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EX-31.1 - EX-31.1 - GLOBALSCAPE INCex31-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 


FORM 10-Q
 

 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period ended June 30, 2016

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 No. 001-33601
 

 
GlobalSCAPE, Inc.
(Exact name of registrant as specified in its charter)
 


Delaware
74-2785449
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
   
4500 Lockhill-Selma, Suite 150
San Antonio, Texas
78249
(Address of Principal Executive Office)
(Zip Code)

(210) 308-8267
(Registrant’s Telephone Number, Including Area Code)
 


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

Indicate by check mark whether the registrant has submitted electronically 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes      No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
 
       
Large accelerated filer
Accelerated filer
       
Non-accelerated filer
  (Do not check if a smaller reporting company)
Smaller reporting company

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

As of July 31, 2016, there were 21,184,301 shares of common stock outstanding.
 

GlobalSCAPE Inc.
Quarterly Report on Form 10-Q
For the Quarter ended June 30, 2016
Index

 
 
Page
     
Part I.
Financial Information
 
     
Item 1.
 
 
3
 
4
 
5
 
6
 
7
     
Item 2.
19
     
Item 3.
38
     
Item 4.
38
     
Part II.
Other Information
39
     
Item 1.
39
     
Item1A
39
     
Item 6.
39
   
40

GlobalSCAPE®, CuteFTP®, CuteFTP Pro®, CuteBackup®, DMZ Gateway®, Enhanced File Transfer®, Enhanced File Transfer Server®, GlobalSCAPE Securely Connected®, CuteSendIt®, and Mail Express® are registered trademarks of GlobalSCAPE, Inc.  

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

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

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

Other trademarks and trade names in this Quarterly Report are the property of their respective owners.
 
Part I. Financial Information
 
Item 1. Financial Statements
 
GlobalSCAPE, Inc.
Condensed Consolidated Balance Sheets
(in thousands except share amounts)
Unaudited

   
June 30,
   
December 31,
 
   
2016
   
2015
 
Assets
           
Current assets:
           
Cash and cash equivalents
 
$
16,990
   
$
15,885
 
Short term investments
   
3,287
     
3,254
 
Accounts receivable (net of allowance for doubtful accounts
of $335 and $325 in 2016 and 2015, respectively)
   
5,673
     
6,081
 
Federal income tax receivable
   
55
     
290
 
Prepaid and other expenses
   
777
     
511
 
Total current assets
   
26,782
     
26,021
 
                 
Fixed assets, net
   
473
     
498
 
Capitalized software development costs
   
3,960
     
3,982
 
Goodwill
   
12,712
     
12,712
 
Deferred tax asset
   
893
     
940
 
Other assets
   
31
     
60
 
Total assets
 
$
44,851
   
$
44,213
 
                 
 Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable
 
$
742
   
$
839
 
Accrued expenses
   
1,478
     
1,893
 
Deferred revenue
   
11,344
     
12,000
 
Income taxes payable
   
-
     
127
 
Total current liabilities
   
13,564
     
14,859
 
                 
Deferred revenue, non-current portion
   
3,825
     
3,612
 
Other long term liabilities
   
37
     
44
 
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Preferred stock, par value $0.001 per share, 10,000,000
authorized, no shares issued or outstanding
   
-
     
-
 
Common stock, par value $0.001 per share, 40,000,000
authorized, 21,584,582 and 21,383,467 shares issued
at June 30, 2016, and December 31, 2015, respectively
   
21
     
21
 
Additional paid-in capital
   
20,580
     
19,583
 
Treasury stock, 403,581 shares, at cost, at
June 30, 2016 and December 31, 2015
   
(1,452
)
   
(1,452
)
Retained earnings
   
8,276
     
7,546
 
Total stockholders’ equity
   
27,425
     
25,698
 
Total liabilities and stockholders’ equity
 
$
44,851
   
$
44,213
 

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

3


GlobalSCAPE, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income
(In thousands, except per share amounts)
(Unaudited)

   
Three months ended June 30,
   
Six months ended June 30,
 
   
2016
   
2015
   
2016
   
2015
 
                         
Operating Revenues:
                       
Software licenses
 
$
2,893
   
$
3,280
   
$
5,192
   
$
5,738
 
Maintenance and support
   
4,632
     
4,093
     
9,129
     
8,127
 
Professional services
   
731
     
490
     
1,345
     
878
 
Total Revenues
   
8,256
     
7,863
     
15,666
     
14,743
 
Cost of revenues
                               
Software licenses
   
800
     
651
     
1,430
     
1,089
 
Maintenance and support
   
387
     
391
     
781
     
716
 
Professional services
   
587
     
335
     
1,156
     
652
 
Total cost of revenues
   
1,774
     
1,377
     
3,367
     
2,457
 
Gross profit
   
6,482
     
6,486
     
12,299
     
12,286
 
Operating expenses
                               
Sales and marketing
   
2,792
     
2,476
     
5,693
     
4,771
 
General and administrative
   
1,712
     
1,457
     
3,445
     
3,180
 
Research and development
   
572
     
657
     
1,199
     
1,186
 
Total operating expenses
   
5,076
     
4,590
     
10,337
     
9,137
 
Income from operations
   
1,406
     
1,896
     
1,962
     
3,149
 
Other income (expense), net
   
27
     
23
     
60
     
34
 
Income before income taxes
   
1,433
     
1,919
     
2,022
     
3,183
 
Income tax expense
   
479
     
594
     
661
     
1,043
 
Net income
 
$
954
   
$
1,325
   
$
1,361
   
$
2,140
 
Comprehensive income
 
$
954
   
$
1,325
   
$
1,361
   
$
2,140
 
                                 
Net income per common share -
                               
Basic
 
$
0.05
   
$
0.06
   
$
0.07
   
$
0.10
 
Diluted
 
$
0.04
   
$
0.06
   
$
0.06
   
$
0.10
 
                                 
Weighted average shares outstanding:
                               
Basic
   
21,105
     
20,804
     
21,056
     
20,726
 
Diluted
   
21,689
     
21,324
     
21,655
     
21,201
 
                                 
Cash dividends declared per share
 
$
0.015
   
$
0.015
   
$
0.030
   
$
0.015
 

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

4


GlobalSCAPE, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(In thousands, except share amounts)
(Unaudited)

               
Additional
                   
   
Common Stock  
   
Paid-in
   
Treasury
   
Retained
       
   
Shares
   
Amount
   
Capital
   
Stock
   
Earnings
   
Total
 
                                     
Balances at December 31, 2015
   
21,383,467
   
$
21
   
$
19,583
   
$
(1,452
)
 
$
7,546
   
$
25,698
 
                                                 
Shares issued as a result of:
                                               
Stock options exercised
   
121,115
             
259
                     
259
 
                                                 
Stock-based compensation:
                                               
Stock options
                   
360
                     
360
 
Restricted stock
   
80,000
             
366
                     
366
 
                                                 
Net increase in excess tax benefit from stock-based compensation
                   
12
                     
12
 
                                                 
Common stock cash dividends of $0.030 per share
                                   
(631
)
   
(631
)
                                                 
Net income
                                   
1,361
     
1,361
 
                                                 
Balances at June 30, 2016
   
21,584,582
   
$
21
   
$
20,580
   
$
(1,452
)
 
$
8,276
   
$
27,425
 

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

5


GlobalSCAPE, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)

   
For the Six Months Ended June 30,
 
   
2016
   
2015
 
Operating Activities:
           
Net income
 
$
1,361
   
$
2,140
 
Items not involving cash at the time they are recorded in the statement of operations:
         
Bad debt expense
   
52
     
127
 
Depreciation and amortization
   
1,006
     
682
 
Share-based compensation
   
500
     
315
 
Deferred taxes
   
47
     
(60
)
Excess tax benefit from share-based compensation
   
(12
)
   
(35
)
Subtotal before changes in operating assets and liabilities
   
2,954
     
3,169
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
356
     
1,130
 
Prepaid expenses
   
(40
)
   
190
 
Deferred revenue
   
(443
)
   
(1,247
)
Accounts payable
   
(108
)
   
(600
)
Accrued expenses
   
(404
)
   
(292
)
Other Assets
   
29
     
5
 
Other long-term liabilities
   
(7
)
   
(1
)
Income tax receivable and payable
   
120
     
340
 
Net cash provided by operating activities
   
2,457
     
2,694
 
Investing Activities:
               
Software development costs capitalized
   
(846
)
   
(1,107
)
Purchase of property and equipment
   
(113
)
   
(90
)
Interest reinvested in long term investments
   
(33
)
   
(32
)
Net cash (used in) investing activities
   
(992
)
   
(1,229
)
Financing Activities:
               
Proceeds from exercise of stock options
   
259
     
307
 
Excess tax benefit from share-based compensation
   
12
     
35
 
Dividends paid
   
(631
)
   
(312
)
Net cash provided by (used in) financing activities
   
(360
)
   
30
 
                 
Net increase in cash
   
1,105
     
1,495
 
Cash at beginning of period
   
15,885
     
11,358
 
Cash at end of period
 
$
16,990
   
$
12,853
 
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
Interest
 
$
-
   
$
-
 
Income taxes
 
$
468
   
$
696
 

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

6


GlobalSCAPE, Inc.
Notes to Condensed Consolidated Financial Statements
As of June 30, 2016 and For the Three and Six Months Then Ended
(Unaudited)

1.    Nature of Business

We develop and sell computer software that provides secure information exchange, transfer and sharing capabilities for enterprises and consumers. Our primary business is selling and supporting managed file transfer, or MFT, software for enterprises. The brand name of our MFT product platform is Enhanced File Transfer, or EFT. We also sell other products that are synergistic to EFT including Mail Express, scConnect, WAFS, and CuteFTP.

We earn most of our revenue from the sale of products that are part of our EFT platform. We earn revenue from the sale of perpetual software licenses, providing products under software-as-a-service, or SaaS, subscriptions, providing maintenance and support services, or M&S, and offering professional services for product customization and integration.

Throughout these notes unless otherwise noted, our references to the 2016 quarter and the 2015 quarter refer to the three months ended June 30, 2016 and 2015, respectively.  Our references to the 2016 six months and the 2015 six months refer to the six months ended June 30, 2016 and 2015, respectively.

2.    Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X, “Interim Financial Statements”, as prescribed by the Securities and Exchange Commission, or SEC. Accordingly, they do not include all information and footnotes required under generally accepted accounting principles in the United States, or GAAP, for complete financial statements. In the opinion of management, all accounting entries necessary for a fair presentation of our financial position and results of operations have been made. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. The information included in this Form 10-Q should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, which we refer to as the 2015 Form 10-K, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations also included in our 2015 Form 10-K and in this report.

We follow accounting standards set by the Financial Accounting Standards Board. This board sets generally accepted accounting principles in the United States, or GAAP, that we follow in preparing financial statements that report our financial position, results of operations, and sources and uses of cash. We also follow the reporting regulations of the United States Securities and Exchange Commission, or SEC.
 
The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of our financial statements. It is possible the actual results could differ from these estimates and assumptions and could have a material effect on the reported amounts of our financial position and results of operations.

3.    Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements of GlobalSCAPE, Inc. and its wholly-owned subsidiary (collectively referred to as the “Company” or “we”) are prepared in conformity with GAAP.  All intercompany accounts and transactions have been eliminated.

7


Revenue Recognition

We develop, market and sell software products. We recognize revenue from a sale transaction when the following conditions are met:

·          Persuasive evidence of an arrangement exists.
·          Delivery has occurred or services have been rendered.
·          The amount of the sale is fixed or determinable.
·          Collection of the sale amount is reasonably assured.

For a sale transaction not meeting any one of these four criteria, we defer recognition of revenue related to that transaction until all the criteria are met.

We earn the majority of our software license revenue from software products sold under perpetual software license agreements. At the time our customers purchase these products, they typically also purchase a product maintenance and support, or M&S, agreement. These transactions are multiple element software sales for which we assess the presence of vendor specific objective evidence (“VSOE”) of the fair value of the undelivered elements to determine the portion of these sales to recognize as revenue upon delivery of the software product and the portion of these sales to record as deferred revenue at the time the product is delivered. We amortize the deferred revenue component to revenue in future periods as we deliver the related future services to the customer. For transactions, if any, for which we cannot establish VSOE of the fair value of the undelivered elements, we initially record the entire transaction as deferred revenue and amortize that amount to revenue in future periods as we deliver the related future services to the customer.
 
Our deferred revenue consists primarily of revenue to be earned in the future as we deliver services under M&S agreements. We bill our customers in advance for M&S services and record accounts receivable and deferred revenue in the same amount at the time we issue an invoice. We commence recognition of the deferred revenue as revenue only after the M&S period begins.
 
For our products licensed and delivered under a software-as-a-service transaction on a monthly or other periodic subscription basis, we recognize subscription revenue, including initial setup fees, on a monthly basis over the contractual term of the customer contract as we deliver our products and services. Amounts invoiced or paid prior to this revenue recognition are presented as deferred revenue until earned.
 
We provide professional services to our customers consisting primarily of software installation support, operations support and training. We recognize revenue from these services as they are completed and accepted by our customers.
 
We collect sales tax on many of our sales. We do not include sales tax collected in our revenue. We record it as a liability payable to taxing authorities.

Reclassification of Expenses

In preparing our financial statements for the year ended December 31, 2015, we revised the manner in which we present cost of revenues and other elements of our statement of operations in response to the changing nature of our business and the resulting differences in the scope and nature of certain expenses we incur.

Cost of Revenue

Cost of revenue was expanded from one line to three lines to correspond with the associated revenue classifications.  Amortization of capitalized software development costs was moved from depreciation and amortization and included in the cost of license revenue.  Other costs included in cost of license revenue are royalties we pay to use technology in our products that is developed by others and fees paid to third party service providers who support our cloud based and SaaS solutions.  Cost of M&S revenue and cost of professional services revenue consist primarily of salaries and related personnel costs of our employees who deliver the related service to our clients.  These costs were previously included in the general and administrative classification.  Also included in the cost of professional services revenue are the fees of third party service providers.

8


Selling, General and Administrative

We separated selling, general and administrative expenses into two line items – sales and marketing and general and administrative.

Depreciation and Amortization

After reclassifying amortization of capitalized software development costs to cost of license revenue, the remaining depreciation and amortization costs were included in general and administrative expense and the depreciation and amortization line on our statement of operations was removed.

Effect of the reclassifications

The reclassifications were between cost of revenues and operating expenses and had no effect on revenue, income from operations, net income or earnings per share.  The following tables illustrate the effects of these reclassifications on previously reported amounts for the quarter and the six months ended June 30, 2015 ($ in thousands):

   
Quarter Ended June 30, 2015             
 
         
Reclassification of Previously Reported Amounts     
       
   
As
Previously
Reported
   
Cost
of
Revenues
   
Capitalized
Software Cost
Amortization
   
Personnel
Costs
   
Depreciation
   
Selling,
General
& Administrative
   
As
Now
Reported
 
                                           
Operating Revenues:
                                         
Software licenses
 
$
3,280
                                 
$
3,280
 
Maintenance and support
   
4,093
                                   
4,093
 
Professional services
   
490
                                   
490
 
Total revenues
   
7,863
                                   
7,863
 
                                               
Cost of Revenues:
                                             
Software licenses
           
324
     
327
                       
651
 
Maintenance and support
                           
391
                 
391
 
Professional services
           
36
             
299
                 
335
 
Total cost of revenues
   
-
                                         
1,377
 
                                                     
Gross profit
   
-
                                         
6,486
 
                                                     
Operating Expenses
                                                   
Sales and marketing
   
-
                                   
2,476
     
2,476
 
General and administrative
   
-
                                   
1,457
     
1,457
 
Cost of Revenues
   
360
     
(360
)
                                 
-
 
Selling, general and administrative
   
4,556
                     
(690
)
   
67
     
(3,933
)
   
-
 
Research and development
   
657
                                             
657
 
Depreciation and amortization
   
394
             
(327
)
           
(67
)
           
-
 
Total operating expenses
   
5,967
                                             
4,590
 
                                                         
Income from operations
   
1,896
                                             
1,896
 
Other income (expense), net
   
23
                                             
23
 
Income before income taxes
   
1,919
                                             
1,919
 
Income tax expense
   
594
                                             
594
 
Net income
 
$
1,325
                                           
$
1,325
 
Comprehensive income
 
$
1,325
                                           
$
1,325
 
                                                         
Net income per common share -
                                                       
Basic
 
$
0.06
                                           
$
0.06
 
Diluted
 
$
0.06
                                           
$
0.06
 

9

   
Six Months Ended June 30, 2015             
 
         
Reclassification of Previously Reported Amounts     
       
   
As
Previously
Reported
   
Cost
of
Revenues
   
Capitalized
Software Cost
Amortization
   
Personnel
Costs
   
Depreciation
   
Selling,
General
& Administrative
   
As
Now
Reported
 
                                           
Operating Revenues:
                                         
Software licenses
 
$
5,738
                                 
$
5,738
 
Maintenance and support
   
8,127
                                   
8,127
 
Professional services
   
878
                                   
878
 
Total revenues
   
14,743
                                   
14,743
 
                                               
Cost of Revenues:
                                             
Software licenses
           
544
     
545
                       
1,089
 
Maintenance and support
                           
716
                 
716
 
Professional services
           
64
             
588
                 
652
 
Total cost of revenues
   
-
                                         
2,457
 
                                                     
Gross profit
   
-
                                         
12,286
 
                                                     
Operating Expenses
                                                   
Sales and marketing
   
-
                                   
4,771
     
4,771
 
General and administrative
   
-
                                   
3,180
     
3,180
 
Cost of Revenues
   
608
     
(608
)
                                 
-
 
Selling, general and administrative
   
9,118
                     
(1,304
)
   
137
     
(7,951
)
   
-
 
Research and development
   
1,186
                                             
1,186
 
Depreciation and amortization
   
682
             
(545
)
           
(137
)
           
-
 
Total operating expenses
   
11,594
                                             
9,137
 
                                                         
Income from operations
   
3,149
                                             
3,149
 
Other income (expense), net
   
34
                                             
34
 
Income before income taxes
   
3,183
                                             
3,183
 
Income tax expense
   
1,043
                                             
1,043
 
Net income
 
$
2,140
                                           
$
2,140
 
Comprehensive income
 
$
2,140
                                           
$
2,140
 
                                                         
Net income per common share -
                                                       
Basic
 
$
0.10
                                           
$
0.10
 
Diluted
 
$
0.10
                                           
$
0.10
 

Cash and cash equivalents

Cash and cash equivalents includes all cash and highly liquid investments with original maturities of three months or less.

Short Term Investments

Short-term investments consist of certificates of deposit held with financial institutions with contractual maturity dates less than one year from the balance sheet date.  The Company has the intent and ability to hold these investments until their maturity dates and therefore accounts for them as held-to-maturity. These certificates of deposit are stated at amortized cost, which approximates the fair value of these investments.

10


Property and Equipment

Property and equipment is comprised of furniture and fixtures, software, computer equipment and leasehold improvements which are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Furniture, fixtures and equipment have a useful life of five to seven years, computer equipment and software have a useful life of three years and leasehold improvements have a useful life that is the shorter of the term of the lease under which the improvements were made or the estimated useful life of the asset.

Expenditures for maintenance and repairs are expensed as incurred.

Goodwill

Goodwill is not amortized. On at least an annual basis, we test goodwill for impairment at the reporting unit level. We operate as a single reporting unit.
 
When testing goodwill, we first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of our reporting unit is less than its carrying amount, including goodwill. In performing this qualitative assessment, we assess events and circumstances relevant to us including, but not limited to:

Macroeconomic conditions.
Industry and market considerations.
Cost factors and trends for labor and other expenses of operating our business.
Our overall financial performance and outlook for the future.
Trends in the quoted market value and trading of our common stock.
 
In considering these and other factors, we consider the extent to which any adverse events and circumstances identified could affect the comparison of our reporting unit’s fair value with its carrying amount. We place more weight on events and circumstances that most affect our reporting unit’s fair value or the carrying amount of our net assets. We consider positive and mitigating events and circumstances that may affect our determination of whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. We evaluate, on the basis of the weight of the evidence, the significance of all identified events and circumstances in the context of determining whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount.
 
If, after assessing the totality of these qualitative events and circumstances, we determine it is not more likely than not that the fair value of our reporting unit is less than its carrying amount, we conclude there is no impairment of goodwill and perform no further testing in accordance with GAAP. If we conclude otherwise, we proceed with performing the first step, and if necessary, the second step, of the two-step goodwill impairment test prescribed by GAAP.

As of December 31, 2015, after assessing the totality of the relevant events and circumstances, we determined it not more likely than not that the fair value of our reporting unit was less than its carrying amount. Accordingly, we concluded there was no impairment of goodwill as of that date. There have been no material events or changes in circumstances since that time indicating that the carrying amount of goodwill may exceed its fair market value and that interim testing needed to be performed.

Capitalized Software Development Costs
 
When we complete research and development for a software product and have in place a detail program design or a working model of that software product, we capitalize production costs incurred for that software product from that point forward until it is ready for general release to the public. Thereafter, we amortize capitalized software production costs to expense using the straight-line method over the estimated useful life of that product, which is generally three years. We periodically assess the carrying value of capitalized software development costs relative to our estimates of realizability through sales of products in the marketplace.

Research and Development
 
We expense research and development costs as incurred.
11


Advertising Expense

We expense advertising costs as incurred as a component of our sales and marketing expenses.  Advertising expense was $559,322 and $406,215 in the 2016 quarter and the 2015 quarter, respectively, and $966,763 and $782,543 in the 2016 six months and 2015 six months, respectively.

Share-Based Compensation

We measure the cost of share-based payment transactions at the grant date based on the calculated fair value of the award. We recognize this cost as an expense ratably over the recipient’s requisite service period during which that award vests or becomes unrestricted.

For stock option awards, we estimate their fair value at the grant date using the Black-Scholes option-pricing model considering the following factors:

We estimate expected volatility based on historical volatility of our common stock.
We use primarily the simplified method to derive an expected term which represents an estimate of the time options are expected to remain outstanding. We use this method because our options are plain-vanilla options, and we believe our historical option exercise experience is not adequately indicative of our future expectations.
We base the risk-free rate for periods within the contractual life of the option on the U.S. treasury yield curve in effect at the time of grant.
We estimate a dividend yield based on our historical and expected future dividend payments.

For restricted stock awards, we use the quoted price of our common stock on the grant date as the fair value of the award.  On the grant date, we record deferred compensation and the related common stock and paid-in-capital for the full amount of the fair value of the award. We recognize the deferred compensation as share-based compensation expense ratably over the vesting period of the restricted stock.
 
Income Taxes

We account for income taxes using the asset and liability method.  We record deferred tax assets and liabilities based on the difference between the tax basis of assets and liabilities and their carrying amount for financial reporting purposes, as measured by the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets and liabilities are carried on the balance sheet with the presumption that they will be realizable in future periods in which we generate taxable income.

We assess the likelihood that deferred tax assets will be realized from future taxable income. Based on this assessment, we provide any necessary valuation allowance on our balance sheet with a corresponding increase in the tax provision on our statement of operations.   Any valuation allowances we establish are determined based upon a number of assumptions, judgments, and estimates, including forecasted earnings, future taxable income, and the relative proportions of revenue and income before taxes in the various domestic jurisdictions in which we operate.

We account for uncertainty in income taxes using a two-step process to determine the amount of tax benefit to be recognized. First, we evaluate the tax position to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, we assess the tax position to determine the amount of benefit to recognize in the financial statements. The amount of the benefit we recognize is the largest amount that we believe has a greater than 50% likelihood of being realized upon ultimate settlement. Unrecognized tax benefits represent tax positions for which reserves have been established.

Earnings Per Share

We compute basic earnings per share using the weighted-average number of common shares outstanding during the periods.  We compute diluted earnings per share using the weighted-average number of common shares outstanding plus the number of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding.
12


Awards of non-vested options are considered potentially dilutive common shares for the purpose of computing earnings per common share.  We apply the treasury stock method to non-vested options under which the assumed proceeds include the amount the employee must pay to exercise the option plus the amount of unrecognized cost attributable to future periods less any expected tax benefits.

Recent accounting pronouncements

In March 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting. When implemented, this standard will discontinue the recording in equity of tax benefits or tax deficiencies that arise from differences between share-based payment compensation expense recorded for financial statement purposes and that expense deductible for tax purposes. This new standard requires that the tax effect of all such differences be recorded and reported in the statement of operations. This standard also requires that tax-related cash flows resulting from share-based payments be reported as operating activities in the statement of cash flows which is a change from the current requirement to present such tax-related items as an inflow from financing activities and an outflow from operating activities. In accordance with this standard, we will implement it beginning with our interim and annual financial statements for 2017. The extent of the effect of this standard on our financial statements for 2017 and later depends upon the level of stock option exercise activity we experience in 2017 and later. The amounts involved in accounting for tax benefits or deficiencies from share-based compensation that are the subject of ASU 2016-09 are presented in our 2016 and earlier consolidated statements of cash flows and consolidated statements of stockholders’ equity on lines that are captioned tax benefit or tax deficiency from share-based compensation.

In February 2016, the FASB issued ASU 2016-02, Leases. The main difference between existing GAAP and this ASU 2016-02 is the presentation by lessees on their financial statements of lease assets and lease liabilities arising from operating leases. Since this new standard retains the distinction between finance and operating leases, the effect of leases in the statement of operations and the statement of cash flows will be largely unchanged from existing GAAP. Our only lease of significance is our operating lease for our corporate office space for which we will present a right-to-use asset and a lease liability on our balance sheet when we implement this standard. We are in the process of determining those amounts. In accordance with this standard, we will implement it beginning with our interim and annual financial statements for 2019. The extent of the effect of this standard on our financial statements for 2019 and later will depend upon the leases, if any, that we have in effect at that date.

In November 2015, the FASB, issued ASU No. 2015-17, Income Tax: Balance Sheet Classification of Deferred Taxes. ASU 2015-07 requires that all deferred tax assets and liabilities for a tax jurisdiction, along with any related valuation allowance, be classified as noncurrent on the balance sheet. We have implemented this ASU in the accompanying financial statements in the manner described in the Note 6 below.

In May 2014, FASB issued ASU No. 2014-09 entitled Revenue from Contracts with Customers (Topic 606). The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for those goods or services. We are subject to this guidance effective with financial statements we issue for the year ending December 31, 2018, and the quarterly periods during that year. We do not expect the amounts or timing of revenue we report in those future periods under this guidance to be materially affected relative to current guidance.

Use of Estimates

The preparation of consolidated financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company’s financial statements. It is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of the Company’s financial position and results of operation.

13


4.    Capitalized Software Development Costs

Our capitalized software development costs profile was as follows: ($ in thousands):

   
June 30,
   
December 31,
 
   
2016
   
2015
 
Gross capitalized cost
 
$
6,561
   
$
5,714
 
Accumulated amortization
   
(2,601
)
   
(1,732
)
Net balance
 
$
3,960
   
$
3,982
 

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2016
   
2015
   
2016
   
2015
 
Amount capitalized
 
$
373
   
$
416
   
$
861
   
$
1,107
 
Amortization expense
   
(438
)
   
(327
)
   
(868
)
   
(545
)

   
Released
   
Unreleased
 
   
Products
   
Products
 
Gross capitalized amount at June 30, 2016
 
$
5,508
   
$
1,053
 
 
Future amortization expense:
               
Six months ending December 31, 2016
   
874
         
Year ending December 31,
               
2017
   
1,365
         
2018
   
631
         
2019
   
26
         
Total
 
$
2,896
         

The future amortization expense of the gross capitalized software development costs related to unreleased products will be determinable at a future date when those products are ready for general release to the public.

5.    Stock Options, Restricted Stock and Share-Based Compensation

We have stock-based compensation plans under which we have granted, and may grant in the future, incentive stock options, non-qualified stock options, and restricted stock to employees and non-employee members of the Board of Directors. Our share-based compensation expense was as follows ($ in thousands):

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2016
   
2015
   
2016
   
2015
 
Share-based compensation expense
 
$
278
   
$
167
   
$
500
   
$
315
 

Stock Options
 
The GlobalSCAPE, Inc. 2010 Employee Long-Term Equity Incentive Plan is our current stock-based incentive plan for our employees.  Provisions and characteristics of this plan include the following:

·
It authorizes the issuance of up to three million shares of common stock for stock-based incentives including stock options and restricted stock awards.
·
The exercise price, term and other conditions applicable to each stock option or stock award granted are determined by the Compensation Committee of the Board of Directors.
·
The exercise price of stock options is set on the grant date and may not be less than the fair market value per share of our stock at market close on that date.
14



·
Stock options we issue generally become exercisable ratably over a three-year period and expire ten years from the date of grant.
·
We issued no restricted stock awards under this plan during the 2016 or 2015 periods.
·
As of June 30, 2016, stock-based incentives for up to 204,495 shares remained available for issuance in the future under this plan.
 
Our stock option activity has been as follows:

         
Weighted
             
         
Average
   
Weighted Average
   
Aggregate
 
         
Exercise
   
Remaining
   
Intrinsic
 
   
Number of
   
Price
   
Contractual
   
Value
 
   
Shares
   
Per Share
   
Term in Years
   
(000's)
 
                         
Outstanding at December 31, 2015
   
2,091,325
   
$
2.45
     
6.09
   
$
3,277
 
Granted
   
985,300
   
$
3.58
                 
Forfeited
   
(264,205
)
 
$
3.20
                 
Exercised
   
(121,115
)
 
$
2.14
                 
Outstanding at June 30, 2016
   
2,691,305
   
$
2.80
     
6.24
   
$
2,486
 
                                 
Exercisable at June 30, 2016
   
1,434,000
   
$
2.28
     
3.52
   
$
2,072
 

Additional information about our stock options is as follows:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2016
   
2015
   
2016
   
2015
 
Weighted average fair value of options granted
 
$
1.58
   
$
1.41
   
$
1.63
   
$
1.38
 
Intrinsic value of options exercised
 
$
110,709
   
$
25,842
   
$
182,454
   
$
280,958
 
Cash received from stock options exercised
 
$
137,130
   
$
28,408
   
$
258,801
   
$
317,974
 
                                 
Number of options that vested
   
72,480
     
50,880
     
266,346
     
181,534
 
Fair value of options that vested
 
$
117,328
   
$
49,182
   
$
376,313
   
$
199,296
 
                                 
Unrecognized compensation expense related to non-vested options at end of period
 
$
1,693,228
   
$
814,783
   
$
1,693,228
   
$
814,783
 
Weighted average years over which non-vested option expense will be recognized
   
2.46
     
2.17
     
2.46
     
2.17
 

As of June 30, 2016           
 
           
Options Outstanding
   
Options Exercisable
 
           
Weighted
                   
           
Average
   
Weighted
         
Weighted
 
     
Underlying
   
Remaining
   
Average
   
Number of
   
Average
 
Range of
   
Shares
   
Contractual
   
Exercise
   
Underlying
   
Exercise
 
Exercise Prices
   
Outstanding
   
Life
   
Price
   
Shares
   
Price
 
$
0.85 - $1.43
     
185,100
     
3.29
   
$
1.15
     
185,100
   
$
1.15
 
$
1.47 - $2.32
     
652,205
     
4.14
   
$
1.83
     
618,925
   
$
1.84
 
$
2.34 - $3.52
     
1,389,350
     
7.21
   
$
3.13
     
499,975
   
$
2.78
 
$
3.53 - $4.21
     
463,000
     
7.44
   
$
3.85
     
130,000
   
$
4.10
 
Total options
     
2,689,655
                     
1,434,000
         


15


We used the following assumptions to determine compensation expense for our stock options using the Black-Scholes option-pricing model:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2016
   
2015
   
2016
   
2015
 
Expected volatility
   
54
%
   
57
%
   
55
%
   
57
%
Expected annual dividend yield
   
1.50
%
   
2.40
%
   
1.50
%
   
2.40
%
Risk free rate of return
   
1.38
%
   
1.58
%
   
1.48
%
   
1.58
%
Expected option term (years)
   
6.00
     
6.00
     
6.00
     
6.00
 

Based upon our dividend payment activity in recent years, beginning with the first quarter of 2015, we added an expected annual dividend yield to these assumptions.

Restricted Stock Awards
 
In May 2015, we adopted the 2015 Non-Employee Directors Long Term Incentive Plan (“2015 Directors Plan”). This plan provides for the issuance of either stock options or restricted stock awards for up to 500,000 shares of our common stock. Provisions and characteristics of this plan include the following:

·
The exercise price, term and other conditions applicable to each stock option or stock award granted are determined by the Compensation Committee of the Board of Directors.
·
Restricted stock awards are initially issued with a legend restricting transferability of the shares until the recipient satisfies the vesting provision of the award, which is generally continuing service for one year subsequent to the date of the award.
·
As of June 30, 2016, stock based incentives for up to 340,000 shares remained available for issuance in the future under this plan.

Our restricted stock awards activity has been as follows:

               
Total
 
         
Grant Date
   
Fair Value of
 
   
Number of
   
Fair Value
   
Shares That
 
   
Shares
   
Per Share
   
Vested
 
Restricted Shares Outstanding at December 31, 2015
   
80,000
   
$
3.34
       
Shares granted with restrictions
   
80,000
   
$
3.31
       
Shares vested and restrictions removed
   
(80,000
)
 
$
3.34
   
$
276,000
 
Restricted Shares Outstanding at June 30, 2016
   
80,000
   
$
3.31
         
                         
Unrecognized compensation expense for non-vested shares as of June 30, 2016
                 
Expense to be recognized in future periods
 
$
223,561
                 
Weighted average number of months over which expense is expected to be recognized
   
10.20
                 

6.    Income Taxes
 
Our income tax expense reconciles to an income tax expense resulting from applying an assumed statutory federal income rate of 34% to income before income taxes as follows ($ in thousands):

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2016
   
2015
   
2016
   
2015
 
Income tax expense at federal statutory rate
 
$
487
   
$
652
   
$
687
   
$
1,082
 
                                 
Increase (decrease) in taxes resulting from:
                               
Domestic production activities deduction
   
(38
)
   
(17
)
   
(58
)
   
(47
)
Research and development credit
   
(32
)
   
-
     
(63
)
   
-
 
Incentive stock options
   
19
     
-
     
35
     
-
 
State taxes, net of federal benefit
   
28
     
22
     
30
     
38
 
Increase in reserve for uncertain tax positions
   
4
     
(51
)
   
10
     
(51
)
Other
   
11
     
(12
)
   
20
     
21
 
Income tax expense per the statement of operations
 
$
479
   
$
594
   
$
661
   
$
1,043
 


16


We claim the research and experimentation tax credit, or R&D tax credit, on our tax returns and have included the effect of those credits in our provisions for income taxes. The Internal Revenue Service, or IRS, has completed its routine examination of our tax returns through 2010 with their findings resulting in a larger portion of the R&D tax credit we claimed being allowed than we had previously estimated. Our tax returns for 2011 and later remain subject to examination by the IRS.  We believe it more-likely-than-not that examination of those tax returns for 2011 and later could result in a portion of the R&D tax credits we claimed for those years not being allowed by the IRS.  After considering the effects of these items collectively, as of June 30, 2016, we have a reserve of $100,000 against R&D tax credits claimed on our tax returns for 2011 and later due to the uncertainty of sustaining those credits.

As of June 30, 2016, we had federal income tax net operating loss carry forwards of $356,000 available to offset future federal taxable income, if any. These carry forwards expire in 2030 and 2031. We have recorded a deferred tax asset for the estimated future tax benefits we believe we will realize from the application of these carryforwards against future taxable income.

We have a capital loss carryforward of $3.2 million available for use through 2017 to offset future capital gains for federal income tax purposes. We also have approximately $138,000 of research and development activities tax credits available to offset future Texas franchise tax expense through 2037. We have not recorded a deferred tax asset for these carryforwards due to the uncertainty of the whether or not we will have items in our tax computations in future periods against which to apply these carryforwards.

In November 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-17, Income Tax: Balance Sheet Classification of Deferred Taxes. ASU 2015-07 requires that all deferred tax assets and liabilities for a tax jurisdiction, along with any related valuation allowance, be classified as noncurrent on the balance sheet. We have implemented this ASU in the accompanying financial statements. This implementation resulted in the previously reported current deferred tax asset of $406,000 as of June 30, 2015, being reclassified and combined with the previously reported non-current deferred asset of $346,000 as of that date to yield a non-current deferred tax asset balance of $752,000 being reported as of June 30, 2015.
 
7.    Earnings per Common Share

Earnings per share for the periods indicated were as follows (in thousands, except per share amounts):

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2016
   
2015
   
2016
   
2015
 
Net income
 
$
954
   
$
1,325
   
$
1,361
   
$
2,140
 
                                 
Weighted average shares outstanding - basic
   
21,105
     
20,804
     
21,056
     
20,726
 
Stock options
   
584
     
520
     
599
     
475
 
Weighted average shares outstanding - diluted
   
21,689
     
21,324
     
21,655
     
21,201
 
                                 
Net income per common share - basic
 
$
0.05
   
$
0.06
   
$
0.07
   
$
0.10
 
Net income per common share - diluted
 
$
0.04
   
$
0.06
   
$
0.06
   
$
0.10
 

8.    Dividends

During 2016, our Board of Directors declared quarterly dividends as follows:

   
March 31, 2016
   
June 30, 2016
 
Dividend per share of common stock
 
$
0.015
   
$
0.015
 
Dividend record date
 
February 23, 2016
   
May 23, 2016
 
Dividend payment date
 
March 3, 2016
   
June 1, 2016
 

17


9.    Commitments and Contingencies

We have agreements with key personnel that provide for severance payments to them in the event of a change in control of the Company, as defined in those agreements, and their employment is terminated in connection with that change in control. In such event, our aggregate severance payments to those employees would be $1.2 million.

10.    Concentration of Business Volume and Credit Risk

In order to leverage the resources of third parties, we make our products available for purchase by end users through third-party, channel distributors even though those end users can also purchase those products directly from us. During the 2016 quarter and 2015 quarter, we earned approximately 8% and 16%, respectively, of our revenue from such sales through our largest, third party, channel distributor. During the 2016 six months and 2015 six months, we earned approximately 11% and 13%, respectively, of our revenue from such sales through our largest, third party, channel distributor. As of June 30, 2016, approximately 11% of our accounts receivable were due from this customer with payment for substantially all such amounts having been received subsequent to that date.

11.    Segment and Geographic Disclosures

Revenues derived from customers and partners located in the United States accounted for approximately 76% and 74% of the Company’s total revenues in 2016 and 2015 quarter, respectively, and 74% of the Company’s total revenues for both the 2016 and 2015 six months.  The remaining revenues were from customers and partners located in foreign countries with each individual foreign country accounting for less than 10% of total revenues in the 2016 quarter and the 2015 quarter and in the 2016 six months and 2015 six months.  The Company attributes revenues to countries based on the country in which the customer or partner is located. None of our property and equipment was located in a foreign country as of June 30, 2016 and 2015.

18


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q and any documents incorporated by reference herein contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended.  “Forward-looking statements” are those statements that are not of historical fact but describe management’s beliefs and expectations.  We have identified many of the forward-looking statements in this Quarterly Report by using words such as “anticipate,” “believe,” “could,” “estimate,” “may,” “expect,” “potentially” and “intend.”  Although we believe these expectations are reasonable, our operations involve a number of risks and uncertainties, including those described in the “Risk Factors” section of our 2015 Form 10-K and other documents filed with the Securities and Exchange Commission.  Therefore, GlobalSCAPE’s actual results of operations and financial condition in the future could differ materially from those discussed in this Quarterly Report.

In the following discussion, our references to the 2016 quarter and the 2015 quarter refer to the three months ended June 30, 2016 and 2015, respectively.  Our references to the 2016 six months and the 2015 six months refer to the six months ended June 20, 2016 and 2015, respectively.

Overview

We develop and sell computer software that provides secure information exchange, transfer and sharing capabilities for enterprises and consumers. We have been in business for twenty years and have sold our products to thousands of enterprises and more than one million individual consumers throughout the world.

Our primary business is selling and supporting managed file transfer, or MFT, software for enterprises. The brand name of our MFT product platform is Enhanced File Transfer, or EFT. We also sell other products that are synergistic to EFT including Mail Express, scConnect, WAFS, and CuteFTP.

We earn most of our revenue from the sale of products that are part of our EFT platform. We earn revenue from the sale of perpetual software licenses, providing products under software-as-a-service, or SaaS, subscriptions, providing maintenance and support services, or M&S, and offering professional services for product customization and integration.

We focus on selling our EFT platform products in a business-to-business environment. The majority of the resources we will expend in the future for product research and development, marketing and sales will focus on that environment. We believe our products and business capabilities are well-positioned to compete effectively in the market for MFT products.  For a more comprehensive discussion of the products we sell and the services we offer, see Software Products and Services below.

As a corporation, we have won multiple awards for performance and reputation, including:

·
In 2016:
-
Earned awards from Info Security Guide in several categories, including:
o
EFT Workspaces – Gold Winner in BYOD Security.
o
Enhanced File Transfer – Silver Winner in Compliance.
o
EFT Cloud Services – Bronze Winner in Cloud Security.
o
Mail Express – Bronze Winner in Email Security and Management.
-
Received a 5-Star rating in The Channel Company’s CRN 2016 Partner Program Guide for the second year in a row.
-
Named by Texas Monthly magazine as one of the best companies to work for in Texas for the sixth year in a row with a ranking of #16 in the medium size category.
-
Honored as the HR Employer of the Year and Excellence in Engagement Strategy in North America by the HRO Today Services and Technology Association.
-
Recognized by the San Antonio Business Journal as a 2016 Best Place to Work, making this the fifth time GlobalSCAPE has received this honor.
-
Named by Computerworld as one of the best companies to work for in IT for the third consecutive year with a ranking of #3 in the small company category.
19


·
In 2015:
-
Listed as a Champion in the Ad-Hoc Mid-Market category and a Leader in the Ad-Hoc Enterprise use case by Info-Tech Research Group within its Managed File Transfer Vendor Landscape report. This is the second consecutive time that Info-Tech Research Group has named GlobalSCAPE a Champion within this report.
-
Named one of the best places to work in the information technologies small business category by Computerworld for the fourth time.
-
Named as one of San Antonio’s best places to work by the San Antonio Business Journal for the fifth time in the medium size category.
-
Received a 5-Star rating in The Channel Company’s CRN 2015 Partner Program Guide.
-
Named by Texas Monthly magazine as one of the best companies to work for in Texas for the fifth year in a row with a ranking of #3 in the medium size category.
-
Named to the San Antonio Business Journal’s 2015 Fast Track list for companies with $10 million or more in revenue.
-
Named by the San Antonio Express News as the #1 Top Workplace for 2015 in the small company category, and recognized as one of the Top Workplaces for the fifth time.
-
Two members of the channel leadership team recognized as The Channel Company’s 2015 CRN Channel Chiefs.
-
Two channel team members named to The Channel Company’s 2015 CRN Women of the Channel list.
-
Recognized by the Golden Bridge Business and Innovation Awards as a Gold Winner in the Managed File Transfer – Innovations category for EFT Workspaces.
-
Recognized by the Info Security Products Guide’s Global Excellence Awards as a Gold Winner within the Compliance category for Enhanced File Transfer (EFT) and as a Bronze Winner within the Email Security and Management category for Mail Express.
-
Recognized by the Network Products Guide awards as a Gold Winner in Compliance Data Centers for EFT v7.0 and a Silver Winner in Email, Security and Management with Mail Express v4.

Key Business Metrics

We review a number of key business metrics on an ongoing basis to help us monitor our performance and to identify trends which may materially affect our business. The significant metrics we review are described below.

Revenue Growth

We believe annual revenue growth is a key metric for monitoring our continued success in developing our business in future periods. Given our diverse solution portfolio, we review our revenue mix and changes in revenue, across all solutions, on a regular basis to identify key trends. We believe our revenue growth is primarily dependent upon executing our business strategies which include:

·
Ongoing innovation of our core EFT platform and its expansion into broader segments of the market.
·
Developing emerging technologies and/or acquiring products with features that build upon and add capabilities to our EFT platform.
·
Continuing the evolution of enhanced demand generation activities including marketing, customer-facing, and partner-facing programs. 

To support product innovation, we continue to enhance our software engineering group and our focus on optimizing the manner in which we assess the development of new technologies, our approach to managing those projects, and the timelines over which we do that work.

In sales and marketing, we have made and continue to make ongoing changes including:
 
·
Increasing sales staff capacity as needed to address our markets.
·
Aligning our sales group to enhance its industry and geographic focus.
·
Implementing new sales and marketing campaigns.
·
Using third party digital marketing experts with search engine optimization expertise to enhance our efforts in this area.
·
Evolving our lead generation programs to increase our sales staff’s exposure to potential purchasers.
·
Enhancing our support of channel partners and engaging them to sell our products through training, orientation and marketing programs.

20


As part of growing revenue in total, we are focused on increasing license revenue both in terms of absolute dollars and as a percent of total revenue. When we sell our licensed products, we also typically create a recurring revenue stream from M&S since almost all purchasers of our licensed enterprise products also purchase an M&S contract. Most of our M&S contracts are for one year although we also sell multi-year contracts. The customer pays us the M&S fee for the entire term of the agreement at the time the contract begins. We recognize that amount as revenue ratably in future periods over the term of the contract. We typically experience a high renewal rate for M&S services for our enterprise products so long as a customer continues using the licensed product they purchased from us. As a result, growing license revenue not only contributes to increasing revenue growth at the time the license is sold but also provides a foundation for future recurring revenue as the purchasers of our licensed products renew M&S agreements to support their ongoing product support needs. This pattern of activity can create a cumulative effect for M&S renewals as a result of the cumulative number of licensed software installations sold over multiple years that create M&S renewals in any single year predictably (and in line with our expectations) exceeding the number of new software licenses we sell in a single year. We expect this cumulative effect to continue to grow if we continue to increase enterprise software license revenue in future periods. For these reasons, we expect M&S revenue will remain a substantial part of our total revenue.

See Comparison of the Statement of Operations for the Three Months Ended March 31, 2016 and 2015 and Comparison of the Statement of Operations for the Six Months Ended June 30, 2016 and 2015 for a discussion of trends in our revenue growth that we monitor using this metric.

Bookings (Non-GAAP Measurement)

Bookings is a business metric we use to measure the success of our sales and marketing programs and the effectiveness of our sales and marketing teams. Bookings arise from sales of software licenses, M&S, and professional services to our customers that consist of:

·
Invoiced amounts for products and services we have delivered and for which we recognize revenue currently.
·
Invoiced amounts for products and services we will deliver in the future and for which we will recognize revenue in those future periods.
·
Statements of work under which customers have engaged us to deliver professional services which we will invoice in the future as we complete that work.

Bookings is not a measure of financial performance under generally accepted accounting principles, or GAAP, and should not be considered a substitute for revenue. Bookings has limitations as an analytical tool and when assessing our operating performance. Bookings should not be considered in isolation or as a substitute for revenue or other income statement data prepared in accordance with GAAP.

Our bookings trends and the reconciliation of bookings to revenue are as follows ($ in thousands):

   
Three Months Ending June 30,
   
Six Months Ending June 30,
 
   
2016
   
2015
   
2016
   
2015
 
                         
Bookings
 
$
8,179
   
$
7,874
   
$
15,958
   
$
14,192
 
Products and services sold for which we will recognize revenue at a future date when the goods and services are delivered to and accepted by the customer
   
(6,416
)
   
(4,430
)
   
(12,342
)
   
(8,114
)
Products and services delivered to and accepted by the customer for which revenue recognition had been deferred at the time of booking
   
6,493
     
4,419
     
12,050
     
8,665
 
Revenue
 
$
8,256
   
$
7,863
   
$
15,666
   
$
14,743
 

Bookings increased during the 2016 quarter compared to the 2015 quarter and during the 2016 six months compared to the 2015 six months primarily as a result of our product development and sales and marketing activities discussed above under Revenue Growth.
21


Adjusted EBITDA

We utilize Adjusted EBITDA (Earnings Before Interest, Taxes, Total Other Income/Expense, Depreciation, Amortization, other than amortization of capitalized software development costs, and Share-Based Compensation Expense) to measure profitability and cash flow from our core operating activities. We monitor and review our cost of revenues as well as our operating expenses to assess conformance with established budget expectations. When we see variations from budget, we consider the relevant facts and circumstances and adjust our activities to the extent we deem necessary.

Adjusted EBITDA is not a measure of financial performance under GAAP and should not be considered a substitute for net income. Adjusted EBITDA has limitations as an analytical tool and when assessing our operating performance. Adjusted EBITDA should not be considered in isolation or as a substitute for net income or other income statement data prepared in accordance with GAAP.

Previously, this key business metric was named Adjusted EBITDA Excluding Infrequent Items. We have not had any infrequent items in recent periods and do not expect any in the foreseeable future. As a result, we have removed the infrequent item component from this key business metric.

We compute Adjusted EBITDA as follows ($ in thousands):

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2016
   
2015
   
2016
   
2015
 
Income from operations
 
$
1,406
   
$
1,896
   
$
1,962
   
$
3,149
 
Add (subtract) items to determine adjusted EBITDA:
                               
Depreciation and amortization:
                               
Total depreciation and amortization
   
511
     
394
     
1,006
     
682
 
Amortization of capitalized software development costs
   
(438
)
   
(327
)
   
(868
)
   
(545
)
Stock-based compensation expense
   
278
     
167
     
500
     
315
 
Adjusted EBITDA
 
$
1,757
   
$
2,130
   
$
2,600
   
$
3,601
 

See the section below comparing our results of operations for the 2016 quarter and the 2015 quarter and the 2016 six months and 2015 six months for discussion of the variances between periods in the components comprising Adjusted EBITDA.

Software Products and Services

We develop and sell computer software that provides secure information exchange, file transfer and file sharing capabilities for enterprises and consumers. We have been in business for twenty years and have sold our products to thousands of enterprises and more than one million individual consumers throughout the world.

Our primary business is selling and supporting MFT software for enterprises. MFT software facilitates the transfer of data from one location to another across a computer network within a single enterprise or between multiple computer networks in multiple enterprises. These transfers may be ongoing, repetitive activities executed by automated software routines that occur without human intervention, or they may be transfers that people create and complete in the absence of automated routines or as a result of ad-hoc, special situations that arise from time-to-time. Examples of enterprise-level activities that rely on MFT software include:

·
Transfer of transactional information within an enterprise on a repetitive basis from one geographic location to another, such as a transfer of deposit and withdrawal information throughout the day from a branch of a bank to a central data processing center at another location.
·
Movement of accumulated information within an enterprise from one data processing application to another on a periodic basis, such as a transfer of bi-weekly payroll information from a payroll system that is used to pay employees to a job cost system that is used to manage the cost of a project.
·
Exchange of information between enterprises to facilitate the completion of one or more business transactions, such as a retailer transmitting inventory purchasing requirements produced by its material requirements planning system to an order entry system at a supplying vendor.
22


We have multiple revenue streams from our MFT products that include:

·
Perpetual software licenses under which customers install our products in their information systems environment.
·
Cloud-based SaaS hosted solutions to which our customers subscribe and pay us a recurring, monthly fee to access the service.
·
M&S.
·
Professional services for product customization and integration.

We also sell products that can be synergistic to our MFT products. These products have capabilities that:

·
Support information sharing and exchange capabilities using traditional email systems.
·
Enable enterprise file synchronization and sharing.
·
Enhance the ability to replicate, share and backup files within a wide area network or local area network, thereby allowing users to access their data at higher speeds than possible with most alternate approaches.
·
Support file transfers by individuals and small businesses.

We earn most of our revenue from the sale of our MFT products to support business-to-business activities. We are strategically focused on selling products in that environment such that the majority of our resources that we will expend in the future for product research and development, marketing and sales will concentrate on the MFT business-to-business market. We believe our products and business capabilities are well-positioned to compete effectively in that market.

Some of our products support consumer-oriented file transfers and file sharing. Even though these products are profitable on an overall basis, we anticipate the future resources we will expend related to products sold to consumers and the associated revenue we earn from those products will continue to be a minor part of our business.

The following is a summary description of our specific products and solutions.

Managed File Transfer – Enhanced File Transfer Platform

Enhanced File Transfer, or EFT, is the brand name of our core MFT platform and services. EFT was a Silver Winner in the Compliance category and Gold Winner in the BYOD category of the 2016 Info Security Products Guide Global Excellence Awards.

The EFT platform provides users the ability to securely transmit data and information from one location to another using any number of files of any size or configuration. It facilitates management, monitoring, and reporting on file transfers and delivers advanced data transfer workflow capabilities to move data and information into, out of, and throughout an enterprise. Notable features and capabilities of the EFT platform include:

·
State-of-the-art, enterprise-level security when transferring information within or between computer networks as well as for collaboration with business partners, customers, and employees. EFT provides automation that supports effective integration of back-end systems. It has built-in regulatory compliance, governance, and visibility controls to provide a means of safely maintaining information. EFT offers a high level of performance and scalability to support operational efficiency and maintain business continuity. Administrative tools are provided at various levels of granularity to allow for complete control and monitoring of file transfer activities.
·
Transmission of critical information such as financial data, medical records, customer files, vendor files, personnel files, transaction activity, and other similar documents between diverse and geographically separated network infrastructures while supporting a range of information protection approaches to meet privacy and other security requirements. In addition to enabling the secure, flexible transmission of critical information using servers, desktop, and notebook computers and a wide range of network-enabled mobile devices, our products also provide customers with the ability to monitor and audit file transfer activities.
·
Compliance with government regulations and industry standards relating to the protection of information while allowing users to reduce information systems and technologies costs, increase efficiency, track and audit transactions, and automate processes. Our solutions also provide data replication, acceleration of file transfer, sharing/collaboration, and continuous data backup and recovery to our customers.
23


The EFT platform provides a common, scalable MFT environment that accommodates a broad family of accompanying modules to provide enterprises with increased security, automation, and performance when compared to traditional FTP-based and e-mail delivery systems. Various, optional modules allow users to select the solution configuration most applicable to their requirements for auditing and reporting, encryption, ad hoc and web-based file transfers, operability in or through a DMZ network, and integration with back-end business processes, including workflow automation capabilities.

During the past several quarters, we have released new versions of our EFT platform and new modules which added several enhancements and capabilities including:

·
Accelerate, which is an accelerated file transfer module that boosts the speed and efficiency of secure data transfers and allows for the fast transfer of large files over disparate geographic distances.
·
Workspaces, which is a file-sharing module that allows employees to create their own groups and assign permissions for those groups, much like a virtual data room, to provide access to files for which they themselves have access on the EFT server.  This functionality is accomplished without compromising the security, control, and governance of those files.
·
Active-active high availability, or HA, which maximizes uptime and performance of critical information technology systems.
·
Enhanced compatibility of web transfer client file transfers through HTML5 support in addition to the existing Java Runtime Environment.
·
Increased scalability and business continuity with more flexible, uninterrupted file transfer service.
·
Improved facilitation of PCI DSS version 3.0 compliance with updates to security components, such as PGP and AS2.
·
Addition of new Content Integrity Control providing an Internet Content Adaptation Protocol (ICAP) connector to anti-malware scanners and data loss prevention (DLP) solutions.
·
Integration with SMS PASSCODE for Mobile-Based 2 Factor Authentication.
·
Enhanced and expanded event rule functionality which improves the ability to integrate our products with client business processes and backend systems

We continue to enhance the EFT platform with capabilities that improve its speed and responsiveness of performance, provide additional administration flexibility supporting cross-platform implementation with our DMZ Gateway solution, offer business activity monitoring, and provide additional language support.

Most EFT customers choose to purchase a perpetual software license for a one-time fee paid at the time of purchase and under which they install the software on equipment they own and/or manage. In almost all cases, they also purchase ongoing M&S for which they pay us a recurring, annual amount that typically is 20% to 30% of the price of the software license.

If a customer prefers to use the capabilities of EFT in a SaaS fashion, we offer EFT Cloud Services. The EFT platform delivered in this manner has the same features and functionality as our EFT platform installed at a customer site. EFT Cloud Services allows users to reduce their upfront cost and achieve other recognized benefits of cloud-based managed file transfer SaaS subscription solutions, including strong service level agreements for information technologies infrastructure reliability and performance.  

EFT Cloud Services provides a flexible continuum of features and functions that gives the user the ability to pick and choose the extent to which they want to own or outsource the capabilities of our EFT platform. EFT Cloud Services gives organizations the flexibility of either a hybrid cloud or virtual environment with the security of an on-premises managed file transfer solution. Users of EFT Cloud Services have the option to work with a variety of top hosting providers that best fit their needs. We offer flexible subscription pricing under one, two, and three-year contracts that can help our customers minimize or eliminate upfront capital expenditures and possibly reduce their ongoing operating costs.

We earn most of our revenue from our products and services related to our EFT platform. Currently, most of this revenue is from sales of perpetual software licenses, paid as a one-time fee, along with an M&S contract that creates recurring revenue. Subscription revenue from EFT Cloud Services is increasing but is not yet a material portion of the total revenue from our EFT platform. Most of the resources we expend, and expect to expend in the future, relate to development, marketing, sales and support of the EFT platform in a business-to-business environment.

24


Secure Information Sharing and Exchange Solution – Mail Express
 
Mail Express is a solution that provides secure information sharing and exchange capabilities leveraging traditional email workflow. It is a stand-alone product installed in a client-server environment that allows users to send and receive secure, encrypted e-mail and attachments of virtually unlimited size. Mail Express was a Bronze Winner in the Email Security and Management category of the 2015 Info Security Products Guide Global Excellence Awards.

To broaden the appeal and capabilities of Mail Express, we are developing functionality that integrates the features of Mail Express into the EFT platform. This integration will take the superior control, visibility and monitoring capabilities of the EFT platform and make them available to administrators and users in an email environment.  This integrated product will improve operational efficiency by providing a coordinated user interface through which data movement activities using both our EFT and Mail Express products can be managed.

File Synchronization and Sharing Solution - scConnect
 
scConnect, is our on-premises, enterprise file synchronization and sharing solution. It provides users with the ability to share and access data anytime on any device, while providing information technology department administrators with the tools necessary to maintain the security of sensitive enterprise information and to control and monitor user access and activity. scConnect enables secure collaboration without involving third-party servers.

We continue to develop the features and functions of scConnect. As part of our development of this product, we intend to eventually integrate its capabilities into the functionality of our EFT platform.

Wide Area File Services Solution - WAFS

Our WAFS software product uses data synchronization to further enhance the ability to replicate, share and backup files within a wide area network or local area network, thereby allowing users to access their data at higher speeds than possible with most alternate approaches. The software uses byte-level differencing technology to update changes to files with minimal impact on network bandwidth while also ensuring that files are never overwritten, even if opened by other remote users. Other key features of WAFS include native file locking, replication to multiple locations simultaneously, adherence to access control list file permissions, and full UTF-8 support.

We will continue selling WAFS as a stand-alone product and providing M&S services to customers who purchased WAFS in the past and who purchase it in the future. We do not expect to expend significant resources in the future expanding the features and capabilities of WAFS.

File Transfer Solution for Consumers - CuteFTP 

CuteFTP is our original product introduced in 1996. It is a file transfer program generally used by individuals and small businesses. It remains popular today and generates incremental revenue for us at a relatively low cost.
 
CuteFTP continues to have significant brand recognition in the market.  Our current CuteFTP Version 9 introduced several notable new features including:

·
Support for Unicode (UTF-8) characters that allows greater international use.
·
Web Distributed Authoring and Versioning (WebDAV) support to facilitate collaboration between users in editing and managing documents and files stored on World Wide Web servers.

Version 9 simplified our CuteFTP product line by consolidating all the features of our previous multi-product CuteFTP product line for Windows operating systems into this single version. We continue to offer CuteFTP Version 3.1 software for Mac platforms. We believe current versions of CuteFTP appeal to users wanting features more robust than offered in free alternatives such that it will be a product competitive in the marketplace for the foreseeable future.
 
We will continue selling CuteFTP as a stand-alone product and providing M&S services to customers who purchased CuteFTP in the past and who purchase it in the future. We do not expect to expend significant resources in the future expanding the features and capabilities of CuteFTP.

25


Professional Services
 
We offer a range of professional services to complement our on-premises and SaaS cloud-based solutions. These professional services include product customization and system integration, solution “quickstart” implementations, business process and workflow, policy development, education and training, and solution health checks. In addition, we may provide longer-term engineering services, including supporting multi-year contracts, if necessary, to support certain solution implementations and integrations. 

Maintenance and Support

We offer M&S contracts to licensees of all of our software products. These M&S contracts entitle the licensee to software upgrades and technical support services in accordance with the terms of our M&S contract.  Standard technical support services are provided via email and telephone during our regular business hours.  For certain of our products, we offer a Platinum M&S contract which provides access to emergency technical assistance 24 hours per day, 7 days a week.

Most of our M&S contracts are for one year although we also sell multi-year contracts. M&S is purchased by substantially all buyers of our EFT platform as well as by many customers who purchase our other products. Customers with M&S pay us a recurring, annual amount that is typically 20% to 30% of the software license price. A majority of our customers with M&S contracts renew them each year.

Solution Perspective and Trends

The components of our revenue are as follows ($ in thousands):

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2016
   
2015
   
2016
   
2015
 
                                                 
         
% of Total
         
% of Total
         
% of Total
         
% of Total
 
   
Amount
   
Revenue
   
Amount
   
Revenue
   
Amount
   
Revenue
   
Amount
   
Revenue
 
Revenue by Type
                                               
Software licenses
 
$
2,893
     
35.0
%
 
$
3,280
     
41.7
%
 
$
5,192
     
33.1
%
 
$
5,738
     
38.9
%
Maintenance and support
   
4,632