“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 client does not need to install the underlying software on its own computer systems to access the application.

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.

Index

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

Products and Services

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

·~~Persuasive evidence of an arrangement exists.~~

·~~Delivery has occurred or services have been rendered.~~

·~~The amount of the sale is fixed or determinable.~~

·~~Collection of the sale amount is reasonably assured.~~

~~Index~~

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

software products and services:

●

Perpetual software licenses under which clients install our products in their information systems environment on computers they manage, own or otherwise procure from a cloud services provider. Clients also deploy our products with cloud services providers in a BYOL 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, or 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 ~~software license~~ revenue from the sale of perpetual software licenses and associated contracts for M&S.

We recognize revenue when we have satisfied a performance obligation by transferring control over a product or delivering a service to a client. We measure revenue based upon the consideration set forth in an arrangement or contract with a client. The revenue recognition criteria we apply to each of our software products ~~sold~~and services are as follows:

●

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 client the software license key that provides the ability to access and use our product. If our client 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.

●

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 clients subscribe. Revenue can include basic monthly fees to access the software and usage fees based upon the volume of certain resources the client consumes (such as volumes of storage or bandwidth). We are generally paid for these services on a month-to-month basis, but if a client 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.

●

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.

●

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.

The delivery of our software ~~license agreements.~~ products and services generally does not involve any variable consideration, financing components or consideration payable to a client such as rebates or other incentives that reduce amounts owed to us by clients.

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 we will deliver more than one year into the future is presented as a non-current liability.

Index

The activity in our deferred revenue balances has been as follows ($ in thousands):

	Three Months Ended March 31,
	2020			2019
Deferred revenue, beginning of period	$	18,255		$	16,237
Deferred revenue resulting from new contracts with customers		7,731			7,102
Deferred revenue at the beginning of the period that was amortized to revenue		(6,821	)		(5,631	)
Deferred revenue arising during the period that was amortized to revenue		(957	)		(1,164	)
Deferred revenue, end of period	$	18,208		$	16,544

Multi-Element Transactions

At the time clients purchase perpetual software licenses, they also typically purchase M&S although it is not mandatory. We do not sell separate M&S to subscribers to our ~~customers purchase these products, they typically~~SaaS solutions as M&S is provided as part of their SaaS subscription. Clients may also purchase a product maintenance and support, or M&S, agreement. These transactions are multiple element software sales for which we assess the presence of vendor specific objective evidence (“VSOE”) of the fair value of the undelivered elements to determine the portion of these sales to recognize as revenue upon delivery of the software product and the portion of these sales to record as deferred revenueprofessional 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 value~~components 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 primarily~~stand-alone transactions, renewals of ~~revenue to be earned in the future as we deliver services under~~pre-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 provide~~contracts, professional services to clients seeking assistance with products they have previously purchased from us, or SaaS subscriptions to clients not requiring any of our ~~customers consisting primarily~~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 ~~installation support, operations support~~licenses are part of multi-element transactions that also involve M&S and/or professional services, and ~~training. We recognize revenue from these services as they are completed and accepted~~because the selling price of those licenses can vary significantly among clients, we use the residual approach under FASB Accounting Standards Codification Topic 606, or ASC 606, to estimate the selling price of perpetual software licenses in a multi-element transaction by ~~our customers.~~

reference to the total transaction price less the sum of the observable stand-alone selling prices of M&S and/or professional services.

Sales Tax

We collect sales tax on many of our ~~sales.~~transactions with clients 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 Expenses~~

~~In preparing~~

Allowance for Sales Returns

We provide an allowance for sales returns. We estimate this allowance based upon our ~~financial statements for~~historical experience and the ~~year ended December 31, 2015, we revised the manner in which we present cost of revenues and other elements of our statement of operations in response to the changing~~ nature of recent transactions with clients. This amount is included in accrued liabilities in our ~~business and~~condensed consolidated balance sheets.

Contract Assets

We generally bill clients for professional services when we have fully delivered the ~~resulting differences~~services specified in the ~~scope~~contract. We may incur costs in delivering the services prior to that time. Such costs are generally not material. Accordingly, we do not record a contract asset for professional service engagements in process but not yet billed.

Incremental Costs of Obtaining a Contract to Deliver Goods 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~~Services

We incur incremental costs ~~was moved from depreciation and amortization and included~~ in the ~~cost~~form of ~~license revenue. Other costs included in cost of license revenue are~~sales commissions paid to our sales personnel and royalties ~~we pay to use technology in our~~on certain products ~~that is developed by others and fees~~ paid to third ~~party service providers who support~~parties. These are costs we would not incur if we did not obtain a contract to deliver our ~~cloud based~~goods and ~~SaaS solutions. Cost of M&S revenue and cost of professional services revenue consist primarily of salaries and related personnel~~services. We account for these costs of our employees who deliver the related service to our clients. These costs were previously included in the general and administrative classification. Also included in the cost of professional services revenue are the fees of third party service providers.

~~Selling, General and Administrative~~

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

~~Depreciation and Amortization~~

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

as follows:

●

If the 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 the 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:

Index

~~Effect~~

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 recognize expense ratably each month over that term.

For the portion of the cost that we determine benefits us over an overall client 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 client relationship.

Our activity in deferred costs of ~~the reclassifications~~

~~The reclassifications were between cost of revenues~~obtaining a contract to deliver goods 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, 2015services has been as follows ($ in thousands):

Quarter Ended September 30, 2015
Reclassification of Previously Reported Amounts

As
Previously
Reported

Cost
of
Revenues

Capitalized
Software Cost
Amortization

Personnel
Costs
Depreciation
Selling,
General
& Administrative

As
Now
Reported

Operating Revenues:
Software licenses $ 2,852 $ 2,852
Maintenance and support 4,142 4,142
Professional services 653 653
Total revenues 7,647 7,647

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

Gross profit - 6,139

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

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

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

~~Index~~

Nine Months Ended September 30, 2015
Reclassification of Previously Reported Amounts

As
Previously
Reported

Cost
of
Revenues

Capitalized
Software Cost
Amortization

Personnel
Costs
Depreciation
Selling,
General
& Administrative

As
Now
Reported

Operating Revenues:
Software licenses $ 8,590 $ 8,590
Maintenance and support 12,269 12,269
Professional services 1,531 1,531
Total revenues 22,390 22,390

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

Gross profit - 18,425

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

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

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

	Three Months Ended March 31,
	2020			2019
Deferred expense, beginning of period	$	943		$	1,009
Deferred expense resulting from new contracts with customers		218			179
Deferred expense amortized to expense		(228	)		(209	)
Deferred expense, end of period	$	933		$	979

At March 31, 2020, $582,000 was recorded in prepaid and current other assets and $351,000 was recorded in noncurrent other assets in our condensed consolidated balance sheet. At December 31, 2019, we had $577,000 recorded in prepaid and other current assets and $366,000 recorded in noncurrent other assets in our condensed consolidated balance sheet.

Leases

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities on our condensed consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are generally accounted for separately. On April 18, 2019, the Company signed a new operating lease for our existing office space location. The lease is for a period of 10 years at an average annual rent of $462,000 beginning May 1, 2019. We recorded a right-of-use asset and lease liability of approximately $3 million at the commencement of the lease.

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~~

Fair Value of ~~certificates of deposit held with~~Financial Instruments

For financial ~~institutions with contractual maturity dates less than one year from the balance sheet date. The Company has the intent~~assets 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~~liabilities recorded at ~~amortized cost, which approximates the~~ fair value on a recurring or non-recurring basis, fair value is the price we would receive to sell an asset, or pay to transfer a liability, in an orderly transaction with a market participant at the measurement date. In the absence of ~~these investments.~~

such data, fair value is estimated using internal information consistent with what market participants would use in a hypothetical transaction. In determining fair value, observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions; preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:

Level 1: Quoted prices for identical instruments in active markets.

Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3: Significant inputs to the valuation model are unobservable.

Index

As of March 31, 2020, we did not have any assets measured at fair value on a recurring basis that would require disclosure based on the fair value hierarchy of valuation techniques. In addition, certain non-financial assets and liabilities are to be initially measured at fair value on a nonrecurring basis. This includes items such as non-financial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and non-financial, long-lived assets measured at fair value for an impairment assessment. In general, non-financial assets and liabilities including goodwill, capitalized software and property and equipment are measured at fair value using Level 3 inputs, which result in management’s best estimate of fair value from the perspective of a market participant, when there is an indication of impairment and are recorded at fair value only when impairment is recognized.

Our financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable and notes payable. The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable, approximates fair value due to the short term maturity of these instruments, all of which mature within 12 months.

The carrying amount of our notes payable, including the current portion, as of March 31, 2020 was $48,125,000. This carrying value approximates fair value based on interest rates that are currently available to us for issuance of debt with similar terms and maturities.

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

We account for goodwill in accordance with FASB Accounting Standards Codification 350, or ASC 350, as amended by ASU 2017-04, Simplifying the Test for Goodwill Impairment (effective January 1, 2020, as described in recent accounting pronouncements below). Goodwill is not amortized. ~~On at least an annual basis,~~Annually, we test goodwill for impairment at the reporting unit ~~level.~~level using December 31 as the measurement date, and will also evaluate throughout the year if any indicators of a potential impairment are identified. We operate as a single reporting ~~unit.~~

unit with $12,712,000 of goodwill. As of March 31, 2020 and December 31, 2019, this single reporting unit had a negative carrying value.

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.

Index

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~~to perform a quantitative goodwill impairment test ~~prescribed by GAAP.~~

to identify both the existence of impairment and the amount of impairment loss. In a quantitative test, the fair value of a reporting unit is compared to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered unimpaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

As of December 31, ~~2015,~~2019, 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 (including the recent coronavirus COVID-19 outbreak), or changes in circumstances since that time indicating that the carrying amount of ~~goodwill~~our reporting unit may exceed its fair market value and that interim testing needed to be performed.

Additionally, because our single reporting unit has a negative carrying value, reasonable changes in the assumptions used would not indicate impairment.

Capitalized Software Development Costs

When we complete research and development for a software product, ~~and~~ have in place a ~~detail~~program 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.

Cost of revenue

Cost of revenue consists of expenses associated with the production, delivery and support of the products and services we sell. Cost of license revenue consists primarily of amortization of the capitalized software development costs we incur when producing our software products, royalties we pay to use software developed by others for certain features of our products, and fees we pay to third parties who provide services supporting our SaaS 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.

Research and Development

We expense research and development costs as incurred.

~~Index~~

Advertising Expense

We expense advertising costs as incurred as a component of our sales and marketing expenses. Advertising expense was ~~$480,315~~approximately $59,000 and ~~$334,352~~$51,000 in the ~~2016~~2020 quarter and the ~~2015~~2019 quarter, ~~respectively, and $1,447,078 and $1,116,894 in the 2016 nine months and 2015 nine months,~~ respectively.

~~Share-Based~~

Stock-Based Compensation

We measure the cost of ~~share-based~~stock-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 primarily 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.

Index

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 condensed 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.

~~Index~~

Recent accounting pronouncements

~~In June 2016, the Financial~~

Accounting Standards ~~Board, or FASB, issued Accounting Standard~~ Update ~~(ASU) 2016-15,~~ ~~Statement~~(“ASU”) 2017-04, Intangibles – Goodwill and Other (issued January 2017) - To simplify the subsequent measurement of ~~Cash Flows – Classification~~goodwill, Step 2 was eliminated from the goodwill impairment test. In computing the implied fair value of ~~Certain Cash Receipts~~goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and ~~Cash Payments.~~ ~~This pronouncement provides guidance as to~~liabilities (including unrecognized assets and liabilities) following the ~~treatment~~procedure that would be required in determining the fair value of ~~transactions~~assets acquired and liabilities assumed in a ~~statement~~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 ~~cash flows~~a reporting unit with ~~respect~~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 ~~eight specific cash flow issues. During 2015 and 2016, we had no transactions~~that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the ~~type cited in~~reporting unit when measuring the ~~statement~~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, doif 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. We adopted ASU 2017-04 effective January 1, 2020, and its adoption did not ~~anticipate having any such transactions in the foreseeable future. Accordingly we do not expect this pronouncement to~~ have a material ~~effect~~impact on ~~how we present items in~~ our ~~statement of cash flows.~~

~~In June 2016, the FASB issued~~ internal condensed consolidated financial statements.

ASU 2016-13, Financial Instruments – Credit Losses. (issued June 2016) - Among ~~its~~the provisions of this ASU is a requirement that assets measured at amortized cost, which includes trade accounts receivable, be presented at the net amount expected to be collected. This pronouncement requires that an entity reflect all of its expected credit losses based on current estimates which will replace the current standard requiring that an entity need consider only past events and current conditions in measuring an incurred loss. We are subject to this guidance effective with the consolidated financial statements we issue for the year ending December 31, ~~2020,~~2023, 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.

Index

~~In March 2016, the FASB issued~~

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

2016-02, Leases (Topic 842): In February 2016, the FASB issued ~~ASU 2016-02,~~ ~~Leases. The main difference between existing GAAP~~a new standard related to leases to increase transparency and ~~this ASU 2016-02 is~~comparability among organizations by requiring the ~~presentation by lessees on their financial statements~~recognition of ~~lease~~ROU assets and lease liabilities ~~arising from~~on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. ~~Since this new~~Under the standard, ~~retains~~disclosures are required to meet the ~~distinction between finance~~objective of enabling users of financial statements to assess the amount, timing, and ~~operating leases, the effect of leases in the statement of operations and the statement~~uncertainty of cash flows ~~will be largely unchanged~~arising from leases. We are also required to recognize and measure leases existing ~~GAAP. Our only~~at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available. We adopted ASC 842 using the modified retrospective approach effective January 1, 2019. As leases in-place at the time of adoption were not material, no right-of-use assets or lease liabilities were recorded upon adoption. We elected the available practical expedients and implemented internal controls and key system functionality to enable the preparation of ~~significance is our~~financial information on adoption. On April 18, 2019, the Company signed a new operating lease for our ~~corporate~~existing office space location. The lease is for ~~which we will present~~ a ~~right-to-use~~period of 10 years at an average annual rent of $462,000 beginning May 1, 2019. We recorded a right-of-use asset and a lease liability ~~on our balance sheet~~of approximately $3 million at the commencement of the lease.

4.	Accounts Receivable, Net

We bill clients and issue invoices when we implement this standard. We are in the process of determining those amounts. In accordance with this standard, we will implement it beginning with our interim and annual financial statements for 2019. The extent of the effect of this standard on our financial statements for 2019 and later will depend upon the leases, if any, that we have ~~in effect at that date.~~

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

~~In May 2014, FASB issued ASU No. 2014-09 entitled~~ ~~Revenue from Contracts with Customers (Topic 606)~~. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for thosedelivered goods or services. ~~We are subject~~In addition, when clients agree to ~~this guidance effective with financial statements~~purchase or renew M&S services, we ~~issue~~bill and invoice clients at that time which could be before the date we begin delivering those services. In that event, we exclude from accounts receivable (and from the related deferred revenue, see Note 6) the invoices we have issued for which the ~~year ending December 31, 2018,~~M&S services commencement date is in the future and which have not been paid by 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.~~

~~Index~~

~~Use of Estimates~~

The preparation of consolidated 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 existclient as of the date ~~the financial statements are published, and the reported amounts~~ of ~~revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company’s~~our condensed consolidated financial statements. ~~It is possible~~We 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, 2020			December 31, 2019
Total invoices issued and unpaid	$	6,760		$	8,245
Less: Unpaid invoices relating to M&S contracts with a start date subsequent to the balance sheet date		(1,079	)		(906	)
Gross accounts receivable		5,681			7,339
Allowance for doubtful accounts		(100	)		(100	)
Accounts receivable, net	$	5,581		$	7,239

Capitalized Software Development Costs, Net

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

	March 31,			December 31,
	2020			2019
Gross capitalized cost	$	11,893		$	11,529
Accumulated amortization		(9,284	)		(8,879	)
Capitalized software development costs, net	$	2,609		$	2,650

	Three Months Ended March 31,
	2020			2019
Amount capitalized	$	364		$	201
Amortization expense		(405	)		(353	)

Index

September 30, December 31,
2016 2015
Gross capitalized cost $ 7,012 $ 5,714
Accumulated amortization (3,051 ) (1,732 )
Net balance $ 3,961 $ 3,982

Three Months Ended September 30, Nine Months Ended September 30,
2016 2015 2016 2015
Amount capitalized $ 452 $ 506 $ 1,298 $ 1,613
Amortization expense (450 ) (367 ) (1,319 ) (912 )

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

	Released			Unreleased
	Products			Products
Gross capitalized amount at March 31, 2020	$	11,493		$	400
Accumulated amortization		(9,284	)		-
Net capitalized cost at March 31, 2020	$	2,209		$	400

Future amortization expense:
Nine months ending December 31, 2020		1,034
Year ending December 31,
2021		714
2022		424
2023		37
Total	$	2,209

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.

6.	5.Deferred Revenue

As described in Note 4 regarding accounts receivable, when clients agree to purchase or renew M&S services, we bill and invoice our clients 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 client as of the date of our financial statements. Accordingly, we determine our deferred revenue as follows ($ in thousands):

	March 31, 2020			December 31, 2019
Total invoiced for M&S contracts for which revenue will be recognized in future periods	$	19,287		$	19,161
Less: Unpaid invoices relating to M&S contracts with a start date subsequent to the balance sheet date		(1,079	)		(906	)
Total deferred revenue	$	18,208		$	18,255

Deferred revenue, current portion	$	15,659		$	15,683
Deferred revenue, non-current portion		2,549			2,572
Total deferred revenue	$	18,208		$	18,255

7.	Notes Payable

In November 2019, we entered into a credit facility with J.P. Morgan Chase Bank, N.A, as Administrative Agent and East West Bank as Syndication Agent consisting of a $50.0 million term loan and a $5 million revolving agreement (the “Loan Agreement”), which is secured by substantially all of our assets. Funds from the term loan were substantially used to fund a special dividend of $3.35 to our common shareholders which was paid on December 5, 2019. The revolving loan may be accessed to fund working capital needs. The loans bear a variable interest rate of LIBOR plus a Term Loan Spread between 3.75% and 2.25%. The amount of the Term Loan Spread is a function of the Company’s Leverage Ratio. Effective January 3, 2020, the Company entered into an Amendment and Waiver No. 1 to the Credit Agreement to increase the amount of the special dividend permitted to be paid to stockholders on December 5, 2019 to accommodate last minute option exercises and to exclude the May 28, 2019 special dividend from the fixed charges calculation. Effective April 13, 2020 the Company entered into Amendment No. 2 to the Credit Agreement which provided consent for the Company to borrow $2.0 million under the U.S. Small Business Administration Payroll Protection Program authorized by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (Note 16).

At March 31, 2020, the principal balance outstanding under the term note payable was $48.1 million and the balance of the revolving note payable was zero.

Index

The aggregate maturities of our notes payable, as of March 31, 2020, are as follows: $3.8 million in 2020, $7.5 million in 2021, $7.5 million in 2022, $10.0 million in 2023, and $19.4 million in 2024.

Interest payments under the credit facility are due monthly. Principal payments are due quarterly. The loans may be prepaid at any time without penalty.

The Loan Agreement contains the following financial covenants:

● We must not exceed a Total Leverage Ratio of 3.25x. This ratio decreases to 3.0x at September 30, 2020, 2.75x at March 31, 2021 and 2.25x at March 31, 2022. This ratio is defined in the Loan Agreement as the ratio of consolidated total funded indebtedness to consolidated EBITDA minus capitalized software expenditures for the period of the four most recent consecutive fiscal quarters. As of March 31, 2020, this debt service coverage ratio was 2.54x.

● We must maintain a Fixed Coverage Charge Ratio of 1.25x. This ratio is defined in the Loan Agreement as the ratio of consolidated EBITDA minus unfinanced capital expenditures to cash interest expense plus scheduled principal payments made plus taxes paid in cash plus restricted payments made in cash. As of March 31, 2020, this debt to tangible net worth ratio was 2.93x.

The Loan Agreement contains customary covenants relating to maintaining legal existence and good standing, complying with applicable laws, delivery of financial statements, payment of taxes and maintaining insurance. The Loan Agreement also contains customary events of default including the failure to make payments of principal and interest, the breach of any covenants, the occurrence of a material adverse change, and certain bankruptcy and insolvency events. Additionally, we may be restricted from declaring dividends if an Event of Default exists, or if immediately prior to and after giving effect of such dividend it would cause us to exceed our maximum Total Leverage Ratio, or fall below our minimum Fixed Charge Coverage Ratio.

The following table represents the components of our long-term debt disclosed on the condensed consolidated balance sheet as of March 31, 2020.

	March 31,
	2020
Credit facility	$	48,125
Unamortized debt issuance costs		(1,948	)
Total long-term debt		46,177

Less current portion of long-term debt		5,200

Total long-term debt, non-current portion	$	40,977

Interest rate		5.4	%

8.	Stock Options, Restricted Stock and ~~Share-Based~~Stock-Based Compensation

We have granted stock-based incentive awards to our officers and employees under long-term equity incentive plans that originated in 2000, 2006, 2010, 2015 and 2016. We currently issue stock-based awards to our officers and employees under the 2015 Non-Employee Directors Long-Term Equity Incentive Plan (“2015 Directors Plan”) and 2016 Employee Long-Term Equity Incentive Plan (“2016 Employee Plan”). The 2015 Directors Plan and 2016 Employee Plan authorize the issuance of up to 500,000 and 5,000,000 shares of common stock for stock-based incentives, including stock options and restricted stock awards, respectively. As of March 31, 2020, stock-based incentives for up to 80,000 and 2,587,259 shares remained available for issuance in the future under these plans, respectively. The following shares are currently outstanding under our long-term equity incentive plans:

Plan	Shares outstanding
2010 Employee LT Equity Incentive Plan		30,338
2015 Directors Plan		60,000
2016 Employee LT Equity Incentive Plan		1,566,091
Total shares Outstanding at March 31, 2020		1,656,429

Index

Under these 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~~our Board of Directors. Our ~~share-based~~stock-based compensation expense was as follows ($ in thousands):

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

~~Index~~

	Three Months Ended March 31,
	2020		2019
Stock-based compensation expense	$	497	$	875

Stock Options

~~The GlobalSCAPE, Inc. 2010~~

During the 2020 quarter, we granted stock options only under the 2016 Employee ~~Long-Term Equity Incentive Plan is our current stock-based incentive plan for our employees.~~ Plan.

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

·	~~It authorizes the issuance of up to three million shares of common stock for stock-based incentives including stock options and restricted stock awards.~~

· ●	The exercise price, term and other conditions applicable to each stock option or stock award granted are determined by the Compensation Committee of ~~the~~our 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~~or following a four-year period, expire ten years from the date of ~~grant.~~grant, and are exercisable for a period of ninety days after the end of employment.

~~We issued no restricted~~

●

Upon exercise of a stock ~~awards under this plan during~~option, we issue new shares from the ~~2016 or 2015 periods.~~shares of common stock we are authorized to issue.

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

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)

Outstanding at December 31, 2015 2,091,325 $ 2.45 6.09 $ 3,277
   Granted 1,055,300 $ 3.58
   Forfeited (372,045 ) $ 3.14
   Exercised (165,135 ) $ 2.02
Outstanding at September 30, 2016 2,609,445 $ 2.83 6.29 $ 2,015

Exercisable at September 30, 2016 1,351,760 $ 2.26 3.59 $ 1,814

				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, 2019		1,563,784		$	5.78		8.69	$	6,372
Granted		126,000		$	9.62
Forfeited		(17,331	)	$	7.48
Exercised		(198,924	)	$	3.86
Outstanding at March 31, 2020		1,473,529		$	6.35		8.67	$	2,192

Exercisable at March 31, 2020		193,559		$	3.96		7.35	$	612

Additional information about our stock options is as follows:

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

	Three Months Ended March 31,
	2020		2019
Weighted average fair value of options granted	$	3.94	$	2.10
Intrinsic value of options exercised	$	1,220,114	$	258,101
Cash received from stock options exercised	$	767,930	$	519,184

Number of options that vested		43,504		626,278
Fair value of options that vested	$	71,727	$	964,820

Unrecognized compensation expense related to non-vested options at end of period	$	2,772,371	$	1,112,499
Weighted average years over which non-vested option expense will be recognized		2.81		2.16

Index

As of September 30, 2016

Range of
Exercise Prices

Underlying
Shares
Outstanding
Options Outstanding Options Exercisable

Weighted
Average
Remaining
Contractual
Life

Weighted
Average
Exercise
Price

Number of
Underlying
Shares

Weighted
Average
Exercise
Price

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

As of March 31, 2020
			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
$1.43 - $2.35		8,004		3.18	$	1.78		8,004	$	1.78
$2.39 - $3.59		184,776		8.07	$	3.49		48,813	$	3.40
$3.60 - $5.83		464,249		8.07	$	4.14		135,408	$	4.27
$5.90 - $8.85		381,500		9.05	$	7.13		1,334	$	5.90
$8.93 - $13.29		435,000		9.33	$	9.31		-	$	-
Total options		1,473,529						193,559

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~~

	Three Months Ended March 31,
	2020			2019
Expected volatility		48	%		49	%
Expected annual dividend yield		1.50	%		1.50	%
Risk free rate of return		1.57	%		2.52	%
Expected option term (years)		6.20			6.00

Restricted Stock Awards

Prior to the ~~first~~fourth quarter of ~~2015,~~2019 we ~~added an expected annual dividend yield to these assumptions.~~

~~Restricted Stock Awards~~

~~In May 2015, we adopted~~issued restricted stock only from the 2015 ~~Non-Employee~~ Directors ~~Long Term Incentive~~Plan. Beginning in the fourth quarter of 2019, shares of restricted stock were granted from the 2016 Employee Plan (“in addition to the 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.~~Plan. Provisions and characteristics of ~~this plan~~these plans 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~~our 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, after which time the restrictive legend is ~~generally continuing service for one year subsequent to~~removed from the ~~date of the award.~~shares.

~~As of September 30, 2016, stock based incentives for up to 340,000~~

●

Restricted shares ~~remained available for issuance~~participate in ~~the future under this plan.~~dividend payments and may be voted.

Our restricted stock awards activity has been as follows:

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

						Total
				Grant Date		Fair Value of
	Number of			Fair Value		Shares That
	Shares			Per Share		Vested
Restricted shares outstanding at December 31, 2019		184,079		$	9.32
Shares granted with restrictions		-		$	-
Shares forfeited		(1,179	)	$	9.54
Shares vested and restrictions removed		-		$	-	$	-
Restricted shares outstanding at March 31, 2020		182,900		$	9.31

Unrecognized compensation expense for non-vested shares as of March 31, 2020
Expense to be recognized in future periods	$	1,140,678
Weighted average number of months over which expense is expected to be recognized		42.4

Index

Income Taxes

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

Three months ended September 30, Nine months ended September 30,
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

~~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

	Three months ended March 31,
	2020						2019
	Current		Deferred		Total		Current		Deferred			Total
Federal	$	253	$	92	$	345	$	647	$	(10	)	$	637
State		91		25		116		115		(5	)		110
Total	$	344	$	117	$	461	$	762	$	(15	)	$	747

Deferred income taxes on our consolidated 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

~~Index~~

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,
	2020		2019
Deferred tax assets:
Deferred revenue	$	545	$	672
Right-of-use operating lease asset		595		609
Share-based compensation		254		200
Compensation and benefits		87		123
Texas franchise tax R&D credit		136		150
Allowance for doubtful accounts		37		37
Deferred state income taxes		35		45
Tangible assets		29		24
Accrued expenses not deducted for tax		9		8
Total deferred tax assets		1,727		1,868

Deferred tax liabilities:
Right-of-use operating lease liability		597		610
Intangible assets		558		567
Deferred expenses		196		198
Total deferred tax liabilities		1,351		1,375

Net deferred tax assets	$	376	$	493

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 assessment~~The ultimate realization of ~~the likelihood of having sufficient taxable income in the future to support deduction or utilization of the items giving rise to our~~ deferred tax assets ~~indicates~~is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We have concluded it is more-likely-than-not that weour ability to generate future taxable income will allow us to realize ~~the~~those deferred tax ~~assets listed~~assets.

As of March 31, 2020, we had Texas Research and Development tax credit carryforwards of $136,000. These carryforwards expire 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 the amount of $125,000 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.~~

2039.

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

	Three Months Ended March 31,
	2020		2019
Balance at beginning of period	$	24	$	113
Increases for tax positions related to the current year		-		-
Increases for tax positions related to prior years		-		-
Decreases for tax positions where the statue has expired		-		-
Balance at end of period	$	24	$	113

Index

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 2017 U.S. income tax return and the ~~extent they arise,~~uncertainty related to the realization of a portion of those credits based on prior experience. If we realized and recognized any of our unrecognized tax benefits, such benefits would reduce our effective tax rate in the year of recognition.

We record interest and penalty ~~expenses~~expense related to income taxes as ~~components of~~interest and other expense, ~~in our statement of operations. We incurred~~respectively. At March 31, 2020, no ~~such expenses in 2016, 2015~~interest or ~~2014.~~

penalties had been or were required to be accrued. We file ~~state~~income tax returns in the US and in various ~~states. The taxes resulting from these filings~~state jurisdictions with varying statues of limitations. We are ~~included in~~no longer subject to income tax ~~expense.~~

examination by tax authorities for years prior to 2016 with respect to our federal income tax returns and years prior to 2015 with respect to most of our state income tax 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 tax rate of ~~34%~~21% for the 2020 quarter and 2019 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

~~Index~~

~~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.

	Three months ended March 31,
	2020			2019
Income tax expense at federal statutory rate	$	594		$	665
Increase (decrease) in taxes resulting from:
State taxes, net of federal benefit		97			86
Stock based compensation		(197	)		73
Other		3			14
Research and development credit		(9	)		(17	)
Foreign derived intangible income deduction		(27	)		(74	)
Income tax expense per the statements of operations	$	461		$	747

10.

Earnings per Common Share

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

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

	Three Months Ended
	March 31,
	2020		2019
Numerators
Numerator for basic and diluted earnings per share:
Net income	$	2,369	$	2,420

Denominators
Denominators for basic and diluted earnings per share:
Weighted average shares outstanding - basic		18,613		17,197

Dilutive potential common shares
Stock options and awards		413		467
Denominator for diluted earnings per share		19,026		17,664

Net income per common share - basic	$	0.13	$	0.14
Net income per common share – diluted	$	0.12	$	0.14

11.

Dividends

~~During 2016, our Board of Directors declared quarterly~~

The Company did not pay dividends during the 2020 quarter. We paid dividends during the 2019 quarter as follows:

	Three Months Ended
	March 31, 2019
Dividend per share of common stock	$	0.015
Dividend record date	March 11, 2019
Dividend payment date	March 25, 2019

Index

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

Severance Payments

We have agreements with key personnel that provide for severance payments to them in the event of a ~~change~~“change in ~~control~~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.~~

between approximately $700,000 and $1.5 million depending upon the circumstances.

Legal and Regulatory Matters

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.	~~10.~~ Leases

On April 18, 2019, the Company signed a new operating lease for our existing office space location. The lease is for a period of 10 years at an average annual rent of $462,000 beginning May 1, 2019. We recorded a right-of-use asset and lease liability of approximately $3 million at the commencement of the lease.

Our non-cancellable, contractual obligations at March 31, 2020 consisted primarily of the following ($ in thousands):

	Operating Lease
2020 (remaining nine months)	$	317
2021		431
2022		442
2023		453
2024		464
Thereafter		2,133
Total lease payments	$	4,240

Supplemental other information related to leases:

	Three Months Ended March 31,
	2019
Operating lease cost	$	101
Weighted-average remaining lease term (years)		9.1
Weighted-average discount rate (%)		5	%
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	103

Index

14.	Concentration of Business Volume and Credit Risk

In order to leverage the resources of third parties, we make our products available for purchase by end users through third-party, channel distributors even though those end users can also purchase those products directly from us. ~~During~~In the ~~2016~~2020 quarter and 2019 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 months~~18% and ~~2015 nine months, we earned approximately 14% and 10%~~19%, respectively, of our revenue from such sales through our largest ~~third party,~~third-party channel distributor.

As of ~~September 30, 2016,~~March 31, 2020, approximately ~~40%~~23% 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. Payment~~with payment for substantially all such amounts ~~has~~having been received subsequent to that date.

~~11.~~

15.

Segment and Geographic Disclosures

In accordance with ASC 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~~clients and partners located inoutside the United States accounted for approximately ~~83%~~23% and ~~78%~~28% of our total revenues in ~~2016~~the 2020 quarter and ~~2015~~2019 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 each~~respectively. Each individual foreign country ~~accounting~~accounts for less than 10% of total ~~revenues~~revenue in all periods. We attribute revenues to countries based on the country in which the ~~customer~~client or partner is located. ~~None~~We have no Company offices located in a foreign country and none of our property and equipment was located in a foreign country as of ~~September 30, 2016~~March 31, 2020.

16.	Subsequent Events

On April 7, 2020 we entered into an agreement with EastWest Bank to borrow $1,987,700 under the U.S. Small Business Administration Payroll Protection Program authorized by the CARES Act. Following receipt of the loan proceeds, we evaluated our access to credit through other sources of funding and ~~2015.~~

determined to repay the funds borrowed under the CARES Act. On May 5, 2020, we returned the $1,987,700 in proceeds from the loan, which was not used by the Company.

Index

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

This Quarterly Report on Form 10-Q (this “Quarterly Report”) of GlobalSCAPE, Inc. and its wholly-owned subsidiary (collectively referred to as “GlobalSCAPE”, the “Company”, “we” or “our”), 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, (the “Securities Act”) and Section 21E of the Securities ~~and~~ Exchange Act of 1934, as ~~amended.~~amended (the “Exchange 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 ~~2015~~Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019 Form 10-K”) and other documents filed with the Securities and Exchange ~~Commission.~~Commission (the “SEC”). Therefore, GlobalSCAPE’s actual results of operations and financial condition in the future could differ materially from those discussed in this Quarterly Report.

In the following discussion, our references to the ~~2016~~2020 quarter and the ~~2015~~2019 quarter refer to the three months ended ~~September 30, 2016~~March 31, 2020 and ~~2015,~~2019, respectively. ~~Our references to the 2016 nine months and the 2015 nine months refer to the nine months ended September 30, 2016 and 2015, 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 ~~twenty years and have sold our products to thousands of enterprises and~~ more than ~~one million individual consumers throughout the world.~~

twenty years.

Our primary business is selling and supporting managed file transfer ~~or MFT,~~(“MFT”) software for enterprises. ~~The brand name~~MFT software facilitates the transfer of ~~our~~data 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 is~~products are based upon our Enhanced File Transfer (“EFT”) platform. This on-premise and cloud-based delivery platform emphasizes secure and efficient data exchange for virtually any organization. It enables business partners, clients 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. The EFT platform promotes ease of administration while providing the detailed capabilities necessary for complete control of a file transfer system.

We continue to explore all strategic alternatives to maximize value for shareholders, including without limitation to improve the market position and profitability of our product offerings in the marketplace, generate additional liquidity, and enhance our valuation. We may pursue our goals through organic growth or ~~EFT.~~

strategic or other alternatives. We will also continue to monitor capital markets for opportunities to repurchase shares, as well as consider other actions designed to enhance shareholder value.

We earn most of our revenue from the sale of ~~EFT~~products and ~~products~~services that are part of our EFT platform. ~~We earn revenue from~~Clients can purchase the ~~sale~~capabilities 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 clients who purchase EFT also purchase a maintenance and support (“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. In January 2018, we introduced EFT Arcus, our SaaS offering of the EFT platform for which users 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 ~~constitute~~constituted less than ~~10%~~2% of our total ~~revenue.~~revenue in the 2020 quarter. Clients pay a one-time fee to purchase these products under a perpetual software license. Some clients also purchase an M&S contract. We do not offer a SaaS version of these products and have no plans to do so. We continue to offer product support for Mail Express and WAFS, which we discontinued as products for sale as of January 1, 2019.

Index

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 ~~MFT~~these products. For a more comprehensive discussion of the products we sell and the services we offer, see ~~Software~~“Software Products and Services” below.

During the 2020 quarter, license revenue from our EFT platform products decreased 24%. The decline is primarily attributable to a ~~corporation, we~~slowdown in deal velocity as companies around the globe began to evaluate the effects of COVID-19 and started shifting to remote workforces. We believe some clients and prospects decided to defer their buying decisions to a later period. Economic downturns or other adverse economic conditions, including but not limited to, public health crises that reduce economic activity (including the recent coronavirus COVID-19 outbreak) could have ~~won multiple awards for performance~~an adverse effect on spending on information technology projects since in such environments, prospects and ~~reputation, including:~~

·	~~In 2016:~~

-	~~Recognized as a 2016 Top Workplace by San Antonio Express-News, marking Globalscape’s sixth recognition as a Top Workplace in San Antonio.~~

-	~~Named as Leader in Secure Information Exchange Services 2016 – Texas by the Corp America 2016 Small Cap Awards.~~

-	~~Earned awards from~~ ~~Info Security Guide~~ ~~in several categories, including:~~

o	~~EFT Workspaces – Gold Winner in BYOD Security.~~

o	~~Enhanced File Transfer – Silver Winner in Compliance.~~

o	~~EFT Cloud Services – Bronze Winner in Cloud Security.~~

o	~~Mail Express – Bronze Winner in Email Security and Management.~~

-	~~Received a 5-Star rating in The Channel Company’s CRN 2016 Partner Program Guide for the second year in a row.~~

-	~~Named by~~ ~~Texas Monthly~~ ~~magazine as one of the best companies to work for in Texas for the sixth year in a row with a ranking of #16 in the medium size category.~~

-	~~Honored as the HR Employer of the Year and Excellence in Engagement Strategy in North America by the HRO Today Services and Technology Association.~~

~~Index~~

-	~~Recognized by the~~ ~~San Antonio Business Journal~~ ~~as a 2016 Best Place to Work, making this the fifth time GlobalSCAPE has received this honor.~~

-	~~Named by~~ ~~Computerworld~~ ~~as one of the best companies to work for in IT for the third consecutive year with a ranking of #3 in the small company category.~~

·	~~In 2015:~~

Listed as a Champion in the Ad-Hoc Mid-Market category and a Leader in the Ad-Hoc Enterprise use case by Info-Tech Research Group within its Managed File Transfer Vendor Landscape report. This is the second consecutive time that Info-Tech Research Group has named GlobalSCAPE a Champion within this report.

-	~~Named one of the best places to work in the information technologies small business category by~~ ~~Computerworld~~ ~~for the fourth time.~~

-	~~Named as one of San Antonio’s best places to work by the~~ ~~San Antonio Business Journal~~ ~~for the fifth time in the medium size category.~~

-	~~Received a 5-Star rating in The Channel Company’s CRN 2015 Partner Program Guide.~~

-	~~Named by~~ ~~Texas Monthly~~ ~~magazine as one of the best companies to work for in Texas for the fifth year in a row with a ranking of #3 in the medium size category.~~

-	~~Named to the~~ ~~San Antonio Business Journal’s~~ ~~2015 Fast Track list for companies with $10 million or more in revenue.~~

-	~~Named by the~~ ~~San Antonio Express News~~ ~~as the #1 Top Workplace for 2015 in the small company category, and recognized as one of the Top Workplaces for the fifth time.~~

-	~~Two members of the channel leadership team recognized as The Channel Company’s 2015~~ ~~CRN~~ ~~Channel Chiefs.~~

-	~~Two channel team members named to The Channel Company’s 2015~~ ~~CRN~~ ~~Women of the Channel list.~~

-	~~Recognized by the Golden Bridge Business and Innovation Awards as a Gold Winner in the Managed File Transfer – Innovations category for EFT Workspaces.~~

-	Recognized by the Info Security Products Guide’s Global Excellence Awards as a Gold Winner within the Compliance category for Enhanced File Transfer (EFT) and as a Bronze Winner within the Email Security and Management category for Mail Express.

-	~~Recognized by the Network Products Guide awards as a Gold Winner in Compliance Data Centers for EFT v7.0 and a Silver Winner in Email, Security and Management with Mail Express v4.~~

clients may reduce, sometimes greatly, their discretionary spending to focus on preserving mandatory spending budgets.

Key Business Metrics

We review ~~a number of~~two 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~~business: revenue growth and Adjusted EBITDA (as defined and further described ~~below.~~

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 ~~key~~emerging 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 and its expansion into broader segments of the market.~~

·	~~Developing emerging technologies and/or acquiring products with features that build upon and add capabilities to our EFT platform.~~

·	~~Continuing the evolution of enhanced demand generation activities including marketing, customer-focused, and partner-focused programs.~~

~~Index~~

~~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 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 agreements to support their ongoing product support needs. This pattern of activity can create a cumulative effect for M&S renewals as a result of the cumulative number of licensed software installations sold over multiple years that create M&S renewals in any single year predictably (and in line with our expectations) exceeding the number of new software licenses we sell in a single year. We expect this cumulative effect to continue to grow if we continue to increase enterprise software license revenue in future periods. For these reasons, we expect M&S revenue will remain a substantial part of our total revenue.

See “Comparison of theCondensed Consolidated Statement of Operations for the Three Months Ended ~~September 30, 2016~~ March 31, 2020 and ~~2015~~ ~~and~~ ~~Comparison of the Statement of Operations for the Nine Months Ended September 30, 2016 and 2015~~ 2019” for a discussion of trends in our revenue growth that we monitor using this metric.

~~Bookings~~

Adjusted EBITDA (Non-GAAP Measurement)

Bookings is a business metric we use to measure the success of our sales and marketing programs and the effectiveness of our sales and marketing teams. Bookings are a measure of the value of our arrangements with customers 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.

~~Index~~

~~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~~

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~~Stock-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.~~income. We use Adjusted EBITDA to provide another perspective for measuring profitability ~~and cash flow from our core operating activities~~ that ~~is before considering~~does not include the effects of ~~expenses that typically do not require us to pay them in~~ the current period (such as depreciation, amortization and share-based compensation), 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 stock-based compensation);

●

The cost of financing our business; and

●

The effects of income taxes.

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

Adjusted EBITDA is not a measure of financial performance under ~~GAAP.~~United States generally accepted accounting principles (“GAAP”). It should not be considered as a substitute for net income presented on our condensed consolidated statement of operations and comprehensive ~~income or for net cash provided by operating activities presented on our condensed consolidated statement of cash flows.~~income. Adjusted EBITDA has limitations as an analytical tool and when assessing our operating performance. Adjusted EBITDA should not be considered in isolation or without a simultaneous reading and consideration of our condensed consolidated financial statements prepared in accordance with GAAP.

Index

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

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

Three Months Ended Nine Months Ended
September 30, September 30,
2016 2015 2016 2015
Net Income $ 1,399 $ 1,230 $ 2,761 $ 3,370
Add (subtract) items to determine adjusted EBITDA:
Income tax expense 687 542 1,348 1,585
Interest (income) expense, net (28 ) (17 ) (88 ) (51 )
Depreciation and amortization:
Total depreciation and amortization 513 433 1,522 1,116
Amortization of capitalized software development costs (450 ) (367 ) (1,319 ) (912 )
Stock-based compensation expense 221 167 721 482
Adjusted EBITDA $ 2,342 $ 1,988 $ 4,945 $ 5,590

~~Index~~

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

	Three Months Ended
	March 31,
	2020		2019
Net Income	$	2,369	$	2,420
Add (subtract) items to determine Adjusted EBITDA:
Income tax expense		461		747
Interest (income) expense, net		774		(24	)
Depreciation and amortization:
Total depreciation and amortization		441		410
Stock-based compensation expense		497		875
Adjusted EBITDA	$	4,542	$	4,428

See “Comparison of ~~cash flow:~~

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

~~See~~ the ~~section below comparing our results~~Condensed Consolidated Statement of ~~operations~~Operations for the ~~2016 quarter~~ Three Months Ended March 31, 2020and ~~the 2015 quarter and the 2016 nine months and 2015 nine months~~2019” for discussion of the variances between periods in the components comprising Adjusted EBITDA.

Software Products and Services

We develop and sell computer software that provides secure information exchange, ~~file~~data transfer, and ~~file~~data sharing capabilities for enterprises and consumers. We have been in business for more than twenty years ~~and have~~having 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 97% 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 products~~the EFT platform that include:

●

Perpetual software licenses under which ~~customers~~clients pay 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. In January 2018, we introduced EFT Arcus, our SaaS offering of the EFT platform going forward, for which ~~our customers subscribe and~~users 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 ~~customization~~installation, integration and ~~integration.~~training.

Index

We ~~also~~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.

We sell other products that ~~can be~~are synergistic to our ~~MFT products. These~~EFT platform including CuteFTP. Collectively, these products constituted less than 2% of our total revenue in the 2020 quarter. Clients pay a one-time fee to purchase these products under a perpetual software license. Some clients also purchase an M&S contract. We do not offer a SaaS version of these products and 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.~~

no plans to do so. We continue to offer product support for Mail Express and WAFS, which we discontinued as products for sale as of January 1, 2019.

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

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

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

Managed File Transfer – Enhanced File Transfer Platform

~~Enhanced File Transfer, or~~

EFT is the brand name of our core MFT product platform. ~~EFT was a Silver Winner in the Compliance category and Gold Winner in the BYOD category of the 2016 Info Security Products Guide Global Excellence Awards.~~

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

The EFT platform provides a common, scalable MFT environment that accommodates a broad family of accompanying modules to provide enterprises with increased security, automation, compliance 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, 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,~~clients, and employees. EFT also 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~~provide for complete control and monitoring of file transfer activities.

●

Transmission of critical information such as financial data, medical records, ~~customer~~client 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, compliance 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~~clients 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/~~sharing and collaboration, and continuous data backup and ~~recovery to our customers.~~recovery.

Index

~~The~~

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

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

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

Workspaces, which is a file-sharing module that allows employees to create their own groups and assign permissions for those groups, much like a virtual data room, to provide access to files for which they themselves have access on the EFT server. This functionality is accomplished without compromising the security, control, and governance of those files.

·	~~Active-active high availability, or HA, which maximizes uptime and performance of critical information technology systems.~~

·	~~Enhanced compatibility of web transfer client file transfers through HTML5 support in addition to the existing Java Runtime Environment.~~

·	~~Increased scalability and business continuity with more flexible, uninterrupted file transfer service.~~

·	~~Improved facilitation of PCI DSS version 3.0 compliance with updates to security components, such as PGP and AS2.~~

·	~~Addition of new Content Integrity Control providing an Internet Content Adaptation Protocol (ICAP) connector to anti-malware scanners and data loss prevention (DLP) solutions.~~

·	~~Integration with SMS PASSCODE for Mobile-Based 2 Factor Authentication.~~

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

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

~~Most EFT customers choose to~~Platform – Delivery Offerings

Our clients can 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.~~

~~Index~~

~~Secure Information Sharing and Exchange Solution – Mail Express~~

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

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

~~File Synchronization and Sharing Solution - scConnect~~

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

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

~~Wide Area File Services Solution - WAFS~~

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

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

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 clients 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 SaaS under which the client 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.

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~~clients, but will not invest significantly in enhancing or marketing the ~~past and who purchase it in the future. We do not expect to expend significant resources in the future expanding the features and capabilities of CuteFTP.~~

~~Index~~

product.

Professional Services

We offer a wide 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.

can include:

●	System integration and implementation

●	Business process and workflow planning

●	Policy development

●	Education and training

●	Solution health checks

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~~clients who purchase our other products. ~~Customers~~Clients with M&S contracts pay us a recurring, annual ~~amount~~fee that is typically 20% to 30% of the software license price. A majority of our ~~customers~~clients with M&S contracts renew them each year.

Employees

~~As of October 31, 2016, we had 126 full-time employees~~

Our workforce is organized as follows:

	March 31,
Department	2020		2019
Sales and Marketing		44		39
Engineering		14		9
Professional Services		6		6
Customer Support		24		23
Management and Administration		18		15
Total		106		92

Index

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

Solution Perspective and Trends

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

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

Revenue by Type

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

Revenue by Product

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

~~Index~~

~~We earn revenue primarily~~

	Three Months Ended March 31,
	2020					2019
	Amount		Percent of Total			Amount		Percent of Total

Revenue By Type
License	$	1,995		20.5	%	$	2,634		28.0	%
M&S		7,066		72.8	%		6,076		64.5	%
Professional Services		651		6.7	%		703		7.5	%

Total Revenue	$	9,712		100.0	%	$	9,413		100.0	%

Revenue by Product Line
License
EFT Platform	$	1,950		97.7	%	$	2,584		98.1	%
Other		45		2.3	%		50		1.9	%

Total License Revenue		1,995		100.0	%		2,634		100.0	%

M&S
EFT Platform		6,930		98.1	%		5,868		96.6	%
Other		136		1.9	%		208		3.4	%

Total M&S Revenue		7,066		100.0	%		6,076		100.0	%

Professional Services (all EFT Platform)		651		100.0	%		703		100.0	%

Total Revenue
EFT Platform		9,531		98.1	%		9,155		97.3	%
Other		181		1.9	%		258		2.7	%

Total Revenue	$	9,712		100.0	%	$	9,413		100.0	%

Revenue from ~~the following activities:~~

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

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

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

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

~~We earn most of our revenue from the sale of~~ our EFT platform products and the associated M&S and professional services related to those products. With our core competency being in products that address the managed file transfer 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 productsincreased 4% for the ~~foreseeable future, they will not be an area of emphasis for us going forward.~~

We believe that continuing to offer licensed products installed on-premises for which we recognize revenue up-front and that carry with them a recurring M&S revenue stream is important to our future success. At the same time, we recognize that a migration of capabilities to a SaaS platform is attractive to a growing number of customers. We have, and have had for quite some time, the capabilities in place to deliver our EFT platform in that manner. However, this migration could create some near-term decreases in the growth rate of license revenue, and may result in similar decreases in future periods, because it typically takes approximately 24 to 36 months of SaaS revenue to yield total revenue equivalent to that realized up-front from the sale of a license for an on-premise installation.

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

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

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

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

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

·	~~Implementing new sales and marketing campaigns.~~

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

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

~~Index~~

~~Our total revenue increased 15% in the 2016~~2020 quarter compared to the ~~2015~~2019 quarter. Revenue for our other product lines decreased 30% for the 2020 quarter ~~and 9% in the 2016 nine months~~ compared to the ~~2015 nine months.~~2019 quarter, which is consistent with our expectations as discussed below. For a more ~~complete~~detailed discussion of these revenue trends, see ~~Comparison~~“Comparison of the Condensed Consolidated Statement of Operations for the Three Months Ended ~~September 30, 2016~~March 31, 2020 and ~~2015~~ ~~and~~ ~~Comparison of the Statement of Operations for the Nine Months Ended September 30, 2016 and 2015.~~

2019”.

Liquidity and Capital Resources

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

	March 31, 2020			December 31, 2019
Cash and cash equivalents	$	9,289		$	4,702

Current assets	$	17,351		$	15,066
Current liabilities		(22,874	)		(22,602	)
Working capital	$	(5,523	)	$	(7,536	)

Index

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

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. 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 when

When assessing our ~~financial position~~liquidity and ~~should not be considered a substitute for working~~ capital ~~computed in accordance with GAAP.~~

resources, we consider the following factor:

●

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 clients 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 )

~~Index~~

	Cash Provided (Used) During the Three Months Ended March 31,
	2020			2019
Operating activities	$	5,477		$	5,973
Investing activities		(408	)		(224	)
Financing activities		(482	)		(560	)

Our cash provided by operating activities ~~increased~~decreased during the ~~2016 nine months~~2020 quarter compared to the ~~2015 nine months~~2019 quarter primarily due to the following factors:

~~Accounts payable decreased $217,000 during~~

●

Stock-based compensation increasing $497,000 in the ~~2016 nine months~~2020 quarter compared to ~~decreasing $757,000~~$875,000 in the ~~2015 nine months. The change in the amount of the decrease was~~2019 quarter primarily due to the ~~payment during~~expense related to the ~~2015 nine months~~accelerated vesting of options granted to our former Chief Executive Officer who passed away unexpectedly in March 2019. The vesting acceleration was pursuant to the terms of the applicable option agreements.

●

Deferred revenue decreasing $47,000 in the 2020 quarter compared to increasing $307,000 in the 2019. The increase in the 2019 quarter was primarily the result of improved processes implemented to better capture M&S renewals. The small decline in the 2020 quarter is due primarily to the completion of certain ~~large obligations~~efforts to ~~third-party software developers which was not repeated~~improve operational processes.

●

Accounts payable decreasing $188,000 in the ~~2016 nine months as a result of our increased use of internal resources~~2020 quarter compared to ~~develop our products and~~increasing $18,000 in the 2019 quarter due to normal variations in the timing of ~~payments~~payment to our vendors.

~~Income tax receivable and payable increased $571,000~~

●

Accrued expenses decreasing $141,000 in the ~~2016 nine months~~2020 quarter compared to increasing ~~$403,000~~$66,000 in the ~~2015 nine months. The change in the amount of the increase was a result of changes in the level of our taxable income between periods and normal~~2019 quarter due primarily to variations in the timing of our ~~tax payments.~~payroll related liabilities.

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. See the section below under ~~Comparison of the Statement of Operations for the Nine Months Ended September 30, 2016 and 2015~~ ~~for a discussion of the changes in the components of these amounts.~~

●

Accounts receivable ~~increased $2.8~~decreasing $1.7 million in the ~~2016 nine months which provided less cash than the $1.7~~2020 quarter compared to decreasing $1.2 million ~~increase~~ in the ~~2015 nine months. This increase was~~2019 quarter due primarily to ~~an increase~~increased customer collections in ~~software licenses sold and bookings of multi-year M&S contracts during~~ the ~~2016 nine months as~~2020 quarter compared to the ~~2015 nine months.~~2019 quarter.

The amount of cash we used for investing activities during the ~~2016 nine months decreased~~2020 quarter increased compared to the ~~2015 nine months with the primary component of that decrease relating~~2019 quarter due primarily to an increase in our capitalized software development ~~costs that were capitalized. This decrease was~~costs.

Index

Financing activities used less cash during the 2020 quarter than during the 2019 quarter primarily due to:

~~Increased use of our employees as an internal resource to do this work~~

●

A one-time payment in the ~~2016 nine months~~2019 quarter of $445,000 (net of tax benefit) to our former Chief Financial Officer to terminate certain stock option agreements where no similar event occurred in the 2020 quarter.

●

No stock repurchases in the 2020 quarter compared to the ~~2015 nine months when we relied more on~~2019 quarter.

●

No dividend payment made in the ~~use~~2020 quarter compared to the 2019 quarter.

●

An increase in proceeds received from the exercise 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~~stock options during the ~~normal course~~2020 quarter compared to the 2019 quarter.

Offset by:

●

The principal loan payment of ~~business to take longer to fill.~~$1.25 million made in the 2020 quarter.

~~Our financing activities~~

Loan Agreement

In November 2019, we entered into a credit facility with J.P. Morgan Chase Bank, N.A, as Administrative Agent and East West Bank as Syndication Agent consisting of a $50.0 million term loan and a $5 million revolving agreement (the “Loan Agreement”). Funds from the term loan were substantially used ~~more cash~~to fund a special dividend of $3.35 to our common shareholders which was paid on December 5, 2019. The revolving loan may be accessed to fund working capital needs. The loans bear a variable interest rate of LIBOR plus a Term Loan Spread between 3.75% and 2.25%. The amount of the Term Loan Spread is a function of the Company’s Leverage Ratio. Effective January 3, 2020, the Company entered into an Amendment and Waiver No. 1 to the Credit Agreement to increase the amount of the special dividend permitted to be paid to stockholders on December 5, 2019 to accommodate last minute option exercises and to exclude the May 28, 2019 special dividend from the fixed charges calculation. Effective April 13, 2020, the Company entered into Amendment No. 2 to the Credit Agreement which provided formal consent for the Company to borrow $2.0 million under the U.S. Small Business Administration Payroll Protection Program authorized by the CARES Act.

As permitted by the above consent, we entered into an agreement with EastWest Bank to borrow $1,987,700 under the U.S. Small Business Administration Payroll Protection Program authorized by the CARES Act. Following receipt of the loan proceeds, we evaluated our access to credit through other sources of funding and determined to repay the funds borrowed under the CARES Act. On May 5, 2020, we returned the $1,987,700 in proceeds from the loan, which was not used by the Company.

At March 31, 2020, the principal balance outstanding under the term note payable was $48.1 million and the balance of the revolving note payable was zero.

Interest payments under the credit facility are due monthly. Principal payments are due quarterly. The loans may be prepaid at any time without penalty.

The Loan Agreement contains the following financial covenants:

● We must not exceed a Total Leverage Ratio of 3.25x. This ratio decreases to 3.0x at September 30, 2020, 2.75x at March 31, 2021 and 2.25x at March 31, 2022. This ratio is defined in the ~~2015 nine months than~~Loan Agreement as the ~~2016 nine months primarily due~~ratio of (a) consolidated total funded indebtedness to consolidated EBITDA minus capitalized software expenditures for the period of the four most recent consecutive fiscal quarters. As of March 31, 2020, this debt service coverage ratio was 2.54x.

The Loan Agreement contains customary covenants relating to maintaining legal existence and good standing, complying with applicable laws, delivery of financial statements, payment of ~~three cash dividends in~~taxes and maintaining insurance. The Loan Agreement also contains customary events of default including the ~~2016 nine months compared~~failure to make payments of principal and interest, the ~~payment~~breach of ~~two cash dividends in~~any covenants, the ~~2015 nine months.~~occurrence of a material adverse change, and certain bankruptcy and insolvency events.

Index

Contractual Obligations and Commitments

At ~~September 30, 2016,~~March 31, 2020, our contractual obligations and commitments consisted primarily of the following items:

●

Obligations outstanding under the Loan Agreement described above.

●

An obligation to deliver services in the future to satisfy our right to earn our deferred revenue of ~~$16.7~~$18.2 million. Those future services primarily relate to our obligations under M&S ~~contracts for which we have invoiced our customers.~~contracts. We will recognize this deferred revenue as revenue over the remaining life of those contracts which generally ranges from one to three years. Deferred revenue, unlike the other liability components of our working capital, is an obligation we will satisfy through providing services in the future to our ~~customers~~clients 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.

●

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

●

Operating lease for our office space.

●

Federal and state taxes.

~~Index~~

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

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, 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 Condensed Consolidated Statement of Operations for the Three Months Ended ~~September 30, 2016~~March 31, 2020 and ~~2015~~

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

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

2019

	Three Months Ended March 31,
	2020			2019		$ Change
	$ in thousands

Total revenues	$	9,712		$	9,413	$	299
Total cost of revenues		1,582			1,434		148
Gross profit		8,130			7,979		151
Operating expenses
Sales and marketing		2,075			1,916		159
General and administrative		1,525			2,019		(494	)
Legal and professional		615			576		39
Research and development		311			325		(14	)
Total operating expenses		4,526			4,836		(310	)
Income from operations		3,604			3,143		461
Other income (expense)		(774	)		24		(798	)
Income before income taxes		2,830			3,167		(337	)
Income tax expense		461			747		(286	)
Net income	$	2,369		$	2,420	$	(51	)

In the discussion below, ~~we refer to~~ the ~~three months ended September 30, 2016, as the “2016 quarter” and the three months ended September 30, 2015, as the “2015 quarter”. The~~ percentage changes cited ~~in our discussions~~ are based on the ~~2016~~2020 quarter amounts compared to the ~~2015~~2019 quarter amounts.

Index

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

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

Revenue by Type

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

Revenue by Product

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

~~Trends in Revenue by Type~~

~~Software Licenses~~ -

	Three Months Ended March 31,
	2020					2019
			Percent of					Percent of
	Amount		Total			Amount		Total

Revenue By Type
License	$	1,995		20.5	%	$	2,634		28.0	%
M&S		7,066		72.8	%		6,076		64.5	%
Professional Services		651		6.7	%		703		7.5	%

Total Revenue	$	9,712		100.0	%	$	9,413		100.0	%

Revenue by Product Line
License
EFT Platform	$	1,950		97.7	%	$	2,584		98.1	%
Other		45		2.3	%		50		1.9	%

		1,995		100.0	%		2,634		100.0	%
M&S
EFT Platform		6,930		98.1	%		5,868		96.6	%
Other		136		1.9	%		208		3.4	%

		7,066		100.0	%		6,076		100.0	%

Professional Services (all EFT Platform)		651		100.0	%		703		100.0	%

Total Revenue
EFT Platform		9,531		98.1	%		9,155		97.3	%
Other		181		1.9	%		258		2.7	%

	$	9,712		100.0	%	$	9,413		100.0	%

Our ~~software license~~total revenue increased ~~18.3%~~3%. ~~Most of this increase came~~Revenue from ~~our sales of~~ our EFT platform products and ~~was a result~~services increased 4%. Revenue from our other products that consist of ~~the following factors:~~

In mid-2016, we reviewed how we were allocating our resources across all of our product lines. Based on that review, 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. 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.

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

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

~~M&S Revenue~~ ~~– When we sell our licensed products, we also typically create a recurring revenue stream from M&S since almost all purchasers~~Mail Express, WAFS, CuteFTP, and TappIn decreased to less than 2% of our ~~licensed products also purchase an M&S contract. In general and depending upon the level of M&S~~total revenue, which is a ~~customer purchases, this recurring revenue stream~~trend that is ~~20% to 30% per year of the price of the underlying software license to which the M&S relates.~~

~~Index~~

M&S revenue increased 13.8% primarily as a result of ongoing license sales for EFT Enterprise and Standard that are almost always accompanied by an M&S contract and sustained high renewal rates of 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~~ongoing de-emphasis of ~~new software licenses we sell in a single year.~~ those products.

We ~~expect this cumulative effect to continue yielding sustainable M&S revenue as we~~ continue to ~~sell our enterprise software~~offer product support for Mail Express and WAFS, which we discontinued as 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~~sale as 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 2.1%. This increase was due to our sales and marketing programs designed to increase the frequency of sales of professional services and our enhanced focus on managing our queue of professional services projects so as to deliver our work product to our customers sooner and in-turn accelerate our ability to recognize revenue from these projects.

~~Trends in Revenue by Product~~

January 1, 2019.

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 servicesPlatform Products

License revenue from our EFT platform ~~increased 18.9% for~~products decreased 24%. The decline is primarily attributable to a slowdown in deal velocity as companies around the ~~reasons discussed above under~~ ~~Trends~~globe began to evaluate the effects of COVID-19 and started shifting to remote workforces. We believe some clients and prospects decided to defer their buying decisions to a later period. Economic downturns or other adverse economic conditions, including but not limited to, public health crises that reduce economic activity (including the recent coronavirus COVID-19 outbreak) could have an adverse effect on spending on information technology projects since in ~~Revenue by Type.~~

~~WAFS, CuteFTP~~such environments, prospects and ~~Other~~ ~~- The total of license and~~ clients may reduce, sometimes greatly, their discretionary spending to focus on preserving mandatory spending budgets.

Index

M&S revenue from WAFS decreased 11.4%, from CuteFTP decreased 48.3% and from other products decreased 21.8%. 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~~increased 18% primarily due to:

●

The addition of sales resources that are focused on (i) increasing the number of clients who renew M&S and (ii) increasing annual contract prices to better reflect the value provided by our support teams.

●

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

●

Sustaining high renewal rates of M&S contracts by clients who initially purchased these services in earlier periods. We believe these renewals are the result of clients recognizing the value provided by our Maintenance and Support team.

Our professional services revenue was $52,000 less for the 2020 quarter compared to the 2019 quarter, a decrease of 7%. This decrease was primarily due to the decreased license revenue from our EFT platform since there generally is a direct relationship between the licenses our customers purchase and ~~Trends~~.

their need for professional services.

Cost of Revenues. These expenses are associated with the production, delivery and support of our products and services. We believe it ~~most~~is 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 primarily consists ~~primarily~~ of:

●

Amortization of capitalized software development costs we incur when producing our software products. ~~This amortization~~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 11% and as a percent of software license revenue was ~~26%~~34% in the ~~2016~~2020 quarter compared to ~~20%~~23% in the ~~2015~~2019 quarter. ~~This~~These increases were primarily due to an increase ~~was the result~~in amortization of ~~our release of new software products and new versions of existing products in periods subsequent to the 2015 quarter and the resulting commencement of amortizing the~~ capitalized software development costs for those products. This additional expense amortization that began subsequent to the 2015 quarter increased cost of revenue in the 2016 quarter as compared to the 2015 quarter. On an absolute dollar basis, cost of revenue for software licenses increased 55% during the 2016 quarter due to the factors cited above and due to higher software license revenue.

~~Index~~

costs.

Cost of M&S revenue as a percent of M&S revenue was ~~substantially unchanged.~~9% in both the 2020 quarter and the 2019 quarter. Cost of revenue for M&S in absolute dollars increased by 6%15%. The increase in absolute dollars was due primarily 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.

personnel related expenses.

Cost of professional services revenue as a percent of that revenue was ~~80%~~45% in the ~~2016~~2020 quarter as compared to ~~93%~~42% in the ~~2015~~2019 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~~client 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 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 in absolute dollars decreased 12% 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%~~21% of total revenue for the ~~2016~~2020 quarter compared to ~~29.9%~~20% of total revenue for the ~~2015~~2019 quarter. In absolute dollars these expenses increased ~~21%. These variations were~~8% due 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.~~

to an increase in personnel related expenses.

General and Administrative. These expenses ~~increased 13%~~decreased 24% primarily due to a ~~continuing severance obligation~~decrease in stock-based compensation expense related to the accelerated vesting of options granted to our former ~~chief executive officer and legal fees related~~Chief Executive Officer who passed away unexpectedly in March 2019. The vesting acceleration was pursuant to the ~~matter discussed below~~terms of the applicable option agreements.

Index

Legal and Professional. These expenses increased 7% primarily due to an increase in ~~Part II. Other Information Item 1. Legal Proceedings~~.

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

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

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

~~Total research~~

	Three Months Ended March 31,
	2020		2019
R&D expense	$	311	$	325
Capitalized software development costs		364		201
Total resources expended for R&D	$	675	$	526

Our total R&D expenditures increased 28% between the 2020 and ~~development expenditures decreased 14.9%~~2019 quarters mainly 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.~~

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

~~Index~~

to higher personnel related expenses.

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~~costs individually.

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

expense related to our credit facility more fully described in Note 7 of our financial statements.

Income Taxes. Our effective ~~tax~~ rate ~~was 32.9% for the 2016 quarter and 30.6% for the 2015 quarter. These rates~~ differed from athe federal statutory tax rate of ~~34%~~21% in the 2020 quarter and 2019 quarter primarily due to:

·	The domestic production activities deduction in both quarters, and the research and development credit, 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 condensed consolidated financial statements, such as a portion of meals and entertainment expenses that are not deductible on our federal income tax return.

●

For 2019 a portion of our stock based compensation that is not deductible on our federal income tax return.

●

State income taxes included in income tax expense in our condensed consolidated financial statements.

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

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

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

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

~~Index~~

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

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

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

Amount

% of Total
Revenue

Revenue by Type

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

Revenue by Product

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

~~Trends in Revenue by Type~~

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

Offset by:

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

●

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

~~Revenue from delivery of our EFT platform through a cloud-based SaaS solution grew 39.3%.~~

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

~~Index~~

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

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

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

We typically experience a high renewal rate for M&S services for our enterprise products so long as a customer continues using the licensed product they purchased from us. Ongoing license revenue provides a foundation for future recurring revenue as the purchasers of our licensed products continually renew M&S agreements to support their ongoing product support needs. This pattern of activity can create a cumulative effect for M&S renewals as a result of the cumulative number of licensed software installations sold over multiple years that create M&S renewals in any single year predictably (and in line with our expectations) exceeding the number of new software licenses we sell in a single year. We expect this cumulative effect to continue yielding sustainable M&S revenue as we continue to sell our enterprise software products in future periods.

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.~~

~~Index~~

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

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

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

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

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

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

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

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

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

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

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

~~Index~~

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

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

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

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

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

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

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

~~The domestic production activities deduction in both quarters, and the~~ research and development credit inwhich is a tax credit incentive that serves to reduce the ~~2016 nine months only, that are items considered in our~~rate at which we pay federal income ~~tax return that are not~~taxes in exchange for us conducting certain aspects of our business in a manner promoted by the Internal Revenue Code.

●

The foreign derived intangible income deduction which was a part of ~~our income before taxes on our financial statements.~~the 2017 Tax Cuts and Jobs Act that lowered the tax rate for US corporations’ foreign derived intangible income.

~~Offset by:~~

~~Certain expenses in our financial statements, such as~~

●

For 2020 a ~~portion~~deduction related to disqualifying disposition of ~~meals and entertainment expenses, that are not deductible on our federal income tax return.~~incentive stock options.

·	~~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, 2016 we earned approximately 17% of our revenue from a single third party, channel distributor who purchases products from us 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% of our accounts receivable as of September 30, 2016, were due from this customer and from one other customer, the latter of which did not constitute more than 10% of our revenue. Payment for substantially all such amounts has been received subsequent to that date.

We earned approximately 17% and 22% of our revenue from customers outside the United States during the three months ended September 30, 2016, 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, 2015 respectively. We receive all revenue in U.S. dollars, so we have no material exchange rate risk with regard to the 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.

~~Index~~

Not Applicable.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this ~~report,~~Quarterly Report, our ~~President~~Chairman of the Board and Chief Executive Officer and our Chief Financial Officer carried out an evaluation of the effectiveness of GlobalSCAPE’s “disclosure controls and procedures” (as defined in the ~~Securities~~ Exchange Act ~~of 1934~~ Rules 13a-15(e) and 15d-15(e)) and concluded that the disclosure controls and procedures were effective.

~~There were~~

Changes in Internal Control over Financial Reporting

We transitioned to a remote work force effective March 16, 2020 due to the coronavirus COVID-19 outbreak. This transition had no effect on our internal control procedures and there have been no other changes in our internal ~~controls~~control over financial reporting during the ~~nine months~~quarter ended ~~September 30, 2016,~~March 31, 2020 that could have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Index

Part II. Other Information

Item 1. Legal Proceedings

~~GlobalSCAPE has been named as one of a number of defendants~~

The information set forth under “Note 11 – Commitments and Contingencies – Legal and Regulatory Matters” to the notes to our 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 itQuarterly Report 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,~~Quarterly Report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our ~~2015~~2019 Form 10-K filed with the ~~Securities and Exchange Commission~~SEC on March ~~3, 2016.~~16, 2020. Except as set forth in this Quarterly Report, the risks and uncertainties described in “Item 1A. Risk Factors” of our 2019 Form 10-K have not materially changed. These risk factors could materially affect our business, financial condition or future results, but they are not the only risks facing ~~GlobalSCAPE.~~the Company. 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.

Our results of operations may be negatively impacted by the coronavirus outbreak.

We are closely monitoring the impact of the 2019 novel coronavirus, or COVID-19, on all aspects of our business. In March 2020, the World Health Organization characterized COVID-19 as a pandemic and the President of the United States declared the COVID-19 outbreak a national emergency. Since then, the COVID-19 pandemic has rapidly spread across the globe and has already resulted in significant volatility, uncertainty and economic disruption. The outbreak of COVID-19 has caused and may continue to cause travel bans or disruptions, and in some cases, prohibitions of non-essential activities, disruption and shutdown of businesses and greater uncertainty in global financial markets. The impact of COVID-19 is fluid and uncertain, but it has caused and may continue to cause various negative effects, including an inability to meet with actual or potential customers, our end customers deciding to delay or abandon their planned purchases or failing to make payments, the Company to delay, cancel, or withdraw from user and industry conferences and other marketing events, and delays or disruptions in our or our partners’ supply chains. As a result, we may experience extended sales cycles, our ability to close transactions with new and existing customers and partners may be negatively impacted, our ability to recognize revenue from software transactions we do close may be negatively impacted, our demand generation activities, and the efficiency and effect of those activities, may be negatively affected, our ability to provide 24x7 worldwide support to our end customers may be effected, and it has been and, until the COVID-19 outbreak is contained, will continue to be more difficult for us to forecast our operating results. These macroeconomic challenges and uncertainties, including the COVID-19 outbreak, have, and may continue to, put pressure on global economic conditions and overall IT spending and may cause our end customers to modify spending priorities or delay or abandon purchasing decisions, thereby lengthening sales cycles and potentially lowering prices for our solutions, and may make it difficult for us to forecast our sales and operating results and to make decisions about future investments, any of which could materially harm our business, operating results and financial condition.

The COVID-19 pandemic may prevent us from conducting business activities at full capacity for an indefinite period of time, including due to spread of the disease or due to shutdowns that are requested or mandated by governmental authorities. For example, we have taken precautionary measures intended to help minimize the risk of the virus to our employees which may disrupt our operations, including temporarily closing our offices and requiring all employees to work remotely, suspending all non-essential travel worldwide for our employees, and discouraging employee attendance at in-person work-related meetings. An extended period of remote work arrangements could strain our business continuity plans, introduce operational risk, including, but not limited to, cybersecurity risks, and impair our ability to effectively manage our business.

Further, our management team is focused on addressing the impacts of COVID-19 on our business, which has required and will continue to require, a large investment of their time and resources and may distract our management team or disrupt our 2020 operating plans. The extent to which COVID-19 ultimately impacts our results of operations, cash flow and financial position will depend on future developments, which are uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions taken by governments and authorities to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of its global economic impact, including as a result of any recession that may occur.

Index

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 5. Other Information.

On April 7, 2020, we entered into an agreement with EastWest Bank to borrow $1,987,700 under the U.S. Small Business Administration Payroll Protection Program authorized by the CARES Act. Effective April 13, 2020, the Company entered into Amendment No. 2 to the Credit Agreement which provided consent for the Company to borrow such funds under the U.S. Small Business Administration Payroll Protection Program authorized by the CARES Act. Following receipt of the loan proceeds, we evaluated our access to credit through other sources of funding and determined to repay the funds borrowed under the CARES Act. On May 5, 2020, we returned the $1,987,700 in proceeds from the loan, which was not used by the Company.

Item 6. Exhibits

(a)

~~(a)~~

Exhibits

	~~31.1~~ 10.1*	Amendment and Waiver No. 2 to Credit Agreement, dated April 15, 2020 by and among the Company, the loan parties party thereto and JPMorgan Chase Bank, N.A.

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

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

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

	101	Interactive Data File.

	~~101~~ *	~~Interactive Data File.~~ Filed herewith.

Index

Signatures

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


		GLOBALSCAPE, INC.

~~November 10, 2016~~ May 11, 2020	By:	/s/ ~~James W. Albrecht, Jr.~~Karen J. Young
Date		~~James W. Albrecht, Jr.~~ Karen J. Young
		Chief Financial Officer

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

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

Common Stock, par value $0.001 per share	GSB	NYSE American, LLC
(Title of Class)	(Trading Symbol)	(Name of exchange on which registered)

Large accelerated filer ☐	☐	Accelerated filer	☐ ☒

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

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

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

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

Deferred revenue, non-current portion		3,688			3,612
Other long term liabilities		34			44

Commitments and contingencies

Stockholders’ equity:
Preferred stock, par value $0.001 per share, 10,000,000 authorized, no shares issued or outstanding		-			-
Common stock, par value $0.001 per share, 40,000,000 authorized, 21,548,602 and 21,383,467 shares issued at September 30, 2016, and December 31, 2015, respectively		21			21
Additional paid-in capital		20,632			19,583
Treasury stock, 403,581 shares, at cost, at September 30, 2016 and December 31, 2015		(1,452	)		(1,452	)
Retained earnings		9,357			7,546
Total stockholders’ equity		28,558			25,698
Total liabilities and stockholders’ equity	$	48,265		$	44,213

	March 31,			December 31,
	2020			2019
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	9,289		$	4,702
Accounts receivable, net		5,581			7,239
Federal income tax receivable		1,241			1,759
Prepaid and other current assets		1,240			1,366
Total current assets		17,351			15,066

Capitalized software development costs, net		2,609			2,650
Goodwill		12,712			12,712
Deferred tax asset, net		376			493
Property and equipment, net		282			274
Right-of-use asset		2,840			2,905
Other assets		437			459
Total assets	$	36,607		$	34,559

Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	558		$	746
Accrued expenses		1,457			1,598
Deferred revenue		15,659			15,683
Long term debt, current portion		5,200			4,575
Total current liabilities		22,874			22,602

Deferred revenue, non-current portion		2,549			2,572
Lease liability		2,833			2,900
Long term debt, non-current portion		40,977			42,745
Other long term liabilities		24			24

Commitments and contingencies

Stockholders’ equity (deficit):
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, 24,089,814 and 23,890,890 shares issued: 18,710,314 and 18,511,390 outstanding at March 31, 2020 and December 31, 2019, respectively		24			24
Additional paid-in capital		33,421			32,156
Treasury stock, 5,379,500 and 5,379,500 shares, at cost, at March 31, 2020 and December 31, 2019, respectively		(23,087	)		(23,087	)
Retained earnings (deficit)		(43,008	)		(45,377	)
Total stockholders’ equity (deficit)		(32,650	)		(36,284	)
Total liabilities and stockholders’ equity (deficit)	$	36,607		$	34,559

		Page

Part I.	Financial Information

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations and Comprehensive Income	4
	Condensed Consolidated Statements of Stockholders’ Equity (Deficit)	5
	Condensed Consolidated Statements of Cash Flows	5 6
	Notes to Condensed Consolidated Financial Statements	6 7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19 23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	34

Part II.	Other Information	35

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3.5.	~~Quantitative and Qualitative Disclosures About Market Risk~~Other Information	39

~~Item 4.~~	~~Controls and Procedures~~	40

~~Part II.~~	~~Other Information~~	41

~~Item 1.~~	~~Legal Proceedings~~	41

~~Item1A.~~	~~Risk Factors~~	41

Item 6.	Exhibits	41 36

Signatures		42 37

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

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

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

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

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

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

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

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

					Additional
	Common Stock				Paid-in			Treasury			Retained
	Shares		Amount		Capital			Stock			Earnings			Total


Balance at December 31, 2018		22,441,860	$	22	$	25,584		$	(22,712	)	$	13,062		$	15,956

Purchase of Treasury Stock									(375	)					(375	)
Shares issued upon exercise of stock options		156,489				519									519
Stock option cash settlement						(445	)								(445	)
Stock-based compensation expense
Stock options						775									775
Restricted stock						100									100
Common stock cash dividends, $0.015 per share												(259	)		(259	)
Net Income												2,420			2,420
Balance at March 31, 2019		22,598,349	$	22	$	26,533		$	(23,087	)	$	15,223		$	18,691

Shares issued upon exercise of stock options		55,520				179									179
Stock-based compensation expense
Stock options						197									197
Restricted stock		40,000				377									377
Common stock cash dividends, $0.50 per share												(8,713	)		(8,713	)
Net Income												3,633			3,633
Balance at June 30, 2019		22,693,869	$	22	$	27,286		$	(23,087	)	$	10,143		$	14,364

Shares issued upon exercise of stock options		57,006				176									176
Stock-based compensation expense
Stock options						321									321
Restricted stock						215									215
Common stock cash dividends, $0.015 per share												(263	)		(263	)
Net Income												3,580			3,580
Balance at September 30, 2019		22,750,875	$	22	$	27,998		$	(23,087	)	$	13,460		$	18,393

Shares issued upon exercise of stock options		1,060,015		2		3,728									3,730
Stock-based compensation expense
Stock options						288									288
Restricted stock		80,000				142									142
Common stock cash dividends, $3.365 per share												(62,471	)		(62,471	)
Net Income												3,634			3,634
Balance at December 31, 2019		23,890,890	$	24	$	32,156		$	(23,087	)	$	(45,377	)	$	(36,284	)

Shares issued upon exercise of stock options		198,924				768									768
Stock-based compensation expense
Stock options						365									365
Restricted stock						132									132
Net Income												2,369			2,369
Balance at March 31, 2020		24,089,814	$	24	$	33,421		$	(23,087	)	$	(43,008	)	$	(32,650	)

	For the Three Months Ended March 31,
	2020			2019
Operating Activities:
Net income	$	2,369		$	2,420
Items not involving cash at the time they are recorded in the statement of operations:
Provision (recoveries) for doubtful accounts receivable		4			9
Depreciation and amortization		441			410
Share-based compensation		497			875
Amortization of debt issuance costs		107			-
Deferred taxes		117			(15	)
Subtotal before changes in operating assets and liabilities		3,535			3,699
Changes in operating assets and liabilities:
Accounts receivable		1,654			1,209
Prepaid and other current assets		126			51
Deferred revenue		(47	)		307
Accounts payable		(188	)		18
Accrued expenses		(141	)		66
Operating lease right-of-use asset		65			-
Other assets		22			38
Operating lease liabilities		(67	)		-
Other long-term liabilities		-			(3	)
Income tax payable (receivable)		518			588
Net cash provided by operating activities		5,477			5,973
Investing Activities:
Software development costs capitalized		(364	)		(201	)
Purchase of property and equipment		(44	)		(23	)
Net cash used in investing activities		(408	)		(224	)
Financing Activities:
Proceeds from exercise of stock options		768			519
Stock option cash settlement		-			(445	)
Purchase of Treasury Stock		-			(375	)
Notes payable principle payments		(1,250	)		-
Dividends paid		-			(259	)
Net cash used in financing activities		(482	)		(560	)

Net increase in cash		4,587			5,189
Cash at beginning of period		4,702			9,173
Cash at end of period	$	9,289		$	14,362

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	804		$	-
Income tax payments (refunds)	$	(192	)	$	16

	Quarter Ended September 30, 2015
			Reclassification of Previously Reported Amounts
	As Previously Reported		Cost of Revenues			Capitalized Software Cost Amortization			Personnel Costs			Depreciation			Selling, General & Administrative			As Now Reported

Operating Revenues:
Software licenses	$	2,852																$	2,852
Maintenance and support		4,142																	4,142
Professional services		653																	653
Total revenues		7,647																	7,647

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

Gross profit		-																	6,139

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

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

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

	Nine Months Ended September 30, 2015
			Reclassification of Previously Reported Amounts
	As Previously Reported		Cost of Revenues			Capitalized Software Cost Amortization			Personnel Costs			Depreciation			Selling, General & Administrative			As Now Reported

Operating Revenues:
Software licenses	$	8,590																$	8,590
Maintenance and support		12,269																	12,269
Professional services		1,531																	1,531
Total revenues		22,390																	22,390

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

Gross profit		-																	18,425

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

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

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

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

	Number of Shares			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term in Years		Aggregate Intrinsic Value (000's)





Outstanding at December 31, 2015		2,091,325		$	2.45		6.09	$	3,277
Granted		1,055,300		$	3.58
Forfeited		(372,045	)	$	3.14
Exercised		(165,135	)	$	2.02
Outstanding at September 30, 2016		2,609,445		$	2.83		6.29	$	2,015

Exercisable at September 30, 2016		1,351,760		$	2.26		3.59	$	1,814

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




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

	Number of Shares			Grant Date Fair Value Per Share		Total Fair Value of Shares That Vested
Restricted Shares Outstanding at December 31, 2015		80,000		$	3.34
Shares granted with restrictions		80,000		$	3.31
Shares vested and restrictions removed		(80,000	)	$	3.34	$	276,000
Restricted Shares Outstanding at September 30, 2016		80,000		$	3.31

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

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

	Three Months Ended				Nine Months Ended
	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

	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

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

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

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

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