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~~

(Mark One)

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

For the ~~Quarterly Period~~quarterly period ended ~~September~~June 30, ~~2016~~2017

ORor

☐

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

☐ 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.~~ file number001-33601

GlobalSCAPE, Inc.

(Exact ~~name~~Name of ~~registrant~~Registrant as ~~specified~~Specified in its ~~charter)~~Charter)

Delaware	74-2785449
(State or ~~other jurisdiction~~Other Jurisdiction of ~~incorporation~~ Incorporation or ~~organization)~~ Organization	(I.R.S. Employer Identification No.)

4500 Lockhill-Selma, Suite 150 San Antonio, Texas	78249
(Address of Principal Executive ~~Office)~~Offices	(Zip ~~Code)~~Code

~~(210) 308-8267~~

(Registrant’s Telephone Number, Including Area ~~Code)~~Code

210-308-8267

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate ~~Web~~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 ☒ ~~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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer”~~filer,” “smaller reporting company,” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange ~~Act (check one):~~Act.

Large accelerated filer	☐	Accelerated filer	☐

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

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of ~~October~~July 31, ~~2016,~~2017 there were ~~21,145,021~~21,793,131 shares of common stock outstanding.

GlobalSCAPE, Inc.

Quarterly Report on Form 10-Q

For the Quarter ended ~~September~~June 30, ~~2016~~

2017

Index

		Page

Part I.	Financial Information

Item 1.	Financial Statements	2
	Condensed Consolidated Balance Sheets	3 2
	Condensed Consolidated Statements of Operations and Comprehensive Income	4 3
	Condensed Consolidated Statements of Cash Flows	5 4
	Notes to Condensed Consolidated Financial Statements	6 5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1926

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39 48

Item 4.	Controls and Procedures	40 49

Part II.	Other Information	41

Item 1.	Legal Proceedings	41 51

Item1A.	Risk Factors	41 51

Item 6.	Exhibits	41 51

Signatures		42 52

GlobalSCAPE®, CuteFTP®, CuteFTP Pro®, ~~CuteBackup®,~~ DMZ Gateway®, ~~Enhanced File Transfer®, Enhanced File Transfer Server®~~EFT Cloud Services®, 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™~~Server™, EFT Workspaces™, EFT Insight™, Enhanced File Transfer™, Enhanced File Transfer Server™, Secure Ad Hoc Transfer™, SAT™, EFT Server Enterprise™, Enhanced File Transfer Server ~~Enterprise ™,~~Enterprise™, Desktop Transfer Client™, DTC™, Mobile Transfer Client™, MTC™, Web Transfer Client™, Workspaces™, Accelerate™, WTC™, Content Integrity Control™, Advanced Authentication™, AAM™ and scConnect™ are trademarks of GlobalSCAPE, Inc.

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

TappIn Secure ~~Share ™,~~Share™, Social ~~Share ™,~~Share™, Now ~~Playing ™,~~Playing™, and Enhanced A La Carte ~~Playlist ™,~~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.

Index

Part I. Financial Information

Item 1. Financial Statements

~~GlobalSCAPE, Inc.~~

~~Condensed Consolidated Balance Sheets~~

GlobalSCAPE, Inc.

Condensed Consolidated Balance Sheets

(in thousands except share amounts)

	June 30,			December 31,
	2017			2016
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	8,757		$	8,895
Short term certificates of deposit		2,763			2,754
Accounts receivable, net		6,016			6,288
Federal income tax receivable		961			292
Prepaid and other expenses		425			531
Total current assets		18,922			18,760

Long term certificates of deposit		12,898			12,779
Capitalized software development costs, net		3,761			3,743
Goodwill		12,712			12,712
Deferred tax asset, net		1,179			1,050
Property and equipment, net		551			456
Other assets		102			245
Total assets	$	50,125		$	49,745

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	948		$	930
Accrued expenses		1,465			1,603
Deferred revenue		12,284			13,655
Total current liabilities		14,697			16,188

Deferred revenue, non-current portion		3,877			3,790
Other long term liabilities		171			152

Commitments and contingencies

Stockholders’ equity:
Preferred stock, par value $0.001 per share, 10,000,000 authorized, no shares issued or outstanding		-			-
Common stock, par value $0.001 per share, 40,000,000 authorized, 22,192,412 and 21,920,912 shares issued at June 30, 2017, and December 31, 2016, respectively		22			22
Additional paid-in capital		22,885			21,756
Treasury stock, 403,581 shares, at cost, at June 30, 2017 and December 31, 2016		(1,452	)		(1,452	)
Retained earnings		9,925			9,289
Total stockholders’ equity		31,380			29,615
Total liabilities and stockholders’ equity	$	50,125		$	49,745

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

September 30, December 31,
2016 2015
(Unaudited) (Audited)
Assets
Current assets:
Cash and cash equivalents $ 17,421 $ 15,885
Short term investments 3,303 3,254
Accounts receivable (net of allowance for doubtful accounts
of $335 and $325 in 2016 and 2015, respectively)
8,870 6,081
Federal income tax receivable 104 290
Prepaid and other expenses 425 511
Total current assets 30,123 26,021

Property and equipment, net 463 498
Capitalized software development costs, net 3,961 3,982
Goodwill 12,712 12,712
Deferred tax asset, net 976 940
Other assets 30 60
Total assets $ 48,265 $ 44,213

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 622 $ 839
Accrued expenses 1,841 1,893
Deferred revenue 13,005 12,000
Income taxes payable 517 127
Total current liabilities 15,985 14,859

Deferred revenue, non-current portion 3,688 3,612
Other long term liabilities 34 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, 21,548,602 and 21,383,467 shares issued
at September 30, 2016, and December 31, 2015, respectively
21 21
Additional paid-in capital 20,632 19,583
Treasury stock, 403,581 shares, at cost, at
September 30, 2016 and December 31, 2015
(1,452 ) (1,452 )
Retained earnings 9,357 7,546
Total stockholders’ equity 28,558 25,698
Total liabilities and stockholders’ equity $ 48,265 $ 44,213

Index

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,
	2017		2016		2017		2016

Operating Revenues:
Software licenses	$	2,700	$	2,796	$	5,279	$	5,060
Maintenance and support		5,222		4,553		10,343		8,998
Professional services		551		762		1,283		1,404
Total Revenues		8,473		8,111		16,905		15,462
Cost of revenues
Software licenses		752		796		1,509		1,422
Maintenance and support		425		386		838		780
Professional services		353		452		717		875
Total cost of revenues		1,530		1,634		3,064		3,077
Gross profit		6,943		6,477		13,841		12,385
Operating expenses
Sales and marketing		3,196		2,879		6,485		5,884
General and administrative		1,889		1,726		3,603		3,413
Research and development		1,213		585		1,935		1,232
Total operating expenses		6,298		5,190		12,023		10,529
Income from operations		645		1,287		1,818		1,856
Interest income (expense), net		77		27		146		60
Income before income taxes		722		1,314		1,964		1,916
Income tax expense		265		473		676		693
Net income	$	457	$	841	$	1,288	$	1,223
Comprehensive income	$	457	$	841	$	1,288	$	1,223

Net income per common share -
Basic	$	0.02	$	0.04	$	0.06	$	0.06
Diluted	$	0.02	$	0.04	$	0.06	$	0.06

Weighted average shares outstanding:
Basic		21,675		21,105		21,610		21,056
Diluted		22,170		21,689		22,094		21,655

Cash dividends declared per share	$	0.015	$	0.015	$	0.030	$	0.030

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

Index

GlobalSCAPE, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

~~Condensed Consolidated Statements of Operations and Comprehensive Income~~

	For the Six Months Ended June 30,
	2017			2016
Operating Activities:
Net income	$	1,288		$	1,223
Items not involving cash at the time they are recorded in the statement of operations:
Provision for sales returns and doubtful accounts receivable		11			42
Depreciation and amortization		1,056			1,006
Share-based compensation		671			523
Deferred taxes		(129	)		47
Excess tax benefit from share-based compensation		-			(12	)
Subtotal before changes in operating assets and liabilities		2,897			2,829
Changes in operating assets and liabilities:
Accounts receivable		261			845
Prepaid expenses		106			(41	)
Deferred revenue		(1,284	)		(726	)
Accounts payable		18			(106	)
Accrued expenses		(138	)		(518	)
Other assets		143			30
Accrued interest receivable		(128	)		(33	)
Other long-term liabilities		19			3
Income tax receivable and payable		(669	)		141
Net cash provided by operating activities		1,225			2,424
Investing Activities:
Software development costs capitalized		(938	)		(846	)
Purchase of property and equipment		(231	)		(113	)
Net cash (used in) investing activities		(1,169	)		(959	)
Financing Activities:
Proceeds from exercise of stock options		458			259
Excess tax benefit from share-based compensation		-			12
Dividends paid		(652	)		(631	)
Net cash (used in) financing activities		(194	)		(360	)
Net increase (decrease) in cash		(138	)		1,105
Cash at beginning of period		8,895			15,885
Cash at end of period	$	8,757		$	16,990

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	-		$	-
Income taxes	$	1,504		$	468

~~(In thousands, except per share amounts)~~

~~(Unaudited)~~

Three months ended September 30, Nine months ended September 30,
2016 2015 2016 2015

Operating Revenues:
Software licenses $ 3,373 $ 2,852 $ 8,565 $ 8,590
Maintenance and support 4,713 4,142 13,843 12,269
Professional services 667 653 2,013 1,531
Total Revenues 8,753 7,647 24,421 22,390
Cost of revenues
Software licenses 873 562 2,303 1,651
Maintenance and support 363 341 1,145 1,057
Professional services 534 605 1,689 1,257
Total cost of revenues 1,770 1,508 5,137 3,965
Gross profit 6,983 6,139 19,284 18,425
Operating expenses
Sales and marketing 2,759 2,289 8,453 7,060
General and administrative 1,638 1,449 5,083 4,629
Research and development 528 646 1,727 1,832
Total operating expenses 4,925 4,384 15,263 13,521
Income from operations 2,058 1,755 4,021 4,904
Other income 28 17 88 51
Income before income taxes 2,086 1,772 4,109 4,955
Income tax expense 687 542 1,348 1,585
Net income $ 1,399 $ 1,230 $ 2,761 $ 3,370
Comprehensive income $ 1,399 $ 1,230 $ 2,761 $ 3,370

Net income per common share -
Basic $ 0.07 $ 0.06 $ 0.13 $ 0.16
Diluted $ 0.06 $ 0.06 $ 0.13 $ 0.16

Weighted average shares outstanding:
Basic 21,122 20,892 21,061 20,782
Diluted 21,674 21,440 21,640 21,294

Cash dividends declared per share $ 0.015 $ 0.015 $ 0.045 $ 0.030

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

~~Index~~

~~GlobalSCAPE, Inc.~~

~~Condensed Consolidated Statements of Cash Flows~~

~~(in thousands)~~

~~(Unaudited)~~

For the Nine Months Ended September 30,
2016 2015
Operating Activities:
Net income $ 2,761 $ 3,370
Items not involving cash at the time they are recorded in the statement of operations:
Bad debt expense 67 147
Depreciation and amortization 1,522 1,116
Share-based compensation 721 482
Deferred taxes (36 ) (320 )
Excess tax benefit from share-based compensation 5 (49 )
Subtotal before changes in operating assets and liabilities 5,040 4,746
Changes in operating assets and liabilities:
Accounts receivable (2,856 ) (1,690 )
Prepaid expenses 86 154
Deferred revenue 1,081 531
Accounts payable (217 ) (757 )
Accrued expenses (52 ) 10
Other Assets 30 37
Other long-term liabilities (10 ) (5 )
Income tax receivable and payable 571 403
Net cash provided by operating activities 3,673 3,429
Investing Activities:
Software development costs capitalized (1,298 ) (1,613 )
Purchase of property and equipment (168 ) (108 )
Interest reinvested in short and long term investments (49 ) (48 )
Net cash (used in) investing activities (1,515 ) (1,769 )
Financing Activities:
Proceeds from exercise of stock options 333 417
Excess tax benefit from share-based compensation (5 ) 49
Dividends paid (950 ) (626 )
Net cash (used in) financing activities (622 ) (160 )

Net increase in cash 1,536 1,500
Cash at beginning of period 15,885 11,358
Cash at end of period $ 17,421 $ 12,858

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ - $ -
Income taxes $ 776 $ 1,341

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

Index

GlobalSCAPE, Inc.

Notes to Condensed Consolidated Financial Statements

As of ~~September~~June 30, ~~2016~~2017 and For the Three and ~~Nine~~ Six

Months Then Ended

(Unaudited)

1. Nature of Business

~~We develop~~GlobalSCAPE, Inc. and ~~sell computer software that~~its wholly-owned subsidiary (together referred to as the “Company”, “GlobalSCAPE”, or “we”) provides secure information exchange ~~file transfer and file sharing~~ capabilities for enterprises and ~~consumers.~~consumers through the development and distribution of software, delivery of managed and hosted solutions, and provisioning of associated services. Our solution portfolio facilitates transmission of critical information such as financial data, medical records, customer files, vendor files, personnel files, transaction activity, and other similar documents between diverse and geographically separated network infrastructures while supporting a range of information protection approaches to meet privacy and other security requirements. In addition to enabling secure, flexible transmission of critical information using servers, desktop and notebook computers, and a wide range of network-enabled mobile devices, our products also provide customers with the ability to monitor and audit file transfer activities. Our primary ~~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 have other products that complement our EFT product.

In June 2017, we introduced a data integration product that we planned to sell under the brand name Kenetix. We licensed the technology for this product from a third party. This product is a cloud-based, integration-as-a-service, or iPaaS, solution used to connect applications, microservices, application program interfaces (or API’s), data and processes within and between organizations. We have experienced issues with the third-party technology and have determined to suspend marketing of the product as we evaluate options and determine whether the licensor can effectively address the issues.

We also sell other products that are synergistic to EFT including Mail Express, ~~scConnect,~~ WAFS, and CuteFTP.

~~We earn most~~ Collectively, these products constitute less than 10% of our revenue from the sale of EFT and products that are part of our EFT platform. We earn revenue from the sale of perpetual software licenses, providing products under software-as-a-service, or SaaS, subscriptions, providing maintenance and support services, or M&S, and offering professional services for product customization and integration.total revenue.

Throughout these notes unless otherwise noted, our references to the ~~2016~~2017 quarter and the ~~2015~~2016 quarter refer to the three months ended ~~September~~June 30, ~~2016~~2017 and ~~2015,~~2016, respectively. Our references to the ~~2016 nine~~2017 six months and the ~~2015 nine~~2016 six months refer to the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015,~~2016, respectively.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X, “Interim Financial Statements”, as prescribed by the United States Securities and Exchange Commission, or SEC. Accordingly, they do not include all information and footnotes required under United States generally accepted accounting principles, ~~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 consolidated financial statements and the notes thereto included in our Annual Report on Form ~~10-K~~10-K/A for the fiscal year ended December 31, ~~2015,~~2016 filed with the SEC on June 14, 2018, which we refer to as the ~~2015~~2016 Form ~~10-K,~~10-K/A, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations also included in our ~~2015~~2016 Form ~~10-K~~10-K/A and in this report.

We follow accounting standards set by the Financial Accounting Standards ~~Board.~~Board, or FASB. This board sets GAAP, ~~that~~which we follow in preparing financial statements that report our financial position, results of operations, and sources and uses of cash. We also follow the reporting regulations of the ~~United States Securities and Exchange Commission, or~~ SEC.

Index

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 consolidated financial statements. It is possible the actual results could differ from these estimates and assumptions and could have a material effect on the reported amounts of our financial position and results of operations.

3. Significant Accounting Policies

Principles of Consolidation

The accompanying condensed consolidated financial statements ~~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.

Changes in Accounting Methods, Reclassifications and Revisions

As part of our ongoing enhancement and refinement of our financial reporting to fairly present our results of operations and financial position, we may make changes from time-to-time in accounting methods and in the classification and presentation of our business activities in our financial statements. To ensure comparability between periods, we revise previous period financial statements presented to conform them to the method of presentation in our current period financial statements. If the changes increase or decrease previously reported amounts of revenue or expenses, we adjust retained earnings as of the beginning of the earliest period presented for the cumulative effect, if any, on that balance. If these changes affect our financial statements for previously reported interim periods not presented herein, we present revised financial statements for those periods when they are reported in the future.

Method of Amortization of Deferred Revenue Related to M&S Contracts

In previously issued financial statements, for our fiscal years prior to 2016 and for the first three quarters of 2016, we amortized deferred revenue related to maintenance and support, or M&S, contracts by recording a full month of amortization in the first month of a contract. We used that method based on our intent to match revenue from our M&S contracts to the expense we incur when delivering M&S services. We acknowledge that the more common and widespread practice is to amortize deferred revenue based upon the specific number of days the M&S contract is in place during that month. Both methods result in the recognition of the same amount of revenue over the term of the M&S contract but yield differing amounts of revenue being recognized in the first month and last month of an M&S contract.

Commencing with the issuance of our consolidated financial statements as of December 31, 2016, and for the year then ended, we changed our method of amortizing deferred revenue related to M&S contracts such that our condensed consolidated statements of operations and balance sheets included herein are now prepared using the specific number of days method. This change decreased M&S revenue and net income for the three months ended June 30, 2016 as reported herein by immaterial amounts relative to amounts previously reported for that period. This change increased deferred revenue as of June 30, 2016 by an immaterial amount relative to the amount previously reported as of that date. This change has no effect on the total amount of revenue we will realize from our M&S contracts.

Method of Recording M&S Billings

We may invoice a customer for M&S to be provided commencing on a date in a month subsequent to the month in which we invoice the customer. We typically receive a purchase order from our customers for M&S prior to invoicing them, and it is not uncommon for a customer to pay us in advance of that M&S commencement date either on their own or when we request such payment. Accordingly, in our consolidated balance sheets issued prior to 2016 and for the first three quarters of 2016, we recorded an account receivable and deferred revenue for these invoices as of the date of the invoice. Commencing with the preparation and issuance of our consolidated financial statements as of December 31, 2016, we determined that a reasonable, alternate and more conservative method would be to wait until the commencement date of the M&S contract had arrived to record the account receivable and deferred revenue for any such invoices for which we have not been paid as of the balance sheet date. Accordingly, our condensed consolidated balance sheet as of June 30, 2016, included herein is now prepared and presented using that method. This change had the effect of decreasing our reported amounts of accounts receivable and deferred revenue relative to the method we previously used but does not affect any of our reported amounts of revenue or net income.

Index

Reclassification of Sales Engineer Expenses

We employ sales engineers who assist our sales staff in addressing technical considerations by our customers prior to their purchasing our product. Our use of sales engineers has expanded in recent quarters. Prior to 2016 and for the first three quarters of 2016, we classified the expense of sales engineers as part of costs of revenue – professional services. Commencing with the preparation and issuance of our financial statements as of December 31, 2016, we began classifying these expenses as part of sales and marketing expense to more appropriately present the current nature of the activities of our sales engineers. This change has the effect of decreasing cost of revenue – professional services and increasing sales and marketing expense. It does not affect any of our reported amounts of revenue or net income.

Reclassification of Reserve for Uncertain Tax Position

As described in Note 9, we maintain a reserve for uncertain tax positions. Prior to 2016 and for the first three quarters of 2016, we classified that reserve as a current liability since it was not material to our financial statements taken as a whole. Commencing with the preparation of our financial statements as of December 31, 2016, we determined it appropriate to classify it as a component of other long term liabilities. This change has the effect of decreasing current income taxes payable and increasing other long term liabilities.

Reclassification of Professional Services Revenue

In preparing our condensed consolidated statement of operations and comprehensive income for the 2017 quarter, we changed the classification of certain revenue from M&S to professional services to better reflect the nature of that revenue. We have made the same reclassification in our condensed consolidated statement of operations and comprehensive income for the 2016 quarter presented herein.

Adjustments Related to the Audit Committee Investigation and Audit of 2016 Financial Statements

The Company has concluded that its previously issued consolidated financial statements for the year ended December 31, 2016 should be restated due to misstatements related to certain revenue transactions incorrectly recognized during the year ended December 31, 2016 as well as other transactions identified during the Audit Committee’s investigation and management’s analysis and for the changes in the Company’s accounting methods, reclassifications and revisions described above in this Note 3.

The impact of all of the misstatements described above on the condensed consolidated financial statements as of and for the three and six months ended June, 2016 are as follows:

Index

Condensed Consolidated Balance Sheet

As of June 30, 2016

(in thousands)

(unaudited)

	As Previously Reported			Adjustments			As Revised
Assets
Current assets:
Cash and cash equivalents	$	16,990					$	16,990
Short term investments		3,287						3,287
Accounts receivable, net		5,673			(622	)		5,051
Federal income tax receivable		55			361			416
Prepaid and other expenses		777						777

Total current assets		26,782			(261	)		26,521

Long term investments
Property and equipment, net		473						473
Capitalized software development costs, net		3,960						3,960
Goodwill		12,712						12,712
Deferred tax asset, net		893						893
Other assets		31			(1	)		30

Total assets	$	44,851		$	(262	)	$	44,589

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		742			(9	)		733
Accrued expenses		1,478			(103	)		1,375
Deferred revenue		11,344			228			11,572
Income taxes payable		-			-			-

Total current liabilities		13,564			116			13,680

Deferred revenue, non-current portion		3,825			145			3,970
Other long term liabilities		37			100			137

Stockholders’ Equity:
Preferred stock		-						-
Common stock		21						21
Additional paid-in capital		20,580			86			20,666
Treasury stock		(1,452	)		-			(1,452	)
Retained earnings		8,276			(709	)		7,567
Total stockholders’ equity		27,425			(623	)		26,802

Total liabilities and stockholders’ equity	$	44,851		$	(262	)	$	44,589

Index

Condensed Consolidated Statement of Operations and Comprehensive Income

For the Three Months Ended June 30, 2016

(in thousands, except per share amounts)

(unaudited)

	As Previously Reported		Adjustments			As Revised

Operating revenues:
Software licenses	$	2,893		(97	)	$	2,796
Maintenance and support		4,632		(79	)		4,553
Professional services		731		31			762
Total revenues		8,256		(145	)		8,111
Costs of revenues
Software licenses		800		(4	)		796
Maintenance and support		387		(1	)		386
Professional services		587		(135	)		452
Total costs of revenues		1,774		(140	)		1,634
Gross Profit		6,482		(5	)		6,477
Operating expenses
Sales and marketing		2,792		87			2,879
General and administrative		1,712		14			1,726
Research and development		572		13			585
Total operating expenses		5,076		114			5,190
Income from operations		1,406		(119	)		1,287
Interest income (expense), net		27					27
Income before income taxes		1,433		(119	)		1,314
Income tax expense		479		(6	)		473
Net income	$	954	$	(113	)	$	841
Comprehensive income	$	954	$	(113	)	$	841

Net income per common share - basic	$	0.05	$	(0.01	)	$	0.04

Net income per common share - diluted	$	0.04	$	(0.01	)	$	0.04

Index

Condensed Consolidated Statement of Operations and Comprehensive Income

For the Six Months Ended June 30, 2016

(in thousands, except per share amounts)

(unaudited)

	As Previously Reported		Adjustments			As Revised

Operating revenues:
Software licenses	$	5,192		(132	)	$	5,060
Maintenance and support		9,129		(131	)		8,998
Professional services		1,345		59			1,404
Total revenues		15,666		(204	)		15,462
Costs of revenues
Software licenses		1,430		(8	)		1,422
Maintenance and support		781		(1	)		780
Professional services		1,156		(281	)		875
Total costs of revenues		3,367		(290	)		3,077
Gross Profit		12,299		86			12,385
Operating expenses
Sales and marketing		5,693		191			5,884
General and administrative		3,445		(32	)		3,413
Research and development		1,199		33			1,232
Total operating expenses		10,337		192			10,529
Income from operations		1,962		(106	)		1,856
Interest income (expense), net		60					60
Income before income taxes		2,022		(106	)		1,916
Income tax expense		661		32			693
Net income	$	1,361	$	(138	)	$	1,223
Comprehensive income	$	1,361	$	(138	)	$	1,223

Net income per common share - basic	$	0.07	$	(0.0	)	$	0.06

Net income per common share - diluted	$	0.06	$	(0.0	)	$	0.06

Index

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2016

(in thousands)

(unaudited)

	As Previously Reported			Adjustments			As Revised

Operating Activities:
Net income	$	1,361			(138	)	$	1,223
Adjustments to reconcile net income to net cash provided by operating activities:
Bad debt expense		52			(10	)		42
Depreciation and amortization		1,006						1,006
Stock-based compensation		500			23			523
Deferred taxes		47						47
Excess tax deficiency from exercise of share based compensation		(12	)					(12	)
Subtotal before changes in operating assets and liabilities		2,954			(125	)		2,829
Changes in operating assets and liabilities:
Accounts receivable		356			489			845
Prepaid expenses		(40	)		(1	)		(41	)
Income tax receivable and payable		120			21			141
Accrued interest receivable		(33	)					(33	)
Other assets		29			1			30
Accounts payable		(108	)		2			(106	)
Accrued expenses		(404	)		(114	)		(518	)
Deferred revenues		(443	)		(283	)		(726	)
Other long-term liabilities		(7	)		10			3
Net cash provided by (used in) operating activities		2,424			-			2,424
Investing Activities:
Software development costs		(846	)					(846	)
Purchase of property and equipment		(113	)					(113	)
Net cash provided by (used in) investing activities		(959	)		-			(959	)
Financing Activities:
Proceeds from exercise of stock options		259						259
Tax deficiency (benefit) from stock-based compensation		12						12
Dividends paid		(631	)					(631	)
Net cash provided by (used in) financing activities		(360	)		-			(360	)
Net increase (decrease) in cash		1,105						1,105
Cash at beginning of period		15,885			-			15,885
Cash at end of period	$	16,990		$	-		$	16,990

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	-					$	-
Income taxes	$	468					$	468

Index

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.

~~Index~~

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~~an M&S ~~agreement.~~contract. 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 on a straight-line method 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~~We provide services under M&S contracts with terms generally ranging from one to three years. We require up-front payment of our M&S fee in an amount that covers the entire term of the agreement. We record deferred revenue ~~consists primarily~~at the commencement date of the contract or when we receive payment, whichever occurs first. We amortize the related deferred revenue over the term of the contract, based upon the specific number of days method. Deferred revenue related to ~~be earned in~~services we will deliver within one year is presented as a current liability while deferred revenue related to services that we will deliver more than one year into the future is presented as a non-current liability. We reduce deferred revenue and recognize revenue ratably in future periods on a straight-line method 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.~~service.

For our products licensed and delivered ~~under a SaaS transaction~~ on a monthly or other periodic subscription or SaaS basis, we recognize subscription revenue, including initial setup fees, on a monthly basis ratably 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.

~~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.

~~Index~~

~~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 nine months ended September 30, 2015 ($ in thousands):

Quarter Ended September 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 $ 2,852 $ 2,852
Maintenance and support 4,142 4,142
Professional services 653 653
Total revenues 7,647 7,647

Cost of Revenues:
Software licenses 195 367 562
Maintenance and support 341 341
Professional services 263 342 605
Total cost of revenues - 1,508

Gross profit - 6,139

Operating Expenses
Sales and marketing - 2,289 2,289
General and administrative - 1,449 1,449
Cost of Revenues 458 (458 ) -
Selling, general and administrative 4,355 (683 ) 66 (3,738 ) -
Research and development 646 646
Depreciation and amortization 433 (367 ) (66 ) -
Total operating expenses 5,892 4,384

Income from operations 1,755 1,755
Other income (expense), net 17 17
Income before income taxes 1,772 1,772
Income tax expense 542 542
Net income $ 1,230 $ 1,230
Comprehensive income $ 1,230 $ 1,230

Net income per common share -
Basic $ 0.06 $ 0.06
Diluted $ 0.06 $ 0.06

~~Index~~

Nine Months Ended September 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 $ 8,590 $ 8,590
Maintenance and support 12,269 12,269
Professional services 1,531 1,531
Total revenues 22,390 22,390

Cost of Revenues:
Software licenses 739 912 1,651
Maintenance and support 1,057 1,057
Professional services 327 930 1,257
Total cost of revenues - 3,965

Gross profit - 18,425

Operating Expenses
Sales and marketing - 7,060 7,060
General and administrative - 4,629 4,629
Cost of Revenues 1,066 (1,066 ) -
Selling, general and administrative 13,472 (1,987 ) 204 (11,689 ) -
Research and development 1,832 1,832
Depreciation and amortization 1,116 (912 ) (204 ) -
Total operating expenses 17,486 13,521

Income from operations 4,904 4,904
Other income (expense), net 51 51
Income before income taxes 4,955 4,955
Income tax expense 1,585 1,585
Net income $ 3,370 $ 3,370
Comprehensive income $ 3,370 $ 3,370

Net income per common share -
Basic $ 0.16 $ 0.16
Diluted $ 0.16 $ 0.16

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.

~~Index~~

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.

Index

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.~~level using December 31 as the measurement date. We operate as a single reporting unit.

When testing goodwill, we first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of our reporting unit is less than its carrying amount, including goodwill. In performing this qualitative assessment, we assess events and circumstances relevant to us including, but not limited to:

Macroeconomic conditions.

Industry and market considerations.

Cost factors and trends for labor and other expenses of operating our business.

Our overall financial performance and outlook for the future.

Trends in the quoted market value and trading of our common stock.

In considering these and other factors, we consider the extent to which any adverse events and circumstances identified could affect the comparison of our reporting unit’s fair value with its carrying amount. We place more weight on events and circumstances that most affect our reporting unit’s fair value or the carrying amount of our net assets. We consider positive and mitigating events and circumstances that may affect our determination of whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. We evaluate, on the basis of the weight of the evidence, the significance of all identified events and circumstances in the context of determining whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount.

If, after assessing the totality of these qualitative events and circumstances, we determine it is not more likely than not that the fair value of our reporting unit is less than its carrying amount, we conclude there is no impairment of goodwill and perform no further testing, in accordance with GAAP. If we conclude otherwise, we proceed with performing the first step, and if necessary, the second step, of the two-step goodwill impairment test prescribed by GAAP.

As of December 31, ~~2015,~~2016, 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 program plan and 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 and our method of amortizing them relative to our estimates of realizability through sales of products in the marketplace.

Research and Development

We expense research and development costs as incurred.

~~Index~~

Advertising Expense

We expense advertising costs as incurred as a component of our sales and marketing expenses. Advertising expense was ~~$480,315~~approximately $608,276 and ~~$334,352~~$559,322 in the 2017 quarter and the 2016 quarter, ~~and the 2015 quarter,~~ respectively, and ~~$1,447,078~~$1,027,837 and ~~$1,116,894~~$967,458 in the ~~2016 nine~~2017 six months and ~~2015 nine~~2016 six months, respectively.

Index

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.

Income Taxes

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

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

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

Earnings Per Share

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

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

Recent accounting pronouncements

The Financial Accounting Standards Board, or FASB, has issued the Accounting Standard Updates (ASU) described below that we believe may be relevant to our business and to the preparation of our financial statements.

1114

Index

~~Recent accounting pronouncements~~ASU 2017-04, Intangibles – Goodwill and Other (issued January 2017) - To simplify the subsequent measurement of goodwill, Step 2 was eliminated from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This update also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. A public business entity that is an SEC filer is required to adopt the amendments in this update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We expect that the application of the provisions of this update will not have a material effect on our consolidated financial statements.

~~In June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update (ASU)~~ASU 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash ~~Payments.~~Payments (issued June 2016) - This pronouncement provides guidance as to the treatment of transactions in a statement of cash flows with respect to eight specific cash flow issues. During ~~2015~~2017 and 2016, we had no transactions of the type cited in the statement and do not anticipate having any such transactions in the foreseeable future. Accordingly, we do not expect this pronouncement to have a material effect on how we present items in our statement of cash flows.

~~In June 2016, the FASB issued~~ ASU 2016-13, Financial Instruments – Credit Losses (issued June 2016). - Among ~~its~~the provisions of this ASU is a requirement that assets measured at amortized cost, which includes trade accounts receivable, be presented at the net amount expected to be collected. This pronouncement requires that an entity reflect all of its expected credit losses based on current estimates which will replace the current standard requiring that an entity need consider only past events and current conditions in measuring an incurred loss. We are subject to this guidance effective with financial statements we issue for the year ending December 31, 2020, and the quarterly periods during that year. We do not expect the amounts we report as accounts receivable in those future periods under this guidance to be materially affected relative to current guidance.

~~In March 2016, the FASB issued~~ ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (issued March 2016) –~~. When implemented, this~~ This standard ~~will discontinue~~discontinued 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~~As prescribed by this standard, we ~~will implement~~adopted it beginning January 1, 2017, and followed it in the preparation of our condensed consolidated financial statements as of June 30, 2017, and for the three months and six months then ended.

This standard also permits an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures may be either estimated (as has been the requirement in the past) or recognized when they occur. We elected to continue estimating forfeitures consistent with our ~~interim and annual financial statements~~existing practices thereby resulting in no change to our application of GAAP for ~~2017. The extent~~this aspect 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 fromcomputing share-based compensation.

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

~~In November 2015, the FASB, issued~~

Index

ASU ~~No.~~ 2015-17, Income Tax: Balance Sheet Classification of Deferred Taxes (issued November 2015)~~. ASU 2015-07~~ - This pronouncement 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 condensed consolidated financial statements in the manner described in ~~the~~ Note 69 below.

~~In May 2014, FASB issued~~ ASU ~~No.~~ 2014-09, ~~entitled~~ Revenue from Contracts with Customers ~~(Topic 606)~~(issued May 2014). - The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for those goods or services. We ~~are subject to this guidance~~will implement these new principles effective with consolidated financial statements we issue for the year ending December 31, 2018, and the quarterly periods during that year.

We have assessed the effect of ASU 2014-09 on the amount and timing of revenue we expect to recognize from our business activities in 2018 and later. We do not expect there to be material differences in the ~~amounts or~~amount and timing of revenue we ~~report~~recognize from similar business activities in ~~those~~ future periods ~~under~~determined by applying ASU 2014-09 as compared to revenue we would have otherwise recognized by applying GAAP as it existed prior to 2018.

We have determined that the application of ASU 2014-09 will have a material effect on the timing of our recording of expenses resulting from the incremental costs we incur to obtain a contract with a customer to deliver goods and services. These incremental costs consist primarily of sales commissions paid to our sales people and royalties on certain of our products paid to third parties. For years ended December 31, 2017, and earlier, we recorded the full amount of the sales commission and royalties paid on the full value of an M&S or SaaS contract as an expense on the inception date of the M&S contract. Under ASU 2014-09, we will account for such costs we incur in 2018 and later as follows:

·	If these costs are associated with products and services for which we recognize revenue at a point in time (primarily sales of perpetual software licenses and professional services), we will expense these costs in full at the time we recognize that revenue.

If these costs are associated with services for which we recognize revenue over time (primarily sales of M&S and SaaS subscriptions) for which we believe it is likely that the contract for those services will be renewed for additional terms in the future, provided we deem these costs to be recoverable, we will record these costs as deferred expense asset and amortize that cost to expense as follows:

o	For the portion of the cost that we determine benefits us primarily only over the term of the specific underlying contract currently in force (such as the term of an M&S contract), we will recognize expense ratably each month over that term.

For the portion of the cost that we determine benefits us over an overall customer relationship that is likely to span a period of time that is longer than an initial contract term (for example, an M&S contract renewed for multiple terms in the future), we will recognize expense ratably monthly over the estimated life of the customer relationship.

Our application of ASU 2014-09 to incremental costs we incur to obtain a contract with a customer will result in us recording, as an asset as of January 1, 2018, a deferred expense of $1.2 million applicable to contracts with customers in effect as of that date. We previously reported this ~~guidance~~amount as an expense in our financial statements for periods ending on and before December 31, 2017. We estimate that we will amortize this amount to ~~be materially affected relative~~expense at the rate of approximately $186,000 per quarter beginning in 2018. The incremental costs we incur to obtain contracts with customers during 2018 and later years, and the amount of such costs we record as a deferred expense and amortize to expense in subsequent periods, will depend upon the nature and scope of our future business activities, the nature and mix of the products and services we sell, the compensation plans we have in place for our sales people, and the royalty arrangements we enter into with third parties.

4. Certificates of Deposit

Our certificates of deposit are held at a bank and mature at various dates through December 2021. Certificates of deposit with contractual maturity dates less than one year from the balance sheet date are presented as current ~~guidance.~~assets. Certificates of deposit with contractual maturity dates beyond one year from the balance sheet date are presented as non-current assets.

1216

Index

~~Use~~We have the ability to hold these certificates of ~~Estimates~~

~~The preparation of consolidated financial statements in accordance with GAAP requires the use of estimates~~deposit until their maturity dates and ~~assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist~~ as of the date of this report intend to do so. We measure these investments on a recurring basis using Level 1 of the ~~financial statements are published,~~fair value hierarchy prescribed by GAAP which results in them being presented at original cost plus accrued interest earned. There is no amortization of original cost associated with our certificates of deposit.

5. Accounts Receivable, Net

We bill our customers and issue them an invoice when we have delivered our goods or services to them. In addition, when our customers agree to purchase or renew M&S services, we bill and invoice our customers at that time, which could be before the ~~reported amounts of revenues and expenses during~~date we begin delivering those services. In that event, we exclude from accounts receivable (and from the ~~reporting period. Uncertainties with respect to such estimates and assumptions are inherent~~related deferred revenue, see Note 3) the invoices we have issued for which the M&S services commencement date is in the ~~preparation~~future and which have not been paid by the customer as of the ~~Company’s~~date of our condensed consolidated 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.Accordingly, we determine our accounts receivable, net, as follows ($ in thousands):

	June 30, 2017			December 31, 2016
Total invoices issued and unpaid	$	6,955		$	6,932
Less: Unpaid invoices relating to M&S contracts with a start date subsequent to the balance sheet date		(661	)		(381	)
Gross accounts receivable		6,294			6,551
Allowance for sales returns and doubtful accounts		(278	)		(263	)
Accounts receivable, net	$	6,016		$	6,288

6. Capitalized Software Development Costs

Our capitalized software development costs ~~profile was~~balances and activities were as follows: ($ in thousands):

	September 30,			December 31,			June 30,			December 31,
	2016			2015			2017			2016
Gross capitalized cost	$	7,012		$	5,714		$	8,190		$	7,252
Accumulated amortization		(3,051	)		(1,732	)		(4,429	)		(3,509	)
Net balance	$	3,961		$	3,982
Capitalized software development costs, net							$	3,761		$	3,743

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015			2017			2016			2017			2016
Amount capitalized	$	452		$	506		$	1,298		$	1,613		$	476		$	373		$	938		$	846
Amortization expense		(450	)		(367	)		(1,319	)		(912	)		(446	)		(438	)		(920	)		(868	)

	Released			Unreleased
	Products			Products
Gross capitalized amount at June 30, 2017	$	7,618		$	572
Accumulated amortization	$	(4,429	)	$	-
Net	$	3,189		$	572

Released Unreleased
Products Products
Gross capitalized amount at September 30, 2016 $ 5,700 $ 1,312

Future amortization expense:
Six months ending December 31, 2017		920
Year ending December 31,
2018		1,339
2019		698
2020		232
Total	$	3,189

Future amortization expense:
Three months ending December 31, 2016 452
Year ending December 31,
2017 1,433
2018 699
2019 65
Total $ 2,649

Index

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

7. Deferred Revenue

As described in Note 5 regarding accounts receivable, when our customers agree to purchase or renew M&S services, we bill and invoice our customers at that time which could be before the date we begin delivering those services. In that event, we exclude from deferred revenue (and from the related accounts receivable) the invoices we have issued for which the M&S services commencement date is in the future and which have not been paid by the customer as of the date of our financial statements. Accordingly, we determine our deferred revenue as follows ($ in thousands):

	June 30, 2017			December 31, 2016
Total invoiced for M&S contracts for which revenue will be recognized in future periods	$	16,822		$	17,826
Less: Unpaid invoices relating to M&S contracts with a start date subsequent to the balance sheet date		(661	)		(381	)
Total deferred revenue	$	16,161		$	17,445

Deferred revenue, current portion	$	12,284		$	13,655
Deferred revenue, non-current portion		3,877			3,790
Total deferred revenue	$	16,161		$	17,445

8. 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 September 30, Nine Months Ended September 30,
2016 2015 2016 2015
Share-based compensation expense $ 221 $ 167 $ 721 $ 482

~~Index~~

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Share-based compensation expense	$	335	$	282	$	671	$	523

Stock Options

~~The GlobalSCAPE, Inc.~~We have granted stock options to our officers and employees under long-term equity incentive plans that originated in 2000, 2010 ~~Employee Long-Term Equity Incentive Plan is our current stock-based incentive plan for our employees.~~ and 2016. During the 2017 quarter and six months, we granted stock options only under the 2016 plan.

Provisions and characteristics of ~~this plan~~the options granted to our officers and employees under our long-term equity incentive plans 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.

·	Stock options we issue generally become exercisable ratably over a three-year period, ~~and~~ expire ten years from the date of ~~grant.~~grant, and are exercisable for a period of ninety days after the end of employment.

·	~~We issued no restricted~~Upon exercise of a stock ~~awards under this plan during~~option, we issue new shares from the ~~2016 or 2015 periods.~~shares of common stock we are authorized to issue.

·	~~As of September 30, 2016, stock-based incentives for up to 167,335 shares remained available for issuance in the future under this plan.~~

Index

We currently issue stock-based awards to our officers and employees only under the 2016 plan which authorizes the issuance of up to 5,000,000 shares of common stock for stock-based incentives including stock options and restricted stock awards. As of June 30, 2017, stock-based incentives for up to 4,266,500 shares remained available for issuance in the future under this plan.

We have not previously issued any restricted stock under any of these plans.

Our stock option activity has been as follows:

	Number of Shares			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term in Years		Aggregate Intrinsic Value (000's)					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
Outstanding at December 31, 2016											2,407,005		$	3.00		7.19	$	2,574
Granted		1,055,300		$	3.58						743,000		$	3.82
Forfeited		(372,045	)	$	3.14						(155,250	)	$	3.81
Exercised		(165,135	)	$	2.02						(191,500	)	$	2.39
Outstanding at September 30, 2016		2,609,445		$	2.83		6.29	$	2,015
Outstanding at June 30, 2017											2,803,255		$	3.22		6.93	$	5,810

Exercisable at September 30, 2016		1,351,760		$	2.26		3.59	$	1,814
Exercisable at June 30, 2017											1,181,844		$	2.64		4.10	$	3,129

Additional information about our stock options is as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Weighted average fair value of options granted	$	1.87	$	1.63	$	1.61	$	1.66
Intrinsic value of options exercised	$	242,223	$	110,709	$	342,609	$	182,454
Cash received from stock options exercised	$	368,235	$	137,130	$	458,349	$	258,801

Number of options that vested		107,030		72,480		402,154		266,346
Fair value of options that vested	$	173,857	$	122,298	$	653,600	$	421,049

Unrecognized compensation expense related to non-vested options at end of period	$	2,210,862	$	1,768,348	$	2,210,862	$	1,768,348
Weighted average years over which non-vested option expense will be recognized		2.17		2.44		2.17		2.44

Three Months Ended September 30, Nine Months Ended September 30,
2016 2015 2016 2015
Weighted average fair value of options granted $ 1.61 $ 1.42 $ 1.63 $ 1.38
Intrinsic value of options exercised $ 78,607 $ 105,450 $ 261,061 $ 386,408
Cash received from stock options exercised $ 70,320 $ 98,706 $ 333,329 $ 416,680

Number of options that vested 42,390 93,290 308,736 274,824
Fair value of options that vested $ 42,565 $ 97,679 $ 418,877 $ 296,886

Unrecognized compensation expense related to non-vested options at end of period $ 1,609,593 $ 753,846 $ 1,609,593 $ 753,846
Weighted average years over which non-vested option expense will be recognized 2.3 2.0 2.3 2.0

As of June 30, 2017
				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		74,100		2.25	$	1.09		74,100	$	1.09
$	1.47 - $2.32		450,245		2.42	$	1.83		448,885	$	1.83
$	2.34 - $3.52		1,027,930		7.35	$	3.28		467,479	$	3.13
$	3.53 - $4.91		1,250,980		8.49	$	3.79		191,380	$	3.95
Total options			2,803,255						1,181,844

1419

Index

As of September 30, 2016

Range of
Exercise Prices

Underlying
Shares
Outstanding
Options Outstanding Options Exercisable

Weighted
Average
Remaining
Contractual
Life

Weighted
Average
Exercise
Price

Number of
Underlying
Shares

Weighted
Average
Exercise
Price

$ 0.85 - $1.43 168,600 3.16 $ 1.16 168,600 $ 1.16
$ 1.47 - $2.32 612,995 4.05 $ 1.82 607,255 $ 1.82
$ 2.34 - $3.52 1,319,850 7.29 $ 3.13 445,905 $ 2.74
$ 3.53 - $4.21 508,000 7.44 $ 3.83 130,000 $ 4.10
Total options 2,609,445 1,351,760

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

Three Months Ended September 30, Nine Months Ended September 30,
2016 2015 2016 2015
Expected volatility 54 % 56 % 55 % 57 %
Expected annual dividend yield 1.50 % 2.40 % 1.50 % 2.40 %
Risk free rate of return 1.18 % 1.75 % 1.46 % 1.59 %
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.~~

	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Expected volatility		51	%		55	%		49	%		56	%
Expected annual dividend yield		1.50	%		1.50	%		1.50	%		1.50	%
Risk free rate of return		1.93	%		1.38	%		1.94	%		1.48	%
Expected option term (years)		6.00			6.00			6.00			6.00

Restricted Stock Awards

~~In May 2015, we adopted the~~Our 2015 Non-Employee Directors ~~Long Term~~Long-Term Equity 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 as restricted shares with a legend restricting transferability of the shares until the recipient satisfies the vesting provision of the award, which is generally continuing service for one year subsequent to the date of the ~~award.~~award, after which time the restrictive legend is removed from the shares.

·	Restricted shares participate in dividend payments and may be voted.

·	As of ~~September~~June 30, ~~2016,~~2017, stock based incentives for up to ~~340,000~~260,000 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, 2016		80,000		$	3.31
Shares granted with restrictions		80,000		$	4.24
Shares vested and restrictions removed		(80,000	)	$	3.31	$	320,000

Restricted shares outstanding at June 30, 2017		80,000		$	4.24

Unrecognized compensation expense for non-vested shares as of June 30, 2017
Expense to be recognized in future periods	$	291,008
Weighted average number of months over which expense is expected to be recognized		10.3

Number of
Shares

Grant Date
Fair Value
Per Share

Total
Fair Value of
Shares That
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 September 30, 2016 80,000 $ 3.31

Unrecognized compensation expense for non-vested shares as of September 30,2016
Expense to be recognized in future periods $ 156,999
Weighted average number of months over which expense is expected to be recognized 7
9. Income Taxes

~~Index~~

~~Income Taxes~~

The components of our income tax expense (benefit) are as follows ($ in thousands):

	Three months ended September 30,																						Nine months ended September 30,																				Three months ended June 30,													Six months ended June 30,
	2016										2015												2016										2015										2017							2016						2017							2016
	Current			Deferred				Total			Current				Deferred				Total				Current			Deferred				Total			Current			Deferred				Total			Current		Deferred			Total		Current		Deferred		Total		Current		Deferred			Total		Current		Deferred			Total
Federal		$	688		$	(81	)		$	607		$	797			$	(254	)		$	543			$	1,214		$	(21	)		$	1,193		$	1,812		$	(313	)		$	1,499	$	317	$	(94	)	$	223	$	367	$	65	$	432	$	707	$	(116	)	$	591	$	586	$	57		$	643
Foreign			12			-				12			6				-				6				37						$	22			33			-			$	33
State			72			(4	)			68			(4	)			(3	)			(7	)			133			(15	)		$	133			60			(7	)		$	53		55		(13	)		42		40		1		41		98		(13	)	$	85		60		(10	)	$	50
Total		$	772		$	(85	)		$	687		$	799			$	(257	)		$	542			$	1,384		$	(36	)		$	1,348		$	1,905		$	(320	)		$	1,585	$	372	$	(107	)	$	265	$	407	$	66	$	473	$	805	$	(129	)	$	676	$	646	$	47		$	693

·	Expenses that typically do not require us to pay them in cash in the current period (such as depreciation, amortization and share-based compensation);

·	The cost of financing our business;

·	The effects of income taxes.

We monitor ~~the components of~~Adjusted EBITDA to assess our ~~actual~~ performance relative to our ~~plans, budgets~~intended strategies, expected patterns of action, and ~~expectations and~~budgets. We use the results of that assessment to adjust our future activities to the extent we deem necessary.

Adjusted EBITDA is not a measure of financial performance under GAAP. It should not be considered as a substitute for net income presented on our condensed consolidated statement of operations and comprehensive ~~income or for net cash provided by operating activities presented on our condensed consolidated statement of cash flows.~~income. Adjusted EBITDA has limitations as an analytical tool and when assessing our operating performance. Adjusted EBITDA should not be considered in isolation or without a simultaneous reading and consideration of our financial statements 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 Nine Months Ended
September 30, September 30,
2016 2015 2016 2015
Net Income $ 1,399 $ 1,230 $ 2,761 $ 3,370
Add (subtract) items to determine adjusted EBITDA:
Income tax expense 687 542 1,348 1,585
Interest (income) expense, net (28 ) (17 ) (88 ) (51 )
Depreciation and amortization:
Total depreciation and amortization 513 433 1,522 1,116
Amortization of capitalized software development costs (450 ) (367 ) (1,319 ) (912 )
Stock-based compensation expense 221 167 721 482
Adjusted EBITDA $ 2,342 $ 1,988 $ 4,945 $ 5,590

~~Index~~

~~Adjusted EBITDA reconciles as follows to net cash provided by operating activities on our condensed consolidated statement of cash flow:~~

Nine Months Ended
September 30,
2016 2015
Adjusted EBITDA $ 4,945 $ 5,590
Add (subtract) items to reconcile to cash flow from operations:
Income tax expense (1,348 ) (1,585 )
Interest income (expense), net 88 51
Amortization of capitalized software development costs 1,319 912
Bad debt expense 67 147
Deferred taxes (36 ) (320 )
Excess tax benefit from share-based comp 5 (49 )
Accounts receivable (2,856 ) (1,690 )
Prepaid expenses 86 154
Other Assets 30 37
Accounts payable (217 ) (757 )
Accrued expenses (52 ) 10
Deferred revenue 1,081 531
Other long term liabilities (10 ) (5 )
Income tax receivable and payable 571 403
Net cash provided by operating activities $ 3,673 $ 3,429

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Net Income	$	457		$	841		$	1,288		$	1,223
Add (subtract) items to determine Adjusted EBITDA:
Income tax expense		265			473			676			693
Interest (income) expense, net		(77	)		(27	)		(146	)		(60	)
Depreciation and amortization:
Total depreciation and amortization		516			511			1,056			1,006
Amortization of capitalized software development costs		(446	)		(438	)		(920	)		(868	)
Stock-based compensation expense		335			282			671			523
Adjusted EBITDA	$	1,050		$	1,642		$	2,625		$	2,517

See Comparison of the ~~section below comparing our results~~Consolidated Statement of ~~operations~~Operations for the Three Months Ended June 30, 2017 and 2016 ~~quarter~~and Comparison of the Consolidated Statement of Operations for the Six Months Ended June 30, 2017 and ~~the 2015 quarter and the~~ 2016 ~~nine months and 2015 nine 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 over twenty years and have sold our products to thousands of enterprises and more than one million individual consumers throughout the world.

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

Index

·	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.

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

Perpetual software licenses under which customers pay us a one-time fee for the right to install our products in their information systems environment on computers they manage and either own or otherwise procure from a cloud services provider, including deploying our products at a cloud services provider in a bring-your-own-license, or BYOL, environment.

·	Cloud-based, SaaS ~~hosted~~ solutions ~~to which~~that we sell on an ongoing subscription basis resulting in our ~~customers subscribe and pay us~~earning a recurring, monthly subscription fee to access the service.

M&S.

·	Professional services for product ~~customization~~installation, integration and ~~integration.~~training.

In June 2017, we introduced a data integration product that we planned to sell under the brand name Kenetix. We licensed the technology for this product from a third-party. We have experienced issues with the third-party technology and have determined to suspend marketing of the product as we evaluate options and determine whether the licensor can effectively address the issues.

We focus on selling our EFT platform products in a business-to-business environment. The majority of the resources we will expend in the future for product research, development, marketing and sales will focus on our EFT platform. 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 below.

~~Index~~

We also sell products that can be synergistic to our ~~MFT~~EFT platform 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~~EFT platform products tothat support business-to-business ~~activities. We~~activities and are strategically focused on selling products in that ~~environment such that~~environment.

We intend to expend the majority of our resources ~~that we will expend~~ in the future for product research and development, marketing, and sales ~~will concentrate~~in a manner that concentrates 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 isdiscussion presents a summary description of our specific products and solutions.

Managed File Transfer – Enhanced File Transfer Platform

Enhanced File Transfer, or EFT, is the brand name of our core MFT product platform. Our EFT ~~was a Silver Winner~~platform products received multiple industry awards in compliance categories in 2016 including the ~~Compliance category~~2016 Golden Bridge awards, the Network Product Guide’s 2016 IT World Awards, and ~~Gold Winner in the BYOD category of~~ the 2016 Info Security Products Guide Global Excellence Awards.

Index

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.

~~Index~~

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,~~Since 2015, 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~~Advanced Authentication Module (AAM) that ~~boosts~~increases the ~~speed and efficiency~~interoperability of ~~secure data transfers and allows for the fast transfer~~EFT with multiple authentication methods. AAM provides a single source of ~~large files over disparate geographic distances.~~authentication across a customer’s infrastructure.

EFT 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~~An EFT Workspaces Outlook plugin that provides secure ad hoc file transfers via email, providing customers with the reporting features in EFT and ~~performance~~combining them with the simplicity and security of ~~critical information technology systems.~~sending files with Mail Express. The integration of these two products takes the best features in Mail Express and incorporates them into EFT.

·	~~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~~Accelerate, which is an accelerated file transfer ~~service.~~module that boosts the speed and efficiency of secure data transfers and allows for the fast transfer of large files over disparate geographic distances.

·	Improved facilitation of PCI DSS version 3.0 compliance with updates to data 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.~~protocols.

·	Enhanced and expanded event rule functionality which improves the ability to integrate our products with client business processes and backend ~~systems~~systems.

·	Support for active-active high availability in Amazon Web Services to accommodate for bursts or dips in network traffic, and provide improved resiliency, scalability and flexibility.

·	Enhanced security features supporting improved compliance with Health Insurance Portability and Accountability Act of 1996 (or HIPAA), guidelines.

·	EFT Insight, which is a new reporting platform that provides enhanced intelligence and analytics regarding file transfer activity that occurs within EFT.

Index

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

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

If a customer prefers to use the capabilities of EFT in a SaaS fashion, we offer EFT Cloud ~~Services.~~Services for a monthly subscription fee. The EFT platform delivered in this manner has the same features and functionality as our EFT platform installed at a customer site. EFT Cloud Services allows users to reduce their upfront cost and achieve other recognized benefits of cloud-based managed file transfer SaaS subscription solutions, including strong service level agreements for information technologies infrastructure reliability and performance. EFT can also be deployed for customers, on a BYOL basis, in their infrastructures running through Amazon Web Services or Microsoft Azure. We have also initiated offering EFT Enterprise direct to buyers on a pre-deployed basis in the Amazon Web Services and Microsoft Azure Marketplaces.

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

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.~~

~~Index~~

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~~by Network Products ~~Guide Global Excellence~~Guide’s 2016 IT World Awards.

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

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

Index

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.~~future but we will not invest significantly in marketing the product. We do not expect to expend significant resources in the future expanding the features and capabilities of CuteFTP.

~~Index~~

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.

Employees

AsOur number of ~~October 31, 2016, we had 126 full-time~~ employees ~~organized~~is as follows:

	June 30,
Department	2017		2016
Sales and Marketing		53		49
Engineering		34		28
Professional Services		7		9
Customer Support		23		16
Management and Administration		20		19
Total		137		121

	~~Number of~~
~~Department~~	~~Employees~~
~~Sales and Marketing~~		44
~~Engineering~~		28
~~Professional Services~~		12
~~Customer Support~~		22
~~Management and Administration~~		20
~~Total~~		~~126~~

Index

Solution Perspective and Trends

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

Three Months Ended September 30, Nine Months Ended September 30,
2016 2015 2016 2015
Amount
% of Total
Revenue
Amount
% of Total
Revenue
Amount
% of Total
Revenue
Amount
% of Total
Revenue

Revenue by Type

Software licenses $ 3,373 38.6 % $ 2,852 37.3 % $ 8,565 35.1 % $ 8,590 38.4 %
Maintenance and support 4,713 53.8 % 4,142 54.2 % 13,843 56.7 % 12,269 54.8 %
Professional services 667 7.6 % 653 8.5 % 2,013 8.2 % 1,531 6.8 %
Total Revenue $ 8,753 100.0 % $ 7,647 100.0 % $ 24,421 100.0 % $ 22,390 100.0 %

Revenue by Product

EFT Enterprise and Standard $ 8,212 93.8 % $ 6,905 90.3 % $ 22,678 92.9 % $ 19,983 89.2 %
Wide Area File Services 209 2.4 % 236 3.1 % 658 2.7 % 764 3.4 %
CuteFTP 124 1.4 % 240 3.1 % 480 2.0 % 665 3.0 %
Other 208 2.4 % 266 3.5 % 605 2.4 % 978 4.4 %
Total Revenue $ 8,753 100.0 % $ 7,647 100.0 % $ 24,421 100.0 % $ 22,390 100.0 %

	Three Months Ended June 30,										Six Months Ended June 30,
	2017					2016					2017					2016
			Percent of					Percent of					Percent of					Percent of
	Amount		Total			Amount		Total			Amount		Total			Amount		Total

Revenue By Type
License		2,700		31.9	%		2,796		34.5	%		5,279		31.2	%		5,060		32.7	%
M&S		5,222		61.6	%		4,553		56.1	%		10,343		61.2	%		8,998		58.2	%
Professional Services		551		6.5	%		762		9.4	%		1,283		7.6	%		1,404		9.1	%

Total Revenue	$	8,473		100.0	%	$	8,111		100.0	%	$	16,905		100.0	%	$	15,462		100.0	%

Revenue by Product Line
License
EFT Platform	$	2,551		94.5	%	$	2,560		91.6	%	$	4,950		93.8	%	$	4,520		89.3	%
Other		149		5.5	%		236		8.4	%		329		6.2	%		540		10.7	%

Total License Revenue		2,700		100.0	%		2,796		100.0	%		5,279		100.0	%		5,060		100.0	%

M&S
EFT Platform		4,953		94.8	%		4,242		93.2	%		9,794		94.7	%		8,366		93.0	%
Other		269		5.2	%		311		6.8	%		549		5.3	%		632		7.0	%

Total M&S Revenue		5,222		100.0	%		4,553		100.0	%		10,343		100.0	%		8,998		100.0	%

Professional Services (all EFT Platform)		551		100.0	%		762		100.0	%		1,283		100.0	%		1,404		100.0	%

Total Revenue
EFT Platform		8,055		95.1	%		7,564		93.3	%		16,027		94.8	%		14,290		92.4	%
Other		418		4.9	%		547		6.7	%		878		5.2	%		1,172		7.6	%

Total Revenue	$	8,473		100.0	%	$	8,111		100.0	%	$	16,905		100.0	%	$	15,462		100.0	%

Total revenue for our EFT platform products and services increased 6.5% for the 2017 quarter and 12.2% for the 2017 six months. This increase was offset by revenue decreasing for all other products which was expected and consistent with our previously stated intent to de-emphasize these products and focus our resources on the development and sale of our EFT platform products. As a result, total revenue increased 4.5% for the 2017 quarter and 9.3% for the 2017 six months. For a more detailed discussion of these revenue trends, see 27Comparison of the Consolidated Statement of Operations for the Three Months Ended June 30, 2017 and 2016

~~Index~~

and Comparison of the Consolidated Statement of Operations for the Six Months Ended June 30, 2017 and 2016.

We earn revenue primarily from the following activities:

License revenue from sales of our EFT ~~and Mail Express~~platform products that we deliver as either perpetually-licensed software installed at the customer’s premises, for which we earn the full amount of the license revenue at the time the license is delivered, or as a cloud-based service under our EFT Cloud Services brand delivered using a SaaS model, for which we earn monthly subscription revenue as these services are ~~delivered over a contract period that is typically one year.~~delivered.

Index

License revenue from sales of our Mail Express, WAFS and CuteFTP products that are installed at the customer’s premises under a perpetual license for which we earn the full amount of the license revenue at the time the license is delivered.

M&S revenue under contracts to provide ongoing product support and software updates to our customers who have purchased license software which we recognize ratably over the contractual period, which is typically one year, but can be up to three years.

Professional services revenue from a variety of ~~customization,~~ implementation, and integration services, as well as delivery of education and training associated with our solutions, which we recognize as the services are performed and accepted by the client.

We earn most of our revenue from the sale of our EFT platform products and the associated M&S and professional services related to those products. With our core competency being in products that address the ~~managed file transfer~~MFT market, we believe our EFT platform products provide the best opportunity for our future growth. Accordingly, expansion of the capabilities of the EFT platform will be our primary focus in the future. While we will continue to sell and support our other products for the foreseeable future, they will not be an area of emphasis for us going forward.

We believe that continuing to offer licensed products installed on-premises for which we recognize revenue up-front and that carry with them a recurring M&S revenue stream is important to our future success. At the same time, we recognize that a migration of capabilities to a SaaS platform is attractive to a growing number of customers. We have, and have had for quite some time, the capabilities in place to deliver our EFT platform in that ~~manner. However, this~~manner through our EFT Cloud products. While our SaaS revenue is not yet a material component of our total revenue, a migration by our customers to our EFT Cloud products could create some near-term decreases in the growth rate of license revenue, and may result in similar decreases in future periods, because it typically takes approximately 24 to 36 months of SaaS revenue to yield total revenue equivalent to that realized up-front from the sale of a license for an on-premise installation.

In mid-2016, we reviewed the allocation of our product research and development resources across all of our products. As a result of that review, we decided to adjust that allocation to focus most of our engineering resources involved in product research and development on our EFT platform products in order to expand their capabilities and to remain positioned to be responsive to the evolving needs of our customers.

~~Over the past few years, we~~We have developed and offered individual product lines throughout our history that include EFT, Mail Express, WAFS, ~~scConnect~~ and CuteFTP. Each of these product lines addresses distinct needs in the marketplace. While some customers purchase products from more than one of these product lines, for the most part, customers in a particular market or vertical have needs that are addressed by only one of these products and, therefore, purchase only that product. ~~With respect to Mail Express and scConnect, while~~While we will continue to offer ~~them~~Mail Express as a stand-alone ~~products~~product for the time being, the engineering resources we allocate to ~~these technologies~~this technology will focus on migrating ~~them~~it to becoming an integrated component of our EFT platform. We do not expect to expend significant resources in the future on expanding the features and capabilities of WAFS and CuteFTP although we will continue to sell those products and support them.

To support product innovation, we continue to enhance our software engineering group and our focus on optimizing the manner in which we assess the development of new technologies, our approach to managing those projects, and the timelines over which we do that work. In continuing to develop our demand generation activities, we have made and continue to make ongoing changes in sales and marketing including:

·	Increasing sales staffing and capabilities as needed to address our markets.

·	Aligning our sales group to enhance its industry and geographic focus.

·	Implementing new sales and marketing campaigns.

·	Evolving our lead generation programs to increase our sales staff’s exposure to potential purchasers.

·	Enhancing our support of channel partners and engaging them to sell our products through training, orientation and marketing programs.

2835

Index

Our total revenue increased 15% in the 2016 quarter compared to the 2015 quarter and 9% in the 2016 nine months compared to the 2015 nine months. For a more complete discussion of these revenue trends, see ~~Comparison of the Statement of Operations for the Three Months Ended September 30, 2016 and 2015~~ ~~and~~ ~~Comparison of the Statement of Operations for the Nine Months Ended September 30, 2016 and 2015.~~

Liquidity and Capital Resources

Our total cash, cash equivalents, certificates of deposit and working capital positions were as follows ($ in thousands):

September 30, 2016 December 31, 2015 September 30, 2015
Cash and cash equivalents $ 17,421 $ 15,885 $ 12,858
Short term investments 3,303 3,254 3,233
Total cash, cash equivalents and long term investments $ 20,724 $ 19,139 $ 16,091

Working capital $ 14,138 $ 11,162 $ 6,515
Deferred revenue, current portion 13,005 12,000 11,848
Working capital plus current deferred revenue (non-GAAP presentation) $ 27,143 $ 23,162 $ 18,363

	June 30, 2017			December 31, 2016
Cash and cash equivalents	$	8,757		$	8,895
Short term certificates of deposit		2,763			2,754
Long term certificates of deposit		12,898			12,779
Total cash, cash equivalents and certificates of deposit	$	24,418		$	24,428

Current assets	$	18,922		$	18,760
Current liabilities		(14,697	)		(16,188	)
Working capital	$	4,225		$	2,572

~~Deferred revenue, unlike the other liability components~~At June 30, 2017, our certificates of ~~our working capital, is an obligation we will satisfy by providing services~~deposit in ~~the future to our customers as part~~current assets mature on various dates through October 2017. Our long term certificates of our ongoing operating activities from which we have historically generated cash flow. Our deferred revenue does not involve a disbursement of cash as a direct payment of that liability. Accordingly, we assess our working capital using both the GAAP computation that includes all current liabilities as well as assessing it excluding the current portion of deferred revenue. Working capital plus the current portion of deferred revenue is not a measure of financial position under GAAP, has limitations as an analytical tool and whendeposit mature after June 30, 2018, on various dates through December 2021.

When assessing our ~~financial position~~liquidity and ~~should not be considered a substitute for working~~ capital ~~computed in accordance with GAAP.~~resources, we consider the following factors:

We may access and monetize our certificates of deposit at any time without risk of loss of the original amounts invested. If we were to redeem these certificates of deposit prior to their maturity, we may incur a penalty and forfeit certain amounts of accrued interest, but we view such amounts as not material.

Deferred revenue, unlike the other liability components of our working capital, is an obligation we will satisfy by providing services in the future to our customers as part of our ongoing operating activities from which we have historically generated cash flow. Our deferred revenue does not involve a disbursement of cash as a direct payment of that liability although we will incur operating expenses in the future as we deliver those M&S services.

Our capital requirements principally relate to our need to fund our ongoing operating expenditures, which are primarily related to employee salaries and benefits. We make these expenditures to enhance our existing products, develop new products, sell those products in the marketplace and support our customers after the sale.

We rely on cash and cash equivalents on hand and cash flows from operations to fund our operating activities and believe those items will be our principal sources of capital for the foreseeable future. If our revenue declines and/or our expenses increase, our cash flow from operations and cash on hand could decline.

We plan to expend significant resources in the future for research and development of our products and expansion and enhancement of our sales and marketing activities. If sales decline or if our liquidity is otherwise under duress, we could substantially reduce personnel and personnel-related costs, reduce or substantially eliminate capital expenditures and/or reduce or substantially eliminate certain research and development and sales and marketing expenditures. We may also sell equity or debt securities or enter into credit arrangements in order to finance future acquisitions or licensing activities, to the extent available.

Cash provided or used by our various activities consisted of the following ($ in thousands):

	Cash Provided (Used) During the Nine Months Ended September 30,						Cash Provided (Used) During the Six Months Ended June 30,
	2016			2015			2017			2016
Operating activities	$	3,673		$	3,429		$	1,225		$	2,424
Investing activities		(1,515	)		(1,769	)		(1,169	)		(959	)
Financing activities		(622	)		(160	)		(194	)		(360	)

2936

Index

Our cash provided by operating activities ~~increased~~decreased during the ~~2016 nine~~2017 six months compared to the ~~2015 nine~~2016 six months primarily due to the following factors:

~~Accounts payable decreased $217,000~~A transition during 2017 to emphasizing selling one-year instead of multi-year M&S contracts primarily due to our desire to reduce the ~~2016 nine~~effects of discounts that customers expect from a multi-year contract. Since our customers pay us for the full M&S term at the beginning of the contract, the up-front cash we receive at the time we sell a single-year contract is less than the up-front cash we receive when we sell a multi-year contract. At the same time, we potentially enhance our future M&S revenue due to less discounting. These factors contributed to our deferred revenue decreasing $1.3 million in the 2017 six months compared to decreasing $757,000 in the 2015 nine months. The change in the amount of the decrease was primarily due to the payment during the 2015 nine months of certain large obligations to third-party software developers which was not repeated$726,000 in the 2016 ~~nine months as a result of our increased use of internal resources to develop our products and normal variations in the timing of payments to our vendors.~~six months.

~~Income~~Higher payments for federal income taxes in the 2017 six months as compared to the 2016 six months. During the 2016 six months, we did not make any federal income tax ~~receivable and payable increased $571,000~~payments due to our application of overpayments from the 2015 tax year to 2016 tax year. We did not have overpayments in the 2016 ~~nine~~tax year to apply to the 2017 tax year. As a result, we made federal income tax payments during the 2017 six months for which there were no similar payments during the 2016 six months. These factors contributed to our federal income taxes payable decreasing $669,000 during the 2017 six months as compared to increasing $141,000 during the 2016 six months.

Offset by:

Higher cash collections from customers during the 2017 six months as compared to the 2016 six months. These higher collections occurred due to higher revenue in fiscal 2016 compared to fiscal 2015 which resulted in us beginning 2017 with a higher accounts receivable balance upon which to collect during the 2017 six months than the comparable balance with which we began the 2016 six months. While these cash collections caused our accounts receivable balance to decrease, this change in accounts receivable was more than offset by increases in accounts receivable from higher revenue during the 2017 six months as compared to the 2016 six months which resulted in accounts receivable decreasing less during the 2017 six months than during the 2016 six months.

Normal variations in our payments to vendors that contributed to our accounts payable increasing $18,000 in the 2017 six months compared to ~~increasing $403,000~~decreasing $106,000 in the ~~2015 nine~~2016 six months. ~~The change in the amount of the increase was a result of changes in the level of our taxable income between periods and normal~~

·	Normal variations in the timing of our ~~tax payments.~~

~~Offset by:~~

~~Net income after considering adjustments~~payroll payment dates relative to ~~reconcile net income to net cash provided by operating activities, as set forth on our Condensed Consolidated Statements of Cash Flow, decreased $609,000. See~~ the ~~section below under~~ ~~Comparison~~date of the ~~Statement~~balance sheet presented as a part of ~~Operations for the Nine Months Ended September 30, 2016 and 2015~~ ~~for a discussion of the changes~~our financial statements that contributed to accrued expenses decreasing $138,000 in the ~~components of these amounts.~~

2017 six months compared to decreasing $518,000 in the 2016 six months.

~~Accounts receivable increased $2.8 million~~Prepaid expenses decreasing $106,000 during the 2017 six months compared to increasing $41,000 during the 2016 six months primarily due to the prepayment of insurance premiums on a portion of our business insurance that we renewed in the 2016 ~~nine~~six months for which ~~provided less cash than the $1.7 million increase~~there was no similar prepayment in the ~~2015 nine months. This increase was due to an increase in software licenses sold and bookings of multi-year M&S contracts during the 2016 nine months as compared to the 2015 nine~~2017 six months.

The amount of cash we used for investing activities during the ~~2016 nine~~2017 six months ~~decreased~~increased compared to the ~~2015 nine~~2016 six months ~~with the primary component of that decrease relating to software development costs that were capitalized. This decrease was~~due primarily ~~due~~ to:

~~Increased use of~~An increase in our ~~employees as an internal resource~~work to ~~do this work~~develop new software products and services which resulted in the amount of software development costs we capitalized being higher during the 2017 six months than during the 2016 ~~nine months compared to the 2015 nine months when we relied more on the use of higher cost, third-party software developers.~~six months.

·	~~Enhancement~~An increase in purchases of ~~relationships with those third-party developers we continue to use by replacing legacy arrangements carrying higher costs with more cost effective~~property and ~~efficient arrangements.~~

·	~~Shortages~~equipment resulting from a reconfiguration of ~~qualified software engineers and qualified technical personnel that caused some~~certain of our ~~open positions that arise during the normal course of business to take longer to fill.~~office space.

~~Our financing~~Financing activities used ~~more~~less cash induring the ~~2015 nine~~2017 six months than during the 2016 ~~nine~~six months primarily due to ~~the payment~~an increase in proceeds from stock option exercises as a result of ~~three cash dividends in the 2016 nine months compared~~more option holders electing to ~~the payment of two cash dividends in the 2015 nine months.~~exercise their options.

Index

Contractual Obligations and Commitments

~~At September~~As of June 30, ~~2016,~~2017, our contractual obligations and commitments consisted primarily of the following items:

An obligation to deliver services in the future to satisfy our right to earn our deferred revenue of ~~$16.7~~$16.1 million. Those future services primarily relate to our obligations under M&S ~~contracts for which we have invoiced our customers.~~contracts. We will recognize this deferred revenue as revenue over the remaining life of those contracts which generally ranges from one to three years. Deferred revenue, unlike the other liability components of our working capital, is an obligation we will satisfy ~~through~~by providing services in the future to our customers as part of our ongoing operating activities from which we have historically generated cash flow. Our deferred revenue does not involve a disbursement of cash as a direct payment of that ~~liability.~~liability although we will incur operating expenses in the future as we deliver those M&S services.

·	An obligation under a contract with a third party to make future minimum prepaid royalty payments in the amount of $800,000 in September 2018 and $1.2 million in November 2019.

·	Trade accounts payable and accrued liabilities which include our contractual obligations to pay software royalties to third parties that vary in amount based on our sales volume of products upon which royalties are payable.

·	Operating lease for our office space.

·	Federal and state taxes.

~~Index~~

Our non-cancellable, contractual obligations at ~~September~~June 30, ~~2016,~~2017 consisted primarily of the ~~lease for our office space with amounts due as follows~~following ($ in thousands):

	Amounts Due for the Period
	Six Months Ending December 31,		Fiscal Years
	2017		2018		2019		Thereafter		Total

Prepaid royalty fees	$	-	$	800	$	1,200	$	-	$	2,000
Operating leases		180		360		120		-		660
Total	$	180	$	1,160	$	1,320	$	-	$	2,660

Amounts Due for the Period

Three Months Ending
December 31,
2016
Fiscal Years

2017 - 2018 2019 - 2020 Thereafter Total

Operating leases $ 90 $ 720 $ 120
$
-

$
930

As of ~~September~~June 30, ~~2016,~~2017, we had no interest-bearing obligations in the form of loans, notes payable or similar debt instruments.

We plan to continue to expend significant resources in the future on product development, sales and marketing which may require that we enter into additional contractual arrangements and use our cash to acquire or license technology, intellectual property, products, services or businesses related to our current business strategy.

Comparison of the Consolidated Statement of Operations for the Three Months Ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016

	Three Months Ended June 30,
	2017		2016		$ Change
	$ in thousands

Total revenues	$	8,473	$	8,111	$	362
Total cost of revenues		1,530		1,634		(104	)
Gross profit		6,943		6,477		466
Operating expenses
Sales and marketing		3,196		2,879		317
General and administrative		1,889		1,726		163
Research and development		1,213		585		628
Total operating expenses		6,298		5,190		1,108
Income from operations		645		1,287		(642	)
Other income		77		27		50
Income before income taxes		722		1,314		(592	)
Income tax expense		265		473		(208	)
Net income	$	457	$	841	$	(384	)

Three Months Ended September 30,
2016 2015 $ Change
$ in thousands

Total revenues $ 8,753 $ 7,647 $ 1,106
Total cost of revenues 1,770 1,508 262
Gross profit 6,983 6,139 844
Operating expenses
Sales and marketing 2,759 2,289 470
General and administrative 1,638 1,449 189
Research and development 528 646 (118 )
Total operating expenses 4,925 4,384 541
Income from operations 2,058 1,755 303
Other income (expense), net 28 17 11
Income before income taxes 2,086 1,772 314
Income tax expense 687 542 145
Net income $ 1,399 $ 1,230 $ 169

Index

In the discussion below, we refer to the three months ended ~~September~~June 30, ~~2016,~~2017, as the ~~“2016~~“2017 quarter” and the three months ended ~~September~~June 30, ~~2015,~~2016, as the ~~“2015~~“2016 quarter”. The percentage changes cited in our discussions are based on the ~~2016~~2017 quarter amounts compared to the ~~2015~~2016 quarter amounts.

~~Index~~

Revenue. The components of our revenues were as follows ($ in thousands):

Three Months Ended September 30,
2016 2015
$ in thousands
Amount
% of Total
Revenue
Amount
% of Total
Revenue

Revenue by Type

Software licenses $ 3,373 38.6 % $ 2,852 37.3 %
Maintenance and support 4,713 53.8 % 4,142 54.2 %
Professional services 667 7.6 % 653 8.5 %
Total Revenue $ 8,753 100.0 % $ 7,647 100.0 %

Revenue by Product

EFT Enterprise and Standard $ 8,212 93.8 % $ 6,905 90.3 %
Wide Area File Services 209 2.4 % 236 3.1 %
CuteFTP 124 1.4 % 240 3.1 %
Other 208 2.4 % 266 3.5 %
Total Revenue $ 8,753 100.0 % $ 7,647 100.0 %

	Three Months Ended June 30,
	2017					2016
			Percent of					Percent of
	Amount		Total			Amount		Total

Revenue By Type
License		2,700		31.9	%		2,796		34.5	%
M&S		5,222		61.6	%		4,553		56.1	%
Professional Services		551		6.5	%		762		9.4	%

Total Revenue	$	8,473		100.0	%	$	8,111		100.0	%

Revenue by Product Line
License
EFT Platform	$	2,551		94.5	%	$	2,560		91.6	%
Other		149		5.5	%		236		8.4	%

		2,700		100.0	%		2,796		100.0	%
M&S
EFT Platform		4,953		94.8	%		4,242		93.2	%
Other		269		5.2	%		311		6.8	%

		5,222		100.0	%		4,553		100.0	%

Professional Services (all EFT Platform)		551		100.0	%		762		100.0	%

Total Revenue
EFT Platform		8,055		95.1	%		7,564		93.3	%
Other		418		4.9	%		547		6.7	%

	$	8,473		100.0	%	$	8,111		100.0	%

~~Trends in Revenue by Type~~

~~Software Licenses~~ - Our ~~software license~~total revenue increased ~~18.3%~~4.5%. ~~Most of this increase came~~Revenue from ~~our sales of~~ our EFT platform products and services increased 6.5%, which was offset by a decrease in revenue from our other products. Revenue from those other products that consist of Mail Express, WAFS, CuteFTP, and TappIn decreased to comprising 4.9% of our total revenue. These trends are in line with our expectations in light of our announcement in mid-2016 that our focus would be on our EFT platform products. At the same time, we announced that while we would continue selling our other products, we would de-emphasize those products in the future, not expend future significant product development and engineering resources to enhance those products, and not dedicate significant future sales and marketing activities to them. We intend to maintain our focus on our EFT platform for the foreseeable future such that we expect to see a continuing decline in revenue from our products other than those that are part of the EFT platform.

Index

EFT Platform Products

License revenue from our EFT platform products remained relatively flat. Historically, we have been able to close several large EFT platform sales each quarter. During the 2017 quarter, we did not achieve our typical level of success in doing so. There was no single common factor that caused large deals in our sales pipeline not to close. We do not believe there has been any fundamental decline in demand for our products in the markets we serve. Instead, we believe that while our exposure to potential customers and selling opportunities were consistent with our past experience, we encountered a situation where an unusually large number of those potential customers deferred their buying decisions to later periods as a result of ~~the following factors:~~their assessment of business factors unique to each of them. We do not believe this decrease in license revenue from our EFT platform products is indicative of a long-term trend.

To improve our ability to successfully sell existing EFT platform products as well as new products produced by our software engineering team, we continued to make, and will continue to make, ongoing changes in sales and marketing personnel and activities including:

·	Increasing sales staffing and capabilities as needed to address our markets.

·	Aligning our sales group to enhance its industry and geographic focus.

·	Implementing new sales and marketing campaigns.

·	Evolving our lead generation programs to increase our sales staff’s exposure to potential purchasers.

·	Enhancing our support of channel partners and engaging them to sell our products through training, orientation and marketing programs.

M&S revenue from our EFT platform products increased 16.8% primarily due to:

~~In mid-2016, we reviewed how we were allocating our resources across all~~Ongoing license sales since a majority of ~~our product lines. Based on that review, we initiated changes that were~~license sales are accompanied by an M&S contract. The change in ~~place throughout~~M&S revenue typically lags behind the ~~2016 quarter to enhance our focus on our EFT platform that~~related change in license revenue because license sales are recognized as revenue in full in the period the license is our flagship product and from which we earn a substantial portion of our revenue. While these changes initially prioritized attention to our product research and development activities, we identified corporate-wide synergies from a similar focus on how we were expending resourcesdelivered while the related M&S revenue is recognized in ~~our marketing and sales activities.~~future periods as those services are delivered. As a result, growth in M&S revenue is typically tied to the ~~attention~~license sales growth we ~~paid~~experienced in earlier periods.

Sustaining high renewal rates of M&S contracts by customers who initially purchased these services in earlier periods. We believe these renewals result from our programs designed to provide high-quality and responsive M&S services to our EFT platform gained momentum across all departments resulting in our overall resources being more optimally used to translate sales leads into completed transactions and revenue for that product line. As a result, we realized 25.1% growth in revenue from our EFT platform perpetual license sales.customers.

Revenue from delivery of our EFT platform through a cloud-based SaaS solution grew 52.8%. We achieved this growth by promoting our ability to offer the features and functions of our EFT platform through a SaaS delivery method without materially impacting our perpetual license sales. We believe this flexibility allows us to address the full range of users, whether they prefer a SaaS solution or an on-premises solution, without negatively compromising our ability to earn revenue from both.

Our professional services revenue was $211,000 less for the 2017 quarter compared to the 2016 quarter which is a decrease of 28%. Going into the 2016 quarter, we had a backlog of professional services engagements that arose from software sales in previous periods. We worked down that backlog during the 2016 quarter which resulted in our professional services revenue being higher than typical for the 2016 quarter relative to software license revenue. There was not a similar backlog going into the 2017 quarter such that our professional services revenue for the 2017 quarter decreased as compared to the 2016 quarter but was at a level relative to software license sales that we believe to be more typical. In addition, during the 2017 quarter, we began to focus more on selling pre-packaged professional services (as compared to customized services) which, while yielding lower total revenue from professional services, allowed us to deliver professional services more efficiently and without the unpredictability that can arise with customized services.

We made an investment in early 2016 to enhance the talent level of our sales force. During the 2016 quarter, we began to realize the benefits of them completing their first full sales cycles of substance and converting our sales pipeline into revenue. These efforts, combined with the refocus on our EFT platform discussed above, allowed our sales and marketing teams to achieve greater efficiencies that led to increased revenue.

~~M&S 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 products also purchase an M&S contract. In general, and depending upon the level of M&S a customer purchases, this recurring revenue stream is 20% to 30% per year of the price of the underlying software license to which the M&S relates.

~~Index~~

~~M&S revenue increased 13.8% primarily as a result of ongoing license sales for EFT Enterprise and Standard that are almost always accompanied by an M&S contract and sustained high renewal rates of~~Our M&S contracts byare typically for one year, with some customers ~~who initially purchased these services~~buying two or three year contracts. The customer pays us the M&S fee for the entire term of the agreement at the time the contract begins. We recognize that amount as revenue ratably in ~~earlier periods. We believe these renewal rates result from our programs designed to provide high-quality and responsive M&S service to our customers.~~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. ~~Ongoing~~As a result, growing license revenue not only contributes to increasing revenue growth at the time the license is sold but also provides a foundation for future recurring revenue as the purchasers of our licensed products continually renew M&S ~~agreements~~contracts to support their ongoing product support needs. This pattern of activity can create a cumulative effect for M&S renewals as a result of the cumulative number of licensed software installations sold over multiple years that create M&S renewals in any single year predictably (and in line with our expectations) exceeding the number of new software licenses we sell in a single year. We expect this cumulative effect to continue ~~yielding sustainable M&S revenue as~~to grow if we continue to ~~sell our~~increase enterprise software ~~products~~license revenue in future periods.

Our M&S contracts are typically for one year, with some customers buying two or three year contracts. The customer pays us the M&S fee for the entire term of the agreement at the time the contract begins. We recognize that amount as revenue ratably in future periods over the term of the contract.

Index

~~Professional Services Revenue~~ - Professional services revenue increased 2.1%. This increase was due to our sales and marketing programs designed to increase the frequency of sales of professional services and our enhanced focus on managing our queue of professional services projects so as to deliver our work product to our customers sooner and in-turn accelerate our ability to recognize revenue from these projects.Other Products

~~Trends in Revenue by Product~~

~~EFT Enterprise and Standard~~ ~~- We earn a substantial portion of~~In mid-2016, we announced that our ~~revenue selling~~focus would be on our EFT platform ~~products and providing M&S and professional services related to those~~ products. ~~We believe these products present~~At the ~~best opportunity for increasing~~same time, we announced that while we would continue selling our ~~revenue. Our software license, M&S and professional services revenue from our EFT platform increased 18.9% for the reasons discussed above under~~ ~~Trends in Revenue by Type.~~

Mail Express, WAFS, CuteFTP, and ~~Other~~ ~~- The total of license and M&S revenue from WAFS decreased 11.4%, from CuteFTP decreased 48.3% and from other~~TappIn products ~~decreased 21.8%. Revenue from these products is~~that collectively constitute less than 10% of our total revenue, in the future we would de-emphasize these stand-alone products that are not part of our EFT platform. Accordingly, during the second half of 2016, we began to curtail our product development and engineering resources for these products and significantly reduced our sales and marketing activities supporting them. As a result, our license and M&S revenue from those products collectively declined 23.6% during the 2017 quarter. Our future focus will be on our EFT platform such that we ~~earn no significant professional services~~expect to see a continuing decline in revenue from these ~~products. These decreases in revenue were~~other products although we do expect them to continue to produce a ~~result of~~modest contribution margin that contributes to our ~~primary focus being on the development, marketing and sales of our EFT platform products as discussed above under~~ ~~Solution Perspective and Trends~~.future profitability.

Cost of Revenues. These expenses are associated with the production, delivery and support of our products and services. We believe it is most meaningful to view cost of revenues as a percent of the revenues to which those costs relate since many of those costs are variable relative to revenue.

Cost of license revenue consists primarily of:

·	Amortization of capitalized software development costs we incur when producing our software products. This amortization begins when a product is ready for general release to the ~~public.~~public and generally is an expense that is not directly variable relative to revenue.

·	Royalties we pay to use software developed by others for certain features of our ~~products.~~products that is generally an expense that is variable relative to revenue.

·	Fees we pay to third parties who provide services supporting our SaaS and cloud-based subscription ~~solutions.~~solutions that generally have components that are both variable and not variable relative to revenue.

Cost of M&S revenue and cost of professional services revenue consist primarily of salaries and related costs of our employees and third parties we use to deliver these services.

Cost of software license revenue decreased by 5.5% and as a percent of software license revenue was ~~26%~~28% in both the 2017 and 2016 ~~quarter compared to 20% in the 2015~~ quarter. ~~This increase~~The decrease was the result of our release of new software products and new versions of existing products in periods subsequent to the 2015 quarter and the resulting commencement of amortizing the capitalized software development costs for those products. This additional expense amortization that began subsequent to the 2015 quarter increased cost of revenue in the 2016 quarter as compared to the 2015 quarter. On an absolute dollar basis, cost of revenue for software licenses increased 55% during the 2016 quarterprimarily due ~~to the factors cited above and due to higher software license revenue.~~to:

A decrease in royalties we pay to third-parties to use their technology for certain components of our products. Our royalties load is sensitive to the mix of products we sell. During the 2017 quarter, more of the products we sold were not subject to royalties than was the case during the 2016 quarter. This product mix will ebb and flow based upon our customers’ unique demands such that we do not view this decrease in royalties as unusual or indicative of a long-term trend.

~~Index~~

A portion of our license revenue for the 2016 quarter was from a customer who required a higher than typical amount of configuration of our product to meet their needs. As a result, we incurred additional costs during the 2016 quarter to provide those configuration services. We did not incur similar costs during the 2017 quarter.

Cost of M&S revenue as a percent of M&S revenue was substantially unchanged. Cost of revenue for M&S in absolute dollars increased by 6%10% due to an increase in M&S revenue. The cost of delivering M&S can vary slightly up or down from period-to-period, but we believe such changes are typically not indicative of long term trends or permanent changes in our cost of delivering M&S. Our gross margin on these services generally remains greater than 90% as a result of a consistent application of our customer support delivery protocols and practices.

Cost of professional services revenue as a percent of that revenue was ~~80%~~64% in the ~~2016~~2017 quarter as compared to ~~93%~~59% in the ~~2015~~2016 quarter. This variation resulted from the varying scope and mix of the professional services we deliver that can change from period-to-period in response to the circumstances of the customer environments in which we are working. ~~Varying customer requirements for~~In addition, during the second half of 2016, we undertook a refinement of our professional services ~~combined with our desire~~organization and the manner in which we manage and deliver these services which resulted in more efficient processes from which we began to ensure that we maintain our high standard of delivering quality, timely services, caused us to engage third-party service providers to a greater extent in the 2015 quarter compared to the 2016 quarter, for whichrealize the cost ~~is higher than~~benefit in 2017. Because the cost ~~of using our own personnel. Cost~~ of revenue for professional services is highly variable relative to our revenue from our services, this cost in absolute dollars decreased ~~12%~~22% due to a decrease in our professional services revenue for the reasons discussed above.

Index

Sales and Marketing. We believe it most meaningful to view cost of sales and marketing as a percent of revenues since many of those costs, particularly sales commissions, are variable relative to revenue. These expenses were ~~31.5%~~38% of total revenue for the ~~2016~~2017 quarter compared to ~~29.9%~~36% of total revenue for the ~~2015~~2016 quarter. In absolute dollars these expenses increased ~~21%~~11%. These variations were primarily due to:

·	Increasing the size of our sales, marketing and product strategy teams and increased compensation rates due to competitive demands in the marketplace.

·	~~Increasing~~Increased marketing activities related to competitive intelligence and channel development.

·	~~An increase~~Increased sales lead generation activities.

·	Increased in revenue which resulted in a higher absolute dollar amount of sales commissions paid to employees although the commission rate as a percent of sales did not change materially.

General and Administrative. These expenses increased ~~13%~~9% primarily due ~~to a continuing severance obligation to our former chief executive officer and legal fees related to the matter discussed below in~~ ~~Part II. Other Information Item 1. Legal Proceedings~~.to:

·	Increased professional fees and related expenses associated with the previously disclosed internal investigation, the restatement of certain of our financial statements and related litigation.

Offset by:

A decrease in share-based compensation expense as a result of the 2016 quarter including share-based compensation expense arising from the modification of certain stock options related to the resignation of our chief executive officer during the 2016 quarter, which is an expense we did not incur in the 2017 quarter.

·	Receiving during the 2017 quarter a refund of an overpayment of office lease operating expenses during fiscal 2016 due to our landlord’s estimate of the amount of those expenses upon which those payments were based being in excess of the expenses actually incurred.

Research and Development. The overall profile of our research and development, or R&D, activities was as follows ($ in thousands):

Three Months Ended September 30,
2016 2015
R&D expenditures capitalized $ 452 $ 506
R&D expenditures expensed 528 646
Total R&D expenditures (non-GAAP measurement) $ 980 $ 1,152

~~Total research and development expenditures decreased 14.9% due to:~~

	Three Months Ended June 30,
	2017		2016
R&D expenditures expensed	$	1,213	$	585
R&D expenditures capitalized		476		373
Total R&D expenditures (non-GAAP measurement)	$	1,689	$	958

·	~~Increased use of our employees as an internal resource to do this work in the 2016 quarter compared to the 2015 quarter when we relied more on the use of higher cost, third-party software developers.~~

·	~~Enhancement of relationships with those third-party developers we continue to use by replacing legacy arrangements carrying higher costs with more cost effective and efficient arrangements.~~

·	~~Shortages of qualified software engineers and qualified technical personnel that caused some of our open positions that arise during the normal course of business to take longer to fill.~~

~~Index~~

Our R&D expenditures expensed increased 107.4% and our R&D expenditures capitalized increased 28%. These results were due to our planned, continued increase in our capacity to develop new products as well as maintain our existing products and research technologies available from third-parties. We did this through a combination of increasing our engineering headcount and engaging additional third-party resources on a flexible basis as needed.

Total resources expended for R&D ~~set~~(set forth above as total R&D ~~expenditures~~expenditures) serves to illustrate our total corporate efforts to improve our existing products and to develop new products regardless of whether or not our expenditures for those efforts were expensed or capitalized. Total resources expended for R&D is not a measure of financial performance under GAAP and should not be considered a substitute for R&D expense (set forth above as R&D expenditures expensed) and capitalized software development costs (set forth above as R&D expenditures capitalized) individually. While we believe the non-GAAP, total resources expended for R&D amount provides useful supplemental information regarding our overall corporate product improvement and new product creation activities, there are limitations associated with the use of this non-GAAP measurement. Total resources expended for R&D is a non-GAAP measure not prepared in accordance with GAAP and may not be comparable to similarly titled measures of other companies since there is no standard for preparing this non-GAAP measure. As a result, this non-GAAP measure of total resources expended for R&D has limitations and should not be considered in isolation from, or as a substitute for, R&D expense and capitalized software development cost individually.

Index

Interest Income (Expense), Net. Interest income (expense), net consists primarily of interest income earned on certificates of deposit. The increase in this amount was due primarily to enhanced investment of our cash beginning in the second half of 2016 to earn a higher rate of interest.

Income Taxes. Our effective tax rate was 37% for the 2017 quarter and 36% for the 2016 quarter. These rates differed from a federal statutory tax rate of 34% primarily due to:

·	The domestic production activities deduction and the research and development credit that are tax credit incentives that serve to reduce the rate at which we pay federal income taxes in exchange for us conducting certain aspects of our business in a manner promoted by the Internal Revenue Code.

Offset by:

·	Certain expenses in our financial statements, such as a portion of meals and entertainment expenses, that are not deductible on our federal income tax return.

·	State income taxes included in income tax expense in our financial statements.

Comparison of the Consolidated Statement of Operations for the Six Months Ended June 30, 2017 and 2016

	Six Months Ended June 30,
	2017		2016		$ Change
	$ in thousands

Total revenues	$	16,905	$	15,462	$	1,443
Total cost of revenues		3,064		3,077		(13	)
Gross profit		13,841		12,385		1,456
Operating expenses
Sales and marketing		6,485		5,884		601
General and administrative		3,603		3,413		190
Research and development		1,935		1,232		703
Total operating expenses		12,023		10,529		1,494
Income from operations		1,818		1,856		(38	)
Other income		146		60		86
Income before income taxes		1,964		1,916		48
Income tax expense		676		693		(17	)
Net income	$	1,288	$	1,223	$	65

In the discussion below, we refer to the six months ended June 30, 2017, as the “2017 six months” and the six months ended June 30, 2016, as the “2016 six months.” The percentage changes cited in our discussions are based on the 2017 six month amounts compared to the 2016 six month amounts.

Index

Revenue. The components of our revenues were as follows ($ in thousands):

	Six Months Ended June 30
	2017					2016
			Percent of					Percent of
	Amount		Total			Amount		Total

Revenue By Type
License		5,279		31.2	%		5,060		32.7	%
M&S		10,343		61.2	%		8,998		58.2	%
Professional Services		1,283		7.6	%		1,404		9.1	%

Total Revenue	$	16,905		100.0	%	$	15,462		100.0	%

Revenue by Product Line
License
EFT Platform	$	4,950		93.8	%	$	4,520		89.3	%
Other		329		6.2	%		540		10.7	%

		5,279		100.0	%		5,060		100.0	%
M&S
EFT Platform		9,794		94.7	%		8,366		93.0	%
Other		549		5.3	%		632		7.0	%

		10,343		100.0	%		8,998		100.0	%

Professional Services (all EFT Platform)		1,283		100.0	%		1,404		100.0	%

Total Revenue
EFT Platform		16,027		94.8	%		14,290		92.4	%
Other		878		5.2	%		1,172		7.6	%

	$	16,905		100.0	%	$	15,462		100.0	%

Our total revenue increased 9.3%. Revenue from our EFT platform products and services increased 12.2% but was offset by a decrease in revenue from our other products. Revenue from those other products that consist of Mail Express, WAFS, CuteFTP, and TappIn decreased to comprising 5.2% of our total revenue. These trends were in line with our expectations in light of our announcement in mid-2016 that our focus would be on our EFT platform products. At the same time, we announced that while we would continue selling our other products, we would de-emphasize those products in the future, not expend future significant product development and engineering resources to enhance those products, and not dedicate significant future sales and marketing activities to them. We intend to maintain our focus on our EFT platform for the foreseeable future such that we expect to see a continuing decline in revenue from our products other than those that are part of the EFT platform.

Index

EFT Platform Products

License and M&S revenue from our EFT platform products increased 10% and 17%, respectively. The increases across these products and services were primarily due to continued enhancement in our product development and software engineering groups which allowed us to refine our process for identifying new product opportunities, to better focus our resources on products that would yield larger and more immediate revenue opportunities, and to optimize our project management and software engineering processes to reduce the time necessary to produce new or improved products.

To improve our ability to successfully sell existing EFT platform products as well as new products produced by our software engineering team, we continued to make and will continue to make, ongoing changes in sales and marketing personnel and activities including:

·	Increasing sales staffing and capabilities as needed to address our markets.

·	Aligning our sales group to enhance its industry and geographic focus.

·	Implementing new sales and marketing campaigns.

·	Evolving our lead generation programs to increase our sales staff’s exposure to potential purchasers.

·	Enhancing our support of channel partners and engaging them to sell our products through training, orientation and marketing programs.

The 10% increase in license revenue from our EFT platform products was primarily due to:

·	The introduction of new products or new versions of products as described above under Business-Software Products and Services.

Our focus on leveraging the changes to our sales and marketing activities described above toward new customers who may not have previously used our products. While sales to existing customers often consist primarily of new modules added to existing software licenses, new customers present the potential for higher license sales since they typically need to purchase a license for our core products in addition to licenses for additional modules.

The 17% increase in M&S revenue from our EFT platform products was also due to:

Ongoing and increased license sales since a majority of license sales are accompanied by an M&S contract. The change in M&S revenue typically lags behind the related change in license revenue because license sales are recognized as revenue in full in the period the license is delivered while the related M&S revenue is recognized in future periods as those services are delivered.

·	Sustaining high renewal rates of M&S contracts by customers who initially purchased these services in earlier periods. We believe these renewals result from our programs designed to provide high-quality and responsive M&S services to our customers.

Our professional services revenue decreased $121,000 which is a decrease of 9% in that revenue line item and a decrease of less than one percent of our total revenue. Going into the 2016 six months, we had a backlog of professional services engagements that arose from software sales in previous periods. We worked down that backlog during the 2016 six months which resulted in our professional services revenue being higher than typical for the 2016 six months relative to software license revenue. There was not a similar backlog going into the 2017 six months such that our professional services revenue for the 2017 six months decreased as compared to the 2016 six months, but was at a level relative to software license sales that we believe to be more typical. In addition, during the 2017 six months, we began to focus more on selling pre-packaged professional services (as compared to customized services) which, while yielding lower total revenue from professional services, allowed us to deliver professional services more efficiently and without the unpredictability that can arise with customized services.

When we sell our licensed products, we also typically create a recurring revenue stream from M&S since almost all purchasers of our licensed products also purchase an M&S contract. In general, and depending upon the level of M&S a customer purchases, this recurring revenue stream is 20% to 30% per year of the price of the underlying software license to which the M&S relates.

Index

We typically experience a high renewal rate for M&S services for our enterprise products so long as a customer continues using the licensed product they purchased from us. As a result, growing license revenue not only contributes to increasing revenue growth at the time the license is sold but also provides a foundation for future recurring revenue as the purchasers of our licensed products continually renew M&S contracts to support their ongoing product support needs. This pattern of activity can create a cumulative effect for M&S renewals as a result of the cumulative number of licensed software installations sold over multiple years that create M&S renewals in any single year predictably (and in line with our expectations) exceeding the number of new software licenses we sell in a single year. We expect this cumulative effect to continue to grow if we continue to increase enterprise software license revenue in future periods.

Other Products

In mid-2016, we announced that our focus would be on our EFT platform products. At the same time, we announced that while we would continue selling our Mail Express, WAFS, CuteFTP, and TappIn products that collectively constitute less than 10% of our total revenue, in the future we would de-emphasize these stand-alone products that are not part of our EFT platform. Accordingly, during the second half of 2016, we curtailed our product development and engineering resources for these products and significantly reduced our sales and marketing activities supporting them. As a result, our license and M&S revenue from those products collectively declined 25% in the 2017 six months compared to the 2016 six months. Our future focus will be on our EFT platform such that we expect to see a continuing decline in revenue from these other products although we do expect them to continue to produce a modest contribution margin that contributes to our future profitability.

Cost of license revenue consists primarily of:

·	Amortization of capitalized software development costs we incur when producing our software products. This amortization begins when a product is ready for general release to the public and generally is an expense that is not directly variable relative to revenue.

·	Royalties we pay to use software developed by others for certain features of our products that is generally an expense that is variable relative to revenue.

·	Fees we pay to third parties who provide services supporting our SaaS and cloud-based subscription solutions that generally have components that are both variable and not variable relative to revenue.

Cost of M&S revenue and cost of professional services revenue consist primarily of salaries and related costs of our employees and third parties we use to deliver these services.

Cost of software license revenue increased 6% and as a percent of software license revenue was 28% in both the 2017 six months and the 2016 six months. These increases were primarily due to:

·	An increase in expense from the amortization of capitalized software development costs as a result of our release of new software products and new versions of existing products in periods subsequent to the 2016 six months.

·	An increase in our royalties expense as a result of an increase in the sales volume of products that contain components on which we pay royalties.

·	An increase in hosting fees paid to third parties to support the delivery of our EFT Cloud SaaS products.

Cost of M&S revenue as a percent of M&S revenue was substantially unchanged. Cost of revenue for M&S in absolute dollars increased by 7% due to an increase in M&S revenue. The cost of delivering M&S can vary slightly up or down from period-to-period, but we believe such changes are typically not indicative of long term trends or permanent changes in our cost of delivering M&S. Our gross margin on these services generally remains greater than 90% as a result of a consistent application of our customer support delivery protocols and practices.

Index

Cost of professional services revenue as a percent of that revenue was 56% in the 2017 six months as compared to 62% in the 2016 six months. This variation resulted from the varying scope and mix of the professional services we deliver that can change from period-to-period in response to the circumstances of the customer environments in which we are working. In addition, during the second half of 2016, we undertook a refinement of our professional services organization and the manner in which we manage and deliver these services which resulted in more efficient processes from which we began to realize the cost benefit in 2017. Because the cost of revenue for professional services is highly variable relative to our revenue from our services, this cost in absolute dollars decreased 17% due to a decrease in our professional services revenue for the reasons discussed above.

Sales and Marketing. We believe it most meaningful to view cost of sales and marketing as a percent of revenues since many of those costs, particularly sales commissions, are variable relative to revenue. These expenses were 38% of total revenue for both the 2017 six months and the 2016 six months. In absolute dollars these expenses increased 10%. These variations were primarily due to:

·	Increasing the size of our sales, marketing and product strategy teams and increased compensation rates due to competitive demands in the marketplace.

·	Increased marketing activities related to competitive intelligence and channel development.

·	Increased sales lead generation activities.

·	Increased in revenue which resulted in a higher absolute dollar amount of sales commissions paid to employees although the commission rate as a percent of sales did not change materially.

General and Administrative. These expenses increased 6% primarily due to:

·	Increased professional fees and related expenses associated with the previously disclosed internal investigation, the restatement of certain of our financial statements and related litigation.

·	An increase in share-based compensation expense due to a higher average number of options outstanding during the 2017 six months as compared to the 2016 six months. Our options outstanding increased as we continued to grant options to attract key personnel in a competitive marketplace for talent.

Offset by:

·	Receiving during the 2017 six months a refund of an overpayment of office lease operating expenses during fiscal 2016 due to our landlord’s estimate of the amount of those expenses upon which those payments were based being in excess of the expenses actually incurred.

A decrease in bad debt expense as a result of an enhanced review of our accounts receivable during the 2016 six months resulting in an increased write-off of accounts receivable in that period for which there was not a similar event during the 2017 six months due to an improvement in our collections of accounts receivable.

Research and Development. The overall profile of our research and development activities was as follows ($ in thousands):

	Six Months Ended June 30,
	2017		2016
R&D expenditures expensed	$	1,935	$	1,232
R&D expenditures capitalized		938		846
Total R&D expenditures (non-GAAP measurement)	$	2,873	$	2,078

Our R&D expense increased 57% and our R&D expenditures capitalized increased 11%.

These results were due to our planned, continued increase in our capacity to develop new products as well as maintain our existing products and research technologies available from third-parties. We did this through a combination of increasing our engineering headcount and engaging additional third-party resources on a flexible basis as needed.

Index

Total resources expended for R&D (set forth above as total R&D expenditures) serves to illustrate our total corporate efforts to improve our existing products and to develop new products regardless of whether or not our expenditures for those efforts were expensed or capitalized. Total resources expended for R&D is not a measure of financial performance under GAAP and should not be considered a substitute for R&D expense (set forth above as R&D expenditures expensed) and capitalized software development costs (set forth above as R&D expenditures capitalized) individually. While we believe the non-GAAP, total resources expended for R&D amount provides useful supplemental information regarding our overall corporate product improvement and new product creation activities, there are limitations associated with the use of this non-GAAP measurement. Total resources expended for R&D is a non-GAAP measure not prepared in accordance with GAAP and may not be comparable to similarly titled measures of other companies since there is no standard for preparing this non-GAAP measure. As a result, this non-GAAP measure of total resources expended for R&D has limitations and should not be considered in isolation from, or as a substitute for, R&D expense and capitalized software development cost individually.

Other ~~Income (Expense), Net.~~Income. ~~The other expense (net) in both quarters~~Other income consists primarily of interest income earned on ~~long and short term investments.~~certificates of deposit. The increase in this amount was due primarily to enhanced investment of our cash beginning in the second half of 2016 to earn a higher rate of interest.

Income Taxes. Our effective tax rate was ~~32.9%~~34% for the 2017 six months and 36% for the 2016 ~~quarter and 30.6% for the 2015 quarter.~~six months. These rates differed from a federal statutory tax rate of 34% primarily due to:

The domestic production activities deduction ~~in both quarters,~~ and the research and development credit that are ~~items considered in our~~tax credit incentives that serve to reduce the rate at which we pay federal income ~~tax return that are not part~~taxes in exchange for us conducting certain aspects of our ~~income before taxes on our financial statements.~~business in a manner promoted by the Internal Revenue Code.

Offset by:

·	Certain expenses in our financial statements, such as a portion of meals and entertainment expenses, that are not deductible on our federal income tax return.

·	State income taxes included in income tax expense in our financial statements.

Our effective rate was higher in the 2016 quarter compared to the 2015 quarter primarily due to the research and development tax credit being lower in 2016 than 2015 and also the granting of only incentive stock options in 2016, for which we generally do not ever take a deduction on the tax return, as compared to the granting of only non-qualified stock options in 2015 for which we take a deduction on the tax return when the option is exercised.

~~Comparison of the Statement of Operations for the Nine Months Ended September 30, 2016 and 2015~~

Nine Months Ended September 30,
2016 2015 $ Change
$ in thousands

Total revenues $ 24,421 $ 22,390 $ 2,031
Total cost of revenues 5,137 3,965 1,172
Gross profit 19,284 18,425 859
Operating expenses
Sales and marketing 8,453 7,060 1,393
General and administrative 5,083 4,629 454
Research and development 1,727 1,832 (105 )
Total operating expenses 15,263 13,521 1,742
Income from operations 4,021 4,904 (883 )
Other income (expense), net 88 51 37
Income before income taxes 4,109 4,955 (846 )
Income tax expense 1,348 1,585 (237 )
Net income $ 2,761 $ 3,370 $ (609 )

~~Index~~

In the discussions below, we refer to the nine months ended September 30, 2016, as the “2016 nine months” and the nine months ended September 30, 2015, as the “2015 nine months”. The percentage changes cited in our discussions are based on the 2016 nine month amounts compared to the 2015 nine month amounts.

~~The components of our revenues were as follows ($ in thousands):~~

Nine Months Ended September 30,
2016 2015
$ in thousands
Amount
% of Total
Revenue

Amount

% of Total
Revenue

Revenue by Type

Software licenses $ 8,565 35.1 % $ 8,590 38.4 %
Maintenance and support 13,843 56.7 % 12,269 54.8 %
Professional services 2,013 8.2 % 1,531 6.8 %
Total Revenue $ 24,421 100.0 % $ 22,390 100.0 %

Revenue by Product

EFT Enterprise and Standard $ 22,678 92.9 % $ 19,983 89.2 %
Wide Area File Services 658 2.7 % 764 3.4 %
CuteFTP 480 2.0 % 665 3.0 %
Other 605 2.4 % 978 4.4 %
Total Revenue $ 24,421 100.0 % $ 22,390 100.0 %

~~Trends in Revenue by Type~~

~~Software Licenses~~ ~~- Software license revenue decreased 0.3%. Most of this change was driven by our sales of our EFT platform products and was a result of the following factors~~

During the six months ended June 30, 2016, we reviewed how we had been allocating our product research and development resources across all of our products. We determined that we had been allocating resources to the development of our EFT platform at a level less than that necessary to allow our sales and marketing activities to continue to yield growth in license revenue from that product during the six months ended June 30, 2016. As a result, software license revenue decreased 9.5% for this period as compared to the six months ended June 30, 2015.

Based on the review described above, we initiated changes that were in place throughout the 2016 quarter to enhance our focus on our EFT platform that is our flagship product and from which we earn a substantial portion of our revenue. While these changes initially prioritized attention to our product research and development activities, we identified corporate-wide synergies from a similar focus on how we were expending resources in our marketing and sales activities. Our enhanced attention to our EFT platform gained momentum across all departments resulting in our overall resources being more optimally used to translate sales leads into completed transactions and revenue for that product line. As a result, we realized 25.1% growth in revenue from our EFT platform perpetual license sales during the 2016 quarter which substantially offset the decrease in software license revenue for first six months of 2016 yielding the 0.3% decrease in software license revenue for the 2016 nine months.

Revenue from delivery of our EFT platform through a cloud-based SaaS solution grew 39.3%. The dollar amount of this revenue is not yet material to our total revenue. We achieved this growth by promoting our ability to offer the features and functions of our EFT platform through a SaaS delivery method without materially impacting our perpetual license sales. We believe this flexibility allows us to address the full range of users, whether they prefer a SaaS solution or an on-premises solution, without negatively compromising our ability to earn revenue from both.

~~Index~~

We made an investment in early 2016 to enhance the talent level of our sales force. During the 2016 nine months, we began to realize the benefits of them completing their first full sales cycles of substance and converting our sales pipeline into revenue. These efforts, combined with the refocus on our EFT platform discussed above, allowed our sales and marketing teams to achieve greater efficiencies that led to increased revenue.

~~M&S 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 products also purchase an M&S contract. In general and depending upon the level of M&S a customer purchases, this recurring revenue stream is 20% to 30% per year of the price of the underlying software license to which the M&S relates.

M&S revenue increased 12.8% primarily as a result of ongoing license sales for EFT Enterprise and Standard that are almost always accompanied by an M&S contract and sustained high renewal rates of M&S contracts by customers who initially purchased these services in earlier periods. We believe these renewal rates result from our programs designed to provide high-quality and responsive M&S service to our customers.

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. Ongoing license revenue provides a foundation for future recurring revenue as the purchasers of our licensed products continually 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 yielding sustainable M&S revenue as we continue to sell our enterprise software products in future periods.

~~Professional Services Revenue~~ - Professional services revenue increased 31.5% due to our sales and marketing programs designed to increase the frequency of sales of professional services and our enhanced focus on managing our queue of professional services projects so as to deliver our work product to our customers sooner and in-turn accelerate our ability to recognize revenue from these projects.

~~Trends in Revenue by Product~~

~~EFT Enterprise and Standard~~ - We earn a substantial portion of our revenue from selling our EFT platform products and providing M&S and professional services related to those products. We believe these products present the best opportunity for increasing our revenue. Our software license, M&S and professional services revenue from our EFT platform increased 13.5% for the reasons discussed above under ~~Trends in Revenue by Type.~~

~~WAFS, CuteFTP and Other~~ - The total of license and M&S revenue from WAFS decreased 13.9%, from CuteFTP decreased 27.8% and from other products decreased 38.1%. Revenue from these products is less than 10% of our total revenue, and we earn no significant professional services revenue from these products. These decreases in revenue were a result of our primary focus being on the development, marketing and sales of our EFT platform products as discussed above under ~~Solution Perspective and Trends~~.

~~Cost of Revenues.~~ These expenses are associated with the production, delivery and support of the products and services we sell. We believe it most meaningful to view cost of revenues as a percent of the revenues to which those costs relate since many of those costs are variable relative to revenue.

~~Cost of license revenue consists primarily of:~~

·	~~Amortization of capitalized software development costs we incur when producing our software products. This amortization begins when a product is ready for general release to the public.~~

·	~~Royalties we pay to use software developed by others for certain features of our products.~~

·	~~Fees we pay to third parties who provide services supporting our SaaS and cloud-based subscription solutions.~~

~~Index~~

~~Cost of M&S revenue and cost of professional services revenue consist primarily of salaries and related costs of our employees and third parties we use to deliver these services.~~

Cost of software license revenue as a percent of software license revenue was 27% in the 2016 nine months compared to 19% in the 2015 nine months. This increase were a result of our release of new software products and new versions of existing products in periods subsequent to the 2015 nine months and the commencement of amortizing the capitalized software development costs for those products. This additional expense amortization that began subsequent to the 2015 nine months increased cost of revenue in the 2016 nine months as compared to the 2015 nine months. On an absolute dollar basis, cost of revenue for software licenses increased 39% during the 2016 quarter due to the factors cited above and due to higher software license revenue.

Cost of M&S revenue as a percent of M&S revenue was substantially unchanged. Cost of revenue for M&S in absolute dollars increased by 8% due to an increase in M&S revenue. The cost of delivering M&S can vary slightly up or down from period-to-period, but we believe such changes are typically not indicative of long term trends or permanent changes in our cost of delivering M&S. Our gross margin on these services generally remains greater than 90% as a result of a consistent application of our customer support delivery protocols and practices.

Cost of professional services revenue as a percent of that revenue was 84% in the 2016 nine months as compared to 82% in the 2015 nine months. This variation resulted from the varying scope and mix of the professional services we deliver that can change from period-to-period in response to the circumstances of the customer environments in which we are working. Varying customer requirements for our professional services, combined with our desire to ensure that we maintain our high standard of delivering quality, timely services, caused us to engage third-party service providers to a greater extent in the 2016 nine months compared to the 2015 nine months for which the cost is higher than the cost of using our own personnel. Cost of revenue for professional services in absolute dollars decreased 34% for the reasons discussed above.

~~Sales and Marketing.~~ We believe it most meaningful to view cost of sales and marketing as a percent of revenues since many of those costs, particularly sales commissions, are variable relative to revenue. These expenses were 35% of total revenue for the 2016 nine months compared to 32% of total revenue for the 2015 nine months. In absolute dollars these expenses increased 20%. These variations were primarily due to:

·	~~Increasing the size of our sales, marketing and product strategy teams and increased compensation rates due to competitive demands in the marketplace.~~

·	~~Increasing marketing activities related to competitive intelligence and channel development.~~

·	~~An increase in revenue which resulted in a higher absolute dollar amount of sales commissions paid to employees although the commission rate as a percent of sales did not change materially.~~

~~General and Administrative.~~ These expenses increased 10%. Our chief executive officer resigned during the 2016 nine months. The severance arrangement related to this resignation included a modification of certain stock options held by him to accelerate their vesting and to extend the period during which they can be exercised and also ongoing severance payments. The stock option modification resulted in a one-time share-based compensation expense. That expense and the ongoing severance payments and legal costs was the primary cause of the increase in this expense. Our legal fees also increased due to the matter discussed below in ~~Part II. Other Information Item 1. Legal Proceedings~~.

~~Research and Development.~~ ~~The overall profile of our research and development activities was as follows ($ in thousands):~~

Nine Months Ended September 30,
2016 2015
R&D expenditures capitalized $ 1,298 $ 1,613
R&D expenditures expensed 1,727 1,832
Total R&D expenditures (non-GAAP measurement) $ 3,025 $ 3,445

~~Index~~

~~Total research and development expenditures decreased 12.2% due to:~~

·	Increased use of our employees as an internal resource to do this work in the 2016 nine months compared to the 2015 nine months when we relied more on the use of higher cost, third-party software developers.

·	~~Enhancement of relationships with those third-party developers we continue to use by replacing legacy arrangements carrying higher costs with more cost effective and efficient arrangements.~~

·	~~Shortages of qualified software engineers and qualified technical personnel that caused some of our open positions that arise during the normal course of business to take longer to fill.~~

Total resources expended for R&D set forth above as total R&D expenditures serves to illustrate our total corporate efforts to improve our existing products and to develop new products regardless of whether or not our expenditures for those efforts were expensed or capitalized. Total resources expended for R&D is not a measure of financial performance under GAAP and should not be considered a substitute for R&D expense and capitalized software development costs individually. While we believe the non-GAAP, total resources expended for R&D amount provides useful supplemental information regarding our overall corporate product improvement and new product creation activities, there are limitations associated with the use of this non-GAAP measurement. Total resources expended for R&D is a non-GAAP measure not prepared in accordance with GAAP and may not be comparable to similarly titled measures of other companies since there is no standard for preparing this non-GAAP measure. As a result, this non-GAAP measure of total resources expended for R&D has limitations and should not be considered in isolation from, or as a substitute for, R&D expense and capitalized software development cost individually.

~~Other Income (Expense), Net.~~ ~~The other expense (net) in both quarters consists primarily of interest income earned on long and short term investments.~~

~~Income Taxes.~~ ~~Our effective tax rate was 32.8% for the 2016 nine months and 32.0% for the 2015 nine months. These rates differed from a federal statutory tax rate of 34% primarily due to:~~

·	The domestic production activities deduction in both quarters, and the research and development credit in the 2016 nine months only, that are items considered in our federal income tax return that are not part of our income before taxes on our financial statements.

~~Offset by:~~

·	~~Certain expenses in our financial statements, such as a portion of meals and entertainment expenses, that are not deductible on our federal income tax return.~~

·	~~State income taxes included in income tax expense in our financial statements.~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have not utilized derivative financial instruments or derivative commodity instruments. We do not expect to employ these or other strategies to hedge market risk in the foreseeable future. We may invest our cash in money market funds which are subject to minimal credit and market risk. We believe that the interest rate risk and other relevant market risks associated with these financial instruments are immaterial.

During the ~~three months ended September 30,~~2017 quarter and 2016 quarter, we earned approximately ~~17%~~12% and 8%, respectively, of our revenue from a single ~~third party,~~third-party channel distributor who purchases products from us and resells them to their customers. During the ~~three~~2017 six months ~~ended September 30, 2015 there was no single customer that exceeded 10% of sales. During the nine~~and 2016 six months, ~~ended September 30, 2016, and the nine months ended September 30, 2015,~~ we earned approximately ~~14%~~5% and ~~10%~~11%, respectively, of our revenue from ~~a single third party,~~the same third-party channel ~~distributor who purchases products from us and resells them to their customers.~~distributor. Approximately ~~40%~~13% of our accounts receivable as of ~~September~~June 30, ~~2016,~~2017 were due from this ~~customer and from one other customer, the latter of which did not constitute more than 10% of our revenue. Payment~~distributor. We have since received payment for substantially all ~~such amounts has been received subsequent to that date.~~of these accounts receivable.

We earned approximately ~~17%~~26% and ~~22%~~25% of our revenue from customers outside the United States during the ~~three months ended September 30, 2016,~~2017 quarter and the ~~three months ended September 30, 2015 respectively. We earned approximately 22%~~2016 quarter, respectively, and 24% ~~of our revenue from customers outside~~and 26% for the ~~United States during the nine~~2017 six months ~~ended September 30,~~and 2016 ~~and the nine~~six months, ~~ended September 30, 2015~~ respectively. We receive all revenue in U.S. dollars, so we have no material exchange rate risk with regard to ~~the~~our sales. We charge Value Added Taxes to our non-business customers in the European Union. We remit these taxes periodically in pound sterling. The impact of this currency translation has not been material to our business.

3948

Index

Item 4. Controls and Procedures

AsEvaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the ~~end of~~Exchange Act is recorded, processed, summarized and reported within the ~~period covered by this report,~~time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, ~~carried out an~~as appropriate, to allow timely decisions regarding required disclosure.

No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls are met. No evaluation of controls can provide absolute assurance that the ~~effectiveness~~system of ~~GlobalSCAPE’s “disclosure~~controls has operated effectively in all cases. Our disclosure controls and ~~procedures” (as defined in~~procedures are designed to provide reasonable assurance that the ~~Securities Exchange Act~~objectives of ~~1934 Rules 13a-15(e)~~disclosure controls and ~~15d-15(e))~~procedures are met.

Our management, including our President and Chief Executive Officer and our Interim Chief Financial Officer, evaluated our disclosure controls and procedures and concluded that ~~the~~our disclosure controls and procedures were ~~effective.~~not effective as of June 30, 2017 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

~~There were no changes~~Material Weaknesses

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. In connection with our management’s assessment of our internal control over financial reporting, our management has identified the following deficiencies that constituted individually, or in the aggregate, material weaknesses in our internal controls over financial reporting as of June 30, 2017.

We had material weaknesses in our control environment and monitoring:

·	We did not implement effective oversight of our finance and accounting processes (including organizational structure and reporting hierarchy), which impacted our ability to make appropriate decisions regarding revenue recognition.

·	We did not effectively design and implement appropriate oversight controls over our period-end financial closing and reporting processes, and our review controls were not sufficient to ensure that errors regarding revenue recognition would be detected.

·	We did not effectively monitor (review, evaluate and assess) the risks associated with key internal control activities that provide the revenue information contained in our financial statements.

We had material weaknesses related to internal control monitoring and activities to support the financial reporting process:

·	We did not maintain effective controls over the invoicing process to ensure that proper supporting documentation was received prior to preparing invoices.

·	We did not maintain effective controls over the revenue recognition process to ensure revenue was only recognized when all four criteria of our revenue recognition policy were met.

Index

Changes in Internal Control Over Financial Reporting

With the exception of the remediation efforts described below, there has been no change in our internal control over financial reporting that occurred during the ~~nine months ended September 30, 2016,~~quarterly period covered by this report and during the subsequent time period through the filing of this Form 10-Q that ~~have~~ materially affected, or ~~are~~is reasonably likely to materially affect, our internal control over financial reporting.

We designed a remediation plan to strengthen our internal control over financial reporting and haven taken, and will continue to take, remediation steps to address the material weaknesses described above. We also continue to take meaningful steps to enhance our disclosure controls and procedures and our internal controls over financial reporting.

Our remediation plan includes the following:

Clearly defining and communicating the management-approved, standard terms and conditions that may be offered to customers during the sales process and requiring appropriate management approval of requested deviations from these standard terms and conditions before a sale is consummated with a customer and a sales invoice is created.

·	Creating and implementing a policy clearly stating that all terms and conditions of agreements with customers are to be recorded in writing, communicated to finance and accounting personnel, and recorded in our permanent records prior to the creation of a sales invoice.

·	Conducting periodic training sessions and briefings to communicate our policies and procedures regarding our standard terms and conditions that we offer to customers and how we document and communicate approved deviations from those standard terms and conditions.

·	Enhancing the breadth and depth of the review by finance and accounting personnel of sales invoices and underlying supporting documentation to ensure that unusual items are identified and considered when determining revenue recognition.

·	Establishing a total invoice dollar amount threshold over which finance and accounting personnel must examine all actual invoices and supporting documentation to confirm the purchase by the customer and the appropriate revenue recognition profile.

·	Publishing guidelines that personnel can reference which set forth the requirements to be met for revenue to be recognized from a sale transaction and conducting periodic meetings with personnel to educate and remind them of these guidelines.

Our management is implementing and monitoring the effectiveness of these and other processes, procedures and controls and will make any further changes deemed appropriate. Our management believes the foregoing remedial efforts will effectively remediate the material weaknesses. As the Company continues to evaluate and work to improve its internal control over financial reporting, our management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan described above. If not remediated, these control deficiencies could result in further material misstatements to the Company’s consolidated financial statements.

4050

Index

Part II. Other Information

Item 1. Legal Proceedings

~~GlobalSCAPE has been named as one of a number of defendants~~The information set forth under “Note 12 – Commitments and Contingencies – Legal and Regulatory Matters” to the condensed consolidated financial statements included in a patent infringement suit filed by Digital Reg of Texas, LLC in the United States District Court for the Eastern District of Texas. The complaint alleges that we infringed a patent that regulates access to digital content. In a previous lawsuit this plaintiff brought asserting infringementPart I, Item 1 of this patent against Adobe Systems Inc., several of the claims of this patent were found to be invalid, a decision which Digital Reg appealed to the Federal Circuit. The case against us was stayed until resolution of that appeal. On April 8, 2016, the Federal Circuit confirmed the prior finding that several of the claims of Digital Reg’s patent were invalid. The stay has now been lifted in the suit against us and we have filed a Motion to Dismiss the case based on the findings of the Federal Circuit. We are currently waiting on the court to rule on our Motion to Dismiss. While we are early in this process such that itForm 10-Q is ~~not possible to reasonably determine the outcome of this lawsuit with any certainty, we believe any loss we could incur would be immaterial to our financial position and results of operations.~~ incorporated herein by reference.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our ~~2015~~2016 Form ~~10-K~~10-K/A filed with the Securities and Exchange Commission on ~~March 3, 2016.~~June 14, 2018. These risk factors could materially affect our business, financial condition or future results, but they are not the only risks facing GlobalSCAPE. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results.

Item 6. Exhibits

(a)

Exhibits


	31.1	Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2	Certification by Interim Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002

	32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	101	Interactive Data File.

4151

Index

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.


		GLOBALSCAPE, INC.

~~November 10, 2016~~June 14, 2018	By:	/s/ ~~James W. Albrecht, Jr.~~Karen J. Young
Date		~~James W. Albrecht, Jr.~~Karen J. Young
		Interim Chief Financial Officer

	June 30			December 31,
	2017			2016
Deferred tax assets:
Deferred revenue	$	1,324		$	1,229
Capital loss carryforward		1,099			1,099
Share-based compensation		528			578
Compensation and benefits		269			278
Texas franchise tax R&D credit		163			153
Allowance for doubtful accounts		94			114
Net operating loss carryforward		62			91
Prepaid expenses not deductible		136			-
Accrued expenses not deductible		72			56
Less Valuation Allowances:
Capital loss carryforward		(1,099	)		(1,099	)
Texas franchise tax R&D credit		(163	)		(153	)
Total deferred tax assets		2,485			2,346

Deferred tax liabilities:
Intangible assets		1,303			1,289
Depreciation		3			7
Total gross deferred tax liabilities		1,306			1,296

Net deferred tax assets	$	1,179		$	1,050

	Three Months Ending September 30,						Nine Months Ending September 30,
	2016			2015			2016			2015

Bookings	$	10,296		$	9,869		$	26,256		$	24,011
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		(8,967	)		(6,772	)		(20,945	)		(15,455	)
Products and services delivered to and accepted by the customer for which revenue recognition had been deferred at the time of booking		7,424			4,550			19,110			13,834
Revenue	$	8,753		$	7,647		$	24,421		$	22,390

	For the Nine Months Ended September 30,
	2016			2015
Operating Activities:
Net income	$	2,761		$	3,370
Items not involving cash at the time they are recorded in the statement of operations:
Bad debt expense		67			147
Depreciation and amortization		1,522			1,116
Share-based compensation		721			482
Deferred taxes		(36	)		(320	)
Excess tax benefit from share-based compensation		5			(49	)
Subtotal before changes in operating assets and liabilities		5,040			4,746
Changes in operating assets and liabilities:
Accounts receivable		(2,856	)		(1,690	)
Prepaid expenses		86			154
Deferred revenue		1,081			531
Accounts payable		(217	)		(757	)
Accrued expenses		(52	)		10
Other Assets		30			37
Other long-term liabilities		(10	)		(5	)
Income tax receivable and payable		571			403
Net cash provided by operating activities		3,673			3,429
Investing Activities:
Software development costs capitalized		(1,298	)		(1,613	)
Purchase of property and equipment		(168	)		(108	)
Interest reinvested in short and long term investments		(49	)		(48	)
Net cash (used in) investing activities		(1,515	)		(1,769	)
Financing Activities:
Proceeds from exercise of stock options		333			417
Excess tax benefit from share-based compensation		(5	)		49
Dividends paid		(950	)		(626	)
Net cash (used in) financing activities		(622	)		(160	)

Net increase in cash		1,536			1,500
Cash at beginning of period		15,885			11,358
Cash at end of period	$	17,421		$	12,858

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	-		$	-
Income taxes	$	776		$	1,341

	Quarter Ended September 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	$	2,852																$	2,852
Maintenance and support		4,142																	4,142
Professional services		653																	653
Total revenues		7,647																	7,647

Cost of Revenues:
Software licenses				195			367												562
Maintenance and support										341									341
Professional services				263						342									605
Total cost of revenues		-																	1,508

Gross profit		-																	6,139

Operating Expenses
Sales and marketing		-														2,289			2,289
General and administrative		-														1,449			1,449
Cost of Revenues		458		(458	)														-
Selling, general and administrative		4,355								(683	)		66			(3,738	)		-
Research and development		646																	646
Depreciation and amortization		433					(367	)					(66	)					-
Total operating expenses		5,892																	4,384

Income from operations		1,755																	1,755
Other income (expense), net		17																	17
Income before income taxes		1,772																	1,772
Income tax expense		542																	542
Net income	$	1,230																$	1,230
Comprehensive income	$	1,230																$	1,230

Net income per common share -
Basic	$	0.06																$	0.06
Diluted	$	0.06																$	0.06

	Nine Months Ended September 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	$	8,590																$	8,590
Maintenance and support		12,269																	12,269
Professional services		1,531																	1,531
Total revenues		22,390																	22,390

Cost of Revenues:
Software licenses				739			912												1,651
Maintenance and support										1,057									1,057
Professional services				327						930									1,257
Total cost of revenues		-																	3,965

Gross profit		-																	18,425

Operating Expenses
Sales and marketing		-														7,060			7,060
General and administrative		-														4,629			4,629
Cost of Revenues		1,066		(1,066	)														-
Selling, general and administrative		13,472								(1,987	)		204			(11,689	)		-
Research and development		1,832																	1,832
Depreciation and amortization		1,116					(912	)					(204	)					-
Total operating expenses		17,486																	13,521

Income from operations		4,904																	4,904
Other income (expense), net		51																	51
Income before income taxes		4,955																	4,955
Income tax expense		1,585																	1,585
Net income	$	3,370																$	3,370
Comprehensive income	$	3,370																$	3,370

Net income per common share -
Basic	$	0.16																$	0.16
Diluted	$	0.16																$	0.16

Future amortization expense:
Three months ending December 31, 2016		452
Year ending December 31,
2017		1,433
2018		699
2019		65
Total	$	2,649

As of September 30, 2016
Range of Exercise Prices		Underlying Shares Outstanding		Options Outstanding				Options Exercisable
				Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number of Underlying Shares		Weighted Average Exercise Price




$	0.85 - $1.43		168,600		3.16	$	1.16		168,600	$	1.16
$	1.47 - $2.32		612,995		4.05	$	1.82		607,255	$	1.82
$	2.34 - $3.52		1,319,850		7.29	$	3.13		445,905	$	2.74
$	3.53 - $4.21		508,000		7.44	$	3.83		130,000	$	4.10
Total options			2,609,445						1,351,760

	Number of Shares			Grant Date Fair Value Per Share		Total Fair Value of Shares That 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 September 30, 2016		80,000		$	3.31

Unrecognized compensation expense for non-vested shares as of September 30,2016
Expense to be recognized in future periods	$	156,999
Weighted average number of months over which expense is expected to be recognized		7

	Six Months Ended June,
	2017		2016
Balance at beginning of period	$	121	$	90
Increases for tax positions related to the current year		11		10
Increases for tax positions related to prior years		15		-
Balance at end of period	$	147	$	100

	2016		2015
Balance at beginning of year	$	90	$	125
Increases for tax positions related to the current year		9		-
Increases for tax positions related to prior years		11		48
Decreases for tax positions related to prior years		-		(51	)
Decreases due to settlements related to prior years		-		(32	)
Balance at September 30 and December 31, respectively	$	110	$	90

	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2016		2015		2016		2015		2017		2016		2017		2016
Numerators
Numerator for basic and diluted earnings per share:
Net income	$	1,399	$	1,230	$	2,761	$	3,370	$	457	$	841	$	1,288	$	1,223

Denominators
Denominators for basic and diluted earnings per share:
Weighted average shares outstanding - basic		21,122		20,892		21,061		20,782		21,675		21,105		21,610		21,056
Stock options		552		548		579		512
Weighted average shares outstanding - diluted		21,674		21,440		21,640		21,294

Dilutive potential common shares
Stock options and awards										495		584		484		599
Denominator for diluted earnings per share										22,170		21,689		22,094		21,655

Net income per common share - basic	$	0.07	$	0.06	$	0.13	$	0.16	$	0.02	$	0.04	$	0.06	$	0.06
Net income per common share - diluted	$	0.06	$	0.06	$	0.13	$	0.16
Net income per common share – diluted									$	0.02	$	0.04	$	0.06	$	0.06

	September 30, 2016		December 31, 2015		September 30, 2015
Cash and cash equivalents	$	17,421	$	15,885	$	12,858
Short term investments		3,303		3,254		3,233
Total cash, cash equivalents and long term investments	$	20,724	$	19,139	$	16,091

Working capital	$	14,138	$	11,162	$	6,515
Deferred revenue, current portion		13,005		12,000		11,848
Working capital plus current deferred revenue (non-GAAP presentation)	$	27,143	$	23,162	$	18,363

	Amounts Due for the Period
	Three Months Ending December 31, 2016		Fiscal Years
	Three Months Ending December 31, 2016		2017 - 2018		2019 - 2020		Thereafter		Total

Operating leases	$	90	$	720	$	120	$	-	$	930