UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________________________________

FORM 10-Q

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended          September 30, 2019

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: 0-26330

ASTEA INTERNATIONAL INC.

(Exact name of registrant as specified in its charter)

Delaware	23-2119058
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

240 Gibraltar Road, Horsham, PA     19044

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (215) 682-2500

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the act:

Title of Each Class	Trading Symbol	Name of Exchange on Which Registered
Common Stock, par value $0.01 per share	ATEA	OTCQB

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  X  No     

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   X   No        

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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. (Check one):

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes     No   X  

As of November 11, 2019, 3,883,299 shares of the registrant’s Common Stock, par value $.01 per share, were outstanding.

1 

ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

FORM 10-Q

QUARTERLY REPORT

INDEX

		Page No.
Facing Sheet		1
Index		2
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2019 (unaudited)
	and December 31, 2018	3
	Condensed Consolidated Statements of Operations (unaudited)	4
	Condensed Consolidated Statements of Comprehensive (Loss) Income (unaudited)	5
	Condensed Consolidated Statements of Stockholders’ Deficit for the Three and Nine Months
	Ended September 30, 2019 (unaudited)	6
	Condensed Consolidated Statements of Stockholders’ Deficit for the Three and Nine Months
	Ended September 30, 2018 (unaudited)	7
	Condensed Consolidated Statements of Cash Flows (unaudited)	8
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial
	Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	33
Item 4.	Controls and Procedures	33
PART II - OTHER INFORMATION
Item 1A.	Risk Factors	34
Item 6.	Exhibits	36
	Signatures	37

2 

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS  

		September 30,			December 31,
		2019 (Unaudited)			2018*
ASSETS
Current assets:
Cash and cash equivalents	$	400,000		$	1,276,000
Accounts receivables, net of reserves allowance of $91,000 (unaudited) and $92,000, respectively		4,973,000			6,294,000
Prepaid expenses and other current assets		432,000			429,000
Deferred hosting costs		1,602,000			992,000
Total current assets		7,407,000			8,991,000
Property and equipment, net		171,000			89,000
Capitalized software development costs, net		4,437,000			4,599,000
Restricted cash		70,000			72,000
Other long-term assets		540,000			517,000
Right-of-use assets		2,284,000			-
Total assets	$	14,909,000		$	14,268,000
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and accrued expenses	$	4,842,000		$	4,137,000
Current lease liabilities		961,000			-
Deferred revenues		9,872,000			10,521,000
Total current liabilities		15,675,000			14,658,000
Long-term liabilities:
Borrowings under line of credit		2,588,000			2,669,000
Long-term accrued expenses		368,000			323,000
Deferred tax liability		49,000			49,000
Deferred revenues, net of current portion		1,351,000			763,000
Lease liabilities, net of current portion		1,323,000			-
Total long-term liabilities		5,679,000			3,804,000
Commitments and contingencies
Stockholders’ deficit:
Convertible preferred stock, $.01 par value, shares authorized 5,000,000: Series A issued and outstanding 826,000 shares		8,000			8,000
Series B issued and outstanding 797,000 shares		8,000			8,000
Common stock $.01 par value, 25,000,000 shares authorized; issued 3,731,000 and 3,659,000 shares; outstanding 3,689,000 and 3,617,000 shares, respectively		37,000			37,000
Additional paid-in-capital		31,342,000			31,455,000
Accumulated deficit		(36,364,000	)		(34,344,000	)
Accumulated other comprehensive loss		(1,268,000	)		(1,150,000	)
Treasury stock at cost, 42,000 common shares		(208,000	)		(208,000	)
Total stockholders’ deficit		(6,445,000	)		(4,194,000	)
Total liabilities and stockholders’ deficit	$	14,909,000		$	14,268,000
*Derived from audited financial statements  See accompanying notes to the unaudited condensed consolidated financial statements.

3 

ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2019			2018			2019			2018
Revenues:
Software license fees	$	140,000		$	765,000		$	1,302,000		$	2,076,000
Subscriptions		1,278,000			1,412,000			3,737,000			3,104,000
Services and maintenance		4,542,000			4,948,000			13,956,000			15,273,000
Total revenues		5,960,000			7,125,000			18,995,000			20,453,000
Costs of revenues:
Cost of software license fees		908,000			750,000			2,532,000			1,976,000
Cost of subscriptions		325,000			369,000			884,000			794,000
Cost of services and maintenance		3,292,000			3,696,000			9,802,000			10,705,000
Total cost of  revenues		4,525,000			4,815,000			13,218,000			13,475,000
Gross profit		1,435,000			2,310,000			5,777,000			6,978,000
Operating Expenses:
Product development		251,000			330,000			857,000			697,000
Sales and marketing		1,156,000			1,013,000			3,122,000			2,991,000
General and administrative		1,355,000			972,000			3,479,000			2,868,000
Total operating expenses		2,762,000			2,315,000			7,458,000			6,556,000
(Loss) income from operations		(1,327,000	)		(5,000	)		(1,681,000	)		422,000
Interest expense, net		78,000			64,000			217,000			163,000
(Loss) income before income taxes		(1,405,000	)		(69,000	)		(1,898,000	)		259,000
Income tax expense		84,000			1,000			122,000			19,000
Net (loss) income		(1,489,000	)		(70,000	)		(2,020,000	)		240,000
Preferred dividend		125,000			125,000			375,000			375,000
Net loss allocable to common stockholders	$	(1,614,000	)	$	(195,000	)	$	(2,395,000	)	$	(135,000	)
Basic and diluted  loss per share allocable to common stockholders	$	(0.44	)	$	(0.05	)	$	(0.66	)	$	(0.04	)
Weighted average shares outstanding used in computing basic and diluted loss per common share		3,642,000			3,607,000			3,627,000			3,600,000

See accompanying notes to the unaudited condensed consolidated financial statements.

4 

ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net (loss) income	$	(1,489,000	)	$	(70,000	)	$	(2,020,000	)	$	240,000
Other comprehensive income (loss):
Foreign currency translation adjustment		44,000			(23,000	)		(118,000	)		(33,000	)
Comprehensive (loss) income	$	(1,445,000	)	$	(93,000	)	$	(2,138,000	)	$	207,000

See accompanying notes to the unaudited condensed consolidated financial statements.

5 

ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

Nine Months Ended September 30, 2019

(Unaudited)

	Series A convertible preferred stock at par value		Series B convertible preferred stock at par value		Common stock		Additional paid-in- capital			Accumulated other compre- hensive loss			Accumulated deficit			Treasury stock			Total stockholders’ deficit
Balances at December 31, 2018	$	8,000	$	8,000	$	37,000	$	31,455,000		$	(1,150,000	)		(34,344,000	)		(208,000	)	$	(4,194,000	)
Net income		—		—		—		—			—			55,000			—			55,000
Series A and B preferred stock dividends		—		—		—		(125,000	)		—			—			—			(125,000	)
Stock-based compensation		—		—		—		17,000			—			—			—			17,000
Other comprehensive loss		—		—		—		—			(46,000	)		—			—			(46,000	)
Balances at March 31, 2019	$	8,000	$	8,000	$	37,000	$	31,347,000		$	(1,196,000	)		(34,289,000	)		(208,000	)	$	(4,293,000	)
Net loss		—		—		—		—			—			(586,000	)		—			(586,000	)
Exercise of stock options		—		—		—		59,000			—			—			—			59,000
Series A and B preferred stock Dividends		—		—		—		(125,000	)		—			—			—			(125,000	)
Stock-based compensation		—		—		—		52,000			—			—			—			52,000
Other comprehensive loss		—		—		—		—			(116,000	)		—			—			(116,000	)
Balances at June 30, 2019	$	8,000	$	8,000	$	37,000	$	31,333,000		$	(1,312,000	)		(34,875,000	)		(208,000	)	$	(5,009,000	)
Net loss		—		—		—		—			—			(1,489,000	)		—			(1,489,000	)
Exercise of stock options		—		—		—		85,000			—			—			—			85,000
Series A and B preferred stock Dividends		—		—		—		(125,000	)		—			—			—			(125,000	)
Stock-based compensation		—		—		—		49,000			—			—			—			49,000
Other comprehensive income		—		—		—		—			44,000			—			—			44,000
Balances at September 30, 2019	$	8,000	$	8,000	$	37,000	$	31,342,000		$	(1,268,000	)		(36,364,000	)		(208,000	)	$	(6,445,000	)

See accompanying notes to the unaudited condensed consolidated financial statements.

6 

	ASTEA INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT Nine Months Ended September 30, 2018
(Unaudited)

Series A convertible preferred stock at par value Series B convertible preferred stock at par value Common stock Additional paid-in- capital Accumulated other compre- hensive loss Accumulated deficit Treasury stock   Total stockholders’ deficit

Balances at December 31, 2017	$	8,000	$	8,000	$	36,000	$	31,710,000		$	(1,055,000	)	$	(35,338,000	)	$	(208,000	)	$	(4,839,000	)
Cumulative effect from change in accounting		—		—		—		—			—			630,000			—			630,000
Net income		—		—		—		—			—			6,000			—			6,000
Series A and B preferred stock dividends		—		—		—		(125,000	)		—			—			—			(125,000	)
Stock-based compensation		—		—		—		31,000			—			—			—			31,000
Other comprehensive loss		—		—		—		—			(104,000	)		—			—			(104,000	)
Balances at March 31, 2018	$	8,000	$	8,000	$	36,000	$	31,616,000		$	(1,159,000	)	$	(34,702,000	)	$	(208,000	)	$	(4,401,000	)
Net income		—		—		—		—			—			304,000			—			304,000
Series A and B preferred stock dividends		—		—		—		(125,000	)		—			—			—			(125,000	)
Stock-based compensation		—		—		—		41,000			—			—			—			41,000
Other comprehensive income		—		—		—		—			92,000			—			—			92,000
Balances at June 30, 2018	$	8,000	$	8,000	$	36,000	$	31,532,000		$	(1,067,000	)	$	(34,398,000	)	$	(208,000	)	$	(4,089,000	)
Net loss		—		—		—		—			—			(70,000	)		—			(70,000	)
Exercise of stock options		—		—		1,000		84,000			—			—			—			85,000
Series A and B preferred stock dividends		—		—		—		(125,000	)		—			—			—			(125,000	)
Stock-based compensation		—		—		—		45,000			—			—			—			45,000
Other comprehensive loss		—		—		—		—			(23,000	)		—			—			(23,000	)
Balances at September 30, 2018	$	8,000	$	8,000	$	37,000	$	31,536,000		$	(1,090,000	)	$	(34,468,000	)	$	(208,000	)	$	(4,177,000	)

See accompanying notes to the unaudited condensed consolidated financial statements.

7 

ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2019			2018
Cash flows from operating activities:
Net (loss) income	$	(2,020,000	)	$	240,000
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		2,527,000			1,993,000
Non cash lease expense		848,000			—
Amortization of deferred financing costs		35,000			32,000
Amortization of deferred hosting costs		311,000			786,000
Decrease in provision for doubtful accounts		(1,000	)		(148,000	)
Stock-based compensation		118,000			116,000
Changes in operating assets and liabilities:
Receivables		1,362,000			(18,000	)
Prepaid expenses and other		(45,000	)		(188,000	)
Deferred hosting costs		(921,000	)		(936,000	)
Other assets		(23,000	)		(6,000	)
Accounts payable and accrued expenses		401,000			47,000
Deferred revenues		(51,000	)		(196,000	)
Lease liabilities		(848,000	)		—
Net cash provided by operating activities		1,693,000			1,722,000
Cash flows from investing activities:
Purchases of property and equipment		(145,000	)		(42,000	)
Capitalized software development costs		(2,301,000	)		(2,430,000	)
Net cash used in investing activities		(2,446,000	)		(2,472,000	)
Cash flows from financing activities:
Dividend payments on preferred stock		(200,000	)		(105,000	)
Payment on the term note from Bridge Bank		—			(225,000	)
Payment on line of credit from Bridge Bank		(12,524,000	)		(7,975,000	)
Proceeds on line of credit from Bridge Bank		12,443,000			8,367,000
Proceeds from exercise of stock options		144,000			84,000
Net cash (used) provided by financing activities		(137,000	)		146,000
Effect of exchange rate changes on cash		12,000			19,000
Net decrease in cash, cash equivalents and restricted cash		(878,000	)		(585,000	)
Cash, cash equivalents and restricted cash, beginning of period		1,348,000			2,001,000
Cash, cash equivalents and restricted cash, end of period	$	470,000		$	1,416,000
Supplemental disclosure of cash flows information:
Cash paid for taxes	$	110,000			—
Cash paid for interest	$	182,000		$	107,000
Supplemental disclosure of non-cash flows information:
Accrued preferred dividends	$	375,000		$	375,000
See accompanying notes to the unaudited condensed consolidated financial statements.

8 

Item 1. FINANCIAL STATEMENTS (Continued)

ASTEA INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The condensed consolidated financial statements at September 30, 2019 and for the three and nine month periods ended September 30, 2019 and 2018 of Astea International Inc. and subsidiaries (“Astea” or the "Company") are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The accompanying unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the rules and regulations of the SEC for quarterly reports on Form 10-Q. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto, included in the Company’s latest annual report (Form 10-K) and our Form 10-Q’s for the quarters ended September 30, 2018, March 31, 2019 and June 30, 2019. The interim financial information presented is not necessarily indicative of results expected for the entire year ending December 31, 2019.

Comparability

The condensed consolidated financial statements as of and for the periods ended September 30, 2019 are presented under the new Lease standard, while the comparative period presented has not been adjusted and continues to be reported in accordance with the previous standard. The Lease standard requires lessees to recognize a right-of-use ("ROU") asset and lease liability for all leases on the condensed consolidated balance sheet beginning January 1, 2019 with no modification to prior periods.

Recently Adopted Accounting Standards - Leases

In February 2016, the FASB issued guidance for accounting for leases. The guidance requires lessees to recognize assets and liabilities related to long-term leases on the balance sheet and expands disclosure requirements regarding leasing arrangements. The guidance was effective for the Company on January 1, 2019. The guidance was adopted on a modified retrospective basis and provides for certain practical expedients. The adoption of this guidance changed the way we account for our operating leases, which resulted in the Company recording the future benefits of those leases as an asset and the related minimum lease payments as a liability on our condensed consolidated balance sheets. The Company reported a significant balance sheet gross-up for the right-of-use assets and corresponding liabilities, with no impact to its debt covenant. The Company does not finance purchases of equipment, but it does have operating leases for office space and equipment in all locations. The Company has identified all material operating lease agreements. It has also reviewed all significant contracts for embedded leases. No embedded leases were identified during this process.

We determine if an arrangement is a lease at inception. All leases to which the Company is a party are operating leases. Beginning January 1, 2019, the operating leases are being reported on our condensed consolidated balance sheet as operating lease ROU assets and current and noncurrent operating lease liabilities. The ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities will be recognized at the commencement date based on the present value of the lease payments over the lease term. As none of our leases provide an implicit interest rate, we used our incremental borrowing rate based on the information available at the commencement date in calculating the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise the option.

The new guidance provides a number of optional practical expedients in transition. The Company elected the package of practical expedients which permitted us under the new guidance not to reassess our prior conclusions about lease identification, lease classification and initial direct costs. Astea did not elect the use-of hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. On adoption, we recognized operating liabilities of $3,132,000, with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.

9 

The new guidance also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for one of our office equipment leases. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities. This includes not recognizing ROU assets or lease liabilities for existing short-term leases on those assets in transition. We elected the practical expedient to not separate lease and non-lease components for all of our leases. As expected, the adoption of this guidance resulted in additional lease-related disclosures in the footnotes to our condensed consolidated financial statements (see Note 5). 

Cash, cash equivalents and restricted cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheet that sum to the total of the same such amounts presented on the condensed consolidated statement of cash flows:

	September 30, 2019	December 31, 2018
Cash and cash equivalents	$   400,000	$    1,276,000
Restricted cash	70,000	72,000
Total cash, cash equivalents, and restricted cash reported on the condensed consolidated statements of cash flows	$   470,000	$    1,348,000

Amounts included in restricted cash represent funds required to be set aside by a contractual agreement with the building leasing companies in Europe. The restrictions will lapse when the building leases expire.

Operating Matters and Liquidity

The Company has a history of net losses and an accumulated deficit of $36,364,000 as of September 30, 2019. In the first nine months of 2019, the Company had a net loss of $2,020,000 compared to income of $240,000 generated in the first nine months of 2018. Further, at September 30, 2019, the Company had a working capital ratio of .47:1, with cash and cash equivalents of $400,000 compared to December 31, 2018 when the Company had cash and cash equivalents of $1,276,000. The decrease in cash and cash equivalents for the first nine months of 2019 was primarily driven by a decrease in cash provided by operations in 2019 compared to 2018 and a decrease in cash provided by financing activities.

As of September 30, 2019, the Company owed $2,588,000 against the line of credit from Western Alliance Bank (“WAB”).   As of September 30, 2019, the availability under the line of credit was $262,000. The Company has projected revenues that management believes will provide sufficient funds along with the additional borrowings available under its line of credit to sustain its continuing operations through at least November 15, 2020. The Agreement with WAB is set to expire November 2020. It is the Company’s intention to either renew or replace the line of credit prior to its expiration.

The Company was in compliance with the WAB financial and liquidity covenant as of September 30, 2019 and expects to be able to continue to comply with the required covenants under the modified agreement with WAB for at least the next year. As a result, the amount due to WAB under the line of credit as of September 30, 2019 were classified in the accompanying condensed consolidated balance sheet in accordance with the repayment terms stipulated in the agreement with WAB.

Our primary cash requirements are to fund operations which mainly include personnel-related costs, marketing costs, third party costs related to hosting and software, general and administrative costs associated with being a public company, travel costs, and quarterly preferred stock dividends. The Company expects to continue to incur operating expenses for research and development and investment in software development costs to achieve its projected revenue growth. We continually evaluate our operating cash flows which can vary subject to the actual timing of expected new sales compared to our expectations of those sales and are sensitive to many factors, including changes in working capital and our results of operations. However, projections of future cash needs and cash flows are subject to risks and uncertainty.

Management’s current operating plan is to maintain and/or reduce operating expenses in order to be aligned with expected revenues.  The primary area of focus will continue to be headcount and costs from outside consultants.  The Company remains focused on maximizing revenue from its revenue generating resources and will continue to repurpose, if necessary, certain personnel to become billable so the Company can continue to improve its liquidity.  The Company has a substantial professional services backlog that resulted from new customers added in 2019 as well as upgrade projects from our existing customers as they move to the latest version of Astea Alliance.   In 2020, the Company will continue to consider ways to reduce operating expenses in certain areas of the Company in order to maintain its liquidity. However, management has implemented new marketing initiatives which have increased our spending in this area in 2019. We believe the new initiatives will directly contribute to increasing new business, which is essential to our growth.  Operations will generate enough cash to meet obligations at least through November 15, 2020. As noted above, if the Company’s actual results fall short of expectations, the Company will make cost adjustments to improve the Company’s operating cash flows. In addition, we plan to maintain the same level of investment in software development and we do not expect to increase capital expenditures.

10 

Our operations are subject to certain risks and uncertainties including, among others, current and potential competitors with greater resources, dependence on our significant and existing customer base, closing license and subscription sales in a timely manner, lack of a history of consistently generating net income and uncertainty of future profitability, and possible fluctuations in financial results.

Revenue from Contracts with Customers

Astea’s revenue is principally recognized from three sources: (i) licensing arrangements, (ii) subscription services and (iii) services and maintenance.

The Company markets its products primarily through its direct sales force and resellers. License agreements do not provide for a right of return, and historically, product returns have not been significant.

Revenue from Contracts with Customers outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The five steps are:

1. Identify the contract with a customer.

2. Identify the performance obligations in the contract.

3. Determine the transaction price.

4. Allocate the transaction price to performance obligations in the contract.

5. Recognize revenue when or as the Company satisfies a performance obligation.

The Company satisfies performance obligations as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer.

The Company recognizes revenue from license sales when the above criteria are met. The Company generally uses written contracts as a means to establish the terms and conditions by which our products, services and maintenance support are sold to our customers. The Company satisfies the performance obligation when the license key has been delivered electronically to the customer. If these criteria are not met, then revenue is deferred until such criteria are met or until the period(s) over which the last performance obligation is delivered.

The Company recognizes revenues from maintenance ratably over the term of the underlying maintenance contract term. The term of the maintenance contract is usually one year. Renewals of maintenance contracts create new performance obligations that are satisfied over the contract term.

Revenues from professional services mostly consist of time and material services. Certain professional service contracts are performed on a fixed price basis and revenue is recognized using the percentage of completion method. However, fixed price contracts are only utilized on rare occasions. Performance obligations are satisfied, and revenues are recognized, when the services are provided or when the service term has expired.

In subscription-based arrangements, even though customers use the software element, they generally do not have a contractual right to take possession of the software at any time during the hosting period without significant penalty to either run the software on its own hardware or contract with an unrelated third party to host the software. Accordingly, these software as a service (“SaaS”) arrangements, including the software license fees within the arrangements, are accounted for as subscription services provided all other revenue recognition criteria have been met. The subscription revenue is recognized on a straight-line basis over the performance obligation. The Company recognizes subscription revenue once a customer goes-live ratably over the remaining contract period or customer life whichever is longer. The contract period is typically 1 to 3 years. The average expected life of a customer is 2 years. The average customer takes about 8 to 10 months to go live. The Company expects the average life of a customer to increase as more customers begin to renew their subscription contracts. When implementation, consulting and training services are bundled with the subscription-based arrangement, these services are recognized over the life of the initial contract (performance obligation), once the project goes live.

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In contracts with multiple performance obligations, the Company accounts for individual performance obligations separately, if they are distinct. The Company allocates the transaction price to each performance obligation based on its relative standalone selling price out of total consideration of the contract. For maintenance and support, the Company determines the standalone selling price based on the price at which the Company separately sells a renewal contract. The Company determines the standalone selling price for sales of licenses using the residual approach. For professional services, the Company determines the standalone selling prices based on the price at which the Company separately sells those services.

The guidance prefers that revenue in a contract with multiple performance obligations use the adjusted market approach which includes SSP or TPE or expected cost plus margin approach as the methodology for allocating revenues to software. The Company uses the Residual Approach for allocating the revenues from a contract to the license component of the sale. Due to competition, highly variable pricing, customer demographics, varying size of our customers, and other such factors, the Company’s selling prices are considered uncertain for each perpetual license sale. Therefore, SSP is not an appropriate methodology as it relates to our license revenue. In terms of TPE as a basis to price our software, our product is unique and expansive in terms of the system’s inherent functionality. There are no directly comparable products in the marketplace today which we could use as the basis to set our standard license pricing based on a comparison with other vendors. In addition, most of the companies with whom we compete, are privately owned, which prevents us from obtaining reliable TPE. Accordingly, the guidance permits the Company to use the Residual Method for allocating selling price if the first two preferable choices cannot be used. The residual between the total transaction price and the observable standalone selling prices of those performance obligations with observable standalone selling prices is considered to be the estimated standalone selling price of the goods or services underlying the performance obligation.

Astea commonly sells its software products bundled with maintenance and professional services. As noted above, the guidance requires an entity to allocate the transaction price to the distinct performance obligations in a contract on a relative SSP basis. Under the guidance, “…an entity shall determine the standalone selling price at contract inception of the distinct good or service underlying each performance obligation in the contract and allocate the transaction price in proportion to those standalone selling prices.” SSP is defined as the price at which an entity would sell a promised good or service separately to a customer. Astea has a history of selling maintenance renewals and professional services on a standalone basis. Therefore, the Company utilizes SSP for its performance obligations as it relates to service and maintenance revenue. In addition, due to the Company having different maintenance and service rates in other parts of the world in which it operates, the Company has developed a reasonable range for its SSP for maintenance and services rather than a single point.

The incremental costs of obtaining a customer contract (i.e., those costs related to obtaining the customer contract that would not have been incurred if the customer contract was not obtained), such as a sales commission, should be capitalized if the Company expects to recover those costs (based on net future cash flows from the contract and expected contract renewals). The Company may expense the incremental costs of obtaining a contract if the amortization period would otherwise be one year or less. Since sales commissions are costs that are incremental and the amortization of sales commissions would be one year or less, the Company will continue to expense these items as incurred. Costs of obtaining a customer contract that are not incremental (i.e., costs related to obtaining the customer contract that would have been incurred regardless of whether the customer contract had been obtained), such as travel costs incurred to present the customer proposal, should only be capitalized if those costs are explicitly chargeable to the customer regardless of whether the entity enters into a contract with the customer. Otherwise, such costs are expensed as incurred. The Company will continue to expense these costs as they are incurred.

Once live, we recognize the deferred implementation costs related to that customer ratably over the remaining expected life of the customer contract or two years, whichever is longer. At this point, based on the Company’s relatively short time-span as a provider of a hosted solution, our analysis shows that the average lifespan of an Astea hosted customer is 2 years. Therefore, we amortize the deferred cost over 2 years or the remaining life of the contract, whichever is longer. This is consistent with the revenue recognition methodology used for the subscription service revenue for that customer. The Company satisfies performance obligations as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised service to a customer.

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We believe that our accounting estimates used in applying our revenue recognition are critical because:

· the determination that it is probable that the customer will pay for the products and services purchased is inherently judgmental and includes credit risk;

· determining the performance obligations and transaction price to certain elements in multiple-element arrangements is complex;

· the determination of whether a service is essential to the functionality of the software is complex and could potentially create a new performance obligation; and

· the estimated customer life of subscription services.

Changes in the aforementioned items could have a material effect on the type and timing of revenue recognized. In addition, Company’s payment terms and conditions vary by contract and size of customer, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, and not to facilitate financing arrangements. The Company generally has not experienced any material losses related to receivables from individual customers, or groups of customers. Due to these factors, no additional credit risk beyond amounts provided by the allowance for doubtful accounts is believed by management to be probable in the Company’s accounts receivable. The Company has not adjusted revenues for customers related to credit risk.

For the three and nine months ended September 30, 2019, there was no individual customer that accounted for 10% of total revenue. For the three months ended September 30, 2018, no individual customer accounted for 10% or more of total revenue. For the nine months ended September 30, 2018, one customer accounted for 10% of total revenue.

We present taxes assessed by a governmental authority including sales, use, value added and excise taxes on a net basis and therefore the presentation of these taxes is excluded from our revenues and is included in accrued expenses in the accompanying condensed consolidated balance sheets until such amounts are remitted to the taxing authority.

The Company is engaged in the design, development, marketing and support of its service management software solutions. All revenues result from selling of license (perpetual and subscription) software products and related professional services and customer support services. Accordingly, the Company considers itself to have one reporting segment. The Company’s chief decision maker further reviews financial information presented on a consolidated basis to determine if revenue can be further disaggregated in order to make operating decisions and assessing financial performance. It was determined that all revenue recognized in our consolidated statements of operations is considered to be revenue from contracts with customers, which can be disaggregated by both the timing of revenue recognition and geographic regions (see Note 9 of the condensed consolidated financial statements for disaggregated revenues by geographic regions).

The following tables depicts the Company’s disaggregation of revenue:

	Three months ended				Nine months ended
	September 30,				September 30,
Timing of Revenue Recognition	2019		2018		2019		2018
Performance obligations transferred at a point in time	$	140,000	$	765,000	$	1,302,000	$	2,076,000
Performance obligations transferred over time		4,380,000		4,720,000		13,266,000		14,657,000
Performance obligations transferred over time initiated at go-live		1,440,000		1,640,000		4,427,000		3,720,000
Total revenues	$	5,960,000	$	7,125,000	$	18,995,000	$	20,453,000

The performance obligations transferred at a point in time relate to perpetual license revenue for which there is no deferred revenue as of September 30, 2019 or 2018. The performance obligations transferred over time consist of professional services that are recognized based on time and materials, as the services are performed. The performance obligations for support services are recognized ratably over time based on the contract life, except for a few fixed price contracts which are recognized based on the achievement of certain milestones. If the customer pays in advance, service revenue is deferred until the performance obligations are met. For support services, the fee is paid in advance of the performance obligation. Accordingly, the Company has recorded deferred revenue from fixed price contracts and support services of $6,557,000 and $7,067,000 as of September 30, 2019 and 2018, respectively. Performance obligations transferred over time, initiated at go-live, relate to our subscription hosting and our subscription professional services for the implementation. No performance obligation is recognized until the customer is live and has access to the subscription services. Once live, the performance obligations are recognized over time, which is either 2 years, the average customer life, or the remaining contract life of the customer, whichever is longer. Because subscription fees are paid in advance, and professional services fees are paid as the services are performed, the revenue from both are deferred until the date in which the customer goes live. The Company has deferred revenue recorded for performance obligations transferred over time, initiated at go-live for hosting and hosting services for $4,656,000 and $4,221,000 as of September 30, 2019 and 2018, respectively.

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The long-term deferred revenue reported as $1,351,000 and $1,474,000 as of September 30, 2019 and 2018, respectively, consists of the portion of revenue that will be recognized beyond one year of the balance sheet date for hosting implementation services.

2. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

In August 2018, the FASB issued guidance that requires a customer in a cloud computing arrangement (i.e. hosting arrangement) that is a service contract to follow the internal-use software guidance to determine which implementation costs to capitalize as assets or expense as incurred. This guidance requires that certain costs incurred during the application development stage be capitalized and other costs incurred during the preliminary project and post-implementation stages be expensed as incurred. The guidance is effective for annual periods beginning after December 15, 2019 with early adoption permitted. The adoption of this guidance is not expected to have a material impact on our condensed consolidated financial statements.

In August 2018, the FASB issued guidance modifying the disclosure requirements on fair value measurements. The amendments add, modify, and eliminate certain disclosure requirements on fair value measurements. The guidance is effective for reporting periods beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact, if any, that the adoption of this guidance will have on our condensed consolidated financial statements.

In June 2016, the FASB issued an accounting standard update that requires measurement and recognition of expected credit losses for financial assets held based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The accounting standard update will be effective for us beginning January 1, 2020. We expect to adopt this accounting standard update on a modified retrospective basis and we are currently evaluating the impact of this accounting standard update on our condensed consolidated financial statements.

3. CONCENTRATION OF CREDIT RISK

Financial instruments, which potentially subject the Company to credit risk, consist of cash, cash equivalents and accounts receivable. The Company’s policy is to limit the amount of credit exposure to any one financial institution. The Company places investments with financial institutions evaluated as being creditworthy, or investing in short-term money market funds which are exposed to minimal interest rate and credit risk. Cash balances are maintained with several banks. Certain operating accounts may exceed insured limits.

The Company sells its products to customers involved in a variety of industries including information technology, medical devices and diagnostic systems, industrial controls and instrumentation and retail systems. While the Company does not require collateral from its customers, it does perform continuing credit evaluations of its customers’ financial condition.

4. LINE OF CREDIT and TERM NOTE

Line of Credit and Term Loan with Western Alliance Bank

On August 11, 2017, the Company entered into a Business Financing Agreement (the “Financing Agreement”) with Bridge Bank, a division of WAB, which included a revolving line of credit and a term loan. The agreement was to mature on September 1, 2019.

The Financing Agreement with WAB, established a revolving credit line for the Company in the principal amount of up to $2,400,000 (the “Revolving Credit Line”) and a Term Loan of $400,000 (the “Term Loan”).  Availability under the Revolving Credit Line is tied to a borrowing base formula that is based on 80% of the Company’s eligible domestic accounts receivable.  Advances under the Revolving Credit Line (the “Advances”) may be repaid and reborrowed in accordance with the Loan Agreement.  Pursuant to the Financing Agreement, the Company originally agreed to pay to WAB the outstanding principal amount of all Advances, the unpaid interest thereon, and all other obligations incurred with respect to the Loan Agreement on September 1, 2019. Interest accrues and is paid monthly at the Wall Street Journal Prime Rate plus 1.5%. At September 30, 2019, the interest rate was 6.5%.

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The original Term Loan provided proceeds of $400,000 to the Company. Beginning in August 2017, for the first six months of the term loan the Company was only required to pay interest. Then for the next 18 months, the Term Loan was to be amortized into monthly payments of principal and interest. The interest rate on the original Term Loan was the Wall Street Journal Prime Rate plus 1.75%. The Term Loan was modified in November 2017 by the First Modification to Business Financing Agreement (“First Modification”), and as a result, the Company fully repaid the Term Loan by April 30, 2018. The Company repaid $150,000 of the Term Loan in December 2017, $125,000 in January 2018 and the balance of $125,000 in April 2018.

On July 24, 2018, the Company entered into a Second Modification to Business Financing Agreement (“Loan Modification”) with WAB which amended the First Modification, dated November 22, 2017. The Loan Modification increased the credit limit under Company’s credit facility to $2,850,000, extended the maturity date of the credit facility through November 15, 2020 and revised and clarified certain covenants and other terms of the credit facility. No other terms or conditions were modified.

The Company expects to be able to continue to comply with the required covenants contained in the agreement with WAB for at least the next year. As a result, the amounts due to WAB under the line of credit and term loan as of September 30, 2019 are classified in the accompanying condensed consolidated balance sheet in accordance with the repayment terms stipulated in the agreement.

As of September 30, 2019, the Company owed $2,588,000 under the revolving line of credit. The Company incurred $54,000 and $64,000 of interest expense to WAB for the three-month period ended September 30, 2019 and 2018, respectively and $152,000 and $119,000 of interest expense to WAB for the nine-month period ended September 30, 2019 and 2018, respectively. As of September 30, 2019, there was availability of $262,000 under the line of credit. The Company was in compliance with the financial and liquidity covenants of the Loan Modification as of September 30, 2019.

Subject to certain exceptions, the amended Financing Agreement contains covenants prohibiting the Company from, among other things: (a) conveying, selling, leasing, transferring or otherwise disposing of their properties or assets; (b) liquidating or dissolving; (c) engaging in any business other than the business currently engaged in or reasonably related thereto; (d) entering into any merger or consolidation, or acquiring all or substantially all of the capital stock or property of another entity; (e) becoming liable for any indebtedness; (f) allowing any lien or encumbrance on any of their property; and (g) paying any dividends (other than dividends on outstanding convertible preferred stock); and (i) making payment on subordinated debt. In addition, actual EBITDA, as defined in the Financing Agreement for the trailing 6-month period must be at least $1 as tested quarterly.

The amended Financing Agreement is secured by a first priority perfected security interest in substantially all of the assets of the Company, excluding the intellectual property of the Company.  The Loan Modification contains a negative covenant prohibiting the Company from granting a security interest in their intellectual property to any party.

5.        LEASES

The Company adopted the new lease standard on January 1, 2019 using the modified retrospective transition method. Prior periods were not retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods. The Company elected the package of practical expedients permitted under the transition guidance within the new lease standard, which among other things, allowed the Company to continue to account for existing leases based on the historical lease classification. The Company also elected the practical expedients to combine lease and non-lease components for its office leases, which primarily relate to ancillary expenses such as common area maintenance charges and management fees.

The Company determines if an arrangement is a lease at inception by assessing whether it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company’s leases are primarily related to operating leases for its corporate office and subsidiaries, office equipment and cars. The Company's leases have remaining lease terms of less than 1 to 4 years, and sometimes include options to renew. Renewal and termination options are included in the lease term when it is reasonably certain that the Company will exercise the option. However, it has been the Company’s experience to renegotiate a lease and not renew based on the terms of the lease. 

15 

ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As all of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate plus some additional considerations for the term of the lease, based on the information available at the lease commencement date, to determine the present value of lease payments. Based on the present value of lease payments for the Company's existing leases, the Company recorded ROU assets and lease liabilities of approximately $3,132,000 upon adoption on January 1, 2019. There was one lease at one of our subsidiaries that was renewed for 2 years effective at January 1, 2019 that is included in the lease liability. The Company had no finance leases.

The impact of the new lease standard on the September 30, 2019 condensed consolidated balance sheet was as follows:

	September 30, 2019
Right-of-use assets	$  2,284,000
Current lease liabilities	$  961,000
Noncurrent lease liabilities	1,323,000
Total lease liabilities	$  2,284,000
Weighted average remaining lease term	1.9 years
Weighted average discount rate	7.17%

Total operating lease costs for the three and nine months ended September 30, 2019 were $283,000 and $848,000, respectively, while the total operating lease costs for the three and nine months ended September 30, 2018 were $326,000 and $978,000, respectively, which is included in operating costs on the condensed consolidated statements of operation.

The following table provides supplemental cash flow information related to our operating leases at September 30, 2019:

	Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of operating lease liabilities	$960,000

The following table shows the future maturities of lease liabilities for leases in effect as of September 30, 2019:

	Lease Liabilities
2019 (excluding the nine months ended September 30, 2019)	$	320,000
2020		1,049,000
2021		837,000
2022		452,000
2023		1,000
Total lease payments		2,659,000
Less: imputed interest		(375,000	)
Total	$	2,284,000

6.        INCOME TAXES

The Company has identified its federal tax return and its state returns in Pennsylvania and California as “major” tax jurisdictions. Based on the Company’s evaluation, it concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The Company’s evaluation was performed for tax years ended 2014 through 2018, the only periods subject to examination. The Company believes that its income tax positions and deductions will be sustained on a tax authority audit and does not anticipate any adjustments that will result in a material change to its financial position.

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The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income before income taxes. Penalties are recorded in general and administrative expenses and interest accrued is recorded in interest expense or interest income, respectively, in the condensed consolidated statement of operations. For the three and nine months ended September 30, 2019 and 2018, there were no interest or penalties related to uncertain tax positions.

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and operating loss and tax credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when the difference and carryforwards are expected to be recovered or settled. A valuation allowance for deferred tax assets is provided when we estimate that it is more likely than not that all or a portion of the deferred tax assets may not be realized through future operations. This assessment is based upon consideration of available positive and negative evidence which includes, among other things, our most recent results of operations and expected future profitability. We consider our actual historical results to have a stronger weight than other more subjective indicators when considering whether to establish or reduce a valuation allowance on deferred tax assets.

As of September 30, 2019, we had approximately $10.9 million of net deferred tax assets, against which we provided a 100% valuation allowance. Our net deferred tax assets were generated primarily by operating losses. Accordingly, it is more likely than not, that we will not realize these assets through future operations.

The tax provision for the period consisted primarily of income taxes paid to Australia due to income generated by our Australian operation. The remainder of the tax provision was for taxes accrued on our Israeli operation.

7.        EQUITY

Share-Based Awards

Compensation costs include share-based payments granted to employees and directors based on the estimated grant date fair value. The Company estimates the fair value of stock options granted using the Black-Scholes-Merton (“Black-Scholes”) option-pricing formula and amortizes the estimated option value using an accelerated amortization method where each option grant is split into tranches based on vesting periods. The Company’s expected term represents the period that the Company’s share-based awards are expected to be outstanding and was determined based on historical experience regarding similar awards, giving consideration to the contractual terms of the share-based awards and employee termination data. Executive level employees who hold a majority of options outstanding, and non-executive level employees each have similar historical option exercise and termination behavior and thus were grouped for valuation purposes. The Company’s expected volatility is based on the historical volatility of its traded common stock and places exclusive reliance on historical volatilities to estimate our stock volatility over the expected term of its awards. The Company has historically not paid dividends to common stockholders and has no foreseeable plans to issue dividends. The risk-free interest rate is based on the yield from the U.S. Treasury zero-coupon bonds with an equivalent term.

As of September 30, 2019, the total unrecognized compensation cost related to non-vested options amounted to $513,000, which is expected to be recognized over the options’ weighted average remaining vesting period of 3.24 years.

The Company has Stock Option Plans (the “Plans”) under which incentive and non-qualified stock options may be granted to its employees, officers, directors and others. Generally, incentive stock options are granted at fair value, become exercisable over a four-year period, have a 10-year contractual term and are subject to the employee’s continued employment. Non-qualified options are granted at exercise prices determined by the Board of Directors and vest over varying periods. 

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  Activity under the Company’s stock option plans for the nine months ended September 30, 2019 is as follows:

	OPTIONS OUTSTANDING
	Shares		Weighted Average Exercise Price Per Share
Balance, December 31, 2018	762,000			$2.54
Granted	245,000			$5.83
Exercised	(73,000	)		$1.99
Forfeited	(129,000	)		$3.86
Balance, September 30, 2019	805,000			$3.42

There are 280,000 shares available for granting future options as of September 30, 2019. It is the Company’s policy to issue shares from authorized but unissued common stock when stock options are exercised.

The following table summarizes outstanding options under the Company’s stock option plans as of September 30, 2019:

	Number of Shares	Weighted Average Exercise Price Per Share	Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding Options	805,000	$3.42	6.05	$1,469,000
Ending Vested and Exercisable	475,000	$2.48	4.04	$1,223,000
Options Vested and Expected to Vest	710,000	$3.19	5.63	$1,423,000

Convertible Preferred Stock

Series A

On September 24, 2008, the Company issued 826,000 shares of Series-A Convertible Preferred Stock (“Series A Preferred Stock”) to its Chief Executive Officer at a price of $3.63 per share for a total of $3,000,000.  Dividends accrue daily on the Series A Preferred at a rate of 10% and are payable only when, and if, declared by the Company’s Board of Directors, quarterly in arrears. At September 30, 2019 and December 31, 2018, there were accrued dividends of $654,000 and $541,000, included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheet.

The Series A Preferred Stock may be converted into common stock at the rate of one share of common for each share of Series A Preferred Stock. The Company has rights to cause conversion of all of the shares of Series A Preferred Stock outstanding. The Company may redeem, subject to board approval, all of the shares of Series A Preferred Stock then outstanding at a price equal to the greater of (i) 130% of the purchase price plus all accrued and unpaid dividends and (ii) the fair market value of such number of shares of common stock which the holder of the Series A Preferred Stock would be entitled to receive had the redeemed Series A Preferred Stock been converted immediately prior to the redemption. Each and every outstanding share of Series A Preferred Stock is subject to mandatory and automatic conversion into shares of common stock if the closing price of the common stock as reported by the principal exchange or quotation system on which such common stock is traded or reported exceeds 300% of the then current conversion price for 30 consecutive trading days.   In the event of a liquidation of the Company, the holder of the Series A and Series B preferred stock shall be entitled to receive in preference to the holders of the common stock, the original amount invested in the preferred stock plus any unpaid and accrued dividends. Preferred stock dividends on the Series A are declared quarterly by the Board of Directors.

The Company reports the Series A Preferred Stock on the Company’s condensed consolidated balance sheet within stockholders’ deficit.

Series B

On June 20, 2014, the Company issued 797,000 of Series-B Convertible Preferred Stock (“Series B Preferred Stock”) to its Chief Executive Officer at a price of $2.51 per share in exchange for the cancellation of $2,000,000 of outstanding principal owed to its Chief Executive Officer under a Revolving Promissory Note dated March 26, 2014.

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The Series B Preferred Stock may be converted into shares of common stock on a one-to-one ratio, subject to customary anti-dilution provisions.  The Series B Preferred Stock is entitled to a quarterly dividend, which accrues at an annual rate of 10%.  The Company’s Chief Executive Officer may convert 100% of his shares of the Series B Preferred Stock into shares of common stock. Each and every outstanding share of Series B Preferred Stock is subject to mandatory and automatic conversion into shares of common stock if the closing price of the common stock as reported by the principal exchange or quotation system on which such common stock is traded or reported exceeds 300% of the then current conversion price for 30 consecutive trading days.  The Company may redeem all of the outstanding shares of the Series B Preferred Stock issued at a price per share equal to 300% of the purchase price. The Series B Preferred Stock ranks senior to the common stock and on parity with the Company’s Series A Preferred Stock. In the event of a liquidation of the Company, the holder of the Series B and Series A Preferred Stock shall be entitled to receive in preference to the holders of the common stock, the original amount invested in the preferred stock plus any unpaid and accrued dividends. Preferred stock dividends on the Series B are declared quarterly by the Board of Directors. At September 30, 2019 and December 31, 2018, there were accrued dividends of $416,000 and $354,000, included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheet.

The Company reports the Series B Preferred Stock on the Company’s condensed consolidated balance sheet within stockholders’ deficit.

8.       LOSS PER SHARE

Loss per share is computed on the basis of the weighted average number of shares and common stock equivalents outstanding during the period. In the calculation of diluted earnings per share, shares outstanding are adjusted to assume conversion of the Company’s non-interest bearing convertible stock and exercise of options as if they were dilutive. In the calculation of basic loss per share, weighted average numbers of shares outstanding are used as the denominator.

The Company had net loss allowable to the common stockholders for the three and nine months ended September 30, 2019 and 2018. In the nine months ended September 30, 2018, there were 179,000 of net additional dilutive stock options assumed to be converted into common stock shares but were excluded from the diluted earnings per common shares calculation as the inclusion of these shares would have been antidilutive. In addition, as of three and nine months ended September 30, 2019 and as of the three months ended September 30, 2018, the outstanding stock options would have been antidilutive due to the net loss incurred during those periods. In addition, 100% of the outstanding convertible preferred stock, 1,623,000 shares, were eligible to be converted into common stock. For purpose of this calculation, if converted, it was assumed that upon conversion, the related dividends were not paid. However, as of the three and nine months ended September 30, 2019 and 2018 shares of common stock issuable on the assumed conversion of the eligible preferred stock were excluded from the diluted earnings per common shares calculation as the inclusion of these shares would have been antidilutive.

	Three Months Ended						Nine Months Ended
	Ended September 30,						Ended September 30,
	2019			2018			2019			2018
Numerator:
Net (loss) income	$	(1,489,000	)	$	(70,000	)	$	(2,020,000	)	$	240,000
Preferred dividend		125,000			125,000			375,000			375,000
Net loss available to common stockholders	$	(1,614,000	)	$	(195,000	)	$	(2,395,000	)	$	(135,000	)
Denominator:
Basic weighted average number of common shares outstanding		3,642,000			3,607,000			3,627,000			3,600,000
Diluted weighted average number of common shares outstanding		3,642,000			3,607,000			3,627,000			3,600,000
Basic (loss) earnings per common share	$	(0.44	)	$	(0.05	)	$	(0.66	)	$	(0.04	)
Diluted (loss) earnings per common share	$	(0.44	)	$	(0.05	)	$	(0.66	)	$	(0.04	)

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9.        GEOGRAPHIC REGION DATA

The Company and its subsidiaries are engaged in the design, development, marketing and support of its service management software solutions. Substantially all revenues result from the license of the Company’s software products and related professional services and customer support services. The Company’s chief executive officer reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance. Accordingly, the Company considers itself to have three geographic segments as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018				2019			2018
Revenues
Software license fees
United States	$	112,000		$	504,000			$	707,000		$	951,000
Europe		21,000			176,000				129,000			328,000
Asia Pacific		7,000			85,000				466,000			797,000
Total foreign software license fees revenue		28,000			261,000				595,000			1,125,000
Total software license fees		140,000			765,000				1,302,000			2,076,000
Subscriptions
United States		678,000			443,000				2,035,000			1,268,000
Europe		341,000			327,000				882,000			914,000
Asia Pacific		259,000			642,000				820,000			922,000
Total foreign subscriptions		600,000			969,000				1,702,000			1,836,000
Total subscription revenue		1,278,000			1,412,000				3,737,000			3,104,000
Services and maintenance
United States		2,790,000			2,649,000				8,789,000			9,030,000
Europe		586,000			591,000				1,821,000			1,776,000
Asia Pacific		1,166,000			1,708,000				3,346,000			4,467,000
Total foreign services and
maintenance revenue		1,752,000			2,299,000				5,167,000			6,243,000
Total services and maintenance revenue		4,542,000			4,948,000				13,956,000			15,273,000
Total revenue	$	5,960,000		$	7,125,000			$	18,995,000		$	20,453,000
Net (loss) income
United States	$	(1,178,000	)	$	(437,000	)		$	(1,251,000	)	$	(328,000	)
Europe		(247,000	)		(60,000	)			(760,000	)		(275,000	)
Asia Pacific		(64,000	)		427,000				(9,000	)		843,000
Net (loss) income	$	(1,489,000	)	$	(70,000	)		$	(2,020,000	)	$	240,000

10.        SUBSEQUENT EVENT

Summary of Merger Agreement

On October 7, 2019, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with IFS Americas, Inc. (“Parent”) and IFS Amber, Inc. (“Merger Sub”), a wholly owned subsidiary of Parent. Subject to the terms and conditions of the Agreement, Merger Sub will merge with the Company and then become a subsidiary of Parent (“the Merger”). It is expected for the merger to close before the end of calendar year 2019.

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The transaction will result in the acquisition of all outstanding shares of the Company by Parent for cash. Each outstanding share of common stock, par value $0.01 per share, excluding shares held in treasury, will be purchased for $12.00 per share. Furthermore, each option to purchase shares of the Company common stock immediately prior to the effective time of the transaction, whether vested or unvested, will be cancelled and converted into the right to receive an amount in cash equal to the product of the total number of shares of common stock subject to the option, multiplied by the excess, if any, of the merger consideration, $12.00, over the applicable exercise price of each option.

The Merger Agreement contains various representations, warranties and covenants by the Company, Parent and Merger Sub. The Merger Agreement requires the Company to call and hold a special stockholders meeting and requires the board of directors of the Company to recommend that the Company’s stockholders approve the Merger Agreement and the merger.

The Merger Agreement requires the Company and Parent to use reasonable best efforts to take all reasonable actions necessary under applicable law to consummate the transactions contemplated by the Merger Agreement.

The Merger Agreement contains certain termination rights for each of the Company and Parent, including the right of each party to terminate the Merger Agreement if the merger has not been consummated by the end of January 31, 2020.

The Merger Agreement provides for a payment by the Company to Parent a termination fee in the amount of $2,569,746 in the case of a termination of the Merger Agreement under certain circumstances described in the Merger Agreement. Parent shall pay a termination fee of $2,936,852 to the Company in the event the Merger Agreement is terminated by Parent subject to certain conditions contained in the Merger Agreement.

The Company board of directors has unanimously determined that the transactions contemplated by the Merger Agreement are fair to, and in the best interest of, the Company and its stockholders, and has unanimously recommended that the Company board of directors approve the Merger Agreement and the transactions contemplated therein. The obligations of the parties to consummate the merger are subject to customary closing conditions.

Closing Compensation Agreement

Following the Company’s agreement upon the terms of the proposed merger with Parent and in consideration of Mr. Etskovitz’s role as the Chief Financial Officer of the Company and the importance of his participation in the due diligence and closing of the proposed transaction, the Company entered into an agreement with him on September 17, 2019, pursuant to which he will be entitled to a bonus of $100,000 (less applicable withholding taxes) on the condition that he remain employed by the Company in good standing through the closing of the merger and perform any additional duties related to the proposed merger (“Closing Compensation Agreement”). If Mr. Etskovitz voluntarily resigns his employment or is terminated for cause before the closing of the merger, he will forfeit the entire amount of the bonus. If the merger is not consummated for any reason, he will be entitled to receive a bonus equal to $50,000 (less applicable withholding taxes) if he remains employed in good standing with the Company through such event.

Conversion of Preferred Stock

Effective November 12, 2019, Zack Bergreen, the Chairman and Chief Executive Officer of Astea International Inc., converted to common stock, par value $0.01 per share of the Company (“Common Stock”), all of the 826,446 outstanding shares of the Series A Convertible Preferred Stock, par value $0.01 per share, and all of the 797,448 outstanding shares of the Series B Convertible Preferred Stock, par value $0.01 per share, of the Company that he held as of such date (the “Convertible Preferred Stock”). The Convertible Preferred Stock was convertible on a 1 for 1 basis, resulting in the issuance of 1,623,894 shares of Common Stock to Mr. Bergreen. Following the conversion, Mr. Bergreen beneficially owns 2,992,287 shares of Common Stock, or approximately 54.3% of the outstanding Common Stock. As described in the Company’s Current Report on Form 8-K filed on October 8, 2019, conversion of the Convertible Preferred Stock was required by the Voting Agreement among IFS Americas, Inc., a Delaware corporation (“Parent”), Mr. Bergreen and the limited partnership that he controls, in connection with the Agreement and Plan of Merger dated October 7, 2019 among the Company, Parent and a subsidiary of Parent.

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 Date, Time, Location and Record Date of Special Meeting of Stockholders

The Company’s Board of Directors has fixed the date, time, location and record date for the special meeting of the stockholders of the Company to consider and vote upon the adoption of the Merger Agreement, which provides for the merger of IFS Amber, Inc., subsidiary of Parent, with and into the Company, with the Company surviving as a wholly owned subsidiary of Parent. The Board of Directors determined that the special meeting of the Company’s stockholders will be held on Monday, December 9, 2019 at 11:00 a.m. (local time), at the Company’s headquarters at 240 Gibraltar Road, Horsham, Pennsylvania 19044. The Board of Directors also established the close of business on November 12, 2019 as the record date for the determination of stockholders entitled to receive notice of, and to vote at, the special meeting and any adjournment or postponement thereof.

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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

This document contains various forward-looking statements and information that are based on management's beliefs, assumptions made by management and information currently available to management. Such statements are subject to various risks and uncertainties, which could cause actual results to vary materially from those contained in such forward-looking statements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected or projected. Certain of these, as well as other risks and uncertainties are described in more detail herein and in Astea International Inc.’s (“Astea” or “the Company”) Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Astea is a global provider of service management software that addresses the unique needs of companies who manage capital equipment, mission critical assets and human capital. Clients include Fortune 500 to mid-size companies which Astea services through company facilities in the United States, United Kingdom, Australia, Japan, the Netherlands and Israel. Since its inception in 1979, Astea has licensed applications to companies in a wide range of sectors including information technology, telecommunications, instruments and controls, business systems, and medical devices.

Astea Alliance, the Company’s service management suite of solutions, supports the complete service lifecycle, from lead generation and project quotation to service and billing through asset retirement. It integrates and optimizes critical business processes for Campaigns, Call Center, Depot Repair, Field Service, Logistics, Projects and Sales, and Order Processing applications. Astea extends its application suite with mobile workforce management, dynamic scheduling optimization, third party vendor and customer self-service portals, and business intelligence. In order to ensure customer satisfaction, Astea also offers infrastructure tools and services. Astea Alliance provides service organizations with technology-enabled business solutions that improve profitability, stabilize cash flows, and reduce operational costs through automating and integrating key service, sales and marketing processes.

The FieldCentrix Enterprise is a service management solution that runs on a wide range of mobile devices (handheld computers, laptops and PCs, and Pocket PC devices), and integrates seamlessly with popular customer relationship management (“CRM”) and ERP applications. Add-on features include a web-based customer self-service portal, workforce optimization capabilities, and equipment-centric functionality. FieldCentrix has licensed applications to companies in a wide range of sectors including HVAC, building and real estate services, manufacturing and process instruments and controls, and medical equipment.

The Company’s sales and marketing efforts are primarily focused on new software licensing (on premise and cloud solutions) and support services for its latest generation of Astea Alliance and FieldCentrix products.

Critical Accounting Policies and Estimates

The Company’s significant accounting policies are described in its “Summary of Accounting Policies,” Note 2, in the Company’s 2018 Annual Report on Form 10-K. The preparation of financial statements in conformity with accounting principles generally accepted within the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related notes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below; however, application of these accounting policies involves the exercise of judgments and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

Revenue from Contracts with Customers

Astea’s revenue is principally recognized from three sources: (i) licensing arrangements, (ii) subscription services and (iii) services and maintenance.

The Company markets its products primarily through its direct sales force and resellers. License agreements do not provide for a right of return, and historically, product returns have not been significant.

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Revenue from Contracts with Customers outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The five steps are:

1. Identify the contract with a customer.

2. Identify the performance obligations in the contract.

3. Determine the transaction price.

4. Allocate the transaction price to performance obligations in the contract.

5. Recognize revenue when or as the Company satisfies a performance obligation.

The Company satisfies performance obligations as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer.

The Company recognizes revenue from license sales when the above criteria are met. The Company generally uses written contracts as a means to establish the terms and conditions by which our products, services and maintenance support are sold to our customers. The Company satisfies the performance obligation when the license key has been delivered electronically to the customer. If these criteria are not met, then revenue is deferred until such criteria are met or until the period(s) over which the last performance obligation is delivered.

The Company recognizes revenues from maintenance ratably over the term of the underlying maintenance contract term. The term of the maintenance contract is usually one year. Renewals of maintenance contracts create new performance obligations that are satisfied over the contract term.

Revenues from professional services mostly consist of time and material services. Certain professional service contracts are performed on a fixed price basis and revenue is recognized using the percentage of completion method. However, fixed price contracts are only utilized on rare occasions. Performance obligations are satisfied, and revenues are recognized, when the services are provided or when the service term has expired.

In subscription based arrangements, even though customers use the software element, they generally do not have a contractual right to take possession of the software at any time during the hosting period without significant penalty to either run the software on its own hardware or contract with an unrelated third party to host the software. Accordingly, these software as a service (“SaaS”) arrangements, including the software license fees within the arrangements, are accounted for as subscription services provided all other revenue recognition criteria have been met. The subscription revenue is recognized on a straight-line basis over the performance obligation. The Company recognizes subscription revenue once a customer goes-live ratably over the remaining contract period or customer life whichever is longer. The contract period is typically 1 to 3 years. The average expected life of a customer is 2 years. The average customer takes about 8 to 10 months to go live. The Company expects the average life of a customer to increase as more customers begin to renew their subscription contracts. When implementation, consulting and training services are bundled with the subscription based arrangement, these services are recognized over the life of the initial contract (performance obligation), once the project goes live.

In contracts with multiple performance obligations, the Company accounts for individual performance obligations separately, if they are distinct. The Company allocates the transaction price to each performance obligation based on its relative standalone selling price out of total consideration of the contract. For maintenance and support, the Company determines the standalone selling price based on the price at which the Company separately sells a renewal contract. The Company determines the standalone selling price for sales of licenses using the residual approach. For professional services, the Company determines the standalone selling prices based on the price at which the Company separately sells those services.

The guidance prefers that revenue in a contract with multiple performance obligations use the adjusted market approach which includes SSP or TPE or expected cost plus margin approach as the methodology for allocating revenues to software. The Company uses the Residual Approach for allocating the revenues from a contract to the license component of the sale. Due to competition, highly variable pricing, customer demographics, varying size of our customers, and other such factors, the Company’s selling prices are considered uncertain for each perpetual license sale. Therefore, SSP is not an appropriate methodology as it relates to our license revenue. In terms of TPE as a basis to price our software, our product is unique and expansive in terms of the system’s inherent functionality. There are no directly comparable products in the marketplace today which we could use as the basis to set our standard license pricing based on a comparison with other vendors. In addition, most of the companies with whom we compete, are privately owned, which prevents us from obtaining reliable TPE. Accordingly, the guidance permits the Company to use the Residual Method for allocating selling price if the first two preferable choices cannot be used. The residual between the total transaction price and the observable standalone selling prices of those performance obligations with observable standalone selling prices is considered to be the estimated standalone selling price of the goods or services underlying the performance obligation.

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Astea commonly sells its software products bundled with maintenance and professional services. As noted above, the guidance requires an entity to allocate the transaction price to the distinct performance obligations in a contract on a relative SSP basis. Under the guidance, “…an entity shall determine the standalone selling price at contract inception of the distinct good or service underlying each performance obligation in the contract and allocate the transaction price in proportion to those standalone selling prices.” SSP is defined as the price at which an entity would sell a promised good or service separately to a customer. Astea has a history of selling maintenance renewals and professional services on a standalone basis. Therefore, the Company utilizes SSP for its performance obligations as it relates to service and maintenance revenue. In addition, due to the Company having different maintenance and service rates in other parts of the world in which it operates, the Company has developed a reasonable range for its SSP for maintenance and services rather than a single point.

The incremental costs of obtaining a customer contract (i.e., those costs related to obtaining the customer contract that would not have been incurred if the customer contract was not obtained), such as a sales commission, should be capitalized if the Company expects to recover those costs (based on net future cash flows from the contract and expected contract renewals). The Company may expense the incremental costs of obtaining a contract if the amortization period would otherwise be one year or less. Since sales commissions are costs that are incremental and the amortization of sales commissions would be one year or less, the Company will continue to expense these items as incurred. Costs of obtaining a customer contract that are not incremental (i.e., costs related to obtaining the customer contract that would have been incurred regardless of whether the customer contract had been obtained), such as travel costs incurred to present the customer proposal, should only be capitalized if those costs are explicitly chargeable to the customer regardless of whether the entity enters into a contract with the customer. Otherwise, such costs are expensed as incurred. The Company will continue to expense these costs as they are incurred.

Once live, we recognize the deferred implementation costs related to that customer ratably over the remaining expected life of the customer contract or two years, whichever is longer. At this point, based on the Company’s relatively short time-span as a provider of a hosted solution, our analysis shows that the average lifespan of an Astea hosted customer is 2 years. Therefore, we amortize the deferred cost over 2 years or the remaining life of the contract, whichever is longer. This is consistent with the revenue recognition methodology used for the subscription service revenue for that customer. The Company satisfies performance obligations as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised service to a customer.

We believe that our accounting estimates used in applying our revenue recognition are critical because:

· the determination that it is probable that the customer will pay for the products and services purchased is inherently judgmental and includes credit risk;

· determining the performance obligations and transaction price to certain elements in multiple-element arrangements is complex;

· the determination of whether a service is essential to the functionality of the software is complex and could potentially create a new performance obligation; and

· the estimated customer life of subscription services.

Changes in the aforementioned items could have a material effect on the type and timing of revenue recognized. In addition, Company’s payment terms and conditions vary by contract and size of customer, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, and not to facilitate financing arrangements. The Company generally has not experienced any material losses related to receivables from individual customers, or groups of customers. Due to these factors, no additional credit risk beyond amounts provided by the allowance for doubtful accounts is believed by management to be probable in the Company’s accounts receivable. The Company has not adjusted revenues for customers related to credit risk.

For the three and nine months ended September 30, 2019, there was no individual customer that accounted for 10% of total revenue. For the three months ended September 30, 2018, no individual customer accounted for 10% or more of total revenue. For the nine months ended September 30, 2018, one customer accounted for 10% of total revenue.

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We present taxes assessed by a governmental authority including sales, use, value added and excise taxes on a net basis and therefore the presentation of these taxes is excluded from our revenues and is included in accrued expenses in the accompanying condensed consolidated balance sheets until such amounts are remitted to the taxing authority.

The Company is engaged in the design, development, marketing and support of its service management software solutions. All revenues result from selling of license (perpetual and subscription) software products and related professional services and customer support services. Accordingly, the Company considers itself to have one reporting segment. The Company’s chief decision maker further reviews financial information presented on a consolidated basis to determine if revenue can be further disaggregated in order to make operating decisions and assessing financial performance. It was determined that all revenue recognized in our consolidated statements of operations is considered to be revenue from contracts with customers, which can be disaggregated by both the timing of revenue recognition and geographic regions (see Note 9 of the condensed consolidated financial statements for disaggregated revenues by geographic regions).

The following tables depicts the Company’s disaggregation of revenue:

	Three months ended				Nine months ended
	September 30,				September 30,
Timing of Revenue Recognition	2019		2018		2019		2018
Performance obligations transferred at a point in time	$	140,000	$	765,000	$	1,302,000	$	2,076,000
Performance obligations transferred over time		4,380,000		4,720,000		13,266,000		14,657,000
Performance obligations transferred over time initiated at go-live		1,440,000		1,640,000		4,427,000		3,720,000
Total revenues	$	5,960,000	$	7,125,000	$	18,995,000	$	20,453,000

The performance obligations transferred at a point in time relate to perpetual license revenue for which there is no deferred revenue as of September 30, 2019 or 2018. The performance obligations transferred over time consist of professional services that are recognized based on time and materials, as the services are performed. The performance obligations for support services are recognized ratably over time based on the contract life, except for a few fixed price contracts which are recognized based on the achievement of certain milestones. If the customer pays in advance, service revenue is deferred until the performance obligations are met. For support services, the fee is paid in advance of the performance obligation. Accordingly, the Company has recorded deferred revenue from fixed price contracts and support services of $6,557,000 and $7,067,000 as of September 30, 2019 and 2018, respectively. Performance obligations transferred over time, initiated at go-live, relate to our subscription hosting and our subscription professional services for the implementation. No performance obligation is recognized until the customer is live and has access to the subscription services. Once live, the performance obligations are recognized over time, which is either 2 years, the average customer life, or the remaining contract life of the customer, whichever is longer. Because subscription fees are paid in advance, and professional services fees are paid as the services are performed, the revenue from both are deferred until the date in which the customer goes live. The Company has deferred revenue recorded for performance obligations transferred over time, initiated at go-live for hosting and hosting services for $4,656,000 and $4,221,000 as of September 30, 2019 and 2018, respectively.

The long term deferred revenue reported as $1,351,000 and $1,474,000 as of September 30, 2019 and 2018, respectively, consists of the portion of revenue that will be recognized beyond one year of the balance sheet date for hosting implementation services.

Capitalized Software Research and Development Costs

The Company capitalizes software development costs incurred during the period subsequent to the establishment of technological feasibility through the product's availability for general release. Costs incurred prior to the establishment of technological feasibility are charged to product development expense as they are incurred. Product development expense includes payroll, employee benefits, other headcount-related costs associated with product development and any related costs to third parties under sub-contracting or net of any collaborative arrangements.

Capitalized software development costs are amortized on a product-by-product basis over the greater of the ratio of current revenues to total anticipated revenues or on a straight-line basis over the estimated useful lives of the products beginning with the initial release to customers.  The Company's estimated life for its capitalized software products is two years based on current sales trends and the rate of product release.  The Company continually evaluates whether events or circumstances have occurred that indicate that the remaining useful life of the capitalized software development costs should be revised or that the remaining balance of such assets may not be recoverable. The Company evaluates the recoverability of capitalized software based on the net realizable value of each product, which includes the estimated future gross revenues from that product reduced by the estimated future costs of completing and disposing of that product, including the costs of performing maintenance and customer support required to satisfy the Company's responsibility set forth at the time of sale. As of September 30, 2019, management believes that no revisions to the remaining useful lives or write-downs of capitalized software development costs are required.

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Currency Translation

The international subsidiaries and foreign branch operations translate their assets and liabilities from international operations by using the exchange rate in effect at the balance sheet date. The results of operations are translated at average exchange rates during the period. The effects of exchange rate fluctuations in translating assets and liabilities of international operations into U.S. dollars are accumulated and reflected as a currency translation adjustment as a component of other comprehensive loss in the accompanying condensed consolidated statements of changes in stockholders’ deficit. Foreign exchange transaction gains and losses are included in general and administrative expenses in the condensed consolidated statements of operations. General and administrative expenses include a foreign exchange transaction loss of $24,000 for the nine months ended September 30, 2019 and a $15,000 gain for the nine months ended September 30, 2018.

Results of Operations

Comparison of Three Months Ended September 30, 2019 and 2019

Revenues

Total revenues decreased by $1,165,000 or 16%, to $5,960,000 for the three months ended September 30, 2019 from $7,125,000 for the three months ended September 30, 2018. Software license fee revenues decreased $625,000, or 82%, from the same quarter in 2018. Subscription revenues decreased $134,000 or 9% to $1,278,000 from $1,412,000 for the same period last year. Services and maintenance revenues for the three months ended September 30, 2019 decreased $406,000 or 8% from the same quarter in 2018.

Software license fee revenue decreased 82% to $140,000 in the third quarter of 2019 from $765,000 in the third quarter of 2018. This is primarily due to Astea Alliance license revenues decreasing by $467,000 or 80% to $120,000 in the third quarter of 2019 from $587,000 in the third quarter of 2018. The decrease was primarily due to lower perpetual license sales in all regions resulting from the Company’s policy of focusing its sales efforts on subscription based opportunities and only selling perpetual licenses to its existing customers. We expect license sales to continue to decrease in the future due to this strategic shift in the sales process. FieldCentrix license sales were $20,000 in the third quarter of 2019 compared to $178,000 in the third quarter of 2018. The decrease was due to lower license sales to existing customers in the third quarter of 2019 compared to the same quarter in 2018.

Subscription revenue decreased 9% to $1,278,000 in the third quarter of 2019 from $1,412,000 in the third quarter of 2018. The primary reason for the decrease resulted from the recognition of subscription revenue from a Japanese customer that went live in the third quarter of 2018 for which 2 years of subscription revenue had previously been deferred, partially offset by the recognition of subscription revenue from additional hosted customers going live in the U.S. in 2019, which had previously been deferred. Previously deferred hosting revenues were recognized as the service periods for those hosting services had lapsed. The Company continues to sell Software as a Service (SaaS) for which hosting revenue may not be recognized until the customers go-live. In addition, the Company’s focus going forward will be exclusively on selling subscription licenses to new customers. As such, we expect deferred revenues and subscription revenues to increase going forward.

Services and maintenance revenues decreased by 8% to $4,542,000 in the third quarter of 2019 compared to $4,948,000 in the third quarter of 2018. This is primarily due to a Japanese hosted customer that went live in the third quarter of 2018 for which 2 years of subscription service revenue had previously been deferred and recognized in full, partially offset by Astea Alliance service revenues in the U.S increasing by $142,000 or 5% compared to the third quarter of 2018. The increase was mainly attributable to a strong backlog of professional services required by new customer implementations and upgrades of current customers. Service and maintenance revenues generated by FieldCentrix decreased by $38,000 or 7% to $513,000 in the third quarter of 2019 compared to $551,000 during the same period in 2018. The decrease in maintenance is due to cancellation of maintenance by a few small customers offset by an increase in service revenue resulting from upgrade projects.

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Costs of Revenues

Cost of software license fees increased 21% to $908,000 in the third quarter of 2019 from $750,000 in the third quarter of 2018. Included in the cost of software license fees is the amortization of capitalized software costs and the third party software embedded in the Company’s software licenses sold to customers. Amortization of capitalized software development costs was $894,000 for the quarter ended September 30, 2019 compared to $739,000 for the same quarter in 2018. The increase was due to the amortization of both Alliance Version 15 that was released in September 2018 and Version 15.1, released in March 2019. Amortization of both versions did not occur during the quarter ended September 30, 2018. The gross margin percentage on software license sales was (550%) in the third quarter of 2019 compared to 2% in the third quarter of 2018. The decline in the 2019 license margin resulted from the combination of lower revenues and higher cost of sales.

Cost of subscriptions decreased 12% to $325,000 in the third quarter of 2019 from $369,000 in the third quarter of 2018. The decrease in cost of subscriptions is mainly attributed the Company transitioning to a lower cost SaaS cloud service provider in 2019 offset by adding more live hosted customers and increased hosting compliance costs in the third quarter of 2019 compared to the same period in 2018. The gross margin percentage on hosting was 75% in the third quarter of 2019 compared to 74% in the same quarter last year.

Cost of services and maintenance decreased 11% to $3,292,000 in the third quarter of 2019 from $3,696,000 in the third quarter of 2018. The decrease in cost of service and maintenance is mainly attributed to a decrease in headcount in the U.S., the reduced use of contractors in Japan and decreases in travel expenses in all regions, partially offset by an increase in recruiting costs. The gross margin percentage was 28% in the third quarter of 2019 compared to 25% in 2018. The growth in the services and maintenance gross margin was mainly due to lower service and maintenance costs in the third quarter of 2019.

Gross Profit

Total gross profit decreased 38% to $1,435,000 in the third quarter of 2019 from $2,310,000 in the third quarter of 2018 primarily due to decreases in all revenue streams as well as increases in costs of license fees. As a percentage of revenue, gross profit in the third quarter of 2019 was 24% compared to 32% in the third quarter of 2018.

Operating Expenses

Product Development

Product development expenses decreased 24% to $251,000 in the third quarter of 2019 from $330,000 in the third quarter of 2018.  Fluctuations in product development expense from period to period result from the amount of product development expense that is capitalized. Development costs of $797,000 were capitalized in the third quarter of 2019 compared to $645,000 during the same period in 2018 due to the increase in resources working on the development of the latest version of Alliance. Gross product development expense was $1,048,000 in the third quarter of September 30, 2019 which is 7% higher than $975,000 during the same quarter in 2018.  The increase was due to increases in salary and benefits and an unfavorable exchange rate on the Israeli shekel relative to the U.S. dollar, as the majority of development work is performed in Israel. Product development expense as a percentage of revenues was 4% in the third quarter of 2019 and 5% in the third quarter of 2018.

Sales and Marketing

Sales and marketing expense increased 14% to $1,156,000 in the third quarter of 2019 from $1,013,000 in the third quarter of 2018. The increase in sales and marketing expense resulted from higher third party marketing costs and increased sales force headcount in the U.S., offset by lower sales commissions due to a decrease in license revenue. The increase in third party marketing costs is due to the Company’s strategy of expanding its marketing presence through additional efforts to increase awareness of our products in order to improve lead generation and sales opportunities. Increased awareness occurs through additional webinars in all regions focused on the vertical industries in which the Company operates, attendance at more trade shows, and new strategies to improve lead generation for the Company’s sales force.  As a percentage of revenues, sales and marketing expense was 19% in the third quarter of 2019 and 14% in the third quarter of 2018.

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General and Administrative

General and administrative expenses consist of salaries, benefits and related costs for the Company’s finance, administrative and executive management personnel, legal costs, accounting costs, bad debt expense and various costs associated with the Company’s status as a public company. General and administrative expenses increased 39% to $1,355,000 during the third quarter of 2019 from $972,000 in the third quarter of 2018 due to increased professional fees which we did not incur during the same period in 2018. As a percentage of revenue, general and administrative expenses were 23% in the third quarter of 2019 compared to 14% in the third quarter of 2018.

Net Interest Expense

Net interest expense was $78,000 in the third quarter of 2019 compared to $64,000 in the third quarter of 2018. The increase in interest expense is mainly due to interest paid on accrued, but unpaid preferred dividends compared to the same period in 2018 offset by a slight decrease in the interest rate charged by Bridge Bank on the Company’s line of credit due to a decrease in the prime rate and by a lower average line of credit during the third quarter of 2019 compared to the same period in 2018 which resulted in a small decline in the interest paid to Bride bank for the quarter. Per the preferred stock agreements, unpaid accrued preferred dividends incur an interest charge calculated at 10% per annum.

Income Tax Expense

The Company recorded a provision for income tax of $84,000 for the third quarter of 2019 compared to $1,000 during the third quarter of 2018. The tax expense increase resulted from income taxes paid in the Asia Pacific region during the third quarter of 2019 compared to no tax provision payment in the same period in 2018. In the past, there has been no tax expense in this region due to the carryforward of operating losses from prior periods that have now been fully utilized and no longer available. We expect to pay taxes in the future in the APAC region as long as operations remain profitable.

International Operations

The Company’s international operations generated revenues of $2,378,000 in the third quarter of 2019, a decrease of 33% from the same quarter in 2018. Revenues from international operations comprised 40% of the Company’s total revenue for the third quarter in 2019, compared to 50% of total revenues for the same quarter in 2018. The decrease in international revenues in the third quarter of 2019 compared to the same period in 2018 is primarily due to decreases in subscription revenue and subscription service revenue in Japan due to a customer that went live in the third quarter of 2018 that had previously been deferred for 2 years. When the customer went live, all of the deferred hosting and services revenue was recognized in the period.

Comparison of Nine Months Ended September 30, 2019 and 2018

Revenues

Total revenues decreased by $1,458,000 or 7%, to $18,995,000 for the nine months ended September 30, 2019 from $20,453,000 for the nine months ended September 30, 2018. Software license fee revenues decreased $774,000, or 37%, from the same period in 2018. Subscription revenues increased $633,000 or 20% to $3,737,000 from the same period last year. Services and maintenance revenue for the nine months ended September 30, 2019 decreased $1,317,000 or 9% from the same period in 2018.

Software license fee revenues decreased 37% to $1,302,000 in the first nine months of 2019 compared to $2,076,000 in the same period in 2018. This is primarily due to Astea Alliance license revenue decreasing by $694,000 or 38%, to $1,138,000 in the first nine months of 2019 from $1,832,000 in the first nine months of 2018. The decrease was primarily due to lower perpetual license sales in the U.S., Japan and EMEA and partially offset by slightly higher sales in the Asia Pacific region.

Subscription revenue increased 20% to $3,737,000 in the first nine months of 2019 from $3,104,000 in the first nine months of 2018. The increase resulted from a number of hosted customers who went live in late 2018 and the first nine months of 2019 as well as the addition of new user licenses by certain customers. The Company continues to add new hosting customers. Even though the Company signed new Software as a Service (SaaS) customers in the first nine months of 2019, most of the associated hosting revenue may not be recognized until the new customers go-live.

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Services and maintenance revenues decreased by 9% to $13,956,000 in the first nine months of 2019 compared to $15,273,000 in the first nine months of 2018. This is primarily due to Astea Alliance service and maintenance decreasing by $1,082,000 or 8% compared to the first nine months of 2018. The decrease was mainly attributable to a larger than usual amount of service revenue recognized in the 2018 period when a hosted customer in Japan went live in the first nine months of 2018 for which a substantial amount of the hosting service revenue, which had previously been deferred for three years, was recognized. In the nine months ended September 30, 2019, there was no remaining revenue to be recognized for this customer in Japan. In addition, there was a decrease in maintenance revenue in 2019 in the U.S. for a few customers that transitioned from on-premise to subscription services. Service and maintenance revenues generated by FieldCentrix decreased by $234,000 or 14% to $1,488,000 in the first nine months of 2019 compared to $1,722,000 during the same period in 2018. The decrease in service revenue is due to a reduction in upgrade projects for existing customers and decreases in maintenance due to cancelation by a few small customers.

Costs of Revenues

Cost of software license fees increased by 28% to $2,532,000 in the first nine months of 2019 from $1,976,000 in the first nine months of 2018. Included in the cost of software license fees are the costs of capitalized software amortization and the cost of all third party software embedded in the Company’s software licenses which are sold to customers. Amortization of capitalized software development costs was $2,463,000 for the first nine months in 2019 compared to $1,940,000 for the same period in 2018. The increase in amortization was due to the amortization of Alliance Version 15 that began being amortized during the 4th quarter of 2018 that will continue for 2 years as well as amortization of Version 15.1 that was released in March 2019. The gross margin percentage on software license sales was (94%) in the first nine months of 2019 compared to 5% in the first nine months of 2018. The decline in the license margin resulted from a decrease in software license fees and an increase in amortization of software license fees in the first nine months of 2019.

Cost of subscriptions increased by 11% to $884,000 in the first nine months of 2019 from $794,000 in the first nine months of 2018. The increase in cost of subscriptions is mainly attributed to the addition of more customers to the SaaS environment and increased hosting compliance costs in the first nine months of 2019 compared to the same period in 2018. The gross margin percentage on hosting was 76% in the first nine months of 2019 compared to 74% in the first nine months of 2018. The growth in the subscription margin was primarily due to the increase in subscription revenues as customers continue to go live.

Cost of services and maintenance decreased 8% to $9,802,000 in the first nine months of 2019 from $10,705,000 in the first nine months of 2018. The decrease in cost of service and maintenance is mainly attributed to a decrease in headcount in the U.S., a decrease in subcontractor cost in Japan, and decreases in travel expenses in all regions partially offset by an increase in recruiting costs. The gross margin percentage was 30% in the first nine months of 2019 and 2018.

Gross Profit

Gross profit decreased 17% to $5,777,000 in the first nine months of 2019 from $6,978,000 in the first nine months of 2018 primarily due to a decrease of license and service and maintenance revenues and an increase in software license and subscription costs partially offset by an increase in subscription revenue and decrease in service and maintenance costs. As a percentage of revenue, gross profit in the first nine months of 2019 was 30% compared to 34% in the first nine months of 2018.

Operating Expenses

Product Development

Product development expenses increased 23% to $857,000 in the first nine months of 2019 from $697,000 in the first nine months of 2018.  Fluctuations in product development expense from period to period result from the amount of product development expense that is capitalized. Development costs of $2,301,000 were capitalized in the first nine months of 2019 compared to $2,430,000 during the same period in 2018 due to additional resources working on Version 15 in 2018. In 2018, there had been extra time and resources allocated to Version 15 due to all the additional functionality and upgrades being made to this version. Gross product development expense was $3,158,000 in the first nine months of 2019 compared to $3,127,000 during the same period in 2018. The slight increase of 1% in gross product development expense was primarily due to general inflationary cost increases. The majority of development work is performed in Israel. Product development expense as a percentage of revenues was 5% in the first nine months of 2019 and 3% in the first nine months of 2018.

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Sales and Marketing

Sales and marketing expense increased by 4% to $3,122,000 in the first nine months of 2019 from $2,991,000 in the first nine months of 2018. The increase in sales and marketing expense resulted from an increase in third party marketing costs and increased headcount in the U.S., partially offset by lower sales commissions due to a decrease in commissionable sales. The increase in third party marketing costs is due to the Company’s strategy of expanding its marketing presence through additional efforts to increase awareness of our products in order to improve lead generation and sales opportunities. Increased awareness occurs through additional webinars in all regions focused on the vertical industries in which the Company operates, attendance at more trade shows, and new strategies to improve lead generation for the Company’s sales force.  As a percentage of revenues, sales and marketing expense was 16% in the first nine months of 2019 and 15% in the first nine months of 2018.

General and Administrative

General and administrative expenses consist of salaries, benefits and related costs for the Company’s finance, administrative and executive management personnel, legal costs, accounting costs, and various costs associated with the Company’s status as a public company. General and administrative expenses increased 21% to $3,479,000 during the first nine months of 2019 from $2,868,000 in the first nine months of 2018 mainly due to increased professional fees which we did not incur during the same period in 2018. As a percentage of revenue, general and administrative expenses were 18% in the first nine months of 2019 compared to 14% in the first nine months of 2018.

Net Interest Expense

Net interest expense was $217,000 in the first nine months of 2019 compared to $163,000 in the first nine months of 2018. The increase in interest expense is mainly due to interest paid on accrued, but unpaid preferred dividends compared to the same period in 2018offset by a slight decrease in the interest rate charged by Bridge Bank on the Company’s line of credit due to a decrease in the prime rate and by a lower average line of credit during the first nine months of 2019 compared to the same period in 2018 which resulted in a small decline in the interest paid to Bride bank for the period. Per the preferred stock agreements, unpaid accrued preferred dividends incur an interest charge calculated at 10% per annum.

Income Tax Expense

The Company recorded a provision for income tax of $122,000 for first nine months of 2019 compared to $19,000 for the same quarter in 2018. The tax expense increase resulted from income tax paid in Australia during the first nine months of 2019 compared to no tax provision paid in the same period in 2018. In the past, there has been no tax expense in the region due to the complete utilization of operating losses from prior periods which have been fully utilized. We expect to pay taxes in the future in the APAC region, as long as they remain profitable. The effective tax rate in the APAC region is 30%.

International Operations

The Company’s international operations generated revenues of $7,464,000 in the first nine months of 2019, a decrease of 19% compared to the same period in 2018. Revenues from international operations comprised 39% of the Company’s total revenue for the first nine months in 2019 compared to 45% in the first nine months of 2018. The decrease in international revenues is primarily due to a decrease revenues in all international regions, primarily Japan.

Liquidity and Capital Resources

Operating Activities

The Company generated $1,693,000 of cash from operating activities in the first nine months of 2019 compared to $1,722,000 in the first nine months of 2018.  The slight decrease in operating cash flows of $29,000 was primarily due to a decrease in income of $2,260,000, offset by an increase in noncash charges of $211,000, partially offset by an increase in collections of $1,380,000 from accounts receivable, a decrease in prepaid expenses of $143,000, and increases in accounts payable and accrued expenses of $354,000 and deferred revenue of $145,000.

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Investing Activities

The Company used $2,446,000 for investing activities in the first nine months of 2019 compared to $2,472,000 for the first nine months of 2018. The slight increase in cash used for investing activities is primarily attributable to a decrease of $129,000 in capitalized software development costs partially offset by an increase of $103,000 for the acquisition of property and equipment.

Financing Activities

The Company used $137,000 in cash for financing activities in the first nine months of 2019, compared to generating $146,000 from financing activities during the first nine months in 2018.  The additional use of $283,000 of cash for financing activities resulted from the payment of $200,000 of preferred stock dividend payments in the first nine months of 2019 compared to $105,000 payments in the first nine months of 2018.  In addition, the Company borrowed $12,443,000 and repaid $12,524,000 on its line of credit from WAB in the first nine months of 2019 compared to borrowing $8,367,000 and repaying $7,975,000 on its line of credit in 2018. The Company repaid $225,000 on the term loan with WAB in 2018. In addition, the Company received $144,000 from the exercise of stock options in the first nine months of 2019 compared to $84,000 in the same period in 2018.

The effect of exchange rates on cash related to the U.S. dollar exchange rates for most other currencies in which the Company operates, primarily the Australian dollar, Japanese yen, the Euro, the British pound sterling and Israel shekel, provided an increase in cash of $12,000 in the first nine months of 2019 compared to $19,000 in the first nine months of 2018.

Operating Matters and Liquidity

The Company has a history of net losses and an accumulated deficit of $36,364,000 as of September 30, 2019. In the first nine months of 2019, the Company had a net loss of $2,020,000 compared to income of $240,000 generated in the first nine months of 2018. Further, at September 30, 2019, the Company had a working capital ratio of .57:1, with cash and cash equivalents of $1,839,000 compared to December 31, 2018 when the Company had cash and cash equivalents of $1,276,000. The increase in cash and cash equivalents for the first nine months 2019 was primarily driven by an increase in cash provided by operations in 2019 compared to 2018 and a decrease in capitalized software development costs, partially offset by an increase in the dividend payment.

As of September 30, 2019, the Company owed $2,588,000 against the line of credit from Western Alliance Bank (“WAB”).   As of September 30, 2019, the availability under the line of credit was $262,000. The Company has projected revenues that management believes will provide sufficient funds along with the additional borrowings available under its line of credit to sustain its continuing operations through at least November 15, 2020. The Second Loan Agreement increased the availability under the line of credit from $2,400,000 to $2,850,000 (see Note 4).

The Company was in compliance with the WAB financial and liquidity covenant as of September 30, 2019 and expects to be able to continue to comply with the required covenants under the modified agreement with WAB for at least the next year. As a result, the amount due to WAB under the line of credit as of September 30, 2019 were classified in the accompanying condensed consolidated balance sheet in accordance with the repayment terms stipulated in the agreement with WAB.

Our primary cash requirements are to fund operations which mainly include personnel-related costs, marketing costs, third party costs related to hosting and software, general and administrative costs associated with being a public company, travel costs, and quarterly preferred stock dividends. The Company expects to continue to incur operating expenses for research and development and investment in software development costs to achieve its projected revenue growth. We continually evaluate our operating cash flows which can vary subject to the actual timing of expected new sales compared to our expectations of those sales and are sensitive to many factors, including changes in working capital and our results of operations. However, projections of future cash needs and cash flows are subject to risks and uncertainty.

Management’s current operating plan is to maintain and/or reduce operating expenses in order to be aligned with expected revenues.  The primary area of focus will continue to be headcount and costs from outside consultants.  The Company remains focused on maximizing revenue from its revenue generating resources and will continue to repurpose, if necessary, certain personnel to become billable so the Company can continue to improve its liquidity.  The Company has a substantial professional services backlog that resulted from new customers added in 2019 as well as upgrade projects from our existing customers as they move to the latest version of Astea Alliance.   In 2020, the Company will continue to consider ways to reduce operating expenses in certain areas of the Company in order to maintain its liquidity. However, management has implemented new marketing initiatives which have increased our spending in this area in 2019. We believe the new initiatives will directly contribute to increasing new business, which is essential to our growth.  Operations will generate enough cash to meet obligations at least through November 15, 2020. As noted above, if the Company’s actual results fall short of expectations, the Company will make cost adjustments to improve the Company’s operating cash flows. In addition, we plan to maintain the same level of investment in software development and we do not expect to increase capital expenditures.

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Our operations are subject to certain risks and uncertainties including, among others, current and potential competitors with greater resources, dependence on our significant and existing customer base, closing license and subscription sales in a timely manner, lack of a history of consistently generating net income and uncertainty of future profitability, and possible fluctuations in financial results.

Off-Balance Sheet Arrangement Transactions

The Company is not involved in off-balance sheet arrangements that have or are reasonably likely to have a material current or future impact on our financial condition, changes in financial condition, revenues or expenses result in operations, liquidity, capital expenditures or capital resources.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign currency. We do not hold financial instruments for trading purposes.

Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to our balances outstanding on our revolving line of credit with WAB, as the interest rate is variable. At September 30, 2019, the outstanding balances on our line of credit under the revolving credit facility with WAB was $2,588,000.

Foreign Currency Risk. All costs associated with the Company’s foreign operations in the United Kingdom, Australia, Japan and Israel are denominated in their respective local currencies and translated into U.S. dollars for financial reporting. As a result, the Company is exposed to risks to the extent that the rate of inflation in many of itws foreign operating regions differs from the rate of revaluation of their related currencies in relation to the U.S. dollar of if the timing of such revaluations lags behind inflation in these regions. In such an event, the costs of the Company’s operations in these regions, measured in U.S. dollars, will change and the U.S. dollar measured results of operations will be affected.

The Company does not use foreign currency forward exchange contracts or purchased currency options to hedge local currency cash flows or for trading purposes. All sales arrangements with international customers are denominated in foreign currency. For the nine months ended September 30, 2019, approximately 39% of the Company’s overall revenue resulted from sales to customers outside the United States. A 10% change in the value of the U.S. dollar relative to each of the currencies of the Company’s non-U.S.-generated sales would not have resulted in a material change to its results of operations. The Company does not expect any material loss with respect to foreign currency risk.

Item 4. CONTROLS AND PROCEDURES

Our management has evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rules 13a-15 as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

During the quarter ended March 31, 2019, we implemented internal controls for the new accounting standard adopted during the period, Leases, but there were no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

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PART II - OTHER INFORMATION

Item 1A. RISK FACTORS

In addition to the risk factors set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect the Company’s business, financial condition or future results. The risks described in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

Variability of Quarterly Results

Risks to the Company on a quarterly basis, and which may vary from quarter to quarter, include but are not limited to the following:

· The Company’s quarterly operating results have varied in the past, and may vary significantly in the future depending on factors such as the size, timing and recognition of revenue from significant orders, the timing of new product releases and product enhancements, and market acceptance of these new releases and enhancements, increases in operating expenses, and seasonality of its business.

· The market price of the Company’s common stock could be subject to significant fluctuations in response to, and may be adversely affected by, variations in quarterly operating results, changes in earnings estimates by analysts, developments in the software industry, adverse earnings or other financial announcements of the Company’s customers and general stock market conditions, as well as other factors.

Merger Agreement

On October 7, 2019, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with IFS Americas, Inc. (“Parent”) and IFS Amber, Inc. (“Merger Sub”), a wholly owned subsidiary of Parent. Subject to the terms and conditions of the Agreement, Merger Sub will merge with the Company and then become a subsidiary of Parent (“the Merger”). It is expected for the merger to close before the end of calendar year 2019.

The transaction will result in the acquisition of all outstanding shares of the Company by Parent for cash. Each outstanding share of common stock, par value $0.01 per share, excluding shares held in treasury, will be purchased for $12.00 per share. Furthermore, each option to purchase shares of the Company common stock immediately prior to the effective time of the transaction, whether vested or unvested, will be cancelled and converted into the right to receive an amount in cash equal to the product of the total number of shares of common stock subject to the option, multiplied by the excess, if any, of the merger consideration, $12.00, over the applicable exercise price of each option.

The Merger Agreement contains various representations, warranties and covenants by the Company, Parent and Merger Sub. The Merger Agreement requires the Company to call and hold a special stockholders meeting and requires the board of directors of the Company to recommend that the Company’s stockholders approve the Merger Agreement and the merger.

The Merger Agreement requires the Company and Parent to use reasonable best efforts to take all reasonable actions necessary under applicable law to consummate the transactions contemplated by the Merger Agreement.

The Merger Agreement contains certain termination rights for each of the Company and Parent, including the right of each party to terminate the Merger Agreement if the merger has not been consummated by the end of January 31, 2020.

The Merger Agreement provides for a payment by the Company to Parent a termination fee in the amount of $2,569,746 in the case of a termination of the Merger Agreement under certain circumstances described in the Merger Agreement. Parent shall pay a termination fee of $2,936,852 to the Company in the event the Merger Agreement is terminated by Parent subject to certain conditions contained in the Merger Agreement.

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The Company board of directors has unanimously determined that the transactions contemplated by the Merger Agreement are fair to, and in the best interest of, the Company and its stockholders, and has unanimously recommended that the Company board of directors approve the Merger Agreement and the transactions contemplated therein. The obligations of the parties to consummate the merger are subject to customary closing conditions.

This description of the Merger Agreement, the transactions contemplated by the Merger Agreement, and the background to the signing same of does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which was filed with the SEC by the Company on October 8, 2019 and is incorporated herein by reference, and attached hereto as Exhibit 2.1, reference.

Risks Associated with a Failure to Consummate the Merger  

The fact that there can be no assurance that all conditions to the parties’ obligations to consummate the Merger will be satisfied and as a result the possibility that the Merger might not be completed. If the Merger is not completed, (i) the Company will have incurred significant risk, transaction expenses and opportunity costs, including the possibility of disruption to its operations, diversion of management and employee attention, employee attrition and a potentially negative effect on its business and client relationships, (ii) depending on the circumstances that caused the Merger not to be completed, it is likely that the price of the Company’s common stock will decline, potentially significantly and (iii) the market’s perception of the Company’s prospects could be adversely affected.

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Item 6. EXHIBITS

2.1	Agreement and Plan of Merger among Astea International Inc., IFS Americas, Inc., and IFS Amber, Inc., dated October 7, 2019 (Incorporated herein by reference to Exhibit 2.1 to the Company’s Registration Statement on Form 8-K filed on October 8, 2019)
10.27	Closing Compensation Agreement between Rick Etskovitz and Astea International Inc. dated September 17, 2019

31.1 Certification Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Executive Officer

32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ASTEA INTERNATIONAL INC.
Date:  November 14, 2019	/s/Zack Bergreen
	Zack Bergreen
	Chief Executive Officer
	(Principal Executive Officer)
Date:  November 14, 2019	/s/Rick Etskovitz
	Rick Etskovitz
	Chief Financial Officer
	(Principal Financial and Chief Accounting Officer)

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EXHIBIT INDEX

No. Description

2.1	Agreement and Plan of Merger among Astea International Inc., IFS Americas, Inc., and IFS Amber, Inc., dated October 7, 2019 (Incorporated herein by reference to Exhibit 2.1 to the Company’s Registration Statement on Form 8-K filed on October 8, 2019)
10.27	Closing Compensation Agreement between Rick Etskovitz and Astea International Inc. dated September 17, 2019
31.1	Certification Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Executive Officer
32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

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