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


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

 
FORM 10-Q  
 

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

OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to             .

Commission File No. 001-33601
 

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

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes      No

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

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

As of October 31, 2016, there were 21,145,021 shares of common stock outstanding.
 

GlobalSCAPE Inc.
Quarterly Report on Form 10-Q
For the Quarter ended September 30, 2016
 
Index
 
 
 
Page
     
Part I.
Financial Information
 
     
Item 1.
 
 
3
 
4
 
5
 
6
     
Item 2.
19
     
Item 3.
39
     
Item 4.
40
     
Part II.
Other Information
41
     
Item 1.
41
     
Item1A.
41
   
Item 6.
41
   
42

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

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

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

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

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

   
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
 

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

3


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

   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2016
   
2015
   
2016
   
2015
 
                         
Operating Revenues:
                       
Software licenses
 
$
3,373
   
$
2,852
   
$
8,565
   
$
8,590
 
Maintenance and support
   
4,713
     
4,142
     
13,843
     
12,269
 
Professional services
   
667
     
653
     
2,013
     
1,531
 
Total Revenues
   
8,753
     
7,647
     
24,421
     
22,390
 
Cost of revenues
                               
Software licenses
   
873
     
562
     
2,303
     
1,651
 
Maintenance and support
   
363
     
341
     
1,145
     
1,057
 
Professional services
   
534
     
605
     
1,689
     
1,257
 
Total cost of revenues
   
1,770
     
1,508
     
5,137
     
3,965
 
Gross profit
   
6,983
     
6,139
     
19,284
     
18,425
 
Operating expenses
                               
Sales and marketing
   
2,759
     
2,289
     
8,453
     
7,060
 
General and administrative
   
1,638
     
1,449
     
5,083
     
4,629
 
Research and development
   
528
     
646
     
1,727
     
1,832
 
Total operating expenses
   
4,925
     
4,384
     
15,263
     
13,521
 
Income from operations
   
2,058
     
1,755
     
4,021
     
4,904
 
Other income
   
28
     
17
     
88
     
51
 
Income before income taxes
   
2,086
     
1,772
     
4,109
     
4,955
 
Income tax expense
   
687
     
542
     
1,348
     
1,585
 
Net income
 
$
1,399
   
$
1,230
   
$
2,761
   
$
3,370
 
Comprehensive income
 
$
1,399
   
$
1,230
   
$
2,761
   
$
3,370
 
                                 
Net income per common share -
                               
Basic
 
$
0.07
   
$
0.06
   
$
0.13
   
$
0.16
 
Diluted
 
$
0.06
   
$
0.06
   
$
0.13
   
$
0.16
 
                                 
Weighted average shares outstanding:
                               
Basic
   
21,122
     
20,892
     
21,061
     
20,782
 
Diluted
   
21,674
     
21,440
     
21,640
     
21,294
 
                                 
Cash dividends declared per share
 
$
0.015
   
$
0.015
   
$
0.045
   
$
0.030
 

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

4

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

   
For the Nine Months Ended September 30,
 
   
2016
   
2015
 
Operating Activities:
           
Net income
 
$
2,761
   
$
3,370
 
Items not involving cash at the time they are recorded in the statement of operations:
               
Bad debt expense
   
67
     
147
 
Depreciation and amortization
   
1,522
     
1,116
 
Share-based compensation
   
721
     
482
 
Deferred taxes
   
(36
)
   
(320
)
Excess tax benefit from share-based compensation
   
5
     
(49
)
Subtotal before changes in operating assets and liabilities
   
5,040
     
4,746
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(2,856
)
   
(1,690
)
Prepaid expenses
   
86
     
154
 
Deferred revenue
   
1,081
     
531
 
Accounts payable
   
(217
)
   
(757
)
Accrued expenses
   
(52
)
   
10
 
Other Assets
   
30
     
37
 
Other long-term liabilities
   
(10
)
   
(5
)
Income tax receivable and payable
   
571
     
403
 
Net cash provided by operating activities
   
3,673
     
3,429
 
Investing Activities:
               
Software development costs capitalized
   
(1,298
)
   
(1,613
)
Purchase of property and equipment
   
(168
)
   
(108
)
Interest reinvested in short and long term investments
   
(49
)
   
(48
)
Net cash (used in) investing activities
   
(1,515
)
   
(1,769
)
Financing Activities:
               
Proceeds from exercise of stock options
   
333
     
417
 
Excess tax benefit from share-based compensation
   
(5
)
   
49
 
Dividends paid
   
(950
)
   
(626
)
Net cash (used in) financing activities
   
(622
)
   
(160
)
                 
Net increase in cash
   
1,536
     
1,500
 
Cash at beginning of period
   
15,885
     
11,358
 
Cash at end of period
 
$
17,421
   
$
12,858
 
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
Interest
 
$
-
   
$
-
 
Income taxes
 
$
776
   
$
1,341
 

The accompanying notes are an integral part of these condensed and consolidated financial statements.
5

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

1.
Nature of Business

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

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

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

2.
Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X, “Interim Financial Statements”, as prescribed by the Securities and Exchange Commission, or SEC. Accordingly, they do not include all information and footnotes required under generally accepted accounting principles in the United States, or GAAP, for complete financial statements. In the opinion of management, all accounting entries necessary for a fair presentation of our financial position and results of operations have been made. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. The information included in this Form 10-Q should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, which we refer to as the 2015 Form 10-K, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations also included in our 2015 Form 10-K and in this report.
We follow accounting standards set by the Financial Accounting Standards Board. This board sets GAAP that we follow in preparing financial statements that report our financial position, results of operations, and sources and uses of cash. We also follow the reporting regulations of the United States Securities and Exchange Commission, or SEC.
 
The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of our financial statements. It is possible the actual results could differ from these estimates and assumptions and could have a material effect on the reported amounts of our financial position and results of operations.

3.
Significant Accounting Policies

Principles of Consolidation

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

Revenue Recognition

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

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

6


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

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

Reclassification of Expenses

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

Cost of Revenue

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

Selling, General and Administrative

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

Depreciation and Amortization

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

7


Effect of the reclassifications

The reclassifications were between cost of revenues and operating expenses and had no effect on revenue, income from operations, net income or earnings per share.  The following tables illustrate the effects of these reclassifications on previously reported amounts for the quarter and the nine months ended September 30, 2015 ($ in thousands):
 
   
Quarter Ended September 30, 2015
 
   
 
   
Reclassification of Previously Reported Amounts
   
 
 
   
As
Previously
Reported
   
Cost
of
Revenues
   
Capitalized
Software Cost
Amortization
   
Personnel
Costs
   
Depreciation
   
Selling,
General
& Administrative
   
As
Now
Reported
 
                                           
Operating Revenues:
                                         
Software licenses
 
$
2,852
                                 
$
2,852
 
Maintenance and support
   
4,142
                                   
4,142
 
Professional services
   
653
                                   
653
 
Total revenues
   
7,647
                                   
7,647
 
                                               
Cost of Revenues:
                                             
Software licenses
           
195
     
367
                       
562
 
Maintenance and support
                           
341
                 
341
 
Professional services
           
263
             
342
                 
605
 
Total cost of revenues
   
-
                                         
1,508
 
                                                     
Gross profit
   
-
                                         
6,139
 
                                                     
Operating Expenses
                                                   
Sales and marketing
   
-
                                   
2,289
     
2,289
 
General and administrative
   
-
                                   
1,449
     
1,449
 
Cost of Revenues
   
458
     
(458
)
                                 
-
 
Selling, general and administrative
   
4,355
                     
(683
)
   
66
     
(3,738
)
   
-
 
Research and development
   
646
                                             
646
 
Depreciation and amortization
   
433
             
(367
)
           
(66
)
           
-
 
Total operating expenses
   
5,892
                                             
4,384
 
                                                         
Income from operations
   
1,755
                                             
1,755
 
Other income (expense), net
   
17
                                             
17
 
Income before income taxes
   
1,772
                                             
1,772
 
Income tax expense
   
542
                                             
542
 
Net income
 
$
1,230
                                           
$
1,230
 
Comprehensive income
 
$
1,230
                                           
$
1,230
 
                                                         
Net income per common share -
                                                       
Basic
 
$
0.06
                                           
$
0.06
 
Diluted
 
$
0.06
                                           
$
0.06
 
 
8

 
   
Nine Months Ended September 30, 2015
 
         
Reclassification of Previously Reported Amounts
       
   
As
Previously
Reported
   
Cost
of
Revenues
   
Capitalized
Software Cost
Amortization
   
Personnel
Costs
   
Depreciation
   
Selling,
General
& Administrative
   
As
Now
Reported
 
                                           
Operating Revenues:
                                         
Software licenses
 
$
8,590
                                 
$
8,590
 
Maintenance and support
   
12,269
                                   
12,269
 
Professional services
   
1,531
                                   
1,531
 
Total revenues
   
22,390
                                   
22,390
 
                                               
Cost of Revenues:
                                             
Software licenses
           
739
     
912
                       
1,651
 
Maintenance and support
                           
1,057
                 
1,057
 
Professional services
           
327
             
930
                 
1,257
 
Total cost of revenues
   
-
                                         
3,965
 
                                                     
Gross profit
   
-
                                         
18,425
 
                                                     
Operating Expenses
                                                   
Sales and marketing
   
-
                                   
7,060
     
7,060
 
General and administrative
   
-
                                   
4,629
     
4,629
 
Cost of Revenues
   
1,066
     
(1,066
)
                                 
-
 
Selling, general and administrative
   
13,472
                     
(1,987
)
   
204
     
(11,689
)
   
-
 
Research and development
   
1,832
                                             
1,832
 
Depreciation and amortization
   
1,116
             
(912
)
           
(204
)
           
-
 
Total operating expenses
   
17,486
                                             
13,521
 
                                                         
Income from operations
   
4,904
                                             
4,904
 
Other income (expense), net
   
51
                                             
51
 
Income before income taxes
   
4,955
                                             
4,955
 
Income tax expense
   
1,585
                                             
1,585
 
Net income
 
$
3,370
                                           
$
3,370
 
Comprehensive income
 
$
3,370
                                           
$
3,370
 
                                                         
Net income per common share -
                                                       
Basic
 
$
0.16
                                           
$
0.16
 
Diluted
 
$
0.16
                                           
$
0.16
 
 
Cash and cash equivalents

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

Short Term Investments

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

9

 
Property and Equipment

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

Expenditures for maintenance and repairs are expensed as incurred.
 
Goodwill

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

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

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

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

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

10

 
Advertising Expense

We expense advertising costs as incurred as a component of our sales and marketing expenses.  Advertising expense was $480,315 and $334,352 in the 2016 quarter and the 2015 quarter, respectively, and $1,447,078 and $1,116,894 in the 2016 nine months and 2015 nine months, respectively.
 
Share-Based Compensation

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

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

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

For restricted stock awards, we use the quoted price of our common stock on the grant date as the fair value of the award.

Income Taxes

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

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

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

Earnings Per Share

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

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.

11


Recent accounting pronouncements

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

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

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

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

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

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

12


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 exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company’s financial statements. It is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of the Company’s financial position and results of operation.

4.
Capitalized Software Development Costs

Our capitalized software development costs profile was as follows: ($ in thousands):
 
   
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
         
 
The future amortization expense of the gross capitalized software development costs related to unreleased products will be determinable at a future date when those products are ready for general release to the public.

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

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

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

13


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

·
It authorizes the issuance of up to three million shares of common stock for stock-based incentives including stock options and restricted stock awards.
·
The exercise price, term and other conditions applicable to each stock option or stock award granted are determined by the Compensation Committee of the Board of Directors.
·
The exercise price of stock options is set on the grant date and may not be less than the fair market value per share of our stock at market close on that date.
·
Stock options we issue generally become exercisable ratably over a three-year period and expire ten years from the date of grant.
·
We issued no restricted stock awards under this plan during the 2016 or 2015 periods.
·
As of 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
 
 
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
 
 
14


As of September 30, 2016
 
    
Range of
Exercise Prices
       
Underlying
Shares
Outstanding
   
Options Outstanding
   
Options Exercisable
 
       
Weighted
Average
Remaining
Contractual
Life
     
Weighted
Average
Exercise
Price
      
Number of
Underlying
Shares
     
Weighted
Average
Exercise
Price
 
                     
                     
                     
                     
$
0.85 - $1.43
     
168,600
     
3.16
   
$
1.16
     
168,600
   
$
1.16
 
$
1.47 - $2.32
     
612,995
     
4.05
   
$
1.82
     
607,255
   
$
1.82
 
$
2.34 - $3.52
     
1,319,850
     
7.29
   
$
3.13
     
445,905
   
$
2.74
 
$
3.53 - $4.21
     
508,000
     
7.44
   
$
3.83
     
130,000
   
$
4.10
 
Total options
     
2,609,445
                     
1,351,760
         

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2016
   
2015
   
2016
   
2015
 
Expected volatility
   
54
%
   
56
%
   
55
%
   
57
%
Expected annual dividend yield
   
1.50
%
   
2.40
%
   
1.50
%
   
2.40
%
Risk free rate of return
   
1.18
%
   
1.75
%
   
1.46
%
   
1.59
%
Expected option term (years)
   
6.00
     
6.00
     
6.00
     
6.00
 

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

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

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

Our restricted stock awards activity has been as follows:
 
 
 
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
                 
 
15

 
6.
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
 
 
Deferred income taxes on our balance sheet reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  Significant components of our deferred tax assets and liabilities are as follows ($ in thousands):

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

16


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.

In assessing the realizability of deferred tax assets, we consider whether it is more-likely-than-not that a deferred tax asset will not be realized.  Our assessment 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 it is more-likely-than-not that we will realize the deferred tax assets listed in the table above.

We claim research and experimentation tax credits, or R&D tax credits, on certain of our tax returns and have included the effect of those credits in our provision for income taxes. Because our 2008, 2009 and 2010 tax returns were under routine examination by the Internal Revenue Service and because we believed it more-likely-than-not the examination could result in $125,000 of such credits we claimed not being allowed by the Internal Revenue Service, we recorded a reserve for an uncertain tax position in 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 2011 through 2016 tax returns related to the R&D tax credit.

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

   
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
 

To the extent they arise, we record interest and penalty expenses related to income taxes as components of other expense in our statement of operations.  We incurred no such expenses in 2016, 2015 or 2014.

We file state tax returns in various states.  The taxes resulting from these filings are included in income tax expense.

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

   
Three months ended 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
 


17


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

7.
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
 

8.
Dividends

During 2016, our Board of Directors declared quarterly dividends as follows:
 
 
 
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
 
 
9.
Commitments and Contingencies

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

10.
Concentration of Business Volume and Credit Risk

In order to leverage the resources of third parties, we make our products available for purchase by end users through third-party, channel distributors even though those end users can also purchase those products directly from us. During the 2016 quarter 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 and 2015 nine months, we earned approximately 14% and 10%, respectively, of our revenue from such sales through our largest, third party, channel distributor.
 
As of September 30, 2016, approximately 40% 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 for substantially all such amounts has been received subsequent to that date.
 
  11.
Segment and Geographic Disclosures
 
Revenues derived from customers and partners located in the United States accounted for approximately 83% and 78% of our total revenues in 2016 and 2015 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 individual foreign country accounting for less than 10% of total revenues in all periods.  We attribute revenues to countries based on the country in which the customer or partner is located. None of our property and equipment was located in a foreign country as of September 30, 2016 and 2015.

18


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

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

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

Our primary business is selling and supporting managed file transfer, or MFT, software for enterprises. The brand name of our MFT product platform is Enhanced File Transfer, or EFT.

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

We also sell other products that are synergistic to EFT including Mail Express, scConnect, WAFS, and CuteFTP. Collectively, these products constitute less than 10% of our total revenue.

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

As a corporation, we have won multiple awards for performance and reputation, including:
 
·
In 2016:
-
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.
19


-
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.

Key Business Metrics

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

Revenue Growth

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

·
Ongoing innovation of, 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. 

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.

20


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

Bookings (Non-GAAP Measurement)

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

21


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 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. We use Adjusted EBITDA to provide another perspective for measuring profitability and cash flow from our core operating activities that is before considering 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. We monitor the components of EBITDA to assess our actual performance relative to our plans, budgets and expectations and use the results of that assessment to adjust our future activities to the extent we deem necessary.

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

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

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

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
Net Income
 
$
1,399
   
$
1,230
   
$
2,761
   
$
3,370
 
Add (subtract) items to determine adjusted EBITDA:
                               
Income tax expense
   
687
     
542
     
1,348
     
1,585
 
Interest (income) expense, net
   
(28
)
   
(17
)
   
(88
)
   
(51
)
Depreciation and amortization: