UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒☒☒☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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
(State or other jurisdiction of incorporation or organization)
74-2785449
(I.R.S. Employer Identification No.)
4500 Lockhill-Selma, Suite 150
San Antonio, Texas
(Address of Principal Executive Office)
78249
(Zip Code)
(210) 308-8267
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.001 per share
(Title of Class)
NYSE American, LLC
(Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
☐ Yes ☒ No
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☐ Yes ☒ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Emerging growth company ☐
Accelerated filer ☒
Smaller reporting company ☒
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act).
☐ Yes ☒ No
As of June 30, 2017, the last day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the common stock held by
non-affiliates of the registrant was $91,805,263 based on the closing sale price as reported on the NYSE American.
As of March 31, 2018, there were 21,793,131 shares of common stock outstanding.
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
Item 5.
Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity
PART II
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Party Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
PART IV
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Preliminary Notes
GlobalSCAPE®, CuteFTP®, CuteFTP Pro®, DMZ Gateway®, EFT Cloud Services, ®GlobalSCAPE Securely Connected®, and Mail Express® are registered
trademarks of GlobalSCAPE, Inc.
Secure FTP Server™, Wide Area File Services™, WAFS™, CDP™, Advanced Workflow Engine™, AWE™, EFT Server™, EFT Workspaces™, EFT
Insight™, Enhanced File Transfer™, Enhanced File Transfer Server™, Secure Ad Hoc Transfer™, SAT™, EFT Server Enterprise™, Enhanced File Transfer Server
Enterprise ™, Desktop Transfer Client™, DTC™, Mobile Transfer Client™, MTC™, Web Transfer Client™, Workspaces™, Accelerate™, WTC™, Content Integrity
Control™, Advanced Authentication™, AAM™ and scConnect™ are trademarks of GlobalSCAPE, Inc.
TappIn® and 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 Annual Report are the property of their respective owners.
In this report, we use the following terms:
“B2B” means business-to-business.
“BYOL” means bring your own license.
“Cloud” or “cloud computing” refers to pooled computing resources, delivered on-demand, over the Internet. In the same manner that electricity is
delivered on-demand from large scale power plants, cloud computing is delivered from centralized data centers to users all over the world.
“DMZ” or Demilitarized Zone refers to a computer host or perimeter network inserted between a trusted internal network and an untrusted public network
such as the Internet.
“FTP” or File Transfer Protocol is a protocol used to exchange or manipulate files over a computer network such as the Internet.
“MFT” or Managed File Transfer refers to software solutions that facilitate the secure transfer of data from one computer to another through a network.
“RFC” or Request for Comment is a memorandum published by the Internet Engineering Task Force describing methods, research, or innovations applicable
to the working of the Internet and Internet-connected systems.
“SaaS” or Software-as-a-Service uses hosted, cloud computing approaches in which the customer does not need to install the underlying software on its
own computer systems to access the application.
“SSL” or Secure Sockets Layer uses cryptography to encrypt data between the web server and the web browser.
Forward-Looking Statements
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities 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 Annual Report by using words such as “will”,
“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 this Annual Report and other documents filed with the
Securities and Exchange Commission, or SEC. Therefore, GlobalSCAPE’s actual results could differ materially from those discussed in this Annual Report.
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Investigation
EXPLANATORY NOTE
On August 7, 2017, GlobalSCAPE, Inc. (together with its wholly-owned subsidiary, “GlobalSCAPE”, the “Company” or “we”) announced that the Audit
Committee (the “Audit Committee”) of our Board of Directors, assisted by outside legal counsel and independent forensic accountants, had been conducting an
investigation (the “Investigation”) into certain transactions in the fourth quarter of 2016. We have since publicly disclosed multiple updates regarding the
Investigation. The Investigation, which is now complete, identified transactions which were recorded inconsistently with the Company’s stated revenue recognition
policies and criteria as described in our discussion of our significant accounting policies in Note 2 to our consolidated financial statements in Part II, Item 8 below.
Subsequent to the announcement of the Investigation on August 7, 2017, the Audit Committee and management identified additional transactions which
occurred during fiscal year 2016 in which revenue was recorded inconsistently with the Company’s stated revenue recognition policies and criteria including:
ö= Transactions in which license activation keys did not appear to have been delivered to the customer in the period in which the sale was recorded;
ö= Transactions appearing to contain side deal terms negotiated with customers but not reflected in the underlying sales documentation;
ö= Transactions in which a sale was recorded although the customer had not yet responded to the Company’s request to provide a commitment to
purchase;
ö= Transactions in which a sale was made to a reseller whereby collection was not reasonably assured due to payment or other nonstandard terms not
consistent with the Company’s revenue recognition policy;
ö= Transactions in which there was either no purchase order or a purchase order dated after the date of the end of the period for which revenue had
been previously recognized; and
ö= One transaction which included incorrect vendor specific objective evidence allocation.
Additionally, management adjusted our consolidated financial statements as of and for the years ended December 31, 2016 and 2015 to account for
immaterial misstatements. These changes in our consolidated financial statements as of and for the year ended December 31, 2015 were in addition to the changes
previously disclosed in our original Annual Report on Form 10-K for the year ended December 31, 2016, filed March 27, 2017, as a result of changes in accounting
methods and in the classification and presentation of our business activities in our consolidated financial statements.
As a result of the Investigation and management’s analysis, we restated (the “Restatement”) (i) our consolidated financial statements as of and for the years
ended December 31, 2016 and 2015 and (ii) our condensed consolidated financial statements as of and for the three months ended March 31, 2017. Our consolidated
financial statements included within this Form 10-K reflect the Restatement.
Transition to Accelerated Filer
The Company met the “accelerated filer” requirements as of the end of its 2017 fiscal year pursuant to Rule 12b-2 of the Securities Exchange Act of 1934, as
amended. However, pursuant to Rule 12b-2, SEC Release No. 33-8876 and applicable SEC guidance, the registrant (as a smaller reporting company transitioning to the
accelerated filer larger reporting company system based on its public float as of June 30, 2017) is not required to satisfy the larger reporting company requirements
until its first quarterly report on Form 10-Q for the 2018 fiscal year and thus is eligible to check the “smaller reporting company” box on the cover of this Form 10-K.
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Item 1. Business
PART I
Company Overview
We develop and sell computer software that provides secure information exchange, data transfer and sharing capabilities for enterprises and consumers. We
have been in business for more than twenty years having sold our products to thousands of enterprises and more than one million individual consumers globally.
Our primary business is selling and supporting managed file transfer, or 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.
Our MFT products are based upon our Enhanced File Transfer, or EFT, platform. This platform emphasizes secure and efficient data exchange for virtually
any organization. It enables business partners, customers and employees to share information safely and securely. The EFT platform provides enterprise-level
security while automating the integration of back-end systems which are features often missing from traditional file transfer software. The EFT platform features built-
in regulatory compliance, governance, and visibility controls to maintain data safety and security. It can replace legacy systems, homegrown servers, expensive
leased lines and virtual area networks, all of which can be insecure, with a top-performing, scalable alternative. The EFT platform promotes ease of administration
while providing the detailed capabilities necessary for complete control of a file transfer system.
We earn most of our revenue from the sale of products and services that are part of our EFT platform. Our customers can purchase the capabilities of our
EFT platform in two ways:
ö= Under a perpetual software license for which they pay a one-time fee and under which they typically install our product on computers that they
own and/or manage. Our brand name for this product is EFT. Almost all customers who purchase EFT also purchase a maintenance and support, or
M&S, contract for which they pay us an annual recurring fee. Most of the revenue we have earned from our EFT platform products has been from
sales of perpetual software licenses and related M&S.
ö= As a software-as-a-service, or SaaS, under which they pay us ongoing fees to access the capabilities of the EFT platform in the cloud. Through the
end of 2017, EFT Cloud was our SaaS offering of the EFT platform which users accessed for a flat monthly subscription fee. In January 2018, we
introduced EFT Arcus, which will be our SaaS offering of the EFT platform going forward, for which users will pay a base monthly subscription fee
plus an additional variable amount determined based upon their metered usage of EFT Arcus resources.
We sell other products that are synergistic to our EFT platform including Mail Express, WAFS, and CuteFTP. Collectively, these products constituted less
than 5% of our total revenue in 2017. Customers pay a one-time fee to purchase these products under a perpetual software license. Some customers also purchase an
M&S contract. We do not offer a SaaS version of these products and have no plans to do so.
We also earn revenue from professional services we provide to assist our customers in configuring and integrating our EFT platform products into their
environments.
We focus on selling our EFT platform products in a business-to-business environment. The majority of the resources we will expend in the future for
product research, development, marketing and sales will focus on our EFT platform products. 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.
In June 2017, we introduced a data integration product that we planned to sell under the brand name Kenetix. We licensed the technology for this product
from a third party. This product is a cloud-based, integration-as-a-service, or iPaaS, solution used to connect applications, microservices, application program
interfaces (or API’s), data and processes within and between organizations. We have experienced issues with the third-party technology and have determined to
suspend marketing of the product as we evaluate options and determine whether the licensor can effectively address the issues.
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For a more comprehensive discussion of the products we sell and the services we offer, see Software Products and Services below.
We have won multiple awards for performance and reputation, including:
ö=
In 2017:
- Recognized by the San Antonio Express News as a Top Workplace in 2017, marking GlobalSCAPE’s seventh recognition as a Top Workplace
in San Antonio.
- Honored with the 2017 Total Rewards & Benefits Excellence Award by the HRO Today Services and Technology Association.
- Named to the CRN 2017 Cloud Partner Program Guide which recognizes partner programs with distinguished margins, sales support and cloud
resources.
- Received three awards from the 2017 Golden Bridge Awards for distinguished technology achievements which included:
Á= Cloud/SaaS Innovations (Gold Winner) – EFT on Amazon Web Services or Microsoft Azure.
Á= Managed File Transfer Innovations (Gold Winner) – The EFT Accelerate module.
Á= Governance, Risk and Compliance Innovations (Bronze Winner) – EFT platform.
- Received two awards from the Network Product Guide 2017 IT World Awards for achievements in product excellence that included:
Á= Governance, Risk and Compliance (Gold Winner) – EFT.
Á= Cloud Security (Silver Winner) – EFT Cloud Services.
- Recognized as a Best Place to Work in IT by Computerworld for the fourth consecutive year and sixth time overall.
- Recognized for three Info Security Products Guide 2017 Global Excellence Awards for distinguished achievements in product innovation in
categories that included:
Á= Innovation in Compliance (Gold Winner) – Enhanced File Transfer.
Á= Cloud/SaaS Solutions (Gold Winner) – EFT Cloud Services.
Á= BYOD Security (Bronze Winner) – EFT Workspaces.
- Honored as a Best Company to Work for in Texas by Best Companies Group (BCG), Texas Monthly, the Texas Association of Businesses
(TAB), and Texas SHRM.
- Received a 5-Star rating in The Channel Company’s CRN 2017 Partner Program Guide for the third year in a row.
- Honored with the 2017 Total Rewards & Benefits Excellence Award by the HRO Today Services and Technology Association.
-
Selected as a finalist in the 2017 Cybersecurity Product Awards Secure File Transfer: EFT Enterprise.
ö=
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.
Selected for CRN’s 2016 Cloud Computing Partner Program Guide.
-
- Certified as a great workplace by the independent analysts at Great Place to Work.
- Recognized for product excellence by the 2016 Golden Bridge Awards in several categories, including:
Á= EFT – Gold Winner in Access Compliance and Risk Management.
Á= EFT Cloud Services – Gold Winner in Managed File Transfer.
- Recognized for distinguished product achievements by Network Products Guide’s 2016 IT World Awards in several categories, including:
Á= The EFT Workspaces module, a part of EFT – Gold Winner in BYOD Security.
Á= EFT – Bronze Winner in Compliance.
Á= Mail Express – Bronze Winner in Email Security and Management.
- 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.
- Recognized by the San Antonio Business Journal as a 2016 Best Place to Work, making this the fifth time GlobalSCAPE has received this
honor.
- Honored as the HR Employer of the Year and Excellence in Engagement Strategy in North America by the HRO Today Services and
Technology Association.
- Received a 5-Star rating in The Channel Company’s CRN 2016 Partner Program Guide for the second year in a row.
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- 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.
- Received Info Security Products Guide 2016 Global Excellence Awards for distinguished achievements in product innovation that included:
Á= EFT Workspaces – Gold Winner in BYOD Security.
Á= Enhanced File Transfer – Silver Winner in Compliance.
Á= EFT Cloud Services – Bronze Winner in Cloud Security.
Á= Mail Express – Bronze Winner in Email Security and Management.
- Named as Leader in Secure Information Exchange Services 2016 – Texas by the Corp America 2016 Small Cap Awards.
GlobalSCAPE was incorporated in Delaware in 1996. Our address is 4500 Lockhill-Selma Road, Suite 150, San Antonio, Texas 78249. Our phone number is
(210) 308-8267.
Industry Background
Communication across private and public computer networks that facilitates the movement and sharing of information between central and remote locations
and with associates, employees, partners, suppliers, and customers is an integral part of daily operations for enterprises of all sizes. Corporate information managers
must protect business assets, ensure that policies and processes meet regulations governing the management of sensitive information, and ensure that the right
people have access to the right information, at the right place and at the right time. Global operations, diverse business partners and networks further emphasize the
need for software applications that ensure compatibility, scalability, privacy, and security. These requirements have created the need for maintaining the security of
data and information in motion (for example, with traditional MFT solutions delivered as on-premises software or as a cloud service) and at rest (for example, through
securely deleting or purging files or securely accessing stored data from mobile tablet or smartphone devices).
The increase in high-profile and large scale data breaches in corporate enterprises and government agencies involving access to information in an
unauthorized manner have created a heightened awareness of the vulnerability of critical and confidential data. As a result, attention at an unprecedented level is
being paid to the security and integrity of systems that store and transfer data electronically. In many cases, this emphasis involves assessing the adequacy of the
security, reliability and visibility provided by existing MFT systems.
The need for secure MFT solutions is particularly strong for organizations faced with a daunting array of privacy, security, and remote accessibility
challenges stemming from various regulatory and business requirements for data privacy and confidentiality. Regulatory requirements regarding privacy and security
include federal legislation and regulations such as the Health Insurance Portability and Accountability Act (HIPAA), the Gramm-Leach-Bliley Act (GLBA), the
Federal Trade Commission Red Flags Rules, as well as state legislation and regulations in the U.S., such as California Senate Bill (SB) 1386 and the data security
regulations issued by the Massachusetts Office of Consumer Affairs and Business. In the European Union, the General Data Protection Regulation (GDPR) also
places requirements on organizations who will have a need for our solutions. Some of these statutes and regulations impose severe penalties for improper disclosure
of confidential information. In addition to legal obligations, industry best-practices such as the Payment Card Industry Data Security Standard (PCI DSS) and self-
imposed business requirements lead to the need to secure and protect consumer information, intellectual property and trade secrets. Use of secure MFT solutions
offers protection against disclosure of proprietary information and also reduces corporate risks associated with the potentially devastating consequences of security
breaches.
Our primary industry is known as managed file transfer. The MFT industry has its technical origin in the file transfer protocol, or FTP. FTP dates back to
1980 (RFC 765, later superseded by RFC 959), with even earlier RFCs guiding prior attempts to establish standards for file transfer protocols. The use of file transfer
protocols increased dramatically with the explosive growth of the Internet and the World Wide Web during the 1990s. The MFT industry arose from recognition that
FTP alone does not provide adequate security and management capabilities for file transfers. MFT solutions offer a greater degree of security and control than FTP.
Features available in MFT solutions include integrated security, auditing capabilities, performance monitoring, and reporting. The MFT industry includes low cost, or
even free, solutions that offer basic capabilities. However, we believe businesses and even individuals require more advanced solutions that provide scalability,
enhanced security options, automated workflow, dedicated maintenance and support, and other features that facilitate high-confidence, secure and cost effective file
transfers.
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Cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks,
servers, storage, applications, and services) that can be rapidly provisioned, released, and scaled to meet requirements. We believe the continuing movement to
cloud services is analogous to the telecommunications shift from dedicated point-to-point circuits to a delivery model in which the entire telecommunications
infrastructure potentially can be used to establish, maintain, and manage individual connections on an as-needed basis.
Strategy
Our long-standing vision has been to simply and securely automate the flow of information between people, places and systems. Using that vision as a
foundation, in 2018 we introduced a fundamentally new brand identity, logo and narrative that embodies our plan to evolve to being primarily a cloud software and
services provider. EFT Arcus is the foundation of that evolution. In addition, we adopted a new visual identity built upon a new tagline: “Make Business Flow
Brilliantly”. Our visual theme now features a shifting background wave of colors representing the perpetual flow of data both within and between enterprises using
our technology as a conduit through which the flow of business and the data it creates can be managed, monitored, controlled and viewed in a secure manner.
We intend to build upon our leadership position in the MFT market to provide businesses, other organizations, and individual users with the solutions
necessary to meet their growing need for secure information exchange. We believe fully addressing this need for secure information exchange requires consideration
of capabilities beyond traditional MFT, including the sharing of content between both people and businesses, work group collaboration, access to content outside
the data center, business-to-business partner enablement, electronic data interchange, integration between systems and information, solution-wide governance, and
advanced visibility including analytics, dashboards, and transaction-level control.
Going forward, we intend to focus on determining which areas of our business will contribute to our future growth in their current state, need additional
investment to contribute in the desired manner or require further analysis to determine their place in our product offerings. As we evolve our solution portfolio, we
intend to maintain an appropriate balance between legacy and new solutions, including making choices about transitioning, sustaining, or retiring solutions as
necessary to best operate under prevailing business conditions. Transitioning or sustaining solutions may involve consolidating capabilities within our solution
portfolio, releasing upgrades in response to market or customer needs, or making bug fixes. We also may phase out solutions and earlier versions of our solutions
periodically in accordance with our end-of-life, or EOL, policy.
In addition to expanding our products into areas adjacent to MFT, we also believe that we need to continue to expand the means of delivering our MFT
products. To that end, we intend to continue expanding our capability to deliver our EFT platform through our EFT Arcus SaaS delivery model which provides a
flexible continuum of features and functions that provide 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 Arcus also provides organizations the flexibility of deploying on-premises, in the cloud or in a hybrid cloud environment with all of the
security, compliance, scalability, and visibility features of an on-premises managed file transfer solution. We seek to evolve our strategic focus based on our vision
for product innovation and development, our assessment of visibility of and demand for our products in the marketplace, and our evaluation of desired approaches
for selling and delivering our products. Our strategic focus consists of:
ö= Ongoing innovation of our EFT platform to address the expanding needs of our existing customers and to enhance our products’ appeal to new
customers.
ö= Licensing, developing and/or acquiring technologies with features and functions that are complementary to and synergistic with our EFT platform so as
to expand the breadth of our product offerings.
öööö==== Enhancing our sales and marketing programs to improve identification of potential demand for our products and to increase the rate at which we are
successful in selling our products.
Ongoing Innovation of Our EFT Platform to Address the Expanding Needs of Our Existing Customers and to Enhance Our Products’ Appeal to New Customers.
We seek to continue to improve and enhance our core technology, primarily in the MFT space, in both breadth and depth. By focusing on the breadth of
the product, we seek to pursue different segments of the market to ensure that we have products and services that meet the needs of small and medium businesses,
or SMBs, but also scale to meet the demands of larger enterprises. This will require new features and packages to be released to these audiences. We believe that
increasing the depth of our products by adding new features will allow us to increase sales to new customers as well as our existing client base by helping them solve
additional problems within their organizations.
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We believe customers in the markets we serve will increasingly begin assessing the viability of accessing and using MFT capabilities through cloud-based,
SaaS offerings. Consistent with our new branding initiative, we intend to emphasize the development, marketing and sales of products with features and capabilities
that support our customers accessing them through a SaaS offering hosted in the cloud such as EFT Arcus.
Licensing, Developing and/or Acquiring Technologies With Features and Functions that are Complementary to and Synergistic with Our EFT Platform so as to
Expand the Breadth of Our Product Offerings.
The second area of strategic focus continues with product innovation but extends beyond pure MFT into adjacent segments and technologies such as data
movement and data security. We intend to continue to focus on determining which areas of our business will contribute to our future growth in their current state,
need additional investment to contribute in the desired manner, or require further analysis to determine their future strategy.
Our solution portfolio may evolve over time, for example, through development of new offerings in adjacent markets or through acquisitions of technologies
by licensing, partnering or by acquiring companies which own such technologies. We also maintain an active research and development program and work closely
with partners and others in the industry to identify new solution opportunities. We also intend to remain alert for attractive opportunities to collaborate with others or
perhaps combine other revenue-producing technologies with ours to expand our product offerings and reach.
We have allocated significant resources in recent years to enhancing our existing products and developing new solutions. This strategic focus has resulted
in our adding features and functions to our EFT platform products and enhancing our ability to deliver those products to our customers in a variety of ways ranging
from an on-premise, perpetual license to a full SaaS offering.
As we evolve our solution portfolio, we intend to maintain an appropriate balance between legacy and new solutions, including making choices about
transitioning, sustaining, or retiring solutions as necessary to best operate under prevailing business conditions. Transitioning or sustaining solutions may involve
consolidating capabilities within our solution portfolio, releasing upgrades in response to market or customer needs, making bug fixes, or phasing-out solutions
periodically pursuant to our EOL policy.
Enhancing Our Sales and Marketing Programs to Improve Identification of Potential Demand for Our Products and to Increase the Rate at Which We are
Successful in Selling Our Products.
We intend to sustain a high level of execution of our demand generation activities through our marketing group to provide a continuing flow of sales leads
to our direct sales personnel and our channel sales partners. During 2018, our sales and marketing efforts will continue to focus on enabling our channel partners and
engaging their customers and prospects. We intend to continue to enhance our partner program to reward our partners who participate in our sales and technical
certifications and drive new opportunities for us. We believe that our marketing, sales and channel demand generation programs will continue to be a primary growth
driver for the foreseeable future.
We also intend to continue to emphasize ongoing initiatives to elevate our product and corporate profiles and awareness under the GlobalSCAPE, EFT, and
EFT Arcus brands. We believe that the transformation of our product lines into a more comprehensive solution architecture will continue to elevate this brand
awareness with larger enterprises while still serving the needs of our traditional clients. We intend to use internal resources as well as outside marketing and
communications professionals to support this work.
We conduct business with thousands of organizations around the world. We provide solutions to some of the world’s largest manufacturers, distributors,
banks, insurance companies, healthcare providers, automakers, film companies and technology providers. Given the breadth and depth of these market opportunities,
we believe the effectiveness of a direct sales approach using only our in-house personnel to sell our products is limited by the number of qualified sales people we
can hire and the number of prospective clients to whom they can present our products. As a result, we plan to continue emphasizing expanding our third-party sales
channel relationships.
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We believe that utilizing and expanding our third-party sales channel relationships allow us to leverage the existing base of sales people in place in those
companies and their existing customer relationships. In addition to exposing our products to hundreds, and potentially thousands, of sales people employed by
those third-party resellers, our products can benefit from proven sales programs and methodologies in those organizations that are financed and supported by those
selling partners. We believe operating an aggressive channel reseller program provides an opportunity for our products to be presented to a notably larger number
of potential buyers and in a more rapid fashion than if we attempted the same effort using only our direct salespersons. We will continue to expand and enhance our
existing channel relationships while at the same time identifying and engaging additional channel partners. Using this approach, we believe we can maintain and
expand the exposure for our products in the marketplace in a manner that would probably take several years for us to accomplish on our own.
We believe this channel sales program helps us establish and maintain a lower-touch delivery model through which we train these partners to sell and
distribute our solutions and provide them sales and marketing tools to support that effort. We utilize this approach to reduce our overall cost of marketing and selling
our solutions in areas where it would be costly to establish a presence with our own employees.
Software Products and Services
We develop and sell computer software that provides secure information exchange, data transfer, and data sharing capabilities for enterprises and
consumers. We have been in business for more than twenty years having sold our products to thousands of enterprises and more than one million individual
consumers 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:
ö= 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.
ö= 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.
ö= Exchange of information between enterprises to facilitate the completion of one or more business transactions, such as a retailer transmitting
inventory purchasing requirements produced by its material requirements planning system to an order entry system at a supplying vendor.
We earn over 90% of our revenue from the sale of MFT products and services that are part of our EFT platform. We have multiple revenue streams from the
EFT platform that include:
ö=
Perpetual software licenses under which customers pay us a one-time fee for the right to install our products in their information systems
environment on computers they manage and either own or otherwise procure from a cloud services provider, including deploying our products at a
cloud services provider in a bring-your-own-license, or BYOL, environment. Our brand name for this product is EFT. Historically, most of the
revenue we have earned from our EFT platform products has been from sales of EFT perpetual software licenses and related M&S.
ö= Cloud-based, SaaS solutions that we sell on an ongoing subscription basis. Through the end of 2017, EFT Cloud was our SaaS offering of the EFT
platform which users accessed for a flat monthly subscription fee. In January 2018, we introduced EFT Arcus, our SaaS offering of the EFT platform
going forward, for which users will pay a base monthly subscription fee plus an additional variable amount based upon their metered usage of EFT
Arcus resources.
ö= M&S.
ö=
Professional services for product installation, integration and training.
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We focus on selling our EFT platform products in a business-to-business environment. The majority of the resources we will expend in the future for
product research, development, marketing and sales will focus on this product line. We expect to expend minimal resources developing and selling our other
products. We believe our EFT platform products and business capabilities are well-positioned to compete effectively in the market for these products. For a more
comprehensive discussion of the products we sell and the services we offer, see below.
We earn less than 5% of our revenue from selling other products that can be synergistic to our EFT platform. These products have capabilities that:
Support information sharing and exchange capabilities using traditional email systems.
ö=
ö= Enable enterprise file synchronization and sharing.
ö= 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.
ö=
We earn most of our revenue from the sale of our EFT platform products that support business-to-business activities and are strategically focused on
selling products in that environment. We intend to expend the majority of our resources in the future for product research and development, marketing, and sales in a
manner that concentrates on the business-to-business market. We believe our products and business capabilities are well-positioned to compete effectively in that
market.
Some of our products support consumer-oriented file transfers and file sharing. Even though these products are profitable on an overall basis, we anticipate
the future resources we will expend related to products sold to consumers and the associated revenue we earn from those products will continue to be a minor part of
our business.
Our long-standing vision has been to simply and securely automate the flow of information between people, places and applications. Using that vision as a
foundation, in 2018 we introduced a fundamentally new brand identity, logo and narrative that embodies our plan to evolve to being primarily a cloud software and
services provider. EFT Arcus is the foundation of that evolution. In addition, we adopted a new visual identity built upon a new tagline: “Make Business Flow
Brilliantly”. Our visual theme now features a shifting background wave of colors representing the perpetual flow of data both within and between enterprises using
our technology as a conduit through which the flow of business and the data it creates can be managed, monitored, controlled and viewed in a secure manner.
The following discussion presents a summary description of our specific products and solutions.
Managed File Transfer–EFT Platform
Enhanced File Transfer, or EFT, is the brand name of our core MFT product platform. Our EFT platform products received multiple industry awards in
compliance categories in 2017 including the 2017 Golden Bridge awards, the Network Product Guide’s 2017 IT World Awards, and the 2017 Info Security Products
Guide Global Excellence Awards.
The EFT platform provides users the ability to securely transmit data 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.
The EFT platform provides a common, scalable MFT environment that accommodates a broad family of accompanying modules to provide enterprises with
increased security, automation, and performance when compared to traditional FTP-based and email delivery systems. Various optional modules allow users to select
the solution configuration most applicable to their requirements for auditing and reporting, encryption, ad hoc and web-based file transfers, operability in or through
a DMZ network, and integration with back-end business processes, including workflow automation capabilities.
General features and capabilities of the EFT platform include:
ö=
State-of-the-art, enterprise-level security when transferring information within or between computer networks as well as for collaboration with
business partners, customers, and employees. EFT provides automation that supports effective integration of back-end systems. It has built-in
regulatory compliance, governance, and visibility controls to provide a means of safely maintaining information. EFT offers a high level of
performance and scalability to support operational efficiency and maintain business continuity. Administrative tools are provided at various levels
of granularity to allow for complete control and monitoring of file transfer activities.
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ö= Transmission of critical information such as financial data, medical records, customer files, vendor files, personnel files, transaction activity, and
other similar documents between diverse and geographically separated network infrastructures while supporting a range of information protection
approaches to meet privacy and other security requirements. In addition to enabling the secure, flexible transmission of critical information using
servers, desktop, and notebook computers and a wide range of network-enabled mobile devices, our products also provide customers with the
ability to monitor and audit file transfer activities.
ö= Compliance with government regulations and industry standards relating to the protection of information while allowing users to reduce
information systems and technologies costs, increase efficiency, track and audit transactions, and automate processes. Our solutions also provide
data replication, acceleration of file transfer, sharing/collaboration, and continuous data backup and recovery.
Specific capabilities of the EFT platform that we currently highlight while marketing this product include:
ö=
ö=
ö=
ö=
ö=
Secure File Transfers – The EFT platform enables an organization to securely manage file transfers among worldwide offices, clients, and partners
using industry-standard Internet protocols such as HTTP, HTTPS, FTP, FTPS, SFTP, and AS2. It provides the flexibility needed to meet the
specific requirements of vendors, business partners, and customers.
Increased Efficiency of Information Technology Operations with File Transfer Automation - Automation allows data delivery without manual
intervention thereby saving time and avoiding potential errors. The EFT platform streamlines business processes without limitations imposed by
legacy systems and applications. Its automation capabilities set it apart from every other MFT solution on the market.
Transmission of Large Files over Large Distances with File Transfer Acceleration - High latency and bandwidth issues are often a major obstacle
for organizations that need to transfer large files over great distances. Without solutions for these issues, organizations can fail to meet service
level commitments, miss critical deadlines or be forced to travel with, or ship, hard copies of data. The EFT platform can increase the speed at which
information is transmitted over large geographical distances.
Improved Uptime for Critical File Transfer Processes – The EFT platform can be deployed in an active-active, highly available cluster. The EFT
platform is scalable so as to provide the flexibility to increase throughput or ensure non-stop uptime of business critical systems.
Integration with Popular Authentication Measures – The EFT platform provides support for easy-to-use authentication methods, including smart
card, single sign-on, and multi-factor authentication options.
ö= Meeting Compliance Mandates for MFT Systems – The EFT platform helps our customers achieve the highest levels of compliance with
government and corporate security policies and privacy regulations, such as PCI DSS, FIPS 140-2, HIPAA, and the Sarbanes-Oxley Act of 2002 in a
manner that can protect sensitive and mission-critical data.
During 2017, we continued to improve the features and capabilities of the EFT platform and announced several product upgrades that included:
ö= EFT Insight, a new reporting platform to strengthen data governance and provide near real-time visibility into business critical data flows and
exchanges.
ö= Cloud storage support capabilities with the Remote Agent Module and Cloud Connector Module.
ö= Expanded support for High Availability capabilities.
ö= New Workspaces features.
ö= Enhanced Web Transfer Client user access to improve user experience.
ö=
ö= New automation and security features.
Improved SFTP security setting configuration to enable more visibility into security settings and help administrators ensure compliance.
We expect to continue enhancing 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 more robust reporting capabilities, and provide additional
language support.
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EFT Platform – Delivery Offerings
Our customers can purchase the capabilities of our EFT platform in two ways:
ö= Under a perpetual software license for which they pay a one-time fee and under which they typically install our product on computers that they
own and/or manage. The EFT platform purchased in this manner can also be used in a bring-your-own-license environment hosted by major cloud
providers such as Amazon Web Services or Microsoft Azure. Almost all customers who purchase a perpetual license to use the EFT platform also
purchase an M&S contract for which they pay us a recurring fee that is typically 20% to 30% of the perpetual license fee per year.
ö= As a software-as-a-service, or SaaS, under which the customer pays us monthly subscription and usage fees to access the capabilities of the EFT
platform in the cloud. Our brand name for this product is EFT Arcus. We introduced this product in January 2018. We have not yet earned
significant revenue from the SaaS offering of our EFT platform.
EFT Arcus
While we currently earn most of our EFT platform revenue from sales of perpetual licenses combined with an M&S contract, we recognize that a major shift
toward a SaaS environment is underway in the marketplace. For this reason, we are increasingly emphasizing the ongoing development, enhancement and marketing
of EFT Arcus. Key features of EFT Arcus include:
ö= Consumption-based pricing that allows customers to pay only for the capacity and throughput they use.
ö= No long-term contractual commitment.
ö= Automatic scalability to accommodate varying workloads to mitigate concerns about capacity planning.
ö= A single tenant environment that allows each customer to have a private deployment.
ö= On-the-fly upgrades.
ö= Data encrypted while at rest.
ö= A minimum service level commitment of 99.9%.
The features and functions of EFT Arcus are most similar to those of our EFT Enterprise product for which our customers can purchase a perpetual license
for on-premise installation. With few exceptions, EFT Arcus offers the same features and functions as EFT Enterprise.
We host and deploy EFT Arcus on Microsoft Azure. It provides our customers with a global platform on which to use EFT Arcus and offers the
infrastructure security, compliance and redundancy features required by many customers. Microsoft Azure provides our customers with geo-redundant storage
which replicates data to a secondary region that is geographically distant from the primary region.
For the first 24 to 36 months that a customer subscribes to EFT Arcus, we believe that its cumulative cost of ownership will typically be less than its total
cost of purchasing an EFT platform perpetual license combined with an M&S contract. Accordingly, we expect the revenue we earn during that period from an EFT
Arcus customer will be less than the revenue we would earn from that same customer during that same period if it purchased a perpetual license with an M&S
contract. However, we believe thereafter and over the long term, the cumulative, recurring revenue stream we will earn from an EFT Arcus customer will exceed what
we would have otherwise earned from the sale of a perpetual license combined with an M&S contract.
Prior to the release of EFT Arcus, we delivered our EFT platform SaaS products under the EFT Cloud brand name. The primary difference between EFT
Arcus and EFT Cloud is that EFT Arcus provides enhanced flexibility and scalability through a consumption-based billing model that allows customers to pay only
for the capacity and through-put they use. EFT Cloud was based upon a flat-rate billing model. Legacy subscribers to our EFT Cloud service will be allowed to
continue under that arrangement indefinitely while we introduce them to EFT Arcus.
Customers subscribing to EFT Arcus may deem that controls pertaining to EFT Arcus are relevant to their internal control over financial reporting. In that
case, a customer may request us to provide them our management description of a service organization’s system and a service auditor’s report on that description
and on the suitability of the design and operating effectiveness of controls (commonly referred to as a SOC Type 1 or SOC Type 2 report prescribed under SSAE 18
issued by the American Institute of Certified Public Accountants). Currently, we rely on our third-party service provider who hosts EFT Arcus for that report as it
pertains to controls they have in place. We do not presently have this report in place with respect to controls that we design, implement and manage at GlobalSCAPE.
We are currently assessing the work necessary to provide such a report. The absence of this report could cause certain potential customers to choose not to
subscribe to EFT Arcus.
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The revenue we earned from our EFT platform SaaS products was not a material part of our total revenue in 2017 and 2016.
EFT SMB and Enterprise
For customers who desire to purchase a perpetual license, we offer two product editions based on the EFT platform, EFT SMB and EFT Enterprise.
EFT SMB is the edition for small-to-medium businesses who need MFT capabilities with basic features and functions but still desire to take advantage of
automated data exchange, military-proven security, and infrastructure stability. As the customer’s needs expand over time, it can purchase add-on modules as-
needed to enhance the capabilities of its EFT SMB solution.
EFT Enterprise is suitable for organizations with complex and mission-critical file transfer requirements. This edition of the EFT platform provides access to
additional capabilities including:
ö= Business activity monitoring.
ö= Content integrity control.
ö= Advanced workflow to build automated actions.
ö= Advanced authentication.
ö= Remote agent.
ö= Cloud connectivity.
Secure Information Sharing and Exchange Solution – Mail Express
Mail Express 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 email and attachments of virtually unlimited size. Mail Express was a Bronze
Winner in Email Security and Management by Network Products Guide’s 2016 IT World Awards.
To broaden the appeal and capabilities of Mail Express, we continue to develop and add functionality that integrates the features of Mail Express into the
EFT platform through the Workspaces Outlook Plugin. This integration takes the superior control, visibility and monitoring capabilities of the EFT platform and
makes them available to administrators and users in an email environment. The Workspaces Outlook Plugin combines the technology and features available in Mail
Express with the functionality of Workspaces and integrates them directly into EFT Enterprise.
We will continue to offer Mail Express as a stand-alone product and provide M&S services to customers who purchased Mail Express 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 Mail Express as a standalone
product.
Wide Area File Services Solution - WAFS
WAFS 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 to offer WAFS as a stand-alone product and provide M&S services to customers who purchased WAFS in the past and who purchase it
in the future. We do not expect to expend significant resources in the future expanding the features and capabilities of WAFS.
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.
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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.
ö=
ö= Web Distributed Authoring and Versioning (WebDAV) support to facilitate collaboration between users in editing and managing documents and
files stored on World Wide Web servers.
Version 9 simplified our CuteFTP product line by consolidating all the features of our previous multi-product CuteFTP product line for Windows operating
systems into this single version. We continue to offer CuteFTP Version 3.1 software for Mac platforms. We believe current versions of CuteFTP appeal to users
wanting features more robust than offered in free alternatives such that it will be a product competitive in the marketplace for the foreseeable future.
We will continue selling CuteFTP as a stand-alone product and providing M&S services to customers who purchased CuteFTP in the past and who
purchase it in the future but we will not invest significantly in marketing the product. We do not expect to expend significant resources in the future expanding the
features and capabilities of CuteFTP.
Professional Services
We offer a range of professional services to complement our on-premises and SaaS solutions. These professional services include product configuration
and system integration, solution “quickstart” implementations, business process and workflow refinement, policy development, education and training, and solution
health checks. In addition, we may provide longer-term engineering services, including supporting multi-year contracts, if necessary, to support certain solution
implementations and integrations.
Maintenance and Support
We offer M&S contracts to licensees of all of our software products. These M&S contracts entitle the licensee to software upgrades and technical support
services in accordance with the terms of our M&S contract. Standard technical support services are provided via email and telephone during our regular business
hours. For certain of our products, we offer a Platinum M&S contract which provides access to emergency technical assistance 24 hours per day, 7 days a week.
Most of our M&S contracts are for one year although we also sell multi-year contracts. M&S is purchased by substantially all buyers of our EFT platform
products as well as by many customers who purchase our other products. Customers with M&S contracts pay us a recurring, annual amount that is typically 20% to
30% of the software license price. A majority of our customers with M&S contracts renew them each year.
In 2017, we earned 61% of our revenue from M&S contracts. Sustaining that revenue stream is dependent upon our ability to continue selling new licenses
for which customers purchase M&S services and to sustain a high renewal rate for existing M&S contracts.
Sales and Marketing
With the release of EFT Arcus, our next generation SaaS product, we continue to evolve towards becoming a cloud services company. While we will
continue to offer our products under perpetual licenses for our customers who want to install software on their premises and manage it themselves, we believe the
market and the perspectives of our customers are quickly moving toward them demanding for their consideration the availability of a SaaS offering delivered from the
cloud.
Our long-standing vision has been to simply and securely automate the flow of information between people, places and applications. Using that vision as a
foundation, in 2018 we introduced a fundamentally new brand identity, logo and narrative that embodies our evolution to a cloud software and services provider. Our
objective is to present ourselves as a cloud services company.
We conducted extensive interviews with and gathered feedback from customers in the marketplace as well as our own team members and shareholders. This
input resulted in our adopting a new visual identity built upon a new tagline: “Make Business Flow Brilliantly”. We adopted a visual theme with a shifting
background wave of colors representing the perpetual flow of data both within and between enterprises using our technology as a conduit through which the flow of
business and the data it creates can be managed, monitored, controlled and viewed in a secure manner.
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We emphasize developing our direct sales staff and reseller channel to capture sales through a high level of individual attention to the customer. We
provide our sales staff and resellers with training and professional development opportunities to ensure they are capable of meeting the needs of our prospects and
customers. These sales team development activities focus on technical and process-oriented topical areas to enhance their ability to identify prospects, best position
our solutions and develop pipeline opportunities into sales.
We believe our reseller and distributor channel relationships allow us to leverage those third-party resources to increase our market penetration. We have
established such relationships throughout the world and across industry lines. In particular, we are focused on growing our domestic reseller channel.
Our marketing efforts focus on building brand awareness and capturing demand for our solutions. We take a two-pronged approach that includes a blend of
digital and channel marketing. Through our digital marketing initiatives, we have invested heavily in content syndication programming, resulting in outbound
targeted campaigns that more effectively reach the right audience with white papers, case studies and competitor comparisons. We also conduct ongoing search-
engine optimization techniques and Pay Per Click advertising to enhance our ranking for particular key words in search results of major search engines. We continue
to invest in channel marketing through programs designed to recruit and enable our target partners in a manner that creates joint initiatives that drive demand
through them for our products. In addition, we are using our technology to meet the customer where they are shopping with placement in the Amazon Web Services
and Azure marketplaces.
Our corporate website is www.globalscape.com . It provides a variety of sales and marketing information for our enterprise solutions as well as an ability to
purchase some of our products online. We continually update the design of our websites to be responsive to the evolving marketplace and to provide a more
solution-oriented perspective of our business, improve site navigation and provide additional opportunities for visitors to contact us through the websites.
Customers
We have sold our solutions throughout the world to individuals and enterprises ranging from SMBs to Fortune 100 companies. In order to leverage the
resources of third parties, we make our products available for purchase by end users through third-party, channel resellers even though end users can also purchase
those products directly from us. During 2017 and 2016, we earned a total of 29% and 39%, respectively, from resellers and approximately 14% of our revenue from
such sales through our largest, third-party channel reseller. Although we believe that we are not substantially dependent on this distributor, if it were to experience a
significant disruption of its business or if our relationship with it were to significantly deteriorate, it is possible that our ability to sell to end users would be, at least
temporarily, negatively impacted. We believe that such termination would not have a material adverse effect on us because we have engaged, or believe that we
would be able to engage, alternative distributors, resellers and other distribution channels to deliver our products to end-customers shortly following the termination
of any agreement with any distributor.
We derive a significant portion of our revenue from risk averse and/or regulated commercial customers in North America and throughout the world. Our
primary commercial vertical markets include finance, health care, energy, retail, manufacturing, and engineering. We also have a customer base in the local, state, and
federal government spaces. We continue to pursue additional government business by leveraging our certifications and industry validations.
Seasonality
Our products are marketed to individuals, SMBs and large organizations. As a result of this mix within our customer base, we typically have not experienced
significant seasonality in our sales other than a typical modest decline from time-to-time in first quarter sales as compared to sales in the preceding fourth quarter. We
believe this sales profile is related to our continued growth as an enterprise solution provider operating in an environment where first quarter sales possibly slow as
prospective customers begin to execute their business activities, including purchases of our solutions, in accordance with new-year budgets and plans.
As a result of customer buying patterns and the efforts of our sales force and channel partners to meet or exceed their sales objectives, we have historically
received a substantial portion of orders from our customers and generated a substantial portion of revenue during the last few weeks of each quarter. If a delay in an
expected order for our products occurs near the end of a quarter this could result in revenue we expected to earn in that period being delayed until a subsequent
quarter.
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Network and Equipment
We conduct business through various Tier 1 Internet services providers. Our arrangements provide for redundancy in the event of a failure and for
expansion of available bandwidth in the event there is a dramatic increase in demand. To protect critical customer data, our online shopping cart utilizes SSL
encryption. We maintain technical and physical measures and procedures compliant with the PCI DSS. We use a certified Approved Scanning Vendor for security
scans and PCI scan attestation.
We have dedicated servers on and off site and expansion plans in place to allow rapid and cost effective scalability. Our offsite servers and data backup
procedures provide a warm backup to our onsite servers for contingency purposes. The backups are performed in accordance with our disaster recovery plan.
We rely on unrelated third parties to host on their computers our EFT Arcus product that we deliver to our customers under a SaaS model. We have
contracts and/or service agreements in place with those third parties that we believe provide us the ability to continue delivering those products without interruption.
Research and Development
The technology industry is characterized by rapid technological change in computer hardware, operating systems and software. Our customers’
requirements and preferences rapidly evolve, as do their expectations of the performance of our software. To keep pace with these changes, we maintain an ongoing
program of new product development to remain competitive and to address demands in the marketplace for our products.
Our internal software engineers are responsible for creating and building our software products. They do so by combining their expertise with input from our
sales, marketing and product management groups as to market trends and needs. Our software engineers design and write software and manage its testing and
quality assurance. We utilize third-party software developers both domestically and overseas working under our supervision to supplement our software engineers.
Using these external software developers in a strategic manner allows us to access highly-skilled labor pools, maintain a 24-hour development schedule, decrease
time to market, and minimize programming costs.
All phases of research and development, or R&D, including scope approval, functional and implementation design, object modeling and programming, are
subject to extensive internal quality assurance testing. We maintain an ongoing focus on improving our quality assurance testing infrastructure and practices.
Technical reporting and customer support feedback from customers confirm the continuing positive effect of our ongoing enhancement of research and development
and quality assurance processes.
Our EFT Arcus product is hosted by third-party cloud services providers. We are reliant upon those third parties, such as Microsoft Azure, for the
continued development and enhancement of their cloud services infrastructures on which our products are hosted. We do not perform significant research and
development of cloud services infrastructures using our own personnel.
Our R&D expenditures profile has been as follows ($ in thousands):
R&D expenditures expensed
R&D expenditures capitalized
Total R&D expenditures
Year ending December 31,
2016
2017
$
$
3,128 $
1,926
5,054 $
2,571
1,538
4,109
Total resources expended for R&D (set forth above as total R&D expenditures) illustrate our total corporate efforts to improve our existing products and to
develop new products regardless of whether our expenditures for those efforts were expensed or capitalized. Total resources expended for R&D is not a measure of
financial performance under United States generally accepted accounting principles, or GAAP, and should not be considered a substitute for R&D expense (set forth
above as R&D expenditures expensed) and capitalized software development costs (set forth above as R&D expenditures capitalized) individually. While we believe
the non-GAAP, total resources expended for R&D amount provides useful supplemental information regarding our overall corporate product improvement and new
product creation activities, there are limitations associated with the use of this non-GAAP measurement. Total resources expended for R&D is a non-GAAP
measurement 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 measurement. As a result, this non-GAAP measurement 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.
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Substantially all of our R&D expenditures relate to our EFT platform products with a relatively minor level of these expenditures being related to our other
products. We expect to increase our research and development activities in future years as we focus on improving our current products and introduce new products.
Competition
The managed file transfer software market sector is highly competitive, subject to rapid change, and significantly affected by new product introductions and
other activities of market participants.
The software industry has limited barriers to entry. The availability of computing power with continually expanding performance at progressively lower
prices contributes to the ease of market entry. The software market is characterized by vigorous competition in each of the vertical markets in which we compete both
from existing competitors and by entry of new competitors with innovative technologies. Competition is increasingly enhanced by consolidation of companies with
complementary products and technologies and the possibility that competitors in one vertical segment may enter other vertical segments that we serve. Some of our
competitors in certain markets have greater financial, technical, sales, marketing and other resources than we do. Because of these and other factors, competitive
conditions in these industries are likely to continue to intensify in the future. Increased competition could result in price reductions, reduced net revenue and profit
margins and loss of market share, any of which could harm our business. See “Risk Factors – Risks Related to Our Operations” for further discussion of risks
regarding competition.
We believe that our future results depend largely upon our ability to better serve customers by offering new products whether by internal development or
acquisition. We also believe we must continue to provide existing product offerings that compete favorably with respect to ease of use, reliability, performance, range
of useful features, continuing product enhancements, reputation, price and training.
There is limited information regarding the market shares of our solutions in their respective categories. Many of our competitors have substantially greater
financial, technical, sales, marketing, personnel, and other resources, as well as greater name recognition and a larger customer base than we do. Significant
competition characterizes the markets for our traditional MFT products. We anticipate we will continue to face increasing pricing pressures from competitors in the
future. Given that there are low barriers to entry into the software market and that the market is subject to rapid technological change, we believe that competition will
persist and intensify in the future. For more discussion on the risks associated with our competition, see “Risk Factors — Risks Related to Our Operations”.
EFT Platform Products. Our EFT Enterprise and EFT Arcus products compete against a number of secure, Windows-based FTP servers. We believe our
primary competitors are IBM, Axway, Accellion, Ipswitch, BMC, Cleo, Acronis, Signiant, Serv-U, and JSCAPE. We believe the features and functions of our
products are competitive with those of other MFT providers. In particular, we believe the ease of installation and use of our products combined with a competitive
price well-position us to compete effectively in the MFT market.
We do not offer a Linux version of our EFT platform. Accordingly, we do not compete in environments in which the customer needs an MFT product that
operates in a Linux operating system environment.
Delivering MFT products through a cloud-based, SaaS offering is a rapidly evolving sector of the markets in which we compete. Many of our MFT
competitors are also introducing SaaS products. The nature of the SaaS delivery model lowers the barriers to entry into this market such that we expect competition in
this area to intensify in the future.
CuteFTP. CuteFTP exists in a highly competitive environment with numerous FTP software utilities available on the Internet for both the personal and
professional user. CuteFTP is positioned as one of the only secure FTP client programs that support a wide range of security standards related to the FTP protocol.
We believe our primary competitors are consumer file transfer solutions sold by Ipswitch, Serv-U and Van Dyke Software, Inc. CuteFTP was an early Windows-
based FTP client to market and historically has been among the most frequently downloaded FTP clients on popular download sites.
WAFS. WAFS competes in the wide area file services/storage market. We believe our primary competitors are Panzura and Peer Sync, each of which is
delivering proprietary appliances. We believe that WAFS has the advantage of being a software-only solution which leverages corporate infrastructure and
minimizes the total cost of ownership.
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Mail Express. Mail Express competes in areas of the file transfer market associated with email attachment offloading. We believe our primary competitors
are Leapfile, Zix, and Biscom. Mail Express has the advantage of centralized policies for outbound file attachments and a transparent end-user experience, which
allows for rapid customer deployments. Mail Express also has the benefit of integration with our most recent EFT release which provides customers with a more
uniform administration experience for email attachment offloading and traditional MFT operations.
Governmental Regulation
Export Control Regulations. All of our products are subject to U.S. export control laws and applicable foreign government import, export and/or use
requirements. The level of control generally depends on the nature of the goods and services in question. For example, the level of control is impacted by the nature
of the software and encryption incorporated into our products. Where controls apply, the export of our products may require an export license or authorization or
that the transaction qualifies for a license exception or the equivalent, and may also be subject to corresponding reporting requirements. For the export of some of
our products, we may be subject to various post-shipment reporting requirements. Minimal U.S. export restrictions apply to all of our products, whether or not they
perform encryption functions. Additionally, because we are a Department of Defense contractor, there are certain registration requirements that may be triggered by
our sales. In addition, certain of our items and/or transactions may be subject to the International Traffic in Arms Regulations (ITAR) if our software or services are
specifically designed or modified for defense purposes. Companies engaged in manufacturing or exporting ITAR-controlled goods and services (even if these
companies do not export such items) are required to register with the U.S. State Department.
Enhancements to existing products may, and new products will, be subject to review under the Export Administration Act to determine what export
classification they will receive. In light of the ongoing discussions regarding anti-terrorism legislation in the U.S. Congress, there continues to be discussions
regarding the correct level of export control. Export regulations may be modified at any time. Modifications to the export regulations could reduce or eliminate our
ability to export some or all of our products from the U.S. without a license in the future, which could put us at a disadvantage in competing for international sales
compared to companies located outside of the U.S. that would not be subject to these restrictions. Modifications to the export regulations could prevent us from
exporting our existing and future products in an unrestricted manner without a license or make it more difficult to receive the desired classification. If export
regulations were to be modified in such a way, we may be put at a competitive disadvantage with respect to selling our products internationally. We are working on
enhancing our systems to address the impact of these regulations on our products and services and understand the need to comply. We will complete technical
reviews on any new products that we acquire or develop that may be subject to these regulations before we can export them.
Privacy Laws. As our business evolves to incorporate more cloud and SaaS solutions, we will receive, transmit, and store a greater volume and diversity
of information. As a result, we may be subject to various international, federal and state regulations regarding the treatment and protection of personally identifying
and other regulated information. Applicable laws may include, without limitation, U.S. federal laws and implementing regulations such as the GLBA and HIPAA, as
well as state laws and regulations, and international laws and regulations including the European Union General Data Protection Regulation, or the GDPR, which
replaced the European Union Data Protection Directive in May 2018. Additionally, some of these laws have requirements on the transmittal of data from one
jurisdiction to another. In the event our systems are compromised by an unauthorized party, many of these privacy laws require that we provide notices to our
customers whose personally identifiable data we reasonably believe may have been compromised. Additionally, if we transfer data in violation of these laws, we
could be subjected to substantial fines. To mitigate the risk of compromised information, we use encryption and other security to protect our databases. We also
have adopted policies to comply with the GDPR in the European Union.
Intellectual Property
We regard some of the features of our internal operations, our software, our brands and marketing message, and our documentation as proprietary and rely
on copyright, patent, and trademark and service mark laws and trade secret protection, such as confidentiality procedures, contractual arrangements, non-disclosure
agreements and other measures to protect our proprietary information. Our intellectual property is an important and valuable asset that enables us to gain recognition
for our products, services, and technology and enhance our competitive position and market value.
As part of our confidentiality procedures, we enter into non-disclosure agreements with our employees and independent contractors, resellers, and
corporate partners. We enter into license or subscription services agreements with respect to our software, documentation, and other proprietary information. Our
standard license agreements are transferable only in limited circumstances and have a perpetual term. Our subscription services agreements for our hosted and
managed solutions restrict access and have a definite term. We also educate our employees on trade secret protection and employ measures to protect our facilities,
equipment, and networks.
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Our trademarks and copyrights are central to our business. We have the following trademarks in the United States:
ö= GlobalSCAPE®, CuteFTP®, CuteFTP Pro®, DMZ Gateway®, EFT Cloud Services ®, GlobalSCAPE Securely Connected®, and Mail Express® are
ö=
registered trademarks of GlobalSCAPE, Inc.
Secure FTP Server™, Wide Area File Services™, WAFS™, CDP™, Advanced Workflow Engine™, AWE™, EFT Server™, EFT Workspaces™, EFT
Insight™, Enhanced File Transfer™, Enhanced File Transfer Server™, Secure Ad Hoc Transfer™, SAT™, EFT Server Enterprise™, Enhanced File
Transfer Server Enterprise ™, Desktop Transfer Client™, DTC™, Mobile Transfer Client™, MTC™, Web Transfer Client™, Workspaces™,
Accelerate™, WTC™, Content Integrity Control™, Advanced Authentication™, AAM™, and scConnect™ are trademarks of GlobalSCAPE, Inc.
ö= TappIn® and design are registered trademarks of TappIn, Inc., our wholly-owned subsidiary.
ö= TappIn Secure Share ™, Social Share ™, Now Playing ™, and Enhanced A La Carte Playlist™ are trademarks of TappIn, Inc., our wholly-owned
subsidiary.
In addition to the United States trademarks listed above, we have trademarks registered in Canada and the European Union for GlobalSCAPE. We have
obtained United States copyright registrations for all but the most recent versions of our software applications. We have two patents in the United States.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that
we regard as proprietary. Policing unauthorized use of our products, which are licensed by the thousands and sold world-wide, is difficult. While we are unable to
determine the extent to which piracy of our software products exists, software piracy is a persistent problem. In selling our products, we rely primarily on click-wrap
licenses which are not signed in writing by licensees and may be unenforceable under the laws of certain jurisdictions. Additionally, our new offerings through
Microsoft Azure require the platform to present the applicable licensing terms and if we cannot prove that a licensee received the intended notice of the license terms,
we may have difficulty enforcing the applicable agreements. The laws of some foreign countries do not protect our proprietary rights to as great an extent as do the
laws of the United States. Companies in the software industry, and other patent and trademark holders seeking to profit from royalties in connection with grants of
licenses, own large numbers of patents, copyrights, trademarks, service marks, and trade secrets and frequently enter into litigation based on allegations of
infringement or other violations of intellectual property rights. We have received, and may receive in the future, communications from third parties asserting that our
products infringe, or may infringe, the proprietary rights of third parties, seeking damages resulting from such infringement or indicating that we may be required to
obtain a license from or pay a royalty to, such third parties. For more discussion on the risks associated with our intellectual property, you should read the
information under “Risk Factors,” especially “Risks Related to Intellectual Property.”
Our number of employees is as follows:
Employees
Department
Sales and Marketing
Engineering
Professional Services
Customer Support
Management and Administration
Total
March 1,
2018
2017
60
28
6
23
20
137
47
33
14
20
19
133
None of our employees are covered by collective bargaining agreements. We believe our employee relations are good.
Investigation
On August 7, 2017, GlobalSCAPE announced that the Audit Committee, assisted by outside legal counsel and independent forensic accountants, had been
conducting an investigation into certain transactions in the fourth quarter of 2016. We have since publicly disclosed multiple updates regarding the Investigation.
The Investigation, which is now complete, identified transactions which were recorded inconsistently with the Company’s stated revenue recognition policies and
criteria as described in our discussion of our significant accounting policies in Note 2 to our consolidated financial statements in Part II, Item 8 below.
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Subsequent to the announcement of the Investigation on August 7, 2017, the Audit Committee and management identified additional transactions which
occurred during fiscal year 2016 in which revenue was recorded inconsistently with the Company’s stated revenue recognition policies and criteria including:
ö= Transactions in which license activation keys did not appear to have been delivered to the customer in the period in which the sale was recorded;
ö= Transactions appearing to contain side deal terms negotiated with customers but not reflected in the underlying sales documentation;
ö= Transactions in which a sale was recorded although the customer had not yet responded to the Company’s request to provide a commitment to
purchase;
ö= Transactions in which a sale was made to a reseller whereby collection was not reasonably assured due to payment or other nonstandard terms not
consistent with the Company’s revenue recognition policy;
ö= Transactions in which there was either no purchase order or a purchase order dated after the date of the end of the period for which revenue had
been previously recognized; and
ö= One transaction which included incorrect vendor specific objective evidence allocation.
Additionally, management adjusted our consolidated financial statements as of and for the years ended December 31, 2016 and 2015 to account for
immaterial misstatements. These changes in our consolidated financial statements as of and for the year ended December 31, 2015 were in addition to the changes
previously disclosed in our original Annual Report on Form 10-K for the year ended December 31, 2016, filed March 27, 2017, as a result of changes in accounting
methods and in the classification and presentation of our business activities in our consolidated financial statements.
As a result of the Investigation and management’s analysis, we restated (i) our consolidated financial statements as of and for the years ended December
31, 2016 and 2015 and (ii) our condensed consolidated financial statements as of and for the three months ended March 31, 2017.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy
any document we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330
for information on the public reference room. The SEC maintains an Internet web site that contains annual, quarterly and current reports, proxy statements and other
information that issuers (including GlobalSCAPE) file electronically with the SEC. The SEC’s web site is www.sec.gov. Our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and other reports and amendments filed with the Securities and Exchange Commission are available free of
charge on our web site at www.globalscape.com in the Investor Relations section as soon as practicable after such reports are filed. Information on our website is
not incorporated by reference into this Form 10-K and should not be considered part of this report or any other filing that we make with the SEC.
Item 1A. Risk Factors
We have described below risks we are aware of that could have a material adverse effect on our business, financial results of operations and financial
condition and the value of our stock owned by our stockholders.
Risks Related to Our Operations
A significant portion of our revenue is generated through maintenance and support services. Decreases in maintenance and support sales or renewal rates, or a
decrease in the number of new licenses we sell, will negatively impact our future revenue and financial results.
Revenue from maintenance and support services, or M&S, we provide our customers comprised 61% and 57% of our total revenue in 2017 and 2016,
respectively. We earn M&S revenue from new M&S contracts, typically sold with new software licenses, and from renewals of such contracts. Any reduction in the
number of new software licenses that we sell, or a reduction in sales of associated initial M&S contracts, therefore may have a long-term negative impact on our
future M&S revenue, even if our customers continue to renew M&S contracts at historical rates. This situation, in turn, would impact our business and harm our
financial results.
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Our customers have no obligation to purchase M&S with their initial software license or to renew their M&S contract after the expiration of their initial M&S
period, which is typically one year, but may also be for two or three years. Our customers’ purchases of M&S, and our renewal rates, may decline or fluctuate as a
result of a number of factors, including the overall global economy, the health of their businesses, and the perceived value of the M&S program. If our customers do
not purchase M&S with their initial software license or do not renew their M&S contract for our products, our M&S revenue will decline and our financial results will
suffer. In addition, customers are generally entitled to a reduced annual maintenance fees for entering into long-term maintenance contracts, i.e. those contracts with
a term longer than one year. Declines in our license sales, increases in the proportion of long-term maintenance contracts and/or increased discounting could lead to
declines in our M&S revenue growth rates. Should customers migrate away from systems and applications which our products support, utilize alternatives to our
products, including solutions offering free maintenance, or become dissatisfied with our maintenance services, increased cancellations could lead to declines in our
maintenance revenue.
Our business and growth depend on our ability to obtain M&S renewals from existing customers. A decline in the percent of our M&S contracts that are
renewed could adversely affect our future operating results.
A substantial portion of our annual M&S revenue is attributable to M&S contracts entered into during previous periods. As a result, if there is a decline in
the renewal rate of M&S contracts in any particular period, it is possible that only a small portion of the decline will be reflected in our M&S revenue recognized in
that period and the remainder will be reflected in our M&S revenue recognized in subsequent periods. Our customers’ renewal rates may decline or fluctuate as a
result of a number of factors including customer dissatisfaction with our products’ functionality, features or performance, the level and quality of our M&S services,
or our pricing. Renewal rates may also change due to competitors’ product offerings, customers converting to in-house developed solutions, customers’ inability to
continue their operations and spending levels, migration path issues for new versions of our products, and other factors, a number of which are beyond our control.
Our customers have no obligation to renew their M&S contracts after the expiration of the initial term, and they may elect not to renew their M&S or to reduce the
product quantity covered under their M&S contracts, thereby potentially reducing our future revenue. A decline in the renewal rate of M&S contracts may also result
in a decrease in deferred revenue on our balance sheet as of the end of the period in which the decline in renewals occurred which, in turn, could result in a decrease
in our future revenue. For more information, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
If we are unable to develop, offer and deliver new and enhanced products and services that achieve widespread market acceptance, or if we are unable to
continually improve the performance, features, and reliability of our existing products and services, our business and operating results could be adversely
affected.
Rapid technological changes, as well as changes in customer requirements and preferences, characterize the software industry. Just as the transition from
mainframes to personal computers transformed the industry, we believe our industry will continue to transform in response to continued adoption of mobile devices
and cloud-based SaaS, growth of big data, and potential emergence of capabilities resulting from disruptive innovation. In response, we have devoted significant
resources to the development of new solutions, such as our SaaS solutions. We are making such investments through our internal efforts, including further
development and enhancement of our existing products, as well as through potential acquisitions of new product lines. Innovation, new product development or
acquisition, and go-to-market activities involve a significant commitment of time and resources and are subject to a number of risks and challenges including:
• Developing, sustaining, and appropriately leveraging market intelligence to identify areas of market need that offer potentially high return on investment
for solution development.
• Managing the length of the development cycle for new products and product enhancements which may be longer than originally expected.
• Adapting to emerging and evolving industry standards and to technological developments by our competitors and customers.
• Addressing the evolution of operating systems and industry platforms that presently may not be served by our existing products.
•
• Managing new product and service strategies, including integrating our various security and file replication technologies, management solutions,
Entering into new or unproven markets with which we have limited experience.
customer service, and support into unified enterprise security and file replication solutions.
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Incorporating acquired products and technologies acquired through mergers, acquisitions or other relationships with third parties.
•
• Developing or expanding efficient sales channels.
• Obtaining sufficient licenses to technology and technical access from operating system software vendors on reasonable terms to enable the
development and deployment of interoperable products, including source code licenses for certain products with deep technical integration into
operating systems.
• Changing purchasing trends such as purchasing through on-line marketplaces such as Amazon Web Services and Microsoft AZURE rather than direct
sales or traditional channels.
Investments in new products may not result in sufficient revenue generation to justify their costs or may cause short or long-term harm to our financial
results. For example, customer adoption of our SaaS products may not occur as rapidly as anticipated, or competitors may introduce new products and services that
achieve acceptance among our current customers thereby adversely affecting our competitive position, or we may not be successful in future attempts to achieve
disruptive innovation.
Our executive management team must act quickly, continuously and with vision due to the rapid speed of changing customer expectations and advancement
of technology inherent in the software industry, the extensive and complex efforts required to create useful and widely accepted products, the rapid evolution of
cloud computing, mobile devices, and new computing platforms, and the creation of other new technologies. Although we have adopted a strategy that we believe
will fulfill these challenges, if we fail to execute properly on that strategy, adapt that strategy as market conditions evolve, or internalize and execute on that strategy,
we may fail to meet our customers’ expectations, fail to compete with our competitors’ products and technology, and lose the confidence of our channel partners and
employees. Such circumstances could adversely affect our business and financial performance.
We earn most of our revenue and operating margins from our Enhanced File Transfer licensed software solution suite and related maintenance and support
services and, as a result, are highly dependent upon the continued success of this product line.
Our Enhanced File Transfer product platform, or EFT platform, is our MFT solution targeted primarily to the enterprise and small and medium business user
environments. Our customers may purchase EFT as an on-premise license or may subscribe to it as software-as-a-service (or SaaS). License (both on-premise and
SaaS), M&S, and professional services revenue from this product line was responsible for 95% and 93% of our total revenue in 2017 and 2016, respectively. This
product has provided substantially all of our recent revenue growth and most of the operating margin necessary to fund our operations including, most notably, our
sales and marketing and research and development activities. Declines and variability in demand for our EFT products could occur as a result of:
Improved products or product versions being offered by competitors in our markets.
•
• Competitive pricing pressures.
•
•
• General economic conditions.
Failure to release new or enhanced versions of the EFT solution on a timely basis or at all.
Technological change that we are unable to address with file transfer products or that changes the way enterprises utilize our products.
Due to our product concentration, our business, results of operations, financial condition, and cash flows would be adversely affected by a decline in
demand for the EFT solution suite.
The transition from an on-premise to a cloud-based, SaaS subscription business model is subject to numerous risks and uncertainties.
We believe that there will be a continuing shift away from sales of on-premise software licenses to sales of subscriptions for our cloud-based, SaaS
solutions, which provide our customers the right to access certain of our software in a hosted environment for a specified subscription period. This shift, and our
pursuit of a SaaS strategy, may give rise to a number of risks, including the following:
ö If customers are uncomfortable with cloud-based solutions and desire only perpetual licenses, we may experience longer than anticipated sales
cycles and sales of our cloud-based solutions may lag behind our expectations;
Our cloud-based strategy may raise concerns among our customer base, including concerns regarding changes to pricing over time, service
availability, information security of a cloud-based solution and access to files while offline or once a subscription has expired;
ö We may be unsuccessful in maintaining our target pricing, adoption and projected renewal rates;
ö We may select a target price that is not optimal and could negatively affect our sales or earnings; and
ö We may incur costs at a higher than forecasted rate as we expand our cloud-based solutions.
The shift of our customers’ preference to cloud-based, SaaS solutions may also require a considerable investment of technical, financial, legal and sales
resources, and a scalable organization. Market acceptance of such offerings is affected by a variety of factors, including but not limited to: security,
reliability, scalability, customization, performance, current license terms, customer preference, customer concerns with entrusting a third party to store and manage
their data, public concerns regarding privacy and the enactment of restrictive laws or regulations. Whether our business model transition will prove successful and
will accomplish our business and financial objectives is subject to numerous uncertainties, including but not limited to: customer demand, renewal rates, channel
acceptance, our ability to further develop and scale infrastructure, our ability to include functionality and usability in such solutions that address customer
requirements, tax and accounting implications, pricing and our costs. In addition, the metrics we use to gauge the status of our business may evolve over the course
of the transition as significant trends emerge.
If we are unable to successfully establish our cloud-based solutions and navigate our business model transition in light of the foregoing risks and
uncertainties, our results of operations could be negatively impacted.
Cloud-based computing trends present competitive and execution risks.
Customers are transitioning to a hybrid computing environment utilizing various cloud-based software and services accessed via various smart client
devices. Pricing and delivery models are evolving and our competitors are developing and deploying cloud-based services for customers. We are devoting
significant resources to develop and deploy our own competing cloud-based software and services strategies. While we believe our expertise and investments in
software for cloud-based services provides us with a strong foundation to compete, it is uncertain whether our strategies will attract the customers or generate the
revenue required to be successful. Delivering our products through cloud-based, SaaS solutions requires that we pay third parties, such as Microsoft Azure, to host
our products and make them available to our customers. As a result, we incur ongoing, recurring third-party hosting expenses associated with delivering SaaS
solutions that we do not incur with respect to our on-premise license products. These expenses may cause the gross margin we realized from our SaaS software
products to be lower than the gross margin we realized from our on-premises software products. Whether we are successful in this new business model depends on
our execution in a number of areas, including:
ö= Continuing to innovate and bring to market compelling cloud-based services that generate increasing traffic and market share;
ö= Maintaining the utility, compatibility and performance of our software on the growing array of cloud computing platforms and the enhanced
interoperability requirements associated with orchestration of cloud computing environments; and
ö=
Successfully deploying our SaaS products on platforms hosted by third-party services upon which we rely for delivery of those computing
solutions to our customers.
These new business models may reduce our revenues or operating margins and could have a material adverse effect on our business, results of operations
and financial condition.
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If the market for cloud-based software develops more slowly than we expect or declines, our business could be materially adversely affected.
The market for cloud-based software is not as mature as the market for on-premise enterprise software, and it is uncertain whether cloud-based software will
achieve and sustain high levels of customer demand and market acceptance. Our success will depend to a substantial extent on the widespread adoption of cloud-
based software solutions. Many enterprises have invested substantial personnel and financial resources to integrate traditional enterprise software into their
businesses and, therefore, may be reluctant or unwilling to migrate to cloud computing. Other enterprises have not elected to move from traditional processes that are
not cloud-based to automated cloud-based processes. It is difficult to predict customer adoption rates and demand for our products and services, the future growth
rate and size of the cloud-based software market or the entry of competitive applications. The expansion of the cloud-based software market depends on a number of
factors, including the cost, performance, and perceived value associated with cloud-based software, as well as the ability of cloud-based software companies to
address heightened security and privacy concerns. If we have a security incident or other cloud-based software providers experience security incidents, loss of
customer data, disruptions in delivery or other similar problems, which is an increasing focus of the public and investors in recent years, the market for cloud-based
applications as a whole, including our offerings, may be negatively affected. If cloud-based software does not achieve widespread adoption, or there is a reduction in
demand for cloud-based software caused by a lack of customer acceptance, technological challenges, weakening economic conditions, increasing security or privacy
concerns, competing technologies and offerings, decreases in corporate spending or otherwise, it could result in decreased revenues and our business could be
materially adversely affected.
Potential customers may be unwilling to implement the business changes attendant to the use of some of our cloud-based software and services.
The use of our cloud-based software and services often requires customers to implement changes to their existing business process or to adopt new
business processes with which they are unfamiliar. Some of our potential customers may continue to rely on existing internal solutions or other non-cloud-based
solutions rather than implement the business changes called for by our solutions.
We must keep up with rapid and ongoing technological change to remain competitive in the rapidly evolving cloud-based technology industry.
The cloud-based technology industry is characterized by rapid and ongoing technological change, frequent new product and service introductions, and
evolving industry standards. Our future success will depend on our ability to adapt quickly to rapidly changing technologies, to adapt our solutions to evolving
industry standards and to improve the performance and reliability of our applications and services. To maintain and increase market acceptance of our applications
and services, we must anticipate subscriber need and offer solutions that meet changing subscriber demands quickly and effectively. Subscribers may require
features and functionality that our current applications and services do not have or that our platforms are not able to support. If we fail to develop solutions that
satisfy subscriber preferences in a timely and cost-effective manner, our ability to renew our agreements with existing subscribers and our ability to increase demand
for our solutions will be harmed.
If we are required to, and fail to successfully manage any changes to our business model, including the transition of our products to cloud offerings, our results
of operations could be harmed.
We are beginning to transition from an on-premise to a cloud-based, SaaS subscription business model. This adjustment to our business model requires a
considerable investment of technical, financial, legal and sales resources. Our transition to cloud offerings will continue to divert resources and increase costs,
especially in cost of license and other revenues, in any given period. Such investments may not improve our long-term growth and results of operations. Further, the
increase in some costs associated with our cloud services may be difficult to predict over time, especially in light of our lack of historical experience with the costs of
delivering cloud-based versions of our applications. We may assume greater responsibilities for implementation related services during this transition. As a result, we
may face risks associated with new and complex implementations, the cost of which may differ from original estimates. The consequences in such circumstances
could include: monetary credits for current or future service engagements, reduced fees for additional product sales, and a customer’s refusal to pay its contractually-
obligated subscription or service fees.
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Our focus on cloud services may result in the loss of other business opportunities and negatively impact our revenue growth.
We have allocated significant resources related to our sales and marketing activities, software product development, management team and other personnel
toward growing our cloud business. This strategic direction and redirection of resources could potentially result in the loss of sales opportunities in our traditional
perpetual license and M&S sales business. If our cloud business does not grow in accordance with our expectations and we are not able to cover the shortfall with
other sales opportunities, then our business could be harmed. Although the subscription model used for our cloud business is designed to create a recurring revenue
stream that is more predictable, the shift to this model may reduce our license sales, spread revenue over a longer period and negatively affect future license and
M&S sales revenue.
Our subscription services, such as EFT Arcus, may impact our revenue trends as some opportunities that otherwise would have materialized as software license
sales for on-premises installation at our customers’ sites could potentially shift to subscription-based sales.
Most of our revenue, and the growth of our revenue, has been attributable to perpetual license and M&S sales of our EFT solution. Perpetual license fees
for software to be installed at a customer site are typically recognized in full as revenue at the time the software is delivered to the customer. On the other hand,
subscription services are recognized as revenue over time as the services are delivered (assuming collection is deemed probable), typically on a monthly basis. Any
significant increase in the percentage of our business generated from such a subscription model could, as a result, delay revenue recognition and have a negative
impact on our operating results.
The impact of subscription services on prior revenue growth trends depends on several key factors, including the number of customers who may shift from
on-premise software licenses to subscription services, the rate at which they may do so, the subscription term and fees, and the comparative value of the opportunity
had it materialized as a software license sale instead of as a subscription service. Generally, for a fixed number of opportunities (that is, without considering the
possibility that a new service offering may result in additional sales opportunities), the addition of subscription services reduces revenue growth rates for several
quarters for the associated solutions until cumulative subscription revenue increases and, potentially, surpasses comparable software license revenue. The revenue
impacts are particularly pronounced early in the introduction of subscription services because there has been only a short time period for accumulation of the
recurring revenue stream. For this reason, we may experience decreased revenue during the time period that our customers shift to subscription services, which may
be a period of multiple years. As we continue to promote subscription-based services, the risk of a negative impact on revenue will continue, with revenue derived
from sales of our EFT solution, the comparable on-premises MFT software in our portfolio, most subject to this ongoing risk from the introduction of these
subscription services.
Subscription offerings create risks related to the timing of revenue recognition.
Although the subscription model is designed to increase the number of customers who purchase our products and services and create a recurring revenue
stream that is more predictable, it creates certain risks related to the timing of revenue recognition and potential reductions in cash flows.
A decline in new or renewed subscriptions in any period may not be immediately reflected in our reported financial results for that period but may result in a
decline in our revenue in future periods. If we were to experience significant downturns in subscription sales and renewal rates, our reported financial results might
not reflect such downturns until future periods. Our subscription model could also make it difficult for us to rapidly increase our revenues from subscription or SaaS-
based services through additional sales in any period as revenue from new customers will be recognized over the applicable subscription term. Increases in sales
under our subscription sales model could result in decreased revenues over the short term if they are offset by a decline in sales from perpetual license customers.
Our cloud and SaaS offerings bring additional business and operational risks.
We offer delivery of several of our products using a SaaS model. Our SaaS offerings provide our customers with existing and new software management
through a cloud service as opposed to traditional on-premises software deployments. There can be no assurance that SaaS revenue will be significant in the future
despite our levels of investment in developing this product delivery method. Margins associated with our SaaS offerings are generally lower than margins associated
with our on-premises solutions.
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SaaS subscription arrangements are under month-to-month agreements. Accordingly, our customers generally have no long-term obligation to us and may
cancel their SaaS subscription at any time. Even if our customers are satisfied with our SaaS products and services, they may elect not to continue their SaaS
subscription. Renewal rates in the future may differ from historical trends such that we may not be able to accurately predict customer renewal rates. Our customers’
renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our services and their ability to continue their
operations and spending levels. If we experience a decline in the renewal rates for our customers or they opt for lower-priced editions of our offerings or fewer
subscriptions, our operating results may be adversely impacted.
There is a risk that we could find it difficult or costly to support both traditional software installed by customers and software delivered as a service. To the
extent that our SaaS offerings are defective or there are disruptions to our services, demand for our SaaS offerings could diminish, and we could be subject to
substantial liability.
Interruptions or delays in service from our third-party service delivery hosts could impair the delivery of our services and harm our business. If we or our
third-party service delivery hosts experience security breaches and unauthorized access is obtained to a customer’s data or our data, our services may be perceived
as not being secure, customers may curtail or stop using our services, and we may incur significant legal and financial exposure and liabilities.
Our success with our SaaS solutions depends on organizations and customers perceiving technological and operational benefits and cost savings
associated with the increasing adoption of virtual infrastructure solutions in lieu of on-premises data centers. Concerns about security, privacy, availability, data
integrity, retention and ownership may negatively impact the rate of adoption of these solutions. SaaS software solutions can be complex, and the deployment of our
secure file transfer solutions in the desired manner may require additional professional services and implementation services for which we may not have the ability to
provide at an appropriate margin. Our SaaS products are dependent upon third-party hardware, software and hosting vendors, all of which must interoperate for end
users to achieve their computing goals. We expect other companies to enter this market and to introduce their own initiatives that may compete with, or not be
compatible with, our cloud solutions.
If any of these events were to occur, our business, results of operations and financial condition could be adversely affected.
We rely on third parties to provide us with a number of operational services, including hosting and delivery of our SaaS products, certain of our customer
support services, and other operations. Any interruption or delay in service from these third parties, breaches of security or privacy, or failures in data
collection could expose us to liability, harm our reputation and adversely impact our financial performance.
We rely on hosted computer services from third parties for certain services that we provide our customers. As we gather customer data and host certain
customer data in third-party facilities, a security breach could compromise the integrity or availability or result in the theft of customer data. In addition, our
operations could be negatively affected in the event of a security breach, and we could be subject to the loss or theft of confidential or proprietary information.
Unauthorized access to this data may be obtained through break-ins, breach of our secure network by an unauthorized party, employee theft or misuse, or
other misconduct. We rely on a number of third-party suppliers in the operation of our business for the provisioning of various services and materials that we use in
the production of our products. Although we seek to diversify our third-party suppliers, we may from time to time rely on a single or limited number of suppliers, or
upon suppliers in a single country, for these services or materials. The inability of such third parties to satisfy our requirements could disrupt our business
operations or make it more difficult for us to implement our business strategy. If any of these situations were to occur, our reputation could be harmed, we could be
subject to third-party liability, including under data protection and privacy laws in certain jurisdictions, and our financial performance could be negatively impacted.
If we are unable to generate significant volumes of sales leads from our various marketing and demand generation efforts then our revenue may not grow as
expected or may decline.
We generate leads through various marketing activities such as targeted email campaigns, attending networking-based trade shows, purchasing information
and services from third-party experts in generating leads, and hosting webinars on enterprise IT management issues. Our marketing efforts may be unsuccessful,
resulting in fewer sales leads. If we fail to generate a sufficient volume of leads from these activities and/or such sales leads do not result in actual sales, our revenue
may not grow as expected or could decrease and our operating results could suffer.
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Some of our sales leads are generated through visits to our websites by potential end-users interested in purchasing or downloading evaluations of our
products. Many of these potential end-users find our websites by searching for secure file transfer products through Internet search engines, such as Google. A
critical factor in attracting potential customers to our websites is how prominently our websites are displayed in response to search inquiries. If we are listed less
prominently or fail to appear in search result listings for any reason, visits to our websites by customers and potential customers could decline significantly. We may
not be able to replace this traffic, and, if we attempt to replace this traffic, we may be required to increase our sales and marketing expenses, which may not be offset
by additional revenue and could adversely affect our operating results.
We rely heavily on third-party service providers to help us identify sales leads. If those service providers become unavailable to us, or if the cost of their
services become more costly than we could afford to pay, our ability to generate a sufficient volume of sales leads could be compromised, and our ability to sustain
or increase our revenue could be adversely affected.
Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales and revenue are difficult to
predict and may vary substantially from period to period, which may cause our results of operations to fluctuate significantly.
Our results of operations may fluctuate, in part, because of the resource intensive nature of our sales efforts, the length and variability of our sales cycle,
and the short-term difficulty in adjusting our operating expenses. Our results of operations depend in part on sales to large organizations. The length of our sales
cycle, from proof of concept to delivery of and payment for our products, is typically three to nine months but can be more than a year. If our competitors offer or
develop products that our prospective customers may want to compare to our products, that situation could cause our average sales cycle to become longer.
Because the length of time required to close a sale varies substantially from customer to customer, it is difficult to accurately predict when, or even if, we will make a
sale to a potential customer. As a result, large individual sales have, in some cases, occurred in periods subsequent to those periods in which we anticipated they
would occur or have not occurred at all. The loss or delay of one or more large transactions in a period could impact our results of operations for that period and any
future periods for which revenue from that transaction is delayed. As a result of these factors, it is difficult for us to forecast accurately our revenue for any particular
period in the future. Because a substantial portion of our expenses are relatively fixed in the short term, our results of operations will suffer if our revenue falls below
expectations in a particular period, which could cause the price of our common stock to decline.
We may acquire new products, capabilities or entire business enterprises in the future that could give rise to risks and challenges that could adversely affect our
future financial results.
Acquisitions of new products, capabilities or entire business enterprises involve a number of risks and challenges, including:
ö= Complexity, time, and costs associated with integration of the acquired business operations, workforce, products, and technologies into our existing
business, sales force, employee base, product lines, marketing and technology which ultimately may not be successful.
ö= Diversion of management time and attention from our existing business and other business opportunities throughout the integration.
ö=
Potential loss or termination of employees, including costs associated with the termination or replacement of those employees.
ö= Assumption of debt or other liabilities of the acquired business, including any future litigation related to alleged liabilities of the acquired business.
ö= The incurrence of additional acquisition-related debt as well as increased expenses and working capital requirements.
ö=
ö=
Potential dilution of earnings per share.
Increased costs and efforts in connection with compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
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ö=
Potentially substantial accounting charges for restructuring and related expenses, write-off of in-process research and development, impairment of
goodwill, amortization of intangible assets, and share-based compensation expense.
The ongoing integration of any acquired products, capabilities or entire business enterprises involves continually determining and leveraging the actual
market synergies, sustaining and even extending the business performance of the acquired entity, implementing our technology systems in the acquired operations,
and integrating and managing the personnel related to the acquired products and/or operations. We also must continue to effectively integrate the different cultures
of acquired business organizations into our own culture in a way that aligns various interests.
Any of the foregoing, and other factors, could harm our ability to achieve anticipated levels of financial performance or to realize other anticipated benefits
of an acquisition. In addition, because acquisitions of technology-based products and companies are inherently risky, no assurance can be given that our previous,
current, or future acquisitions will be successful and will not adversely affect our business, operating results, or financial condition.
Our ability to sell our products is highly dependent on the quality of our support and services offerings. Our failure to offer high-quality support and services
could have a material and adverse effect on our business and results of operations.
Once our products are deployed for use by our end customers, our end customers may depend on our support organization and our channel partners to
resolve issues relating to our products. High-quality support is critical for the successful marketing and sale of our products. If we or our channel partners do not
assist our end customers in deploying our products effectively, succeed in helping our customers resolve post-deployment issues quickly, or provide ongoing
support, it could adversely affect our ability to sell our products to existing end customers and could harm our reputation with other potential end customers. As we
expand our operations internationally, our support organization will face additional challenges, including those associated with delivering support, training and
documentation in languages other than English. Our failure or the failure of our channel partners to maintain high-quality support and services could have a material
and adverse effect on our business and operating results.
If we fail to manage our sales and distribution channels effectively, our operating results could be adversely affected.
We sell our software products both directly to end-users and through a network of distributors and resellers that we collectively refer to as the channel as
well as through marketplaces such as Amazon Web Services and Microsoft Azure. Sales through these different methods involve distinct risks. Risks associated with
direct sales include:
ö= Challenges in scaling the size of the direct sales team to levels required for revenue growth.
ö= Difficulty in hiring, retaining, and motivating our direct sales force.
ö=
Substantial amounts of training for sales representatives to become productive, including regular updates to cover new and revised products.
ö= Leads obtained from paid advertising (for example, Google ads) impacting direct sales should the marketing and advertising effectiveness decline due to
non-attributable declines in leads, unforeseen search engine algorithm changes, or other occurrences that may adversely impact the lead generation
aspects of the direct sales cycle. Increased competition may materially impact the costs associated with such marketing and advertising.
From time-to-time, we make significant changes in the organizational structure and compensation plans of our sales organization, which may increase the risk
of sales personnel turnover. To the extent that we experience turnover within our direct sales force or sales management, there is a risk that the productivity of our
sales force would be negatively impacted which could lead to revenue declines. Turnover within our sales force can cause disruption in sales cycles leading to delay
or loss of business. It can take time to implement new sales management plans and to effectively recruit and train new sales representatives. We review and modify
our compensation plans for the sales organization periodically. Changes to our sales compensation plans could make it difficult for us to attract and retain top sales
talent.
Sales through third-party distributors and resellers involve a number of risks, including:
•
Our lack of control over the timing of delivery of our products to end-users.
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•
•
•
Our resellers and distributors currently not being subject to minimum sales requirements or any obligation to market our products to their customers.
Our reseller and distributor agreements generally being nonexclusive and terminable at any time without cause.
Our resellers and distributors frequently marketing and distributing competing products and, from time to time, placing greater emphasis on the sale of
these products due to pricing, promotions, and other terms offered by our competitors.
For 2017 and 2016, approximately 35% and 37%, respectively, of our revenue was derived from indirect channel sales through distributors and resellers. We
expect that a significant portion of our revenue will continue to be derived from indirect channel sales in the future. Our ability to effectively distribute our products
through those channels depends in part upon the financial and business condition of our distributor and reseller network. Computer software distributors and
resellers typically are not highly capitalized, have previously experienced difficulties during times of economic contraction, and have experienced difficulties during
the past several years. If our distributors and resellers were not be able to sustain their business at a level necessary to sell our products or provide customer support
services, our business and revenue could be negatively impacted.
We rely upon major distributors and resellers in both the U.S. and international regions. Our largest distributor accounted for 14% of our total revenues in
2017 and 2016. Although we believe that we are not substantially dependent on this distributor, if it were to experience a significant disruption with its business or if
our relationship with it were to significantly deteriorate, it is possible that our ability to sell to end users would be, at least temporarily, negatively impacted. This
could, in turn, negatively impact our financial results.
Over time, we have modified and will continue to modify aspects of our relationship with our distributors and resellers, such as their incentive programs,
pricing to them and our distribution model, to motivate and reward them for aligning their businesses with our strategy and business objectives. Changes in these
relationships and underlying programs could negatively impact their business and/or harm our business. In addition, the loss of or a significant reduction in business
with those distributors or resellers or the failure to achieve anticipated levels of sell-through with any one of our major international distributors or large resellers
could harm our business. In particular, if one or more of such distributors or resellers were unable to meet their obligations with respect to our accounts receivable
from them, we could be forced to write off such accounts receivables and may be required to delay the recognition of revenue on future sales to these customers.
These events could have a material adverse effect on our financial results.
Revenue from our Mail Express, Wide Area File Services, CuteFTP and TappIn product lines will likely decline in the future and become a smaller part of our
total revenue.
Revenue from our products and services other than our EFT solution was $1.6 million and $2.2 million in 2017 and 2016, respectively, and accounted for 4.6%
and 6.9% of our total revenue in 2017 and 2016, respectively. As we increase our focus and emphasis on our EFT platform products, our revenue from these products
will likely continue to decline. We incur costs and expenses supporting these products for our customers who are currently using them. If revenue from these
products continues to decline, we may begin to incur losses from these products. The potential for such losses may cause us to decide to sell or discontinue one or
more of these product lines. If we cannot effectively reduce our costs to support these products, or if see decide to sell one or more of these product lines but cannot
find a buyer for them, we may begin incurring losses on these products that could materially affect our results of operations and financial condition.
We may engage third parties to develop products on our behalf. These engagements may involve reliance on resources owned and managed by those third
parties over which we have no direct control.
In addition to research and development of new products by our employees, we engage third parties from time-to-time to conceive, design and develop
products on our behalf. Arrangements of this type involve high levels of risk as a result of inherent uncertainties about the timely delivery and ultimate viability of
those products due to the reliance we must place on third parties to plan, perform and successfully complete work for us. These are processes for which we could
have notably less direct control than if we performed the work ourselves. These arrangements involve our reliance on the ongoing financial viability of the enterprise
performing the work. This risk is challenging to manage because we do not always have clear visibility as to the overall condition of the third-party enterprise. These
risks could result in the product not being successfully completed within the expected timeframe, or at all. If actual results from these type of endeavors that we may
undertake in the future differ materially from original and ongoing expectations, our business, operating results and financial position could be harmed.
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Our ability to develop our software will be seriously impaired if we are not able to use our foreign subcontractors.
We rely on foreign subcontractors to help us develop some aspects of some of our software. If these programmers decided to stop working for us, or if we
were unable to continue using them because of political or economic instability, we would have difficulty finding comparably skilled developers in a timely manner. In
addition, we would likely have to pay considerably more for the same work, especially if we used U.S. personnel. If we could not replace the contract programmers, it
could take us longer to develop certain products and product upgrades and at a higher cost.
Seasonality may cause fluctuations in our revenue.
We believe there could be notable seasonal factors in the future that may cause us to record higher revenue in some quarters compared with others. We
believe this variability is possible largely due to our customers’ budgetary and spending patterns, as many customers spend the unused portions of their
discretionary budgets prior to the end of their fiscal years. For example, we have historically recorded our highest level of revenue in our fourth quarter, which we
believe corresponds to the fourth quarter of a majority of our customers. If our rate of growth slows over time, seasonal or cyclical variations in our operations may
become more pronounced, and our business, results of operations and financial position may be adversely affected.
Reliance on delivery of our products near or at the end of each quarter could cause our revenue for the applicable period to fall below expected levels.
As a result of customer buying patterns and the efforts of our sales force and channel partners to meet or exceed their sales objectives, we have historically
received a substantial portion of orders from our customers and generated a substantial portion of revenue during the last few weeks of each period. A significant
interruption in our IT systems, which manage critical functions such as order processing, trade compliance reviews, delivery of our products, billings, collections,
revenue recognition, and financial reporting, among others, could result in delayed order fulfillment and decreased revenue for that period. If expected revenue at the
end of any period is delayed for any reason, including the failure of anticipated purchase orders to materialize, our logistics or channel partners’ inability to deliver
products prior to period-end to fulfill purchase orders received near the end of the period, our inability to release new products on schedule, any failure of our
systems related to order review and processing, or any delays in product delivery based on trade compliance requirements, our revenue for that period could fall
below our expectations and the estimates of market analysts, if any, which could adversely impact our business and results of operations and cause a decline in the
trading price of our common stock.
Fluctuations in professional services revenue may be greater than experienced in previous reporting periods and have a disproportionate impact on our
financial results. For example, increased professional services sales, especially to the government, may result in lower earnings as a percentage of revenue.
Our solution portfolio includes software licenses, subscription services, M&S, and professional services. Because they are relatively labor intensive,
professional services typically have substantially lower margins than software license sales, M&S and subscription services. Professional services were 6% and 8%
of our total revenue in 2017 and 2016, respectively. However, this percentage can fluctuate significantly from period to period depending on the needs of our
customers.
Depending on our mix of software licenses, subscription, M&S, and professional services revenue in a given reporting period, our earnings as a percentage
of revenue may fluctuate from historical norms. For example, if we were to derive a relatively large (compared to historical norms) component of our revenue from
professional services in a reporting period, earnings as a percentage of revenue may decline in that period due to lower margin contribution from those labor-
intensive services as compared to software license, subscription, and M&S revenue.
We may not be able to compete effectively with larger, better-positioned companies, resulting in lower margins and loss of market share.
We operate in intensely competitive markets that experience rapid technological developments, market consolidation, changes in industry standards,
changes in customer requirements, and frequent new product introductions and product improvements by existing and new competitors. If we are unable to
anticipate or react to these competitive challenges or if existing or new competitors take or gain additional market share in any of our markets, our competitive
position could weaken, and we could experience a decrease in revenues that could adversely affect our business and operating results. To compete successfully, we
must maintain a successful research and development effort to create new products and services and enhance existing products and services, effectively adapt to
changes in the technology or product rights held by our competitors, appropriately respond to competitor strategies as such strategies become apparent, and
effectively adapt to technological changes and changes in the ways that our information is accessed, used, and stored within our enterprise and consumer markets.
If we are unsuccessful in responding to our competitors or to changing technological and customer demands, we could experience a negative effect on our
competitive position and our financial results.
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We compete with a variety of companies that have significantly greater revenues and financial resources, more partners, resellers and distribution channels
than we have, and greater quantities of personnel and technical resources. For example, our EFT solution suite competes with products from IBM Sterling, Ipswitch,
Axway and several other vendors. Our WAFS product competes with Riverbed Technology, Panzura, and Peer Sync. Large companies may be able to develop new
technologies, across multiple solution spaces, and on more operating systems, more quickly than we can, to offer a broader array of products, and to respond more
quickly to new opportunities, industry standards or customer requirements.
Additional competitors may enter the market and also may have significantly greater capabilities and resources than we do. Some existing competitors also
may be able to adopt more aggressive pricing strategies. For example, Ipswitch provides an older version of its consumer file transfer protocol program for free for
non-commercial use, and Microsoft includes file transfer protocol functionality in its Internet browser, which it also distributes for free. Increased competition may
result in lower operating margins and loss of market share.
As we attempt to expand our business, our operating expenses may increase, and we may incur losses.
We intend to expand our business, specifically with regard to new on-premise license sales and SaaS delivery of our products, with increased focus on SaaS
delivery. To do so, we plan to increase our research and development expenditures to accelerate our introduction of new features, functions and capabilities for our
products to the marketplace. We intend to enhance the presence and visibility of those products by increasing our sales and marketing expenditures to expand our
sales force, particularly through a broader reseller program involving more third parties, and by implementing new sales lead generation and marketing initiatives.
These expanded research and development and sales and marketing activities may result in an increase in our operating expenses. If we do not successfully
develop new features, functions and capabilities for our products in a manner that increases license sales of our products, and if our enhanced sales and marketing
activities, including expansion of our third-party reseller programs, are not successful, our revenue may not increase. In that event, our net income could decline or
we may incur losses.
As we develop new products or new features, functions and capabilities for existing products, we capitalize certain of our costs related to those activities and
defer the expense arising from those activities to future periods.
In accordance with GAAP, we capitalize certain of our costs related to the development of new products or new features, functions and capabilities for
existing products. We present these capitalized costs as an asset on our balance sheet. We amortize these costs to expense in future periods after these work
products are completed and released for sale so as to match these expenses the associated revenue we earn in the future. If we were to deem these capitalized costs
not to be realizable through future revenue and accordingly had to reduce the carrying value of these assets, possibly to zero, we could incur significant expenses
earlier than anticipated.
Our products are complex and operate in a wide variety of computer configurations, which could result in errors or product failures.
Addressing MFT both on-premise licenses and SaaS models typically requires very complex products. Undetected errors, failures, or bugs may occur,
especially when products are first introduced or when new versions are released. Our products are often installed and used in large-scale computing environments
with different operating systems, system management software, and equipment and networking configurations, which may cause errors or failures in our products or
may expose undetected errors, failures, or bugs in our products. Our customers’ computing environments also are often characterized by a wide variety of standard
and non-standard configurations that make pre-release testing for programming or compatibility errors very difficult and time-consuming. In addition, despite testing
by us and others, errors, failures, or bugs may not be found in new products or releases until after commencement of commercial shipments. In the past, we have
discovered software errors, failures, and bugs in certain of our product offerings after their introduction and have experienced delayed or lost revenues during the
time required to correct these errors.
Errors, failures, or bugs in products released by us could result in negative publicity, product returns, loss of or delay in market acceptance of our products,
loss of competitive position, or claims by customers or others. Many of our end-user customers use our products in applications that are critical to their businesses
and may have a greater sensitivity to defects in our products than to defects in other, less critical, software products. In addition, if an actual or perceived breach of
information integrity or availability occurs in one of our end-user customer’s systems, regardless of whether the breach is attributable to our products, the market
perception of the effectiveness of our products could be harmed. Alleviating any of these problems could require significant expenditures of our capital and other
resources and could cause interruptions, delays, or cessation of our product licensing, which could cause us to lose existing or potential customers and could
adversely affect our operating results.
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Our business is subject to the risks of warranty claims, product returns, product liability and product defects.
Real or perceived errors, failures or defects in our products could result in claims by customers for losses that they sustain. If customers make these types
of claims, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem. Liability
provisions in our standard terms and conditions of sale, and those of our resellers and distributors, may not be enforceable under some circumstances or may not
fully or effectively protect us from customer claims and related liabilities and costs, including indemnification obligations under our agreements with resellers and
distributors. The sale and support of our products also entail the risk of product liability claims. We maintain insurance to protect against certain types of claims
associated with the use of our products, but our insurance coverage may not adequately cover any such claims. Even claims that ultimately are unsuccessful could
result in expenditures of funds in connection with litigation and divert management’s time and other resources.
Turmoil and uncertainty in U.S. and international economic markets could adversely affect our business and operating results.
Demand for our products depends in large part upon the level of capital and maintenance expenditures by many of our customers. Economic downturns
could have an adverse effect on spending on information technology projects since in such environments, prospects and customers may reduce, sometimes greatly,
their discretionary spending to focus on preserving mandatory spending budgets.
These adverse impacts to customer spending may be directly, and adversely, reflected in our future business and operating results because we believe a
substantial part of their MFT spending budget is considered discretionary by our prospects and customers. The perception of MFT solutions spending as
discretionary is further reinforced by the existence of low cost, or even free, products that deliver some subset of the capabilities found in our solutions. In the event
of an economic downturn, some customers may decide to defer spending for our solutions or may elect to obtain low cost or free “good enough” products as an
interim measure. The potential adverse impacts of such decisions may persist for an extended period of time, even well into a period of economic recovery, given that
many prospects will not change their IT infrastructure for a considerable period of time after that infrastructure has been installed and is operating adequately.
Adverse financial results from another economic downturn and uncertainty could include flat, or even decreasing, sales, lower gross and net margins, and
impairment of current or future goodwill and long-lived assets. In addition, some of our customers could delay paying their obligations to us. Potentially reduced
sales and margins and customer payment problems could limit our ability to fund research and development, marketing, sales, and other activities necessary to
sustain and expand our market position.
In past economic downturns, we have sometimes experienced a decrease in our stock price. If investors have concerns that our business, financial condition
and results of operations will be negatively impacted by another economic downturn, our stock price could decrease again.
Regardless of economic conditions, fluctuations in demand for our products and services are driven by many factors and a decrease in demand for our products
could adversely affect our financial results.
We are subject to fluctuations in demand for our products and services due to a variety of factors, including competition, product obsolescence,
technological change, budget constraints of our actual and potential customers, awareness of security threats to IT systems, and other factors. While such factors
may, in some periods, increase product sales, fluctuations in demand can also negatively impact our product sales. If demand for our products declines, our
revenues, as well as our gross and net margins, could be adversely affected.
Sales to the U.S. Government make up a portion of our business, and changes in government defense spending could have consequences on our financial
position, results of operations and business.
Our revenues from the U.S. Government largely result from contracts awarded to us under various U.S. Government programs, primarily defense-related
programs with the Department of Defense (“DoD”). The funding of our programs is subject to the overall U.S. Government foreign policy, budget and appropriation
decisions, and processes which are driven by numerous factors, including geo-political events and macroeconomic conditions, and are beyond our control. Projected
defense spending budgets are uncertain and difficult to predict.
Significant changes in defense spending could have long-term consequences for our size and structure. Changes in government priorities and requirements
could impact the funding, or the timing of funding, of our programs which could negatively impact our results of operations and financial condition. Government
contracts typically have long sales cycles such that closure of such contracts is difficult to predict.
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U.S. Government contracts generally also permit the government to terminate the contract, in whole or in part, without prior notice, at the government’s
convenience or for default based on performance. A termination arising out of our default could expose us to liability and have a negative impact on our ability to
obtain future contracts and orders. Furthermore, on contracts for which we are a subcontractor and not the prime contractor, the U.S. Government could terminate the
prime contract for convenience or otherwise, irrespective of our performance as a subcontractor.
Because we are a DoD contractor, certain of our items and/or transactions may be subject to the International Traffic in Arms Regulations (“ITAR”) if our
software or services are specifically designed or modified for defense purposes. Companies engaged in manufacturing or exporting ITAR-controlled goods and
services (even if these companies do not export such items) are required to register with the U.S. State Department. Failure to comply with these requirements could
result in fines and sanctions which could negatively impact our results of operations and financial condition.
If we lose key personnel we may not be able to execute our business plan.
Our future success depends on the continued services of our employees. If employees leave, it can be difficult to replace them because of the intense
competition in the marketplace for people with the skillsets we need to operate our business. New employees may not be productive for weeks or months as they
learn about our solutions, our personnel and the administrative practices within our company.
It may be difficult for us to recruit and retain software developers and other technical and management personnel because we are a relatively small company.
We compete intensely with other software development and distribution companies domestically and internationally as well as information technology
departments supporting larger businesses all of whom strive to recruit and hire employees from a limited pool of qualified personnel. Some qualified candidates prefer
to work for larger, better known companies or in another geographic area. In order to attract and retain personnel in a competitive marketplace, we believe that we
must provide a competitive compensation package, including cash, equity-based compensation, and other employee benefits including medical insurance and
healthcare plans. The volatility in our stock price may from time to time adversely affect our ability to recruit or retain employees. In addition, we may be unable to
obtain required stockholder approvals of future increases in the number of shares available for issuance under our equity compensation plans. Also, accounting
rules require us to treat the issuance of employee stock options and other forms of equity-based compensation as compensation expense. As a result, we may decide
to issue fewer equity-based incentives and may be impaired in our efforts to attract and retain necessary personnel. If we are unable to hire and retain qualified
employees, or conversely, if we fail to manage employee performance or reduce staffing levels when required by market conditions, our business and operating
results could be adversely affected.
Key personnel have left our company in the past. There likely will be additional departures of key personnel from time to time in the future. The loss of any
key employee could result in significant disruptions to our operations, including adversely affecting the timeliness of product releases, the successful implementation
and completion of company initiatives, the effectiveness of our disclosure controls and procedures and our internal control over financial reporting, and the results of
our operations. Hiring, training, and successfully integrating replacement sales, engineering, and other personnel could be time consuming, may cause additional
disruptions to our operations, and may be unsuccessful, which could negatively impact future revenues.
Our operations potentially are vulnerable to security breaches that could harm the quality of our products and services or disrupt our ability to deliver our
products and services.
Information security is a dynamic discipline that historically has faced threats that develop and emerge in ways that are sometimes unpredictable. Third
parties may breach our systems and information security and damage our products and services or misappropriate confidential customer information. This might
cause us to lose customers, or even cause customers to make claims against us for damages. We may be required to expend significant resources to protect against
potential or actual security breaches and/or to address problems caused by such breaches.
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Improper disclosure of personal data could result in liability and harm our reputation.
While we have derived the majority of our historical revenues from on-premises delivery of our products, we now also offer our products on third-party,
hosted platforms. As we continue to execute our strategy of increasing the number and scale of our cloud-based offerings, we may store and process increasingly
large amounts of personally identifiable information of our customers. At the same time, the continued occurrence of high-profile data breaches provides evidence of
an external environment increasingly hostile to information security. This environment demands that we continuously improve our design and coordination of
security controls. It is possible our security controls over personal data, our training of employees and vendors on data security, and other practices we follow may
not prevent the improper disclosure of personally identifiable information. Improper disclosure of this information could harm our reputation, lead to legal exposure to
customers, or subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue. We believe consumers using our
subscription services increasingly will want efficient, centralized methods of choosing their privacy preferences and controlling their data. Perceptions that our
products or services do not adequately protect the privacy of personal information could inhibit sales of our products or services and could constrain consumer and
business adoption of cloud-based solutions.
Breaches of our cybersecurity systems could degrade our ability to conduct our business operations and deliver products and services to our customers, delay
our ability to recognize revenue, compromise the integrity of our software products, result in significant data losses and the theft of our intellectual property,
damage our reputation, expose us to liability to third parties and require us to incur significant additional costs to maintain the security of our networks and
data.
We increasingly depend upon our IT systems to conduct virtually all of our business operations, ranging from our internal operations and product
development activities to our marketing and sales efforts and communications with our customers and business partners. Cyber threats may attempt to penetrate our
network security, or that of our website, and misappropriate our proprietary information or cause interruptions of our service. Because the techniques used by such
attackers to access or sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these
techniques. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in
design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. We have also outsourced a number
of our business functions to third-party contractors. Therefore, our business operations also depend, in part, on the success of our contractors’ own cybersecurity
measures. Similarly, we rely upon distributors, resellers, system vendors and systems integrators to sell our products and our sales operations depend, in part, on the
reliability of their cybersecurity measures. Additionally, we depend upon our employees to appropriately handle confidential data and deploy our IT resources in a
safe and secure fashion that does not expose our network systems to security breaches and the loss of data. Accordingly, if our cybersecurity systems and those of
our contractors fail to protect against unauthorized access, sophisticated cyber-attacks and the mishandling of data by our employees and contractors, our ability to
conduct our business effectively could be damaged in a number of ways, including:
Sensitive data regarding our business, including intellectual property and other proprietary data, could be stolen.
ö=
ö= Our electronic communications systems, including email and other methods, could be disrupted, and our ability to conduct our business operations
could be seriously damaged until such systems can be restored.
ö= Our ability to process customer orders and electronically deliver products and services could be degraded, and our distribution channels could be
disrupted, resulting in delays in revenue recognition.
ö= Defects and security vulnerabilities could be introduced into our software products, thereby damaging the reputation and perceived reliability and
security of our products and potentially making the data systems of our customers vulnerable to further data loss and cyber incidents.
Personally identifiable data of our customers, employees and business partners could be lost.
ö=
Should any of the above events occur, we could be subject to significant claims for liability from our customers or from regulatory actions of governmental
agencies, our ability to protect our intellectual property rights could be compromised and our reputation and competitive position could be significantly harmed.
Also, the regulatory and contractual actions, litigations, investigations, fines, penalties and liabilities relating to data breaches that result in losses of personally
identifiable or credit card information of users of our services could be significant in terms of fines and reputational impact and necessitate changes to our business
operations that may be disruptive to us. Additionally, we could incur significant costs in order to upgrade our cybersecurity systems and remediate damages.
Consequently, our financial performance and results of operations could be adversely affected.
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Certain components of the software code comprising some of our products are licensed from third parties making us dependent upon those licenses remaining in
place for those products to operate in their current form.
Certain key components of the software code comprising certain of our products are licensed from unrelated, third parties. These licenses are not perpetual
and, as such, with advance notice as provided in the license agreements, these third parties could terminate these licenses. Even with advance notice, termination of
these licenses could create a severe hardship for us due to the need to locate substitute software code from other third parties or create alternative software code
ourselves in order for our products to continue to operate in the manner designed or for us to keep pace with customer requirements, including our obligations under
maintenance and support agreements. There is no assurance we could achieve either of those alternative solutions in a timely and effective manner that would not
disrupt our ability to continue selling and supporting those products, or without the consumption of significant company resources in the form of time spent by our
personnel creating alternative solutions or cash paid to third parties to assist us. Such a situation could delay the completion and introduction to the marketplace of
other products we are developing to remain competitive due to the diversion of the attention of certain of our key personnel away from that work. If any of these
events occur, our future business and financial results could be adversely affected.
We utilize “open source” software in some of our products.
The open source software community develops software technology for free use by anyone. We incorporate a limited amount of open source code software
into our products. We may use more open source code software in the future.
Our use, in some instances, of open source code software may impose limitations on our ability to commercialize our solutions and may subject us to
possible intellectual property litigation. Open source code may impose limitations on our ability to commercialize our products because, among other reasons, open
source license terms may be ambiguous and may result in unanticipated obligations regarding our solution, and open source software cannot be protected under
trade secret law. In addition, it may be difficult for us to accurately determine the identities of the developers of the open source code and whether the acquired
software infringes third-party intellectual property rights. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open
source software. From time to time, companies that incorporate open source software into their products have been subject to such claims.
Claims of infringement or misappropriation against us could be costly for us to defend and could require us to re-engineer our solution or to seek to obtain
licenses from third parties in order to continue offering our solution. We also might need to discontinue the sale of our solution in the event re-engineering could not
be accomplished on a timely or cost-effective basis. If any such claim, attempted remediation, or solution discontinuance occur, our business and operating results
could be harmed.
Our products may expose customers to invasion of privacy, causing customer dissatisfaction or possible claims against us for damages.
Our products and solutions are intended to facilitate data and information transfer and sharing, sometimes by providing outsiders access to a customer’s
computer. Such access potentially may make the customer vulnerable to security breaches, which could result in the loss of the customer’s privacy or property.
Invasions of privacy or other customer harm occurring in an environment where our solutions are operating could result in customer dissatisfaction and possible
claims against us for any resulting damages.
We are subject to governmental export and import controls, and sanctions laws that could subject us to liability or impair our ability to compete in
international markets.
All products that are exported, re-exported or that are worked on by foreign nationals are subject to export controls. Such controls include prohibitions on
end uses, end users and exports to certain sanctioned countries. In addition, incorporation of encryption technology into our products increases the level of U.S.
export controls. We are subject to these requirements as certain of our products include the ability for the end user to encrypt data. Therefore, our products may be
exported outside the United States or revealed to foreign nationals only by complying with the required level of export controls/restrictions. Restrictions applicable to
our products may include a requirement to have a license to export the technology, a requirement to have software licenses approved before export is allowed, and
outright bans on the licensing of certain encryption technology to particular end users or to all end users in a particular country. In addition, various countries
regulate the import and re-export of certain technology and have enacted laws that could limit our ability to distribute our products or could limit our customers’
ability to implement our products in those countries or that make it a violation for us to comply with U.S. sanctions requirements.
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There can be no assurance that we will be successful in obtaining or maintaining the licenses and other authorizations required to export our products from
applicable government authorities. Any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing
regulations, changes in the list of countries to which we cannot export, or changes in persons or technologies targeted by such regulations could result in decreased
use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. Changes in our
products or changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with
international operations from deploying our products throughout their global systems or, in some cases, prevent the export or import of our products to certain
countries, companies or individuals altogether. Any change in export, import or sanctions regulations or related legislation, a shift in approach to the enforcement or
scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or
in our decreased ability to export or sell our products to, existing or potential customers with international operations.
Export and sanctions laws and regulations can be extremely complex in their application. If we are found not to have complied with applicable export control
or sanctions laws, we may be sanctioned, fined or penalized by, among other things, having our ability to obtain export licenses curtailed or eliminated, possibly for
an extended period of time. Our failure to receive or maintain any required export licenses or authorizations or our being penalized for failure to comply with applicable
export control or sanctions laws would hinder our ability to sell our products, could result in financial penalties, and could materially adversely affect our business,
financial condition, and results of operations. Any failure on our part or the part of our distributors to comply with encryption or other applicable export control or
sanctions requirements could harm our business and operating results.
Import and export regulations of encryption/decryption technology vary from country to country. We may be subject to different statutory or regulatory
controls, including licensing requirements, in different foreign jurisdictions, and as such, importation or re-exportation of our technology may not be permitted in
these foreign jurisdictions. Violations of foreign regulations or regulation of international transactions could prevent us from being able to sell our products in
international markets. Our success depends in large part on our having access to international markets. A violation of foreign regulations could limit our access to
such markets and have a negative effect on our results of operations.
As our international sales grow, we could become increasingly subject to additional risks that could harm our business.
We conduct significant sales and customer support in countries outside of the United States. Approximately 25% and 23% of our sales were to purchasers
outside the United States in 2017 and 2016, respectively. If our sales outside the United States increase, we may be required to further expand our international
operations. To successfully expand international sales, we must establish additional foreign operations, hire additional personnel, including regulatory compliance
professionals, and recruit additional international resellers. We may also incur additional expense translating our applications into additional languages. In addition,
there is significant competition for entry into high growth markets. Our international operations are subject to a variety of risks, which could cause fluctuations in the
results of our international operations. These risks include:
Potential increase in expenses to comply with international data protection laws.
ö= Compliance with foreign regulatory and market requirements.
ö= Variability of foreign economic, political and labor conditions.
ö= Changing restrictions imposed by regulatory requirements, tariffs or other trade barriers or by U.S. export laws.
ö=
ö= The imposition by the United States government of sanctions on countries, individuals or business entities.
ö= Longer accounts receivable payment cycles.
Potentially adverse tax consequences.
ö=
ö= Difficulties in protecting intellectual property.
ö= Burdens of complying with a wide variety of foreign laws.
ö= Difficulty transferring funds to the U.S. in a tax efficient manner from non-U.S jurisdictions in which the cash flow originates.
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We are subject to risks associated with compliance with laws and regulations globally which may harm our business.
We are a global company subject to varied and complex laws, regulations and customs domestically and internationally. These laws and regulations relate to
a number of aspects of our business, including trade protection, import and export control, sanctions laws, data and transaction processing security, payment card
industry data security standards, records management, user-generated content hosted on websites we operate, corporate governance, employee and third-party
complaints, gift policies, conflicts of interest, employment and labor relations laws, securities regulations and other regulatory requirements affecting trade and
investment. The application of these laws and regulations to our business is often unclear and may at times conflict. Compliance with these laws and regulations may
involve significant costs or require changes in our business practices that result in reduced revenue and profitability. Non-compliance could also result in fines,
damages, or criminal sanctions against us, our officers or our employees, prohibitions on the conduct of our business, and damage to our reputation. We incur
additional legal compliance costs associated with our global operations and could become subject to legal penalties if we fail to comply with local laws and
regulations in U.S. jurisdictions or in foreign countries, which laws and regulations may be substantially different from those in the U.S.
In many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by U.S.
regulations applicable to us, including the Foreign Corrupt Practices Act. Although we implement policies and procedures designed to ensure compliance with these
laws, there can be no assurance that all of our employees, contractors and agents, as well as those companies to which we outsource certain of our business
operations, including those based in or from countries where practices that violate such U.S. laws may be customary, will not take actions in violation of our internal
policies. Any such violation, even if prohibited by our internal policies, could have an adverse effect on our business.
Our interaction with foreign parties can also increase our costs with respect to compliance. For example, the EU has recently adopted a comprehensive
overhaul of its data protection regime from the current national legislative approach to a single European Economic Area Privacy Regulation, the GDPR, which came
into effect in May 2018. The EU data protection regime extends the scope of the EU data protection law to all foreign companies processing data of EU residents. It
imposes a strict data protection compliance regime with severe penalties of up to the greater of 4% of worldwide turnover and € 20 million and includes new rights
such as the “portability” of personal data. Although the GDPR will apply across the EU without a need for local implementing legislation, as has been the case under
the current data protection regime, local data protection authorities (“DPAs”) will still have the ability to interpret the GDPR, which has the potential to create
inconsistencies on a country-by-country basis. Since we act as a data processor for our SaaS customers, we are taking steps to cause our processes to be compliant
with applicable portions of the GDPR, but we cannot assure you that such steps will be effective. We have adopted policies to comply with the GDPR, but ongoing
implementation and maintenance of compliance regimes could require changes to certain of our business practices, thereby increasing our costs.
Failure to comply with existing or future privacy and data use and security laws, regulations, and requirements to which we are subject or could become
subject, including by reason of inadvertent disclosure of confidential information, could result in fines, sanctions, penalties or other adverse consequences and loss
of consumer confidence, which could materially adversely affect our results of operations, overall business and reputation especially since we market our products as
a means by which compliance can be achieved.
Failure to maintain proper and effective internal controls has affected, and could in the future affect, our ability to produce accurate financial statements which
has resulted, and could in the future result, in the restatement of our consolidated financial statements, and such failure to maintain proper and effective
internal controls could adversely affect our operating results, our ability to operate our business, and our stock price.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We maintain a system of internal control
over financial reporting, which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or
persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our management has determined that our
internal control over financial reporting was not effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external reporting purposes in accordance with GAAP as of December 31, 2017.
Failure to establish and maintain appropriate internal financial reporting controls and procedures has caused us to fail to meet our reporting obligations,
resulted in the restatement of our financial statements, harmed our operating results, subjected us to regulatory scrutiny and investigation, potentially caused
investors to lose confidence in our reported financial information, and had a negative effect on the market price for shares of our common stock. Failure to remediate
our material weaknesses and control deficiencies with respect to our internal control over financial reporting could result in similar consequences in the future.
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There are inherent limitations in all control systems, and misstatements due to error or fraud have occurred and may occur again in the future and not be
detected.
The ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 require us to identify material weaknesses in internal control over
financial reporting, which is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with GAAP.
Our management, including our principal executive officer and principal financial officer, does not expect that our internal controls and disclosure controls, even once
all material weaknesses and control deficiencies are remediated, will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact
that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances of fraud in our company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Further, controls can be circumvented
by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls is also
based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated
goals under all potential future conditions. Over time, a control may be inadequate because of changes in conditions, such as growth of the company or increased
transaction volume, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur again in the future and not be detected.
In addition, discovery and disclosure of a material weakness, such as those material weaknesses we have previously discovered and disclosed, by
definition, could have a material adverse impact on our financial statements. Such an occurrence could discourage certain customers or suppliers from doing business
with us and affect how our stock trades. This could, in turn, negatively affect our ability to access public debt or equity markets for capital.
The amount of income taxes we compute as payable on our income tax returns filed with the Internal Revenue Service and certain states could be challenged by
those taxing authorities resulting in us paying more taxes than anticipated.
We file income tax returns with the Internal Revenue Service and taxing authorities in certain states. We prepare and file those returns based on our
interpretations of the relevant tax code as to revenue to be reported and deductions and credits allowed. We use third-party experts to assist us in preparing our tax
returns and computing our tax liabilities to help us ensure we pay the proper amount of tax due. Our tax returns are subject to examination by taxing authorities that
could interpret the tax code in a different manner from us and conclude we are obligated to pay more taxes than we originally computed and paid. While we would
defend the position taken on our tax returns as filed, a challenge from a taxing authority can be costly to defend with no assurance of a favorable outcome for us. In
the event of an unfavorable result under these circumstances, our business, operating results and financial position could be harmed.
The amount of sales tax we collect on sales could be challenged by taxing authorities both in jurisdictions in which we have a corporate presence as well as by
taxing authorities in areas where we have no corporate presence.
We collect and remit sales tax on sales in jurisdictions where we have a corporate or physical presence that results in an obligation to do so. We sell our
products to customers in numerous locations where we do not have a corporate or physical presence and, therefore, do not collect sales tax on those sales. States in
which we collect sales tax could audit our activities and assess us with additional tax based on their interpreting the sales tax code differently than we interpret it.
Various states in which we do not collect sales tax are aggressive in interpreting their sales tax codes in determining if a company with no apparent presence in those
states is obligated to collect and remit sales taxes, particularly on sales made across the Internet. States where we do not collect sales tax could make an assertion
that we should have been collecting sales tax and could assess us with that tax. While we would defend our position taken as to our obligation to collect sales tax
and the amount of sales tax collected, a challenge from a taxing authority can be costly to defend with no assurance of a favorable outcome for us. In the event of an
unfavorable result under these circumstances, our business, operating results and financial position could be harmed.
Risks Related to Stock Ownership
Our stock price is, and may continue to be, volatile.
The trading price of our common stock has been and could continue to be subject to wide fluctuations in response to certain factors, including:
ö= U.S. and global economic conditions leading to general declines in market capitalizations, with such declines not associated with operating performance.
ö= Quarter-to-quarter variations in results of operations.
ö= Our announcements of new products.
ö= Our announcements of acquisitions.
ö= Our announcements of significant new customers or contracts.
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ö= Our competitors’ announcements of new products.
ö= Our product development or release schedule.
ö= Changes in our management team.
ö= General conditions in the software industry.
ö=
Investor perceptions and expectations regarding our products, plans and strategic position and those of our competitors and customers.
In addition, the public stock markets experience extreme price and trading volume volatility, particularly in high-technology sectors of the market. This
volatility has significantly affected the market prices of securities of many technology companies for reasons often unrelated to the operating performance of the
specific companies. The broad market fluctuations may adversely affect the market price of our common stock.
Accounting charges may cause fluctuations in our annual or quarterly financial results.
Our financial results may be affected by non-cash and other accounting charges, including:
ö= Amortization of intangible assets, including acquired technology and product rights.
ö= Acquisition expenses.
ö=
ö=
Impairment of goodwill and intangibles.
Share-based compensation expense.
ö= Restructuring charges.
ö=
Impairment of long-lived assets.
ö= Reserves for uncertain tax positions.
Anti-takeover provisions in our charter and Delaware law could inhibit others from acquiring us.
Some of the provisions of our certificate of incorporation and bylaws and in Delaware law could, together or separately:
ö= Discourage potential acquisition proposals.
ö= Delay or prevent a change in control.
ö= Limit the price that investors may be willing to pay in the future for shares of our common stock.
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In particular, our certificate of incorporation and bylaws prohibit stockholders from voting by written consent or calling meetings of the stockholders. We
are also subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of
business combinations with any interested stockholder, as defined in the statute, for a period of three years following the date on which the stockholder became an
interested stockholder.
Our directors and executive officers continue to have substantial control over us.
Our directors and executive officers, together with their affiliates and related persons, beneficially owned, in the aggregate, approximately 20% of our
outstanding common stock as of March 31, 2018. These stockholders would have the ability to substantially control our operations and direct our policies including
the outcome of matters submitted to our stockholders for approval, such as the election of directors and any acquisition or merger, consolidation or sale of all or
substantially all of our assets. In addition, our certificate of incorporation and bylaws provide for our Board of Directors to be divided into three classes of directors
serving staggered three-year terms. As a result, approximately one-third of our Board of Directors will be elected each year.
Stockholders’ ownership of our stock may be significantly diluted as a result of the exercise of stock options, thereby affecting the value of the stock.
There were options to purchase 2,665,210 shares of our common stock outstanding under our employee and director stock option plans as of December 31,
2017, of which options to purchase 1,124,109 shares were vested. We have filed registration statements under the Securities Act of 1933, as amended (the “Securities
Act”), covering stock issued upon the exercise of options by non-affiliates, and we may file a registration statement covering options held by affiliates as well. If we
do not file a registration statement covering affiliates, affiliates who exercise their options may choose to sell the stock under an exemption from registration, such as
Rule 144 under the Securities Act. The exercise of these options and sale of the resulting stock could depress the value of our stock.
Risks Related to Intellectual Property
We are vulnerable to claims that our products infringe third-party intellectual property rights particularly because our products are partially developed by
independent parties.
From time to time, we experience claims that our products infringe third-party intellectual property rights. We may be exposed to future litigation based on
claims that our products infringe the intellectual property rights of others. This risk is exacerbated by the fact that some of the code in our products is developed by
independent parties or licensed from third parties over whom we have less control than we exercise over internal developers. In addition, we expect that infringement
claims against software developers will become more prevalent as the number of products and developers grows and the functionality of software programs in the
market increasingly overlaps. Companies in the technology industry, and other patent and trademark holders seeking to profit from royalties in connection with
grants of licenses, own large numbers of patents, copyrights, trademarks, service marks, and trade secrets and frequently enter into litigation based on allegations of
infringement or other violations of intellectual property rights. In addition, we may be the target of aggressive and opportunistic enforcement of patents by third
parties, including non-practicing entities.
Responding to and defending against such claims may cause us to incur significant expense and divert the time and efforts of our management and
employees. Successful assertion of such claims could require that we pay substantial damages or ongoing royalty payments, prevent us from selling our products
and services, damage our reputation, or require that we comply with other unfavorable terms, any of which could materially harm our business. In addition, we may
decide to pay substantial settlement costs in connection with any claim or litigation, whether or not successfully asserted.
While it is not possible to predict the outcome of patent litigation incidents to our business, defense costs may be significant, and we believe the costs
associated with this litigation or other claims of infringement could generally have a material adverse impact on our results of operations, financial position or cash
flows. Regardless of the merit of such claims, responding to infringement claims can be expensive and time-consuming.
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For any intellectual property rights claim against us or our customers, we may have to pay damages and indemnify our customers against damages.
Claims of infringement could require us to re-engineer our products or seek to obtain licenses from third parties in order to continue offering our products in
a manner that may include licensing technologies from others. In addition, an adverse legal decision affecting our intellectual property, or the use of significant
resources to defend against this type of claim could place a significant strain on our financial resources and harm our reputation.
We may not be able to protect our intellectual property rights.
Our software code and trade and service marks are some of our most valuable assets. Given the global nature of the Internet and our business, we are
vulnerable to the misappropriation of this intellectual property, particularly in foreign markets, such as China and Eastern Europe, where laws or law enforcement
practices are less developed. The global nature of the Internet makes it difficult to control the ultimate destination or security of our software making it more likely
that unauthorized third-parties will copy certain portions of our proprietary information or reverse engineer the proprietary information used in our programs. If our
proprietary rights were infringed by a third-party and we did not have adequate legal recourse, our ability to earn profits, which are highly dependent on those rights,
would be severely diminished.
Other companies may own, obtain or claim trademarks that could prevent, limit or interfere with our use of our trademarks.
Our various trademarks are important to our business. If we were to lose the use of any of our trademarks, our business would be harmed and we would have
to devote substantial resources towards developing an independent brand identity. Defending or enforcing our trademark rights at a local and international level
could result in the expenditure of significant financial and managerial resources.
Risks Related to the Investigation and the Restatement
Matters relating to or arising from our Audit Committee investigation, including regulatory proceedings, litigation matters and potential additional expenses,
may adversely affect our business and results of operations.
As previously disclosed in our public filings and in this Form 10-K, the Audit Committee has recently completed the investigation relating to revenue
recognition. We are also the subject of an investigation by the SEC related to these matters.
We have incurred significant expenses related to legal, accounting, and other professional services in connection with the Audit Committee investigation
and related matters and related remediation efforts. The expenses incurred, and expected to be incurred, in connection with the Audit Committee and SEC
investigations, the impact of our delay in 2017 and to date in 2018 in meeting our periodic reporting requirements on the confidence of investors, employees and
customers, and the diversion of the attention of the management team that has occurred, and is expected to continue, has adversely affected, and could continue to
adversely affect, our business, financial condition and results of operations or cash flows.
As a result of the matters reported above, we are exposed to greater risks associated with litigation, regulatory proceedings and government enforcement
actions. In addition, we have incurred significant legal expenses in connection with a securities class action that has been filed against us and certain of our directors
and officers. Any future investigations or additional lawsuits may adversely affect our business, financial condition, results of operations and cash flows.
We have restated our consolidated financial statements, which may lead to additional risks and uncertainties.
As discussed in Note 15 to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data”, of our Form 10-
K/A filed on June 14, 2018, we have restated our consolidated financial statements as of and for the years ended December 31, 2016 and 2015. The determination to
restate these consolidated financial statements was made by our Audit Committee upon management’s recommendation. As a result of these events, we have become
subject to a number of additional risks and uncertainties, including substantial unanticipated accounting and legal fees in connection with or related to the
Restatement. Likewise, such events might cause a diversion of our management’s time and attention.
We are also subject to claims, investigations and proceedings arising out of the Restatement. For additional information regarding this litigation, see Part I,
Item 3, “Legal Proceedings”, of this Form 10-K.
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The restatement of our previously issued financial results has resulted in private litigation and could result in private litigation judgments that could have a
material adverse impact on our results of operations and financial condition.
We are subject to shareholder litigation relating to the restatement of our previously filed financial statements and to certain of our previous public
disclosures. For additional discussion of this litigation, see Part I, Item 3, “Legal Proceedings”, of this Form 10-K. Our management has been, and may in the future
be, required to devote significant time and attention to this litigation, and this and any additional matters that arise could have a material adverse impact on our
results of operations and financial condition as well as on our reputation. While we cannot estimate our potential exposure in these matters at this time, we have
already incurred significant expense defending this litigation and expect to continue to need to incur significant expense in the defense.
The existence of the litigation may have an adverse effect on our reputation with our customers, which could have an adverse effect on our results of
operations and financial condition.
We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, result in additional material
misstatements in our consolidated financial statements.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). As disclosed in Part II, Item 9A, management has identified material weaknesses in our internal
control over financial reporting.
A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. In connection
with our management’s assessment of our internal control over financial reporting, our management identified the following deficiencies that constituted individually,
or in the aggregate, material weaknesses in our internal control over financial reporting as of December 31, 2017.
We had material weaknesses in our control environment and monitoring:
ö= We did not implement effective oversight of our finance and accounting processes (including organizational structure and reporting hierarchy),
which impacted our ability to make appropriate decisions regarding revenue recognition.
ö= We did not effectively design and implement appropriate oversight controls over our period-end financial closing and reporting processes, and our
review controls were not sufficient to ensure that errors regarding revenue recognition would be detected.
ö= We did not effectively monitor (review, evaluate and assess) the risks associated with key internal control activities that provide the revenue
information contained in our financial statements.
We had material weaknesses related to internal control monitoring and activities to support the financial reporting process:
ö= We did not maintain effective controls over the invoicing process to ensure that proper supporting documentation was received prior to preparing
invoices.
ö= We did not maintain effective controls over the revenue recognition process to ensure revenue was only recognized when all four criteria of our
revenue recognition policy were met.
Because of these material weaknesses, our management concluded that our internal control over financial reporting was not effective based on criteria set
forth by the Committee of Sponsoring Organization of the Treadway Commission in Internal Control-An Integrated Framework (2013).
As disclosed in Part II, Item 9A, we have developed and are in the process of implementing remediation plans designed to address these material
weaknesses. If our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our
internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate
our financial results, which could lead to substantial additional costs for accounting and legal fees.
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Any additional revisions or restatements of our consolidated financial statements may lead to a further loss of investor confidence and have a negative
impact on the trading prices of our securities. Any of these matters could adversely affect our business, reputation, revenues, results of operations and financial
condition and limit our ability to access the capital markets through equity or debt issuances.
We face risks related to an ongoing Securities and Exchange Commission investigation.
On January 11, 2018, we received a subpoena from the SEC which has since opened a formal investigation relating to, among other things, the Restatement
(the “SEC Investigation”). See Part I, Item 3, “Legal Proceedings” of this Form 10-K for a discussion of the SEC Investigation. We are cooperating fully with the SEC
Investigation. At this point, we are unable to predict what the outcome of the SEC Investigation may be or what, if any, consequences the SEC Investigation may
have with respect to the Company or any current or former Company personnel. However, the SEC Investigation could result in considerable legal expenses, divert
management’s attention from other business concerns and harm our business. If the SEC were to determine that legal violations occurred, we could be required to
pay significant civil and/or criminal penalties and/or other amounts and we could become subject to a cease and desist order and/or other remedies or conditions
imposed as part of any resolution. We can provide no assurances as to the outcome of the SEC Investigation.
Our indemnification obligations and limitations of our director and officer liability insurance may have a material adverse effect on our financial condition,
results of operations and cash flows.
Under Delaware law, our certificate of incorporation and bylaws and certain indemnification agreements to which we are a party, we have an obligation to
indemnify, or we have otherwise agreed to indemnify, certain of our current and former directors and officers with respect to current and future investigations and
litigation, including the matters discussed in Part I, Item 3, “Legal Proceedings” of this Form 10-K. In connection with some of these pending matters, we are required
to, or we have otherwise agreed to, advance, and have advanced, legal fees and related expenses to certain of our current and former directors and officers and expect
to continue to do so while these matters are pending. Certain of these obligations may not be “covered matters” under our directors’ and officers’ liability insurance,
or there may be insufficient coverage available. Further, in the event the directors and officers are ultimately determined not to be entitled to indemnification, we may
not be able to recover the amounts we previously advanced to them.
In addition, we have incurred significant expenses in connection with the Audit Committee’s independent investigation, the pending SEC Investigation, and
shareholder litigation. We cannot provide any assurances that past or future claims related to those or other matters, including the cost of fees, penalties or other
expenses, will not exceed the limits of our insurance policies, that such claims are covered by the terms of our insurance policies or that our insurance carrier will be
able to cover our claims. Additionally, to the extent there is coverage of these claims, the insurers also may seek to deny or limit coverage in some or all of these
matters. Furthermore, the insurers could become insolvent and unable to fulfill their obligation to defend, pay or reimburse us for insured claims. Accordingly, we
cannot be sure that claims will not arise that are in excess of the limits of our insurance or that are not covered by the terms of our insurance policy. Due to these
coverage limitations, we may incur significant unreimbursed costs to satisfy our indemnification obligations, which may have a material adverse effect on our
financial condition, results of operations or cash flows.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate office is in San Antonio, Texas. That office contains approximately 21,000 square feet for which the average annual rent under the lease is
$347,000. We believe these facilities are suitable for our current business needs and that suitable, additional space would be available if needed in the future under
acceptable terms.
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Item 3. Legal Proceedings
As previously disclosed in the Company’s Current Report on Form 8-K filed on November 15, 2017, on August 9, 2017, a securities class action complaint,
Anthony Giovagnoli v. GlobalSCAPE, Inc., et. al., Case No. 5:17-cv-00753, was filed against the Company in the United States District Court for the Western District
of Texas. The complaint names as defendants the Company, Matthew Goulet, and James Albrecht for allegedly making materially false and misleading statements
regarding, inter alia, the Company’s previously reported financial statements. The complaint alleges violations of Sections 10(b) and 20(a) of the Exchange Act and
Rule 10b-5 promulgated thereunder. The complaint seeks unspecified damages, costs, attorneys’ fees, and equitable relief. On November 6, 2017, the Court appointed
a lead plaintiff, who has agreed to file an amended complaint following the completion of the Restatement. Management intends to vigorously defend against this
action. At this time, the Company cannot predict how the courts will rule on the merits of the claims and/or the scope of the potential loss in the event of an adverse
outcome. Should the Company ultimately be found liable, the resulting damages could have a material adverse effect on its financial position, liquidity, or results of
operations.
On October 20, 2017, the Company received a demand letter from a stockholder seeking the inspection of books and records of the Company pursuant to
Section 220 of the Delaware General Corporation Law (the “Section 220 Demand”). This stockholder’s stated purpose for the demand is, inter alia, to investigate
whether the Company’s Board of Directors and officers engaged in an illegal scheme to misrepresent the Company’s performance by falsely reporting accounts
receivable, license revenue, total current assets and total assets, total stockholders’ equity, and total liabilities for the year ended December 31, 2016, as well as the
Board’s independence to consider a stockholder derivative demand. The Company intends to fully respond to the Section 220 Demand to the extent required under
Delaware law.
The Board has established a special litigation committee (“Special Litigation Committee”) consisting of Dr. Thomas Hicks and Frank Morgan to analyze and
investigate claims that could potentially be asserted in stockholder derivative litigation related to facts connected to the claims and allegations asserted in the
litigation related to the Restatement and the Section 220 Demand (the “Potential Derivative Litigation”). The Special Litigation Committee will determine what actions
are appropriate and in the best interests of the Company, and decide whether it is in the best interests of the Company to pursue, dismiss, or consensually resolve
any claims that may be asserted in the Potential Derivative Litigation. The Board determined that each member of the Special Litigation Committee is disinterested and
independent with respect to the Potential Derivative Litigation. Among other things, the Special Litigation Committee has the power to retain counsel and advisors,
as appropriate, to assist it in the investigation, to gather and review relevant documents relating to the claims, to interview persons who may have knowledge of the
relevant information, to prepare a report setting forth its conclusions and recommended course of action with respect to the Potential Derivative Litigation, and to
take any actions, including, without limitation, directing the filing and prosecution of litigation on behalf of the Company, as the Special Litigation Committee in its
sole discretion deems to be in the best interests of the Company in connection with the Potential Derivative Litigation. The Special Litigation Committee’s findings
and determinations shall be final and not subject to review by the Board and in all respects shall be binding upon the Company.
As disclosed in a Current Report on Form 8-K filed on March 16, 2018, the Fort Worth, Texas Regional Office of the SEC has opened a formal investigation
of issues relating to the Restatement, with which the Company is cooperating fully. At this time, the Company is unable to predict the duration, scope, result or
related costs associated with the SEC’s investigation. The Company is also unable to predict what, if any, action may be taken by the SEC, or what penalties or
remedial actions the SEC may seek. Any determination by the SEC that the Company’s activities were not in compliance with existing laws or regulations, however,
could result in the imposition of fines, penalties, disgorgement, equitable relief, or other losses, which could have a material adverse effect on the Company’s financial
position, liquidity, or results of operations.
On May 31, 2018, the Company was served with a subpoena issued by a grand jury sitting in the United States District Court for the Western District of
Texas (the “Grand Jury Subpoena”). The Grand Jury Subpoena requests all documents and emails relating to the Company’s investigation of the potential improper
recognition of software license revenue. The Company intends to fully cooperate with the Grand Jury Subpoena and related investigation being conducted by the
United States Attorney’s Office for the Western District of Texas (the “U.S. Attorney’s Investigation”). At this time, the Company is unable to predict the duration,
scope, result or related costs of the U.S. Attorney’s Investigation. The Company is also unable to predict what, if any, further action may be taken in connection with
the Grand Jury Subpoena and the U.S. Attorney’s Investigation, or what, if any, penalties, sanctions or remedial actions may be sought. Any determination by the
U.S. Attorney’s office that the Company’s activities were not in compliance with existing laws or regulations, however, could result in the imposition of fines,
penalties, disgorgement, equitable relief, or other losses, which could have a material adverse effect on the Company’s consolidated financial position, liquidity, or
results of operations.
Item 4. Mine Safety Disclosures
Not Applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
PART II
Our common stock is listed on the NYSE American Exchange under the symbol “GSB”. The following table sets forth the quarterly high and low closing sale
prices for our common stock for the last two fiscal years.
First Quarter (ending March 31)
Second Quarter (ending June 30)
Third Quarter (ending September 30)
Fourth Quarter (ending December 31)
Annual
High
2017
4.26
5.29
5.44
4.33
$
$
$
$
5.44
$
$
$
$
$
$
Low
High
Low
2016
3.71 $
3.87 $
3.62 $
3.40 $
3.40 $
4.08
4.00
3.87
4.18
$
$
$
$
4.18
$
3.27
3.20
3.41
3.35
3.20
On April 30, 2018, the last reported sales price of our common stock on the NYSE American Exchange was $3.73 per share. As of April 30, 2018, we had
approximately 1,769 stockholders of record of our common stock.
We paid quarterly dividends of $.015 per share on March 8, 2016, June 8, 2016, September 8, 2016 and December 8, 2016 to stockholders of record as of the
close of business on February 23, 2016, May 23, 2016, August 23, 2016 and November 23, 2016, respectively. We paid quarterly dividends of $.015 per share on March
8, 2017, June 8, 2017, September 8, 2017 and December 18, 2017 to stockholders of record as of the close of business on February 23, 2017, May 23, 2017, August 23,
2017 and November 30, 2017, respectively. The timing and amount of dividends to be paid, if any, in subsequent quarters will be determined on future dates by the
Board of Directors.
Item 6. Selected Financial Data
The following selected financial data is derived from the Consolidated Financial Statements included in this and previous annual reports. This data is
qualified in its entirety by and should be read in conjunction with the more detailed Financial Statements and related notes included in this annual report and with
Item 8, “Financial Statements and Supplementary Data”. Historical results may not be indicative of future results.
As part of our ongoing enhancement and refinement of our financial reporting to fairly present our results of operations and financial position, we may make
changes from time-to-time in accounting methods and in the classification and presentation of our business activities in our financial statements. To ensure
comparability between periods, we revise previous period financial statements presented to conform them to the method of presentation in our current period
financial statements.
As discussed in Note 2 to our Consolidated Financial Statements included in this annual report, in preparing our consolidated financial statements as of
December 31, 2017, and for the year then ended, we refined our classification of revenue from certain services we provide such that we now classify those activities
as professional services revenue instead of M&S revenue. We have applied that reclassification to our consolidated statements of operations and comprehensive
income for the year ended December 31, 2016, which had the effect of decreasing previously reported M&S revenue and increasing previously reported professional
services revenue by $113,000 for the year ended December 31, 2016.
Statement of Operations Data:
($ in thousands except per share amounts)
2017
2016
Year Ended December 31,
2015
2014
2013
Total revenues
Income from operations
Net income
Net income per common share - basic
Net income per common share - diluted
Cash dividends declared per share
$
$
$
$
$
$
33,891
2,622
1,371
$
$
$
0.06
0.06
$
$
32,595
5,227
3,585
$
$
$
0.17
0.17
$
$
30,735
6,309
4,526
$
$
$
0.22
0.21
$
$
26,770
4,615
3,026
$
$
$
0.15
0.15
$
$
0.060
$
0.060
$
0.045
$
0.050
$
24,339
3,901
3,840
0.21
0.20
0.050
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Balance Sheet Data:
($ in thousands)
2017
2016
2015
2014
2013
Total assets
Long term debt, less current portion
$
$
52,513
-
$
$
49,745
-
$
$
44,325
-
$
$
38,387
-
$
$
33,092
2,989
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our
consolidated financial statements for the years ended December 31, 2017 and 2016, and related notes included elsewhere in this document. Our consolidated financial
information as of December 31, 2016, and for the year then ended, presented within this Form 10-K reflects the effects of the Restatement.
Overview
We develop and sell computer software that provides secure information exchange, data transfer and sharing capabilities for enterprises and consumers. We
have been in business for more than twenty years having sold our products to thousands of enterprises and more than one million individual consumers globally.
Our primary business is selling and supporting managed file transfer, or 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.
Our MFT products are based upon our Enhanced File Transfer, or EFT, platform. This platform emphasizes secure and efficient data exchange for virtually
any organization. It enables business partners, customers and employees to share information safely and securely. The EFT platform provides enterprise-level
security while automating the integration of back-end systems which are features often missing from traditional file transfer software. The EFT platform features built-
in regulatory compliance, governance, and visibility controls to maintain data safety and security. It can replace legacy systems, homegrown servers, expensive
leased lines and virtual area networks, all of which can be insecure, with a top-performing, scalable alternative. The EFT platform promotes ease of administration
while providing the detailed capabilities necessary for complete control of a file transfer system.
We earn most of our revenue from the sale of products and services that are part of our EFT platform. Our customers can purchase the capabilities of our
EFT platform in two ways:
ö= Under a perpetual software license for which they pay a one-time fee and under which they typically install our product on computers that they
own and/or manage. Our brand name for this product is EFT. Almost all customers who purchase EFT also purchase a maintenance and support, or
M&S, contract for which they pay us a 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.
ö= As a software-as-a-service, or SaaS, under which they pay us ongoing fees to access the capabilities of the EFT platform in the cloud. Through the
end of 2017, EFT Cloud was our SaaS offering of the EFT platform which users accessed for a flat monthly subscription fee. In January 2018, we
introduced EFT Arcus, which will be our SaaS offering of the EFT platform going forward, for which users will pay a base monthly subscription fee
plus an additional variable amount determined based upon their metered usage of EFT Arcus resources.
We sell other products that are synergistic to our EFT platform including Mail Express, WAFS, and CuteFTP. Collectively, these products constituted less
than 5% of our total revenue in 2017. Customers pay a one-time fee to purchase these products under a perpetual software license. Some customers also purchase an
M&S contract. We do not offer a SaaS version of these products and have no plans to do so.
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We also earn revenue from professional services we provide to assist our customers in configuring and integrating our EFT platform products into their
environments.
We focus on selling our EFT platform products in a business-to-business environment. The majority of the resources we will expend in the future for
product research, development, marketing and sales will focus on EFT platform products. 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.
In June 2017, we introduced a data integration product that we planned to sell under the brand name Kenetix. We licensed the technology for this product
from a third-party. We have experienced issues with the third-party technology and have determined to suspend marketing of the product as we evaluate options and
determine whether the licensor can effectively address the issues.
For a more comprehensive discussion of the products we sell and the services we offer, see Software Products and Services above.
Key Business Metrics
Key Business Metrics
We review a number of key business metrics on an ongoing basis to help us monitor our performance and to identify material trends which may affect our
business. The significant metrics we review are described below.
Revenue Growth
We believe annual revenue growth is a key metric for monitoring our continued success in developing our business in future periods. Given our diverse
solution portfolio, we regularly review our revenue mix and changes in revenue across all solutions to identify emerging trends. We believe our revenue growth is
primarily dependent upon executing our business strategies which include:
ö= Ongoing innovation of our EFT platform to address the expanding needs of our existing customers and to enhance our products’ appeal to new
customers.
ö= Licensing, developing and/or acquiring technologies with features and functions that are complementary to and synergistic with our EFT platform so
as to expand the breadth of our product offerings.
ö= Enhancing our sales and marketing programs to improve identification of potential demand for our products and to increase the rate at which we are
successful in selling our products.
To support product innovation, we continue to enhance our software engineering group and our focus on optimizing the manner in which we assess the
development of new technologies, our approach to managing those projects, and the timelines over which we do that work.
We remain alert for attractive opportunities to collaborate with others or perhaps combine other revenue-producing technologies with ours to expand our
product offerings and reach. To that end, we continually assess products and services offered by others that might be synergistic with our existing products. We
may elect to take advantage of those opportunities through cooperative marketing agreements or licensing arrangements or by acquiring an ownership position in the
enterprise offering the opportunity.
In continuing to develop our demand generation activities, we have made and continue to make ongoing changes in sales and marketing including:
Increasing sales staff capacity as needed to address our markets.
ö=
ö= Aligning our sales group to enhance its industry and geographic focus.
ö=
ö= Using third-party digital marketing experts with search engine optimization expertise to enhance our efforts in this area.
Implementing new sales and marketing campaigns.
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ö= Evolving our lead generation programs to increase our sales staff’s exposure to potential purchasers.
ö= 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 contracts to support their ongoing product support needs. This
pattern of activity can create a cumulative effect for M&S renewals as a result of the cumulative number of licensed software installations sold over multiple years
that create M&S renewals in any single year predictably (and in line with our expectations) exceeding the number of new software licenses we sell in a single year.
We expect this cumulative effect to continue to grow if we continue to increase enterprise software license revenue in future periods. For these reasons, we expect
M&S revenue will remain a substantial part of our total revenue.
See Comparison of the Consolidated Statement of Operations for the Years Ended December 31, 2017 and 2016 for a discussion of trends in our revenue
growth that we monitor using this metric.
In the past, we reported bookings and potential future revenue as key business metrics. With the refinement of our revenue growth key business metric
discussed above, we no longer rely on bookings or potential future revenue as key business metrics since we have determined that our revenue growth metric is the
primary metric upon which we rely to measure the success of sales and marketing programs and our outlook for revenue in the future.
Adjusted EBITDA (Non-GAAP Measurement)
We utilize Adjusted EBITDA (Earnings Before Interest, Taxes, Total Other Income/Expense, Depreciation, Amortization, other than amortization of
capitalized software development costs, and Share-Based Compensation Expense) to provide us a view of income and expenses that is supplemental and secondary
to our primary assessment of net income as presented in our consolidated statement of operations and comprehensive income. We use Adjusted EBITDA to provide
another perspective for measuring profitability from our core operating activities that does not include the effects of the following items:
ö= Expenses that typically do not require us to pay them in cash in the current period (such as depreciation, amortization and share-based
compensation);
ö= The cost of financing our business; and
ö= The effects of income taxes.
We monitor Adjusted EBITDA to assess our performance relative to our intended strategies, expected patterns of action, and budgets. We use the results
of that assessment to adjust our future activities to the extent we deem necessary.
Adjusted EBITDA is not a measure of financial performance under GAAP. It should not be considered as a substitute for net income presented on our
consolidated statement of operations and comprehensive income. Adjusted EBITDA has limitations as an analytical tool and when assessing our operating
performance. Adjusted EBITDA should not be considered in isolation or without a simultaneous reading and consideration of our consolidated financial statements
prepared in accordance with GAAP.
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We compute Adjusted EBITDA as follows ($ in thousands):
Net Income
Add (subtract) items to determine Adjusted EBITDA:
Income tax expense
Interest (income) expense, net
Depreciation and amortization:
Total depreciation and amortization
Amortization of capitalized software development costs
Share-based compensation expense
Adjusted EBITDA
Year Ended
December 31,
2017
2016
$
1,371 $
1,547
(296)
2,144
(1,883)
1,566
4,449 $
$
3,585
1,801
(159)
2,045
(1,777)
1,014
6,509
See Comparison of the Consolidated Statement of Operations for the Years Ended December 31, 2017 and 2016 for discussion of the variances between
periods in the components comprising Adjusted EBITDA.
Our discussion of the business trends of our products is based on the following profile of our revenue components ($ in thousands):
Solution Perspective and Trends
2017
2016
Amount
Percent of
Total
Amount
Percent of
Total
Revenue By Type
License
M&S
Professional Services
Total Revenue
Revenue By Product Line
License
EFT Platform
Other
M&S
EFT Platform
Other
Professional Services (all EFT Platform)
Total Revenue
EFT Platform
Other
$
$
$
10,929
20,761
2,201
33,891
10,412
517
10,929
19,715
1,046
20,761
2,201
32,328
1,563
33,891
48
32.2%
61.3%
6.5%
100.0% $
95.3% $
4.7%
100.0%
95.0%
5.0%
100.0%
100.0%
95.4%
4.6%
100.0% $
11,243
18,668
2,684
32,595
10,237
1,006
11,243
17,432
1,236
18,668
2,684
30,353
2,242
32,595
34.5%
57.3%
8.2%
100.0%
91.1%
8.9%
100.0%
93.4%
6.6%
100.0%
100.0%
93.1%
6.9%
100.0%
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We earn revenue primarily from the following activities:
•
•
License revenue from sales of our EFT platform products that we deliver as either perpetually-licensed software installed at the customer’s
premises, for which we earn the full amount of the license revenue at the time the license is delivered, or as a cloud-based service delivered using a
SaaS model, for which we earn monthly subscription revenue as these services are delivered.
License revenue from sales of our Mail Express, WAFS and CuteFTP products that are installed at the customer’s premises under a perpetual
license for which we earn the full amount of the license revenue at the time the license is delivered.
• M&S revenue under contracts to provide ongoing product support and software updates to our customers who have purchased licensed 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 implementation and integration services, as well as delivery of education and training associated
with our solutions, which we recognize as the services are completed.
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 MFT market, we believe our EFT platform products provide the best opportunity for our future growth.
Accordingly, expansion of the capabilities of the EFT platform will be our primary focus in the future. While we will continue to sell and support our other products
for the foreseeable future, they will not be an area of emphasis for us going forward.
We believe that continuing to offer licensed products installed on-premises for which we recognize revenue up-front and that carry with them a recurring
M&S revenue stream continues to be 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. In 2018, we released
EFT Arcus as our newest offering of the EFT platform as SaaS.
A migration in the marketplace from purchasing our EFT platform products for a one-time, perpetual license fee, along with an associated contract for M&S
services, to paying a monthly fee to access those products in a SaaS manner, could cause our revenue growth rate to decrease and could cause a short-term decline
in our revenue. These decreases could occur because it can typically takes approximately 24 to 36 months for the cumulative revenue earned from delivering our EFT
platform products for a monthly subscription fee to exceed the cumulative revenue we would earn from the combination of selling a perpetual license for a one-time
fee along with an M&S contract.
In mid-2016, we reviewed the allocation of our product research, development, sales and marketing resources across all of our products. As a result of that
review, we decided to adjust that allocation to focus most of our resources involved in product research and development, as well as our sales and marketing
activities, 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.
Accordingly, we do not expect to expend significant resources in the future on expanding the features and capabilities of, or on sales and marketing programs for,
Mail Express, WAFS and CuteFTP. We plan to continue providing customer support for those products for the foreseeable future.
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, marketing and sales 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.
ö=
ö= Aligning our sales group to enhance its industry and geographic focus.
ö=
ö= Evolving our lead generation programs to increase our sales staff’s exposure to potential purchasers.
ö= Enhancing our support of channel partners and engaging them to sell our products through training, orientation and marketing programs.
Implementing new sales and marketing campaigns.
Our total revenue increased 4% in 2017. For a more complete discussion of this revenue trend, see Comparison of the Consolidated Statement of
Operations for the Years Ended December 31, 2017 and 2016.
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Liquidity and Capital Resources
Our cash and working capital positions were as follows ($ in thousands):
Cash and cash equivalents
Short term certificates of deposit
Long term certificates of deposit
Total cash, cash equivalents and certificates of deposit
December 31, 2017 December 31, 2016
8,895
$
2,754
12,779
24,428
11,583 $
4,291
11,503
27,377 $
$
Current assets
Current liabilities
Working capital
$
$
23,296 $
(16,886)
6,410 $
18,760
(16,188)
2,572
At December 31, 2017, our short term investments consisted of certificates of deposit maturing on various dates through 2018. Our long term investments as
of that date consisted of a certificate of deposit maturing in December 2021.
When assessing our liquidity and capital resources, we consider the following factors:
ö= We may access and monetize our certificates of deposit at any time without risk of loss of the original amounts invested. If we were to redeem these
certificates of deposit prior to their maturity, we may incur a penalty and forfeit certain amounts of accrued interest.
ö= Deferred revenue, unlike the other liability components of our working capital, is an obligation we will satisfy by providing services in the future to
our customers as part of our ongoing operating activities from which we have historically generated cash flow. Our deferred revenue does not
involve a disbursement of cash as a direct payment of that liability although we will incur operating expenses in the future as we deliver those M&S
services.
Our capital requirements principally relate to our need to fund our ongoing operating expenditures, which are primarily related to employee salaries and
benefits. We make these expenditures to enhance our existing products, develop new products, sell those products in the marketplace and support our customers
after the sale.
We rely on cash and cash equivalents on hand and cash flows from operations to fund our operating activities and believe those items will be our principal
sources of capital for the foreseeable future. If our revenue declines and/or our expenses increase, our cash flow from operations and cash on hand could decline.
We plan to expend significant resources in the future for research and development of our products and expansion and enhancement of our sales and
marketing activities. If sales decline or if our liquidity is otherwise under duress, we could substantially reduce personnel and personnel-related costs, reduce or
substantially eliminate capital expenditures and/or reduce or substantially eliminate certain research and development and sales and marketing expenditures. We may
also sell equity or debt securities or enter into credit arrangements in order to finance future acquisitions or licensing activities, to the extent available.
Cash provided or used by our various activities consisted of the following ($ in thousands):
Operating activities
Investing activities
Financing activities
Cash Provided (Used) During the
Year Ended December 31,
2016
2017
$
$
$
5,736
$
(2,212) $
(836) $
7,065
(13,880)
(175)
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Our cash provided by operating activities decreased during 2017 compared to 2016 primarily due to the following factors set forth on our Consolidated
Statements of Cash Flows:
ö= Net income after considering adjustments to reconcile net income to net cash provided by operating activities decreasing from $6.7 million in 2016
to $5.5 million in 2017. The primary cause of this decrease was the expenses we incurred in connection with the Investigation. See the section below
under Comparison of the Consolidated Statement of Operations for the Years Ended December 31, 2017 and 2016 for a discussion of additional
factors that contributed to this variation.
ö= Deferred revenue decreasing $395,000 during 2017 compared to increasing $1.2 million during 2016. This change was primarily due to an M&S
contract supporting our EFT platform products used by the U.S. Army in connection with their Standard Army Maintenance System-Enhanced
logistics program not being renewed at the end of the third fiscal quarter of 2017 as a result of the U.S. Army consolidating certain of their
operations.
Federal income tax receivable increasing $530,000 during 2017 compared to decreasing $229,000 during 2016 due to higher payments in 2017 as
compared to 2016. In 2016 we did not make any federal income tax payments due to utilization of overpayments from 2015.
ö=
Offset by:
ö= Accounts receivable decreasing $346,000 during 2017 compared to increasing $532,000 during 2016 primarily due to our ongoing work to improve
the timeliness of our accounts receivable collections.
ö= Accounts payable increasing $970,000 in 2017 compared to increasing $91,000 during 2016 primarily due to the abnormally high payables related to
expenses from the Investigation and normal variations in the timing of payments to our vendors.
The amount of cash we used for investing activities during 2017 decreased compared to 2016 due primarily to the purchase of certificates of deposit in 2016
for which there was no similar event in 2017.
Financing activities used more cash during 2017 than during 2016 primarily due to a decrease in proceeds from stock option exercises as a result 2017 having
fewer departures of personnel with significant vested stock options. Former employees typically exercise their vested stock options shortly after the end of their
employment.
Contractual Obligations and Commitments
At December 31, 2017, our contractual obligations and commitments consisted primarily of the following items:
ö= An obligation to deliver services in the future to satisfy our right to earn our deferred revenue of $17.0 million. Those future services primarily relate
to our obligations under M&S 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 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.
ö= An obligation under a contract with a third party to make future minimum prepaid royalty payments in the amount of $800,000 in September 2018
and $1.2 million in November 2019.
ö= 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.
ö= Operating lease for our office space.
ö=
Federal and state taxes.
Our non-cancellable, contractual obligations at December 31, 2017, consisted of the following (in thousands):
Amounts Due for the Period
Fiscal Years
2018
2019
Thereafter
Total
Prepaid royalty fees
Operating leases
Total
$
$
800
360
1,160
$
$
1,200 $
120
1,320 $
-
-
-
$
2,000
480
2,480
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Recent Accounting Pronouncements
The Financial Accounting Standards Board, or FASB, has issued the following Accounting Standard Updates (ASU) described below that we believe may
be relevant to our business and to the preparation of our consolidated financial statements.
ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (issued September 2017) – This update provides
guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. It states that
in these situations, modification accounting should be applied unless the fair value of the modified award is the same as the fair value of the original award
immediately before the original award was modified, the vesting conditions of the modified award are the same as the vesting conditions of the original
award immediately before the original award was modified, and the classification of the modified award as equity or a liability is the same as the classification
of the original award immediately before the original award was modified. This update is effective for all entities for annual periods including interim periods
within those annual periods beginning after December 15, 2017. The adoption of this pronouncement did not have a material impact on our consolidated
financial statements.
ASU 2017-04, Intangibles – Goodwill and Other (issued January 2017) - To simplify the subsequent measurement of goodwill, Step 2 was eliminated from
the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity was required to perform procedures to determine the fair
value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required
in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity
should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should
recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed
the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on
the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This update also eliminated the requirements for any
reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the
goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill
allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for
a reporting unit to determine if the quantitative impairment test is necessary. A public business entity that is a U.S. Securities and Exchange Commission
(SEC) filer is required to adopt the amendments in this update for its annual or any interim goodwill impairment tests in fiscal years beginning after December
15, 2019. We expect that the application of the provisions of this update will not have a material effect on our consolidated financial statements.
ASU 2016-18, Statement of Cash Flows – Restricted Cash (issued November 2016) – This pronouncement addresses the diversity of practice that exists in
the classification and presentation of transfers between cash and restricted cash in the statement of cash flows. It provides that restricted cash and
restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts
shown on the statement of cash flow. Since we do not have any restricted cash balances, we do not expect this pronouncement to have a material effect on
how we present items in our consolidated statement of cash flows.
ASU 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments (issued June 2016) - This pronouncement provides
guidance as to the treatment of transactions in a statement of cash flows with respect to eight specific cash flow issues. During 2017 and 2016, we had no
transactions of the type cited in the statement and do not anticipate having any such transactions in the foreseeable future. Accordingly, we do not expect
this pronouncement to have a material effect on how we present items in our consolidated statement of cash flows.
ASU 2016-13, Financial Instruments – Credit Losses (issued June 2016) - Among 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 consolidated financial statements we issue
for the year ending December 31, 2020, and the quarterly periods during that year. We do not expect the amounts we report as accounts receivable in those
future periods under this guidance to be materially affected relative to current guidance.
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ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (issued March 2016) - 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. As prescribed by this standard, we adopted it beginning January 1, 2017, and followed it in the
preparation of our financial statements as of December 31, 2017.
This standard also permits an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards.
Forfeitures may be either estimated (as has been the requirement in the past) or recognized when they occur. We elected to continue estimating forfeitures
consistent with our existing practices thereby resulting in no change to our application of GAAP for this aspect of computing share-based compensation.
ASU 2016-02, Leases (issued February 2016). The main difference between existing GAAP and this ASU 2016-02 is the presentation by lessees on their
financial statements of lease assets and lease liabilities arising from operating leases. Since this new standard retains the distinction between finance and
operating leases, the effect of leases in the statement of operations and the statement of cash flows will be largely unchanged from existing GAAP. Our only
lease of significance is our operating lease for our corporate office space for which we will present a right-to-use asset and a lease liability on our balance
sheet when we implement this standard. We are in the process of determining those amounts. In accordance with this standard, we will implement it
beginning with our interim and annual financial statements for 2019. The extent of the effect of this standard on our consolidated financial statements for
2019 and later will depend upon the leases, if any, that we have in effect at that date.
ASU 2015-17, Income Tax: Balance Sheet Classification of Deferred Taxes (issued November 2015) – This pronouncement requires that all deferred tax
assets and liabilities for a tax jurisdiction, along with any related valuation allowance, be classified as noncurrent on the balance sheet. We have
implemented this ASU in the accompanying consolidated financial statements.
ASU 2014-09, Revenue from Contracts with Customers (issued May 2014) - The core principle of this guidance is that an entity should recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in
exchange for those goods or services. We will implement these new principles effective with consolidated financial statements we issue for the year ending
December 31, 2018, and the quarterly periods during that year.
We have assessed the effect of ASU 2014-09 on the amount and timing of revenue we expect to recognize from our business activities in 2018 and later. We
do not expect there to be material differences in the amount and timing of revenue we recognize from similar business activities in future periods determined
by applying ASU 2014-09 as compared to revenue we would have otherwise recognized by applying GAAP as it existed prior to 2018.
We have determined that the application of ASU 2014-09 will have a material effect on the timing of our recording of expenses resulting from the incremental
costs we incur to obtain a contract with a customer to deliver goods and services. These incremental costs consist primarily of sales commissions paid to
our sales people and royalties on certain of our products paid to third parties. For years ended December 31, 2017, and earlier, we recorded the full amount of
the sales commission and royalties paid on the full value of an M&S or SaaS contract as an expense on the inception date of the M&S contract. Under ASU
2014-09, we will account for such costs we incur in 2018 and later as follows:
ö
ö
If these costs are associated with products and services for which we recognize revenue at a point in time (primarily sales of perpetual
software licenses and professional services), we will expense these costs in full at the time we recognize that revenue.
If these costs are associated with services for which we recognize revenue over time (primarily sales of M&S and SaaS subscriptions)
for which we believe it is likely that the contract for those services will be renewed for additional terms in the future, provided we deem
these costs to be recoverable, we will record these costs as deferred expense asset and amortize that cost to expense as follows:
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o
o
For the portion of the cost that we determine benefits us primarily only over the term of the specific underlying contract
currently in force (such as the term of an M&S contract), we will recognize expense ratably each month over that term.
For the portion of the cost that we determine benefits us over an overall customer relationship that is likely to span a period
of time that is longer than an initial contract term (for example, an M&S contract renewed for multiple terms in the future), we will
recognize expense ratably monthly over the estimated life of the customer relationship.
Our application of ASU 2014-09 to incremental costs we incur to obtain a contract with a customer will result in our recording, as an asset as of January 1,
2018, a deferred expense of approximately $1.2 million applicable to contracts with customers in effect as of that date. We previously reported this amount as
an expense in our consolidated financial statements for periods ending on and before December 31, 2017. We estimate that we will amortize this amount to
expense at the rate of approximately $186,000 per quarter beginning in 2018. The incremental costs we incur to obtain contracts with customers during 2018
and later years, and the amount of such costs we record as a deferred expense and amortize to expense in subsequent periods, will depend upon the nature
and scope of our future business activities, the nature and mix of the products and services we sell, the compensation plans we have in place for our sales
people, and the royalty arrangements we enter into with third parties.
Critical Accounting Policies
We follow accounting standards set by the Financial Accounting Standards Board. This board sets GAAP, which we follow in preparing financial
statements that report our financial position, results of operations, and sources and uses of cash. We also follow the reporting regulations of the United States
Securities and Exchange Commission, or SEC.
The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of
revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of our consolidated
financial statements. It is possible the actual results could differ from these estimates and assumptions and could have a material effect on the reported amounts of
our financial position and results of operations.
Principles of Consolidation
We prepare our consolidated financial statements in accordance with GAAP. All intercompany accounts and transactions have been eliminated.
Revenue Recognition
We develop, market and sell software products and services. We recognize revenue from a transaction when the following conditions are met:
ö Persuasive evidence of an arrangement exists.
ö Delivery has occurred or services have been rendered.
ö The amount of the sale is fixed or determinable.
ö Collection of the sale amount is reasonably assured.
For a sale transaction not meeting any one of these four criteria, we defer recognition of revenue related to that transaction until all the criteria are met.
We earn the majority of our software license revenue from software products sold under perpetual software license agreements. At the time our customers
purchase these products, they typically also purchase an M&S contract. These transactions are multiple element software sales for which we assess the presence of
vendor specific objective evidence (“VSOE”) of the fair value of the undelivered elements to determine the portion of these sales to recognize as revenue upon
delivery of the software product and the portion of these sales to record as deferred revenue at the time the product is delivered. We amortize the deferred revenue
component to revenue in future periods on a straight-line method as we deliver the related future services to the customer. For transactions, if any, for which we
cannot establish VSOE of the fair value of the undelivered elements, we initially record the entire transaction as deferred revenue and amortize that amount to revenue
in future periods as we deliver the related future services to the customer.
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We provide services under M&S contracts with terms generally ranging from one to three years. We require up-front payment of our M&S fee in an amount
that covers the entire term of the agreement. We record as deferred revenue amounts due or paid that relate to future periods during which we will provide the M&S
service. Deferred revenue related to services we will deliver within one year is presented as a current liability while deferred revenue related to services that we will
deliver more than one year into the future is presented as a non-current liability. We reduce deferred revenue and recognize revenue ratably in future periods on a
straight-line method as we deliver the M&S service.
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 ratably over the contractual term of the customer contract as we deliver our products and services. Amounts 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.
We will apply the principles under ASU 2014-09, Revenue from Contracts with Customers (issued May 2014), beginning with consolidated financial
statements we issue in 2018. We have evaluated the implementation of these principles resulting in the following observations:
ö= We have assessed the effect of the principles relative to our business and the manner in which we recognize revenue. We have concluded that its
application will not have a material effect on the amounts or timing of revenue we report in future periods.
ö= We believe the application of the principles will result in a change in the manner in which we record sales commission expenses related to M&S
contracts. Currently, we record the full amount of the sales commission paid on the full value of an M&S contract as an expense on the inception
date of the M&S contract. After implementing ASU 2014-09, we will record that commission expense ratably over the term of the M&S contract.
ö= We will adopt the new principles using the modified retrospective method.
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 fair value of these investments.
Long-Term Investments
Long-term investments consist of certificates of deposit held with financial institutions with contractual maturity dates greater 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 fair value of these investments.
Property and Equipment
Property and equipment is comprised of furniture and fixtures, software, computer equipment and leasehold improvements which are recorded at cost and
depreciated using the straight-line method over their estimated useful lives. Furniture, fixtures and equipment have a useful life of five to seven years, computer
equipment and software have a useful life of three years and leasehold improvements have a useful life that is the shorter of the term of the lease under which the
improvements were made or the estimated useful life of the asset.
Expenditures for maintenance and repairs are charged to operations as incurred.
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Goodwill
Goodwill is not amortized. On at least an annual basis, we test goodwill for impairment at the reporting unit level using December 31 as the measurement
date. We operate as a single reporting unit.
When testing goodwill, we first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that
the fair value of our reporting unit is less than its carrying amount, including goodwill. In performing this qualitative assessment, we assess events and circumstances
relevant to us including, but not limited to:
Industry and market considerations.
• Macroeconomic conditions.
•
• 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, 2017, after assessing the totality of the relevant events and circumstances, we determined it not more likely than not that the fair value of
our reporting unit was less than its carrying amount. Accordingly, we concluded there was no impairment of goodwill as of that date. There have been no material
events or changes in circumstances since that time indicating that the carrying amount of goodwill may exceed its fair market value and that interim testing needed to
be performed.
Capitalized Software Development Costs
When we complete research and development for a software product and have in place a program plan and a detail program design or a working model of
that software product, we capitalize production costs incurred for that software product from that point forward until it is ready for general release to the public.
Thereafter, we amortize capitalized software production costs to expense using the straight-line method over the estimated useful life of that product, which is
generally three years. We periodically assess the carrying value of capitalized software development costs and our method of amortizing them relative to our
estimates of realizability through sales of products in the marketplace.
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.
Advertising Expense
We expense advertising costs as incurred as a component of our sales and marketing expenses.
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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 percent likelihood of being realized upon ultimate settlement. Unrecognized tax benefits represent tax positions for which reserves have
been established.
We record the effect of new tax legislation in the period in which it is signed into law.
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 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.
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Comparison of the Consolidated Statement of Operations for the Years Ended December 31, 2017 and 2016
Results of Operations
Total revenues
Cost of revenues
Gross profit
Operating expenses
Sales and marketing
General and administrative
Research and development
Total operating expenses
Income from operations
Other income (expense), net
Provision for income taxes
Net Income
2017
($ in thousands)
2016
$ Change
$
$
33,891 $
6,213
27,678
12,862
9,066
3,128
25,056
2,622
296
1,547
1,371 $
32,595 $
6,292
26,303
11,558
6,947
2,571
21,076
5,227
159
1,801
3,585 $
1,296
(79)
1,375
1,304
2,119
557
3,980
(2,605)
137
(254)
(2,214)
In the discussions below, we refer to the year ended December 31, 2017 as “2017” and the year ended December 31, 2016, as “2016”. The percentage changes
cited in our discussions below are the change between 2017 and 2016.
The components of our revenues were as follows ($ in thousands):
Revenue for the Year Ended December 31,
2017
2016
Amount
Percent of
Total
Amount
Percent of
Total
Revenue By Type
License
M&S
Professional Services (all EFT Platform)
Total Revenue
Revenue By Product Line
License
EFT Platform
Other
Total License Revenue
M&S
EFT Platform
Other
Professional Services (all EFT Platform)
Total Revenue
EFT Platform
Other
10,929
20,761
2,201
33,891
10,412
517
10,929
19,715
1,046
20,761
2,201
32,328
1,563
33,891
$
$
$
$
58
32.2% $
61.3%
6.5%
100.0% $
95.3% $
4.7%
100.0%
95.0%
5.0%
100.0%
100.0%
95.4%
4.6%
100.0% $
11,243
18,668
2,684
32,595
10,237
1,006
11,243
17,432
1,236
18,668
2,684
30,353
2,242
32,595
34.5%
57.3%
8.2%
100.0%
91.1%
8.9%
100.0%
93.4%
6.6%
100.0%
100.0%
93.1%
6.9%
100.0%
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Our total revenue increased 4.0%. Revenue from our EFT platform products and services increased 6.5%. That increase was offset by a 30.3% decrease in
revenue from our other products consisting of Mail Express, WAFS, CuteFTP, and TappIn. The portion of our total revenue realized from those other products
decreased to 4.6%.
These trends are in line with our expectations as a result of our strategy implemented in mid-2016 to focus our efforts primarily on our EFT platform products.
At the same time, we decided that while we would continue selling our other products, we would de-emphasize them in the future, not expend future significant
product development and engineering resources to enhance those products, and not dedicate significant future sales and marketing activities to them. We intend to
maintain our focus on our EFT platform for the foreseeable future such that we expect to see a continuing decline in revenue from our products other than those that
are part of the EFT platform.
EFT Platform Products
License and M&S revenue from our EFT platform products increased 1.7%, and 13.1%, respectively. The increases across these products and services were
primarily due to continued enhancement in our product development and software engineering groups which allowed us to refine our process for identifying new
product opportunities, to better focus our resources on products that would yield larger and more immediate revenue opportunities, and to optimize our project
management and software engineering processes to reduce the time necessary to produce new or improved products.
Substantially all of our EFT platform license revenue is from the sale of perpetual licenses to customers who install the software on computers they own or
access in the cloud. In 2018, we released EFT Arcus, our SaaS offering of our EFT platform products, which replaced our EFT Cloud SaaS products that we sold prior
to that time. Through December 31, 2017, we have not earned significant revenue from our EFT platform SaaS products. In the future, we will be placing a greater
emphasis on promoting EFT Arcus to our customers. For the first 24 to 36 months that a customer subscribes to EFT Arcus, their cumulative cost of ownership will
typically be less than their total cost of purchasing an EFT platform perpetual license combined with an M&S contract. Accordingly, we expect the revenue we earn
during that period from an EFT Arcus customer will be less than the revenue we would earn from that same customer during that same period had they purchased a
perpetual license with an M&S contract. As a result, during that period of time, we could experience a decrease in the growth rate of, or even a decline in revenue we
earn from, the sale of new EFT platform perpetual licenses. We could also experience a decrease in the growth rate of our M&S revenue. However, we believe
thereafter and over the long term, the cumulative, recurring revenue stream we will earn from EFT Arcus will exceed what we would have otherwise earned from the
sale of a perpetual licenses combined with an M&S contract.
M&S Revenue - When we sell an EFT platform license, 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.
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.
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, the sale of an EFT platform license not only contributes to license revenue but also provides a foundation for future recurring
revenue as the purchasers of our licensed products typically continue to renew M&S contracts to support their ongoing product support needs. This pattern of
activity can create a cumulative effect for M&S renewals as a result of the cumulative number of licensed software installations sold over multiple years that create
M&S renewals in any single year predictably (and in line with our expectations) exceeding the number of new software licenses we sell in a single year. We expect
this cumulative effect to continue to grow if we continue to increase enterprise software license revenue in future periods.
M&S revenue from our EFT platform products increased 13.1% primarily due to:
ö= New M&S contracts resulting from ongoing sales of EFT licenses that add to the base of M&S contracts already in place.
ö=
Sustained, high renewal rates of M&S contracts by customers who initially purchased these services in earlier periods. We believe these renewals
result from our programs designed to provide high-quality and responsive M&S services to our customers.
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At the end of the third fiscal quarter of 2017 the U.S. Army did not renew their M&S contract used in connection with their Standard Army Maintenance
System-Enhanced logistics program due to consolidation of certain of their operations. This contract provided approximately $1.9 million annually in M&S revenue.
Our professional services revenue was $483,000 less for 2017 compared to 2016 which is a decrease of 17.9%. Going into 2016, we had a backlog of
professional services engagements that arose from software sales in previous periods. We worked down that backlog during 2016 which resulted in our professional
services revenue being higher than typical for 2016 relative to software license revenue. There was not a similar backlog going into 2017 such that our professional
services revenue for 2017 decreased as compared to 2016 but was at a level relative to software license sales that we believe to be more typical. In addition, during
2017 we began to focus more on selling pre-packaged professional services (as compared to customized services) which, while yielding lower total revenue from
professional services, allowed us to deliver professional services more efficiently and without the unpredictability that can arise with customized services.
To improve our ability to successfully sell existing EFT platform products and services as well as new products produced by our software engineering team,
we continued to evolve our sales and marketing activities as follows:
Increasing sales staffing and capabilities as needed to address our markets.
ö=
ö= Aligning our sales group to enhance its industry and geographic focus.
ö=
ö= Evolving our lead generation programs to increase our sales staff’s exposure to potential purchasers.
ö= Enhancing our support of channel partners and engaging them to sell our products through training, orientation and marketing programs.
Implementing new sales and marketing campaigns.
Other Products
In mid-2016, we announced that we would reduce our emphasis in the future on selling Mail Express, WAFS, CuteFTP, and TappIn products that are not
part of our EFT platform. Collectively, these products constituted less than 5% and 10% of our total revenue in 2017 and 2016, respectively. Accordingly, during the
second half of 2016, we began to curtail our product development and engineering resources for these products and significantly reduced our sales and marketing
activities supporting them. As a result, our license and M&S revenue from those products collectively declined 30.3% in 2017 compared to 2016. Our future focus will
continue to be on our EFT platform such that we expect to see a continuing decline in revenue from these other products although we do expect them to continue to
produce a modest contribution margin that contributes to our future profitability.
Cost of Revenues. These expenses are associated with the production, delivery and support of our products and services. We believe it is most meaningful
to view cost of revenues as a percent of the revenues to which those costs relate since many of those costs are variable relative to revenue.
Cost of license revenue consists primarily of:
ö= Amortization of capitalized software development costs we incur when producing our software products. This amortization begins when a product
is ready for general release to the public and generally is an expense that is not directly variable relative to revenue.
ö= Royalties we pay to use software developed by others for certain features of our products that is generally an expense that is variable relative to
ö=
revenue.
Fees we pay to third parties who provide services supporting our SaaS subscription solutions for our EFT platform that generally have components
that are both variable and not variable relative to revenue.
Cost of M&S revenue and cost of professional services revenue consist primarily of salaries and related costs of our employees and third parties we use to
deliver these services.
Cost of software license revenue decreased 2.8% and as a percent of software license revenue was 27.3% in both 2017 and 2016. These minor fluctuations
are primarily caused by the mix of products sold that are associated with a royalty and are well within our expectations.
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 14.7% due to
an increase in M&S revenue. The cost of delivering M&S can vary slightly up or down from period-to-period, but we believe such changes are typically not
indicative of long term trends or permanent changes in our cost of delivering M&S. Our gross margin on these services generally remains greater than 90% as a result
of a consistent application of our customer support delivery protocols and practices.
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Cost of professional services revenue as a percent of that revenue was 66.5% in 2017 as compared to 62.7% in 2016. 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. Because the cost of revenue for professional services is highly variable relative to our revenue from our services, this cost in absolute dollars
decreased 13.1% due to a decrease in our professional services revenue for the reasons discussed above.
Sales and Marketing. We believe it meaningful to view cost of sales and marketing as a percent of revenues since many of those costs, particularly sales
commissions, are variable relative to revenue. These expenses were 38.0% of total revenue for 2017 compared to 35.6% of total revenue for 2016. In absolute dollars
these expenses increased 11.3%. These variations were primarily due to:
ö=
ö=
ö=
Increasing the size of our sales, marketing and product strategy teams and increased compensation rates due to competitive demands in the
marketplace.
Increased marketing activities related to competitive intelligence and channel development.
Increased sales lead generation activities.
Research and Development. The overall profile of our research and development activities was as follows ($ in thousands):
R&D expenditures expensed
R&D expenditures capitalized
Total R&D expenditures (non-GAAP measurement)
Year Ending December 31,
2016
2017
$
$
3,128 $
1,926
5,054 $
2,571
1,538
4,109
Our R&D expenditures expensed increased 21.7% and our R&D expenditures capitalized increased 25.2%. These results were due to our planned, continued
increase in our capacity to develop new products as well as maintain our existing products and research technologies available from third-parties. We did this
through a combination of increasing our engineering headcount and engaging additional third-party resources on a flexible basis as needed. In particular, we
expended additional resources developing our Workspaces, Remote Agent and Cloud Connector EFT platform modules released in 2017 and our EFT Arcus product
that we introduced in January 2018.
Total resources expended for R&D set forth above as total R&D expenditures serves to illustrate our total corporate efforts to improve our existing products
and to develop new products regardless of whether or not our expenditures for those efforts were expensed or capitalized. Total resources expended for R&D is not a
measure of financial performance under GAAP and should not be considered a substitute for R&D expense (set forth above as R&D expenditures expensed) and
capitalized software development costs (set forth above as R&D expenditures capitalized) individually. While we believe the non-GAAP, total resources expended for
R&D amount provides useful supplemental information regarding our overall corporate product improvement and new product creation activities, there are limitations
associated with the use of this non-GAAP measurement. Total resources expended for R&D is a non-GAAP measure not prepared in accordance with GAAP and may
not be comparable to similarly titled measures of other companies since there is no standard for preparing this non-GAAP measure. As a result, this non-GAAP
measure of total resources expended for R&D has limitations and should not be considered in isolation from, or as a substitute for, R&D expense and capitalized
software development cost individually.
General and Administrative. These expenses increased 30.5% primarily due to:
Increased professional fees and related expenses totaling $2.5 million associated with the Investigation, the Restatement and related litigation.
ö=
ö= An increase in professional fees paid to third-party advisors and our registered independent public accountants related to the independent audit of
our internal controls in 2017 that was required for the first time due to us becoming an accelerated filer under SEC regulations.
ö= An increase in share-based compensation expense due to a higher average number of options outstanding in 2017 compared to 2016. Our options
outstanding increased as we continued to grant options to attract and retain key personnel in a competitive marketplace for talent.
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Offset by:
ö= A decrease in bonus payments to certain of our personnel due to our financial results for 2017 not achieving the objectives necessary for them to
receive bonus payments in the amounts paid in 2016.
Severance pay related to the departure of the former chief executive officer in 2016 for which there was not a similar event in 2017.
ö=
ö= A decrease in bad debt expense as a result of an enhanced review of our accounts receivable during 2016 resulting in an increased write-off of
accounts receivable in that period for which there was not a similar event during 2017 due to an improvement in our collections of accounts
receivable.
Other Income. Other income consists primarily of interest income earned on certificates of deposit. The increase in this amount was due primarily to
enhanced investment of our cash beginning in the second half of 2016 to earn a higher rate of interest.
Income Taxes. Our effective tax rate was 53.0% for 2017 and 33.4% for 2016. These rates differed from a federal statutory tax rate of 34% primarily due to:
ö= A reduction in the value of our net deferred tax assets due to the reduction of the corporate income tax to 21% under the Tax Cuts and Jobs Act of
2017.
ö= Certain expenses in our consolidated financial statements, such as a portion of meals and entertainment expenses, that are not deductible on our
federal income tax return.
State income taxes included in income tax expense in our consolidated financial statements.
ö=
Offset by:
ö= The domestic production activities deduction and the research and development credit that are tax credit incentives that serve to reduce the rate at
which we pay federal income taxes in exchange for us conducting certain aspects of our business in a manner promoted by the Internal Revenue
Code.
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Item 8. Financial Statements and Supplementary Data
GlobalSCAPE, Inc.
Index to Consolidated Financial Statements
Years ending December 31, 2017 and 2016
Contents
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
63
64
65
66
67
68
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Board of Directors and Stockholders
GlobalSCAPE, Inc.
Opinion on the Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of GlobalSCAPE, Inc. and its subsidiary (the Company) as of December 31, 2017 and 2016, and the
related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended
December 31, 2017, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements
present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal
control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission, and our report dated June 14, 2018 expressed an adverse opinion on the effectiveness of the Company’s
internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Emphasis of Matter
As discussed in Note 7 to the consolidated financial statements, the Company is involved in litigation and regulatory matters. The Company intends to vigorously
defend against these matters. However, at this time, the Company cannot predict the ultimate outcome and/or the scope of any potential loss. Accordingly, no
provision for any liability that may result has been made in the consolidated financial statements. Should the Company ultimately be found liable, the resulting
outcome could have a material adverse effect on its consolidated financial position, liquidity or the results of its operations. Our opinion is not modified with respect
to these matters.
/s/ WEAVER AND TIDWELL LLP
We have served as the Company’s auditors since 2017.
Austin, Texas
June 14, 2018
64
GlobalSCAPE, Inc.
Consolidated Balance Sheets
(in thousands except share amounts)
Table of Contents
Assets
Current assets:
Cash and cash equivalents
Short term certificates of deposit
Accounts receivable, net
Federal income tax receivable
Prepaid expenses and other
Total current assets
Long term certificates of deposit
Capitalized software development costs, net
Goodwill
Deferred tax asset, net
Property and equipment, net
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued expenses
Deferred revenue
Total current liabilities
Deferred revenue, non-current portion
Other long term liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $0.001 per share, 10,000,000
authorized, no shares issued or outstanding
Common stock, par value $0.001 per share, 40,000,000
authorized, 22,196,712 and 21,920,912 shares issued
at December 31, 2017 and December 31, 2016, respectively
Additional paid-in capital
Treasury stock, 403,581 shares, at cost, at
December 31, 2017 and December 31, 2016
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
65
December 31,
2017
2016
$
$
$
11,583
4,291
5,925
822
675
23,296
11,503
3,786
12,712
651
481
84
52,513
1,900
1,671
13,315
16,886
3,735
176
8,895
2,754
6,288
292
531
18,760
12,779
3,743
12,712
1,050
456
245
49,745
930
1,603
13,655
16,188
3,790
152
-
-
22
23,793
(1,452)
9,353
31,716
52,513
$
22
21,756
(1,452)
9,289
29,615
49,745
$
$
$
$
Table of Contents
GlobalSCAPE, Inc.
Consolidated Statements of Operations and Comprehensive Income
(in thousands, except per share amounts)
Operating revenues:
Software licenses
Maintenance and support
Professional services
Total revenues
Costs of revenues
Software licenses
Maintenance and support
Professional services
Total costs of revenues
Gross Profit
Operating expenses
Sales and marketing
General and administrative
Research and development
Total operating expenses
Income from operations
Other income (expense):
Interest expense
Interest income
Total other income (expense)
Income before income taxes
Provision for income taxes
Net income
Comprehensive income
Net income per common share - basic
Net income per common share - diluted
Weighted average shares outstanding:
Basic
Diluted
The accompanying notes are an integral part of these consolidated financial statements.
66
$
$
$
$
$
For the Year Ended December 31,
2017
2016
10,929
20,761
2,201
33,891
2,986
1,763
1,464
6,213
27,678
12,862
9,066
3,128
25,056
2,622
-
296
296
2,918
1,547
1,371
1,371
$
$
$
0.06
$
0.06
$
21,702
22,154
11,243
18,668
2,684
32,595
3,071
1,537
1,684
6,292
26,303
11,558
6,947
2,571
21,076
5,227
-
159
159
5,386
1,801
3,585
3,585
0.17
0.17
21,126
21,677
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GlobalSCAPE, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands, except number of shares)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Treasury
Stock
Retained
Earnings
Total
Balance at December 31, 2015
21,303,467
$
21
$
19,647
$
(1,452) $
6,975
$
25,191
Shares issued upon exercise of stock options
537,445
1
1,119
Tax benefit (deficiency) from stock-based
compensation
Stock-based compensation expense
Stock options
Restricted stock
Common stock cash dividends
Net income
80,000
(24)
741
273
1,120
(24)
741
273
(1,271)
3,585
(1,271)
3,585
Balance at December 31, 2016
21,920,912
$
22
$
21,756
$
(1,452) $
9,289
$
29,615
Shares issued upon exercise of stock options
195,800
Stock-based compensation expense
Stock options
Restricted stock
Cash payments for expiring options
Common stock cash dividends
Net income
80,000
471
1,257
309
471
1,257
309
(1,307)
1,371
(1,307)
1,371
Balance at December 31, 2017
22,196,712
$
22
$
23,793
$
(1,452) $
9,353
$
31,716
The accompanying notes are an integral part of these consolidated financial statements.
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GlobalSCAPE, Inc.
Consolidated Statements of Cash Flows
(in thousands)
For the Year Ended December 31,
2017
2016
$
1,371
$
Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Bad debt expense
Depreciation and amortization
Stock-based compensation
Deferred taxes
Excess tax deficiency from exercise of share based compensation
Subtotal before changes in operating assets and liabilities
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses
Federal income taxes
Accrued interest receivable
Other assets
Accounts payable
Accrued expenses
Deferred revenues
Other long-term liabilities
Net cash provided by operating activities
Investing Activities:
Software development costs
Purchase of property and equipment
Purchase of certificates of deposit
Net cash (used in) investing activities
Financing Activities:
Proceeds from exercise of stock options
Tax deficiency (benefit) from stock-based compensation
Dividends paid
Net cash (used in) financing activities
Net increase (decrease) in cash
Cash at beginning of period
Cash at end of period
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest
Income taxes
The accompanying notes are an integral part of these consolidated financial statements.
68
17
2,144
1,566
399
-
5,497
346
(144)
(530)
(261)
161
970
68
(395)
24
5,736
(1,926)
(286)
-
(2,212)
471
-
(1,307)
(836)
2,688
8,895
11,583
$
3,585
182
2,045
1,014
(110)
24
6,740
(532)
(20)
229
(163)
(185)
91
(290)
1,177
18
7,065
(1,538)
(226)
(12,116)
(13,880)
1,120
(24)
(1,271)
(175)
(6,990)
15,885
8,895
$
$
$
-
1,649
$
$
-
1,638
Table of Contents
GlobalSCAPE, Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
1. Nature of Business and Corporate Structure
We provide secure information exchange capabilities for enterprises and consumers through the development and distribution of software, delivery of
managed and hosted solutions, and provisioning of associated services. Our solution portfolio facilitates transmission of critical information such as financial data,
medical records, customer files, vendor files, personnel files, transaction activity, and other similar documents between diverse and geographically separated network
infrastructures while supporting a range of information protection approaches to meet privacy and other security requirements. In addition to enabling secure, flexible
transmission of critical information using servers, desktop and notebook computers, and a wide range of network-enabled mobile devices, our products also provide
customers with the ability to monitor and audit file transfer activities. Our primary product is Enhanced File Transfer, or EFT. We have other products that
complement our EFT product.
In June 2017, we introduced a data integration product that we planned to sell under the brand name Kenetix. We licensed the technology for this product
from a third party. This product is a cloud-based, integration-as-a-service, or iPaaS, solution used to connect applications, microservices, application program
interfaces (or API’s), data and processes within and between organizations. We have experienced issues with the third-party technology and have determined to
suspend marketing of the product as we evaluate options and determine whether the licensor can effectively address the issues.
We sell other products that are synergistic to our EFT platform including Mail Express, WAFS, and CuteFTP.
Throughout these notes, unless otherwise noted, our references to 2017 and 2016 refer to the years ended December 31, 2017 and 2016, respectively.
2. Significant Accounting Policies
Basis of Presentation
We follow accounting standards set by the Financial Accounting Standards Board. This board sets GAAP, which we follow in preparing financial
statements that report our financial position, results of operations, and sources and uses of cash. We also follow the reporting regulations of the 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.
Principles of Consolidation
The accompanying consolidated financial statements of GlobalSCAPE, Inc. and its wholly-owned subsidiary (collectively referred to as “GlobalSCAPE”, 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 and services. We recognize revenue from a transaction when the following conditions are met:
ö Persuasive evidence of an arrangement exists.
ö Delivery has occurred or services have been rendered.
ö The amount of the sale is fixed or determinable.
ö Collection of the sale amount is reasonably assured.
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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 an M&S contract. These transactions are multiple element software sales for which we assess the presence of
vendor specific objective evidence (“VSOE”) of the fair value of the undelivered elements to determine the portion of these sales to recognize as revenue upon
delivery of the software product and the portion of these sales to record as deferred revenue at the time the product is delivered. We amortize the deferred revenue
component to revenue in future periods on a straight-line method as we deliver the related future services to the customer. For transactions, if any, for which we
cannot establish VSOE of the fair value of the undelivered elements, we initially record the entire transaction as deferred revenue and amortize that amount to revenue
in future periods as we deliver the related future services to the customer.
We provide services under M&S contracts with terms generally ranging from one to three years. We require up-front payment of our M&S fee in an amount
that covers the entire term of the agreement. We record as deferred revenue amounts due or paid that relate to future periods during which we will provide the M&S
service. Deferred revenue related to services we will deliver within one year is presented as a current liability while deferred revenue related to services that we will
deliver more than one year into the future is presented as a non-current liability. We reduce deferred revenue and recognize revenue ratably in future periods on a
straight-line method as we deliver the M&S service.
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 ratably over the contractual term of the customer contract as we deliver our products and services. Amounts 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.
We will apply the principles under ASU 2014-09, Revenue from Contracts with Customers (issued May 2014), beginning with consolidated financial
statements we issue in 2018. We have evaluated the implementation of these principles resulting in the following observations:
ö= We have assessed the effect of the principles relative to our business and the manner in which we recognize revenue. We have concluded that its
application will not have a material effect on the amounts or timing of revenue we report in future periods.
ö= We believe the application of the principles will result in a change in the manner in which we record sales commission expenses related to M&S
contracts. Currently, we record the full amount of the sales commission paid on the full value of an M&S contract as an expense on the inception
date of the M&S contract. After implementing ASU 2014-09, we will record that commission expense ratably over the term of the M&S contract.
ö= We will adopt the new principles using the modified retrospective method.
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. We intend and have the ability to hold these investments until their maturity dates and therefore account for them as held-to-maturity. These certificates
of deposit are stated at amortized cost, which approximates fair value of these investments.
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Long-Term Investments
Long-term investments consist of certificates of deposit held with financial institutions with contractual maturity dates greater than one year from the
balance sheet date. We have the intent and ability to hold these investments until their maturity dates and therefore account for them as held-to-maturity. These
certificates of deposit are stated at amortized cost, which approximates the fair value of these investments.
Property and Equipment
Property and equipment is comprised of furniture and fixtures, software, computer equipment and leasehold improvements which are recorded at cost and
depreciated using the straight-line method over their estimated useful lives. Furniture, fixtures and equipment have a useful life of five to seven years, computer
equipment and software have a useful life of three years and leasehold improvements have a useful life that is the shorter of the term of the lease under which the
improvements were made or the estimated useful life of the asset.
Expenditures for maintenance and repairs are expensed as incurred.
Goodwill
Goodwill is not amortized. On at least an annual basis, we test goodwill for impairment at the reporting unit level using December 31 as the measurement
date. We operate as a single reporting unit.
When testing goodwill, we first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that
the fair value of our reporting unit is less than its carrying amount, including goodwill. In performing this qualitative assessment, we assess events and circumstances
relevant to us including, but not limited to:
Industry and market considerations.
• Macroeconomic conditions.
•
• 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, 2017, after assessing the totality of the relevant events and circumstances, we determined it not more likely than not that the fair value of
our reporting unit was less than its carrying amount. Accordingly, we concluded there was no impairment of goodwill as of that date. There have been no material
events or changes in circumstances since that time indicating that the carrying amount of goodwill may exceed its fair market value and that interim testing needed to
be performed.
Capitalized Software Development Costs
When we complete research and development for a software product and have in place a program plan and a detail program design or a working model of
that software product, we capitalize production costs incurred for that software product from that point forward until it is ready for general release to the public.
Thereafter, we amortize capitalized software production costs to expense using the straight-line method over the estimated useful life of that product, which is
generally three years. We periodically assess the carrying value of capitalized software development costs and our method of amortizing them relative to our
estimates of realizability through sales of products in the marketplace.
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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.
Advertising Expense
We expense advertising costs as incurred as a component of our sales and marketing expenses. Advertising expense was approximately $1.9 million in both
2017 and 2016.
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 consolidated 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 percent likelihood of being realized upon ultimate settlement. Unrecognized tax benefits represent tax positions for which reserves have
been established.
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We record the effects of new tax legislation in the period in which it is signed into law.
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.
Changes in Accounting Methods, Reclassifications and Revisions
As part of our ongoing enhancement and refinement of our financial reporting to fairly present our results of operations and financial position, we may make
changes from time-to-time in accounting methods and in the classification and presentation of our business activities in our consolidated financial statements. To
ensure comparability between periods, we revise previous period consolidated financial statements presented to conform them to the method of presentation in our
current period consolidated financial statements. If the changes increase or decrease previously reported amounts of revenue or expenses, we adjust retained
earnings as of the beginning of the earliest period presented for the cumulative effect, if any, on that balance. If these changes affect our financial statements for
previously reported interim periods not presented herein, we present revised consolidated financial statements for those periods when they are reported in the future.
In 2017, we refined our classification of revenue from certain services we provide such that we now classify those activities as professional services revenue
instead of M&S revenue. We have applied that reclassification to our consolidated statements of operations and comprehensive income for 2016 which had the effect
of decreasing previously reported M&S revenue and increasing previously reported professional services revenue by $113,000 for the year ended December 31, 2016.
Recent accounting pronouncements
ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (issued September 2017) – This update provides
guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. It states that in these
situations, modification accounting should be applied unless the fair value of the modified award is the same as the fair value of the original award immediately before
the original award was modified, the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the
original award was modified, and the classification of the modified award as equity or a liability is the same as the classification of the original award immediately
before the original award was modified. This update is effective for all entities for annual periods including interim periods within those annual periods beginning
after December 15, 2017. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.
ASU 2017-04, Intangibles – Goodwill and Other (issued January 2017) - To simplify the subsequent measurement of goodwill, Step 2 was eliminated from
the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the
impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the
fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or
interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the
amount by which the carrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of goodwill allocated to that
reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when
measuring the goodwill impairment loss, if applicable. This update also eliminated the requirements for any reporting unit with a zero or negative carrying amount to
perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment
applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net
assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. A public
business entity that is an SEC filer is required to adopt the amendments in this update for its annual or any interim goodwill impairment tests in fiscal years beginning
after December 15, 2019. We expect that the application of the provisions of this update will not have a material effect on our consolidated financial statements.
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ASU 2016-18, Statement of Cash Flows – Restricted Cash (issued November 2016) – This pronouncement addresses the diversity of practice that exists in
the classification and presentation of transfers between cash and restricted cash in the statement of cash flows. It provides that restricted cash and restricted cash
equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement
of cash flows. Since we do not have any restricted cash balances, we do not expect this pronouncement to have a material effect on how we present items in our
consolidated statement of cash flows.
ASU 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments (issued June 2016) - This pronouncement provides
guidance as to the treatment of transactions in a statement of cash flows with respect to eight specific cash flow issues. During 2017 and 2016, we had no
transactions of the type cited in the statement and do not anticipate having any such transactions in the foreseeable future. Accordingly, we do not expect this
pronouncement to have a material effect on how we present items in our consolidated statement of cash flows.
ASU 2016-13, Financial Instruments – Credit Losses (issued June 2016) - Among 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 consolidated financial statements we issue for the year ending December 31,
2020, and the quarterly periods during that year. We do not expect the amounts we report as accounts receivable in those future periods under this guidance to be
materially affected relative to current guidance.
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (issued March 2016) – This standard discontinued the recording in equity of
tax benefits or tax deficiencies that arise from differences between share-based payment compensation expense recorded for financial statement purposes and that
expense deductible for tax purposes. This new standard requires that the tax effect of all such differences be recorded and reported in the statement of operations.
This standard also requires that tax-related cash flows resulting from share-based payments be reported as operating activities in the statement of cash flows which is
a change from the current requirement to present such tax-related items as an inflow from financing activities and an outflow from operating activities. As prescribed
by this standard, we adopted it beginning January 1, 2017, and followed it in the preparation of our financial statements as of December 31, 2017.
This standard also permits an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards.
Forfeitures may be either estimated (as has been the requirement in the past) or recognized when they occur. We elected to continue estimating forfeitures consistent
with our existing practices thereby resulting in no change to our application of GAAP for this aspect of computing share-based compensation.
ASU 2016-02, Leases (issued February 2016) - The main difference between existing GAAP and this ASU 2016-02 is the presentation by lessees on their
financial statements of lease assets and lease liabilities arising from operating leases. Since this new standard retains the distinction between finance and operating
leases, the effect of leases in the statement of operations and the statement of cash flows will be largely unchanged from existing GAAP. Our only lease of
significance is our operating lease for our corporate office space for which we will present a right-to-use asset and a lease liability on our balance sheet when we
implement this standard. We are in the process of determining those amounts. In accordance with this standard, we will implement it beginning with our interim and
annual financial statements for 2019. The extent of the effect of this standard on our consolidated financial statements for 2019 and later will depend upon the leases,
if any, that we have in effect at that date.
ASU 2015-17, Income Tax: Balance Sheet Classification of Deferred Taxes (issued November 2015) – This pronouncement requires that all deferred tax
assets and liabilities for a tax jurisdiction, along with any related valuation allowance, be classified as noncurrent on the balance sheet. We have implemented this
ASU in the accompanying consolidated financial statements.
ASU 2014-09, Revenue from Contracts with Customers (issued May 2014) - The core principle of this guidance is that an entity should recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for
those goods or services. We will implement these new principles effective with consolidated financial statements we issue for the year ending December 31, 2018, and
the quarterly periods during that year.
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We have assessed the effect of ASU 2014-09 on the amount and timing of revenue we expect to recognize from our business activities in 2018 and later. We
do not expect there to be material differences in the amount and timing of revenue we recognize from similar business activities in future periods determined by
applying ASU 2014-09 as compared to revenue we would have otherwise recognized by applying GAAP as it existed prior to 2018.
We have determined that the application of ASU 2014-09 will have a material effect on the timing of our recording of expenses resulting from the incremental
costs we incur to obtain a contract with a customer to deliver goods and services. These incremental costs consist primarily of sales commissions paid to our sales
people and royalties on certain of our products paid to third parties. For years ended December 31, 2017, and earlier, we recorded the full amount of the sales
commission and royalties paid on the full value of an M&S or SaaS contract as an expense on the inception date of the M&S contract. Under ASU 2014-09, we will
account for such costs we incur in 2018 and later as follows:
ö
ö
If these costs are associated with products and services for which we recognize revenue at a point in time (primarily sales of perpetual
software licenses and professional services), we will expense these costs in full at the time we recognize that revenue.
If these costs are associated with services for which we recognize revenue over time (primarily sales of M&S and SaaS subscriptions) for
which we believe it is likely that the contract for those services will be renewed for additional terms in the future, provided we deem these costs to
be recoverable, we will record these costs as deferred expense asset and amortize that cost to expense as follows:
o
o
For the portion of the cost that we determine benefits us primarily only over the term of the specific underlying contract
currently in force (such as the term of an M&S contract), we will recognize expense ratably each month over that term.
For the portion of the cost that we determine benefits us over an overall customer relationship that is likely to span period of
time that is longer than an initial contract term (for example, an M&S contract renewed for multiple terms in the future), we will recognize
expense ratably monthly over the estimated life of the customer relationship.
Our application of ASU 2014-09 to incremental costs we incur to obtain a contract with a customer will result in us recording, as an asset as of January 1,
2018, a deferred expense of approximately $1.2 million applicable to contracts with customers in effect as of that date. We previously reported this amount as an
expense in our financial statements for periods ending on and before December 31, 2017. We estimate that we will amortize this amount to expense at the rate of
approximately $186,000 per quarter beginning in 2018. The incremental costs we incur to obtain contracts with customers during 2018 and later years, and the amount
of such costs we record as a deferred expense and amortize to expense in subsequent periods, will depend upon the nature and scope of our future business
activities, the nature and mix of the products and services we sell, the compensation plans we have in place for our sales people, and the royalty arrangements we
enter into with third parties.
3. Accounts Receivable, Net
We bill our customers and issue them an invoice when we have delivered our goods or services to them. In addition, when our customers agree to purchase
or renew M&S services, we bill and invoice our customers at that time, which could be before the date we begin delivering those services. In that event, we exclude
from accounts receivable (and from the related deferred revenue, see Note 6) the invoices we have issued for which the M&S services commencement date is in the
future and which have not been paid by the customer as of the date of our financial statements. We continually assess the collectability of our accounts receivable.
If we deem it less than probable that we will collect an amount due us, we write-off that balance against our allowance for doubtful accounts.
We determine our accounts receivable, net, as follows ($ in thousands):
Total invoices issued and unpaid
Less: Unpaid invoices relating to M&S contracts with a start date subsequent
to the balance sheet date
Gross accounts receivable
Allowance for sales returns and doubtful accounts
Accounts receivable, net
$
$
75
December 31,
2017
2016
6,644 $
(441)
6,203
(278)
5,925 $
6,932
(381)
6,551
(263)
6,288
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The activity in our allowance for doubtful accounts and sales returns has been as follows ($ in thousands):
Balance, beginning of period
Provision for doubtful accounts and sales returns
Accounts written off
Balance, end of period
4. Property and Equipment, Net
Year Ended December 31,
2016
2017
$
$
263 $
17
(2)
278 $
263
182
(182)
263
Property and equipment, at cost, and the related accumulated depreciation consist of the following ($ in thousands):
Furniture and fixtures
Software
Equipment
Leasehold improvements
Less accumulated depreciation
Property and equipment, net
December 31,
2017
2016
$
$
786 $
662
1,469
559
3,476
(2,995)
481 $
636
651
1,411
559
3,257
(2,801)
456
5. Capitalized Software Development Costs, Net
Our capitalized software development costs balances and activity were as follows ($ in thousands):
Gross capitalized cost
Accumulated amortization
Net balance
Amount capitalized
Amortization expense
Gross capitalized at December 31, 2017
Accumulated amortization
Net balance
Future amortization expense for
the year ending December 31,
2018
2019
2020
Total
December 31,
2017
2016
9,179 $
(5,393)
3,786 $
7,252
(3,509)
3,743
Year Ended December 31,
2016
2017
1,926 $
(1,883) $
1,538
(1,777)
Released
Products
Unreleased
Products
785
-
785
8,394 $
(5,393)
3,001 $
1,597
957
447
3,001
$
$
$
$
$
$
$
$
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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. Deferred Revenue
As described in Note 3 regarding accounts receivable, when our customers agree to purchase or renew M&S services, we bill and invoice our customers at
that time which could be before the date we begin delivering those services. In that event, we exclude from deferred revenue (and from the related accounts
receivable) the invoices we have issued for which the M&S services commencement date is in the future and which have not been paid by the customer as of the
date of our consolidated financial statements. Accordingly, we determine our deferred revenue as follows ($ in thousands):
Total invoiced for M&S contracts for which revenue will be recognized in future periods
Less: Unpaid invoices at December 31 relating to M&S agreements with a start date subsequent to the balance sheet
date
Total deferred revenue at December 31
Deferred revenue, current portion
Deferred revenue, non-current portion
Total deferred revenue
7. Commitments and Contingencies
Contractual Obligations
December 31
2017
2016
17,491
$
(441)
17,050
$
13,315
3,735
17,050
$
$
17,826
(381)
17,445
13,655
3,790
17,445
$
$
$
$
We have an obligation under a contract with a third party to make future minimum prepaid royalty payments in the amount of $800,000 in September 2018
and $1.2 million in November 2019.
Leases
We have an operating lease related to our office space. Minimum rental commitments under operating leases at December 31, 2017 are as follows ($ in
thousands):
Year Ending December 31,
2018
2019
Total
$
$
360
120
480
Rent expense under operating leases was $347,000 in 2017 and 2016. We had a deferred rent liability of $18,000 at December 31, 2017, which we amortize to
rent expense on a straight-line basis over the remaining life of the applicable lease.
Severance Payments
We have agreements with key personnel that provide for severance payments to them in the event of a change in control of the Company, as defined in
those agreements, and their employment is terminated in connection with that change in control. In such event, our aggregate severance payments to those
employees would be approximately $1.9 million.
Legal and Regulatory Matters
As previously disclosed in the Company’s Current Report on Form 8-K filed on November 15, 2017, on August 9, 2017, a securities class action complaint,
Anthony Giovagnoli v. GlobalSCAPE, Inc., et. al., Case No. 5:17-cv-00753, was filed against the Company in the United States District Court for the Western District
of Texas. The complaint names as defendants the Company, Matthew Goulet, and James Albrecht for allegedly making materially false and misleading statements
regarding, inter alia, the Company’s previously reported financial statements. The complaint alleges violations of Sections 10(b) and 20(a) of the Exchange Act and
Rule 10b-5 promulgated thereunder. The complaint seeks unspecified damages, costs, attorneys’ fees, and equitable relief. On November 6, 2017, the Court appointed
a lead plaintiff, who has agreed to file an amended complaint following the completion of the Restatement. Management intends to vigorously defend against this
action. At this time, the Company cannot predict how the courts will rule on the merits of the claims and/or the scope of the potential loss in the event of an adverse
outcome. Should the Company ultimately be found liable, the resulting damages could have a material adverse effect on our financial position, liquidity, or results of
our operations.
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On October 20, 2017, the Company received a demand letter from a stockholder seeking the inspection of books and records of the Company pursuant to
Section 220 of the Delaware General Corporation Law (the “Section 220 Demand”). This stockholder’s stated purpose for the demand is, inter alia, to investigate
whether the Company’s Board of Directors and officers engaged in an illegal scheme to misrepresent the Company’s performance by falsely reporting accounts
receivable, license revenue, total current assets and total assets, total stockholders’ equity, and total liabilities for the year ended December 31, 2016, as well as the
Board’s independence to consider a stockholder derivative demand. The Company intends to fully respond to the Section 220 Demand to the extent required under
Delaware law.
The Board has established a special litigation committee (“Special Litigation Committee”) consisting of Thomas Hicks and Frank Morgan to analyze and
investigate claims that could potentially be asserted in stockholder derivative litigation related to facts connected to the claims and allegations asserted in the
litigation related to the Restatement and the Section 220 Demand (the “Potential Derivative Litigation”). The Special Litigation Committee will determine what actions
are appropriate and in the best interests of the Company, and decide whether it is in the best interests of the Company to pursue, dismiss, or consensually resolve
any claims that may be asserted in the Potential Derivative Litigation. The Board determined that each member of the Special Litigation Committee is disinterested and
independent with respect to the Potential Derivative Litigation. Among other things, the Special Litigation Committee has the power to retain counsel and advisors,
as appropriate, to assist it in the investigation, to gather and review relevant documents relating to the claims, to interview persons who may have knowledge of the
relevant information, to prepare a report setting forth its conclusions and recommended course of action with respect to the Potential Derivative Litigation, and to
take any actions, including, without limitation, directing the filing and prosecution of litigation on behalf of the Company, as the Special Litigation Committee in its
sole discretion deems to be in the best interests of the Company in connection with the Potential Derivative Litigation. The Special Litigation Committee’s findings
and determinations shall be final and not subject to review by the Board and in all respects shall be binding upon the Company.
As disclosed in a Current Report on Form 8-K filed on March 16, 2018, the Fort Worth, Texas Regional Office of the SEC has opened a formal investigation
of issues relating to the Restatement, with which the Company is cooperating fully. At this time, the Company is unable to predict the duration, scope, result or
related costs associated with the SEC’s investigation. The Company is also unable to predict what, if any, action may be taken by the SEC, or what penalties or
remedial actions the SEC may seek. Any determination by the SEC that the Company’s activities were not in compliance with existing laws or regulations, however,
could result in the imposition of fines, penalties, disgorgement, equitable relief, or other losses, which could have a material adverse effect on the Company’s financial
position, liquidity, or results of operations.
On May 31, 2018, the Company was served with a subpoena issued by a grand jury sitting in the United States District Court for the Western District of
Texas (the “Grand Jury Subpoena”). The Grand Jury Subpoena requests all documents and emails relating to the Company’s investigation of the potential improper
recognition of software license revenue. The Company intends to fully cooperate with the Grand Jury Subpoena and related investigation being conducted by the
United States Attorney’s Office for the Western District of Texas (the “U.S. Attorney’s Investigation”). At this time, the Company is unable to predict the duration,
scope, result or related costs of the U.S. Attorney’s Investigation. The Company is also unable to predict what, if any, further action may be taken in connection with
the Grand Jury Subpoena and the U.S. Attorney’s Investigation, or what, if any, penalties, sanctions or remedial actions may be sought. Any determination by the
U.S. Attorney’s office that the Company’s activities were not in compliance with existing laws or regulations, however, could result in the imposition of fines,
penalties, disgorgement, equitable relief, or other losses, which could have a material adverse effect on the Company’s consolidated financial position, liquidity, or
results of operations.
8. Stock Options, Restricted Stock and Share-Based Compensation
We have stock-based compensation plans under which we have granted, and may grant in the future, incentive stock options, non-qualified stock options,
and restricted stock to employees and non-employee members of the Board of Directors. Our share-based compensation expense was as follows ($ in thousands):
Share-based compensation expense
$
1,566 $
1,014
Year Ended December 31,
2016
2017
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Stock Options
We have granted stock options to our officers and employees under long-term equity incentive plans that originated in 2000, 2010 and 2016. During 2017, we
granted stock options only under the 2016 plan. During 2016, we granted options only under the 2016 plan and the 2010 plan.
Provisions and characteristics of the options granted to our officers and employees under our long-term equity incentive plans include the following:
ö= 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.
ö= 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
ö=
that date.
Stock options we issue generally become exercisable ratably over a three-year period, expire ten years from the date of grant, and are exercisable for
a period of ninety days after the end of employment.
ö= Upon exercise of a stock option, we issue new shares from the shares of common stock we are authorized to issue.
We currently issue stock-based awards to our officers and employees only under the 2016 plan which authorizes the issuance of up to 5,000,000 shares of
common stock for stock-based incentives including stock options and restricted stock awards. As of December 31, 2017, stock-based incentives for up to 4,178,500
shares remained available for issuance in the future under this plan.
We have not issued any restricted stock under any of these plans.
Our stock option activity has been as follows:
Outstanding at December 31, 2015
2,091,325
$
2.45
6.09
$
3,277
Number of
Shares
Weighted
Average
Exercise
Price
Weighted Average
Remaining
Contractual
Terms
(Years)
Aggregate
Intrinsic
Value
(000’s)
2016
Granted
Forfeitures
Exercised
Outstanding at December 31, 2016
2017
Granted
Forfeitures
Exercised
Outstanding at December 31, 2017
Exercisable at December 31, 2017
1,257,300
$
(404,175) $
(537,445) $
$
2,407,005
975,000
$
(600,995) $
(195,800) $
$
2,585,210
1,124,109
$
79
3.58
3.14
2.08
3.00
3.98
3.35
2.41
3.34
2.77
7.19
$
2,574
6.77
$
4.30
$
1,015
956
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Additional information about our stock options is as follows:
Weighted average fair value of options granted during the year
Intrinsic value of options exercised during the year
Cash received from stock options exercised during the year
Number of options that vested during the year
Fair value of options that vested during the year
Unrecognized compensation expense related to non-vested options at end of year
Weighted average years over which non-vested option expense will be recognized
$
$
$
$
$
2017
2016
1.67
351,893
471,789
$
$
$
528,734
850,044
1,751,077
1.93
$
$
1.64
880,064
1,118,177
348,116
528,725
1,768,344
2.17
Range of
Exercise Prices
$
$
$
$
$
Total options
0.85 - $1.43
1.47 - $2.32
2.34 - $3.52
3.53 - $4.21
5.44 - $5.44
Underlying
Shares
Outstanding
54,700
388,070
857,940
1,277,500
7,000
2,585,210
As of December 31, 2017
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Life
Weighted
Average
Exercise
Price
Number of
Underlying
Shares
Weighted
Average
Exercise
Price
2.36
2.23
6.93
8.22
9.55
$
$
$
$
$
1.05
1.86
3.29
3.90
5.44
54,700
386,710
441,259
241,440
0
1,124,109
$
$
$
$
$
1.05
1.86
3.17
3.86
-
We used the following assumptions to determine compensation expense for our stock options using the Black-Scholes option-pricing model:
Expected volatility
Expected annual dividend yield
Risk free rate of return
Expected option term (years)
Year Ended December 31,
2016
2017
49%
1.5%
1.95%
6.00
55%
1.5%
1.45%
6.00
Due to the Investigation, during a portion of 2017 and as of December 31, 2017, we had in place a moratorium on issuing shares of our common stock in
connection with stock option exercises. In September and October 2017, for stock options that were scheduled to expire during the six months ended December 31,
2017, and were not exercisable due to the moratorium, we modified those stock options to extend their expiration date to December 31, 2017. We recorded share-based
compensation expense of $255,000 for these modifications with respect to which there was no associated cash payment. None of those options were exercised prior
to December 31, 2017, their expiration dates were not extended beyond that date, and they were allowed to expire. As consideration for certain of those expired
options, we made cash payments to the option holders and recorded expense totaling $78,000 which was determined based upon the difference between the quoted
market price of our common stock as of December 31, 2017, and the exercise price of the stock options.
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Restricted Stock Awards
Our 2015 Non-Employee Directors Long-Term Equity Incentive Plan (“2015 Directors 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:
ö= 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.
ö= Restricted stock awards are initially issued as restricted shares with a legend restricting transferability of the shares until the recipient satisfies the
vesting provision of the award, which is generally continuing service for one year subsequent to the date of the award, after which time the restrictive
legend is removed from the shares.
ö= Restricted shares participate in dividend payments and may be voted.
ö= As of December 31, 2017, stock based incentives for up to 260,000 shares remained available for issuance in the future under this plan.
Our restricted stock awards activity has been as follows:
Restricted Shares Outstanding at December 31, 2015
2016
Shares granted with restrictions
Shares vested and restrictions removed
Restricted Shares Outstanding at December 31, 2016
2017
Shares granted with restrictions
Shares vested and restrictions removed
Restricted Shares Outstanding at December 31, 2017
Number of
Shares
Grant Date
Fair Value
Per Share
Total
Fair Value of
Shares That
Vested
80,000
$
80,000
$
(80,000) $
$
80,000
80,000
$
(80,000) $
$
80,000
3.34
3.31
3.34
3.31
4.24
3.31
4.24
$
276,000
$
320,000
We have not issued any stock options under the 2015 Directors Plan.
The 2015 Directors Plan replaced the 2006 Non-Employee Directors Long-Term Equity Incentive Plan (the “2006 Plan”). We will not issue any additional
stock or stock options under the 2006 Plan.
At December 31, 2017, we had $120,481 of unrecognized compensation expense related to non-vested stock awards. We expect to recognize that expense in
the future over a weighted-average period of four months.
9. Income Taxes
The components of our income tax expense (benefit) consist of the following (amounts in thousands):
Current
2017
Deferred
Federal
State
Total
$
$
1,008
140
1,148
$
$
416
(17)
399
$
$
Total
Current
1,424 $
123
1,547 $
1,732
179
1,911
$
$
2016
Deferred
(92) $
(18)
(110) $
Total
1,640
161
1,801
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The difference between income tax expense and the amount computed by applying the federal statutory income tax rate of 34% to income before income
taxes consists of the following (amounts in thousands):
Income tax expense (benefit) at federal statutory rate
$
992 $
1,831
Year Ended December 31,
2016
2017
Increase (decrease) in taxes resulting from:
State taxes, net of federal benefit
Stock based compensation
Change in US tax rate due to tax reform
R&D tax credit uncertain tax position (net)
Research and development credit
Domestic production activities deduction
Other
Income tax expense (benefit) per the statement of operations
$
86
294
355
37
(208)
(35)
26
1,547 $
100
55
-
31
(177)
(64)
25
1,801
The U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted on December 22, 2017. This legislation significantly changes U.S. tax law by, among
other things, lowering corporate income tax rates. The Tax Reform Act permanently reduces the U.S. corporate tax rate from a maximum of 35% to a flat 21% rate
effective January 1, 2018. The main impact of the Tax Reform Act on our 2017 consolidated financial statements is the re-measurement of our deferred tax balances
from the old corporate tax rate to the new corporate tax rate. Because of the decrease in the U.S. corporate tax rate, we recorded deferred tax expense of $355,000 due
to this re-measurement. We have no material or provisional items for which the accounting of the effects of the Tax Reform Act on our consolidated financial
statements is incomplete.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in our consolidated
financial statements. The components of our deferred income tax assets and liabilities are as follows (amounts in thousands):
Deferred tax assets:
Deferred revenue
Capital loss carryforward
Share-based compensation
Compensation and benefits
Texas franchise tax R&D credit
Prepaid expenses not deducted for tax
Allowance for doubtful accounts
Net operating loss carryforward
State deferred tax asset
Accrued expenses not deducted for tax
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Intangible assets
Depreciation
Total gross deferred tax liabilities
Net deferred tax assets
As of December 31,
2017
2016
$
$
775
-
351
111
185
84
58
20
61
9
(185)
1,469
805
13
818
$
651
$
1,229
1,099
578
278
153
-
114
91
44
12
(1,252)
2,346
1,289
7
1,296
1,050
In assessing the realizability of deferred tax assets, we consider whether it is more-likely-than-not that some portion or all the deferred tax asset will not be
realized. The ultimate realization of deferred tax assets 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 our ability to generate future taxable income will allow us to realize those deferred
tax assets.
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As of December 31, 2017, our capital loss carryforward of $3,231,000 has expired. Accordingly, the deferred tax asset related to this item has been reversed.
Additionally, we reversed the related valuation allowance.
As of December 31, 2017, we have federal income tax net operating loss carryforwards of $93,000 available to offset future federal taxable income. We expect
to fully utilize this net operating loss in 2018. The net operating loss expires in 2031.
As of December 31, 2017, we have Texas Research and Development tax credit carryforwards of $185,000. We believe it uncertain that we will have sufficient
Texas Franchise Tax in the future to support utilization of these carryforward credits. Accordingly, have provided a valuation allowance for the full amount of these
credit carryforwards. These carryforwards expire in years 2034 through 2038.
A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows (amounts in thousands):
Balance, beginning of year
Increases for tax positions related to the current year
Increases for tax positions related to prior years
Balance, end of year
2017
2016
$
$
121 $
22
15
158 $
90
22
9
121
Our unrecognized tax benefit is related to research and development credits taken on our U.S. income tax returns from 2011 to 2017 and the uncertainty
related to the realization of a portion of those credits based on prior experience. We believe it reasonably possible that we will not recognize any of our unrecognized
tax benefits at least through December 31, 2017. 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 expense related to income taxes as interest and other expense, respectively. At December 31, 2017, no interest or penalties
have been or are required to be accrued. Our open tax years are 2011 and forward for our federal income tax returns and 2013 and forward for most of our state income
tax returns. We do not file, and are not required to file, any foreign income tax returns.
10. Earnings Per Share
Earnings per share for the periods indicated were computed as follows (in thousands except per share amounts):
Numerators
Numerator for basic and diluted earnings per share:
Net income
Denominators
Denominators for basic and diluted earnings per share:
Weighted average shares outstanding - basic
Dilutive potential common shares
Stock options and awards
Denominator for diluted earnings per share
Net income per common share - basic
Net income per common share – diluted
$
$
83
Year ended December 31,
2016
2017
$
1,371 $
3,585
21,702
21,126
452
22,154
0.06 $
0.06 $
551
21,677
0.17
0.17
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As a result of our implementation of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (issued March 2016), the estimated
proceeds resulting from equity compensation deductible for federal income tax purposes being greater than the associated share-based compensation expense are no
longer considered as part of the treasury stock method used in computing diluted earnings per share. This change had no material effect on our earnings per share
computations.
11. Dividends
We paid dividends as follows:
Dividend per share of common stock
$
0.060 $
0.060
Year ended December 31,
2016
2017
12. Employee Benefit Plan
We provide our employees a 401(k) plan under which we make employer matching contributions in amounts determined by our Board of Directors. Our
matching contributions were $156,000 and $143,000, for 2017 and 2016, respectively.
13. Segment and Geographic Disclosures
We view our operations and manage our business as principally one segment. As a result, the financial information disclosed herein represents all of the
material financial information related to our principal operating segment.
Revenues derived from customers and partners located in the United States accounted for approximately 75% and 77% of our total revenues for 2017 and
2016, respectively. The remaining revenues were from customers and partners located in foreign countries, and each individual foreign country accounted for less
than 10% of total revenues in each of those years. We attribute revenue to countries based on the country in which the customer or partner is located. We have no
property or equipment located outside the United States.
14. Concentration of Business Volume and Credit Risk
Our cash, cash equivalents and long-term investments are on deposit in banks and are collectively insured by the Federal Deposit Insurance Corporation for
$750,000. Our balances in excess of that amount are not insured. We may withdraw our cash deposits upon demand but in doing so may forfeit certain earned but
unpaid interest on certain certificates of deposit if we redeem them prior to their maturity date. We maintain our cash with multiple financial institutions of reputable
credit to minimize our risk of loss.
We generally provide credit to our customers under typical invoice payment terms (for example, net 30) that gives rise to trade accounts receivable from
those customers. We do not require collateral from our customers. We perform ongoing evaluations of the credit risk related to offering these payment terms. We
provide an allowance for uncollectible accounts based on our historical collections experience and the profile of our accounts receivable.
In order to leverage the resources of third parties, we make our products available for purchase by end users through third-party channel resellers even
though those end users can also purchase those products directly from us. During 2017 and 2016, we earned approximately 14% of our revenue from such sales
through our largest, third-party, channel reseller.
In 2017 and 2016, approximately 25% and 23%, respectively, of our revenues resulted from sales to customers in foreign countries. We received
substantially all of our revenues from foreign customers in U.S. dollars resulting in limited exchange rate risks. Our foreign sales are concentrated mostly in Canada,
Western Europe and Latin America.
We use software developers outside the United States to perform a portion of the coding for the development and maintenance of our software products. If
we were unable to continue using these developers because of political or economic instability, we may have difficulty finding comparably skilled developers or may
have to pay considerably more for the same work, which could have a material adverse impact on our financial position and results of operations.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
As previously disclosed in our Current Report on Form 8-K filed on March 31, 2017, effective on March 27, 2017, RSM US LLP, or RSM, was dismissed as
the Company’s independent registered public accounting firm.
RSM performed the audit of our consolidated financial statements as of and for the year ended December 31, 2016 (the “2016 Financial Statements”). In
connection with the preparation of the 2016 Financial Statements, the Company changed certain accounting methods and the classification and presentation of its
business activities in its financial statements. To ensure comparability between periods the Company revised the 2015 Financial Statements (as defined below) to
conform them to the method of presentation in the 2016 Financial Statements. For more information, please see Note 2 of the Notes to our consolidated financial
statements included in Item 8 of this report. The audit report of RSM on the 2016 Financial Statements did not contain an adverse opinion or a disclaimer of opinion,
and was not qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with the audit of the 2016 Financial Statements and through the date of its dismissal, there were: (i) no disagreements between the Company
and RSM on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved
to the satisfaction of RSM, would have caused RSM to make reference to the subject matter of the disagreement in their report on the Company’s financial statements
for such year, and (ii) no reportable events within the meaning set forth in Item 304(a)(1)(v) of Regulation S‐K.
On March 27, 2017, the Company announced that the Audit Committee had approved the appointment of BDO USA, LLP, or BDO, as its independent
registered public accounting firm to audit the Company’s financial statements subject to completion of its standard client acceptance procedures.
Effective as of April 11, 2017, BDO notified the Company that it had completed such client acceptance procedures. On April 12, 2017, the Audit Committee
formally engaged BDO as the Company’s independent registered public accounting firm to audit the Company’s financial statements. On August 1, 2017, the
Company informed BDO that it had been dismissed as the Company’s independent registered public accounting firm. The Audit Committee approved this dismissal.
BDO did not issue any audit reports during the period of its engagement.
On August 2, 2017, GlobalSCAPE received a letter (the “10A Letter”) from BDO in accordance with Section 10A(b)(2) of the Exchange Act.
In the 10A Letter, BDO advised that on or around July 6, 2017 BDO was contacted by David Mann, the Audit Committee Chairman, who provided
information about conduct that in BDO’s view indicated an illegal act, as defined by Section 10A of the Exchange Act, may have occurred. BDO stated in the 10A
Letter that BDO was informed that the Company had learned of the subject conduct in May of 2017 and had already engaged the Company’s corporate outside
counsel, along with forensic accountants, to conduct an investigation into the conduct and that additional information would be provided as the investigation
continued. In a separate communication to the Audit Committee Chairman on July 6, 2017, BDO advised GlobalSCAPE of both its and BDO’s obligations under
Section 10A of the Exchange Act and auditing standards of the Public Company Accounting Oversight Board, and that BDO would recommend that the Audit
Committee engage independent counsel to conduct the investigation, which BDO defined as counsel who had not previously performed substantial work for the
Company. BDO communicated that it did not believe the counsel GlobalSCAPE had engaged met that definition due to GlobalSCAPE’s historical working
relationship with them.
BDO stated in the 10A Letter that additional information related to the conduct under investigation was provided to BDO by GlobalSCAPE’s corporate
outside counsel on July 10, 2017, noting that employees of the Company had entered into “side agreements” with customers of the Company in December 2016 which
increased revenue recorded, and accounts receivable, by amounts that had not yet been fully quantified. BDO was engaged by GlobalSCAPE on April 12, 2017, and
was not the Company’s independent registered public accounting firm during the period in which the misconduct was alleged to have occurred.
BDO stated in the 10A Letter that in a discussion with the Audit Committee Chairman on July 10, 2017, BDO discussed its request for the Company to
engage other counsel to lead the investigation, and was told that the Company considered the engaged counsel to be independent. BDO stated in the 10A Letter
that during that discussion BDO detailed the reasons for its concern, and that BDO viewed the Company’s failure to engage alternate legal counsel as a failure to take
timely and appropriate remedial action as defined by Section 10A(b)(2)(B) of the Exchange Act, where absent action by the Company, BDO would not be in a position
to assess the adequacy of the investigation, which BDO would consider a disagreement with the Company as it would limit the scope of BDO’s audit, warranting
either a departure from its standard report or resignation from the audit engagement. In the 10A Letter, BDO stated that since July 10, 2017, in response to multiple
requests by BDO, the Audit Committee reiterated their position that they would continue the investigation being performed by their corporate outside counsel, who
they believe were sufficiently independent.
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In the 10A Letter, BDO stated its belief that the Company had not been forthcoming with details regarding the investigation or the conclusions, if any,
reached by counsel and the Company about the conduct at issue. In the 10A Letter, BDO stated that due to the lack of details that BDO had been provided regarding
the investigation, and its dismissal as the Company’s independent registered public accounting firm, it was unable to determine whether it was likely that an illegal act
had occurred, and whether the impact of any misstatements resulting from the alleged misconduct had a material impact on the Company’s consolidated financial
statements. In the 10A Letter, BDO stated that based on the limited information BDO had been provided, it believed that it was possible that the conduct could have
had a material effect on the Company’s consolidated financial statements that had been filed with the SEC, or that are expected to be filed in the foreseeable future. In
the 10A Letter, BDO stated that it had been informed but had not confirmed that, at its urging in its communications with the Company on July 6, 2017, the Company
had advised its prior auditor of the investigation. In the 10A Letter, BDO also stated that it did not believe senior management had taken timely and appropriate
remedial action in response to the conduct, in particular by not having the investigation performed by counsel with no prior affiliation with the Company and by not
sharing information from the investigation with BDO on a timely basis. In the 10A Letter, BDO also stated that the failure to take timely and appropriate remedial
action may have either warranted a departure from a standard report or warranted BDO’s resignation, had BDO not been terminated.
As a result of the 10A Letter, on August 3, 2017, GlobalSCAPE filed a notice pursuant to Section 10A of the Exchange Act (the “Notice”) with the SEC. In
the Notice, GlobalSCAPE notified the SEC of the 10A Letter received from BDO.
During the period from April 12, 2017 until the date of BDO’s dismissal and through August 7, 2017, the date of our Current Report on Form 8-K disclosing
our receipt of the 10A Letter, except for the matters described above, there were no disagreements between the Company and BDO on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of BDO, would have
caused BDO to make reference to the subject matter of the disagreement in its report on the Company’s financial statements for such year. On August 2, 2017, BDO
reported that it considered the use of non-independent counsel to lead the investigation described above to be a material weakness in internal control over financial
reporting, as such counsel could be influenced by the Company’s existing relationship with such counsel. During the period from April 12, 2017 until the date of
BDO’s dismissal and through August 7, 2017, there were no other reportable events within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
Effective on August 1, 2017, the Audit Committee approved the appointment of Weaver and Tidwell, L.L.P., or Weaver, as its independent registered public
accounting firm to audit the Company’s financial statements. During the two most recent fiscal years prior to such appointment and through August 1, 2017, the
Company (or someone on its behalf) had not consulted with Weaver with respect to: (i) the application of accounting principles to a specified transaction, either
completed or proposed; (ii) the type of audit opinion that might be rendered on the Company’s financial statements; or (iii) any matter that was either the subject of a
disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).
On November 20, 2017, the Chairman of the Audit Committee was orally informed by RSM that RSM was withdrawing from its engagement by the Audit
Committee to reissue its audit report on the 2016 Financial Statements. On November 21, 2017, RSM delivered a withdrawal letter to the Chairman of the Audit
Committee. In its withdrawal letter, RSM stated that (x) as of November 21, 2017, it had not completed the audit procedures necessary to reissue its report on the 2016
Financial Statements and (y) based on the information the Audit Committee provided from its Investigation, RSM had concluded that, in its professional judgment, it
could no longer rely on management’s representations, which the Company has concluded is a “reportable event” as defined in Item 304(a)(1)(v) of Regulation S-K.
The audit report originally issued by RSM on the 2016 Financial Statements, when previously filed, did not contain an adverse opinion or a disclaimer of
opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. However, as previously disclosed in our Current Report on Form
8-K filed on August 7, 2017 (the “August 8-K”), the 2016 Financial Statements included in our Annual Report on Form 10-K originally filed on March 27, 2017 (the
“Original 2016 10-K Filing”), including the auditor’s report on the 2016 Financial Statements included in the Original 2016 10-K Filing, should no longer be relied upon
in light of the Restatement. In connection with the audit of the Company’s consolidated financial statements for the fiscal year ended December 31, 2016 and through
the date of RSM’s dismissal on March 27, 2017, there were: (i) no disagreements between the Company and RSM on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of RSM, would have caused RSM
to make reference to the subject matter of the disagreement in their report on the Company’s financial statements for such year, and (ii) no reportable events within
the meaning set forth in Item 304(a)(1)(v) of Regulation S-K. During the period from August 15, 2017, when RSM was re-engaged to reissue its audit report on the
restated consolidated financial statements for the year ended December 31, 2016 until November 21, 2017, there were: (i) no disagreements between the Company and
RSM on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to
the satisfaction of RSM, would have caused RSM to make reference to the subject matter of the disagreement in their report on the Company’s financial statements
for such year, and (ii) except as set forth above, no reportable events within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
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On December 1, 2017, the Chairman of the Audit Committee received a letter from Padgett, Stratemann & Co., L.L.P., or Padgett, in which Padgett stated that
based on the circumstances described in the August 8-K surrounding the dismissal of BDO as the Company’s independent registered public accounting firm and the
previously disclosed withdrawal of RSM from its engagement by the Audit Committee to reissue its audit report on the 2016 Financial Statements, and based on the
fact that current management is substantially the same as the management in place in 2015, Padgett had concluded that it could not rely on management’s
representations that would be necessary for Padgett to complete the audit procedures necessary to issue consents to the inclusion of its audit report on our
consolidated financial statements as of and for the year ended December 31, 2015 (the “2015 Financial Statements”) in the Company’s filings or transactions after the
date of the letter. Padgett also stated in its letter that (1) it was not at that time aware of whether any of the circumstances described in the August 8-K with respect
to the 2016 Financial Statements could have been applicable to the Company’s 2015 Financial Statements, and (2) it had not reached a conclusion as to whether it was
necessary for Padgett to withdraw its Report on the 2015 Financial Statements. The Company has concluded that this is a “reportable event” as defined in Item 304
(a)(1)(v) of Regulation S-K.
The audit report originally issued by Padgett on the 2015 Financial Statements, when previously filed, did not contain an adverse opinion or a disclaimer of
opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. In connection with the audit of the 2015 Financial Statements and
through the date of Padgett’s resignation as the Company’s independent registered public accounting firm on October 19, 2016 as a result of the partners of Padgett
becoming partners of RSM, there were: (i) no disagreements between the Company and Padgett on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Padgett, would have caused Padgett to make
reference to the subject matter of the disagreement in its report on the Company’s financial statements for such year, and (ii) no reportable events within the meaning
set forth in Item 304(a)(1)(v) of Regulation S-K. During the period from October 19, 2016 until December 1, 2017, there were: (i) no disagreements between the
Company and Padgett on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if
not resolved to the satisfaction of Padgett, would have caused Padgett to make reference to the subject matter of the disagreement in its report on the Company’s
financial statements for such year, and (ii) except as set forth above, no reportable events within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
Effective on December 13, 2017, the Audit Committee expanded the initial appointment of Weaver as the Company’s independent registered public
accounting firm with respect to the audit of the Company’s financial statements for the year ended December 31, 2017 to also include serving as the Company’s
independent registered public accounting firm with respect to the audit of the 2015 Financial Statements and the 2016 Financial Statements. In connection with the
expansion of the initial appointment of Weaver to include serving as the Company’s independent registered public accounting firm with respect to the audit of 2015
Financial Statements and the 2016 Financial Statements, the Audit Committee made Weaver aware of the matters discussed by RSM and Padgett in their
communications to the Chairman of the Audit Committee.
During 2015 and 2016 and through August 1, 2017, the date that Weaver was appointed as the Company’s independent registered public accounting firm
with respect to the audit of the Company’s financial statements for the year ended December 31, 2017, the Company (or someone on its behalf) had not consulted
with Weaver with respect to: (i) the application of accounting principles to a specified transaction, either completed or proposed; (ii) the type of audit opinion that
might be rendered on the Company’s financial statements; or (iii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of
Regulation S-K) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls are met. No
evaluation of controls can provide absolute assurance that the system of controls has operated effectively in all cases. Our disclosure controls and procedures are
designed to provide reasonable assurance that the objectives of disclosure controls and procedures are met.
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Our management, including our President and Chief Executive Officer and our Interim Chief Financial Officer, evaluated the effectiveness of the design and
operation of our disclosure controls and procedures and concluded that our disclosure controls and procedures were not effective as of December 31, 2017 to ensure
that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in SEC’s rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required disclosures.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the
Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our President and Chief Executive Officer and our Interim Chief Financial Officer, evaluated the effectiveness of our internal
control over financial reporting as of December 31, 2017 using the criteria set forth in the Internal Control – Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”). We identified material weaknesses in our internal control over financial reporting which are
described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. In connection with our
management’s assessment of our internal control over financial reporting described above, our management has identified the following deficiencies that constituted
individually, or in the aggregate, material weaknesses in our internal control over financial reporting as of December 31, 2017.
We had material weaknesses in our control environment and monitoring:
ö= We did not implement effective oversight of our finance and accounting processes (including organizational structure and reporting hierarchy),
which impacted our ability to make appropriate decisions regarding revenue recognition.
ö= We did not effectively design and implement appropriate oversight controls over our period-end financial closing and reporting processes, and our
review controls were not sufficient to ensure that errors regarding revenue recognition would be detected.
ö= We did not effectively monitor (review, evaluate and assess) the risks associated with key internal control activities that provide the revenue
information contained in our consolidated financial statements.
We had material weaknesses related to internal control monitoring and activities to support the financial reporting process:
ö= We did not maintain effective controls over the invoicing process to ensure that proper supporting documentation was received prior to preparing
invoices.
ö= We did not maintain effective controls over the revenue recognition process to ensure revenue was only recognized when all four criteria of our
revenue recognition policy were met.
Because of these material weaknesses, our management has concluded that our internal control over financial reporting was not effective to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with
GAAP as of December 31, 2017.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Weaver and Tidwell, L.L.P., an independent
registered public accounting firm, as stated in their report included herein.
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Changes in Internal Control Over Financial Reporting
With the exception of the remediation efforts described below, there has been no change in our internal control over financial reporting that occurred during
the annual period covered by this report and during the subsequent time period through the filing of this Form 10-K that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
We designed a remediation plan to strengthen our internal control over financial reporting and have taken, and will continue to take, remediation steps to
address the material weaknesses described above. We also continue to take meaningful steps to enhance our disclosure controls and procedures and our internal
controls over financial reporting.
Our remediation plan includes the following:
ö= Clearly defining and communicating the management-approved, standard terms and conditions that may be offered to customers during the sales
process and requiring appropriate management approval of requested deviations from these standard terms and conditions before a sale is
consummated with a customer and a sales invoice is created.
ö= Creating and implementing a policy clearly stating that all terms and conditions of agreements with customers are to be recorded in writing,
communicated to finance and accounting personnel, and recorded in our permanent records prior to the creation of a sales invoice.
ö= Conducting periodic training sessions and briefings to communicate our policies and procedures regarding our standard terms and conditions that
we offer to customers and how we document and communicate approved deviations from those standard terms and conditions.
ö= Enhancing the breadth and depth of the review by finance and accounting personnel of sales invoices and underlying supporting documentation
to ensure that unusual items are identified and considered when determining revenue recognition.
ö= Establishing a total invoice dollar amount threshold over which finance and accounting personnel must examine all actual invoices and supporting
ö=
documentation to confirm the purchase by the customer and the appropriate revenue recognition profile.
Publishing guidelines that personnel can reference which set forth the requirements to be met for revenue to be recognized from a sale transaction
and conducting periodic meetings with personnel to educate and remind them of these guidelines.
Our management is implementing and monitoring the effectiveness of these and other processes, procedures and controls and will make any further changes
deemed appropriate. Our management believes the foregoing remedial efforts will effectively remediate the material weaknesses. As the Company continues to
evaluate and work to improve its internal control over financial reporting, our management may determine to take additional measures to address control deficiencies
or determine to modify the remediation plan described above. If not remediated, these control deficiencies could result in further material misstatements to the
Company’s consolidated financial statements.
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Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
GlobalSCAPE, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited GlobalSCAPE, Inc.’s and its subsidiary’s (the Company) internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control—Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion,
because of the effect of the material weaknesses, described below, on the achievement of the objectives of the control criteria, the Company has not maintained
effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of
management’s assessment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance
sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive income, stockholders’ equity and
cash flows for each of the two years in the period ended December 31, 2017 and the related notes (collectively, the consolidated financial statements) and our report
dated June 14, 2018 expressed an unqualified opinion on those consolidated financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a
material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses related to the
control environment, monitoring, and control activities have been identified and included in management’s assessment. These material weaknesses were considered
in determining the nature, timing, and extent of audit tests applied in our audits of the 2017 and 2016 consolidated financial statements, and this report does not affect
our report on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/WEAVER AND TIDWELL LLP
Austin, Texas
June 14, 2018
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Item 9B. Other Information
None.
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Item 10. Directors, Executive Officers and Corporate Governance
PART III
GlobalSCAPE’s Amended and Restated Certificate of Incorporation divides the Board of Directors into three classes of directors serving staggered three-
year terms, with one class to be elected at each annual meeting of stockholders.
The following table sets forth the name and age of each director as of June 14, 2018, the principal occupation of each director during at least the past five
years and the year each began serving as a director of GlobalSCAPE.
Name
Thomas W. Brown
Age
74
Frank M. Morgan
69
Mr. Brown has been an independent stockbroker and investment advisor in San Antonio since 1995. He entered
the securities brokerage business in 1967 after receiving an M.B.A. from Southern Methodist University. In recent
years, he has been involved in the real estate development business in San Antonio in addition to managing stock
and bond investments. Mr. Brown currently serves as a member and Chairman of the Board of Directors of the
Company and has served in such capacity since June 2002. Mr. Brown is an experienced investor who beneficially
owns approximately 12% of our shares. Mr. Brown’s current term as a director of GlobalSCAPE expires in 2018.
Mr. Morgan most recently served as Executive Director for Cyber Security Operations Business Development for
Mantech International Corp supporting the national security community. He also served as the Vice President and
General Manager of the Information Systems Department, Intelligence Solutions Division, L-3 Communications
Services Group. He held a similar position with Titan Corporation before its acquisition by L-3. He worked for BTG,
Inc. (acquired by Titan Corp.) as Vice President of federal sales where he was responsible for marketing computer
security products. Mr. Morgan spent 26 years in the Air Force, retiring in 1996 as a Colonel. He holds a B.S. in
Aeronautical Engineering from the Air Force Academy, a M.S. in Human Resources Management from the
University of Utah, and a M.A. in National Security and Strategic Studies from the Naval War College. Mr. Morgan
has served as a member of the Board of Directors of the Company since 2006. Mr. Morgan’s current term as a
director of GlobalSCAPE expires in 2019.
Dr. Thomas E. Hicks
69
Dr. Hicks has 47 years of experience as an educator in the computer science field. He is currently an Associate
Professor of Computer Science at Trinity University in San Antonio, Texas. He has served in that position since
1983. He is responsible for all of the software engineering courses at Trinity University where he also teaches
courses in database design, networking and data communications, advanced website design and cloud computing.
He has over 100 publications and/or conference presentations to his credit. Dr. Hicks is a graduate of West Virginia
University where he received a Bachelor of Science in Secondary Education-Comprehensive Mathematics, a
Masters of Science-Secondary and Elementary Mathematics Education, and an Educational Doctorate in
Mathematics Education-Concentrations in Mathematics and Computer Science. Dr. Hicks’ extensive experience in
the computer science field and software engineering provides valuable technical insight to our board. Dr. Hicks first
became a director of GlobalSCAPE in 2016 and his current term as a director of GlobalSCAPE expires in 2019.
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David L. Mann
Matthew C. Goulet
Executive Officers
64
46
Mr. Mann has been in the real estate development and home building business since his graduation from Southern
Methodist University in 1975 where he earned a B.B.A. For the past twenty years, he has worked exclusively in the
San Antonio, Texas market. Mr. Mann currently serves as a member of the Board of Directors of GlobalSCAPE and
has served in such capacity since June 2002. Mr. Mann has broad business and finance experience and beneficially
owns approximately 7% of our shares. Mr. Mann’s current term as a director of GlobalSCAPE expires in 2020.
Mr. Goulet has served as GlobalSCAPE’s President and Chief Executive Officer and as a member of the Board of
Directors since May 2016. Prior to that time, he served as GlobalSCAPE’s Chief Operating Officer beginning
October 2015 and its Senior Vice President of Sales and Marketing beginning January 2015. From October 2013 to
December 2014, he was GlobalSCAPE’s Vice President of Sales. He has more than 20 years of experience in the
security, networking, and storage industries. From 2008 to September 2013, he was at Kaspersky Labs, an
information technologies security company, most recently as the Vice President of SME sales and operations,
where he was responsible for setting the strategy for their go-to-market SME initiatives and where he built their
North America SME sales organization from the ground up. Mr. Goulet’s current term as a director of GlobalSCAPE
expires in 2020.
Mr. Goulet received a BS in Marketing from the Boston College Carroll School of Management.
The following table sets forth the name, age, and position of each of our executive officers as of June 14, 2018, and the principal occupation of each
executive officer during the past five years.
Name
Matthew C. Goulet
Age
46
Position
President and Chief
Executive Officer
Karen J. Young
55
Interim Chief Financial
Officer
See discussion of principal occupation above under “Board of Directors”.
Ms. Young has served as GlobalSCAPE’s Interim Chief Financial Officer since March 2018
and prior to this she served as the Company’s Controller since January 2015. From June
2014 to January 2015, Ms. Young was the owner of a CPA practice in which she provided
accounting and managerial consulting services to businesses. Prior to operating her own
CPA practice, Ms. Young served as Controller of PIC Business Systems, Inc., a provider of
web-based integrated Enterprise Resource Planning solutions, where she worked from
May 1995 to August 1999 and again from December 2001 to June 2014. At PIC Business
Systems, Inc., Ms. Young prepared the company’s financial statements and was
responsible for oversight of the company’s accounting department and other
administrative functions. Between her time at PIC Business Systems, Ms. Young worked
for a public accounting firm working mainly in the tax area. Ms. Young began her career at
Valero Energy Corporation, an independent petroleum refiner, where she focused on
budgeting and forecasting for the company and its subsidiaries.
Ms. Young is a Certified Public Accountant with over 20 years of experience as a corporate
controller. She has a B.B.A. in Accounting from The University of Texas at San Antonio
and is a member of the Texas Society of Certified Public Accountants.
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Peter S. Merkulov
38
Chief Technology Officer Mr. Merkulov brings over 14 years of experience in the IT security industry, specifically in
product strategy and management to GlobalSCAPE. He is a seasoned international leader
with over a decade of experience in building and leading international teams as well as
developing and executing global product strategies.
Michael Canavan
37
Vice President of Sales
Mr. Merkulov has served as GlobalSCAPE’s Chief Technology Officer since October 2017.
Prior to that he served as the Company’s Vice President of Product Strategy and
Technology Alliances since joining the Company in October of 2015. Prior to joining
GlobalSCAPE, from September 2013 to April 2014, Mr. Merkulov served as Executive Vice
President at Kaspersky Lab North America, where he oversaw the expansion of the business
within North America and was second in command of their North American operations. He
also served as Kaspersky Lab’s Chief Product Officer, where he drove the adoption,
development, and execution of their long-term product strategy. Under his leadership in this
role, he substantially expanded Kaspersky Lab’s B2B product line as they became one of the
leaders in the Endpoint Protection market as recognized by Gartner. Mr. Merkulov also spent
a number of years as the Vice President of Technology Alliances at Kaspersky Lab where he
led the global alliances strategy and technology partner programs.
Mr. Merkulov is a graduate of Moscow State Institute of International Relations and is
fluent in English, Russian and Swedish.
Mr. Canavan has served at GlobalSCAPE’s Vice President of sales since October 2017. Prior
to that he served as Vice President of Global Enterprise Services since joining the Company
in July 2017. As Vice President of Sales, Mr. Canavan is responsible for leading and
overseeing all direct and channel sales teams for GlobalSCAPE. Mr. Canavan brings a
diverse background with more than 15 years of experience in sales, engineering, and product
management to Globalscape.
Prior to joining GlobalSCAPE in May 2017, Mr. Canavan served multiple roles with
Kaspersky Lab North America starting in May 2010. The last role he held with the
organization was as Senior Vice President, Sales. In that role, he was responsible for all
business-to-business sales activities in North America, including leading channel and
presales system engineering organizations. Mr. Canavan has also held various roles in sales,
engineering and product management at Kaspersky Lab, Trend Micro and CDW, among
others.
Mr. Canavan graduated from Purdue University, Krannert School of Management with a
Bachelor of Science in Economics and a Bachelor of Arts in Psychology.
James W. Albrecht, Jr. retired from his position as Chief Financial Officer of GlobalSCAPE effective March 2, 2018. Also, Gregory T. Hoffer resigned from his
position as Vice President of Engineering of GlobalSCAPE effective April 5, 2018.
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Compensation Committee Interlocks and Insider Participation
Messrs. Morgan and Mann and Dr. Hicks served on the Compensation Committee throughout 2017. No member of the Compensation Committee was at any
time during 2017, or any other time, an officer or employee of GlobalSCAPE or had any relationship with GlobalSCAPE requiring disclosure as a related-party
transaction in Item 13, “Certain Relationships and Related Party Transactions, and Director Independence” below. No executive officer of GlobalSCAPE has served
on the board of directors or compensation committee of any other entity that has or has had one or more executive officers who served as a member of the
Company’s Board of Directors or Compensation Committee during 2017.
Code of Ethics
GlobalSCAPE has adopted a Code of Ethics that applies to all its employees, including its President and Chief Executive Officer and its Interim Chief
Financial Officer. GlobalSCAPE will provide a copy of its Code of Ethics to any person without charge upon written request to:
Karen J. Young
Interim Chief Financial Officer
GlobalSCAPE, Inc.
4500 Lockhill-Selma, Suite 150
San Antonio, Texas 78249
Director Recommendation Process
As of June 14, 2018, there have been no material changes to the procedures by which stockholders may recommend nominees to our Board as described in
the Company’s Definitive Proxy Statement filed with the SEC on March 31, 2017.
Board Meetings and Attendance
During the fiscal year ended December 31, 2017, the Board of Directors held eleven meetings. Separate from the full Board of Directors’ meetings, there were
eleven Audit Committee meetings and nine Compensation Committee meetings. During 2017, each of our current directors attended at least 75% of all Board and
applicable Committee meetings.
During 2017, our directors received compensation for service to GlobalSCAPE as a director. See “Executive Compensation – Compensation of Directors.”
GlobalSCAPE encourages, but does not require, directors to attend the annual meeting of stockholders. At GlobalSCAPE’s 2017 Annual Meeting of Stockholders, all
members of the Board were present.
Board Leadership Structure
The Board believes it is in the best interests of the Company to separate the roles of Chief Executive Officer and Chairman of the Board. This structure
ensures a greater role for the directors in the oversight of management and the Company and promotes active participation of the directors in setting meeting
agendas and establishing Board priorities and procedures. Further, this structure permits the Chief Executive Officer to focus on the management of the Company’s
day-to-day operations.
Committees of the Board of Directors
GlobalSCAPE has standing Audit and Compensation Committees. GlobalSCAPE did not have a standing Nominating Committee during 2017, but
established one in March 2018.
The Audit Committee is a separately-designated audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Audit
Committee consisted of Messrs. Mann and Morgan and Dr. Hicks during 2017. Mr. Mann was the chairman of this committee during 2017. This committee met eleven
times during 2017. The Board has determined that Mr. Mann is an audit committee financial expert as defined by SEC rules. The Audit Committee aids management in
the establishment and supervision of our financial controls, evaluates the scope of the annual audit, reviews audit results, makes recommendations to our Board
regarding the selection of our independent registered public accounting firm, consults with management and our independent registered public accounting firm prior
to the production of consolidated financial statements to stockholders and, as appropriate, initiates inquiries into aspects of our financial affairs. The Audit
Committee has authority under its charter to retain, approve fees for and terminate advisors, consultants, and agents as it deems necessary to assist in the fulfillment
of its responsibilities. The Audit Committee Report, which appears in a subsequent section of this document, more fully describes the activities and responsibilities
of the Audit Committee.
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The Compensation Committee consisted of Messrs. Mann and Morgan and Dr. Hicks during 2017. Mr. Morgan was chairman of this committee during 2017.
This committee met nine times during 2017. The Compensation Committee’s role is to establish and oversee GlobalSCAPE’s compensation and benefit plans and
policies, administer its stock option plans, and review and approve annually all compensation decisions relating to GlobalSCAPE’s officers. At least annually, our
President and Chief Executive Officer submits to the Compensation Committee his recommendations as to base salary, bonus and equity incentive awards for each
executive officer, except himself, for the following fiscal year based upon his subjective evaluation of their individual performance. The Compensation Committee
reviews and discusses the recommendations and has the sole authority to determine the base salary, bonus, and equity incentives for the President and Chief
Executive Officer.
The agenda for meetings of the Compensation Committee is determined by its Chairman. At each meeting, the Compensation Committee meets in executive
session. The Compensation Committee’s Chairman reports the Committee’s recommendations on executive compensation to the Board. The Company’s personnel
support the Compensation Committee in its duties and, along with the President and Chief Executive Officer, may be delegated authority to fulfill certain
administrative duties regarding the compensation programs. The Compensation Committee has authority under its charter to retain, approve fees for and terminate
advisors, consultants, and agents as it deems necessary to assist in the fulfillment of its responsibilities.
GlobalSCAPE did not have a nominating committee during 2017. The Board of Directors did not believe that it was appropriate to have a separate nominating
committee during 2017 because of the small size of the Board and because the Board consisted of a majority of independent directors. During 2017, all directors,
including all of the independent directors, participated in the consideration of director nominees. In March 2018, the Board of Directors established a Nominating
Committee, consisting of Messrs. Mann and Morgan and Dr. Hicks. The chairman of this committee is Dr. Hicks.
Each of the Board’s committees has a written charter. Copies of the charters are available for review on the Company’s website at www.globalscape.com on
the Investor Relations page.
Section 16(a) Beneficial Ownership Reporting Compliance
GlobalSCAPE believes, based solely on its review of the copies of Section 16(a) forms furnished to it and written representations from executive officers and
directors (and its ten percent stockholders), that all Section 16(a) filing requirements were fulfilled on a timely basis during the fiscal year ended December 31, 2017.
In making this disclosure, GlobalSCAPE has relied solely on written representations of its directors and executive officers (and its ten percent stockholders)
and copies of the reports that they have filed with the SEC.
Item 11. Executive Compensation
Compensation Discussion & Analysis
We compensate our management through a combination of base salary, sales commissions, incentive bonuses and long-term equity based awards in the
form of stock options and stock awards. This compensation is designed to be competitive with those of a group of companies which we have selected for
comparative purposes in order to attract and retain our executive officers while also creating incentives which will align executive performance with the long-term
interests of our stockholders.
This section discusses the principles underlying our executive compensation policies and decisions and the most important factors relevant to an analysis
of these policies and decisions. It provides qualitative information regarding the manner and context in which compensation is awarded to and earned by our
executive officers named in the Summary Compensation Table below, whom we sometimes refer to as our named executive officers, or NEOs, and places in
perspective the data presented in the tables and narrative that follow.
Our Compensation Committee
Our Compensation Committee approves, implements, and monitors all compensation and awards to executive officers including the President and Chief
Executive Officer, Chief Financial Officer, and the other NEOs. The Committee’s membership is determined by the Board of Directors and is currently composed of
three non-management directors. The Committee has the authority to delegate any of its responsibilities to subcommittees as the Committee may deem appropriate in
its sole discretion. During 2017, the Committee did not delegate any of its responsibilities.
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The Committee periodically approves and adopts, or makes recommendations to the Board for, GlobalSCAPE’s compensation decisions (including the
approval of grants of stock options to our NEOs). At least annually, our President and Chief Executive Officer submits to the Compensation Committee his
recommendations as to base salary, bonus and equity incentive awards for each executive officer, except himself, for the following fiscal year based upon his
subjective evaluation of their individual performance. The Compensation Committee reviews and discusses the recommendations and has the sole authority to
determine the base salary, bonus, and equity incentives for the President and Chief Executive Officer.
The Compensation Committee reviewed all components of compensation for our executive officers, including salary, bonuses, long-term equity incentives,
the dollar value to the executive, and the cost to GlobalSCAPE of all perquisites and all severance and change in control arrangements. Based on this review, the
Compensation Committee determined that the compensation paid to our executive officers reflected our compensation philosophy and objectives.
Compensation Philosophy and Objectives
Our underlying philosophy in the development and administration of GlobalSCAPE’s annual, incentive, and long-term compensation plans is that our
compensation system should be designed to attract and retain talented executives while also creating incentives that reward performance and align the interests of
our NEOs with those of GlobalSCAPE’s stockholders. Key elements of this philosophy are:
ö= Establishing base salaries that are competitive with the companies in our comparative group, within GlobalSCAPE’s budgetary constraints and
commensurate with GlobalSCAPE’s salary structure.
ö= Rewarding our NEOs for outstanding Company-wide performance as reflected by financial measures, such as sales revenue or net income, or other
goals, such as the consummation of an acquisition and product delivery as well as customer and employee satisfaction and compliance with regulatory
requirements.
Providing equity-based incentives for our NEOs to ensure that they are motivated over the long term to respond to GlobalSCAPE’s business
challenges and opportunities as owners rather than just as employees.
ö=
Attracting and Retaining Executive Talent.
We recognize salary is one component in successfully attracting and retaining talented executives who will help the Company grow. Being mindful of our
budgetary responsibilities, we generally set our base salaries at levels we believe are competitive relative to comparable companies in our industry that are in our
general geographic area. We use third-party services that gather and report base salary, incentives, equity, and total compensation information for multiple
companies. The services we use include Salary.com Small Business Compensation Solutions and Kenexa CompAnalyst. We use these services because we believe
they provide information relevant to the industry and geographic areas in which our personnel work. This comparison allows us to create competitive total
compensation packages for our executive team. Annual adjustments are considered and based on the Company’s ability to achieve pre-established revenue and
profitability goals.
Rewarding Performance.
We reward outstanding performance by certain of our personnel (other than those who earn sales commissions) with cash bonuses that are based on
financial measures, such as sales revenue or net income, or other goals, such as the consummation of an acquisition or product delivery. For more information on our
bonus program, refer to “Elements of Executive Compensation—Incentive Compensation.” We reward performance by certain of our sales personnel through
payment of commissions based on bookings for sales of our products and services and/or through other incentive awards paid based on the achievement of certain
qualitative objectives.
Aligning Executive and Stockholder Interests.
We believe that equity-based compensation provides an incentive to our NEOs to build value for our Company over the long term and to align the interests
of our NEOs and stockholders. We use stock options because we believe such options will generate value to the recipient only if our stock price increases during
the term of the option. The stock options granted to our NEOs vest solely based on the passage of time, other than in the event of a change in control. We believe
that time-vested equity awards encourage long-term value creation and executive retention because executives can realize value from such rewards only if they
remain employed by us until the awards vest.
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CEO Pay Ratio
We believe executive pay must be internally consistent and equitable to motivate our employees to create shareholder value. We are committed to internal
pay equity, and the Compensation Committee monitors the relationship between the pay our executive officers receive and the pay our non-managerial employees
receive. The Compensation Committee reviewed a comparison of CEO pay (base salary and incentive pay) to the pay of all our employees in 2017. The compensation
for our CEO in 2017 was approximately 8.4 times the median pay of our full-time employees.
Our CEO to median employee pay ratio is calculated in accordance with SEC regulations. We identified the median employee by examining the 2017 total
cash compensation for all individuals, excluding our CEO, who were employed by us on December 23, 2017, the last day of our payroll year. We included all
employees, whether employed on a full-time, part-time, or seasonal basis. We did not make any assumptions, adjustments, or estimates with respect to total cash
compensation and we did not annualize the compensation for any full-time employees that were not employed by us for all of 2017.
After identifying the median employee based on total cash compensation, we calculated annual total compensation for such employee using the same
methodology we use for our named executive officers as set forth in the Summary Compensation Table below.
As illustrated in the table below, our 2017 CEO to median employee pay ratio is 8.4:1.
Base Salary
Severance
Option Awards
Non-Equity Incentive Plan Compensation
Discretionary Bonus
All Other Compensation
CEO to Median
Employee Pay Ratio
President and CEO Median Employee
65,253
$
6,297
8,449
10,207
-
8,169
98,375
375,000 $
-
296,413
81,580
-
76,178
829,171 $
$
Elements of Executive Compensation
The compensation currently paid to GlobalSCAPE’s executive officers consists of the following core elements:
ö=
ö=
ö=
ö=
ö=
Base salary.
For sales personnel, commissions based on bookings for sales of our products and services.
For non-sales personnel, bonuses under a performance-based, non-equity cash incentive plan.
Stock option awards granted pursuant to our 2016 Employee Long-Term Equity Incentive Plan, which we refer to as the 2016
Employee Plan.
Other employee benefits available to all employees of GlobalSCAPE.
We believe these elements support our underlying philosophy of attracting and retaining talented executives while remaining within our budgetary
constraints, creating cash incentives that reward Company-wide and individual performance, and aligning the interests of our NEOs with those of GlobalSCAPE’s
stockholders by providing the NEOs with equity-based incentives to ensure motivation over the long term. We view the core elements of compensation as related
but individually distinct. Although we review total compensation, we do not believe that significant compensation derived from one component should increase or
reduce compensation from another component. We determine the appropriate level for each component of compensation separately. We have not adopted any
formal or informal policies or guidelines for allocating compensation among long-term incentives and annual base salary and bonuses, between cash and non-cash
compensation, or among different forms of non-cash compensation. We consider the experience, tenure, and seniority of each named executive officer in making
compensation decisions.
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GlobalSCAPE does not have any deferred compensation programs or supplemental executive retirement plans. No perquisites are provided to
GlobalSCAPE’s executive officers that are not otherwise available to all employees of GlobalSCAPE, except that the Company reimburses Messrs. Goulet and
Albrecht for travel and lodging expenses they incur while working in our corporate office. Being mindful of our budgetary responsibilities, the base salaries for all
GlobalSCAPE NEOs are targeted at levels we believe are competitive relative to a comparative group of the companies in our general industry and geographic region.
This approach enables us to attract and retain the necessary talent a small, competitive company needs to grow. This salary structure is reviewed at least annually,
and more frequently if warranted, to ensure its competitiveness within our peer group. Adjustments are determined initially by our President and Chief Executive
Officer with final approval by the Compensation Committee before being implemented. The composite average increase in base salaries for all Company employees,
including NEOs, during 2017 was approximately 2%.
The Compensation Committee has set base salaries for 2018 for our named executive officers as follows:
Name
Matthew C. Goulet
Peter S. Merkulov
Michael P. Canavan
$
Base Salary
375,000
236,250
235,000
Incentive Compensation. The Compensation Committee believes that paying incentive compensation in the form of bonuses or commissions helps create
financial incentives for our NEOs that are tied directly to goals that best reflect their respective duties and responsibilities or the achievement of certain goals. The
Compensation Committee approves the plans under which bonuses and commissions are paid and may, at its discretion, modify the goals and objectives upon which
these payments are based, pay bonuses if such goals are not met, or increase or decrease the amounts paid.
If certain target levels of revenue and income from operations were achieved for 2017, Messrs. Goulet and Albrecht were eligible for an annual bonus equal
to 35% of their base salaries. If actual revenue and income from operations fall below the target levels, the base bonuses are reduced on a sliding scale by specified
percentages to a point where if less than 85% of the target levels of revenue and net income are achieved, no bonus is earned. If actual revenue and income from
operations exceed the target levels, the base bonuses are increased on a sliding scale by specified percentages of up to 200%. During 2017, neither of the target levels
were achieved; however, the Compensation Committee, exercising its discretion, determined that the Company’s operating results were overly affected by the
Investigation. The Compensation Committee utilized the average results for the first, second and fourth quarters of 2017 and applied them to the third quarter and
used their discretion to pay the annual bonus at the 50% level. Based on these results, the Compensation Committee approved, and the Company paid, bonuses for
2017 of $81,580 to Mr. Goulet and $55,735 to Mr. Albrecht. These amounts are reflected in the “Bonus” column of the Summary Compensation Table below.
Long-Term Equity Incentive Plan. GlobalSCAPE’s 2010 Employee Long-Term Equity Incentive Plan, or 2010 Employee Plan, was approved by our
stockholders in 2010. GlobalSCAPE’s 2016 Employee Long-Term Equity Incentive Plan, or the 2016 LTIP, was approved by our stockholders in 2017. These plans
authorize us to grant incentive stock options, non-qualified stock options, and shares of restricted stock to our NEOs, as well as to all employees of GlobalSCAPE.
Prior to 2017, we granted stock options totaling all of the 3,000,000 shares that were reserved for issuance under the 2010 Employee Plan. Accordingly, we
will not grant any more stock options under this plan. We did not grant any shares of restricted stock under this plan.
Under the 2016 LTIP, a total of 5,000,000 shares of common stock have been reserved for grants of incentive stock options, non-qualified stock options, and
shares of restricted stock to our NEOs, as well as to all employees of GlobalSCAPE.
The purpose of the 2010 Employee Plan and the 2016 LTIP is to employ and retain qualified and competent personnel and to promote the growth and
success of GlobalSCAPE, which can be accomplished by aligning the long-term interests of the NEOs and employees with those of the stockholders by providing the
NEOs and employees an opportunity to acquire an equity interest in GlobalSCAPE. We believe that stock options motivate our NEOs and employees to exert their
best efforts on behalf of our stockholders and align the interests of our NEOs and employees with our stockholders.
All grants are made with an exercise price equal to the closing price of our common stock on the date of grant. On their date of hire and generally each year
thereafter, our NEOs and employees are granted options to purchase shares. These options generally vest ratably over three years from the option grant date.
Vesting is accelerated in certain events described under “Employment Agreements and Potential Payments Upon Termination or Change in Control.” Options granted
on the date of hire and each year thereafter generally may each be for the purchase of additional shares of our common stock with the exact number determined at the
discretion of the Compensation Committee and Board of Directors based upon input from our President and Chief Executive Officer. We do not time stock option
grants in coordination with the release of material non-public information.
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In granting stock options, our Compensation Committee considers the share-based compensation expense we will incur in current and future accounting
periods as the stock options vest. In particular, the Compensation Committee considers the fact that the aggregate date fair value of stock option awards (as set forth
in the summary compensation table below) is an amount that we will recognize over time as the options vest and is not necessarily an expense of the Company or
compensation realized by a stock option recipient totally and only in the year a stock option is granted.
Other Employee Benefits. GlobalSCAPE’s NEOs are eligible to participate in all of our employee benefit plans, such as medical, dental, group life, and long-
term disability insurance on the same basis as other employees. GlobalSCAPE’s NEOs are eligible to participate in our 401(k) plan on the same basis as other
employees. GlobalSCAPE’s Board of Directors, at its sole discretion, may authorize GlobalSCAPE to make matching cash contributions (in part or in whole) each year
to the 401(k) on behalf of our employees.
Compensation Policies and Practices
The Compensation Committee has conducted an in-depth risk assessment of the Company’s compensation policies and practices in response to public and
regulatory concerns about the link between incentive compensation and excessive risk taking by companies. The Compensation Committee concluded that our
compensation policy does not motivate imprudent risk taking. In this regard, the Compensation Committee believes that:
ö= The Company’s annual incentive compensation is based on performance metrics that promote a disciplined approach towards the long-term goals of the
Company.
ö= The Company does not offer significant short-term incentives that might drive high-risk investments at the expense of the long-term value of the
Company.
ö= The Company’s compensation programs are weighted towards offering long-term incentives that reward sustainable performance.
ö= The Company’s compensation awards are capped at reasonable levels, as determined by a review of the Company’s financial position and prospects, as
well as the compensation offered by companies in our industry.
ö= The Board’s high level of involvement in approving our operating budget, material investments and capital expenditures helps avoid imprudent risk
taking.
The Company’s compensation policies and practices were evaluated to ensure that they do not foster risk taking above the level of risk associated with the
Company’s business. The Company and the Compensation Committee concluded that the Company has a balanced pay and performance program and that the risks
arising from its compensation policies and practices are not reasonably likely to have a material adverse effect on the Company.
Impact of Regulatory Requirements
Deductibility of Executive Compensation. Federal income tax laws limit the deductions a publicly-held company is allowed for compensation paid to the
Chief Executive Officer and to the four most highly compensated executive officers other than the Chief Executive Officer. Generally, amounts paid in excess of $1.0
million to a covered executive, other than performance-based compensation, cannot be deducted. In order to constitute performance-based compensation for
purposes of the tax law, stockholders must approve the performance measures. We will consider ways to maximize the deductibility of executive compensation, while
retaining the discretion necessary to compensate executive officers in a manner commensurate with performance and the competitive environment for executive
talent.
Policy on Recovery of Compensation. Our President and Chief Executive Officer and Chief Financial Officer are required to repay certain bonuses and stock-
based compensation they receive if we are required to restate our financial statements as a result of misconduct as required by Section 304 of the Sarbanes-Oxley Act
of 2002.
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Risk Considerations in our Compensation Program
The Compensation Committee has reviewed the Company’s compensation policies and practices in response to current public and regulatory concern about
the link between incentive compensation and excessive risk-taking by corporations. The Committee concluded that the Company’s compensation program does not
motivate imprudent risk taking and that any risks taken resulting from compensation policies and practices are not reasonably likely to have a material adverse effect
on the Company. In reaching this conclusion, the Committee determined the following:
ö= The Company’s annual incentive compensation is based on balanced performance metrics that promote progress towards longer-term
Company goals.
ö= The Company’s compensation programs are capped at reasonable levels, as determined by a review of the Company’s budgetary constraints,
economic position and prospects, as well as the compensation offered by comparable companies.
ö= The oversight of the Compensation Committee in the operation of incentive plans and the high level of board involvement in approving
material use of Company resources adequately mitigates imprudent risk-taking.
Compensation Committee Report
The Compensation Committee of GlobalSCAPE reviewed and discussed the Compensation Discussion & Analysis required by Item 402(b) of Regulation S-K
with management. Accordingly, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion & Analysis be included in
this Annual Report on Form 10-K.
This report is submitted by the members of the Compensation Committee, which consists of the following directors:
Frank M. Morgan (Chairman of the Compensation Committee)
ö=
ö= David L. Mann
ö= Dr. Thomas E. Hicks
Summary Compensation Table
The following table summarizes compensation that GlobalSCAPE paid during the fiscal years ended December 31, 2017, 2016 and 2015 to our President and
Chief Executive Officer, our Chief Financial Officer and the four most highly compensated executive officers for the fiscal year ended December 31, 2017. As
previously noted, Mr. Albrecht retired from his position as Chief Financial Officer effective March 2, 2018 and Mr. Hoffer resigned from his position as Vice President
of Engineering effective April 5, 2018. Additionally, Daniel Burke resigned from his position as Vice President of Sales effective September 30, 2017.
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Mathew C. Goulet
President and Chief
Executive
Officer/Senior Vice
President of Sales and
Marketing (4)
James W. Albrecht, Jr.
Chief Financial
Officer
Peter Merkulov
Chief Technology
Officer (5)
Michael P. Canavan
Vice President of
Sales (6)
Gregory T. Hoffer
Vice President of
Engineering
Daniel L. Burke
Former Vice President
of Sales (7)
2017
2016
2015
2017
2016
2015
2017
2016
2015
2017
2017
2016
2015
2017
2016
2015
Salary
Severance
Bonus
375,000
300,000
206,542
256,200
244,007
236,900
225,000
218,400
50,400
137,500
190,200
184,597
165,434
261,981
179,250
118,500
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Option
Awards (1)
296,413
405,165
Non-Equity
Incentive Plan
Compensation
-
137,053 (2)
All Other
Compensation
(3)
76,178
60,541
Total
829,171
902,759
81,580
-
-
123,031
259,361 (2)
23,329
612,263
55,735
150,721
-
-
-
-
-
-
-
163,619
123,031
56,918
101,874
57,558
131,600
-
152,583
205,992
131,600
16,450
29,459
43,027
32,024
23,900
18,346
14,192
100
1,875
505,683
496,568
485,705
432,504
364,192
219,533
374,826
7,820
53,224
-
112,914
364,158
-
-
-
-
-
163,619
-
31,104
31,918
-
133,617
141,560
8,202
244,555
332,114
22,520
18,432
14,734
18,407
21,793
401,840
215,784
410,332
583,772
480,609
(1)
(2)
(3)
(4)
(5)
(6)
(7)
These amounts represent the aggregate grant date fair value of stock option awards for fiscal years 2017, 2016 and 2015 calculated as described in our
Consolidated Financial Statements included in this Form 10-K. See specifically footnote 2, Significant Accounting Policies, and footnote 8, Stock Options,
Restricted Stock and Share-Based Compensation for a discussion of all assumptions made in the calculation of this amount. These amounts do not
necessarily represent the actual amounts paid to or realized by the named executive officer for these awards during fiscal years 2017, 2016 or 2015. These
amounts are recognized as an expense in our financial statements over the period of service required for the grant to become vested which is generally three
years. For the options granted to Mr. Goulet in 2017, those expenses were determined to be $93,206, $109,529, $79,042 and $14,635 in 2017, 2018, 2019 and
2020, respectively. For the options granted to Mr. Albrecht in 2017, those expenses were determined to be $52,862, $61,464, $29,533 and $6,862 in 2017, 2018,
2019 and 20120, respectively. For the options granted to Mr. Merkulov in 2017, those expenses were determined to be $16,157, $19,158, $19,158 and $3,085 in
2017, 2018, 2019 and 2020, respectively. For the options granted to Mr. Canavan in 2017, those expenses were determined to be $29,326, $68,510, $68,529 and
$39,627 in 2017, 2018, 2019 and 2020, respectively. For the options granted to Mr. Hoffer in 2017, those expenses were determined to be $19,692, $22,770,
$8,416 and $2,346 in 2017, 2018, 2019 and 2020, respectively. Mr. Burke was not awarded any options in 2017.
Mr. Goulet’s non-equity incentive plan compensation for 2016 consists of $88,450 earned under our annual incentive bonus plan described above and
$48,603 of sales commissions. For 2015, this amount consisted of $12,090 earned under our annual incentive bonus plan described above and $247,271 of
sales commissions.
Primarily 401k matching contributions and group health plan premiums for all officers. Also includes $52,225 and $19,720 in 2017 of reimbursement to
Messrs. Goulet and Albrecht, respectively, for lodging and other travel expenses incurred for travel to our corporate office. Also includes $94,500 in realized
gain from sale of stock options from Mr. Hoffer in 2017.
Mr. Goulet became our President and Chief Executive Officer in May 2016. Prior to that time, he was our Senior Vice President of Sales and Marketing.
Mr. Merkulov was hired on October 19, 2015. He did not receive any option awards in 2016.
Mr. Canavan was hired on July 10, 2017.
Mr. Burke resigned effective September 30, 2017.
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OPTION EXERCISES AND STOCK VESTED
The following table provides information concerning exercises of stock options and other stock awards by our named executive officers during the fiscal
year ended December 31, 2017.
Name
Mathew C. Goulet
James W. Albrecht, Jr.
Peter S. Merkulov
Michael P. Canavan
Gregory T. Hoffer
Daniel L. Burke
OPTION AWARDS
STOCK AWARDS
Number of Shares
Acquired on
Exercise
Value Realized
Number of Shares
Value Realized
On Exercise
($)
Acquired on
Vesting
On Vesting
($)
-
-
-
-
50,000
-
-
-
-
-
94,500
-
115,750 (1)
57,750 (2)
33,000 (3)
-
50,000 (4)
31,350 (5)
85,075
28,545
30,360
-
42,440
30,327
(1)
(2)
(3)
(4)
(5)
These 115,750 stock awards vested on January 2, 2017, February 1, 2017, February 9, 2017, May 16, 2017, and June 2, 2017 and the closing price of
GlobalSCAPE’s common stock on these dates were $4.07, $3.92, $3.82, $4.25, and $4.60, respectively.
These 57,750 stock awards vested on February 1, 2017 and February 9, 2017 and the closing price of GlobalSCAPE’s common stock on these dates were
$3.92 and $3.82, respectively.
These 33,000 stock awards vested on October 19, 2017 and the closing price of GlobalSCAPE’s common stock on this date was $4.20.
These 50,000 stock awards vested on January 2, 2017 and February 1, 2017 and the closing price of GlobalSCAPE’s common stock on these dates were $4.07
and $3.92, respectively.
These 31,350 stock awards vested on February 1, 2017, February 9, 2017, and May 18, 2017 and the closing price of GlobalSCAPE’s common stock on these
dates were $3.92, $3.82, and $4.46, respectively.
Relationship of Salary and Annual Incentive Compensation to Total Compensation
The following table sets forth the relationship of salary and annual incentive compensation to total compensation for our NEOs for 2017.
Executive
Matthew C. Goulet
James W. Albrecht, Jr.
Peter S. Merkulov
Michael P. Canavan
Gregory T. Hoffer
Daniel L. Burke
Percentage of
Salary to Total
Compensation
Percentage of
Annual Cash
Incentive Payment
to Total
Compensation(1)
45.2%
50.7%
52.0%
36.7%
52.2%
63.8%
9.8%
11.0%
30.4%
7.9%
2.1%
32.6%
(1)
Includes non-equity incentive plan compensation and sales commissions.
Employment Agreements and Potential Payments Upon Termination or Change in Control
GlobalSCAPE has entered into employment agreements with Messrs. Goulet, Albrecht, Merkulov and Canavan pursuant to which each will receive
compensation as determined from time to time by the Board of Directors in its sole discretion.
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Absent a Change in Control, these agreements do not provide for any minimum term of employment. In the event there is a Change in Control without a
termination in connection with that event, a one year employment term commences as of the date of the Change in Control. Each agreement automatically renews on
each subsequent annual anniversary date for an additional one year period unless the agreement is cancelled by the Company at least 90 days prior to the end of any
such one year term. These agreements do not provide for any payment in the event of termination, except that if their employment is terminated in connection with a
Change in Control, the Company will pay them an amount equal to their annual base salary which the Company may, at its option, pay as a lump sum.
A Change in Control occurs under these employment agreements upon the occurrence of any of the following:
ö= Any “person” or “group” (as such terms are used in Section 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial owner, directly or
indirectly, of securities representing 50% or more of the combined voting power of the Company’s then outstanding securities; provided, however,
that if Thomas W. Brown and/or David L. Mann acquire, directly or indirectly, beneficial ownership of securities representing 50% or more of the
combined voting power of GlobalSCAPE’s then outstanding securities, then it shall not be deemed a Change in Control.
ö= Any person or group makes a tender offer or an exchange offer for 50% or more of the combined voting power of the Company’s then outstanding
securities.
ö= At any time during any period of twelve consecutive months, individuals who at the beginning of such period constituted a majority of the Board
of Directors (“Incumbent Directors”) of the Company cease for any reason other than death to constitute a majority of the board; provided,
however, that an individual who becomes a member of the Board subsequent to the beginning of the 12-month period, shall be deemed to have
satisfied such 12-month requirement and shall be deemed an Incumbent Director if such Director was elected by or on the recommendation of, or
with the approval of, at least two-thirds of the Directors who then qualified as Incumbent Directors either actually (because they were Directors at
the beginning of such period) or whose election was approved by two-thirds of the Incumbent Directors; if any such individual initially assumes
office as a result of or in connection with either an actual or threatened solicitation with respect to the election of Directors (as such terms are used
in Rule 14a-12(c) of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitations of proxies or consents by or on
behalf of a person other than a member of the Board, then such individual shall not be considered an Incumbent Director.
ö= The Company consolidates, merges or exchanges securities with any other entity where the stockholders of the Company immediately before the
effective time of such transaction beneficially own, immediately after the effective time of such transaction, less than 50% of the combined voting
power of the outstanding securities of the entity resulting from such a transaction.
ö= Any person or group acquires all or substantially all of the Company’s assets.
All of our employment agreements provide for termination without any further payments due if the termination is for “cause”, with that term defined to
include any one of the following events:
ö= Employee substantially fails to perform his duties with the Company (other than any such failure resulting from his incapacity due to disability
or any such actual or anticipated failure resulting from termination by employee for Good Reason, as defined below) after a written demand for
substantial performance is delivered to employee by the Board, which specifically identifies the manner in which the Board believes that
employee has not substantially performed his duties.
ö= Employee engages in conduct which is demonstrably and materially injurious to the Company or any of its affiliates, monetarily or otherwise.
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ö= Employee commits fraud, bribery, embezzlement or other material dishonesty with respect to the business of the Company or any of its
affiliates, or the Company discovers that employee has committed any such act in the past with respect to a previous employer.
ö= Employee is indicted for any felony or any criminal act involving moral turpitude, or the Company discovers that employee has been convicted
of any such act in the past.
ö= Employee commits a material breach of any of the covenants, representations, terms or provisions of the employment agreement.
ö= Employee violates any instructions or policies of the Company with respect to the operation of its business or affairs that causes material harm,
economic or otherwise, to the Company.
ö= Employee uses illegal drugs.
“Good Reason,” as used above, means, without the officer’s express written consent, any of the following:
ö= The material failure by the Company, without employee’s consent, to pay to employee any portion of his current compensation within ten (10)
days of the date any such compensation payment is due.
ö= The Company commits a material breach of any of the covenants, representations, terms or provisions of the employment agreement, and such
breach is not cured within thirty (30) days after written notice thereof to the Company, which notice shall identify in reasonable detail the
nature of the breach and give the Company an opportunity to respond, excluding, however, failure to pay salary within ten (10) days as
described above.
ö= Any material diminution of employee’s title, function, duties, authority or responsibilities, including reporting requirements.
ö= A reduction in employee’s base salary as in effect on the date of the employment agreement or as may be increased from time to time.
ö= A material reduction in the employee benefits that are in effect from time to time for employee.
ö= A relocation of the employee’s principal place of employment to a location which is beyond a 50 mile radius from San Antonio, Texas.
If any lump sum payment to a named executive officer would individually or together with any other amounts paid or payable constitute an “excess
parachute payment” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended, and applicable regulations thereunder, the amounts to be
paid will be increased so that each named executive officer, as the case may be, will be entitled to receive the amount of compensation provided in his contract after
payment of the tax imposed by Section 280G.
In the event of a Change in Control, unvested options to purchase our common stock that have been awarded to our NEOs will become fully vested.
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The table below contains information concerning termination and Change in Control payments to each of our named executive officers as if the event
occurred on December 31, 2017.
Name & Principal Position
Benefit
Matthew C. Goulet
President and Chief Executive Officer
James W. Albrecht, Jr.
Chief Financial Officer
Peter S. Merkulov
Chief Technology Officer
Michael P. Canavan
Vice President of Sales
Gregory T. Hoffer
Vice President of Engineering
Daniel L. Burke
Former Vice President of Sales
Severance
Option Acceleration
Severance
Option Acceleration
Severance
Option Acceleration
Severance
Option Acceleration
Severance
Option Acceleration
Severance
Option Acceleration
Before Change in Control
Termination Without Cause or for Good
Reason
After Change in
Control
Termination
Without Cause or
for Good Reason
(1)
(1)
(1)
(1)
(1)
(1)
not applicable
not applicable
not applicable
not applicable
not applicable
not applicable
not applicable
not applicable
not applicable
not applicable
not applicable
not applicable
$
375,000
13,950
256,200
10,935
236,250
9,180
137,500
-
190,200
2,010
261,981
8,836
(1)
The option acceleration amount is the intrinsic value of equity awards minus the exercise price. This intrinsic value is based upon the closing price
for a share of our common stock of $3.55 on December 29, 2017, minus the exercise price. If the number in this row is zero, the option exercise price
of all options held by that NEO is greater than the closing price of our common stock used in determining this amount.
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The following table provides information with regard to grants of non-equity incentive compensation and all other stock awards to our named executive
officers in 2017. We do not have an equity incentive plan. Therefore, these columns have been omitted from the following table.
GRANTS OF PLAN-BASED AWARDS
Estimated Future Payouts Under Non-Equity
Incentive Plan Awards ($) (1)
Threshold
Target
Maximum
All Other
Option
Awards:
Number of
Securities
Underlying
Options
Per Share
Exercise or
Base Price of
Option
Awards ($)
Grant date
fair value of
stock and
option awards
($)(2)
$
-
n/a
131,250
n/a
Unlimited
n/a
-
200,000
$
-
3.73
$
-
296,413
-
n/a
n/a
n/a
n/a
n/a
$
89,670
n/a
Unlimited
n/a
-
100,000
$
-
3.73
$
-
150,721
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
35,000
$
3.73
$
57,558
75,000
25,000
$
$
3.73
3.73
$
$
163,843
42,149
35,000
$
3.73
$
53,224
Grant Date
5/10/2017
2/8/2017
5/10/2017
2/8/2017
2/8/2017
7/10/2017
8/23/2017
2/8/2017
Matthew C. Goulet
Matthew C. Goulet
James W. Albrecht, Jr.
James W. Albrecht, Jr.
Peter S. Merkulov
Michael P. Canavan
Gregory T. Hoffer
(1) Awards potentially payable under our annual bonus plan. The annual bonus plan does not provide for a threshold level as the bonuses under the plan
can range from zero to an unlimited amount. See the discussion under “Compensation Discussion & Analysis – Elements of Executive Compensation –
Incentive Compensation” for more information.
(2) These amounts represent the aggregate grant date fair value of stock option awards for fiscal year 2017 calculated as described in our Consolidated
Financial Statements included in this Form 10-K. See specifically footnote 2, Significant Accounting Policies, and footnote 8, Stock Options, Restricted
Stock and Share-Based Compensation for a discussion of all assumptions made in the calculation of this amount. These amounts do not necessarily
represent the actual amounts paid to or realized by the named executive officer for these awards during fiscal year 2017. These amounts are recognized
as an expense in our financial statements over the period of service required for the grant to become vested, which is generally three years.
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Outstanding Equity Awards at Fiscal Year-End
The table below contains certain information concerning outstanding option awards at December 31, 2017 for our named executive officers
Name
Matthew C. Goulet
President and Chief Operating Officer
James W. Albrecht, Jr.
Chief Financial Officer
Peter Merkulov
Chief Technology Officer
Michael P. Canavan
Vice President of Sales
Gregory T. Hoffer
Vice President of Engineering
Pension Benefits
OPTION AWARDS
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
Option Exercise
Price Per Share
($)
Option Expiration
Date
75,000
25,000
49,500
33,000
33,000
16,500
-
150,000
49,500
33,000
-
66,000
-
-
-
33,000
-
-
-
25,500
67,000
67,000
33,500
200,000
-
25,500
67,000
100,000
$
$
$
$
$
$
$
$
$
$
$
34,000
35,000
$
$
75,000
25,000
$
$
67,000
35,000
$
$
1.55
2.35
3.20
3.52
3.53
3.50
3.73
2.10
3.20
3.52
3.73
3.28
3.73
5.28
3.89
3.52
3.73
9/9/2023
1/2/2024
2/9/2025
2/1/2026
5/16/2026
6/2/2026
2/8/2027
7/10/2022
2/9/2025
2/1/2026
2/8/2017
10/19/2025
2/8/2017
7/10/2027
8/23/2027
2/1/2026
2/8/2027
GlobalSCAPE does not sponsor any pension benefit plans. None of the NEOs contribute to such a plan.
Non-Qualified Deferred Compensation
GlobalSCAPE does not sponsor any non-qualified defined compensation plans or other non-qualified deferred compensation plans.
Compensation of Directors
The Board of Directors has the authority to determine the amount of compensation to be paid to its members for their services as directors and committee
members and to reimburse directors for their expenses incurred in attending meetings.
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Our non-employee directors received the following cash compensation during the fiscal year ended December 31, 2017:
ö= Base monthly retainer:
o Board Chairman (Mr. Brown) - $5,000 per month
o All other Board members - $2,000 per month
ö= Committee chair monthly retainer (Messrs. Mann and Morgan) - $1,000 per month
ö= Attendance at Board or committee meetings - $1,000 per meeting
Mr. Goulet, an employee of the Company, does not receive a monthly retainer or attendance fees for his service on the Board.
We also provide stock-based compensation to our directors under the GlobalSCAPE, Inc. 2015 Non-Employee Directors Long-Term Equity Incentive Plan, or
the 2015 Directors Plan, and previously under the GlobalSCAPE, Inc. 2006 Non-Employee Directors Long-Term Equity Incentive Plan, or the 2006 Directors Plan.
Under the 2015 Directors Plan, a maximum of 500,000 shares of GlobalSCAPE common stock may be awarded. As of June 3, 2018, options to purchase a total of 40,000
shares were outstanding under the 2006 Directors Plan. As of June 3, 2018, 80,000 shares of restricted common stock were issued and outstanding under the 2015
Directors Plan for which the restrictions lapse in May 2018 provided the owner of those restricted shares meets the continuing service requirement at that time.
The 2015 Directors Plan is administered by the Compensation Committee of the Board of Directors which sets the exercise price, term, and other conditions
applicable to each stock option granted under the plan. Stock options awarded under this plan shall have an exercise share price of no less than 100% of the fair
market value on the date of the award while the option terms and vesting schedules are at the discretion of the Compensation Committee. The 2015 Directors Plan
provides that each year, at the first regular meeting of the Board of Directors immediately following GlobalSCAPE’s annual stockholders’ meeting, each non-employee
director shall be granted or issued maximum awards of either (1) a grant of an option to purchase 20,000 shares of our common stock or (2) the issuance of 20,000
shares of restricted common stock for participation in Board and Committee meetings during the previous calendar year. In 2017, the Compensation Committee
granted 20,000 shares of restricted stock to each director except for Mr. Goulet, who received no such shares as a result of his being an employee of the Company.
The restrictions on this restricted stock lapsed in May 2018 provided the owner of those restricted shares met the continuing service requirement at that time.
The following table sets forth a summary of compensation for the fiscal year ended December 31, 2017 that GlobalSCAPE paid to each director.
GlobalSCAPE does not sponsor a pension benefits plan, a non-qualified deferred compensation plan or a non-equity incentive plan for our directors and,
accordingly, these columns have been omitted from the following table:
Name
Thomas W. Brown
David L. Mann
Frank M. Morgan
Thomas E. Hicks
Fees Earned or
Paid in Cash
Stock
Awards (1)
Stock Option
Exercises (2)
$
$
60,000
66,000
66,000
51,000
$
80,000
80,000
80,000
80,000
27,600
27,600
16,400
-
$
All Other
Compensation (3)
12,795
12,795
512
-
$
Total
180,395
186,395
162,912
131,000
(1) These amounts represent the aggregate grant date fair value of restricted stock awards for the year ended December 31, 2017 calculated as
described in our Consolidated Financial Statements included in this Form 10-K. See specifically footnote 2, Significant Accounting Policies, and
footnote 8, Stock Options, Restricted Stock and Share-Based Compensation for a discussion of all assumptions made in the calculation of this
amount. These amounts do not necessarily represent the actual amounts paid to or realized by the directors for the 2017 award. These amounts
are recognized as an expense in our financial statements over the period of service required for the grant to become unrestricted, which is
generally continuing service for one year subsequent to the date of the award.
(2) These amounts represent the income earned from the exercise of stock options. These amounts have been previously recognized as an expense in
our financial statements.
(3) Health insurance premiums.
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As of December 31, 2017, stock options issued to our directors that had not been exercised and restricted stock awards for which the restrictions had not yet
lapsed as of that date are as follows:
Name
Thomas W. Brown
David L. Mann
Frank M. Morgan
Thomas E. Hicks
Outstanding
Stock Options
Not Exercised
Restricted
Stock
Awards
20,000
20,000
-
-
20,000
20,000
20,000
20,000
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
The following table gives information about shares of our common stock that may be issued upon the exercise of options and rights under our equity
compensation plans as of December 31, 2017.
Plan Category
Number of Securities
to be Issued
upon Exercise of
Outstanding Options,
Warrants and Rights
(A)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(B)
Number of Securities
Available for Future
Issuance under Equity
Compensation Plans
(Excluding securities
Reflected in Column (A))
(C)
Equity compensation plans approved by security holders
2,585,210
$
3.34
4,850,885(1)
(1) Includes 412,385 shares from the 2010 Employee Plan. We will not grant anymore stock options under this plan.
Beneficial Ownership
The following table sets forth certain information regarding ownership of our common stock as of June 3, 2018, by (i) each person known by GlobalSCAPE to
be the beneficial owner of more than 5% of the outstanding shares of common stock, (ii) each director and director nominee of GlobalSCAPE, (iii) the President and
Chief Executive Officer, (iv) each of the other named executive officers, as described below, of GlobalSCAPE, and (v) all executive officers and directors of
GlobalSCAPE as a group. Unless otherwise indicated in the footnotes below, each of the named persons has sole voting and investment power with respect to the
shares shown as beneficially owned.
Applicable percentage ownership is based on 21,753,131 shares of common stock outstanding at June 3, 2018. In computing the number of shares of
common stock beneficially owned by a person and the percentage ownership of that person, we deemed to be outstanding all shares of common stock subject to
options or restricted stock held by that person that are currently exercisable or will vest or are exercisable within 60 days of June 3, 2018.
Shares Beneficially Owned as of June 3, 2018
Common
Shares
Currently
Owned
(# of shares)
4,179,807(1)
2,640,393(2) (3)
1,300,000(4)
1,486,971(3)(5)
167,875(3)
17,000(6)
-
40,000
-
Name of Beneficial Owner
210/GSB Acquisition Partners, LLC et. al.
Thomas W. Brown
BLR Partners LP
David L. Mann
Frank M. Morgan
Matthew C. Goulet
Peter S. Merkulov
Dr. Thomas G. Hicks
Michael P. Canavan
Karen J. Young
All directors and executive officers as a
group (8 persons)
Common Shares
That May Be
Acquired By
Exercise of
Stock Options
(# of shares)
-
20,000
-
20,000
-
406,990
78,326
-
15,200
Total Common
Shares Held
(# of shares)
4,179,807
2,660,393
1,300,000
1,506,971
167,875
423,990
78,326
40,000
-
15,200
Additional
Common Shares
That May Be
Acquired within
60 Days of
June 3, 2017
(# of shares)
-
-
-
-
-
-
-
-
24,750
-
Total
Beneficial
Ownership
(# of shares)
4,179,807
2,660,393
1,300,000
1,506,971
167,875
423,990
78,326
40,000
24,750
15,200
4,892,755
-
4,917,505
Percentage
of
Class
19.14%
12.17%
5.95%
6.90%
*
1.91%
*
*
*
*
22.52%
*Less than one percent
(1) Based on information set forth in Schedule 13D/A filed on August 10, 2017 (the “Schedule 13D”), 210/GSB Acquisition Partners, LLC (“GSB Acquisition”) holds
directly 3,716,800 shares of common stock of GlobalSCAPE. GSB Acquisition is managed by its sole member, 210 Capital, LLC (“210 Capital”), which is managed by its
members Covenant RHA Partners, L.P. (“RHA Partners”) and CCW/LAW Holdings, LLC (“CCW Holdings”). C. Clark Webb has the power to direct the affairs of
CCW Holdings as its sole member. RHA Partners is managed by its general partner RHA Investments, Inc. (“RHA Investments”), and Robert H. Alpert has the power
to direct the affairs of RHA Investments as its President and sole shareholder. Accordingly, GSB Acquisition may be deemed to share voting and dispositive power
with 210 Capital, RHA Partners, CCW Holdings, RHA Investments, Mr. Alpert and Mr. Webb over the shares of the Company’s common stock that it holds. In
addition to the 3,716,800 shares of common stock owned by GSB Acquisition, Atlas Capital Management, L.P. (“ACM”) holds directly 231,500 shares of common
stock. ACM is managed by its general partner, RHA Investments. Accordingly, Mr. Alpert may be deemed to share voting and dispositive power with RHA
Investments over the shares of common stock owned by ACM. In addition to the 3,716,800 shares of common stock owned by GSB Acquisition, Mr. Webb holds
directly 231,507 shares of common stock. The address of GSB Acquisition is 8214 Westchester Drive, Suite 950, Dallas, Texas 75225.
(2) Includes 650 shares owned by Mr. Brown’s spouse. Mr. Brown disclaims beneficial ownership of the shares owned by his
spouse.
(3) Includes 20,000 shares of restricted common stock.
(4) Based on the information set forth in a Schedule 13G filed on January 25, 2018 by BLR Partners LP, a Texas limited partnership (“BLR Partners”), BLRPart, LP, a
Texas limited partnership (“BLRPart GP”), BLRGP Inc., a Texas S corporation (“BLRGP”), Fondren Management, LP, a Texas limited partnership (“Fondren
Management”), FMLP Inc., a Texas S corporation (“FMLP”) and Bradley L. Radoff (collectively, the “BLR Reporting Persons”), BLR Partners directly owns 1,300,000
shares of common stock of GlobalSCAPE and each of BLRPart GP, as the general partner of BLR Partners, BLRGP, as the general partner of BLRPart GP, Fondren
Management, as the investment manager of BLR Partners, FMLP, as the general partner of Fondren Management, and Mr. Radoff, as the sole shareholder and sole
director of each of BLRGP and FMLP, may be deemed the beneficial owner of the 1,300,000 shares owned by BLR Partners.
The address of the principal office of each of the BLR Reporting Persons is 1177 West Loop South, Suite 1625, Houston, Texas 77027.
(5) Mr. Mann has pledged 750,000 shares to secure his obligations under a personal loan.
(6) Includes 2,000 shares owned by Mr. Goulet’s minor children.
Except as otherwise provided in the footnotes above, the address of the beneficial owners listed in the table above is 4500 Lockhill-Selma Rd, Suite 150, San Antonio,
Texas, 78249.
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Item 13. Certain Relationships and Related Party Transactions, and Director Independence
Transactions in 2017
Robert Langenbahn, an Enterprise Sales Manager, earned $146,918 in base salary and commissions in 2017. Mr. Langenbahn is the son-in-law of Thomas
W. Brown, our Chairman of the Board. Mr. Langenbahn’s compensation plan is comparable to that of others in our sales and marketing organization.
We did not have any other related-party transactions in 2017.
Policy Related to Related Party Transactions
Our Board of Directors has adopted a formal, written related-person transaction approval policy, setting forth GlobalSCAPE’s policies and procedures for
the review, approval, or ratification of “related-person transactions.” For these purposes, a “related person” is a director, nominee for director, executive officer, or
holder of more than 5% of our common stock, or any immediate family member of any of the foregoing. This policy applies to any financial transaction, arrangement,
or relationship or any series of similar financial transactions, arrangements, or relationships in which GlobalSCAPE is a participant and in which a related person has a
direct or indirect interest, other than the following:
ö=
Payment of compensation by GlobalSCAPE to a related party for the related person’s service in the capacity or capacities that give rise to the person’s
status as a “related person”.
ö= Transactions available to all employees or all stockholders on the same terms.
ö=
Purchases of products or services from GlobalSCAPE in the ordinary course of business at the same price and on the same terms as offered to our other
customers, regardless of whether the transactions are required to be reported in GlobalSCAPE’s filings with the SEC.
ö= Transactions, which when aggregated with the amount of all other transactions between the related person and GlobalSCAPE, involve less than $5,000
in a fiscal year.
Our Audit Committee is required to approve any related-person transaction subject to this policy before commencement of the related-person transaction,
provided that if the related-person transaction is identified after it commences, it shall be brought to the Audit Committee for ratification, amendment, or rescission.
The Chairman of our Audit Committee has the authority to approve or take other actions with respect to any related-person transaction that arises, or first becomes
known, between meetings of the Audit Committee, provided that any action by the Chairman must be reported to our Audit Committee at its next regularly scheduled
meeting.
Our Audit Committee will analyze the following factors, in addition to any other factors the members of the Audit Committee deem appropriate, in
determining whether to approve a related-person transaction:
ö= Whether the terms are fair to GlobalSCAPE.
ö= Whether the transaction is material to GlobalSCAPE.
ö= The role the related person has played in arranging the related-person transaction.
ö= The structure of the related-person transaction.
ö= The interest of all related persons in the related-person transaction.
Our Audit Committee may, in its sole discretion, approve or deny any related-person transaction. Approval of a related-person transaction may be
conditioned upon GlobalSCAPE’s and the related party’s following certain procedures designated by the Audit Committee.
Director Independence
A majority of the Board has determined that Messrs. Mann and Morgan and Dr. Hicks are independent as determined in accordance with the listing
standards of the NYSE American LLC and the Exchange Act. All members of the Audit, Compensation and Nominating Committees are “independent” as defined by
the SEC and the listing standards of the NYSE American LLC.
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Item 14. Principal Accountant Fees and Services
Audit Fees
Our audit fees paid during 2017 and 2016 to our independent registered public accounting firms were are as follows:
ö=
ö=
ö=
ö=
ö=
ö=
ö=
ö=
For their audit of our consolidated financial statements as of December 31, 2016, and for the year then ended, included in our Form 10-K, we paid
$142,500 to RSM.
For their review of our condensed financial statements included in our Form 10-Q for the third quarter of 2016, we paid $15,000 to RSM.
For their reviews of our condensed financial statements included in our Form 10-Qs for the first two quarters of 2016, we paid $30,000 to Padgett.
For their audit of our consolidated financial statements as of December 31, 2015, and for the year then ended, included in our Form 10-K, and for
their reviews of our condensed financial statements included in our Form 10-Qs for the first three quarters of 2015, we paid $184,000 to Padgett.
For their reviews of our condensed consolidated financial statements included in our Form 10-Qs for the first and second quarters of 2017, we paid
$27,414 to BDO.
For their reviews of our condensed consolidated financial statements included in our Form 10-Qs for the first three quarters of 2017, we paid $60,000
to Weaver.
For their audit of our consolidated financial statements as of December 31, 2017, and for the year then ended, included in our Form 10-K, we paid
$45,000 to Weaver.
For their audit of our consolidated financial statements as of December 31, 2016, and for the year then ended, included in our Form 10-K, we paid
$83,249 to RSM.
Audit-Related Fees
For their audit-related services for our consolidated financial statements as of December 31, 2017, and for the year then ended, included in our Form 10-K, we
paid $22,400 to BDO. These audit-related services included planning services related to the 2017 audit. The fees we paid for these audit-related services were pre-
approved by the Audit Committee.
Tax Fees and All Other Fees
Other than the fees described above, we paid no fees for any other services, including other audit-related fees, tax fees or other fees, to Weaver, BDO,
Padgett or RSM during 2017 or 2016.
The Audit Committee has considered and noted that Weaver, BDO and RSM have not rendered any non-audit services to the Company. Accordingly, the
Audit Committee has concluded that the independence of those firms has been maintained.
Audit Committee Pre-Approval Policy
The Audit Committee’s policy is to pre-approve all audit, audit-related and non-audit services provided by the independent registered public accounting
firm. These services may include audit services, audit-related services, tax services, and other services. The Audit Committee may also pre-approve particular services
on a case-by-case basis. The independent registered public accounting firm is required to periodically report to the Audit Committee regarding the extent of services
provided by the independent registered public accounting firm in accordance with such pre-approval. The Audit Committee may also delegate pre-approval authority
to one or more of its members. Such member(s) must report any decisions to the Audit Committee at the next scheduled meeting.
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Table of Contents
Item 15. Exhibits and Financial Statement Schedules
(a)(1)
Financial Statements and Schedules
PART IV
The following financial statements of GlobalSCAPE, Inc. are included in Item 8:
ö= Consolidated Balance Sheets — December 31, 2017 and 2016
ö= Consolidated Statements of Operations and Comprehensive Income — Years ended December 31, 2017 and 2016
ö= Consolidated Statements of Stockholders’ Equity — Years ended December 31, 2017 and 2016
ö= Consolidated Statements of Cash Flows — Years ended December 31, 2017 and 2016
ö= Notes to Consolidated Financial Statements — December 31, 2017 and 2016
(2)
Schedules not listed above have been omitted because they are not applicable or required, or the information required to be set forth therein is included in
the Financial Statements or Notes thereto.
(3) Exhibits
Exhibit
Number
3.1
3.2
4.1
Amended Restated Certificate of Incorporation (Filed as Exhibit 3.1 to Form 8-K filed November 17, 2006).
Description
Amended and Restated Bylaws of the Company effective as of October 30, 2008 (Filed as Exhibit 3.2 to Form 8-K filed November 5, 2008).
Specimen of Stock Certificate (Filed as Exhibit 4.1 to Form 10-K filed April 2, 2001).
*10.1
1998 Stock Option Plan as amended May 13, 1999 (Filed as Exhibit 4.2 to Form 10-K filed May 12, 2000).
*10.2
2000 Stock Option Plan dated May 8, 2000 (Filed as Exhibit 4.3 to Form 10-K filed May 12, 2000).
*10.3
*10.4
*10.5
*10.6
*10.7
*10.8
Form of 1998 Stock Option Plan Rights Termination Letter Agreement of Directors to Agree Not to Claim Any Right of Adjustment dated February 4,
2000 (Filed as Exhibit 4.6 to Form 10 filed May 12, 2000).
Form of 1998 Stock Option Plan Rights Termination Letter Agreement for Employees and Consultants to Cancel Options dated February 8, 2000 (Filed
as Exhibit 4.7 to Form 10, filed May 12, 2000).
Form of 1998 Stock Option Plan Rights Termination Letter of Officer to Agree Not to Claim Any Right of Adjustment dated February 8, 2000 (Filed as
Exhibit 4.8 to Form 10 filed May 12, 2000).
Form of 1998 Stock Option Plan Rights Termination Letter Agreement of Officer to Agree Not to Exercise Options dated February 8, 2000 (Filed as
Exhibit 4.9 to Form 10 filed May 12, 2000).
Form of 1998 Stock Option Plan Reinstatement and Adjustment Letter for Employees dated December 19, 2000 (Filed as Exhibit 10.17 to Annual Report
on Form 10-K filed April 2, 2001).
Form of Release and Indemnity Agreement between GlobalSCAPE, Inc. and Employees dated December 19, 2000 (Filed as Exhibit 10.18 to Form 10-K
filed April 2, 2001).
*10.9
Form of Incentive Stock Option Agreement under GlobalSCAPE, Inc. 2000 Stock Option Plan (Filed as Exhibit 10.21 to Form 10-K filed April 1, 2002).
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Table of Contents
*10.10
Form of Non-Qualified Stock Option Agreement under the GlobalSCAPE, Inc. 2000 Stock Option Plan (Filed as Exhibit 10.2 to Form 10-Q filed
November 13, 2006).
*10.11
GlobalSCAPE, Inc. 2006 Non-Employee Directors Long-Term Equity Incentive Plan (Filed as Exhibit 10.1 to Form 8-K filed June 7, 2007).
*10.12
Form of Non-Statutory Stock Option Agreement under GlobalSCAPE, Inc. 2006 Non-Employee Directors Long-Term Equity Incentive Plan (Filed as
Exhibit 10.1 to Form 10-Q filed November 14, 2007).
*10.13
Form of Employment Agreement for Executive Officers at Vice President-level and above (Filed as Exhibit 10.1 to Form 8-K filed August 19, 2009).
*10.14
*10.15
*10.16
10.17
*10.18
*10.19
*10.20
10.21
14.1
21.1
23.1
31.1
31.2
32.1
101
GlobalSCAPE, Inc. 2010 Employee Long Term Equity Incentive Plan dated June 3, 2010 (Filed as Appendix A to the Definitive Proxy Statement filed
April 22, 2010).
Form of Non-Qualified Stock Option Agreement under GlobalSCAPE, Inc. 2010 Employee Long-Term Equity Incentive Plan dated June 3, 2010 (Filed as
Exhibit 10.1 to Form 8-K filed on February 10, 2015).
Form of Employment Agreement dated as of April 1, 2015 by and between GlobalSCAPE and each of Matthew C. Goulet and James W. Albrecht, Jr.
(Filed as Exhibit 10.1 to Form 8-K filed on April 1, 2015).
Form of Indemnification Agreement by and between GlobalSCAPE and each of its directors and named executive officers (Filed as Exhibit 10.1 to Form
8-K filed on May 18, 2015).
GlobalSCAPE, Inc. 2015 Non-Employee Directors Long-Term Equity Incentive Plan (Filed as Appendix A to the Definitive Proxy Statement filed April
2, 2015).
Form of Restricted Stock Award Agreement pursuant to the GlobalSCAPE, Inc. 2015 Non-Employee Directors Long-Term Equity Incentive Plan (Filed
as Exhibit 10.2 to Form 8-K filed on May 18, 2015).
Form of Incentive Stock Option Agreement GlobalSCAPE, Inc. 2010 Employee Long-Term Equity Incentive Plan dated June 3, 2010 (Filed as Exhibit
10.1 to Form 8-K filed on February 4, 2016).
Stock Purchase Agreement dated January 9, 2017 by and between Thomas H Brown, David L. Mann and 210 Capital LLC (filed as Exhibit 10.1 to Form
8-K filed January 9, 2017).
Code of Ethics (Filed as Exhibit 14.1 to Form 10-K filed March 27, 2008).
Subsidiaries of GlobalSCAPE, Inc. (Filed as Exhibit 21.1 to Form 10-K filed March 29, 2012).
Consent of Weaver and Tidwell, L.L.P. (Filed herewith).
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).
Certification of Interim Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).
Certification of Chief Executive and Interim Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
Interactive Data File.
* Management Compensatory Plan or Agreement
115
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Item 16. 10-K Summary
None.
116
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Signatures
Pursuant to the requirements of Section 13 or 15(d) 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, in San Antonio, Texas on June 14, 2018.
GlobalSCAPE, Inc.
By:
/s/ Matthew C. Goulet
Matthew C. Goulet
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
in the capacities indicated on June 14, 2018.
Signature
/s/ Matthew C. Goulet
Matthew C. Goulet
/s/ Karen J. Young
Karen J. Young
Thomas W. Brown
/s/ David L. Mann
David L. Mann
/s/ Frank M. Morgan
Frank M. Morgan
/s/ Dr. Thomas E. Hicks
Dr. Thomas E. Hicks
Title
President and Chief Executive Officer and Director
(Principal Executive Officer)
Interim Chief Financial Officer
(Principal Finance and Accounting Officer)
Chairman of the Board and Director
Director
Director
Director
117
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
We hereby consent to the incorporation by reference in the Registration Statements (No. 333-61180, No. 333-61160, No. 333-145771, No. 333-168871, and No. 333-
204163) on Form S-8 of GlobalSCAPE, Inc., of our report dated June 14, 2018, relating to our audit of the consolidated financial statements and the effectiveness of
internal control over financial reporting, which appears in this Annual Report on Form 10-K of GlobalSCAPE, Inc. for the year ended December 31, 2017. Our report on
the effectiveness of internal control over financial reporting expresses an adverse opinion on the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2017.
/s/ WEAVER AND TIDWELL LLP
Austin, Texas
June 14, 2018
EXHIBIT 31.1
I, Matthew C. Goulet, certify that:
1. I have reviewed this annual report on Form 10-K of GlobalSCAPE, Inc.;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: June 14, 2018
/s/Matthew C. Goulet
Matthew C. Goulet
President and Chief Executive Officer
EXHIBIT 31.2
I, Karen J. Young, certify that:
1. I have reviewed this annual report on Form 10-K of GlobalSCAPE, Inc.;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: June 14, 2018
/s/Karen J. Young
Karen J. Young
Interim Chief Financial Officer
CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of GlobalSCAPE, Inc. on Form 10-K for the period ending December 31, 2017, as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), the undersigned, Matthew C. Goulet, Chief Executive Officer and Karen J. Young, Interim Chief Financial Officer,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of GlobalSCAPE, Inc.
June 14, 2018
/s/ Matthew C. Goulet
Matthew C. Goulet
President and Chief Executive Officer
/s/ Karen J. Young
Karen J. Young
Interim Chief Financial Officer