Security Products Guide 2017 Global Excellence Awards for distinguished achievements in product innovation in categories that included:
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Innovation in Compliance (Gold Winner) – Enhanced File Transfer
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Cloud/SaaS Solutions (Gold Winner) – EFT Cloud Services
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BYOD Security (Bronze Winner) – EFT Workspaces
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Received a 5-Star rating in The Channel Company’s CRN 2017 Partner Program Guide for the third year in a row.
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Honored with the 2017 Total Rewards & Benefits Excellence Award by the HRO Today Services and Technology Association.
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Selected as a finalist in the 2017 Cybersecurity Product Awards Secure File Transfer: EFT Enterprise
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Recognized as a 2016 Top Workplace by San Antonio Express-News, marking our sixth recognition as a Top Workplace in San Antonio.
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Named as Leader in Secure Information Exchange Services 2016 – Texas by the Corp America 2016 Small Cap Awards.
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Earned awards from
Info Security Guide
in several categories, including:
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EFT Workspaces – Gold Winner in BYOD Security.
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Enhanced File Transfer – Silver Winner in Compliance.
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EFT Cloud Services – Bronze Winner in Cloud Security.
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Mail Express – Bronze Winner in Email Security and Management.
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Received a 5-Star rating in The Channel Company’s CRN 2016 Partner Program Guide for the second year in a row.
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Named by
Texas Monthly
magazine as one of the best companies to work for in Texas for the sixth year in a row with a ranking of #16 in the medium size category.
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Honored as the HR Employer of the Year and Excellence in Engagement Strategy in North America by the HRO Today Services and Technology Association.
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Recognized by the
San Antonio Business Journal
as a 2016 Best Place to Work, making this the fifth time GlobalSCAPE has received this honor.
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Named by
Computerworld
as one of the best companies to work for in IT for the third consecutive year with a ranking of #3 in the small company category.
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Key Business Metrics
We review a number of key business metrics on an ongoing basis to help us monitor our performance and to identify material trends which may affect our business. The significant metrics we review are 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. We believe our revenue growth is primarily dependent upon executing our business strategies which include:
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Ongoing innovation of our EFT platform to address the expanding needs of our existing customers and enhancing our products’ appeal to new customers.
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Licensing, developing and/or acquiring technologies with features and functions that are complementary to and synergistic with our EFT platform so as to expand the breadth of our products offerings.
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Enhancing our sales and marketing programs to improve identification of potential demand for our products and to increase the rate at which we are successful in selling our products.
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To support product innovation, we continue to enhance our software engineering group and our focus on optimizing the manner in which we assess the development of new technologies, our approach to managing those projects, and the timelines over which we do that work.
We remain alert for attractive opportunities to collaborate with others or perhaps combine other revenue-producing technologies with ours to expand our product offerings and reach. To that end, we continually assess products and services offered by others that might be synergistic with our existing products. We may elect to take advantage of those opportunities through cooperative marketing agreements or licensing arrangements or by acquiring an ownership position in the enterprise offering the opportunity.
In continuing to develop our demand generation activities, we have made and continue to make ongoing changes in sales and marketing including:
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Increasing sales staff capacity as needed to address our markets.
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Aligning our sales group to enhance its industry and geographic focus.
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Implementing new sales and marketing campaigns.
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Using third party digital marketing experts with search engine optimization expertise to enhance our efforts in this area.
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Evolving our lead generation programs to increase our sales staff’s exposure to potential purchasers.
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Enhancing our support of channel partners and engaging them to sell our products through training, orientation and marketing programs.
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As part of growing revenue in total, we are focused on increasing license revenue both in terms of absolute dollars and as a percent of total revenue. When we sell our licensed products, we also typically create a recurring revenue stream from M&S since almost all purchasers of our licensed enterprise products also purchase an M&S contract. Most of our M&S contracts are for one year although we also sell multi-year contracts. The customer pays us the M&S fee for the entire term of the agreement at the time the contract begins. We recognize that amount as revenue ratably in future periods over the term of the contract.
We typically experience a high renewal rate for M&S services for our enterprise products so long as a customer continues using the licensed product they purchased from us. As a result, growing license revenue not only contributes to increasing revenue growth at the time the license is sold but also provides a foundation for future recurring revenue as the purchasers of our licensed products renew M&S contracts to support their ongoing product support needs. This pattern of activity can create a cumulative effect for M&S renewals as a result of the cumulative number of licensed software installations sold over multiple years that create M&S renewals in any single year predictably (and in line with our expectations) exceeding the number of new software licenses we sell in a single year. We expect this cumulative effect to continue to grow if we continue to increase enterprise software license revenue in future periods. For these reasons, we expect M&S revenue will remain a substantial part of our total revenue.
See
Comparison of the Statement of Operations for the Three Months Ended March 31, 2017 and 2016
for a discussion of trends in our revenue growth that we monitor using this metric
.
Bookings
Bookings is a business metric we use to measure the success of our sales and marketing programs. For this purpose, we define bookings as the sum of the sales of:
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M&S contracts sold with software licenses for which the M&S services will be delivered within the next year.
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SaaS arrangements for up to one year.
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Most of the resources we expend for sales and marketing are targeted toward increasing our revenue from the four sources listed above. M&S contract renewals bookings, which are an additional source of revenue for us, typically are not significantly dependent upon our sales and marketing programs to be successful. Based upon these factors, beginning in 2017, we revised the definition our bookings metric to exclude amounts related to renewals of M&S contracts so as to better measure the success of our sales and marketing programs.
Bookings is not a measure of financial performance under GAAP and should not be considered a substitute for revenue. Bookings has limitations as an analytical tool and when assessing our operating performance. Bookings should not be considered in isolation or as a substitute for revenue or other income statement data prepared in accordance with GAAP.
Our bookings trends and the reconciliation of bookings to revenue are as follows ($ in thousands):
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Three Months Ending March 31,
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2017
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2016
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Revenue
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$
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8,317
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$
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7,387
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Products and services sold for which we will recognize revenue at a future date when the goods and services are delivered to and accepted by the customer
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2,218
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1,773
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Products and services delivered to and accepted by the customer for which revenue recognition had been deferred in the past at the time of booking
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(6,643
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)
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(5,534
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)
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Bookings
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$
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3,892
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$
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3,626
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Our bookings increased 7.3%. This increase was a result of our continuing development and implementation of sales and marketing programs designed to increase the level of our sales of software licenses.
Amounts we previously reported as bookings reconcile to the bookings in the table above as follows:
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Three Months Ended
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March 31, 2016
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Bookings as previously reported
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$
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7,779
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M&S renewals and M&S to be delivered beyond one year in the future not part of bookings
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(4,153
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)
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Bookings as now reported
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$
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3,626
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While M&S renewals and M&S to be delivered beyond one year in the future are not part of bookings, we record and include these items in deferred revenue on our balance sheet at the time we record them as an account receivable.
In connection with the bookings metric we previously reported, we also reported potential future revenue as a key business metric. With the refinement of our bookings key business metric, we no longer rely on potential future revenue as a key business metric since we have determined that our revenue growth metric discussed above is the primary metric upon which we rely to measure our outlook for revenue in the future.
Adjusted EBITDA (Non-GAAP Measurement)
We utilize Adjusted EBITDA (Earnings Before Interest, Taxes, Total Other Income/Expense, Depreciation, Amortization, other than amortization of capitalized software development costs, and Share-Based Compensation Expense) to provide us a view of income and expenses and cash flow from our operations that is supplemental and secondary to our primary assessment of net income as presented in our condensed consolidated statement of operations and comprehensive income and of cash flow from operating activities as presented on our condensed consolidated statement of cash flows. We use Adjusted EBITDA to provide another perspective for measuring profitability and cash flow from our core operating activities that does not include the effects of expenses that typically do not require us to pay them in the current period (such as depreciation, amortization and share-based compensation), the cost of financing our business, and the effects of income taxes, as well as the effects on our cash of changes in certain balance sheet items such as accounts receivable and accounts payable. We monitor the components of Adjusted EBITDA to assess our actual performance relative to our plans, budgets and expectations and use the results of that assessment to adjust our future activities to the extent we deem necessary. Our Adjusted EBITDA results indicate that we have been able to sustain consistently positive cash flow to help fund our future operations.
Adjusted EBITDA is not a measure of financial performance under GAAP. It should not be considered as a substitute for net income presented on our condensed consolidated statement of operations and comprehensive income or for net cash provided by operating activities presented on our condensed consolidated statement of cash flows. 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 financial statements prepared in accordance with GAAP.
We compute Adjusted EBITDA as follows ($ in thousands):
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Three Months Ended
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March 31,
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2017
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2016
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Net Income
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$
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751
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$
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392
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Add (subtract) items to determine adjusted EBITDA:
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Income tax expense
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322
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174
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Interest (income) expense, net
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(70
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)
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(33
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)
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Depreciation and amortization:
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Total depreciation and amortization
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541
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501
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Amortization of capitalized software development costs
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(474
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)
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(430
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)
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Stock-based compensation expense
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324
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222
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Adjusted EBITDA
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$
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1,394
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$
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826
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See
Comparison of the Statement of Operations for the Three Months Ended March 31, 2017 and 2016
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, file transfer and file sharing capabilities for enterprises and consumers. We have been in business for over twenty years and have sold our products to thousands of enterprises and more than one million individual consumers throughout the world.
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. These transfers may be ongoing, repetitive activities executed by automated software routines that occur without human intervention, or they may be transfers that people create and complete in the absence of automated routines or as a result of ad-hoc, special situations that arise from time-to-time. Examples of enterprise-level activities that rely on MFT software include:
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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.
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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.
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Exchange of information between enterprises to facilitate the completion of one or more business transactions, such as a retailer transmitting inventory purchasing requirements produced by its material requirements planning system to an order entry system at a supplying vendor.
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We have multiple revenue streams from our MFT products that include:
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Perpetual software licenses under which customers install our products in their information systems environment on computers they manage and either own or otherwise procure from a cloud services provider, including deploying our products at a cloud services provider in a BYOL environment.
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Cloud-based, hosted SaaS solutions that we sell on an ongoing subscription basis resulting in our earning a recurring, monthly subscription fee to access the service.
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Professional services for product customization and integration.
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We also sell products that can be synergistic to our MFT products. These products have capabilities that:
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Support information sharing and exchange capabilities using traditional email systems.
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Enable enterprise file synchronization and sharing.
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Enhance the ability to replicate, share and backup files within a wide area network or local area network, thereby allowing users to access their data at higher speeds than possible with most alternate approaches.
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Support file transfers by individuals and small businesses.
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We earn most of our revenue from the sale of our MFT products that support business-to-business activities and are strategically focused on selling products in that environment. The majority of our resources that we will expend in the future for product research and development, marketing, and sales will concentrate on the MFT business-to-business market. We believe our products and business capabilities are well-positioned to compete effectively in that market.
Some of our products support consumer-oriented file transfers and file sharing. Even though these products are profitable on an overall basis, we anticipate the future resources we will expend related to products sold to consumers and the associated revenue we earn from those products will continue to be a minor part of our business.
The discussion following presents a summary description of our specific products and solutions.
Managed File Transfer – Enhanced File Transfer Platform
Enhanced File Transfer, or EFT, is the brand name of our core MFT product platform. EFT was awarded multiple industry awards in compliance categories in 2016 including the 2016 Golden Bridge awards, the Network Product Guide’s 2016 IT World Awards, and the 2016 Info Security Products Guide Global Excellence Awards.
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. Notable features and capabilities of the EFT platform include:
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State-of-the-art, enterprise-level security when transferring information within or between computer networks as well as for collaboration with business partners, customers, and employees. EFT provides automation that supports effective integration of back-end systems. It has built-in regulatory compliance, governance, and visibility controls to provide a means of safely maintaining information. EFT offers a high level of performance and scalability to support operational efficiency and maintain business continuity. Administrative tools are provided at various levels of granularity to allow for complete control and monitoring of file transfer activities.
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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 the 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.
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Compliance with government regulations and industry standards relating to the protection of information while allowing users to reduce information systems and technologies costs, increase efficiency, track and audit transactions, and automate processes. Our solutions also provide data replication, acceleration of file transfer, sharing/collaboration, and continuous data backup and recovery to our customers.
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The EFT platform provides a common, scalable MFT environment that accommodates a broad family of accompanying modules to provide enterprises with increased security, automation, and performance when compared to traditional FTP-based and e-mail delivery systems. Various, optional modules allow users to select the solution configuration most applicable to their requirements for auditing and 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.
Since 2015, we have released new versions of our EFT platform and new modules which added several enhancements and capabilities including:
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Advanced Authentication Module (AAM) that increases the interoperability of EFT with multiple authentication methods. AAM provides a single source of authentication across a customer’s infrastructure.
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Workspaces, which is a file-sharing module that allows employees to create their own groups and assign permissions for those groups, much like a virtual data room, to provide access to files for which they themselves have access on the EFT server. This functionality is accomplished without compromising the security, control, and governance of those files.
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A Workspaces Outlook plugin that provides secure ad hoc file transfers via email, providing customers with the reporting features in EFT and combining them with the simplicity and security of sending files with Mail Express. The integration of these two products takes the best features in Mail Express and incorporates them into EFT.
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Accelerate, which is an accelerated file transfer module that boosts the speed and efficiency of secure data transfers and allows for the fast transfer of large files over disparate geographic distances.
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Enhanced compatibility of web transfer client file transfers through HTML5 support in addition to the existing Java Runtime Environment.
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Increased scalability and business continuity with more flexible, uninterrupted file transfer service.
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Improved facilitation of PCI DSS version 3.0 compliance with updates to security components, such as PGP and AS2.
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Enhanced and expanded event rule functionality which improves the ability to integrate our products with client business processes and backend systems.
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Support for active-active high availability in Amazon Web Services.
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Enhanced security features supporting improved compliance with HIPPA guidelines.
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We expect to continue to enhance the EFT platform with capabilities that improve its speed and responsiveness of performance, provide additional administration flexibility supporting cross-platform implementation with our DMZ Gateway solution, offer business activity monitoring, and provide additional language support.
Most EFT customers choose to purchase a perpetual software license for a one-time fee paid at the time of purchase and under which they install the software on equipment they own and/or manage. In almost all cases, they also purchase ongoing M&S for which they pay us a recurring, annual amount that typically is 20% to 30% of the price of the software license.
If a customer prefers to use the capabilities of EFT in a SaaS fashion, we offer EFT Cloud Services for a monthly subscription fee. The EFT platform delivered in this manner has the same features and functionality as our EFT platform installed at a customer site. EFT Cloud Services allows users to reduce their upfront cost and achieve other recognized benefits of cloud-based managed file transfer SaaS subscription solutions, including strong service level agreements for information technologies infrastructure reliability and performance. EFT can also be deployed for customers, on a BYOL basis, in their infrastructures running through Amazon Web Services or Microsoft Azure. We have also initiated offering EFT Enterprise direct to buyers on a pre-deployed basis in the Amazon Web Services and Microsoft Azure Marketplaces.
EFT Cloud Services provides a flexible continuum of features and functions that gives the user the ability to pick and choose the extent to which they want to own or outsource the capabilities of our EFT platform. EFT Cloud Services gives organizations the flexibility of deploying on-premises, in the cloud or in a hybrid cloud environment with all of the security, compliance, scalability, and visibility features of an on-premises managed file transfer solution. Users of EFT Cloud Services have the option to work with a variety of top hosting providers that best fit their needs. We offer flexible subscription pricing under one, two, and three-year contracts that can help our customers minimize or eliminate upfront capital expenditures and possibly reduce their ongoing operating costs. Subscription revenue from EFT Cloud Services is increasing but is not yet a material portion of the total revenue from our EFT platform.
Secure Information Sharing and Exchange Solution – Mail Express
Mail Express is a solution that provides secure information sharing and exchange capabilities leveraging traditional email workflow. It is a stand-alone product installed in a client-server environment that allows users to send and receive secure, encrypted e-mail and attachments of virtually unlimited size. Mail Express was a Bronze Winner in Email Security and Management by Network Products Guide’s 2016 IT World Awards.
To broaden the appeal and capabilities of Mail Express, we are developing functionality that integrates the features of Mail Express into the EFT platform. This integration will take the superior control, visibility and monitoring capabilities of the EFT platform and make them available to administrators and users in an email environment. This integrated product will improve operational efficiency by providing a coordinated user interface through which data movement activities using both our EFT and Mail Express products can be managed.
Wide Area File Services Solution - WAFS
Our WAFS software product uses data synchronization to further enhance the ability to replicate, share and backup files within a wide area network or local area network, thereby allowing users to access their data at higher speeds than possible with most alternate approaches. The software uses byte-level differencing technology to update changes to files with minimal impact on network bandwidth while also ensuring that files are never overwritten, even if opened by other remote users. Other key features of WAFS include native file locking, replication to multiple locations simultaneously, adherence to access control list file permissions, and full UTF-8 support.
We will continue to offer WAFS as a stand-alone product and provide M&S services to customers who purchased WAFS in the past and who purchase it in the future. We do not expect to expend significant resources in the future expanding the features and capabilities of WAFS.
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 remains popular today and generates incremental revenue for us at a relatively low cost.
CuteFTP continues to have significant brand recognition in the market. Our current CuteFTP Version 9 introduced several notable new features including:
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Support for Unicode (UTF-8) characters that allows greater international use.
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Web Distributed Authoring and Versioning (WebDAV) support to facilitate collaboration between users in editing and managing documents and files stored on World Wide Web servers.
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Version 9 simplified our CuteFTP product line by consolidating all the features of our previous multi-product CuteFTP product line for Windows operating systems into this single version. We continue to offer CuteFTP Version 3.1 software for Mac platforms. We believe current versions of CuteFTP appeal to users wanting features more robust than offered in free alternatives such that it will be a product competitive in the marketplace for the foreseeable future.
We will continue selling CuteFTP as a stand-alone product and providing M&S services to customers who purchased CuteFTP in the past and who purchase it in the future. We do not expect to expend significant resources in the future expanding the features and capabilities of CuteFTP.
Professional Services
We offer a range of professional services to complement our on-premises and SaaS solutions. These professional services include product customization and system integration, solution “quickstart” implementations, business process and workflow, policy development, education and training, and solution health checks. In addition, we may provide longer-term engineering services, including supporting multi-year contracts, if necessary, to support certain solution implementations and integrations.
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 of our 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 customers who purchase our other products. Customers with M&S pay us a recurring, annual amount that is typically 20% to 30% of the software license price. A majority of our customers with M&S contracts renew them each year.
Employees
Our number of employees is as follows:
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March 31,
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Department
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2017
|
|
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2016
|
|
Sales and Marketing
|
|
|
52
|
|
|
|
46
|
|
Engineering
|
|
|
36
|
|
|
|
29
|
|
Professional Services
|
|
|
8
|
|
|
|
14
|
|
Customer Support
|
|
|
21
|
|
|
|
20
|
|
Management and Administration
|
|
|
19
|
|
|
|
19
|
|
Total
|
|
|
136
|
|
|
|
128
|
|
Solution Perspective and Trends
The components of our revenue are as follows ($ in thousands):
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Three Months Ended March 31
|
|
|
|
2017
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|
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2016
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|
|
|
|
|
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Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
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Total
|
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Revenue By Type
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|
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|
|
|
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|
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|
|
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License
|
|
$
|
2,464
|
|
|
|
29.6
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%
|
|
$
|
2,299
|
|
|
|
31.1
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%
|
M&S
|
|
|
5,121
|
|
|
|
61.6
|
%
|
|
|
4,446
|
|
|
|
60.2
|
%
|
Professional Services
|
|
|
733
|
|
|
|
8.8
|
%
|
|
|
642
|
|
|
|
8.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
8,318
|
|
|
|
100.0
|
%
|
|
$
|
7,387
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by Product Line
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFT Platform
|
|
$
|
2,283
|
|
|
|
92.7
|
%
|
|
$
|
1,995
|
|
|
|
86.8
|
%
|
Other
|
|
|
181
|
|
|
|
7.3
|
%
|
|
|
304
|
|
|
|
13.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total License Revenue
|
|
|
2,464
|
|
|
|
100.0
|
%
|
|
|
2,299
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M&S
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFT Platform
|
|
|
4,841
|
|
|
|
94.5
|
%
|
|
|
4,125
|
|
|
|
92.8
|
%
|
Other
|
|
|
280
|
|
|
|
5.5
|
%
|
|
|
321
|
|
|
|
7.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total M&S Revenue
|
|
|
5,121
|
|
|
|
100.0
|
%
|
|
|
4,446
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Services (all EFT Platform)
|
|
|
733
|
|
|
|
100.0
|
%
|
|
|
642
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFT Platform
|
|
|
7,857
|
|
|
|
94.5
|
%
|
|
|
6,762
|
|
|
|
91.5
|
%
|
Other
|
|
|
461
|
|
|
|
5.5
|
%
|
|
|
625
|
|
|
|
8.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
8,318
|
|
|
|
100.0
|
%
|
|
$
|
7,387
|
|
|
|
100.0
|
%
|
Our total revenue increased 13% in the 2017 quarter compared to the 2016 quarter. Revenue from our EFT platform products and services increased 16% which consisted of EFT platform license revenue increasing 14%, EFT platform M&S revenue increasing 17%, and professional services revenue increasing 14%. Revenue from our other product lines decreased which is consistent with our expectations as discussed below. For a more complete discussion of these revenue trends, see
Comparison of the Statement of Operations for the Three Months Ended March 31, 2017 and 2016.
We earn revenue primarily from the following activities:
·
|
License revenue from sales of our EFT platform products that we deliver as either perpetually-licensed software installed at the customer’s premises, for which we earn the full amount of the license revenue at the time the license is delivered, or as a cloud-based service under our EFT Cloud Services brand delivered using a SaaS model, for which we earn monthly subscription revenue as these services are delivered.
|
·
|
License revenue from sales of our Mail Express, WAFS and CuteFTP products that are installed at the customer’s premises under a perpetual license for which we earn the full amount of the license revenue at the time the license is delivered.
|
·
|
M&S revenue under contracts to provide ongoing product support and software updates to our customers who have purchased license software which we recognize ratably over the contractual period, which is typically one year, but can be up to three years.
|
·
|
Professional services revenue from a variety of customization, implementation, and integration services, as well as delivery of education and training associated with our solutions, which we recognize as the services are performed and accepted by the client.
|
We earn most of our revenue from the sale of our EFT platform products and the associated M&S and professional services related to those products. With our core competency being in products that address the MFT market, we believe our EFT platform products provide the best opportunity for our future growth. Accordingly, expansion of the capabilities of the EFT platform will be our primary focus in the future. While we will continue to sell and support our other products for the foreseeable future, they will not be an area of emphasis for us going forward.
We believe that continuing to offer licensed products installed on-premises for which we recognize revenue up-front and that carry with them a recurring M&S revenue stream is important to our future success. At the same time, we recognize that a migration of capabilities to a SaaS platform is attractive to a growing number of customers. We have, and have had for quite some time, the capabilities in place to deliver our EFT platform in that manner through our EFT Cloud products. While our SaaS revenue is not yet a material component of our total revenue, a migration by our customers to our EFT Cloud products could create some near-term decreases in the growth rate of license revenue, and may result in similar decreases in future periods, because it typically takes approximately 24 to 36 months of SaaS revenue to yield total revenue equivalent to that realized up-front from the sale of a license for an on-premise installation.
In mid-2016, we reviewed the allocation of our product research and development resources across all of our products. As a result of that review, we decided to adjust that allocation to focus most of our engineering resources involved in product research and development on our EFT platform products in order to expand their capabilities and to remain positioned to be responsive to the evolving needs of our customers.
Over the past few years, we have developed and offered individual product lines that include EFT, Mail Express, WAFS, and CuteFTP. Each of these product lines addresses distinct needs in the marketplace. While some customers purchase products from more than one of these product lines, for the most part, customers in a particular market or vertical have needs that are addressed by only one of these products and, therefore, purchase only that product. With respect to Mail Express, while we will continue to offer them as stand-alone products for the time being, the engineering resources we allocate to these technologies will focus on migrating them to becoming an integrated component of our EFT platform. We do not expect to expend significant resources in the future on expanding the features and capabilities of WAFS and CuteFTP although we will continue to sell those products and support them.
To support product innovation, we continue to enhance our software engineering group and our focus on optimizing the manner in which we assess the development of new technologies, our approach to managing those projects, and the timelines over which we do that work. In continuing to develop our demand generation activities, we have made and continue to make ongoing changes in sales and marketing including:
·
|
Increasing sales staffing and capabilities as needed to address our markets.
|
·
|
Aligning our sales group to enhance its industry and geographic focus.
|
·
|
Implementing new sales and marketing campaigns.
|
·
|
Evolving our lead generation programs to increase our sales staff’s exposure to potential purchasers.
|
·
|
Enhancing our support of channel partners and engaging them to sell our products through training, orientation and marketing programs.
|
Liquidity and Capital Resources
Our total cash, cash equivalents, certificates of deposit and working capital positions were as follows ($ in thousands):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Cash and cash equivalents
|
|
$
|
10,400
|
|
|
$
|
8,895
|
|
Certificates of deposit, current
|
|
|
2,759
|
|
|
|
2,754
|
|
Certificates of deposit, long term
|
|
|
12,837
|
|
|
|
12,779
|
|
Total cash, cash equivalents and certificates of deposit
|
|
$
|
25,996
|
|
|
$
|
24,428
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
19,150
|
|
|
$
|
19,303
|
|
Current liabilities
|
|
|
(15,763
|
)
|
|
|
(16,367
|
)
|
Working capital
|
|
$
|
3,387
|
|
|
$
|
2,936
|
|
At March 31, 2017, our certificates of deposit in current assets mature on various dates through October 2017. Our long term certificates of deposit mature after March 31, 2018, on various dates through December 2021.
When assessing our liquidity and capital resources, we consider the following factors:
·
|
We may access and monetize our certificate deposits at any time without risk of loss of the original amounts invested. If we were to redeem these certificates of deposit prior to their maturity, we may incur a penalty and forfeit certain amounts of accrued interest, but we view such amounts as not material.
|
·
|
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 customers as part of our ongoing operating activities from which we have historically generated cash flow. Our deferred revenue does not involve a disbursement of cash as a direct payment of that liability although we will incur operating expenses in the future as we deliver those M&S services.
|
Our capital requirements principally relate to our need to fund our ongoing operating expenditures, which are primarily related to employee salaries and benefits. We make these expenditures to enhance our existing products, develop new products, sell those products in the marketplace and support our customers after the sale.
We rely on cash and cash equivalents on hand and cash flows from operations to fund our operating activities and believe those items will be our principal sources of capital for the foreseeable future. If our revenue declines and/or our expenses increase, our cash flow from operations and cash on hand could decline. We plan to expend significant resources in the future for research and development of our products and expansion and enhancement of our sales and marketing activities. If sales decline or if our liquidity is otherwise under duress, we could substantially reduce personnel and personnel-related costs, reduce or substantially eliminate capital expenditures and/or reduce or substantially eliminate certain research and development and sales and marketing expenditures. We may also sell equity or debt securities or enter into credit arrangements in order to finance future acquisitions or licensing activities, to the extent available.
Cash provided or used by our various activities consisted of the following ($ in thousands):
|
|
Cash Provided (Used) During the
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Operating activities
|
|
$
|
2,389
|
|
|
$
|
1,207
|
|
Investing activities
|
|
|
(650
|
)
|
|
|
(578
|
)
|
Financing activities
|
|
|
(234
|
)
|
|
|
(190
|
)
|
Our cash provided by operating activities increased during the 2017 quarter compared to the 2016 quarter primarily due to the following factors:
·
|
Net income after considering items not involving cash at the time they are recorded in the statement of operations, as set forth on our Condensed Consolidated Statements of Cash Flow, increased $243,000. See the section below under
Comparison of the Statement of Operations for the Three Months Ended March 31, 2017 and 2016
for a discussion of the changes in the components of these amounts.
|
·
|
Cash flow from payments by customers resulted in accounts receivable decreasing $1.5 million in the 2017 quarter compared to $916,000 in the 2016 quarter. This increased cash flow was primarily due to the increase in our revenue during the three months ended December 31, 2016, compared to the three months ended December 31, 2015, which in turn resulted in increased cash collections during the 2017 quarter when the accounts receivable from those sales were due.
|
·
|
Payments to our vendors and service providers resulted in accounts payable decreasing $219,000 during the 2017 quarter compared to decreasing $925,000 during the 2016 quarter. The change in the amount of the decrease was primarily due to:
|
|
o
|
The payment during the 2016 quarter of invoices for certain marketing expenses incurred in 2015 for initial expansion of certain sales and marketing programs which were expenses that did not have to be repeated in the 2016 quarter and paid in the 2017 quarter; and
|
|
o
|
Normal variations in the timing of payments to our vendors.
|
·
|
Income tax receivable and payable decreased $643,000 in the 2017 quarter compared to decreasing $151,000 in the 2016 quarter primarily due to:
|
|
o
|
Receiving from the Internal Revenue Service during the 2017 quarter a refund of taxes paid in previous years as a result of favorable adjustments to our research and development tax credits previously claimed; and
|
|
o
|
Normal variations in the timing of our tax payments.
|
Offset by:
·
|
Deferred revenue decreasing $1.1 million in the 2017 quarter compared to decreasing $416,000 in the 2016 quarter primarily as a result of our new emphasis on selling one year M&S contracts instead of multi-year agreements as discussed above.
|
·
|
Accrued expenses increased $92,000 in the 2017 quarter compared to increasing $303,000 in the 2016 quarter primarily due to normal variations in the timing of our payroll payment dates relative to the date of the balance sheet presented as a part of our financial statements.
|
The amount of cash we used for investing activities during the 2017 quarter increased compared to the 2016 quarter due primarily to:
·
|
An increase in the purchase of property and equipment as a result of remodeling of our sales and engineering office spaces to improve the efficiency of these work environments; and
|
·
|
A decrease in our software development costs capitalized due to it taking longer than expected to fill open engineering positions with the skillsets needed to support new product development as a result of competition in the marketplace for software engineers.
|
Our financing activities used more cash in the 2017 quarter than the 2016 quarter due to an increase in the amount of dividends paid as a result of an increase in our outstanding shares of common stock offset by a decrease in proceeds from stock option exercises as a result of fewer option holders electing to exercise their options.
Contractual Obligations and Commitments
As of March 31, 2017, our contractual obligations and commitments consisted primarily of the following items:
·
|
An obligation to deliver services in the future to satisfy our right to earn our deferred revenue of $16.3 million. Those future services primarily relate to our obligations under M&S contracts. We will recognize this deferred revenue as revenue over the remaining life of those contracts which generally ranges from one to three years. Deferred revenue, unlike the other liability components of our working capital, is an obligation we will satisfy by providing services in the future to our customers as part of our ongoing operating activities from which we have historically generated cash flow. Our deferred revenue does not involve a disbursement of cash as a direct payment of that liability although we will incur operating expenses in the future as we deliver those M&S services.
|
·
|
Trade accounts payable and accrued liabilities which include our contractual obligations to pay software royalties to third parties that vary in amount based on our sales volume of products upon which royalties are payable.
|
·
|
Operating lease for our office space.
|
·
|
Federal and state taxes.
|
Our non-cancellable, contractual obligations at March 31, 2017, consisted primarily of the lease for our office space with amounts due as follows ($ in thousands):
|
|
Amounts Due for the Period
|
|
|
|
Nine Months Ending
December 31,
|
|
|
Fiscal Years
|
|
|
|
2017
|
|
|
2018 - 2019
|
|
|
2019 - 2020
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
270
|
|
|
$
|
480
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
750
|
|
As of March 31, 2017, we had no interest-bearing obligations in the form of loans, notes payable or similar debt instruments.
We plan to continue to expend significant resources in the future on product development, sales and marketing which may require that we enter into additional contractual arrangements and use our cash to acquire or license technology, intellectual property, products, services or businesses related to our current business strategy.
Comparison of the Statement of Operations for the Three Months Ended March 31, 2017 and 2016
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
|
$ in thousands
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
8,318
|
|
|
$
|
7,387
|
|
|
$
|
931
|
|
Total cost of revenues
|
|
|
1,525
|
|
|
|
1,446
|
|
|
|
79
|
|
Gross profit
|
|
|
6,793
|
|
|
|
5,941
|
|
|
|
852
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
3,330
|
|
|
|
3,048
|
|
|
|
282
|
|
General and administrative
|
|
|
1,721
|
|
|
|
1,733
|
|
|
|
(12
|
)
|
Research and development
|
|
|
739
|
|
|
|
627
|
|
|
|
112
|
|
Total operating expenses
|
|
|
5,790
|
|
|
|
5,408
|
|
|
|
382
|
|
Income from operations
|
|
|
1,003
|
|
|
|
533
|
|
|
|
470
|
|
Other income
|
|
|
70
|
|
|
|
33
|
|
|
|
37
|
|
Income before income taxes
|
|
|
1,073
|
|
|
|
566
|
|
|
|
507
|
|
Income tax expense
|
|
|
322
|
|
|
|
174
|
|
|
|
148
|
|
Net income
|
|
$
|
751
|
|
|
$
|
392
|
|
|
$
|
359
|
|
In the discussion below, we refer to the three months ended March 31, 2017, as the “2017 quarter” and the three months ended March 31, 2016, as the “2016 quarter”. The percentage changes cited in our discussions are based on the 2017 quarter amounts compared to the 2016 quarter amounts.
Revenue.
The components of our revenues were as follows ($ in thousands):
|
|
Three Months Ended March 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue By Type
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$
|
2,464
|
|
|
|
29.6
|
%
|
|
$
|
2,299
|
|
|
|
31.1
|
%
|
M&S
|
|
|
5,121
|
|
|
|
61.6
|
%
|
|
|
4,446
|
|
|
|
60.2
|
%
|
Professional Services
|
|
|
733
|
|
|
|
8.8
|
%
|
|
|
642
|
|
|
|
8.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
8,318
|
|
|
|
100.0
|
%
|
|
$
|
7,387
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by Product Line
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFT Platform
|
|
$
|
2,283
|
|
|
|
92.7
|
%
|
|
$
|
1,995
|
|
|
|
86.8
|
%
|
Other
|
|
|
181
|
|
|
|
7.3
|
%
|
|
|
304
|
|
|
|
13.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,464
|
|
|
|
100.0
|
%
|
|
|
2,299
|
|
|
|
100.0
|
%
|
M&S
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFT Platform
|
|
|
4,841
|
|
|
|
94.5
|
%
|
|
|
4,125
|
|
|
|
92.8
|
%
|
Other
|
|
|
280
|
|
|
|
5.5
|
%
|
|
|
321
|
|
|
|
7.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,121
|
|
|
|
100.0
|
%
|
|
|
4,446
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Services (all EFT Platform)
|
|
|
733
|
|
|
|
100.0
|
%
|
|
|
642
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFT Platform
|
|
|
7,857
|
|
|
|
94.5
|
%
|
|
|
6,762
|
|
|
|
91.5
|
%
|
Other
|
|
|
461
|
|
|
|
5.5
|
%
|
|
|
625
|
|
|
|
8.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,318
|
|
|
|
100.0
|
%
|
|
$
|
7,387
|
|
|
|
100.0
|
%
|
Our total revenue increased 13%. This increase consisted of growth in total revenue from our EFT platform products and services of $1.1 million, or 16%, offset by a decrease in revenue from our other products that constitute less than 10% of our total revenue. These trends are in line with our expectations in light of our announcement in mid-2016 that our focus would be on our EFT platform products. At the same time, we announced that while we would continue selling our other products consisting of Mail Express, WAFS, CuteFTP, and TappIn, we would de-emphasize those products in the future, not expend future significant product development and engineering resources to enhance those products, and not dedicate significant future sales and marketing activities to them. We intend to maintain our focus on our EFT platform for the foreseeable future such that we expect to see a continuing decline in revenue from our products other than those that are part of the EFT platform.
EFT Platform Products
License, M&S and professional services revenue from our EFT platform products increased 14%, 17% and 14% respectively. The increases across these products and services were primarily due to continued enhancement in our product development and software engineering groups which allowed us to refine our process for identifying new product opportunities, to better focus our resources on products that would yield larger and more immediate revenue opportunities, and to optimize our project management and software engineering processes to reduce the time necessary to produce new or improved products.
To improve our ability to successfully sell existing EFT platform products as well as new products produced by our software engineering team, we continued to make ongoing changes in sales and marketing personnel and activities including:
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Increasing sales staffing and capabilities as needed to address our markets.
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Aligning our sales group to enhance its industry and geographic focus.
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Implementing new sales and marketing campaigns.
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Evolving our lead generation programs to increase our sales staff’s exposure to potential purchasers.
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Enhancing our support of channel partners and engaging them to sell our products through training, orientation and marketing programs.
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The 14% increase in license revenue from our EFT platform products was primarily due to:
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The introduction of new products or new versions of products as described above under
Business-Software Products and Services
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Our focus on leveraging the changes to our sales and marketing activities described above toward new customers who may not have previously used our products. While sales to existing customers often consist primarily of new modules added to existing software licenses, new customers present the potential for higher license sales since they typically need to purchase a license for our core products in addition to licenses for additional modules.
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The 17% increase in M&S revenue from our EFT platform products was also due to:
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Ongoing and increased license sales since a majority of license sales are accompanied by an M&S contract. The change in M&S revenue typically lags behind the related change in license revenue because license sales are recognized as revenue in full in the period the license is delivered while the related M&S revenue is recognized in future periods as those services are delivered.
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Sustaining high renewal rates of M&S contracts by customers who initially purchased these services in earlier periods. We believe these renewals result from our programs designed to provide high-quality and responsive M&S services to our customers.
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The 14% increase in professional services revenue was primarily related to the increased license revenue from our EFT platform since the demand for our professional services is closely related to purchases of licenses for our EFT platform products. The remaining increase was due to an enhanced focus on managing our queue of professional services projects to be delivered which resulted in a reduction in our backlog of professional services related to earlier EFT platform license sales.
When we sell our licensed products, we also typically create a recurring revenue stream from M&S since almost all purchasers of our licensed products also purchase an M&S contract. In general, and depending upon the level of M&S a customer purchases, this recurring revenue stream is 20% to 30% per year of the price of the underlying software license to which the M&S relates.
Our M&S contracts are typically for one year, with some customers buying two or three year contracts. The customer pays us the M&S fee for the entire term of the agreement at the time the contract begins. We recognize that amount as revenue ratably in future periods over the term of the contract.
We typically experience a high renewal rate for M&S services for our enterprise products so long as a customer continues using the licensed product they purchased from us. As a result, growing license revenue not only contributes to increasing revenue growth at the time the license is sold but also provides a foundation for future recurring revenue as the purchasers of our licensed products continually renew M&S contracts to support their ongoing product support needs. This pattern of activity can create a cumulative effect for M&S renewals as a result of the cumulative number of licensed software installations sold over multiple years that create M&S renewals in any single year predictably (and in line with our expectations) exceeding the number of new software licenses we sell in a single year. We expect this cumulative effect to continue to grow if we continue to increase enterprise software license revenue in future periods.
Even though we experienced growth in EFT platform license revenue, that revenue as a percent of our total EFT platform revenue was 29% in the 2017 quarter compared to 30% in the 2016 quarter. This decrease was due to the continuing accumulation of our recurring M&S revenue stream from prior license sales and the revenue produced by the reduction of our backlog of professional services.
Other Products
In mid-2016, we announced that our focus would be on our EFT platform products. At the same time, we announced that while we would continue selling our Mail Express, WAFS, CuteFTP, and TappIn products that collectively constitute less than 10% of our total revenue, in the future we would de-emphasize these stand-alone products that are not part of our EFT platform. Accordingly, during the second half of 2016, we curtailed our product development and engineering resources for these products and significantly reduced our sales and marketing activities supporting them. As a result, our license and M&S revenue from those products collectively declined 26%. Our future focus will be on our EFT platform such that we expect to see a continuing decline in revenue from these other products although we do expect them to continue to produce a modest contribution margin that contributes to our future profitability.
Cost of Revenues.
These expenses are associated with the production, delivery and support of our products and services. We believe it is most 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 consists primarily of:
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Amortization of capitalized software development costs we incur when producing our software products. This amortization begins when a product is ready for general release to the public and generally is an expense that is not directly variable relative to revenue.
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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.
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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.
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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 17% and as a percent of software license revenue was 30% in the 2017 quarter compared to 27% in the 2016 quarter. These increases were primarily due to:
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An increase in expense from the amortization of capitalized software development costs as a result of our release of new software products and new versions of existing products in periods subsequent to the 2016 quarter.
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An increase in our royalties expense as a result of an increase in sales volume of products that contain components on which we pay royalties.
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Cost of M&S revenue as a percent of M&S revenue was substantially unchanged. Cost of revenue for M&S in absolute dollars increased by 5% due to an increase in M&S revenue. The cost of delivering M&S can vary slightly up or down from period-to-period, but we believe such changes are typically not indicative of long term trends or permanent changes in our cost of delivering M&S. Our gross margin on these services generally remains greater than 90% as a result of a consistent application of our customer support delivery protocols and practices.
Cost of professional services revenue as a percent of that revenue was 51% in the 2017 quarter as compared to 66% in the 2016 quarter. This variation resulted from the varying scope and mix of the professional services we deliver that can change from period-to-period in response to the circumstances of the customer environments in which we are working. In addition, during the second half of 2016, we undertook a refinement of our professional services organization and the manner in which we manage and deliver these services which resulted in more efficient processes from which we began to realize the cost benefit in 2017. Cost of revenue for professional services in absolute dollars decreased 11% for the reasons discussed above.
Sales and Marketing.
We believe it most 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 40% of total revenue for the 2017 quarter compared to 41% of total revenue for the 2016 quarter. In absolute dollars these expenses increased 9%. These variations were primarily due to:
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Increasing the size of our sales, marketing and product strategy teams and increased compensation rates due to competitive demands in the marketplace.
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Increasing marketing activities related to competitive intelligence and channel development.
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An increase in revenue which resulted in a higher absolute dollar amount of sales commissions paid to employees although the commission rate as a percent of sales did not change materially.
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General and Administrative.
These expenses were substantially unchanged between periods. This consistent outcome was a result of our ongoing programs to manage these expenses.
Research and Development.
The overall profile of our research and development activities was as follows ($ in thousands):
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Three Months Ended March 31,
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2017
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2016
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R&D expenditures expensed
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$
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738
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$
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627
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R&D expenditures capitalized
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462
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488
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Total R&D expenditures (non-GAAP measurement)
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$
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1,200
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$
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1,115
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Total R&D expenditures increased 8% primarily due to a planned increase in our software engineering headcount offset by a decrease in the cost of third-party software developers as a result of our efforts during 2016 to reduce our reliance on those outsourced services. Our R&D expense increased 18% as we continued our enhanced focus on our EFT platform and its installed customer base to ensure the products those customers are using remain optimized to meet their needs. Our R&D capitalized decreased 5% primarily due to those amounts in the 2016 quarter including higher cost, outsourced engineering work on products other than those that are part of our EFT platform which is work that did not occur in the 2017 quarter as a result of our focus on the development of our EFT platform primarily using our in-house personnel.
Total resources expended for R&D set forth above as total R&D expenditures 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 cost individually.
Other Income.
Other income consists primarily of interest income earned on certificates of deposit. The increase in this amount was due primarily to enhanced investment of our cash to earn a higher rate of interest.
Income Taxes.
Our effective tax rate was 30% for the 2017 quarter and 31% for the 2016 quarter. These rates differed from a federal statutory tax rate of 34% primarily due to:
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The domestic production activities deduction and the research and development credit that are tax credit incentives that serve 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.
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Offset by:
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Certain expenses in our financial statements, such as a portion of meals and entertainment expenses, that are not deductible on our federal income tax return.
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State income taxes included in income tax expense in our financial statements.
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