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

 
FORM 10-Q
 

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Periodquarterly period ended September 30, 2016March 31, 2018.

or
☐          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 nameName of registrantRegistrant as specifiedSpecified in its charter)Charter)


Delaware
74-2785449
(State or other jurisdictionOther 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 Webweb 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 filerAccelerated 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 31, 2016,June 1, 2018 there were 21,145,02121,793,131 shares of common stock outstanding.
 

GlobalSCAPE, Inc.
Quarterly Report on Form 10-Q
For the Quarter ended September 30, 2016
March 31, 2018
Index
 
  Page
   
Part I.Financial Information 
   
Item 1. 
 3
4
 4
5
 5
6
7
 6
8
   
Item 2.19
27
   
Item 3.39
44
   
Item 4.40
44
   
Part II.Other Information41
   
Item 1.4146
   
Item1A.Item 1A.41
46
  
Item 5.
46
Item 6.41
46
  
42
47


Preliminary Notes
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.
In this report, we use the following terms:

“BYOL” means bring your own license.
“Cloud” or “cloud computing” refers to pooled computing resources, delivered on-demand, over the Internet.  In the same manner that electricity is delivered on-demand from large scale power plants, cloud computing is delivered from centralized data centers to users all over the world.
“DMZ” or Demilitarized Zone refers to a computer host or perimeter network inserted between a trusted internal network and an untrusted public network such as the Internet.

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

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

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

3

Part I. Financial Information
Item 1.          Financial Statements
GlobalSCAPE, Inc.
GlobalSCAPE, Inc.
Condensed Consolidated Balance Sheets
(in thousands except share amounts)
(in thousands except share amounts)

 September 30,  December 31,  March 31,  December 31, 
 2016  2015  2018  2017 
 (Unaudited)  (Audited)  (Unaudited)    
Assets            
Current assets:            
Cash and cash equivalents $17,421  $15,885  $11,653  $11,583 
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 
Certificates of deposit, short term  4,302   4,291 
Accounts receivable, net  4,155   5,925 
Federal income tax receivable  104   290   795   822 
Prepaid and other expenses  425   511 
Prepaid and other current assets  1,394   675 
Total current assets  30,123   26,021   22,299   23,296 
                
Property and equipment, net  463   498 
Certificates of deposit, long term  11,558   11,503 
Capitalized software development costs, net  3,961   3,982   3,654   3,786 
Goodwill  12,712   12,712   12,712   12,712 
Deferred tax asset, net  976   940   639   651 
Property and equipment, net  448   481 
Other assets  30   60   639   84 
Total assets $48,265  $44,213  $51,949  $52,513 
                
Liabilities and Stockholders’ Equity                
Current liabilities:                
Accounts payable $622  $839  $2,102  $1,900 
Accrued expenses  1,841   1,893   1,834   1,671 
Deferred revenue  13,005   12,000   12,681   13,315 
Income taxes payable  517   127 
Total current liabilities  15,985   14,859   16,617   16,886 
                
Deferred revenue, non-current portion  3,688   3,612   3,052   3,735 
Other long term liabilities  34   44   176   176 
                
Commitments and contingencies                
                
Stockholders’ equity:                
Preferred stock, par value $0.001 per share, 10,000,000
authorized, no shares issued or outstanding
  -   -   -   - 
Common stock, par value $0.001 per share, 40,000,000
authorized, 21,548,602 and 21,383,467 shares issued
at September 30, 2016, and December 31, 2015, respectively
  21   21 
Common stock, par value $0.001 per share, 40,000,000
authorized, 22,196,712 shares issued at both
March 31, 2018 and December 31, 2017
  22   22 
Additional paid-in capital  20,632   19,583   24,464   23,793 
Treasury stock, 403,581 shares, at cost, at
September 30, 2016 and December 31, 2015
  (1,452)  (1,452)
Treasury stock, 403,581 shares, at cost, at
March 31, 2018 and December 31, 2017
  (1,452)  (1,452)
Retained earnings  9,357   7,546   9,070   9,353 
Total stockholders’ equity  28,558   25,698   32,104   31,716 
Total liabilities and stockholders’ equity $48,265  $44,213  $51,949  $52,513 

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

34


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

 Three months ended September 30,  Nine months ended September 30,  Three months ended March 31, 
 2016  2015  2016  2015  2018  2017 
                  
Operating Revenues:                  
Software licenses $3,373  $2,852  $8,565  $8,590  $2,160  $2,578 
Maintenance and support  4,713   4,142   13,843   12,269   5,100   5,121 
Professional services  667   653   2,013   1,531   451   733 
Total Revenues  8,753   7,647   24,421   22,390   7,711   8,432 
Cost of revenues                        
Software licenses  873   562   2,303   1,651   771   758 
Maintenance and support  363   341   1,145   1,057   522   413 
Professional services  534   605   1,689   1,257   325   364 
Total cost of revenues  1,770   1,508   5,137   3,965   1,618   1,535 
Gross profit  6,983   6,139   19,284   18,425   6,093   6,897 
Operating expenses                        
Sales and marketing  2,759   2,289   8,453   7,060   3,113   3,289 
General and administrative  1,638   1,449   5,083   4,629   3,501   1,714 
Research and development  528   646   1,727   1,832   722   722 
Total operating expenses  4,925   4,384   15,263   13,521   7,336   5,725 
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 
Income (loss) from operations  (1,243)  1,172 
Interest income (expense), net  76   70 
Income (loss) before income taxes  (1,167)  1,242 
Income tax expense (benefit)  (232)  411 
Net income (loss) $(935) $831 
Comprehensive income (loss) $(935) $831 
                        
Net income per common share -                
Net income (loss) per common share -        
Basic $0.07  $0.06  $0.13  $0.16  $(0.04) $0.04 
Diluted $0.06  $0.06  $0.13  $0.16  $(0.04) $0.04 
                        
Weighted average shares outstanding:                        
Basic  21,122   20,892   21,061   20,782   21,793   21,544 
Diluted  21,674   21,440   21,640   21,294   21,793   22,023 
                        
Cash dividends declared per share $0.015  $0.015  $0.045  $0.030  $0.015  $0.015 

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

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

 For the Nine Months Ended September 30,  For the Three Months Ended March 31, 
 2016  2015  2018  2017 
Operating Activities:            
Net income $2,761  $3,370 
Net income (loss) $(935) $831 
Items not involving cash at the time they are recorded in the statement of operations:        Items not involving cash at the time they are recorded in the statement of operations:     
Bad debt expense  67   147 
Provision for doubtful accounts receivable  (75)  11 
Depreciation and amortization  1,522   1,116   594   541 
Share-based compensation  721   482   671   337 
Deferred taxes  (36)  (320)  (248)  (23)
Excess tax benefit from share-based compensation  5   (49)
Subtotal before changes in operating assets and liabilities  5,040   4,746   7   1,697 
Changes in operating assets and liabilities:                
Accounts receivable  (2,856)  (1,690)  1,845   1,332 
Prepaid expenses  86   154   (89)  39 
Deferred revenue  1,081   531   (1,317)  (1,123)
Accounts payable  (217)  (757)  202   (290)
Accrued expenses  (52)  10   163   93 
Other Assets  30   37 
Other assets  54   181 
Accrued interest receivable  (66)  (63)
Other long-term liabilities  (10)  (5)  -   17 
Income tax receivable and payable  571   403   27   507 
Net cash provided by operating activities  3,673   3,429   826   2,390 
Investing Activities:                
Software development costs capitalized  (1,298)  (1,613)  (402)  (462)
Purchase of property and equipment  (168)  (108)  (27)  (188)
Interest reinvested in short and long term investments  (49)  (48)
Net cash (used in) investing activities  (1,515)  (1,769)  (429)  (650)
Financing Activities:                
Proceeds from exercise of stock options  333   417   -   90 
Excess tax benefit from share-based compensation  (5)  49 
Dividends paid  (950)  (626)  (327)  (325)
Net cash (used in) financing activities  (622)  (160)  (327)  (235)
        
Net increase in cash  1,536   1,500   70   1,505 
Cash at beginning of period  15,885   11,358   11,583   8,895 
Cash at end of period $17,421  $12,858  $11,653  $10,400 
                
Supplemental disclosure of cash flow information:                
Cash paid during the period for:                
Interest $-  $-  $-  $- 
Income taxes $776  $1,341 
Income tax payments (refunds) $18  $15 

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


GlobalSCAPE, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(in thousands, except number of shares)
(unaudited)

        Additional          
  Common Stock  Paid-in  Treasury  Retained    
  Shares  Amount  Capital  Stock  Earnings  Total 
                   
                   
Balance at December 31, 2017  22,196,712  $22  $23,793  $(1,452) $9,353  $31,716 
                         
Retained Earnings Adjustment due to ASC 606                  979   979 
                         
Shares issued upon exercise of stock options  -   -   -   -       0 
                         
Stock-based compensation expense                        
       Stock options          587           587 
       Restricted stock          84           84 
                         
Common stock cash dividends                  (327)  (327)
                         
Net loss                  (935)  (935)
                         
Balance at March 31, 2018  22,196,712  $22  $24,464  $(1,452) $9,070  $32,104 
The accompanying notes are an integral part of these condensed consolidated financial statements.
7

GlobalSCAPE, Inc.
Notes to Condensed Consolidated Financial Statements
As of September 30, 2016March 31, 2018 and For the Three and Nine
Months Then Ended
(Unaudited)

1.1.         Nature of Business

We developGlobalSCAPE, Inc. and sell computer software thatits 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 5% 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 20162018 quarter and the 20152017 quarter refer to the three months ended September 30, 2016March 31, 2018 and 2015, respectively.  Our references to the 2016 nine months and the 2015 nine months refer to the nine months ended September 30, 2016 and 2015,2017, respectively.

2.2.         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 financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015,2017, filed with the SEC on June 14, 2018, which we refer to as the 20152017 Form 10-K, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations also included in our 20152017 Form 10-K and in this report.
We follow accounting standards set by the Financial Accounting Standards Board.Board or FASB. This board sets GAAP, thatwhich we follow in preparing financial statements that report our financial position, results of operations, and sources and uses of cash. We also follow the reporting regulations of the United States Securities and Exchange Commission, or SEC.
 
The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of our financial statements. It is possible the actual results could differ from these estimates and assumptions and could have a material effect on the reported amounts of our financial position and results of operations.

3.Significant Accounting Policies
8

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.

Revenue Recognition

Nature of Our Products and Services

We develop, marketearn revenue by delivering the following software products and services:

·Perpetual software licenses under which customers install our products in their information systems environment on computers they manage 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 environment.
·Cloud-based, hosted SaaS solutions that we sell on an ongoing subscription basis resulting in our earning recurring, monthly subscription and usage fees to access the service.
·Maintenance and support services (“M&S”) that generally consist of telephone support and access to unspecified future software upgrades.
·Professional services for product integration and configuration that generally do not significantly modify our software products.
We earn the majority of our revenue from the sale of perpetual software products. licenses and associated contracts for M&S.

We recognize revenue fromwhen we have satisfied a sale transaction whenperformance obligation by transferring control over a product or delivering a service to a customer. We measure revenue based upon the following conditionsconsideration set forth in an arrangement or contract with a customer. The revenue recognition criteria we apply to each of our software products and services are met:as follows:

·Persuasive evidence of an arrangement exists.
·Perpetual software licenses – These licenses grant a right to use our functional intellectual property. We recognize revenue at the point in time when we electronically deliver to our customer the software license key that provides the ability to access and use our product. If our customer is a reseller who will further transfer the ability to access and use our product to a third party under a separate arrangement that the reseller has with that third party, we recognize revenue at the time we deliver the software license key to the reseller since our contract is with the reseller.
·Delivery has occurred or services have been rendered.
·Cloud-based, hosted SaaS solutions – These solutions grant a right to access our functional intellectual property. We recognize revenue over time on a monthly basis as we deliver the services to which our customers subscribe. This revenue can include basic monthly fees to access the software and usage fees based upon the volume of certain resources the customer consumes (such as volumes of storage or bandwidth). We are generally paid for these services on a month-to-month basis, but if a customer pays us in advance for services we will deliver in the future, we record as deferred revenue the amount of such payment related to services we have not yet delivered.
·The amount of the sale is fixed or determinable.
·M&S – We provide these services to purchasers of perpetual software licenses under agreements with terms generally ranging from one to three years. We require up-front payment of our M&S fee in an amount that covers the entire term of the agreement.  We record as deferred revenue amounts paid that relate to future periods during which we will provide the M&S service. We reduce deferred revenue and recognize revenue ratably in future periods as we deliver the M&S service.
·Collection of the sale amount is reasonably assured.
·Professional services – We recognize revenue from these services when the services are completed. If we are paid in advance for these services, we record such payment as deferred revenue until we complete the services.

69


ForThe delivery of our software products and services generally does not involve any variable consideration, financing components or consideration payable to a sale transaction not meeting any one of these four criteria, we defer recognition ofcustomer such as rebates or other incentives that reduce amounts owed us by customers.

Deferred Revenue Classification and Activity

Deferred revenue related to services we will deliver within one year is presented as a current liability. Deferred revenue related to services that transaction until allwe will deliver more than one year into the criteria are met.future is presented as a non-current liability.

We earn the majority ofThe activity in our software licensedeferred revenue from software products sold under perpetual software license agreements. balances has been as follows ($in thousands):

  Three Months Ended March 31, 
  2018  2017 
Deferred revenue, beginning of period $17,050  $17,445 
Deferred revenue resulting from new contracts with customers  3,898   4,216 
Deferred revenue at the beginning of the period that was amortized to revenue  (4,786)  (4,919)
Deferred revenue arising during the period that was amortized to revenue  (429)  (420)
Deferred revenue, end of period $15,733  $16,322 

Multi-Element Transactions

At the time our customers purchase these products,perpetual software licenses, they typically also purchase a product maintenance and support, or M&S agreement. These transactions are multiple element software sales for which we assessalthough it is not mandatory that they do so to use the presencesoftware. We do not sell separate M&S to subscribers to our SaaS solutions as M&S is provided as part 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 revenuetheir SaaS subscription. Our customers may also purchase professional services at the time the product is delivered. We amortize the deferred revenue component to revenue in future periods as we deliver the related future services to the customer. For transactions, if any, for which we cannot establish VSOEthey purchase perpetual software licenses or a SaaS subscription. Each of the fair valuecomponents of these multi-element transactions is a separately identifiable performance obligation.

For multi-element transactions, we allocate the transaction price to each performance obligation on a relative stand-alone selling price basis. We determine that stand-alone selling price for each item at the inception of the undelivered elements, we initially record the entire transaction involving these multiple elements.

We sell, as deferred revenue and amortize that amount to revenue in future periods as we deliver the related future services to the customer.
Our deferred revenue consists primarilystand-alone transactions, renewals of revenue to be earned in the future as we deliver services underpre-existing M&S agreements. We bill our customers in advance for M&S services and record accounts receivable and deferred revenue in the same amount at the time we issue an invoice. We commence recognition of the deferred revenue as revenue only after the M&S period begins.
For our products licensed and delivered under a SaaS transaction on a monthly or other periodic subscription basis, we recognize subscription revenue, including initial setup fees, on a monthly basis over the contractual term of the customer contract as we deliver our products and services. Amounts invoiced or paid prior to this revenue recognition are presented as deferred revenue until earned.
We providecontracts, professional services to customers seeking assistance with products they have previously purchased from us, or SaaS subscriptions to customers not requiring any of our other products or services. Accordingly, we are able to estimate the stand-alone selling price of these items based upon our observation of those transactions. Since most of our sales of perpetual software licenses are part of multi-element transactions that also involve M&S and/or professional services, and because the selling price of those licenses can vary significantly among customers, consisting primarilywe use the residual approach under ASC 606 to estimate the selling price of perpetual software installation support, operations support and training. licenses in a multi-element transaction by reference to the total transaction price less the sum of the observable stand-alone selling prices of M&S and/or professional services.

We recognize revenue from these services as they are completed and accepted by our customers.allocate discounts proportionally to all of the components of a multi-element transaction.

Sales Tax

We collect sales tax on many of our sales.transactions with customers as required under applicable law. We do not include sales tax collected in our revenue. We record it as a liability payable to taxing authorities.

Reclassification of ExpensesAllowance for Sales Returns

In preparingWe provide an allowance for sales returns. We estimate this allowance based upon our financial statementshistorical experience and the nature of recent transactions with customers. This amount is included in accrued liabilities in our condensed consolidated balance sheet.

Contract Assets

We generally bill our customers for professional services when we have fully delivered the year ended December 31, 2015,services specified in the contract with the customer. We may incur costs in delivering the services prior to that time. Such costs are generally not material. Accordingly, we reviseddo not record a contract asset for professional service engagements in process but not yet billed.
10

Incremental Costs of Obtaining a Contract to Deliver Goods and Services

We incur incremental costs in the manner in which we present costform of revenuessales commissions paid to our sales personnel and other elementsroyalties on certain 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 supportparties. These are costs that we would not incur if we did not obtain a contract to deliver our cloud basedgoods and SaaS solutions.  Cost of M&S revenue and cost of professional services revenue consist primarily of salaries and related personnelservices. We account for these costs as follows:

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

oFor the portion of the cost that we determine benefits us primarily only over the term of the specific underlying contract currently in force (such as the term of an M&S contract), we recognize expense ratably each month over that term.
oFor the portion of the cost that we determine benefits us over an overall customer relationship that is likely to span a period of time that is longer than an initial contract term (for example, an M&S contract renewed for multiple terms in the future), we recognize expense ratably monthly over the estimated life of the customer relationship.

Our activity in deferred costs of our employees whoobtaining a contract to deliver the related service to our clients.  These costs were previously included goods and services has been as follows ($in the general and administrative classification.  Also included in the cost of professional services revenue are the fees of third party service providers.thousands):

Selling, General and Administrative
  
Three Months
Ended March 31,
 
  2018 
Deferred expense, beginning of period $1,239 
Deferred expense resulting from new contracts with customers  149 
Deferred expense amortized to expense  (204)
Deferred expense, end of period $1,184 

We separated selling, generalFor the three months ended March 31, 2108, $616,000 is recorded in prepaid and administrative expenses into two line items – salescurrent other assets 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$568,000 is recorded in general and administrative expense and the depreciation and amortization line onother assets in our statement of operations was removed.condensed consolidated balance sheet.

711

The following tables present our reported results under FASB Accounting Standards Codification Topic 606, or ASC 606 and a reconciliation to results using the historical accounting method:

Condensed Consolidated Balance Sheet
(in thousands)
As of March 31, 2018
(unaudited)
  
As
Reported
  
Effect of
ASC 606
  
ASC 605
Historical
 
Assets         
Current assets:         
Cash and cash equivalents $11,653     $11,653 
Certificates of deposit, short term  4,302      4,302 
Accounts receivable, net  4,155   (100)  4,055 
Federal income tax receivable  795   12   807 
Prepaid and other assets  1,394   (616)  778 
Total current assets  22,299   (704)  21,595 
             
Certificates of deposit, long term  11,558       11,558 
Capitalized software development costs, net  3,654       3,654 
Goodwill  12,712       12,712 
Deferred tax asset, net  639   260   899 
Property and equipment, net  448       448 
Other assets  639   (568)  71 
Total assets $51,949  $(1,012) $50,937 
             
Liabilities and Stockholders' Equity            
Current liabilities:            
Accounts payable  2,102       2,102 
Accrued expenses  1,834   (100)  1,734 
Deferred revenue  12,681       12,681 
Total current liabilities  16,617   (100)  16,517 
             
Deferred revenue, non-current portion  3,052       3,052 
Other long term liabilities  176       176 
             
Stockholders' Equity:            
Preferred stock  -       - 
Common stock  22       22 
Additional paid-in capital  24,464       24,464 
Treasury stock  (1,452)      (1,452)
Retained earnings  9,070   (912)  8,158 
Total stockholders' equity  32,104   (912)  31,192 
             
Total liabilities and stockholders' equity $51,949  $(1,012) $50,937 
12


Effect of the reclassifications
Condensed Consolidated Statement of Operations and Comprehensive Income (Loss)
(in thousands, except per share amounts)
For the Three Months Ended March 31, 2018
(unaudited)

  
As
Reported
  
Effect of
ASC 606
  
ASC 605
Historical
 
          
Operating revenues:         
Software licenses $2,160     $2,160 
Maintenance and support  5,100      5,100 
Professional services  451      451 
Total revenues  7,711   -   7,711 
Costs of revenues            
Software licenses  771   (25)  746 
Maintenance and support  522       522 
Professional services  325       325 
Total costs of revenues  1,618   (25)  1,593 
Gross Profit  6,093   25   6,118 
Operating expenses            
Sales and marketing  3,113   (31)  3,082 
General and administrative  3,501       3,501 
Research and development  722       722 
Total operating expenses  7,336   (31)  7,305 
Income (loss) from operations  (1,243)  56   (1,187)
Interest income (expense), net  76       76 
Income (loss) before income taxes  (1,167)  56   (1,111)
Income tax expense (benefit)  (232)  12   (220)
Net income (loss) $(935) $44  $(891)
Comprehensive income (loss) $(935) $44  $(891)
             
Net income (loss) per common share - basic $(0.04) $0.00  $(0.04)
             
Net income (loss) per common share - diluted $(0.04) $0.00  $(0.04)
The reclassifications were between cost of revenues and operating expenses and had no effect on revenue, income from operations, net income or earnings per share.  The following tables illustrate the effects of these reclassifications on previously reported amounts for the quarter and the nine months ended September 30, 2015 ($ 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 

 
  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 

Condensed Consolidated Statements of Cash Flows
(in thousands)
For the Three Months Ended March 31 2018
(unaudited)

  
As
Reported
  
Effect of
ASC 606
  
ASC 605
Historical
 
          
Operating Activities:         
Net loss $(935)  44  $(891)
Items not involving cash at the time they are recorded in the statement of operations:            
Provision for doubtful accounts receivable  (75)      (75)
Depreciation and amortization  594       594 
Share-based compensation  671       671 
Deferred taxes  (248)      (248)
Subtotal before changes in operating assets and liabilities  7   44   51 
Changes in operating assets and liabilities:            
Accounts receivable  1,845   (100)  1,745 
Prepaid expenses  (89)  (56)  (145)
Deferred revenues  (1,317)      (1,317)
Accounts payable  202       202 
Accrued expenses  163   100   263 
Other assets  54       54 
Accrued interest receivable  (66)      (66)
Other long-term liabilities  -       - 
Income tax receivable and payable  27   12   39 
Net cash provided by operating activities  826   -   826 
Investing Activities:            
Software development costs  (402)      (402)
Purchase of property and equipment  (27)      (27)
Net cash (used in) investing activities  (429)  -   (429)
Financing Activities:            
Proceeds from exercise of stock options  -       - 
Dividends paid  (327)      (327)
Net cash (used in)  financing activities  (327)  -   (327)
Net increase in cash  70       70 
Cash at beginning of period  11,583   -   11,583 
Cash at end of period $11,653  $-  $11,653 
             
Supplemental disclosure of cash flow information:            
Cash paid during the period for:            
Interest $-      $- 
Income taxes $18      $18 
 


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.

Property and Equipment

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

Expenditures for maintenance and repairs are expensed as incurred.

Goodwill

Goodwill is not amortized. On at least an annual basis, we test goodwill for impairment at the reporting unit level.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, 2015,2017, after assessing the totality of the relevant events and circumstances, we determined it not more likely than not that the fair value of our reporting unit was less than its carrying amount. Accordingly, we concluded there was no impairment of goodwill as of that date. There have been no material events or changes in circumstances since that time indicating that the carrying amount of goodwill may exceed its fair market value and that interim testing needed to be performed.

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

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

Advertising Expense

We expense advertising costs as incurred as a component of our sales and marketing expenses.  Advertising expense was $480,315approximately $324,000 and $334,352$420,000 in the 20162018 quarter and the 20152017 quarter, respectively, and $1,447,078 and $1,116,894 in the 2016 nine months and 2015 nine months, respectively.

Share-Based Compensation

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

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

We estimate expected volatility based on historical volatility of our common stock.
We 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

In June 2016, theThe Financial Accounting Standards Board, or FASB, has issued the Accounting Standard UpdateUpdates (ASU) described below that we believe may be relevant to our business and to the preparation of our financial statements.

ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (issued September 2017) – This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. It states that in these situations, modification accounting should be applied unless the fair value of the modified award is the same as the fair value of the original award immediately before the original award was modified, the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award was modified, and the classification of the modified award as equity or a liability is the same as the classification of the original award immediately before the original award was modified. This update is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.  We adopted this pronouncement in the first quarter of 2018 and do not expect this pronouncement to have a material effect on how we account for the changes to the terms or conditions of a share-based payment award.

ASU 2017-04, Intangibles – Goodwill and Other (issued January 2017) - To simplify the subsequent measurement of goodwill, Step 2 was eliminated from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This update also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. A public business entity that is a U.S. Securities and Exchange Commission (“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.

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 20152017 and 2016,the first quarter of 2018, 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 consolidated statement of cash flows.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (issued June 2016). - Among itsthe 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 consolidated financial statements we issue for the year ending December 31, 2020, and the quarterly periods during that year. We do not expect the amounts we report as accounts receivable in those future periods under this guidance to be materially affected relative to current guidance.

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 discontinuediscontinued 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 withAs prescribed by this standard, we will implementadopted it beginning January 1, 2017, and followed it in the preparation of our condensed consolidated financial statements as of March 31, 2018, and for the three 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 statementsexisting practices thereby resulting in no change to our application of GAAP for 2017. The extentthis 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 consolidated financial statements for 2019. The extent of the effect of this standard on our consolidated financial statements for 2019 and later will depend upon the leases, if any, that we have in effect at that date.

In November 2015, the FASB, issued 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 have implemented these new principles using the modified retrospective transition method and recorded an increase (tax effected) to retained earnings at January 1, 2018 of $979,000.  We also recorded as an asset deferred expense of approximately $1.2 million.  We are subjectaccounting for these costs we incur to this guidance effective with financial statements we issue for the year ending December 31, 2018, and the quarterly periods during that year. We do not expect the amounts or timing of revenue we report in those future periods under this guidance to be materially affected relative to current guidance.obtain a contract as follows:

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

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

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 assets.  Certificates of deposit with contractual maturity dates beyond one year from the balance sheet date are presented as non-current assets.
1218


UseWe have the ability to hold these certificates of Estimates

The preparation of consolidated financial statements in accordance with GAAP requires the use of estimatesdeposit 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 duringdate 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 inherentrelated deferred revenue, see Note 3) the invoices we have issued for which the M&S services commencement date is in the preparationfuture and which have not been paid by the customer as of the Company’sdate of our consolidated financial statements.  It is possibleWe continually assess the collectability of our accounts receivable.  If we deem it less than probable 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.we will collect an amount due us, we write-off that balance against our allowance for doubtful accounts.   Accordingly, we determine our accounts receivable, net, as follows ($ in thousands):

  
March 31,
2018
  
December 31,
2017
 
Total invoices issued and unpaid $5,099  $6,644 
Less: Unpaid invoices relating to M&S contracts with a start date subsequent to the balance sheet date  (844)  (441)
Gross accounts receivable  4,255   6,203 
Allowance for doubtful accounts  (100)  (278)
Accounts receivable, net $4,155  $5,925 
4.Capitalized Software Development Costs
6.          Capitalized Software Development Costs, Net

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

 September 30,  December 31,  March 31,  December 31, 
 2016  2015  2018  2017 
Gross capitalized cost $7,012  $5,714  $9,581  $9,179 
Accumulated amortization  (3,051)  (1,732)  (5,927)  (5,393)
Net balance $3,961  $3,982 
Capitalized software development costs, net $3,654  $3,786 

 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended March 31, 
 2016  2015  2016  2015  2018  2017 
Amount capitalized $452  $506  $1,298  $1,613  $402  $462 
Amortization expense  (450)  (367)  (1,319)  (912)  (534)  (474)

  Released  Unreleased 
  Products  Products 
Gross capitalized amount at March 31, 2018 $9,059  $522 
Accumulated amortization  (5,927)  - 
Net capitalized cost at March 31, 2018 $3,132  $522 
 
  Released  Unreleased 
  Products  Products 
Gross capitalized amount at September 30, 2016 $5,700  $1,312 
Future amortization expense:        
Three months ending December 31, 2016  452     
Year ending December 31,        
2017  1,433     
2018  699     
2019  65     
Total $2,649     
Future amortization expense:        
Nine months ending December 31, 2018  1,255     
Year ending December 31,        
2019  1,178     
2020  669     
2021  30     
Total $3,132     
 
The future amortization expense of the gross capitalized software development costs related to unreleased products will be determinable at a future date when those products are ready for general release to the public.

5.7.          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):

  
March 31,
2018
  
December 31,
2017
 
Total invoiced for M&S contracts for which revenue will be recognized in future periods $16,577  $17,491 
Less: Unpaid invoices relating to M&S contracts
with a start date subsequent to the balance sheet date
  (844)  (441)
         
Total deferred revenue $15,733  $17,050 
         
Deferred revenue, current portion $12,681  $13,315 
Deferred revenue, non-current portion  3,052   3,735 
Total deferred revenue $15,733  $17,050 

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 
  Three Months Ended March 31, 
  2018  2017 
Share-based compensation expense $671  $337 


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 2018 quarter, we granted stock options only under the 2016 plan.

Provisions and characteristics of this planthe 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 restrictedUpon exercise of a stock awards under this plan duringoption, 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.

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 March 31, 2018, stock-based incentives for up to 4,146,500 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, 2017  2,585,210  $3.34   7.24  $1,015 
Granted  1,055,300  $3.58           76,000  $3.55         
Forfeited  (372,045) $3.14           (271,840) $3.86         
Exercised  (165,135) $2.02           -  $-         
Outstanding at September 30, 2016  2,609,445  $2.83   6.29  $2,015 
Outstanding at March 31,2018  2,389,370  $3.28   6.64  $1,209 
                                
Exercisable at September 30, 2016  1,351,760  $2.26   3.59  $1,814 
Exercisable at March 31, 2018  1,351,583  $2.86   4.99  $1,128 
 
Additional information about our stock options is as follows:

  Three Months Ended March 31, 
  2018  2017 
Weighted average fair value of options granted $1.52  $1.57 
Intrinsic value of options exercised $-  $100,386 
Cash received from stock options exercised $-  $90,114 
         
Number of options that vested  360,074   295,124 
Fair value of options that vested $570,552  $479,742 
         
Unrecognized compensation expense related to non-vested options at end of period $1,393,633  $2,383,732 
Weighted average years over which non-vested option expense will be recognized  1.85   2.34 
  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 March 31, 2018 
      Options Outstanding  Options Exercisable 
      Weighted          
      Average  Weighted     Weighted 
   Underlying  Remaining  Average  Number of  Average 
Range of  Shares  Contractual  Exercise  Underlying  Exercise 
Exercise Prices  Outstanding  Life  Price  Shares  Price 
$0.85 - $1.43   54,700   2.12  $1.05   54,700  $1.05 
$1.47 - $2.32   386,070   1.99  $1.86   386,070  $1.86 
$2.34 - $3.52   824,450   6.11  $3.29   619,588  $3.24 
$3.53 - $5.30   1,119,150   8.85  $3.86   291,225  $3.70 
$5.44 - $5.44   5,000   9.30  $5.44   -  $- 
                       
Total options   2,389,370           1,351,583     
 
1421


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 March 31, 
  2018  2017 
Expected volatility  49%  49%
Expected annual dividend yield  1.50%  1.50%
Risk free rate of return  2.49%  1.94%
Expected option term (years)  6.00   6.00 

Restricted Stock Awards
 
In May 2015, we adopted theOur 2015 Non-Employee Directors Long TermLong-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 30, 2016,March 31, 2018, stock based incentives for up to 340,000260,000 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, 2017  80,000  $4.24    
Shares granted with restrictions  -  $-    
Shares vested and restrictions removed  -  $-  $- 
Restricted shares outstanding at March 31, 2018  80,000  $4.24     
             
Unrecognized compensation expense for non-vested shares as of March 31, 2018         
Expense to be recognized in future periods $37,071         
Weighted average number of months over which expense is expected to be recognized  1.3         

 
 
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         
6.9.          Income Taxes

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

  Three months ended March 31, 
  2018  2017 
  Current  Deferred  Total  Current  Deferred  Total 
Federal $40  $(258) $(218) $390  $(22) $368 
State  (24)  10   (14)  44   (1)  43 
Total $16  $(248) $(232) $434  $(23) $411 

 Three months ended September 30, Nine months ended September 30, 
 2016 2015 2016 2015 
 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 
Foreign  12   -   12   6   -   6   37      $22   33   -  $33 
State  72   (4)  68   (4)  (3)  (7)  133   (15) $133   60   (7) $53 
Total $772  $(85) $687  $799  $(257) $542  $1,384  $(36) $1,348  $1,905  $(320) $1,585 
22
Current taxes per our federal income tax return are presented in these financial statements as follows ($ in thousands):
  Three months ended September 30,  Nine months ended September 30, 
  2016  2015  2016  2015 
             
Current federal income tax expense in the statement of operations $687  $542  $1,348  $1,585 
                 
Tax (deficiency) from stock-based compensation recorded in additional paid-in capital  (13)  (15)  (26)  (59)
                 
Current taxes per our federal income tax return $674  $527  $1,322  $1,526 
Deferred income taxes on our balance sheet reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  Significant components of our deferred tax assets and liabilities are as follows ($ in thousands):

  September 30,  December 31, 
  2016  2015 
Deferred tax assets:      
   Share-based compensation $718  $677 
   Deferred revenue  1,185   1,154 
   Net operating loss carryforward  106   151 
   Compensation and benefits  164   168 
   Allowance for doubtful accounts  114   111 
   Other  52   33 
Total deferred tax assets  2,339   2,294 
         
Deferred tax liabilities:        
   Intangible assets  1,356   1,339 
   Depreciation  7   15 
Total gross deferred tax liabilities  1,363   1,354 
         
Net deferred tax assets $976  $940 


As of September 30, 2016, we had federal income tax net operating loss carryforwards of $312,000 available to offset future federal taxable income, if any. These carryforwards became available through our acquisition of TappIn, Inc. in 2011.  These carryforwards expire in 2030 and 2031.

As of September 30, 2016, we had federal income tax capital loss carryforwards of $1,100,000 (tax effected) which resulted from the reduction of our investments in and notes receivable from CoreTrace Corporation in 2012.  We can realize capital loss carryforwards to the extent we have capital gains in future periods against which this capital loss can be deducted.  We believe it uncertain that we will have sufficient capital gains in the future to support this deduction and accordingly have not reflected this item as a deferred tax asset in the schedule above.  This carryforward expires in 2017.
  March 31,  December 31, 
  2018  2017 
Deferred tax assets:      
   Deferred revenue $783  $775 
   Share-based compensation  462   351 
   Compensation and benefits  119   111 
Texas franchise tax R&D credit  190   185 
Prepaid expenses not deductible for tax  -   84 
   Allowance for doubtful accounts  42   58 
   Net operating loss carryforward  183   20 
Deferred state income taxes  51   61 
Federal R&D credits  17   - 
   Accrued expenses not deducted for tax  11   9 
   Valuation allowance  (190)  (185)
Total deferred tax assets  1,668   1,469 
         
Deferred tax liabilities:        
   Intangible assets  778   805 
Book expenses deductible for tax purposes  248   - 
   Depreciation  3   13 
Total gross deferred tax liabilities  1,029   818 
         
Net deferred tax assets $639  $651 

In assessing the realizability of deferred tax assets, we consider whether it is more-likely-than-not that asome portion or all the deferred tax asset will not be realized.  Our assessmentThe ultimate realization of deferred tax assets is dependent upon the likelihoodgeneration of having sufficientfuture taxable income during the periods in which those temporary differences become deductible.  We have concluded it is more-likely-than-not that our ability to generate future taxable income will allow us to realize those deferred tax assets.

As of March 31, 2018, we have federal income tax net operating loss carryforwards of $872,000 available to offset future federal taxable income.  We expect to fully utilize this net operating loss in 2018.  The net operating loss expires in 2038.

As of March 31, 2018, we had Texas Research and Development tax credit carryforwards of $190,000.  We believe it is uncertain that we will have sufficient Texas Franchise Tax in the future to support deduction or utilization of these carryforward credits. Accordingly, have provided a valuation allowance for the items giving rise to our deferred tax assets indicates it is more-likely-than-not that we will realize the deferred tax assets listed in the table above.

We claim research and experimentation tax credits, or R&D tax credits, on certain of our tax returns and have included the effect of those credits in our provision for income taxes. Because our 2008, 2009 and 2010 tax returns were under routine examination by the Internal Revenue Service and because we believed it more-likely-than-not the examination could result in $125,000 of such credits we claimed not being allowed by the Internal Revenue Service, we recorded a reserve for an uncertain tax position in thefull amount of $125,000these credit carryforwards.  These carryforwards expire in 2012 related to this item.  The Internal Revenue Service completed its routine examination of our 2008, 2009 and 2010 income tax returns in 2015 and those results have been included in our provision for income taxes in 2015. We continue to maintain a reserve for an uncertain tax position in the amount of $110,000 for our 2011years 2034 through 2016 tax returns related to the R&D tax credit.2038.

The aggregate changes in the balance of our gross unrecognized tax benefits were as follows ($ in thousands):

  Three Months Ended March 31, 
  2018  2017 
Balance at beginning of period $158  $121 
Increases for tax positions related to the current year  4   15 
Increases for tax positions related to prior years  -   6 
Balance at end of period $162  $142 
  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 
Our unrecognized tax benefit is related to research and development credits taken on our U.S. income tax returns from 2011 to 2017 and the uncertainty related to the realization of a portion of those credits based on prior experience.  We believe it reasonably possible that we will not recognize any of our unrecognized tax benefits at least through December 31, 2018. If we realized and recognized any of our unrecognized tax benefits, such benefits would reduce our effective tax rate in the year of recognition.

To the extent they arise, weWe record interest and penalty expensesexpense related to income taxes as components ofinterest and other expense, inrespectively. At March 31, 2018, no interest or penalties have been or are required to be accrued.  Our open tax years are 2011 and forward for our statement of operations.  We incurred no such expenses in 2016, 2015 or 2014.

We file statefederal income tax returns in various states.  The taxes resulting from these filings are included inand 2013 and forward for most of our state income tax expense.returns.  We do not file, and are not required to file, any foreign income tax returns.

Our income tax expense (benefit) reconciles to an income tax expense resulting from applying an assumed statutory federal income rate of 21% for the 2018 quarter and 34% for the 2017 quarter to income before income taxes as follows ($ in thousands):

  Three months ended September 30,  Nine months ended September 30, 
  2016  2015  2016  2015 
Income tax expense (benefit) at federal statutory rate $710  $603  $1,397  $1,685 
                 
Increase (decrease) in taxes resulting from:                
State taxes, net of federal benefit  44   (5)  72   33 
Incentive stock options  25   0   60   0 
Other  (1)  (13)  20   8 
R&D tax credit uncertain tax position (net)  10   110   21   59 
Research and development credit  (55)  (123)  (119)  (123)
Domestic production activities deduction  (46)  (30)  (103)  (77)
Income tax expense (benefit) per the statement of operations $687  $542  $1,348  $1,585 

  Three months ended March 31, 
  2018  2017 
Income tax expense (benefit) at federal statutory rate $(245) $422 
Increase (decrease) in taxes resulting from:        
State taxes, net of federal benefit  5   28 
Stock based compensation  30   60 
Other  (6)  7 
R&D tax credit uncertain tax position (net)  3   (65)
Research and development credit  (19)  (30)
Domestic production activities deduction  0   (11)
Income tax expense (benefit) per the statements of operations $(232) $411 


In November 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-17, Income Tax: Balance Sheet Classification of Deferred Taxes. ASU 2015-07 requires that all deferred tax assets and liabilities for a tax jurisdiction, along with any related valuation allowance, be classified as noncurrent on the balance sheet. We have implemented this ASU in the accompanying financial statements. This implementation resulted in the previously reported current deferred tax asset of $313,000 as of September 30, 2015, being reclassified and combined with the previously reported non-current deferred asset of $699,000 as of that date to yield a non-current deferred tax asset balance of $1,012,000 being reported as of September 30, 2015, in the accompanying financial statements.

7.10.          Earnings (Loss) per Common Share

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

  Three Months Ended 
  March 31, 
  2018  2017 
Numerators      
Numerator for basic and diluted earnings per share:      
Net income (loss) $(935) $831 
         
Denominators        
Denominators for basic and diluted earnings (loss) per share:        
Weighted average shares outstanding - basic  21,793   21,544 
         
Dilutive potential common shares        
Stock options and awards  -   479 
Denominator for diluted earnings (loss) per share  21,793   22,023 
         
Net income (loss) per common share - basic $(0.04) $0.04 
Net income (loss) per common share – diluted $(0.04) $0.04 
         
         
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2016  2015  2016  2015 
Net income $1,399  $1,230  $2,761  $3,370 
                 
Weighted average shares outstanding - basic  21,122   20,892   21,061   20,782 
Stock options  552   548   579   512 
Weighted average shares outstanding - diluted  21,674   21,440   21,640   21,294 
                 
Net income per common share - basic $0.07  $0.06  $0.13  $0.16 
Net income per common share - diluted $0.06  $0.06  $0.13  $0.16 

Due to the loss for the three months ended March 31, 2018, potentially dilutive securities related to stock options and awards of 324 have not been included in the dilutive earnings (loss) computation above as they are antidilutive.

8.Dividends
As a result of our implementation of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (issued March 2016), the estimated proceeds resulting from equity compensation deductible for federal income tax purposes being greater than the associated share-based compensation expense are no longer considered as part of the treasury stock method used in computing diluted earnings per share. This change had no material effect on our earnings per share computations.

During 2016, our Board of Directors declared quarterly11.          Dividends

We paid dividends during the 2018 quarter and 2017 quarter as follows:

  Three Months Ended 
  March 31, 2018  March 31, 2017 
Dividend per share of common stock $0.015  $0.015 
Dividend record date March 9, 2018  February 23, 2017 
Dividend payment date March 23, 2018  March 8, 2017 

 
 March 31, 2016  June 30, 2016  September 30, 2016 
Dividend per share of common stock $0.015  $0.015  $0.015 
Dividend record date
 February 23, 2016  May 23, 2016  August 23, 2016 
Dividend payment date March 3, 2016  June 1, 2016  September 9, 2016 
12.          Commitments and Contingencies

9.Commitments and Contingencies
Severance Payments

We have agreements with key personnel that provide for severance payments to them in the event of a change in control of the Company, as defined in those agreements, and their employment is terminated in connection with that change in control. In such event, our aggregate severance payments to those employees would be $1.6 million.

10.Concentration of Business Volume and Credit Risk
Contractual Obligations

We have 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.

Legal and Regulatory Matters

As previously disclosed in the Company’s Current Report on Form 8-K filed on November 15, 2017, on August 9, 2017, a securities class action complaint, Anthony Giovagnoli v. GlobalSCAPE, Inc., et. al., Case No. 5:17-cv-00753, was filed against the Company in the United States District Court for the Western District of Texas. The complaint names as defendants the Company, Matthew Goulet, and James Albrecht for allegedly making materially false and misleading statements regarding, inter alia, the Company’s previously reported financial statements. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder. The complaint seeks unspecified damages, costs, attorneys’ fees, and equitable relief. On November 6, 2017, the Court appointed a lead plaintiff, who has agreed to file an amended complaint following the completion of the previously disclosed restatement of certain of the Company’s consolidated financial statements (the “Restatement”). Management intends to vigorously defend against this action. At this time, the Company cannot predict how the courts will rule on the merits of the claims and/or the scope of the potential loss in the event of an adverse outcome. Should the Company ultimately be found liable, the resulting damages could have a material adverse effect on its financial position, liquidity, or results of operations.

On October 20, 2017, the Company received a demand letter from a stockholder seeking the inspection of books and records of the Company pursuant to Section 220 of the Delaware General Corporation Law (the “Section 220 Demand”). This stockholder’s stated purpose for the demand is, inter alia, to investigate whether the Company’s Board of Directors and officers engaged in an illegal scheme to misrepresent the Company’s performance by falsely reporting accounts receivable, license revenue, total current assets and total assets, total stockholders’ equity, and total liabilities for the year ended December 31, 2016, as well as the Board’s independence to consider a stockholder derivative demand. The Company intends to fully respond to the Section 220 Demand to the extent required under Delaware law.

The Board has established a special litigation committee (“Special Litigation Committee”) consisting of Dr. Thomas Hicks and Frank Morgan to analyze and investigate claims that could potentially be asserted in stockholder derivative litigation related to facts connected to the claims and allegations asserted in the litigation related to the Restatement and the Section 220 Demand (the “Potential Derivative Litigation”). The Special Litigation Committee will determine what actions are appropriate and in the best interests of the Company, and decide whether it is in the best interests of the Company to pursue, dismiss, or consensually resolve any claims that may be asserted in the Potential Derivative Litigation. The Board determined that each member of the Special Litigation Committee is disinterested and independent with respect to the Potential Derivative Litigation. Among other things, the Special Litigation Committee has the power to retain counsel and advisors, as appropriate, to assist it in the investigation, to gather and review relevant documents relating to the claims, to interview persons who may have knowledge of the relevant information, to prepare a report setting forth its conclusions and recommended course of action with respect to the Potential Derivative Litigation, and to take any actions, including, without limitation, directing the filing and prosecution of litigation on behalf of the Company, as the Special Litigation Committee in its sole discretion deems to be in the best interests of the Company in connection with the Potential Derivative Litigation. The Special Litigation Committee’s findings and determinations shall be final and not subject to review by the Board and in all respects shall be binding upon the Company.

As disclosed in a Current Report on Form 8-K filed on March 16, 2018, the Fort Worth, Texas Regional Office of the SEC has opened a formal investigation of issues relating to the Restatement, with which the Company is cooperating fully.  At this time, the Company is unable to predict the duration, scope, result or related costs associated with the SEC’s investigation.  The Company is also unable to predict what, if any, action may be taken by the SEC, or what penalties or remedial actions the SEC may seek.  Any determination by the SEC that the Company’s activities were not in compliance with existing laws or regulations, however, could result in the imposition of fines, penalties, disgorgement, equitable relief, or other losses, which could have a material adverse effect on the Company’s financial position, liquidity, or results of operations.

On May 31, 2018, the Company was served with a subpoena issued by a grand jury sitting in the United States District Court for the Western District of Texas (the “Grand Jury Subpoena”). The Grand Jury Subpoena requests all documents and emails relating to the Company’s investigation of the potential improper recognition of software license revenue.  The Company intends to fully cooperate with the Grand Jury Subpoena and related investigation being conducted by the United States Attorney’s Office for the Western District of Texas (the “U.S. Attorney’s Investigation”).  At this time, the Company is unable to predict the duration, scope, result or related costs of the U.S. Attorney’s Investigation.  The Company is also unable to predict what, if any, further action may be taken in connection with the Grand Jury Subpoena and the U.S. Attorney’s Investigation, or what, if any, penalties, sanctions or remedial actions may be sought.  Any determination by the U.S. Attorney’s office that the Company’s activities were not in compliance with existing laws or regulations, however, could result in the imposition of fines, penalties, disgorgement, equitable relief, or other losses, which could have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations.

13.          Concentration of Business Volume and Credit Risk
In order to leverage the resources of third parties, we make our products available for purchase by end users through third-party, channel distributors even though those end users can also purchase those products directly from us. DuringIn the 20162018 quarter and 2017 quarter, we earned approximately 17% of our revenue from such sales through our largest, third party, channel distributor. During the 2015 quarter there was no single customer that exceeded 10% of sales.  During the 2016 nine months12% and 2015 nine months, we earned approximately 14% and 10%, respectively, of our revenue from such sales through our largest, third party,third-party, channel distributor.
As of September 30, 2016,March 31, 2018, approximately 40%15% of our accounts receivable were due from this third party, channel distributor discussed above and from one other customer, the latter of which did not constitute more than 10% of our revenue for any of the periods presented.  Paymentwith payment for substantially all such amounts hashaving been received subsequent to that date.

  11.14.          Segment and Geographic Disclosures

In accordance with FASB ASC Topic 280, Segment Reporting, we view our operations and manage our business as principally one segment. As a result, the financial information disclosed herein represents all of the material financial information related to our principal operating segment.

Revenues derived from customers and partners located inoutside the United States accounted for approximately 83%30% and 78%22% of our total revenues in 2016the 2018 quarter and 2015the 2017 quarter, respectively, and 78% and 76% of our total revenues for both the 2016 and 2015 nine months.  The remaining revenues were from customers and partners located in foreign countries with eachrespectively.  Each individual foreign country accountingaccounts for less than 10% of total revenues in all periods.  We attribute revenues to countries based on the country in which the customer or partner is located. None of our property and equipment was located in a foreign country as of September 30, 2016 and 2015.March 31, 2018.

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

This Quarterly Report on Form 10-Q and any documents incorporated by reference herein contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended.Act.  “Forward-looking statements” are those statements that are not of historical fact but describe management’s beliefs and expectations.  We have identified many of the forward-looking statements in this Quarterly Report by using words such as “anticipate,” “believe,” “could,” “estimate,” “may,” “expect,” “potentially” and “intend.”  Although we believe these expectations are reasonable, our operations involve a number of risks and uncertainties, including those described in the “Risk Factors” section of our 20152017 Form 10-K and other documents filed with the Securities and Exchange Commission.  Therefore, GlobalSCAPE’s actual results of operations and financial condition in the future could differ materially from those discussed in this Quarterly Report.

In the following discussion, our references to the 20162018 quarter and the 20152017 quarter refer to the three months ended September 30, 2016March 31, 2018 and 2015, respectively.  Our references to the 2016 nine months and the 2015 nine months refer to the nine months ended September 30, 2016 and 2015,2017, respectively.

Overview

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

Our primary business is selling and supporting managed file transfer, or MFT, software for enterprises. The brand nameMFT software facilitates the transfer of ourdata from one location to another across a computer network within a single enterprise or between multiple computer networks in multiple enterprises.

Our MFT product platform isproducts are based upon our Enhanced File Transfer, or EFT.EFT, platform. This platform emphasizes secure and efficient data exchange for virtually any organization. It enables business partners, customers and employees to share information safely and securely. The EFT platform provides enterprise-level security while automating the integration of back-end systems which are features often missing from traditional file transfer software. The EFT platform features built-in regulatory compliance, governance, and visibility controls to maintain data safety and security. It can replace legacy systems, homegrown servers, expensive leased lines and virtual area networks, all of which can be insecure, with a top-performing, scalable alternative. The EFT platform promotes ease of administration while providing the detailed capabilities necessary for complete control of a file transfer system.

We earn most of our revenue from the sale of EFTproducts and productsservices that are part of our EFT platform. We earn revenue fromOur customers can purchase the salecapabilities 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.our EFT platform in two ways:

·Under a perpetual software license for which they pay a one-time fee and under which they typically install our product on computers that they own and/or manage. Our brand name for this product is EFT. Almost all customers who purchase EFT also purchase a maintenance and support, or M&S, contract for which they pay us an annual recurring fee. Most of the revenue we have earned from our EFT platform products has been from sales of perpetual software licenses and related M&S.
·As a software-as-a-service, or SaaS, under which they pay us ongoing fees to access the capabilities of the EFT platform in the cloud. Through 2017, EFT Cloud was our SaaS offering of the EFT platform which users accessed for a flat monthly subscription fee. In January 2018, we introduced EFT Arcus, our SaaS offering of the EFT platform going forward, for which users will pay a base monthly subscription fee plus an additional variable amount determined based upon their metered usage of EFT Arcus resources.
We also sell other products that are synergistic to our EFT platform including Mail Express, scConnect, WAFS, and CuteFTP. Collectively, these products constituteconstituted less than 10%5% of our total revenue.revenue in the three months ended March 31, 2018. Customers pay a one-time fee to purchase these products under a perpetual software license. Some customers also purchase an M&S contract. We do not offer a SaaS version of these products and have no plans to do so.

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

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

·In 2016:2018:
-Recognized as a 2016 Top Workplace by San Antonio Express-News, marking Globalscape’s sixth recognition as a Top Workplacefor two Info Security Products Guide 2018 Global Excellence Awards for distinguished achievements in San Antonio.product innovation in categories that included:
§BYOD/Security Category (Gold Winner) – EFT.
§Compliance Innovations Category (Gold Winner) – EFT.
-Named to The Channel Company’s list of CRN Channel Chiefs as Leadertop leaders in Secure Information Exchange Services 2016 – Texas by the Corp America 2016 Small Cap Awards.IT channel for the 5th consecutive year.
-
Earned awards from Info SecurityAwarded a 5-star rating in The Channel Company’s 2018 CRN Partner Program Guide in several categories, including: for the 4th consecutive year.

·In 2017:
o-EFT Workspaces – Gold Winner in BYOD Security.
oEnhanced File Transfer – Silver Winner in Compliance.
oEFTNamed to the CRN 2017 Cloud Services – Bronze Winner in Cloud Security.
oMail Express – Bronze Winner in Email SecurityPartner Program Guide which recognizes partner programs with distinguished margins, sales support and Management.cloud resources
-Received a 5-Star ratingthree awards from the 2017 Golden Bridge Awards for distinguished technology achievements which included:
§Cloud/SaaS Innovations (Gold Winner) – EFT on Amazon Web Services or Microsoft Azure.
§Managed File Transfer Innovations (Gold Winner) – The EFT Accelerate module.
§Governance, Risk and Compliance Innovations (Bronze Winner) – EFT platform.
-Received two awards from the Network Product Guide 2017 IT World Awards for achievements in The Channel Company’s CRN 2016 Partner Program Guide for the second year in a row.product excellence that included:
§Governance, Risk and Compliance (Gold Winner) – EFT.
§Cloud Security (Silver Winner) – EFT Cloud Services.
-
NamedRecognized as a Best Place to Work in IT by Texas MonthlyComputerworld magazine as one of the best companies to work for in Texas for the fourth consecutive year and sixth year in a row with a ranking of #16 in the medium size category.time overall.
-Honored as the HR Employer of the Year andRecognized for three Info Security Products Guide 2017 Global Excellence Awards for distinguished achievements in Engagement Strategyproduct innovation in North America by the HRO Today Services and Technology Association.categories that included:

§Innovation in Compliance (Gold Winner) – Enhanced File Transfer.
-§Cloud/SaaS Solutions (Gold Winner) – EFT Cloud Services.
Recognized by the San Antonio Business Journal as a 2016 Best Place to Work, making this the fifth time GlobalSCAPE has received this honor.
§BYOD Security (Bronze Winner) – EFT Workspaces.
-
Named by ComputerworldHonored as one of the best companiesa Best Company to workWork for in IT forTexas by Best Companies Group (BCG), Texas Monthly, the third consecutive year with a rankingTexas Association of #3 in the small company category.
·In 2015:
-Listed as a Champion in the Ad-Hoc Mid-Market categoryBusinesses (TAB), and a Leader in the Ad-Hoc Enterprise use case by Info-Tech Research Group within its Managed File Transfer Vendor Landscape report. This is the second consecutive time that Info-Tech Research Group has named GlobalSCAPE a Champion within this report.
-
Named one of the best places to work in the information technologies small business category by ComputerworldTexas SHRM for the fourth time.
-
Named as one of San Antonio’s best places to work by the San Antonio Business Journal for the fifth time in the medium size category..
-Received a 5-Star rating in The Channel Company’s CRN 20152017 Partner Program Guide.Guide for the third year in a row.
-
NamedHonored with the 2017 Total Rewards & Benefits Excellence Award by Texas Monthly magazine as one of the best companies to work for in Texas for the fifth year in a row with a ranking of #3 in the medium size category.
HRO Today Services and Technology Association.
-
Named toSelected as a finalist in the San Antonio Business Journal’s 2015 Fast Track list for companies with $10 million or more in revenue.
2017 Cybersecurity Product Awards Secure File Transfer: EFT Enterprise.
-
Named by the San Antonio Express News as the #1 Top Workplace for 2015 in the small company category, and recognized as one of the Top Workplaces for the fifth time.
-
Two members of the channel leadership team recognized as The Channel Company’s 2015 CRN Channel Chiefs.
-
Two channel team members named to The Channel Company’s 2015 CRN Women of the Channel list.
-Recognized by the Golden Bridge Business and Innovation Awards as a Gold Winner in the Managed File Transfer – Innovations category for EFT Workspaces.
-Recognized by the Info Security Products Guide’s Global Excellence Awards as a Gold Winner within the Compliance category for Enhanced File Transfer (EFT) and as a Bronze Winner within the Email Security and Management category for Mail Express.
-Recognized by the Network Products Guide awards as a Gold Winner in Compliance Data Centers for EFT v7.0 and a Silver Winner in Email, Security and Management with Mail Express v4.

Key Business Metrics

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

Revenue Growth

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

·Ongoing innovation of and focus on, our core EFT platform to address the expanding needs of our existing customers and its expansion into broader segments of the market.to enhance our products’ appeal to new customers.

·Developing emerging technologiesLicensing, developing and/or acquiring productstechnologies with features and functions that build uponare complementary to and add capabilities tosynergistic with our EFT platform.platform so as to expand the breadth of our products offerings.

·ContinuingEnhancing our sales and marketing programs to improve identification of potential demand for our products and to increase the evolution of enhanced demand generation activities including marketing, customer-focused, and partner-focused programs. rate at which we are successful in selling our products.

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.

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We remain alert for attractive opportunities to collaborate with others or perhaps combine other revenue-producing technologies with ours to expand our product offerings and reach. To that end, we continually assess products and services offered by others that might be synergistic with our existing products. We may elect to take advantage of those opportunities through cooperative marketing agreements or licensing arrangements or by acquiring an ownership position in the enterprise offering the opportunity.

In continuing to develop our demand generation activities, we have made and continue to make ongoing changes in sales and marketing including:

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

As part of growing revenue in total, we are focused on increasing license revenue both in terms of absolute dollars and as a percent of total revenue. When we sell our licensed products, we also typically create a recurring revenue stream from M&S since almost all purchasers of our licensed enterprise products also purchase an M&S contract. Most of our M&S contracts are for one year although we also sell multi-year contracts. The customer pays us the M&S fee for the entire term of the agreement at the time the contract begins. We recognize that amount as revenue ratably in future periods over the term of the contract.

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

See Comparison of the Consolidated Statement of Operations for the Three Months Ended September 30, 2016March 31, 2018 and 2015 and Comparison of the Statement of Operations for the Nine Months Ended September 30, 2016 and 20152017 for a discussion of trends in our revenue growth that we monitor using this metric.

Bookings (Non-GAAP Measurement)

Bookings is aIn the past, we reported bookings and potential future revenue as key business metrics. With the refinement of our revenue growth key business metric discussed above, we useno longer rely on bookings or potential future revenue as key business metrics since we have determined that our revenue growth metric is the primary metric upon which we rely to measure the success of our sales and marketing programs and the effectiveness of our sales and marketing teams. Bookings are a measure of the value of our arrangements with customersoutlook for purchases of software licenses, software-as-a-service, M&S, and professional services. Our bookings consist of:

·Invoiced amounts for products and services we have delivered and for which we recognize revenue currently.
·Invoiced amounts for products and services we will deliver in the future and for which we will recognize revenue in those future periods.
·Arrangements to provide customers with software-as-a-service for which we will invoice over the course of an agreed-upon period of time in the future.
·Statements of work under which customers have engaged us to deliver professional services for which we will invoice in the future as we complete that work.

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


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

  Three Months Ending 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 

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

Adjusted EBITDA (Non-GAAP Measurement)

We utilize Adjusted EBITDA (Earnings Before Interest, Taxes, Total Other Income/Expense, Depreciation, Amortization, other than amortization of capitalized software development costs, and Share-Based Compensation Expense) to provide us a view of income and expenses and cash flow from our operations that is supplemental and secondary to our primary assessment of net income as presented in our condensed consolidated statement of operations and comprehensive income and of cash flow from operating activities as presented on our condensed consolidated statement of cash flows.(loss). We use Adjusted EBITDA to provide another perspective for measuring profitability and cash flow from our core operating activities that is before consideringdoes not include the effects of expenses that typically do not require us to pay them in the current period (such as depreciation, amortization and share-based compensation), that is prior to considering the cost of financing our business and the effects of income taxes, and that is prior to the effects on our cash of changes in certain balance sheet items such as accounts receivable and accounts payable. following items:

·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; and
·The effects of income taxes.

We monitor the components ofAdjusted EBITDA to assess our actual performance relative to our plans, budgetsintended strategies, expected patterns of action, and expectations andbudgets. 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 (loss) 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 consolidated 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 
Adjusted EBITDA reconciles as follows to net cash provided by operating activities on our condensed consolidated statement of cash flow:
  Three Months Ended 
  March 31, 
  2018  2017 
Net Income (loss) $(935) $831 
Add (subtract) items to determine Adjusted EBITDA:        
Income tax expense (benefit)  (232)  411 
Interest (income) expense, net  (76)  (70)
Depreciation and amortization:        
Total depreciation and amortization  594   541 
Amortization of capitalized software development costs  (534)  (474)
Share-based compensation expense  671   337 
Adjusted EBITDA $(512) $1,576 

  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 
See Comparison of the section below comparing our resultsConsolidated Statement of operationsOperations for the 2016 quarterThree Months Ended March 31, 2018 and the 2015 quarter and the 2016 nine months and 2015 nine months 2017 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, filedata transfer, and filedata sharing capabilities for enterprises and consumers. We have been in business for more than twenty years and havehaving sold our products to thousands of enterprises and more than one million individual consumers throughout the world.globally.

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

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

We earn over 90% of our revenue from the sale of MFT products and services that are part of our EFT platform. We have multiple revenue streams from our MFT productsthe EFT platform 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. Our brand name for this product is EFT. Historically, most of the revenue we have earned from our EFT platform products has been from sales of EFT perpetual software licenses and related M&S.
·Cloud-based, SaaS hosted solutions tothat we sell on an ongoing subscription basis. Through the end of 2017, EFT Cloud was our SaaS offering of the EFT platform which users accessed for a flat monthly subscription fee. In January 2018, we introduced EFT Arcus, our customers subscribe andSaaS offering of the EFT platform going forward, for which users will pay us a recurring,base monthly subscription fee to access the service.plus an additional variable amount based upon their metered usage of EFT Arcus resources.
·M&S.
·Professional services for product customizationinstallation, integration and integration.training.

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 this product line. We expect to expend minimal resources developing and selling our other products. We believe our EFT platform products and business capabilities are well-positioned to compete effectively in the market for these products. For a more comprehensive discussion of the products we sell and the services we offer, see below.
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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 also sellearn less than 5% of our revenue from selling other products that can be synergistic to our MFT products.EFT platform. 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 MFTEFT platform products tothat support business-to-business activities. Weactivities and are strategically focused on selling products in that environment such thatenvironment. 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 concentratein 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.

Our long-standing vision has been to simply and securely automate the flow of information between people, places and applications. Using that vision as a foundation, in 2018 we introduced a fundamentally new brand identity, logo and narrative that embodies our plan to evolve to being primarily a cloud software and services provider.  EFT Arcus is the foundation of that evolution. In addition, we adopted a new visual identity built upon a new tagline: “Make Business Flow Brilliantly”. Our visual theme now features a shifting background wave of colors representing the perpetual flow of data both within and between enterprises using our technology as a conduit through which the flow of business and the data it creates can be managed, monitored, controlled and viewed in a secure manner.

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 Winnerplatform products received multiple industry awards in compliance categories in 2018 and 2017, including the Compliance category2018 and Gold Winner in the BYOD category of the 20162017 Info Security Products Guide Global Excellence Awards, the 2017 Golden Bridge awards and the Network Product Guide’s 2017 IT World Awards.

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

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 email 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.

General 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.recovery.

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 2017 and the past several quarters,first five months of 2018, we have released new versionscontinued to improve the features and capabilities of ourthe EFT platform and new modules which addedannounced several enhancements and capabilities including:product upgrades that included:

·Accelerate, which is an accelerated file transfer module that boosts the speedEFT Insight, a new reporting platform to strengthen data governance and efficiency of secureprovide near real-time visibility into business critical data transfersflows and allows for the fast transfer of large files over disparate geographic distances.exchanges.
·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 onCloud storage support capabilities with the EFT server.  This functionality is accomplished without compromising the security, control, and governance of those files.Cloud Connector Module.
·Active-active high availability, or HA, which maximizes uptimeRemote Agent Module for streamlining and performance of critical information technology systems.centrally managing the data exchanges with branch offices and remote locations.
·Major enhancements for clustering and High Availability configuration.
·Over a dozen major features in the Workspaces module to enhance sharing and collaboration capabilities.
·Enhanced compatibility of web transfer client file transfers through HTML5 support in additionWeb Transfer Client user access to the existing Java Runtime Environment.
·Increased scalability and business continuity with more flexible, uninterrupted file transfer service.improve user experience.
·Improved facilitation of PCI DSS version 3.0 compliance with updatesSFTP security setting configuration to enable more visibility into security components, such as PGPsettings and AS2.help administrators ensure compliance.
·Addition of new Content Integrity Control providing an Internet Content Adaptation Protocol (ICAP) connectorMajor update to anti-malware scanners and data loss prevention (DLP) solutions.the Advanced Workflow Engine (AWE) module.
·Integration with SMS PASSCODE for Mobile-Based 2 Factor Authentication.New security features, including DMZ Gateway module enhancements and updates.
·Enhanced and expanded event rule functionality which improves the ability to integrate our products with client business processes and backend systems

We expect to continue to enhanceenhancing 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,more robust reporting capabilities, and provide additional language support.

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

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

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

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

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EFT Platform – Delivery Offerings

Our customers can purchase the capabilities of our EFT platform in two ways:

·Under a perpetual software license for which they pay a one-time fee and under which they typically install our product on computers that they own and/or manage. The EFT platform purchased in this manner can also be used in a bring-your-own-license environment hosted by major cloud providers such as Amazon Web Services or Microsoft Azure. Almost all customers who purchase a perpetual license to use the EFT platform also purchase an M&S contract for which they pay us a recurring fee that is typically 20% to 30% of the perpetual license fee per year.
·As a software-as-a-service, or SaaS, under which the customer pays us monthly subscription and usage fees to access the capabilities of the EFT platform in the cloud. Our brand name for this product is EFT Arcus. We introduced this product in January 2018. We have not yet earned significant revenue from the SaaS offering of our EFT platform.

Secure Information Sharing and Exchange Solution – Mail Express
 
Mail Express is a solution that provides secure information sharing and exchange capabilities leveraging traditional email workflow. It is a stand-alone product installed in a client-server environment that allows users to send and receive secure, encrypted e-mailemail and attachments of virtually unlimited size. Mail Express was a Bronze Winner in the Email Security and Management category of the 2015 Info Securityby Network Products Guide Global ExcellenceGuide’s 2016 IT World Awards.

To broaden the appeal and capabilities of Mail Express, we are developingcontinue to develop and add functionality that integrates the features of Mail Express into the EFT platform.platform through the Workspaces Microsoft® Outlook Plugin. This integration will taketakes the superior control, visibility and monitoring capabilities of the EFT platform and makemakes 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 EFTThe Workspaces Microsoft® Outlook Plugin combines the technology and features available in 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 ourWorkspaces and integrates them directly into EFT platform.
Enterprise.

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

File Transfer Solution for Consumers - CuteFTP 

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

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

Version 9 simplified our CuteFTP product line by consolidating all the features of our previous multi-product CuteFTP product line for Windows operating systems into this single version. We continue to offer CuteFTP Version 3.1 software for Mac platforms. We believe current versions of CuteFTP appeal to users wanting features more robust than offered in free alternatives such that it will be a product competitive in the marketplace for the foreseeable future.
 
We will continue selling CuteFTP as a stand-alone product and providing M&S services to customers who purchased CuteFTP in the past and who purchase it in the future.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.


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 contracts 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 organizedis as follows:

  March 31, 
Department
 2018  2017 
Sales and Marketing  57   52 
Engineering  30   36 
Professional Services  6   8 
Customer Support  23   21 
Management and Administration  19   19 
Total  135   136 
Number of
DepartmentEmployees
Sales and Marketing44
Engineering28
Professional Services12
Customer Support22
Management and Administration20
Total126


Solution Perspective and Trends
 
The components of our revenue are as follows ($ in thousands):
 
  Three Months Ended March 31, 
  2018  2017 
     Percent of     Percent of 
  Amount  Total  Amount  Total 
             
Revenue By Type
            
License  2,160   28.0%  2,578   30.6%
M&S  5,100   66.1%  5,121   60.7%
Professional Services  451   5.8%  733   8.7%
                 
Total Revenue $7,711   100.0% $8,432   100.0%
                 
Revenue by Product Line
                
License                
EFT Platform $2,076   96.1% $2,397   93.0%
Other  84   3.9%  181   7.0%
                 
Total License Revenue  2,160   100.0%  2,578   100.0%
                 
M&S                
EFT Platform  4,870   95.5%  4,841   94.5%
Other  230   4.5%  280   5.5%
                 
Total M&S Revenue  5,100   100.0%  5,121   100.0%
                 
Professional Services (all EFT Platform)  451   100.0%  733   100.0%
                 
Total Revenue                
EFT Platform  7,397   95.9%  7,971   94.5%
Other  314   4.1%  461   5.5%
                 
Total Revenue $7,711   100.0% $8,432   100.0%
  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%

Total revenue decreased 8.6% for the 2018 quarter compared to the 2017 quarter and revenue from our EFT platform products decreased 7.2% for the 2018 quarter compared to the 2017 quarter.  Revenue from our other product lines decreased 31.9% for the 2018 quarter compared to the 2017 quarter, which is consistent with our expectations as discussed below.  For a more detailed discussion of these revenue trends, see 27Comparison of the Consolidated Statement of Operations for the Three Months Ended March 31, 2018 and 2017.


We earn revenue primarily from the following activities:

License revenue from sales of our EFT and Mail Expressplatform 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 brandor EFT Arcus brands 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.
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 transferMFT 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, thismanner through our EFT Cloud and Arcus products. While our SaaS revenue is not yet a material component of our total revenue, a migration by our customers to our EFT Cloud and Arcus 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, weWe 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, whileWhile we will continue to offer themMail Express as a stand-alone productsproduct for the time being, the engineering resources we allocate to these technologiesthis technology will focus on migrating themit 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.


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):

  March 31, 2018  December 31, 2017 
Cash and cash equivalents $11,653  $11,583 
Short term certificates of deposit  4,302   4,291 
Long term certificates of deposit  11,558   11,503 
Total cash, cash equivalents and certificates of deposit $27,513  $27,377 
         
Current assets $22,299  $23,296 
Current liabilities  (16,617)  (16,886)
Working capital $5,682  $6,410 

 
 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 
36
Deferred revenue, unlike the other liability components

At March 31, 2018, our certificates of our working capital, is an obligation we will satisfy by providing servicesdeposit in the future to our customers as partcurrent assets mature on various dates through October 2018. Our long term certificate 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 matures in December 2021.

When assessing our financial positionliquidity 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,  
 
 2016  2015 
Operating activities $3,673  $3,429 
Investing activities  (1,515)  (1,769)
Financing activities  (622)  (160)
  
Cash Provided (Used) During
the Three Months Ended March 31,
 
  2018  2017 
Operating activities $826  $2,390 
Investing activities  (429)  (650)
Financing activities  (327)  (235)


Our cash provided by operating activities increaseddecreased during the 2016 nine months2018 quarter compared to the 2015 nine months2017 quarter primarily due to the following factors:

·Accounts payable decreased $217,000 during
Net income (loss) after considering items not involving cash at the 2016 nine months compared to decreasing $757,000time they are recorded in the 2015 nine months. The change in the amountstatement 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 in the 2016 nine months as a result of our increased use of internal resources to develop our productsoperations and normal variations in the timing of payments to our vendors.
·Income tax receivable and payable increased $571,000 in the 2016 nine months compared to increasing $403,000 in the 2015 nine months. The change in the amount of the increase was a result of changes in the level of our taxablecomprehensive income, between periods and normal variations in the timing of our tax payments.
Offset by:
·
Net income after considering adjustments 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.Flows, decreasing $1.7 million in the 2017 quarter to $7,000 in the 2018 quarter. See the section below under Comparison of the Consolidated Statement of Operations for the NineThree Months Ended September 30, 2016March 31, 2018 and 20152017 for a discussion of the changes in the components of these amounts.

·Deferred revenue decreasing $1.3 million during the 2018 quarter compared to decreasing $1.1 million during the 2017 quarter due primarily to the renewal of certain M&S contracts being delayed and not renewed during the 2018 quarter while they were renewed during the 2017 quarter.

Offset by:

·Accounts receivable decreasing $1.8 million during the 2018 quarter compared to decreasing $1.3 million during the 2017 quarter.  This increased $2.8 million incash flow was primarily due to the 2016 nine months which provided less cash than the $1.7 million increase in the 2015 nine months.  This increase was due to an increase in software licenses sold and bookings of multi-year M&S contractsour revenue during the 2016 ninethree months asended December 31, 2017, compared to the 2015 nine months.three months ended December 31, 2016, which in turn resulted in increased cash collections during the 2018 quarter compared to the 2017 quarter, and our continued progress in improving our collection efforts.

·Accounts payable increasing $202,000 during the 2018 quarter compared to decreasing $209,000 during the 2017 quarter due to normal variations in the timing of payments to our vendors.

The amount of cash we used for investing activities during the 2016 nine months2018 quarter decreased compared to the 2015 nine months with the primary component of that decrease relating to software development costs that were capitalized. This decrease was2017 quarter due primarily due to:

·Increased useA decrease in the purchase of property and equipment as a result of remodeling of our employees as an internal resource to do this worksales and engineering office spaces in the 2016 nine months compared to2017 quarter, for which there was no comparable event in the 2015 nine months when we relied more on the use of higher cost, third-party software developers.2018 quarter; and
·EnhancementA decrease in our software development costs capitalized due to it taking longer than expected to fill open engineering positions with the skillsets needed to support new product development as a result of relationships with those third-party developers we continue to use by replacing legacy arrangements carrying higher costs with more cost effective and efficient arrangements.competition in the marketplace for software engineers.
·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.

Our financingFinancing activities used more cash induring the 2015 nine months2018 quarter than during the 2016 nine months2017 quarter primarily due to the paymenta moratorium on issuing shares of three cash dividendsour common stock in connection with stock option exercises in the 2016 nine months compared to the payment of two cash dividends2018 quarter that did not exist in the 2015 nine months.2017 quarter.

Contractual Obligations and Commitments

At September 30, 2016,As of March 31, 2018, 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$15.7 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 throughby 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.
·We have an obligation under a contract with a third-party to prepay future minimum 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.

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Our non-cancellable, contractual obligations at September 30, 2016,March 31, 2018, consisted primarily of the lease for our office space with amounts due as followsfollowing ($ in thousands):

  Amounts Due for the Period 
  
Nine Months
Ending
December 31,
  Fiscal Years 
  2018  2019  2020  Thereafter  Total 
                
Prepaid royalty fees $800  $1,200  $-  $-  $2,000 
Operating leases  270   120   -   -   390 
Total $1,070  $1,320  $-  $-  $2,390 
 
 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 30, 2016,March 31, 2018, 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 30, 2016March 31, 2018 and 20152017

 Three Months Ended September 30,    
 2016  2015  $ Change  Three Months Ended March 31,    
 $ in thousands  2018  2017  $ Change 
          $ in thousands 
Total revenues $8,753  $7,647  $1,106  $7,711  $8,432  $(721)
Total cost of revenues  1,770   1,508   262   1,618   1,535   83 
Gross profit  6,983   6,139   844   6,093   6,897   (804)
Operating expenses                        
Sales and marketing  2,759   2,289   470   3,113   3,289   (176)
General and administrative  1,638   1,449   189   3,501   1,714   1,787 
Research and development  528   646   (118)  722   722   - 
Total operating expenses  4,925   4,384   541   7,336   5,725   1,611 
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 
Income (loss) from operations  (1,243)  1,172   (2,415)
Other income  76   70   6 
Income (loss) before income taxes  (1,167)  1,242   (2,409)
Income tax expense (benefit)  (232)  411   (643)
Net income (loss) $(935) $831  $(1,766)
 
In the discussion below, we refer to the three months ended September 30, 2016,March 31, 2018 as the “2016“2018 quarter” and the three months ended September 30, 2015,March 31, 2017 as the “2015“2017 quarter”. The percentage changes cited in our discussions are based on the 20162018 quarter amounts compared to the 20152017 quarter amounts.

3139


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

  Three Months Ended March 31, 
  2018  2017 
     Percent of     Percent of 
  Amount  Total  Amount  Total 
             
Revenue By Type            
License  2,160   28.0%  2,578   30.6%
M&S  5,100   66.1%  5,121   60.7%
Professional Services  451   5.8%  733   8.7%
                 
Total Revenue $7,711   100.0% $8,432   100.0%
                 
Revenue by Product Line                
License                
EFT Platform $2,076   96.1% $2,397   93.0%
Other  84   3.9%  181   7.0%
                 
   2,160   100.0%  2,578   100.0%
M&S                
EFT Platform  4,870   95.5%  4,841   94.5%
Other  230   4.5%  280   5.5%
                 
   5,100   100.0%  5,121   100.0%
                 
Professional Services (all EFT Platform)  451   100.0%  733   100.0%
                 
Total Revenue                
EFT Platform  7,397   95.9%  7,971   94.5%
Other  314   4.1%  461   5.5%
                 
  $7,711   100.0% $8,432   100.0%
  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%

Trends inOur total revenue decreased 8.6%. Revenue by Type

Software Licenses - Our software license revenue increased 18.3%. Most of this increase came from our sales of our EFT platform products and services decreased 7.2%. Revenue from our other products that consist of Mail Express, WAFS, CuteFTP, and TappIn decreased to comprising 4.1% of our total revenue, which is a trend that is in line with our ongoing de-emphasis of those products.

EFT Platform Products

License revenue from our EFT platform products decreased 13.4%. Historically, we have been able to close several large EFT platform sales each quarter. During the 2018 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 we encountered a situation where an unusually large number of those potential customers deferred their buying decisions to later periods as a result of their assessment of business factors unique to each of them. In addition, we changed our lead generation strategy toward the following factors:end of 2017 which lead to a temporary drop in selling opportunities in the 2018 quarter.  We do not believe the 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:

·In mid-2016, we reviewed how we were allocatingIncreasing sales staffing and capabilities as needed to address our resources across all ofmarkets.
·Aligning our product lines. Based on that review, we initiated changes that were in place throughout the 2016 quartersales group to enhance our focus on our EFT platform that is our flagship productits industry 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. As a result, the attention we paid 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.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 1% primarily due to:

·Revenue from deliveryOngoing license sales since a majority of our EFT platform throughlicense 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. As a cloud-based SaaS solution grew 52.8%. We achieved thisresult, growth in M&S revenue is typically tied to the license sales growth we experienced in earlier periods.
·Sustaining high renewal rates of M&S contracts 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.customers who initially purchased these services in earlier periods. We believe this flexibility allows usthese renewals result from our programs designed to address the full range of users, whether they prefer a SaaS solution or an on-premises solution, without negatively compromisingprovide high-quality and responsive M&S services to our ability to earn revenue from both.customers.

·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.
Our professional services revenue was $282,000 less for the 2018 quarter compared to the 2017 quarter which is a decrease of 38%. This decrease was primarily related to the decreased license revenue from our EFT platform since there generally is a direct relationship between the licenses our customers purchase and their need for professional services.

M&S RevenueWhen 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 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 ofOur M&S contracts byare typically for one year, with some customers who initially purchased these servicesbuying 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. OngoingAs 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 agreementscontracts 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 asto grow if we continue to sell ourincrease enterprise software productslicense 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.Other Products

Professional Services Revenue - Professional servicesIn 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 5% of our total revenue, increased 2.1%. This increase was duein 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 programs designed to increase the frequency of sales of professional services  andactivities supporting them. As a result, 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 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 18.9% 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 11.4%, from CuteFTP decreased 48.3% and from otherthose products decreased 21.8%collectively declined 31.8%. Revenue from these products is less than 10% ofOur future focus will be on our total revenue, andEFT platform such that we earn no significant professional servicesexpect to see a continuing decline in revenue from these products. These decreases in revenue wereother products although we do expect them to continue to produce a result ofmodest contribution margin that contributes to our primary focus being on the development, marketing and sales of our EFT platform products as discussed above under future profitability.
Solution Perspective and Trends41.


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 increased 1.7% and as a percent of software license revenue was 26%35.7% in the 20162018 quarter compared to 20%29.4% in the 20152017 quarter. This increase wasWhile the resultchange in absolute dollars is relatively flat, the cost as a percent of our release of new software products and new versions of existing products in periods subsequentthe related revenue increased due to the 2015 quarter and the resulting commencementamortization of amortizing the capitalized software development costs for those products. This additional expense amortizationwhich is a cost that began subsequent todoes not fluctuate based upon the 2015 quarter increased costnumber 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 quarter due to the factors cited above and due to higher software license revenue.

33

units sold.

Cost of M&S revenue as a percent of M&S revenue was substantially unchanged.10.2% in the 2018 quarter as compared to 8.1% in the 2017 quarter. Cost of revenue for M&S in absolute dollars increased by 6% due to an increase26.4%. These increases were a combination of increasing our headcount 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 protocolsdepartment and practices.the decision by the U.S. Army to consolidate certain of their operations resulting in the non-renewal of their M&S contract.

Cost of professional services revenue as a percent of that revenue was 80%72.1% in the 20162018 quarter as compared to 93%50.0% in the 20152017 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 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 inBecause the 2015 quarter compared to the 2016 quarter, for which the cost is higher than 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%10.7% 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 31.5%40.4% of total revenue for the 20162018 quarter compared to 29.9%39.0% of total revenue for the 20152017 quarter. In absolute dollars these expenses increased 21%decreased 5.4%. These variations were primarily due to:

·IncreasingDecreased sales commissions due to lower sales and a change in the size ofway in which we compensate our sales marketing and product strategy teams and increased compensation rates due to competitive demands in the marketplace.people.
·IncreasingDecreased marketing activities relatedexpenses due to competitive intelligence and channel development.
·An increasea decrease in revenue which resultedour spending for content syndication in a higher absolute dollar amount of sales commissions paidorder to employees although the commission rate as a percent of sales did not change materially.instead use those resources to enhance our business development representative program.

General and Administrative.  These expenses increased 13%104.0% 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.
·A one-time share based compensation expense related to modification of certain stock options of our former Chief Financial Officer.

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

  Three Months Ended March 31, 
  2018  2017 
R&D expenditures expensed $722  $722 
R&D expenditures capitalized  402   462 
Total R&D expenditures (non-GAAP measurement) $1,124  $1,184 

  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 developmentOur total R&D expenditures decreased 14.9%5% primarily due to:

·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.
·Shortagesto 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 (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 costcosts individually.

OtherInterest Income (Expense), Net.  The other expense (net) in both quartersInterest income (expense), net consists primarily of interest income earned on long and short term investments.certificates of deposit. This income increased 8.5% during the 2018 quarter as compared to the 2017 quarter due to an increase in the rate of interest on certain of our certificates.

Income Taxes.  Our effective tax rate was 32.9%19.8% for the 20162018 quarter and 30.6%33.1% for the 20152017 quarter. These rates differed from a federal statutory tax rate of 21% in the 2018 quarter and 34% in the 2018 quarter primarily due to:

·The domestic production activities deduction in both quarters,(in the 2017 quarter) and the research and development credit which are tax credit incentives that are items considered in ourserve to reduce the rate at which we pay federal income tax return that are not parttaxes 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 consolidated 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 consolidated financial statements.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)
3543


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.
·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.

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.

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.


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 

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, 20162018 quarter and 2017 quarter, we earned approximately 17% of our revenue from a single third party, channel distributor who purchases products from us12% and resells them to their customers. During the three months ended September 30, 2015 there was no single customer that exceeded 10% of sales. During the nine months ended September 30, 2016, and the nine months ended September 30, 2015, we earned approximately 14% and 10%, respectively, of our revenue from a single third party channel distributor who purchases products from us and resells them to their customers. Approximately 40%15% of our accounts receivable as of September 30, 2016,March 31, 2018, were due from this customer and from one other customer, the latter of which did not constitute more than 10% of our revenue. Paymentdistributor. 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%30% and 22% of our revenue from customers outside the United States during the three months ended September 30, 2016,2018 quarter and the three months ended September 30, 2015 respectively. We earned approximately 22% and 24% of our revenue from customers outside the United States during the nine months ended September 30, 2016, and the nine months ended September 30, 20152017 quarter, respectively. We receive all revenue in U.S. dollars, so we have no material exchange rate risk with regard to theour 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.


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 ofExchange 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 anas 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 effectivenesssystem of GlobalSCAPE’s “disclosurecontrols has operated effectively in all cases.  Our disclosure controls and procedures” (as defined inprocedures are designed to provide reasonable assurance that the Securities Exchange Actobjectives 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 theour disclosure controls and procedures were effective.not effective as of March 31, 2018 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 changesMaterial 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 March 31, 2018.

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.

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 areis 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.
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Part II. Other Information

Item 1.          Legal Proceedings

GlobalSCAPE has been named as one of a number of defendantsThe 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 20152017 Form 10-K 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 5.          Other Information.

We have not yet announced the date for our 2018 annual meeting of stockholders (the “2018 Annual Meeting”). Because the 2018 Annual Meeting date will represent a change of more than thirty days from the anniversary of our 2017 annual meeting of stockholders held on May 10, 2017, the deadline for the receipt of stockholder proposals for the 2018 Annual Meeting will change. When we set the date for our 2018 Annual Meeting, we will publicly announce such date and deadlines for the receipt of stockholder proposals.

Item 6.          Exhibits

(a)Exhibits

 31.1
   
 31.2
   
 32.1
   
 101Interactive Data File.
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Signatures
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
    
   GLOBALSCAPE, INC.
    
November 10, 2016June 14, 2018 By: /s/ James W. Albrecht, Jr.Karen J. Young
Date  James W. Albrecht, Jr.Karen J. Young
   Interim Chief Financial Officer
 
 
 
 
 
 
 
 
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