GlobalScape Inc. Annual Report 2018

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2018 OR ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 001-33601 GlobalSCAPE, Inc.(Exact name of registrant as specified in its charter) Delaware 74-2785449(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 4500 Lockhill-Selma, Suite 150 San Antonio, Texas 78249(Address of Principal Executive Office) (Zip Code) (210) 308-8267(Registrant’s Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $0.001 per share NYSE American, LLC(Title of Class)(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 1934during 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 filingrequirements for the past 90 days.☒ Yes ☐ No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuantto 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 tosubmit 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 thisForm 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, a smaller reporting company, or anemerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growthcompany” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐Accelerated filer ☒Non-accelerated filer ☐Smaller reporting company ☒Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with anynew or revised fi nancial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 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, 2018, the last day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the common stockheld by non-affiliates of the registrant was $51,583,172 based on the closing sale price as reported on the NYSE American. As of February 28, 2019, there were 17,228,241 shares of common stock outstanding. Table of Contents TABLE OF CONTENTS PagePART I Item 1.Business2 Item 1A.Risk Factors16 Item 1B.Unresolved Staff Comments38 Item 2.Properties38 Item 3.Legal Proceedings38 Item 4.Mine Safety Disclosures39 PART II Item 5.Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity40 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations 41 Item 8.Financial Statements and Supplementary Data49 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure76 Item 9A.Controls and Procedures79 Item 9B.Other Information82 PART III Item 10.Directors, Executive Officers and Corporate Governance83 Item 11.Executive Compensation83 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters83 Item 13.Certain Relationships and Related Transactions, and Director Independence83 Item 14.Principal Accountant Fees and Services83 PART IV Item 15.Exhibits and Financial Statement Schedules84 Table of Contents Preliminary Notes GlobalSCAPE®, CuteFTP®, CuteFTP Pro®, DMZ Gateway®, EFT Cloud Services, ®GlobalSCAPE Securely Connected®, and Mail Express® areregistered trademarks of GlobalSCAPE, Inc. (together with its wholly-owned subsidiary, GlobalSCAPE, the “Company” or “we”). 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 FileTransfer 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”). TappIn Secure Share ™, Social Share ™, Now Playing ™, and Enhanced A La Carte Playlist ™ are trademarks of TappIn. Other trademarks and trade names in this Annual Report on Form 10-K (this “Annual Report”) are the property of their respective owners. In this Annual 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 electricityis 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 publicnetwork 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 anetwork. “RFC” or Request for Comment is a memorandum published by the Internet Engineering Task Force describing methods, research, orinnovations 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 underlyingsoftware 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 contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). “Forward-looking statements” are thosestatements that are not of historical fact but describe management’s beliefs and expectations. We have identified many of the forward-looking statementsin this Annual Report by using words such as “will”, “anticipate,” “believe,” “could,” “estimate,” “may,” “expect,” “potentially” and “intend.” Althoughwe 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 resultscould differ materially from those discussed in this Annual Report. 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 Exchange Act. However,pursuant to Rule 12b-2, as amended June 28, 2018, and applicable SEC guidance, the registrant also qualifies as a smaller reporting company and is eligibleto comply with the scaled disclosure requirements in Regulation S-K and Regulation S-X and is also eligible to check the “smaller reporting company” boxon the cover of this Annual Report. 1Table of Contents PART I Item 1. Business Company Overview GlobalSCAPE was incorporated in Delaware in 1996. We develop and sell computer software that provides secure information exchange, datatransfer and sharing capabilities for enterprises and consumers. We have been in business for more than twenty years having sold our products tothousands of enterprises and individual consumers globally. Our primary business is selling and supporting managed file transfer software for enterprises. MFT software facilitates the transfer of data fromone 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 (“EFT”) platform. This on-premise and cloud-based delivery platform emphasizessecure and efficient data exchange for organizations. 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 fromtraditional file transfer software. The EFT platform features built-in regulatory compliance, governance, and visibility controls to maintain data safety andsecurity. It can replace legacy systems, homegrown servers, expensive leased lines and virtual area networks. The EFT platform promotes ease ofadministration 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 thecapabilities of our EFT platform in two ways: ●Under a perpetual software license for which they pay a one-time fee and under which they typically install our product oncomputers they own and/or manage. Our brand name for this product is EFT. Almost every customer who purchases EFT alsopurchases a maintenance and support (“M&S”), contract for which they pay us an annual recurring fee. Most of the revenue wehave earned from our EFT platform products has been from sales of perpetual software licenses and related M&S. ●As a software-as-a-service, or SaaS, under which they pay us ongoing fees to access the capabilities of the EFT platform in thecloud. In January 2018, we introduced EFT Arcus, our SaaS offering of the EFT platform for which users pay a base monthlysubscription 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 productsconstituted less than 4% of our total revenue in 2018. Customers pay a one-time fee to purchase these products under a perpetual software license. Somecustomers also purchase an M&S contract. We do not offer a SaaS version of these products and have no plans to do so. We plan to phase out MailExpress and WAFS in 2019. We also earn revenue from professional services we provide to assist our customers in configuring and integrating our EFT platform productsinto 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 thefuture for product research, development, marketing and sales will focus on this product line. We expect to expend minimal resources developing andselling other products. We believe our EFT platform products and business capabilities are well-positioned to compete effectively in the market for theseproducts. 2Table of Contents 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: ●In 2018: -Named to The Channel Company’s list of CRN Channel Chiefs as top leaders in the IT channel for the 5th consecutive year. -Awarded a 5-star rating in The Channel Company’s 2018 CRN Partner Program Guide for the 4th consecutive year. ●In 2017: -Named to the CRN 2017 Cloud Partner Program Guide which recognizes partner programs with distinguished margins, salessupport and cloud resources -Received three awards from the 2017 Golden Bridge Awards for distinguished technology achievements which included: ■Cloud/SaaS Innovations (Gold Winner) – EFT on Amazon Web Services or Microsoft Azure. ■Managed File Transfer Innovations (Gold Winner) – The EFT Accelerate module. ■Governance, Risk and Compliance Innovations (Bronze Winner) – EFT platform. -Received two awards from the Network Product Guide 2017 IT World Awards for achievements in product excellence thatincluded: ■Governance, Risk and Compliance (Gold Winner) – EFT. ■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 productinnovation in categories that included: ■Innovation in Compliance (Gold Winner) – Enhanced File Transfer. ■Cloud/SaaS Solutions (Gold Winner) – EFT Cloud Services. ■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 ofBusinesses (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 TechnologyAssociation. -Selected as a finalist in the 2017 Cybersecurity Product Awards Secure File Transfer: EFT Enterprise. 3Table of Contents Industry Background Communication across computer networks that facilitates the movement and sharing of information between central and remote locations andwith associates, employees, partners, suppliers, and customers is an integral part of daily operations for enterprises of all sizes. Corporate informationtechnology (IT) managers must protect business assets, follow strict regulatory and compliance guidelines and ensure that the right people have accessto the right information, at the right place and at the right time. Global operations, diverse business partners and networks further emphasize the need forsoftware applications that ensure compatibility, scalability, privacy, and security. These requirements have created the need for maintaining the security ofdata and information in motion and at rest. The increase in high-profile and large scale data breaches in corporate enterprises and government agencies involving access to information inan unauthorized manner have created a heightened awareness of the vulnerability of critical and confidential data. As a result, attention at anunprecedented level is being paid to the security and integrity of systems that store and transfer data electronically. In many cases, this emphasisinvolves 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 remoteaccessibility challenges stemming from various regulatory and business requirements for data privacy and confidentiality. Regulatory requirementsregarding privacy and security include federal legislation and regulations such as the Health Insurance Portability and Accountability Act (HIPAA), theGramm-Leach-Bliley Act (GLBA) and the Federal Trade Commission Red Flags Rules. 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 penaltiesfor improper disclosure of confidential information. In addition to legal obligations, industry best-practices such as the Payment Card Industry DataSecurity Standard (PCI DSS) and self-imposed business requirements lead to the need to secure and protect consumer information, intellectual propertyand trade secrets. Use of secure MFT solutions offers protection against disclosure of proprietary information and also reduces corporate risksassociated with the potentially devastating consequences of security breaches. Our industry is known as managed file transfer. The MFT industry has its technical origin in the file transfer protocol, or FTP. FTP dates back to1980. The use of file transfer protocols increased dramatically with the explosive growth of the Internet during the 1990s. The MFT industry arose fromrecognition that FTP alone does not provide adequate security and management capabilities for file transfers. MFT solutions offer a greater degree ofsecurity and control than FTP. Features available in MFT solutions include integrated security, auditing capabilities, performance monitoring, andreporting. The MFT industry includes low cost, or even free, solutions that offer basic capabilities. However, we believe businesses and even individualsrequire more advanced solutions that provide scalability, enhanced security options, automated workflow and dedicated maintenance and support. Cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources that canbe rapidly provisioned, released, and scaled to meet requirements. We believe the continuing movement to cloud services is a favorable trend that offersus increased opportunities to win customers and expand our market presence. Strategy We intend to build upon our leadership position in the MFT market to provide organizations and individual users with the solutions necessaryto meet their growing need for secure information exchange. As we evolve our solution portfolio, we intend to maintain an appropriate balance between legacy and new solutions, including making choicesabout transitioning, sustaining, or retiring solutions as necessary to best operate under prevailing business conditions. Transitioning or sustainingsolutions may involve consolidating capabilities within our solution portfolio, releasing upgrades in response to market or customer needs, or making bugfixes. We also may phase out solutions and earlier versions of our solutions periodically in accordance with our end-of-life, or EOL, policy. 4Table of Contents In addition to expanding our products into areas adjacent to MFT, we also believe that we need to continue to expand the means of deliveringour MFT products. To that end, we intend to continue expanding our capability to deliver our EFT platform through our EFT Arcus SaaS delivery model.EFT Arcus 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. Our strategic focus consists of: ●Continuing innovation of our EFT platform to address the expanding needs of our existing customers and to enhance our products’appeal to new customers. ●Enhancing sales and marketing programs to improve identification of demand for our products and to increase revenue. ●Licensing, developing and/or acquiring technologies with features and functions that are complementary to and synergistic withour EFT platform. Continuing Innovation of Our EFT Platform to Address the Expanding Needs of Our Existing Customers and to Enhance Our Products’ Appeal to NewCustomers. We seek to continue to improve and enhance our core technology, especially as it relates to existing customers. This may require new productfeatures to be released. We believe that by adding new features and product functionality, we will increase sales to existing customers by helping themsolve additional problems within their organizations. It will also position us to attract new customers. We believe customers in the markets we serve will increasingly begin assessing the viability of accessing and using MFT capabilities throughcloud-based, SaaS offerings. EFT Arcus is designed to meet the needs of customers who wish to access MFT through a cloud delivery model. Enhancing Sales and Marketing Programs to Improve Identification of Demand for Our Products and to Increase Revenue Sales and marketing efforts will continue to focus on enabling our sales people and channel partners to successfully engage customers andprospects. We believe that much of our new business will be attributable to current customer relationships and we intend to continue to deepen theserelationships. As we deepen our customer relationships, we will seek to identify opportunities for additional deployments of our products and services. We provide solutions to some of the world’s largest brokerage firms, manufacturers, oil companies, banks, insurance companies, healthcareproviders, airlines, cruise ship operators and technology providers. Given the breadth and depth of these market opportunities, we believe theeffectiveness 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 canhire and the number of prospective clients to whom they can present our products. As a result, we plan to continue emphasizing our third-party saleschannel relationships. We believe our channel sales program helps us establish and maintain a lower-touch delivery model through which we train these partners to selland distribute our solutions and provide them sales and marketing tools to support that effort. We utilize this approach to reduce the overall cost ofmarketing and selling our solutions in areas where it would be costly to establish a presence with our own employees. Licensing, Developing and/or Acquiring Technologies With Features and Functions that are Complementary to and Synergistic with Our EFTPlatform. Another area of strategic focus continues with product innovation but extends beyond pure MFT into adjacent segments and technologiessuch as data movement and data security. We intend to continue to focus on determining which areas of our business will contribute to our future growthin their current state, need additional investment to contribute in the desired manner, or require further analysis to determine their future strategy. 5Table of Contents Our solution portfolio may evolve over time, for example, through development of new offerings in adjacent markets or through acquisitions oftechnologies by licensing, partnering or by acquiring companies which own such technologies. We also maintain a research and development programand work closely with partners and others in the industry to identify new solution opportunities. We also intend to remain alert for attractiveopportunities to collaborate with others or perhaps combine other revenue-producing technologies with ours to expand our product offerings and reach. As we evolve our solution portfolio, we intend to maintain an appropriate balance between legacy and new solutions, including making choicesabout transitioning, sustaining, or retiring solutions as necessary to best operate under prevailing business conditions. Transitioning or sustainingsolutions may involve consolidating capabilities within our solution portfolio, releasing upgrades in response to market or customer needs, making bugfixes, or phasing-out solutions periodically pursuant to our EOL policy. Software Products and Services Our primary business is selling and supporting MFT software for enterprises. MFT software facilitates the transfer of data from one location toanother across a computer network within a single enterprise or between multiple computer networks in multiple enterprises. These transfers may beongoing, repetitive activities executed by automated software routines that occur without human intervention, or they may be transfers that people createand 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-levelactivities that rely on MFT software include: ●Transfer of transactional information within an enterprise on a repetitive basis from one geographic location to another, such as atransfer of deposit and withdrawal information throughout the day from a branch of a bank to a central data processing center atanother location. ●Movement of accumulated information within an enterprise from one data processing application to another on a periodic basis,such as a transfer of bi-weekly payroll information from a payroll system that is used to pay employees to a job cost system that isused to manage the cost of a project. ●Exchange of information between enterprises to facilitate the completion of one or more business transactions, such as a retailertransmitting inventory purchasing requirements produced by its material requirements planning system to an order entry system ata supplying vendor. We earn over 96% of our revenue from the sale of MFT products and services that are part of our EFT platform. We have multiple revenuestreams from the EFT platform that include: ●Perpetual software licenses under which customers pay us a one-time fee for the right to install our products in their informationsystems environment on computers they manage and either own or otherwise procure from a cloud services provider, includingdeploying our products at a cloud services provider in a bring-your-own-license, or BYOL, environment. Our brand name for thisproduct is EFT. Historically, most of the revenue we have earned from our EFT platform products has been from sales of EFTperpetual software licenses and related M&S. ●Cloud-based, SaaS solutions that we sell on an ongoing subscription basis. In January 2018, we introduced EFT Arcus, our SaaSoffering of the EFT platform for which users pay a base monthly subscription fee plus an additional variable amount based upontheir metered usage of EFT Arcus resources. ●Maintenance and Support ●Professional services for product installation, integration and training We focus on selling our EFT platform products in a business-to-business environment. The majority of the resources we will expend in thefuture for product research, development, marketing and sales will focus on this product line. We expect to expend minimal resources developing andselling our other products. We believe our EFT platform products and business capabilities are well-positioned to compete effectively in the market forthese products. For a more comprehensive discussion of the products we sell and the services we offer, see below. 6Table of Contents We earn less than 4% of our revenue from selling other products that can be synergistic to our EFT platform. These products have capabilitiesthat: ●Support information sharing and exchange capabilities using traditional email systems. ●Enable enterprise file synchronization and sharing. ●Enhance the ability to replicate, share and backup files within a wide area network or local area network, thereby allowing users toaccess their data at higher speeds than possible with most alternate approaches. ●Support file transfers by individuals and small businesses. 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 willcontinue to be a minor part of our business. 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. The EFT platform provides users the ability to securely transmit data from one location to another using any number of files of any size orconfiguration. It facilitates management, monitoring, and reporting on file transfers and delivers advanced data transfer workflow capabilities to movedata 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 provideenterprises with increased security, automation, and performance when compared to traditional FTP-based and email delivery systems. Various optionalmodules allow users to select the solution configuration most applicable to their requirements for auditing and reporting, encryption, file transfers,operability in or through a DMZ network, and integration with back-end business processes, including workflow automation capabilities. General features and capabilities of the EFT platform include: ●State-of-the-art, enterprise-level security when transferring information within or between computer networks as well as forcollaboration with business partners, customers, and employees. EFT provides automation that supports effective integration ofback-end systems. It has built-in regulatory compliance, governance, and visibility controls to provide a means of safelymaintaining information. EFT offers a high level of performance and scalability to support operational efficiency and maintainbusiness continuity. Administrative tools are provided at various levels of granularity to allow for complete control and monitoringof file transfer activities. ●Transmission of critical information such as financial data, medical records, customer files, vendor files, personnel files, transactionactivity, and other similar documents between diverse and geographically separated network infrastructures while supporting arange of information protection approaches to meet privacy and other security requirements. In addition to enabling the secure,flexible transmission of critical information, our products also provide customers with the ability to monitor and audit file transferactivities. ●Compliance with government regulations and industry standards relating to the protection of information while allowing users toreduce costs, increase efficiency, track and audit transactions, and automate processes. Our solutions also provide data replication,acceleration of file transfer, sharing and collaboration, and continuous data backup and recovery. We expect to continue enhancing the EFT platform with capabilities that meet the needs of customers and enhance our market position. 7Table of Contents EFT Platform – Delivery Offerings Our customers can purchase the capabilities of our EFT platform in two ways: ●Under a perpetual software license for which they pay a one-time fee and under which they typically install our product oncomputers they own and/or manage. The EFT platform purchased in this manner can also be used in a bring-your-own-licenseenvironment hosted by major cloud providers such as Amazon Web Services or Microsoft Azure. Almost all customers whopurchase a perpetual license to use the EFT platform also purchase an M&S contract for which they pay us a recurring fee that istypically 20% to 30% of the perpetual license fee per year. ●As a software-as-a-service, or SaaS, under which the customer pays us monthly subscription and usage fees to access thecapabilities of the EFT platform in the cloud. Our brand name for this product is EFT Arcus. We introduced this product in January2018. 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 amajor shift toward a SaaS environment is underway in the marketplace. Key features of EFT Arcus include: ●Consumption-based pricing that allows customers to pay only for the capacity and throughput they use. ●No long-term contractual commitment. ●Automatic scalability to accommodate varying workloads to mitigate concerns about capacity planning. ●A single tenant environment that allows each customer to have a private deployment. ●On-the-fly upgrades. ●Data encrypted while at rest. ●A minimum service level commitment of 99.9%. The features and functions of EFT Arcus are similar to those of our EFT Product delivered for on-premise installation. We host and deploy EFT Arcus on Microsoft Azure. It provides customers with a global platform on which to use EFT Arcus and providesinfrastructure security, compliance and redundancy features. Microsoft Azure provides customers with geo-redundant storage which replicates data to asecondary 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 the cumulative cost of ownership will typically be lessthan the total cost of purchasing an EFT platform perpetual license combined with an M&S contract. Accordingly, we expect the revenue we earn duringthat period from an EFT Arcus customer will be less than the revenue we would have earned from that same customer during that same period if thecustomer had purchased a perpetual license with an M&S contract. However, we believe thereafter and over the long term, the cumulative, recurringrevenue stream we will earn from an EFT Arcus customer will exceed what we would have otherwise earned from the sale of a perpetual license combinedwith an M&S contract. 8Table of Contents Customers subscribing to EFT Arcus may deem that controls pertaining to EFT Arcus are relevant to their internal control over financialreporting. In that case, a customer may request us to provide them our management description of a service organization’s system and a service auditor’sreport on that description and on the suitability of the design and operating effectiveness of controls (commonly referred to as a SOC Type 1 or SOCType 2 report prescribed under SSAE 18 issued by the American Institute of Certified Public Accountants). Currently, we rely on our third-party serviceprovider 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 tocontrols that we design, implement and manage at GlobalSCAPE. We are currently assessing the work necessary to provide such a report. The absence ofthis report could cause certain potential customers to choose not to subscribe to EFT Arcus. 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 productinstalled in a client-server environment that allows users to send and receive secure, encrypted email and attachments of virtually unlimited size. In 2019,Mail Express will no longer be offered for sale, however we will continue to offer product support. 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 areanetwork, thereby allowing users to access their data at higher speeds than possible with most alternate approaches. The software uses byte-leveldifferencing technology to update changes to files with minimal impact on network bandwidth while also ensuring that files are never overwritten, even ifopened by other remote users. Other key features of WAFS include native file locking, replication to multiple locations simultaneously, adherence toaccess control list file permissions, and full UTF-8 support. In 2019, WAFS will no longer be offered for sale, however we will continue to offer productsupport. 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 generatesincremental revenue for us at a relatively low cost. We will continue selling CuteFTP as a stand-alone product and providing M&S services to customers who purchased CuteFTP in the past andwho 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 futureexpanding the features and capabilities of CuteFTP. Professional Services We offer a range of professional services to complement our solutions. These professional services include product configuration and systemintegration, solution “quickstart” implementations, business process and workflow refinement, policy development, education and training, and solutionhealth checks. In addition, we may provide longer-term engineering services, including supporting multi-year contracts, if necessary, to support certainsolution 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 andtechnical support services in accordance with the contract terms. Standard technical support services are provided via email and telephone during ourregular business hours. For certain of our products, we offer a Premier M&S contract which provides access to emergency technical assistance 24 hoursper 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 EFTplatform products as well as by many customers who purchase our other products. Customers pay an annual amount that is typically 20% to 30% of thesoftware license price. A majority of our customers with M&S contracts renew them each year. 9Table of Contents In 2018, we earned 63% of our revenue from M&S contracts. Sustaining that revenue stream is dependent upon our ability to continue sellingnew licenses for which customers purchase M&S services and to sustain a high renewal rate for existing M&S contracts. Customers We have sold our solutions throughout the world to individuals and enterprises ranging from SMBs to Fortune 100 companies. In order toleverage the resources of third parties, we make our products available for purchase by end users through third-party, channel resellers even though endusers can also purchase those products directly from us. During 2018 and 2017, we earned a total of 35% and 29%, respectively, from resellers andapproximately 14% of our revenue from such sales through our largest, third-party channel reseller. Although we believe that we are not substantiallydependent on this distributor, if it were to experience a significant disruption of its business or if our relationship with it were to significantly deteriorate, itis possible that our ability to sell to end users would be, at least temporarily, negatively impacted. We believe that such termination would not have amaterial adverse effect on us because we have engaged, or believe that we would be able to engage, alternative distributors, resellers and otherdistribution 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 theworld. Our primary commercial vertical markets include finance, health care, energy, retail, manufacturing, and engineering. We also have a customer basein the local, state, and federal government spaces. We continue to pursue additional government business by leveraging our certifications and industryvalidations. Seasonality Our products are marketed to individuals, SMBs and large organizations. As a result of this mix within our customer base, we typically have notexperienced significant seasonality in our sales other than a typical modest decline from time-to-time in first quarter sales as compared to sales in thepreceding fourth quarter. 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 havehistorically received a substantial portion of orders from our customers and generated a substantial portion of revenue during the last few weeks of eachquarter. 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 periodbeing delayed until a subsequent quarter. Network and Equipment We conduct business through various Tier 1 Internet services providers. Our arrangements provide for redundancy in the event of a failure andfor expansion of available bandwidth in the event there is a dramatic increase in demand. To protect critical customer data, our online shopping cartutilizes SSL encryption. We maintain technical and physical measures and procedures compliant with the PCI DSS. We use a certified Approved ScanningVendor 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 databackup procedures provide a warm backup to our onsite servers for contingency purposes. The backups are performed in accordance with our disasterrecovery plan. We rely on unrelated third parties to host on their computers our EFT Arcus product. We have contracts and/or service agreements in place withthose third parties that we believe provide us the ability to continue delivering those products without interruption. 10Table of Contents Research and Development To keep pace with customer and market demand, we maintain an ongoing program of new product development. Our software engineers are responsible for creating and building our software products. They do so by combining their expertise with input fromour sales, marketing and product management groups as to market trends and needs. Our software engineers design and write software and manage itstesting and quality assurance. We utilize third-party software developers both domestically and overseas working under our supervision to supplementour software engineers. Using these external software developers in a strategic manner allows us to access highly-skilled labor pools, maintain a 24-hourdevelopment 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 andprogramming, are subject to extensive internal quality assurance testing. We maintain an ongoing focus on improving our quality assurance testinginfrastructure and practices. Technical reporting and customer support feedback from customers confirm the continuing positive effect of our ongoingenhancement 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, forthe continued development and enhancement of their cloud services infrastructures on which our products are hosted. We do not perform significantresearch and development of cloud services infrastructures using our own personnel. Our R&D expenditures profile has been as follows ($ in thousands): Year ending December 31, 2018 2017 R&D expenditures expensed $1,883 $3,128 R&D expenditures capitalized 1,276 1,926 Total R&D expenditures $3,159 $5,054 Our total R&D expenditures decreased 37% in 2018 as compared to 2017 primarily due to fewer employed software engineers and technicalpersonnel in addition to lower third-party expenses. Total resources expended for R&D (set forth above as total R&D expenditures) illustrate our total corporate efforts to improve our existingproducts and to develop new products regardless of whether our expenditures for those efforts were expensed or capitalized. Total resources expendedfor R&D is not a measure of financial performance under United States generally accepted accounting principles, or GAAP, and should not be considereda substitute for R&D expense (set forth above as R&D expenditures expensed) and capitalized software development costs (set forth above as R&Dexpenditures capitalized) individually. While we believe the non-GAAP, total resources expended for R&D amount provides useful supplementalinformation regarding our overall corporate product improvement and new product creation activities, there are limitations associated with the use of thisnon-GAAP measurement. Total resources expended for R&D is a non-GAAP measurement not prepared in accordance with GAAP and may not becomparable 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&Dexpense and capitalized software development cost individually. Substantially all of our R&D expenditures relate to our EFT platform products with a relatively minor level of these expenditures being related toour other products. We expect to carefully manage our research and development activities in future years as we focus on improving our current productsand introduce new products. 11Table of Contents Competition The managed file transfer software market sector is highly competitive, subject to rapid change, and significantly affected by new productintroductions and other activities of market participants. Some of our competitors in certain markets have greater financial, technical, sales, marketing and other resources than we do. Because of theseand other factors, competitive conditions in these industries are likely to continue to intensify in the future. Increased competition could result in pricereductions, reduced net revenue and profit margins and loss of market share, any of which could harm our business. See “Risk Factors – Risks Related toOur Operations” for further discussion of risks regarding competition. We believe that our future results depend largely upon our ability to better serve customers and by offering new product enhancements whetherby internal development or acquisition. We also believe we must continue to provide existing product offerings that compete favorably with respect toease of use, reliability, performance, range of useful features, reputation, and price. There is limited information regarding the market shares of our solutions in their respective categories. Some of our competitors havesubstantially greater financial, technical, sales, marketing, personnel, and other resources, as well as greater name recognition and a larger customer basethan we do. Significant competition characterizes the markets for our traditional MFT products. We anticipate we will continue to face increasing pricingpressures from competitors in the future. Given that there are low barriers to entry into the software market and that the market is subject to rapidtechnological change, we believe that competition will persist and intensify in the future. For more discussion on the risks associated with ourcompetition, 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. Webelieve our primary competitors are IBM, Axway, Accellion, Ipswitch, BMC, Cleo, Acronis, Signiant, Serv-U, and JSCAPE. We believe the features andfunctions of our products are competitive with those of other MFT providers. In particular, we believe the ease of installation and use of our productscombined with a competitive price position us to compete effectively. We do not offer a Linux version of our EFT platform. Accordingly, we do not compete in environments in which the customer needs an MFTproduct 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 ourMFT competitors are also introducing SaaS products. The nature of the SaaS delivery model lowers the barriers to entry into this market such that weexpect 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 thepersonal and professional user. CuteFTP is positioned as one of the only secure FTP client programs that support a wide range of security standardsrelated 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 populardownload sites. WAFS. WAFS competes in the wide area file services/storage market. We believe our primary competitors are Panzura and Peer Sync, each ofwhich is delivering proprietary appliances. In 2019, WAFS will no longer be offered for sale, however we will continue to offer product support. Mail Express. Mail Express competes in areas of the file transfer market associated with email attachment offloading. We believe our primarycompetitors are Leapfile, Zix, and Biscom. In 2019, Mail Express will no longer be offered for sale, however we will continue to offer product support. 12Table of Contents Governmental Regulation Export Control Regulations. All of our products are subject to U.S. export control laws and applicable foreign government import, export and/oruse requirements. The level of control generally depends on the nature of the goods and services in question. For example, the level of control isimpacted by the nature of the software and encryption incorporated into our products. Where controls apply, the export of our products may require anexport license or authorization or that the transaction qualifies for a license exception or the equivalent, and may also be subject to correspondingreporting requirements. For the export of some of our products, we may be subject to various post-shipment reporting requirements. Minimal U.S. exportrestrictions apply to all of our products, whether or not they perform encryption functions. Additionally, because we are a Department of Defensecontractor, there are certain registration requirements that may be triggered by our sales. In addition, certain of our items and/or transactions may besubject 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 requiredto 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 whatexport classification they will receive. In light of the ongoing discussions regarding anti-terrorism legislation in the U.S. Congress, there continues to bediscussions regarding the correct level of export control. Export regulations may be modified at any time. Modifications to the export regulations couldreduce 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 incompeting for international sales compared to companies located outside of the U.S. that would not be subject to these restrictions. Modifications to theexport regulations could prevent us from exporting our existing and future products in an unrestricted manner without a license or make it more difficult toreceive the desired classification. If export regulations were to be modified in such a way, we may be put at a competitive disadvantage with respect toselling our products internationally. We will complete technical reviews on any new products that we acquire or develop that may be subject to theseregulations 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 anddiversity of information. As a result, we may be subject to various international, federal and state regulations regarding the treatment and protection ofpersonally identifying and other regulated information. Applicable laws may include, without limitation, U.S. federal laws and implementing regulationssuch as the GLBA and HIPAA, as well as state laws and regulations, and international laws and regulations including the European Union General DataProtection Regulation, or the GDPR, which replaced the European Union Data Protection Directive in May 2018. Additionally, some of these laws haverequirements on the transmittal of data from one jurisdiction to another. In the event our systems are compromised by an unauthorized party, many ofthese privacy laws require that we provide notices to our customers whose personally identifiable data we reasonably believe may have beencompromised. Additionally, if we transfer data in violation of these laws, we could be subjected to substantial fines. To mitigate the risk of compromisedinformation, we use encryption and other security to protect our databases. We also have adopted policies to comply with the GDPR in the EuropeanUnion. Intellectual Property We regard some of the features of our internal operations, our software, our brands and marketing message, and our documentation asproprietary 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 importantand 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 proprietaryinformation. Our standard license agreements are transferable only in limited circumstances and have a perpetual term. Our subscription servicesagreements for our hosted and managed solutions restrict access and have a definite term. We also educate our employees on trade secret protection andemploy measures to protect our facilities, equipment, and networks. 13Table of Contents Our trademarks and copyrights are central to our business. We have the following trademarks in the United States: ●GlobalSCAPE®, CuteFTP®, CuteFTP Pro®, DMZ Gateway®, EFT Cloud Services ®, GlobalSCAPE Securely Connected®, and MailExpress® are registered trademarks of GlobalSCAPE ●Secure FTP Server™, Wide Area File Services™, WAFS™, CDP™, Advanced Workflow Engine™, AWE™, EFT Server™, EFTWorkspaces™, EFT Insight™, Enhanced File Transfer™, Enhanced File Transfer Server™, Secure Ad Hoc Transfer™, SAT™, EFTServer 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. ●TappIn® and design are registered trademarks of TappIn, Inc. ●TappIn Secure Share ™, Social Share ™, Now Playing ™, and Enhanced A La Carte Playlist™ are trademarks of TappIn, Inc. 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 theUnited States. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and useinformation that we regard as proprietary. Policing unauthorized use of our products, which are licensed by the thousands and sold world-wide, isdifficult. While we are unable to determine the extent to which piracy of our software products exists, software piracy is a persistent problem. In sellingour products, we rely primarily on click-wrap licenses which are not signed in writing by licensees and may be unenforceable under the laws of certainjurisdictions. Additionally, our new offerings through Microsoft Azure require the platform to present the applicable licensing terms and if we cannotprove that a licensee received the intended notice of the license terms, we may have difficulty enforcing the applicable agreements. The laws of someforeign 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, andother 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 intellectualproperty 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 orpay a royalty to, such third parties. For more discussion on the risks associated with our intellectual property, you should read the information under thecaption “Risk Factors,” especially “Risks Related to Intellectual Property.” Employees Our number of employees is as follows: March 1, Department 2019 2018 Sales and Marketing 38 60 Engineering 9 28 Professional Services 6 6 Customer Support 22 23 Management and Administration 17 20 Total 92 137 14Table of Contents On August 3, 2018, we implemented a plan to restructure our organization, which included a reduction in workforce of approximately 40employees, representing approximately 30% of the Company’s total pre-restructuring workforce. We recorded a charge of $381,000 in the third quarter of2018 relating to this reduction in force, consisting primarily of one-time severance payments and termination benefits. The Company’s goal in therestructuring is to better focus our workforce on retaining current customers, gaining incremental business from current customers, and winning newbusiness in the market segments where we can leverage our expertise and long history as an EFT pioneer. The Company expects for the realignment to result in a significant reduction in total expenses. Furthermore, to the extent that it can besuccessfully implemented without negatively impacting revenues or growth opportunities, the realignment offers an opportunity for the Company torealize significant increases in operating earnings in future periods, although there can be no assurance that any such increase will occur. Investigation On August 7, 2017, GlobalSCAPE announced that the Audit Committee of our Board of Directors, assisted by outside legal counsel andindependent forensic accountants, had been conducting an investigation (the “Investigation”) into certain transactions in the fourth quarter of 2016. Wehave since publicly disclosed multiple updates regarding the Investigation. The Investigation, which is now complete, identified transactions which wererecorded inconsistently with the Company’s stated revenue recognition policies and criteria. Subsequent to the announcement of the Investigation on August 7, 2017, the Audit Committee and management identified additionaltransactions which occurred during fiscal year 2016 in which revenue was recorded inconsistently with the Company’s stated revenue recognitionpolicies and criteria including: ●Transactions in which license activation keys did not appear to have been delivered to the customer in the period in which the salewas recorded; ●Transactions appearing to contain side deal terms negotiated with customers but not reflected in the underlying salesdocumentation; ●Transactions in which a sale was recorded although the customer had not yet responded to the Company’s request to provide acommitment to purchase; ●Transactions in which a sale was made to a reseller whereby collection was not reasonably assured due to payment or othernonstandard terms not consistent with the Company’s revenue recognition policy; ●Transactions in which there was either no purchase order or a purchase order dated after the date of the end of the period for whichrevenue had been previously recognized; and ●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 accountfor immaterial misstatements. These changes in our consolidated financial statements as of and for the year ended December 31, 2015 were in addition tothe 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 ofchanges 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 andfor 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. 15Table of Contents Available Information We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document we filewith 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 forinformation on the public reference room. The SEC maintains an Internet web site that contains annual, quarterly and current reports, proxy statementsand other information that issuers (including GlobalSCAPE) file electronically with the SEC. The SEC’s web site is www.sec.gov. Our Annual Reports onForm 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and amendments filed with the SEC are available free ofcharge on our web site at www.globalscape.com in the Investor Relations section as soon as practicable after such reports are filed. Information on ourwebsite is not incorporated by reference into this Annual Report and should not be considered part of this Annual Report or any other filing that wemake 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 andfinancial 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 renewalrates, 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, comprised 63% and 61% of our total revenue in 2018 and 2017, respectively. We earnM&S revenue from new M&S contracts, typically sold with new software licenses, and from renewals of such contracts. Any reduction in the number ofnew 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 ourfuture M&S revenue, even if our customers continue to renew M&S contracts at historical rates. This situation, in turn, would impact our business andharm our financial results. 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 theirinitial 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, maydecline or fluctuate as a result of a number of factors, including the overall global economy, the health of their businesses, customer dissatisfaction withour products’ functionality, features or performance, the level and quality of our M&S services, or pricing, and the perceived value of the M&S program.Renewal rates may also change due to competitors’ product offerings, customers converting to in-house developed solutions, customers’ inability tocontinue their operations and spending levels, migration path issues for new versions of our products, and other factors, a number of which are beyondour control. 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&Srevenue will decline and our financial results will suffer. In addition, customers are generally entitled to a reduced annual maintenance fees for enteringinto long-term maintenance contracts, i.e. those contracts with a term longer than one year. Declines in our license sales, increases in the proportion oflong-term maintenance contracts and/or increased discounting could lead to declines in our M&S revenue growth rates. Should customers migrate awayfrom systems and applications which our products support, utilize alternatives to our products, including solutions offering free maintenance, or becomedissatisfied with our maintenance services, increased cancellations could lead to declines in our maintenance revenue. 16Table of Contents If we are unable to develop, offer and deliver new and enhanced products and services that achieve widespread market acceptance, or if we areunable to continually improve the performance, features, and reliability of our existing products and services, our business and operating resultscould be adversely affected. We believe our industry will continue to evolve in response to continued adoption of mobile devices, acceptance of cloud-based SaaS products,and the growth of big data. In response, we have devoted resources to the development of new solutions, such as our SaaS solutions. We are makingsuch investments through our internal efforts, including further development and enhancement of our existing products. We may also make acquisitionsof new product lines. Innovation, new product development or acquisition, and go-to-market activities involve a significant commitment of time andresources 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 attractive returnon investment. ●Managing the length of the development cycle for new products and product enhancements which may be longer than originallyexpected. ●Adapting to emerging industry standards and to technological developments. ●Addressing the evolution of operating systems and industry platforms that presently may not be served by our existing products. ●Entering new or unproven markets with which we have limited experience. ●Managing new product and service strategies, including integrating our various security and file replication technologies,management solutions, customer service, and support into unified enterprise security and file replication solutions. ●Incorporating 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 toenable the development and deployment of interoperable products, including source code licenses for certain products with deeptechnical integration into operating systems. ●Changing purchasing trends such as purchasing through on-line marketplaces rather than through direct sales or traditionalchannels. Investments in new products may not result in sufficient revenue generation to justify their costs or may cause short or long-term harm to ourfinancial results. For example, customer adoption of our SaaS products has not occurred as rapidly as anticipated, or competitors may introduce newproducts and services that achieve acceptance among our current customers thereby adversely affecting our competitive position, or we may not besuccessful 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 andadvancement 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, new computing platforms, and the creation of other new technologies. Although we haveadopted a strategy that we believe will fulfill these challenges, if we fail to internalize and execute properly on that strategy or adapt that strategy asmarket conditions evolve, we may fail to meet our customers’ expectations, fail to compete with our competitors’ products and technology, and lose theconfidence of our channel partners and employees. Such circumstances could adversely affect our business and financial performance. 17Table of Contents We earn most of our revenue and operating margins from our Enhanced File Transfer licensed software solution suite and related maintenance andsupport 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 mediumbusiness 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 96% and 95% of our total revenue in 2018and 2017, respectively. Our EFT product has provided substantially all of our recent revenue growth and most of the operating margin necessary to fundour operations including, most notably, our sales and marketing and research and development activities. Declines and variability in demand for our EFTproducts could occur as a result of: ●Improved products or product versions being offered by competitors in our markets. ●Competitive pricing pressures. ●Failure to release new or enhanced versions of the EFT solution on a timely basis or at all. ●Technological changes that we are unable to address with file transfer products or that change the way enterprises utilize ourproducts. ●General economic conditions. Due to our product concentration, our business, results of operations, financial condition, and cash flows would be adversely affected by adecline in demand for the EFT solution suite. We rely on third parties to provide us with a number of operational services, including hosting and delivery of our SaaS products, certain of ourcustomer support services, and other operations. Any interruption or delay in service from these third parties, breaches of security or privacy, orfailures 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 hostcertain customer data in third-party facilities, a security breach could compromise the integrity or availability or result in the theft of customer data. Inaddition, 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 orproprietary information. Unauthorized access to this data may be obtained through break-ins, breach of our secure network by an unauthorized party, employee theft ormisuse, or other misconduct. We rely on a number of third-party suppliers in the operation of our business for the provisioning of various services andmaterials 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 singleor limited number of suppliers, or upon suppliers in a single country, for these services or materials. The inability of such third parties to satisfy ourrequirements could disrupt our business operations or make it more difficult for us to implement our business strategy. If any of these situations were tooccur, our reputation could be harmed, we could be subject to third-party liability, including under data protection and privacy laws in certainjurisdictions, 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 notgrow as expected or may decline. We generate leads through various marketing activities such as targeted email campaigns, attending networking-based trade shows, purchasinginformation and services from third-party experts in generating leads, and hosting webinars on enterprise IT management issues. Our marketing effortsmay 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 notresult in actual sales, our revenue may not grow as expected or could decrease and our operating results could suffer. 18Table of Contents Some of our sales leads are generated through visits to our websites by potential end-users interested in purchasing or downloadingevaluations of our products. Many of these potential end-users find our websites by searching for secure file transfer products through Internet searchengines, such as Google. A critical factor in attracting potential customers to our websites is how prominently our websites are displayed in response tosearch inquiries. If we are listed less prominently or fail to appear in search result listings for any reason, visits to our websites by customers andpotential 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 toincrease our sales and marketing expenses, which may not be offset by additional revenue and could adversely affect our operating results. Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales and revenue aredifficult 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 oursales cycle, and the short-term difficulty in adjusting our operating expenses. Our results of operations depend in part on sales to large organizations. Thelength 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 averagesales cycle to become longer. Because the length of time required to close a sale varies substantially from customer to customer, it is difficult to accuratelypredict 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 periodssubsequent 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 aperiod could impact our results of operations for that period and any future periods for which revenue from that transaction is delayed. As a result ofthese factors, it is difficult for us to forecast accurately our revenue for any particular period in the future. Because a substantial portion of our expensesare relatively fixed in the short term, our results of operations will suffer if our revenue falls below expectations in a particular period, which could causethe 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 couldadversely affect our future financial results. Acquisitions of new products, capabilities or entire business enterprises involve a number of risks and challenges, including: ●Complexity, time, and costs associated with integration of the acquired business operations, workforce, products, and technologiesinto our existing business, sales force, employee base, product lines, marketing and technology which ultimately may not besuccessful. ●Diversion of management time and attention from our existing business and other business opportunities throughout theintegration. ●Potential loss or termination of employees, including costs associated with the termination or replacement of those employees. ●Assumption of debt or other liabilities of the acquired business, including any future litigation related to alleged liabilities of theacquired business. ●The incurrence of additional acquisition-related debt as well as increased expenses and working capital requirements. ●Potential dilution of earnings per share. ●Increased costs and efforts in connection with compliance with Section 404 of the Sarbanes-Oxley Act of 2002. ●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. 19Table of Contents The ongoing integration of any acquired products, capabilities or entire business enterprises involves continually determining and leveragingthe actual market synergies, sustaining and even extending the business performance of the acquired entity, implementing our technology systems in theacquired operations, and integrating and managing the personnel related to the acquired products and/or operations. We also must continue toeffectively 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 otheranticipated benefits of an acquisition. In addition, because acquisitions of technology-based products and companies are inherently risky, no assurancecan be given that our previous, current, or future acquisitions will be successful and will not adversely affect our business, operating results, or financialcondition. 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 andservices could have a material and adverse effect on our business and results of operations. Once our products are deployed for use by our customers, our customers may depend on our support organization and our channel partners toresolve issues relating to our products. High-quality support is critical for the successful marketing and sale of our products. If we or our channelpartners do not assist our customers in deploying our products effectively, succeed in helping our customers resolve post-deployment issues quickly, orprovide ongoing support, it could adversely affect our ability to sell our products to existing customers and could harm our reputation. As we expand ouroperations internationally, our support organization will face additional challenges, including those associated with delivering support, training anddocumentation in languages other than English. Our failure or the failure of our channel partners to maintain high-quality support and services couldhave a material and adverse effect on our business and operating results. The transition from an on-premise to a cloud-based, SaaS subscription business model is subject to numerous risks and uncertainties. We believe some customers and potential purchasers of our products are evaluating MFT via the cloud. Some will choose to embrace clouddelivery as a complete MFT solution or possibly employ a hybrid architecture. This potential shift in customer preferences, and our pursuit of a SaaSstrategy, may give rise to a number of risks, including the following: ●If customers are uncomfortable with cloud-based solutions and desire only perpetual licenses, we may experience longer thananticipated 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 hasexpired; ●We may be unsuccessful in maintaining our target pricing, adoption and projected renewal rates; ●We may select a target price that is not optimal and could negatively affect our sales or earnings; and ●We may incur costs at a higher than forecasted rate as we expand our cloud-based solutions. The potential 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 notlimited to: security, reliability, scalability, customization, performance, current license terms, customer preference, customer concerns with entrusting athird party to store and manage their data, public concerns regarding privacy and the enactment of restrictive laws or regulations. If we are unable to successfully establish our cloud-based solutions and navigate our business model transition in light of the foregoing risksand uncertainties, our results of operations could be negatively impacted. 20Table of Contents 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 smartclient devices. Pricing and delivery models are evolving and our competitors are developing and deploying cloud-based services for customers. We aredevoting resources to develop and deploy our own competing cloud-based software and services strategies. While we believe our expertise andinvestments in software for cloud-based services provide us with a strong foundation to compete, it is uncertain whether our strategies will attract thecustomers or generate the revenue required to be successful. Delivering our products through cloud-based, SaaS solutions requires that we pay thirdparties, such as Microsoft Azure, to host our products and make them available to our customers. As a result, we incur ongoing, recurring third-partyhosting expenses associated with delivering SaaS solutions that we do not incur with respect to our on-premise license products. These expenses maycause the gross margin we realized from our SaaS software products to be lower than the gross margin we realized from our on-premises softwareproducts. Whether we are successful in this new business model depends on our execution in a number of areas, including: ●Continuing to innovate and bring to market compelling cloud-based services that generate increasing traffic and market share; ●Maintaining the utility, compatibility and performance of our software on the growing array of cloud computing platforms and theenhanced interoperability requirements associated with orchestration of cloud computing environments; and ●Successfully deploying our SaaS products on platforms hosted by third-party services upon which we rely for delivery of thosecomputing 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 ofoperations and financial condition. 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 serviceintroductions, and evolving industry standards. Our future success will depend on our ability to adapt quickly to rapidly changing technologies, to adaptour solutions to evolving industry standards and to improve the performance and reliability of our applications and services. To maintain and increasemarket acceptance of our applications and services, we must anticipate customer needs and offer solutions that meet changing demands quickly andeffectively. Customers may require features and functionality that our current applications and services do not have or that our platforms are not able tosupport. If we fail to develop solutions that satisfy customer preferences in a timely and cost-effective manner, our ability to renew our agreements withexisting customers 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 modelrequires a considerable investment of technical, financial, legal and sales resources. Our transition to cloud offerings will continue to divert resources andincrease costs, especially in cost of license and other revenues, in any given period. Such investments may not improve our long-term growth and resultsof 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 ofhistorical experience with the costs of delivering cloud-based versions of our applications. We may assume greater responsibilities for implementationrelated services during this transition. As a result, we may face risks associated with new and complex implementations, the cost of which may differ fromoriginal estimates. The consequences in such circumstances could include: monetary credits for current or future service engagements, reduced fees foradditional product sales, and a customer’s refusal to pay its contractually-obligated subscription or service fees. 21Table of Contents Offering cloud services may result in the loss of other business opportunities and negatively impact our revenue growth. We have allocated resources related to our sales and marketing activities, software product development, management team and other personneltoward growing our cloud business. This strategic direction and redirection of resources could potentially result in the loss of sales opportunities in ourtraditional perpetual license and M&S sales business. If our cloud business does not grow in accordance with our expectations and we are not able tocover the shortfall with other sales opportunities, then our business could be harmed. Although the subscription model used for our cloud business isdesigned to create a recurring revenue stream that is more predictable, the shift to this model may reduce our license sales, spread revenue over a longerperiod and negatively affect future license and M&S sales revenue. 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 arecurring revenue stream that is more predictable, it creates certain risks related to the timing of revenue recognition and potential reductions in cashflows. A decline in new or renewed subscriptions in any period may not be immediately reflected in our reported financial results for that period butmay result in a decline in our revenue in future periods. If we were to experience significant downturns in subscription sales and renewal rates, ourreported financial results might not reflect such downturns until future periods. Our subscription model could also make it difficult for us to rapidlyincrease our revenues from subscription or SaaS-based services through additional sales in any period as revenue from new customers will be recognizedover the applicable subscription term. Increases in sales under our subscription sales model could result in decreased revenues over the short term if theyare 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 softwaremanagement through a cloud service as opposed to traditional on-premises software deployments. There can be no assurance that SaaS revenue will besignificant in the future despite our levels of investment in developing this product delivery method. Margins associated with our SaaS offerings aregenerally lower than margins associated with our on-premises solutions. SaaS subscription arrangements are under month-to-month agreements. Accordingly, our customers generally have no long-term obligation tous 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 tocontinue their SaaS subscription. Renewal rates in the future may differ from historical trends such that we may not be able to accurately predict customerrenewal rates. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with ourservices 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 forlower-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 aservice. To the extent that our SaaS offerings are defective or there are disruptions to our services, demand for our SaaS offerings could diminish, and wecould 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. Ifwe or our third-party service delivery hosts experience security breaches and unauthorized access is obtained to a customer’s data or our data, ourservices may be perceived as not being secure, customers may curtail or stop using our services, and we may incur significant legal and financialexposure and liabilities. SaaS software solutions can be complex, and the deployment of our secure file transfer solutions in the desired manner may require additionalprofessional services and implementation services for which we may not have the ability to provide at an appropriate margin. Our SaaS products aredependent upon third-party hardware, software and hosting vendors, all of which must interoperate for end users to achieve their computing goals. Weexpect 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. 22Table of Contents 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 and through a network of distributors and resellers that we collectively refer to as the channel, aswell as through marketplaces such as Amazon Web Services and Microsoft Azure. Sales through these different methods involve distinct risks. Risksassociated with direct sales include: ●Challenges in scaling the size of the direct sales team to levels required for revenue growth. ●Difficulty in hiring, retaining, and motivating our direct sales force. ●Substantial amounts of training for sales representatives to become productive, including regular updates to cover new and revisedproducts. ●Leads obtained from paid advertising (for example, Google ads) impacting direct sales should the marketing and advertisingeffectiveness decline due to non-attributable declines in leads, unforeseen search engine algorithm changes, or other occurrencesthat may adversely impact the lead generation aspects of the direct sales cycle. Increased competition may materially impact thecosts 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 mayincrease the risk of sales personnel turnover. To the extent that we experience turnover within our direct sales force or sales management, there is a riskthat the productivity of our sales force would be negatively impacted which could lead to revenue declines. Turnover within our sales force can causedisruption in sales cycles leading to delay or loss of business. It can take time to implement new sales management plans and to effectively recruit andtrain new sales representatives. We review and modify our compensation plans for the sales organization periodically. Changes to our sales compensationplans 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 our customers. ●Our resellers and distributors currently not being subject to minimum sales requirements or any obligation to market our products totheir 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 greateremphasis on the sale of these products due to pricing, promotions, and other terms offered by our competitors. For 2018 and 2017, approximately 35% of our revenue was derived from indirect channel sales through distributors and resellers. We expect that asignificant portion of our revenue will continue to be derived from indirect channel sales in the future. Our ability to effectively distribute our productsthrough those channels depends in part upon the financial and business condition of our distributor and reseller network. Computer software distributorsand resellers typically are not highly capitalized, have previously experienced difficulties during times of economic contraction, and have experienceddifficulties during the past several years. If our distributors and resellers were not be able to sustain their business at a level necessary to sell ourproducts 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 totalrevenues in 2018 and 2017. Although we believe that we are not substantially dependent on this distributor, if it were to experience a significantdisruption with its business or if our relationship with it were to deteriorate, it is possible that our ability to sell to our customers would be, at leasttemporarily, negatively impacted. This could, in turn, negatively impact our financial results. 23Table of Contents Over time, we have modified and will continue to modify aspects of our relationship with our distributors and resellers, such as their incentiveprograms, pricing to them and our distribution model, to motivate and reward them for aligning their businesses with our strategy and businessobjectives. Changes in these relationships and underlying programs could negatively impact their business and/or harm our business. In addition, theloss 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 ofour major international distributors or large resellers could harm our business. In particular, if one or more of such distributors or resellers were unable tomeet their obligations with respect to our accounts receivable from them, we could be forced to write off such accounts receivables and may be requiredto delay the recognition of revenue on future sales to these customers. These events could have a material adverse effect on our financial results. It may be difficult for us to recruit and retain software developers and other technical and management personnel because we are a relatively smallcompany. We compete intensely with other software development and distribution companies domestically and internationally as well as informationtechnology departments supporting larger businesses all of whom strive to recruit and hire employees from a limited pool of qualified personnel. Somequalified candidates prefer to work for larger, better known companies or in another geographic area. In order to attract and retain personnel in acompetitive marketplace, we believe that we must provide a competitive compensation package, including cash, equity-based compensation, and otheremployee benefits including medical insurance and healthcare plans. The volatility in our stock price may from time to time adversely affect our ability torecruit or retain employees. In addition, we may be unable to obtain required stockholder approvals of future increases in the number of shares availablefor issuance under our equity compensation plans. Also, accounting rules require us to treat the issuance of employee stock options and other forms ofequity-based compensation as compensation expense. As a result, we may decide to issue fewer equity-based incentives and may be impaired in ourefforts to attract and retain necessary personnel. If we are unable to hire and retain qualified employees, or conversely, if we fail to manage employeeperformance 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. Theloss of any key employee could result in significant disruptions to our operations, including adversely affecting the timeliness of product releases, thesuccessful implementation and completion of company initiatives, the effectiveness of our disclosure controls and procedures and our internal controlover financial reporting, and the results of our operations. Hiring, training, and successfully integrating replacement sales, engineering, and otherpersonnel could be time consuming, may cause additional disruptions to our operations, and may be unsuccessful, which could negatively impact futurerevenues. We may engage third parties to develop products on our behalf. These engagements may involve reliance on resources owned and managed by thosethird 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 anddevelop products on our behalf. Arrangements of this type involve high levels of risk as a result of inherent uncertainties about the timely delivery andultimate viability of those products due to the reliance we must place on third parties to plan, perform and successfully complete work for us. These areprocesses for which we could have notably less direct control than if we performed the work ourselves. These arrangements involve our reliance on theongoing financial viability of the enterprise performing the work. This risk is challenging to manage because we do not always have clear visibility as tothe 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, ourbusiness, operating results and financial position could be harmed. 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 forus, or if we were unable to continue using them because of political or economic instability, we would have difficulty finding comparably skilleddevelopers 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 wecould not replace the contract programmers, it could take us longer to develop certain products and product upgrades and at a higher cost. 24Table of Contents Revenue from our Mail Express, Wide Area File Services, CuteFTP and TappIn product lines will likely continue to decline in the future and becomea smaller part of our total revenue. Revenue from our products and services other than our EFT solution was $1.2 million and $1.6 million in 2018 and 2017, respectively, andaccounted for 3.4% and 4.6% of our total revenue in 2018 and 2017, 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 arecurrently using them. If revenue from these products continues to decline, we may begin to incur losses from these products. The potential for suchlosses 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 theseproducts, 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 productsthat could materially affect our results of operations and financial condition. 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 expectedlevels. 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 havehistorically received a substantial portion of orders from our customers and generated a substantial portion of revenue during the last few weeks of eachperiod. A significant interruption in our IT systems, which manage critical functions such as order processing, trade compliance reviews, delivery of ourproducts, billings, collections, revenue recognition, and financial reporting, among others, could result in delayed order fulfillment and decreased revenuefor 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, ourinability to release new products on schedule, any failure of our systems related to order review and processing, or any delays in product delivery basedon trade compliance requirements, our revenue for that period could fall below our expectations and the estimates of market analysts, if any, which couldadversely 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 onour financial results. For example, increased professional services sales, especially to the government, may result in lower earnings as a percentageof revenue. Our solution portfolio includes software licenses, subscription services, M&S, and professional services. Because they are relatively laborintensive, professional services typically have substantially lower margins than software license sales, M&S and subscription services. Professionalservices were 7% of our total revenue in both 2018 and 2017. However, this percentage can fluctuate significantly from period to period depending on theneeds 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 apercentage of revenue may fluctuate from historical norms. For example, if we were to derive a relatively large (compared to historical norms) componentof our revenue from professional services in a reporting period, earnings as a percentage of revenue may decline in that period due to lower margincontribution 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 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 unableto anticipate or react to these competitive challenges or if existing or new competitors take or gain additional market share in any of our markets, ourcompetitive position could weaken, and we could experience a decrease in revenues that could adversely affect our business and operating results. Tocompete successfully, we must maintain a successful research and development effort to create new products and services and enhance existing productsand services, effectively adapt to changes in the technology or product rights held by our competitors, appropriately respond to competitor strategies assuch strategies become apparent, and effectively adapt to technological changes and changes in the ways that our information is accessed, used, andstored within our enterprise and consumer markets. If we are unsuccessful in responding to our competitors or to changing technological and customerdemands, we could experience a negative effect on our competitive position and our financial results. 25Table of Contents We compete with a variety of companies that have significantly greater revenues and financial resources, more partners, resellers anddistribution channels than we have, and greater quantities of personnel and technical resources. For example, our EFT solution suite competes withproducts from IBM Sterling, Ipswitch, Axway and several other vendors. Our WAFS product competes with Riverbed Technology, Panzura, and PeerSync. Large companies may be able to develop new technologies, across multiple solution spaces, and on more operating systems, more quickly than wecan, 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 existingcompetitors also may be able to adopt more aggressive pricing strategies. For example, Ipswitch provides an older version of its consumer file transferprotocol program for free for non-commercial use, and Microsoft includes file transfer protocol functionality in its Internet browser, which it alsodistributes for free. Increased competition may result in lower operating margins and loss of market share. As we develop new products or new features, functions and capabilities for existing products, we capitalize certain of our costs related to thoseactivities 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 andcapabilities for existing products. We present these capitalized costs as an asset on our balance sheet. We amortize these costs to expense in futureperiods 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 wewere 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 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 computingenvironments with different operating systems, system management software, and equipment and networking configurations, which may cause errors orfailures in our products or may expose undetected errors, failures, or bugs in our products. Our customers’ computing environments also are oftencharacterized by a wide variety of standard and non-standard configurations that make pre-release testing for programming or compatibility errors difficultand time-consuming. In addition, despite testing by us and others, errors, failures, or bugs may not be found in new products or releases until aftercommencement of commercial shipments. In the past, we have discovered software errors, failures, and bugs in certain of our product offerings after theirintroduction 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 ofour products, loss of competitive position, or claims by customers or others. Many of our end-user customers use our products in applications that arecritical to their businesses and may have a greater sensitivity to defects in our products than to defects in other, less critical, software products. Inaddition, if an actual or perceived breach of information integrity or availability occurs in one of our end-user customer’s systems, regardless of whetherthe breach is attributable to our products, the market perception of the effectiveness of our products could be harmed. Alleviating any of these problemscould 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. 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 makethese types of claims, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correctthe problem. Liability provisions in our standard terms and conditions of sale, and those of our resellers and distributors, may not be enforceable undersome circumstances or may not fully or effectively protect us from customer claims and related liabilities and costs, including indemnification obligationsunder our agreements with resellers and distributors. The sale and support of our products also entail the risk of product liability claims. We maintaininsurance to protect against certain types of claims associated with the use of our products, but our insurance coverage may not adequately cover anysuch claims. Even claims that ultimately are unsuccessful could result in expenditures of funds in connection with litigation and divert management’s timeand other resources. 26Table of Contents 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. Economicdownturns could have an adverse effect on spending on information technology projects since in such environments, prospects and customers mayreduce, 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 webelieve a substantial part of their MFT spending budget is considered discretionary by our prospects and customers. The perception of MFT solutionsspending as discretionary is further reinforced by the existence of low cost, or even free, products that deliver some subset of the capabilities found inour 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 orfree “good enough” products as an interim measure. The potential adverse impacts of such decisions may persist for an extended period of time, evenwell into a period of economic recovery, given that many prospects will not change their IT infrastructure for a considerable period of time after thatinfrastructure 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 netmargins, and impairment of current or future goodwill and long-lived assets. In addition, some of our customers could delay paying their obligations tous. Potentially reduced sales and margins and customer payment problems could limit our ability to fund research and development, marketing, sales, andother 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 forour 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. Whilesuch factors may, in some periods, increase product sales, fluctuations in demand can also negatively impact our product sales. If demand for ourproducts 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 ourfinancial 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, budgetand appropriation decisions, and processes which are driven by numerous factors, including geo-political events and macroeconomic conditions, and arebeyond 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 andrequirements could impact the funding, or the timing of funding, of our programs which could negatively impact our results of operations and financialcondition. Government contracts typically have long sales cycles such that closure of such contracts is difficult to predict. U.S. Government contracts generally also permit the government to terminate the contract, in whole or in part, without prior notice, at thegovernment’s convenience or for default based on performance. A termination arising out of our default could expose us to liability and have a negativeimpact on our ability to obtain future contracts and orders. Furthermore, on contracts for which we are a subcontractor and not the prime contractor, theU.S. Government could terminate the prime contract for convenience or otherwise, irrespective of our performance as a subcontractor. 27Table of Contents 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 tocomply 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 theintense competition in the marketplace for people with the skillsets we need to operate our business. New employees may not be productive for weeks ormonths as they learn about our solutions, our personnel and the administrative practices within our company. 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 withothers. We believe this variability is possible largely due to our customers’ budgetary and spending patterns, as many customers spend the unusedportions of their discretionary budgets prior to the end of their fiscal years. For example, we have historically recorded our highest level of revenue in ourfourth quarter, which we believe corresponds to the fourth quarter of a majority of our customers. If our rate of growth slows over time, seasonal orcyclical variations in our operations may become more pronounced, and our business, results of operations and financial position may be adverselyaffected. Our operations potentially are vulnerable to security breaches that could harm the quality of our products and services or disrupt our ability todeliver our products and services. Information security is a dynamic discipline that historically has faced threats that develop and emerge in ways that are sometimesunpredictable. Third parties may breach our systems and information security and damage our products and services or misappropriate confidentialcustomer information. This might cause us to lose customers, or even cause customers to make claims against us for damages. We may be required toexpend significant resources to protect against potential or actual security breaches and/or to address problems caused by such breaches. 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 onthird-party, hosted platforms. As we continue to execute our strategy of increasing the number and scale of our cloud-based offerings, we may store andprocess increasingly large amounts of personally identifiable information of our customers. At the same time, the continued occurrence of high-profiledata breaches provides evidence of an external environment increasingly hostile to information security. This environment demands that we continuouslyimprove our design and coordination of security controls. It is possible our security controls over personal data, our training of employees and vendorson data security, and other practices we follow may not prevent the improper disclosure of personally identifiable information. Improper disclosure of thisinformation could harm our reputation, lead to legal exposure to customers, or subject us to liability under laws that protect personal data, resulting inincreased costs or loss of revenue. We believe consumers using our subscription services increasingly will want efficient, centralized methods ofchoosing their privacy preferences and controlling their data. Perceptions that our products or services do not adequately protect the privacy of personalinformation could inhibit sales of our products or services and could constrain consumer and business adoption of cloud-based solutions. 28Table of Contents Breaches of our cybersecurity systems could degrade our ability to conduct our business operations and deliver products and services to ourcustomers, delay our ability to recognize revenue, compromise the integrity of our software products, result in significant data losses and the theft ofour intellectual property, damage our reputation, expose us to liability to third parties and require us to incur significant additional costs tomaintain 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 andproduct development activities to our marketing and sales efforts and communications with our customers and business partners. Cyber threats mayattempt 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 atarget, we may be unable to anticipate these techniques. In addition, sophisticated hardware and operating system software and applications that weproduce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedlyinterfere with the operation of the system. We have also outsourced a number of our business functions to third-party contractors. Therefore, ourbusiness 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 thatdoes not expose our network systems to security breaches and the loss of data. Accordingly, if our cybersecurity systems and those of our contractorsfail to protect against unauthorized access, sophisticated cyber-attacks and the mishandling of data by our employees and contractors, our ability toconduct 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. ●Our electronic communications systems, including email and other methods, could be disrupted, and our ability to conduct ourbusiness operations could be seriously damaged until such systems can be restored. ●Our ability to process customer orders and electronically deliver products and services could be degraded, and our distributionchannels could be disrupted, resulting in delays in revenue recognition. ●Defects and security vulnerabilities could be introduced into our software products, thereby damaging the reputation and perceivedreliability and security of our products and potentially making the data systems of our customers vulnerable to further data loss andcyber incidents. ●Personally identifiable data of our customers, employees and business partners could be lost. Should any of the above events occur, we could be subject to significant claims for liability from our customers or from regulatory actions ofgovernmental agencies, our ability to protect our intellectual property rights could be compromised and our reputation and competitive position could besignificantly harmed. Also, the regulatory and contractual actions, litigations, investigations, fines, penalties and liabilities relating to data breaches thatresult in losses of personally identifiable or credit card information of users of our services could be significant in terms of fines and reputational impactand necessitate changes to our business operations that may be disruptive to us. Additionally, we could incur significant costs in order to upgrade ourcybersecurity systems and remediate damages. Consequently, our financial performance and results of operations could be adversely affected. Certain components of the software code comprising some of our products are licensed from third parties making us dependent upon those licensesremaining 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 notperpetual and, as such, with advance notice as provided in the license agreements, these third parties could terminate these licenses. Even with advancenotice, termination of these licenses could create a severe hardship for us due to the need to locate substitute software code from other third parties orcreate alternative software code ourselves in order for our products to continue to operate in the manner designed or for us to keep pace with customerrequirements, including our obligations under maintenance and support agreements. There is no assurance we could achieve either of those alternativesolutions in a timely and effective manner that would not disrupt our ability to continue selling and supporting those products, or without theconsumption of significant company resources in the form of time spent by our personnel creating alternative solutions or cash paid to third parties toassist us. Such a situation could delay the completion and introduction to the marketplace of other products we are developing to remain competitive dueto 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 financialresults could be adversely affected. 29Table of Contents 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 sourcecode 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 subjectus to possible intellectual property litigation. Open source code may impose limitations on our ability to commercialize our products because, amongother reasons, open source license terms may be ambiguous and may result in unanticipated obligations regarding our solution, and open sourcesoftware cannot be protected under trade secret law. In addition, it may be difficult for us to accurately determine the identities of the developers of theopen source code and whether the acquired software infringes third-party intellectual property rights. As a result, we could be subject to suits by partiesclaiming ownership of what we believe to be open source software. From time to time, companies that incorporate open source software into theirproducts 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 seekto 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, ourbusiness 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 acustomer’s computer. Such access potentially may make the customer vulnerable to security breaches, which could result in the loss of the customer’sprivacy or property. Invasions of privacy or other customer harm occurring in an environment where our solutions are operating could result in customerdissatisfaction 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 ininternational markets. All products that are exported, re-exported or that are worked on by foreign nationals are subject to export controls. Such controls includeprohibitions on end uses, end users and exports to certain sanctioned countries. In addition, incorporation of encryption technology into our productsincreases 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 encryptdata. Therefore, our products may be exported outside the United States or revealed to foreign nationals only by complying with the required level ofexport controls/restrictions. Restrictions applicable to our products may include a requirement to have a license to export the technology, a requirement tohave software licenses approved before export is allowed, and outright bans on the licensing of certain encryption technology to particular end users orto all end users in a particular country. In addition, various countries regulate the import and re-export of certain technology and have enacted laws thatcould limit our ability to distribute our products or could limit our customers’ ability to implement our products in those countries or that make it aviolation for us to comply with U.S. sanctions requirements. There can be no assurance that we will be successful in obtaining or maintaining the licenses and other authorizations required to export ourproducts from applicable government authorities. Any change in export or import regulations or related legislation, shift in approach to the enforcementor scope of existing regulations, changes in the list of countries to which we cannot export, or changes in persons or technologies targeted by suchregulations could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customerswith international operations. Changes in our products or changes in export and import regulations may create delays in the introduction of our productsin international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in somecases, prevent the export or import of our products to certain countries, companies or individuals altogether. Any change in export, import or sanctionsregulations or related legislation, a shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons ortechnologies 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. 30Table of Contents Export and sanctions laws and regulations can be extremely complex in their application. If we are found not to have complied with applicableexport control or sanctions laws, we may be sanctioned, fined or penalized by, among other things, having our ability to obtain export licenses curtailed oreliminated, possibly for an extended period of time. Our failure to receive or maintain any required export licenses or authorizations or our being penalizedfor failure to comply with applicable export control or sanctions laws would hinder our ability to sell our products, could result in financial penalties, andcould materially adversely affect our business, financial condition, and results of operations. Any failure on our part or the part of our distributors tocomply 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 orregulatory controls, including licensing requirements, in different foreign jurisdictions, and as such, importation or re-exportation of our technology maynot be permitted in these foreign jurisdictions. Violations of foreign regulations or regulation of international transactions could prevent us from beingable to sell our products in international markets. Our success depends in large part on our having access to international markets. A violation of foreignregulations 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 26% and 25% of our sales were topurchasers outside the United States in 2018 and 2017, respectively. If our sales outside the United States increase, we may be required to further expandour 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 ourapplications into additional languages. In addition, there is significant competition for entry into high growth markets. Our international operations aresubject to a variety of risks, which could cause fluctuations in the results of our international operations. These risks include: ●Compliance with foreign regulatory and market requirements. ●Variability of foreign economic, political and labor conditions. ●Changing restrictions imposed by regulatory requirements, tariffs or other trade barriers or by U.S. export laws. ●Potential increase in expenses to comply with international data protection laws. ●The imposition by the United States government of sanctions on countries, individuals or business entities. ●Longer accounts receivable payment cycles. ●Potentially adverse tax consequences. ●Difficulties in protecting intellectual property. ●Burdens of complying with a wide variety of foreign laws. ●Difficulty transferring funds to the U.S. in a tax efficient manner from non-U.S jurisdictions in which the cash flow originates. 31Table of Contents 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 andregulations relate to a number of aspects of our business, including trade protection, import and export control, sanctions laws, data and transactionprocessing 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 regulationsand other regulatory requirements affecting trade and investment. The application of these laws and regulations to our business is often unclear and mayat times conflict. Compliance with these laws and regulations may involve significant costs or require changes in our business practices that result inreduced 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 globaloperations 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 byU.S. regulations applicable to us, including the Foreign Corrupt Practices Act. Although we implement policies and procedures designed to ensurecompliance with these laws, there can be no assurance that all of our employees, contractors and agents, as well as those companies to which weoutsource 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 onour business. Our interaction with foreign parties can also increase our costs with respect to compliance. For example, the EU has recently adopted acomprehensive overhaul of its data protection regime from the current national legislative approach to a single European Economic Area PrivacyRegulation, 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 foreigncompanies processing data of EU residents. Although the GDPR will apply across the EU without a need for local implementing legislation, as has beenthe case under the current data protection regime, local data protection authorities (“DPAs”) will still have the ability to interpret the GDPR, which has thepotential 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 causeour processes to be compliant with applicable portions of the GDPR, but we cannot assure you that such steps will be effective. We have adoptedpolicies to comply with the GDPR, but ongoing implementation and maintenance of compliance regimes could require changes to certain of our businesspractices, 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 couldbecome subject, including by reason of inadvertent disclosure of confidential information, could result in fines, sanctions, penalties or other adverseconsequences and loss of consumer confidence, which could materially adversely affect our results of operations, overall business and reputationespecially 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 financialstatements which has resulted, and could in the future result, in the restatement of our consolidated financial statements, and such failure tomaintain 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 ofinternal control over financial reporting, which is defined as a process designed by, or under the supervision of, our principal executive officer andprincipal financial officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withGAAP. Failure to establish and maintain appropriate internal financial reporting controls and procedures has caused us to fail to meet our reportingobligations, 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 ourcommon stock. Failure to remediate our material weaknesses and control deficiencies with respect to our internal control over financial reporting couldresult in similar consequences in the future. 32Table of Contents There are inherent limitations in all control systems, and misstatements due to error or fraud have occurred and may occur again in the future andnot be detected. The ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 require us to identify material weaknesses in internalcontrol over financial reporting, which is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes inaccordance with GAAP. Our management, including our principal executive officer and principal financial officer, does not expect that our internal controlsand disclosure controls 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 areresource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no evaluation ofcontrols can provide absolute assurance that all control issues and instances of fraud in our company have been detected. These inherent limitationsinclude 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. Thedesign 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 thatany design will succeed in achieving our stated goals under all potential future conditions. Over time, a control may be inadequate because of changes inconditions, 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 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 fromdoing business with us and affect how our stock trades. This could, in turn, negatively affect our ability to access public debt or equity markets forcapital. The amount of income taxes we compute as payable on our income tax returns filed with the Internal Revenue Service and certain states could bechallenged 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 onour 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 inpreparing 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 toexamination 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 weoriginally 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 todefend with no assurance of a favorable outcome for us. In the event of an unfavorable result under these circumstances, our business, operating resultsand 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 aswell 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 an obligation to do so. States in which we collect sales tax could audit ouractivities and assess us with additional tax based on their interpreting the sales tax code differently than we interpret it. States where we do not collectsales 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 positiontaken 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 noassurance of a favorable outcome for us. In the event of an unfavorable result under these circumstances, our business, operating results and financialposition could be harmed. 33Table of Contents 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: ●U.S. and global economic conditions leading to general declines in market capitalizations, with such declines not associated withoperating performance. ●Quarter-to-quarter variations in results of operations. ●Our announcements of new products. ●Our announcements of acquisitions. ●Our announcements of significant new customers or contracts. ●Our competitors’ announcements of new products. ●Our product development or release schedule. ●Changes in our management team. ●General conditions in the software industry. ●Investor perceptions and expectations regarding our products, plans and strategic position and those of our competitors andcustomers. 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 operatingperformance 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: ●Amortization of intangible assets, including acquired technology and product rights. ●Acquisition expenses. ●Impairment of goodwill and intangibles. ●Share-based compensation expense. ●Restructuring charges. ●Impairment of long-lived assets. ●Reserves for uncertain tax positions. 34Table of Contents 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: ●Discourage potential acquisition proposals. ●Delay or prevent a change in control. ●Limit the price that investors may be willing to pay in the future for shares of our common stock. In particular, our certificate of incorporation and bylaws prohibit stockholders from voting by written consent or calling meetings of thestockholders. We are also subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation fromengaging in any of a broad range of business combinations with any interested stockholder, as defined in the statute, for a period of three years followingthe 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 36% ofour outstanding common stock as of February 28, 2019. These stockholders would have the ability to substantially control our operations and direct ourpolicies, 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 tobe divided into three classes of directors serving staggered three-year terms. As a result, approximately one-third of our Board of Directors will be electedeach 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 2,536,320 shares of our common stock outstanding under our employee and director stock option plans as ofDecember 31, 2018, of which options to purchase 1,103,631 shares were vested. We have filed registration statements under the Securities Act, coveringstock 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 donot 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 partiallydeveloped 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 litigationbased 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 ourproducts is developed by independent parties or licensed from third parties over whom we have less control than we exercise over internal developers. Inaddition, we expect that infringement claims against software developers will become more prevalent as the number of products and developers growsand the functionality of software programs in the market increasingly overlaps. Companies in the technology industry, and other patent and trademarkholders seeking to profit from royalties in connection with grants of licenses, own large numbers of patents, copyrights, trademarks, service marks, andtrade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. In addition, wemay be the target of aggressive and opportunistic enforcement of patents by third parties, including non-practicing entities. 35Table of Contents Responding to and defending against such claims may cause us to incur significant expense and divert the time and efforts of our managementand employees. Successful assertion of such claims could require that we pay substantial damages or ongoing royalty payments, prevent us from sellingour products and services, damage our reputation, or require that we comply with other unfavorable terms, any of which could materially harm ourbusiness. 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 believethe 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. For any intellectual property rights claim against us or our customers, we may have to pay damages and indemnify our customers againstdamages. Claims of infringement could require us to re-engineer our products or seek to obtain licenses from third parties in order to continue offering ourproducts in a manner that may include licensing technologies from others. In addition, an adverse legal decision affecting our intellectual property, or theuse 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 orlaw enforcement practices are less developed. The global nature of the Internet makes it difficult to control the ultimate destination or security of oursoftware making it more likely that unauthorized third parties will copy certain portions of our proprietary information or reverse engineer the proprietaryinformation 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 earnprofits, 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 wewould have to devote substantial resources towards developing an independent brand identity. Defending or enforcing our trademark rights at a localand 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 additionalexpenses, may adversely affect our business and results of operations. As previously disclosed in our public filings and in this Annual Report, the Audit Committee has recently completed the investigation relating torevenue recognition. We are also the subject of an investigation by the SEC and the United States Attorney’s Office for the Western District of Texasrelated to these matters. We have incurred significant expenses related to legal, accounting, and other professional services in connection with the Audit Committeeinvestigation and related matters and related remediation efforts. The expenses incurred, and expected to be incurred, in connection with the AuditCommittee and government investigations, the impact of our delay in 2017 and through June 14, 2018 in meeting our periodic reporting requirements onthe confidence of investors, employees and customers, and the diversion of the attention of the management team that has occurred, and is expected tocontinue, has adversely affected, and could continue to adversely affect, our business, financial condition and results of operations or cash flows. 36Table of Contents As a result of the matters reported above, we are exposed to greater risks associated with litigation, regulatory proceedings and governmentenforcement actions. In addition, we have incurred significant legal expenses in connection with a securities class action that was filed against us andcertain of our directors and officers, which the Court gave final approval of a settlement on December 18, 2018. The Company has also receivedstockholder demand letters related to the above matters, and the Board has established a Special Litigation Committee to analyze and investigate claimsthat could be potentially asserted against the Company. Any future investigations or additional lawsuits may adversely affect our business, financialcondition, 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”, ofour 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 resultof these events, we have become subject to a number of additional risks and uncertainties, including substantial unanticipated accounting and legal feesin 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 Annual Report. The restatement of our previously issued financial results has resulted in private litigation and could result in private litigation judgments that couldhave 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 previouspublic disclosures. For additional discussion of this litigation, see Part I, Item 3, “Legal Proceedings”, of this Annual Report. 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 amaterial adverse impact on our results of operations and financial condition as well as on our reputation. While we cannot estimate our potential exposurein these matters at this time, we have already incurred significant expense defending this litigation and expect to continue to need to incur significantexpense 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 ourresults of operations and financial condition. 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, theRestatement (the “SEC Investigation”). See Part I, Item 3, “Legal Proceedings” of this Annual Report for a discussion of the SEC Investigation. We arecooperating 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 SECconsequences the SEC Investigation may have with respect to the Company or any current or former Company personnel. However, the SECInvestigation could result in considerable legal expenses, divert management’s attention from other business concerns and harm our business. If the SECwere to determine that legal violations occurred, we could be required to pay significant civil and/or criminal penalties and/or other amounts and we couldbecome 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 tothe outcome of the SEC Investigation. We face risks related to an ongoing investigation by the United States Attorney’s Office for the Western District of Texas. On May 31, 2018, we were served with a subpoena issued by a grand jury sitting in the United States District Court for the Western District ofTexas (the “Grand Jury Subpoena”). The Grand Jury Subpoena requests all documents and emails relating to the Company’s investigation of the potentialimproper recognition of software license revenue. We intend to fully cooperate with the Grand Jury Subpoena and related investigation being conductedby the United States Attorney’s Office for the Western District of Texas (the “U.S. Attorney’s Investigation”). At this time, we are unable to predict theduration, scope, result or related costs of the U.S. Attorney’s Investigation. We are also unable to predict what, if any, further action may be taken inconnection 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, couldresult in the imposition of fines, penalties, disgorgement, equitable relief, or other losses, which could have a material adverse effect on the Company’sconsolidated financial position, liquidity, or results of operations. 37Table of Contents Our indemnification obligations and limitations of our director and officer liability insurance may have a material adverse effect on our financialcondition, 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 anobligation to indemnify, or we have otherwise agreed to indemnify, certain of our current and former directors and officers with respect to current andfuture investigations and litigation, including the matters discussed in Part I, Item 3, “Legal Proceedings” of this Annual Report. In connection with someof these pending matters, we are required to, or we have otherwise agreed to, advance, and have advanced, legal fees and related expenses to certain ofour current and former directors and officers and expect to continue to do so while these matters are pending. Certain of these obligations are not andmay not be “covered matters” under our directors’ and officers’ liability insurance, or there may be insufficient coverage available. Further, in the eventthe directors and officers are ultimately determined not to be entitled to indemnification, we may not be able to recover the amounts we previouslyadvanced to them. In addition, we have incurred significant expenses in connection with the Audit Committee’s independent investigation, the pending SECInvestigation, the U.S. Attorney’s Investigation and shareholder litigation. We cannot provide any assurances that past or future claims related to thoseor other matters, including the cost of fees, penalties or other expenses, will not exceed the limits of our insurance policies, that such claims are coveredby 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 theseclaims, the insurers also have and may seek to deny or limit coverage in some or all of these matters. Furthermore, the insurers could become insolventand 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 inexcess 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 incursignificant unreimbursed costs to satisfy our indemnification obligations, which may have a material adverse effect on our financial condition, results ofoperations 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 thecurrent lease is $347,000. This lease expires April 30, 2019. Subsequent to year end, we entered into a memorandum of understanding to extend this leasefor a term of 10 years at an average annual rent of $408,000. 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. 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 actioncomplaint, Anthony Giovagnoli v. GlobalSCAPE, Inc., et. al., Case No. 5:17-cv-00753, was filed against the Company in the United States District Court forthe Western District of Texas. On November 6, 2017, the Court appointed Irfan Rahman as lead plaintiff (the “Lead Plaintiff”), and he filed the FirstAmended Complaint on July 26, 2018 (the “Amended Complaint”). The Amended Complaint named, Matthew Goulet, James Albrecht, Thomas Brown,David Mann, Frank Morgan, and Thomas Hicks (collectively, the “individual Defendants”) and the Company as defendants for allegedly makingmaterially false and misleading statements regarding, inter alia, the Company’s previously reported financial statements. The Amended Complaint allegedviolations of Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder. The Amended Complaint sought unspecifieddamages, costs, attorneys’ fees, and equitable relief. The parties reached a settlement and submitted a Stipulation of Settlement to the Court on September13, 2018. Under this settlement, the Company’s and Individual Defendants’ insurance carrier has provided the Class with a cash payment of $1,400,000,which includes the cash amount of any attorney’s fees or litigation expenses that the Court may award Lead Plaintiff’s counsel and costs Lead Plaintiffmay incur in administering and providing notice of the settlement. In exchange, Lead Plaintiff has agreed that the settlement will include a dismissal of theClass Action with prejudice and a release of all claims against the Company and the Individual Defendants by the Class. The Court entered an Order andFinal Judgment approving the settlement on December 18, 2018. On December 18, 2018, the Court also awarded Plaintiff’s Lead Counsel and LiaisonCounsel 25% of the settlement fund ($350,000) in fees and $12,721 in reimbursement of expenses, which was paid from the settlement fund. 38Table of Contents On October 20, 2017, the Company received a demand letter from a stockholder seeking the inspection of books and records of the Companypursuant to Section 220 of the Delaware General Corporation Law (the “Section 220 Demand”). This stockholder’s stated purpose for the demand is, interalia, to investigate whether the Company’s Board of Directors and officers engaged in an illegal scheme to misrepresent the Company’s performance byfalsely reporting accounts receivable, license revenue, total current assets and total assets, total stockholders’ equity, and total liabilities for the yearended December 31, 2016, as well as the Board’s independence to consider a stockholder derivative demand. The Company intends to fully respond tothe Section 220 Demand to the extent required under Delaware law. On October 12, 2018 and November 30, 2018, the Company received letters from stockholders demanding that the Company take action toremedy alleged harm caused to the Company, including to remedy alleged breaches of fiduciary duties by certain current and/or former directors andexecutive officers of the Company. The stockholder alleges, inter alia, that certain current and former directors and executive officers violated theirfiduciary duties beginning at least in July 2016, causing the Company to suffer damages by overstating financial results for the fourth quarter of 2016. The Board has established a special litigation committee (“Special Litigation Committee”) consisting of Dr. Thomas Hicks and Frank Morgan toanalyze and investigate claims that could potentially be asserted in stockholder derivative litigation related to facts connected to the claims andallegations asserted in the litigation related to the Restatement and the stockholder demands described above and the Section 220 Demand (the “PotentialDerivative Litigation”). The Special Litigation Committee will determine what actions are appropriate and in the best interests of the Company, and decidewhether it is in the best interests of the Company to pursue, dismiss, or consensually resolve any claims that may be asserted in the Potential DerivativeLitigation. The Board determined that each member of the Special Litigation Committee is disinterested and independent with respect to the PotentialDerivative Litigation. Among other things, the Special Litigation Committee has the power to retain counsel and advisors, as appropriate, to assist it inthe investigation, to gather and review relevant documents relating to the claims, to interview persons who may have knowledge of the relevantinformation, to prepare a report setting forth its conclusions and recommended course of action with respect to the Potential Derivative Litigation, and totake any actions, including, without limitation, directing the filing and prosecution of litigation on behalf of the Company, as the Special LitigationCommittee in its sole discretion deems to be in the best interests of the Company in connection with the Potential Derivative Litigation. The SpecialLitigation Committee’s findings and determinations shall be final and not subject to review by the Board and in all respects shall be binding upon theCompany. 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 formalinvestigation of issues relating to the Restatement, with which the Company is cooperating fully. At this time, the Company is unable to predict theduration, scope, result or related costs associated with the SEC’s investigation. The Company is also unable to predict what, if any, action may be takenby 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 compliancewith existing laws or regulations, however, could result in the imposition of fines, penalties, disgorgement, equitable relief, or other losses, which couldhave 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 WesternDistrict of Texas (the “Grand Jury Subpoena”). The Grand Jury Subpoena requests all documents and emails relating to the Company’s investigation ofthe potential improper recognition of software license revenue. The Company intends to fully cooperate with the Grand Jury Subpoena and relatedinvestigation 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 predictwhat, 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 withexisting laws or regulations, however, could result in the imposition of fines, penalties, disgorgement, equitable relief, or other losses, which could have amaterial adverse effect on the Company’s consolidated financial position, liquidity, or results of operations. Item 4. Mine Safety Disclosures Not Applicable. 39Table of Contents PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Our common stock is listed on the NYSE American Exchange under the symbol “GSB”. Price Range of Common Stock The following table sets forth the quarterly high and low closing sale prices for our common stock for the last two fiscal years. 2018 2017 High Low High Low First Quarter (ending March 31) $3.73 $3.33 $4.26 $3.71 Second Quarter (ending June 30) $4.18 $3.54 $5.29 $3.87 Third Quarter (ending September 30) $4.08 $3.23 $5.44 $3.62 Fourth Quarter (ending December 31) $4.73 $3.88 $4.33 $3.40 Annual $4.73 $3.23 $5.44 $3.40 On March 1, 2019, the last reported sales price of our common stock on the NYSE American Exchange was $6.06 per share. Holders As of February 28, 2019, we had approximately 1,729 stockholders of record of our common stock. Dividends We paid quarterly dividends of $.015 per share on March 8, 2017, June 8, 2017, September 8, 2017 and December 18, 2017 to stockholders ofrecord as of the close of business on February 23, 2017, May 23, 2017, August 23, 2017 and November 30, 2017, respectively. We paid quarterly dividendsof $.015 per share on March 23, 2018, June 22, 2018, and November 5, 2018 to stockholders of record as of the close of business on March 9, 2018, June 8,2018, and October 22, 2018, respectively. The timing and amount of dividends to be paid, if any, in subsequent quarters will be determined on future datesby the Board of Directors. Purchases of Equity Securities by the Issuer Share repurchase activity during the three months ended December 31, 2018 was as follows: Total number of Maximum Total shares purchased dollar value number of Average as part of publicly of shares shares price per announced plans that may yet purchased share or programs be purchased October 1 - October 31, 2018 - - - $5,000,000 November 1 - November 30, 2018 698,585 4.43 698,585 $1,908,822 December 1 - December 31, 2018 197,763 4.45 197,763 $1,017,689 Total 896,348 896,348 1,017,689 40Table of Contents On October 29, 2018, the Company announced that its Board of Directors had authorized a stock repurchase program. Under the program, theCompany may purchase up to $5,000,000 of its outstanding common stock. Under the stock repurchase program, the Company intends to repurchaseshares through authorized Rule 10b5-1 plans (which permits the Company to repurchase shares when the Company might otherwise be precluded fromdoing so under insider trading laws), open market purchases, privately-negotiated transactions, block purchases or otherwise in accordance withapplicable federal securities laws including Rule 10b-18 of the Exchange Act. The $1,017,689 above represents the funds remaining available to repurchaseshares under the current plan at December 31, 2018. Item 6. Selected Financial Data Not applicable. 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 ourconsolidated financial statements for the years ended December 31, 2018 and 2017, and related notes included elsewhere in this Annual Report. Overview We develop and sell computer software that provides secure information exchange, data transfer and sharing capabilities for enterprises andconsumers. We have been in business for more than twenty years. Our primary business is selling and supporting MFT software for enterprises. MFT software facilitates the transfer of data from one location toanother across a computer network within a single enterprise or between multiple computer networks in multiple enterprises. Our MFT products are based upon our EFT platform. This on-premise and cloud-based delivery platform emphasizes secure and efficient dataexchange for virtually any organization. It enables business partners, customers and employees to share information safely and securely. The EFTplatform provides enterprise-level security while automating the integration of back-end systems which are features often missing from traditional filetransfer software. The EFT platform features built-in regulatory compliance, governance, and visibility controls to maintain data safety and security. It canreplace legacy systems, homegrown servers, expensive leased lines and virtual area networks. The EFT platform promotes ease of administration whileproviding the detailed capabilities necessary for complete control of a file transfer system. We continue to explore strategic alternatives to improve the market position and profitability of our product offerings in the marketplace,generate additional liquidity and enhance our valuation. We may pursue our goals through organic growth or other alternatives. 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 mayaffect 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 ourdiverse solution portfolio, we regularly review our revenue mix and changes in revenue across all solutions to identify emerging trends. See “Comparison of the Consolidated Statement of Operations for the Years Ended December 31, 2018 and 2017” for a discussion of trends inour revenue growth that we monitor using this metric. 41Table of Contents Adjusted EBITDA (Non-GAAP Measurement) We utilize Adjusted EBITDA (Earnings Before Interest, Taxes, Total Other Income/Expense, Depreciation, Amortization and Share-BasedCompensation Expense) to provide us a view of income and expenses that is supplemental and secondary to our primary assessment of net income aspresented in our consolidated statement of operations and comprehensive income. We use Adjusted EBITDA to provide another perspective formeasuring profitability that does not include the effects of the following items: ●Expenses that typically do not require us to pay them in cash in the current period (such as depreciation, amortization and share-based compensation); ●The cost of financing our business; and ●The effects of income taxes. Prior to 2018, we did not add back the amortization of capitalized software development costs in our Adjusted EBITDA computation. In 2018,after researching the methods used by other software companies, we changed our method of computing Adjusted EBITDA to include the amortization ofcapitalized software development cost in order to enhance the comparability of the computation to that of our peers. We monitor Adjusted EBITDA to assess our performance relative to our intended strategies, expected patterns of action, and budgets. We usethe 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 generally accepted accounting principles (“GAAP”). It should not beconsidered as a substitute for net income presented on our consolidated statement of operations and comprehensive income. Adjusted EBITDA haslimitations as an analytical tool and when assessing our operating performance. Adjusted EBITDA should not be considered in isolation or without asimultaneous reading and consideration of our consolidated financial statements prepared in accordance with GAAP. We compute Adjusted EBITDA as follows ($ in thousands): Year Ended December 31, 2018 2017 Net Income $3,654 $1,371 Add (subtract) items to determine Adjusted EBITDA: Income tax expense 1,227 1,547 Interest (income) expense, net (86) (296)Depreciation and amortization: Total depreciation and amortization 2,173 2,144 Share-based compensation expense 1,269 1,566 Adjusted EBITDA $8,237 $6,332 Amounts we previously reported as Adjusted EBITDA reconcile to the metric in the table above as follows: Year Ended December 31, 2017 Adjusted EBITDA as previously reported $4,449 Amortization of capitalized software development costs $1,883 Adjusted EBITDA as now reported $6,332 See “Comparison of the Consolidated Statement of Operations for the Years Ended December 31, 2018 and 2017” for discussion of thevariances between periods in the components comprising Adjusted EBITDA. 42Table of Contents Liquidity and Capital Resources Our cash and working capital positions were as follows ($ in thousands): December 31, 2018 December 31, 2017 Cash and cash equivalents $9,173 $11,583 Short term certificates of deposit - 4,291 Long term certificates of deposit - 11,503 Total cash, cash equivalents and certificates of deposit $9,173 $27,377 Current assets $17,351 $23,296 Current liabilities (15,483) (16,886)Working capital $1,868 $6,410 At December 31, 2017, our short term investments consisted of certificates of deposit maturing on various dates through 2018. Our long terminvestments as of that date consisted of a certificate of deposit maturing in December 2021. All short term investments were redeemed in 2018. Our longterm certificate was redeemed prior to maturity in part to provide funds necessary to execute the modified Dutch auction tender offer that concluded inSeptember of 2018. Our capital requirements principally relate to our need to fund our ongoing operating expenditures, which are primarily related to employeesalaries and benefits. We make these expenditures to enhance our existing products, develop new products, sell those products in the marketplace andsupport our customers after the sale. We rely on cash and cash equivalents on hand and cash flows from operations to fund our operating activities and believe those items will beour principal sources of capital for the foreseeable future. If our revenue declines and/or our expenses increase, our cash flow from operations and cashon hand could decline. Cash provided or used by our various activities consisted of the following ($ in thousands): Cash Provided (Used) Duringthe Years Ended December 31, 2018 2017 Operating activities $4,896 $5,736 Investing activities $14,356 $(2,212)Financing activities $(21,662) $(836) Our cash provided by operating activities decreased during 2018 compared to 2017 primarily due to the following factors set forth on ourConsolidated Statements of Cash Flows: ●Accounts payable decreasing $1,080,000 in 2018 as compared to increasing $970,000 in 2017 due to a decrease in outstandingprofessional fees associated with the Restatement and Investigation in 2018 as compared to 2017. ●Accounts receivable increasing $644,000 in 2018 as compared to decreasing $346,000 during 2017 primarily due to increased sales atthe end of 2018. ●Deferred revenue decreasing $813,000 in 2018 as compared to decreasing $395,000 in 2017 due primarily to a decrease in multi-yearM&S renewals. ●Accrued expenses decreasing $457,000 in 2018 as compared to increasing $68,000 in 2017 due primarily to reduced personnel relatedliabilities due to the reduction in force. 43Table of Contents Offset by: ●Federal income tax payable increasing $970,000 in 2018 as compared to federal income tax receivable decreasing $530,000 in 2017 dueprimarily to paying $1.4 million more in income tax payments in 2017 than 2018 combined with the federal income tax accrualassociated with the substantial increase in taxable income in 2018. The amount of cash we used for investing activities during 2018 increased as compared to 2017 due primarily to: ●The redemption of our certificates of deposit in 2018 for which no comparable event occurred in 2017. Offset by: ●A decrease in capitalized software development costs due to the reduction in force. Financing activities used more cash during 2018 than during 2017 primarily due to: ●The repurchase of our common stock under the modified Dutch auction tender offer and the stock repurchase plan announced onOctober 29, 2018. Offset by: ●A decrease in the amount of dividends paid in 2018 as compared to 2017. Contractual Obligations and Commitments At December 31, 2018, our contractual obligations and commitments consisted primarily of the following items: ●An obligation to deliver services in the future to satisfy our right to earn our deferred revenue of $16.2 million. Those future servicesprimarily relate to our obligations under M&S contracts. We will recognize this deferred revenue as revenue over the remaining lifeof those contracts which generally ranges from one to three years. Deferred revenue, unlike the other liability components of ourworking capital, is an obligation we will satisfy through providing services in the future to our customers as part of our ongoingoperating activities from which we have historically generated cash flow. Our deferred revenue does not involve a disbursement ofcash as a direct payment of that liability. ●Trade accounts payable and accrued liabilities which include our contractual obligations to pay software royalties to third partiesthat vary in amount based on our sales volume of products upon which royalties are payable. ●Operating lease for our office space. ●Federal and state taxes. Recent Accounting Pronouncements See Note 2 “Significant Accounting Policies” of our consolidated financial statements included in this Annual Report which includes adiscussion of recent accounting pronouncements and the impact they may have on our consolidated financial statements. Critical Accounting Policies We follow accounting standards set by the Financial Accounting Standards Board. This board sets GAAP, which we follow in preparingfinancial statements that report our financial position, results of operations, and sources and uses of cash. We also follow the reporting regulations of theSEC. 44Table of Contents The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reportedamounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, andthe reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent inthe preparation of our consolidated financial statements. It is possible the actual results could differ from these estimates and assumptions and couldhave a material effect on the reported amounts of our financial position and results of operations. For a description of our critical accounting policies, please refer to Note 2 “Significant Accounting Policies” of our consolidated financialstatements included in this Annual Report. Results of Operations Comparison of the Consolidated Statement of Operations for the Years Ended December 31, 2018 and 2017 2018 2017 $ Change ($ in thousands) Total revenues $34,416 $33,891 $525 Cost of revenues 6,236 6,213 23 Gross profit 28,180 27,678 502 Operating expenses Sales and marketing 10,009 12,840 (2,831)General and administrative 6,382 6,117 265 Legal & Professional 4,623 2,949 1,674 Severance 488 29 459 Research and development 1,883 3,121 (1,238)Total operating expenses 23,385 25,056 (1,671)Income from operations 4,795 2,622 2,173 Other income (expense), net 86 296 (210)Provision for income taxes 1,227 1,547 (320)Net Income $3,654 $1,371 $2,283 In the discussions below, we refer to the year ended December 31, 2018 as “2018” and the year ended December 31, 2017, as “2017”. Thepercentage changes cited in our discussions below are the change between 2018 and 2017. 45Table of Contents The components of our revenues were as follows ($ in thousands): Revenue for the Year Ended December 31, 2018 2017 Percent of Percent of Amount Total Amount Total Revenue By Type License $10,512 30% $10,929 32%M&S 21,587 63% 20,761 61%Professional Services (all EFT Platform) 2,317 7% 2,201 7%Total Revenue $34,416 100% $33,891 100% Revenue by Product Line License EFT Platform $10,208 97% $10,412 95%Other 304 3% 517 5%Total License Revenue 10,512 100% 10,929 100% M&S EFT Platform 20,707 96% 19,715 95%Other 880 4% 1,046 5% 21,587 100% 20,761 100% Professional Services (all EFT Platform) 2,317 100% 2,201 100% Total Revenue EFT Platform 33,232 97% 32,328 95%Other 1,184 3% 1,563 5% $34,416 100% $33,891 100% Our total revenue increased 2%. Revenue from our EFT platform products and services increased 3%. That increase was offset by a 24%decrease in revenue from our other products consisting of Mail Express, WAFS, CuteFTP, and TappIn. The portion of our total revenue realized fromthose other products decreased to 3%, which is a trend that is in line with our ongoing de-emphasis of those products. In 2019, Mail Express and WAFS will no longer be offered for sale, however we will continue to offer product support. EFT Platform Products License revenue from our EFT platform products slightly decreased 2%. This decrease was primarily due to some customers deciding to delaytheir buying decision at the end of the year. M&S revenue from our EFT platform products increased 5% primarily due to: ●Ongoing license sales since a majority of license sales are accompanied by an M&S contract. ●Sustaining high renewal rates of M&S contracts by customers who initially purchased these services in earlier periods. We believethese renewals result from our programs designed to provide high-quality and responsive M&S services to customers. 46Table of Contents Our professional services revenue increased 5% in 2018 as compared to 2017 due primarily to an enhanced focus on managing our queue ofprofessional service projects. This focus resulted in a reduction in our backlog of professional services related to EFT platform license sales. Cost of Revenues. These expenses are associated with the production, delivery and support of our products and services. We believe it is mostmeaningful to view cost of revenues as a percent of the revenues to which those costs relate since many of those costs are variable relative to revenue. Cost of license revenue consists primarily of: ●Amortization of capitalized software development costs we incur when producing our software products. This amortization beginswhen a product is ready for general release to the public and generally is an expense that is not directly variable relative to revenue. ●Royalties we pay to use software developed by others for certain features of our products that is generally an expense that isvariable relative to revenue. ●Fees we pay to third parties who provide services supporting our SaaS subscription solutions for our EFT platform that generallyhave 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 partieswe use to deliver these services. Cost of software license revenue was relatively flat and as a percent of software license revenue was 28% in 2018 compared to 27% in 2017. Anincrease in amortization of capitalized software development cost and third-party hosting fees for our SaaS products was offset by lower royalty expense. Cost of M&S revenue as a percent of M&S revenue was 10% in 2018 as compared to 9% in 2017. Cost of revenue for M&S in absolute dollarsincreased by 19%. These increases were a combination of increasing our headcount in our customer support department and the decision by the U.S. Army toconsolidate certain of their operations resulting in the non-renewal of their M&S contract in September of 2017. Cost of professional services revenue as a percent of that revenue was 50% in 2018 as compared to 67% in 2017. The cost in absolute dollarsdecreased 20%. These decreases were due primarily to the reduction in force and a decrease in the use of third parties to deliver services. 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 29% of total revenue for 2018 compared to 38% of total revenue for2017. In absolute dollars these expenses decreased 22%, due primarily to a decrease in the headcount of our sales representatives, a change in the way inwhich we compensate our sales people and decreased marketing expenses due to a decrease in our spending for content. General and Administrative. These expenses increased 4% primarily due to a one-time share based compensation expense related to themodification of certain stock options of our former Chief Financial Officer and an increase in the number of members of our Board of Directors whichresulted in increased fees, offset by a credit to bad debt expense as a result of reducing the balance in our allowance for doubtful accounts to betterreflect our potential exposure. Legal and Professional. These expenses increased 57% primarily due to increases in professional fees and related expenses associated with thepreviously disclosed internal investigation, the restatement of certain of our financial statements and related litigation. Severance. These expenses increased $459,000 primarily due to one-time severance payments and termination benefits associated with thereduction in force. 47Table of Contents Research and Development. The overall profile of our research and development activities was as follows ($ in thousands): Year Ending December 31, 2018 2017 R&D expenditures expensed $1,883 $3,128 R&D expenditures capitalized 1,276 1,926 Total R&D expenditures (non-GAAP measurement) $3,159 $5,054 Our total R&D expenditures decreased 37% in 2018 as compared to 2017 primarily due to fewer employed software engineers and technicalpersonnel in addition to lower third-party expenses. Total resources expended for R&D set forth above as total R&D expenditures serves to illustrate our total corporate efforts to improve ourexisting products and to develop new products regardless of whether or not our expenditures for those efforts were expensed or capitalized. Totalresources expended for R&D is not a measure of financial performance under GAAP and should not be considered a substitute for R&D expense (setforth 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 corporateproduct improvement and new product creation activities, there are limitations associated with the use of this non-GAAP measurement. Total resourcesexpended for R&D is a non-GAAP measure not prepared in accordance with GAAP and may not be comparable to similarly titled measures of othercompanies since there is no standard for preparing this non-GAAP measure. As a result, this non-GAAP measure of total resources expended for R&Dhas limitations and should not be considered in isolation from, or as a substitute for, R&D expense and capitalized software development costindividually. Other Income. Other income consists primarily of interest income earned on certificates of deposit. The reduction in income in 2018 was dueprimarily to the redemption of all of our certificates of deposit in order to fund the purchase of shares related to the tender offer, which resulted in a one-time forfeiture of accrued interest. Income Taxes. Our effective tax rate was 25% for 2018 and 53% for 2017. These rates differed from a federal statutory tax rate of 21% and 34%,respectively, primarily due to: ●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 Cutsand Jobs Act of 2017. ●Certain expenses in our consolidated financial statements, such as a portion of meals and entertainment expenses, that are notdeductible on our federal income tax return. ●State income taxes included in income tax expense in our consolidated financial statements. Offset by: ●The domestic production activities deduction (in 2017) and the research and development credit that are tax credit incentives thatserve to reduce the rate at which we pay federal income taxes in exchange for us conducting certain aspects of our business in amanner promoted by the Internal Revenue Code. ●The deduction for foreign-derived intangible income. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Not applicable. 48Table of Contents Item 8. Financial Statements and Supplementary Data GlobalSCAPE, Inc. Index to Consolidated Financial Statements Years ending December 31, 2018 and 2017 Contents Report of Independent Registered Public Accounting Firm50 Consolidated Financial Statements Consolidated Balance Sheets51Consolidated Statements of Operations and Comprehensive Income52Consolidated Statements of Stockholders’ Equity53Consolidated Statements of Cash Flows54Notes to Consolidated Financial Statements55 49Table of Contents Report of Independent Registered Public Accounting Firm Board of Directors and StockholdersGlobalSCAPE, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of GlobalSCAPE, Inc. and its subsidiary (the Company) as of December 31, 2018 and2017, and the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the two years inthe period ended December 31, 2018, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, theconsolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2018 and2017 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accountingprinciples generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sinternal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issuedby the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 18, 2019 expressed an unqualified opinionthereon. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independentwith respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and ExchangeCommission 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 obtainreasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our auditsincluded performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, andperforming procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosuresin the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonablebasis 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 tovigorously 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 befound liable, the resulting outcome could have a material adverse effect on its consolidated financial position, liquidity or the results of its operations. Ouropinion is not modified with respect to these matters. /s/ WEAVER AND TIDWELL LLP We have served as the Company’s auditor since 2017.Austin, TexasMarch 18, 2019 50Table of Contents GlobalSCAPE, Inc.Consolidated Balance Sheets(in thousands except share amounts) December 31, 2018 2017 Assets Current assets: Cash and cash equivalents $9,173 $11,583 Short term certificates of deposit - 4,291 Accounts receivable, net 6,657 5,925 Federal income tax receivable - 822 Prepaid expenses and other 1,521 675 Total current assets 17,351 23,296 Long term certificates of deposit - 11,503 Capitalized software development costs, net 3,133 3,786 Goodwill 12,712 12,712 Deferred tax asset, net 395 651 Property and equipment, net 399 481 Other assets 502 84 Total assets $34,492 $52,513 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $820 $1,900 Accrued expenses 1,214 1,671 Income Tax Payable 148 - Deferred revenue 13,301 13,315 Total current liabilities 15,483 16,886 Deferred revenue, non-current portion 2,936 3,735 Other long term liabilities 117 176 Commitments and contingencies Stockholders’ equity: Preferred stock, par value $0.001 per share, 10,000,000 authorized, no shares issued or outstanding - - Common stock, par value $0.001 per share, 40,000,000authorized, 22,441,860 and 22,196,712 shares issued at December 31, 2018 and December 31, 2017, respectively 22 22 Additional paid-in capital 25,584 23,793 Treasury stock, 5,310,942 and 403,581 shares, at cost, at December 31, 2018 and December 31, 2017, respectively (22,712) (1,452)Retained earnings 13,062 9,353 Total stockholders’ equity 15,956 31,716 Total liabilities and stockholders’ equity $34,492 $52,513 The accompanying notes are an integral part of these consolidated financial statements. 51Table of Contents GlobalSCAPE, Inc.Consolidated Statements of Operations and Comprehensive Income(in thousands, except per share amounts) For the Year Ended December 31, 2018 2017 Operating revenues: Software licenses $10,512 $10,929 Maintenance and support 21,587 20,761 Professional services 2,317 2,201 Total revenues 34,416 33,891 Costs of revenues Software licenses 2,978 2,986 Maintenance and support 2,093 1,763 Professional services 1,165 1,464 Total costs of revenues 6,236 6,213 Gross Profit 28,180 27,678 Operating expenses Sales and marketing 10,009 12,840 General and administrative 6,382 6,117 Legal and Professional 4,623 2,949 Severance 488 29 Research and development 1,883 3,121 Total operating expenses 23,385 25,056 Income from operations 4,795 2,622 Other income (expense): Interest income 86 296 Total other income (expense) 86 296 Income before income taxes 4,881 2,918 Provision for income taxes 1,227 1,547 Net income $3,654 $1,371 Comprehensive income $3,654 $1,371 Net income per common share - basic $0.18 $0.06 Net income per common share - diluted $0.17 $0.06 Weighted average shares outstanding: Basic 20,721 21,702 Diluted 21,017 22,154 The accompanying notes are an integral part of these consolidated financial statements. 52Table of Contents GlobalSCAPE, Inc.Consolidated Statements of Stockholders' Equity(in thousands, except number of shares) Additional Common Stock Paid-in Treasury Retained Shares Amount Capital Stock Earnings Total Balance at December 31, 2016 21,920,912 $22 $21,756 $(1,452) $9,289 $29,615 Shares issued upon exercise of stockoptions 195,800 471 471 Stock-based compensation expense Stock options 1,257 1,257 Restricted stock 80,000 309 309 Common stock cash dividends, $0.060 pershare (1,307) (1,307) Net income 1,371 1,371 Balance at December 31, 2017 22,196,712 $22 $23,793 $(1,452) $9,353 $31,716 Retained Earnings Adjustment due to 606 979 979 Purchase of Treasury Stock (21,260) (21,260) Cancellation of Restricted Stock (40,000) Shares issued upon exercise of stockoptions 205,148 522 522 Stock-based compensation expense Stock options 1,055 1,055 Restricted stock 80,000 214 214 Common stock cash dividends, $0.045 pershare (924) (924) Net income 3,654 3,654 Balance at December 31, 2018 22,441,860 $22 $25,584 $(22,712) $13,062 $15,956 The accompanying notes are an integral part of these consolidated financial statements. 53Table of Contents GlobalSCAPE, Inc.Consolidated Statements of Cash Flows(in thousands) For the Year Ended December 31, 2018 2017 Operating Activities: Net income $3,654 $1,371 Adjustments to reconcile net income to net cash provided by operating activities: Bad debt expense (recovery) (88) 17 Depreciation and amortization 2,173 2,144 Stock-based compensation 1,269 1,566 Deferred taxes (4) 399 Subtotal before changes in operating assets and liabilities 7,004 5,497 Changes in operating assets and liabilities: Accounts receivable (644) 346 Prepaid expenses (216) (144)Federal income taxes 970 (530)Accrued interest receivable - (261)Other assets 191 161 Accounts payable (1,080) 970 Accrued expenses (457) 68 Deferred revenues (813) (395)Other long-term liabilities (59) 24 Net cash provided by operating activities 4,896 5,736 Investing Activities: Software development costs (1,276) (1,926)Purchase of property and equipment (162) (286)Redemption of certificates of deposit 15,794 - Net cash provided by (used in) investing activities 14,356 (2,212)Financing Activities: Proceeds from exercise of stock options 522 471 Purchase of Treasury Stock (21,260) - Dividends paid (924) (1,307)Net cash (used in) financing activities (21,662) (836)Net increase (decrease) in cash (2,410) 2,688 Cash at beginning of period 11,583 8,895 Cash at end of period $9,173 $11,583 Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $- $- Income taxes $253 $1,649 The accompanying notes are an integral part of these consolidated financial statements. 54Table of Contents GlobalSCAPE, Inc.Notes to Consolidated Financial StatementsDecember 31, 2018 and 2017 1. Nature of Business 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 informationsuch as financial data, medical records, customer files, vendor files, personnel files, transaction activity, and other similar documents between diverse andgeographically separated network infrastructures while supporting a range of information protection approaches to meet privacy and other securityrequirements. In addition to enabling secure, flexible transmission of critical information using servers, desktop and notebook computers, and a widerange of network-enabled mobile devices, our products also provide customers with the ability to monitor and audit file transfer activities. Our primaryproduct is Enhanced File Transfer, or EFT. We have other products that complement our EFT product. Throughout these notes, unless otherwise noted, our references to 2018 and 2017 refer to the years ended December 31, 2018 and 2017,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 preparingfinancial statements that report our financial position, results of operations, and sources and uses of cash. We also follow the reporting regulations of theSEC. The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reportedamounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, andthe reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent inthe preparation of our financial statements. It is possible the actual results could differ from these estimates and assumptions and could have a materialeffect 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 Products and Services We earn revenue by delivering the following software products and services: ●Perpetual software licenses under which customers install our products in their information systems environment on computersthey manage, own or otherwise procure from a cloud services provider. Customers also deploy our products with cloud servicesproviders in a BYOL environment. ●Cloud-based, hosted SaaS solutions that we sell on an ongoing subscription basis resulting in our earning recurring, monthlysubscription and usage fees to access the service. ●Maintenance and support services, or M&S, that generally consist of telephone support and access to unspecified future softwareupgrades. ●Professional services for product integration and configuration that generally do not significantly modify our software products. We earn the majority of our revenue from the sale of perpetual software licenses and associated contracts for M&S. 55Table of Contents We recognize revenue when we have satisfied a performance obligation by transferring control over a product or delivering a service to acustomer. We measure revenue based upon the consideration set forth in an arrangement or contract with a customer. The revenue recognition criteria weapply to each of our software products and services are as follows: ●Perpetual software licenses – These licenses grant a right to use our functional intellectual property. We recognize revenue at thepoint in time when we electronically deliver to our customer the software license key that provides the ability to access and use ourproduct. If our customer is a reseller who will further transfer the ability to access and use our product to a third party under aseparate arrangement that the reseller has with that third party, we recognize revenue at the time we deliver the software license keyto the reseller since our contract is with the reseller. ●Cloud-based, hosted SaaS solutions – These solutions grant a right to access our functional intellectual property. We recognizerevenue over time on a monthly basis as we deliver the services to which our customers subscribe. Revenue can include basicmonthly fees to access the software and usage fees based upon the volume of certain resources the customer consumes (such asvolumes of storage or bandwidth). We are generally paid for these services on a month-to-month basis, but if a customer pays us inadvance for services we will deliver in the future, we record as deferred revenue the amount of such payment related to services wehave not yet delivered. ●M&S – We provide these services to purchasers of perpetual software licenses under agreements with terms generally ranging fromone to three years. We require up-front payment of our M&S fee in an amount that covers the entire term of the agreement. Werecord as deferred revenue amounts paid that relate to future periods during which we will provide the M&S service. We reducedeferred revenue and recognize revenue ratably in future periods as we deliver the M&S service. ●Professional services – We recognize revenue from these services when the services are completed. If we are paid in advance forthese services, we record such payment as deferred revenue until we complete the services. The delivery of our software products and services generally does not involve any variable consideration, financing components orconsideration payable to a customer such as rebates or other incentives that reduce amounts owed to us by customers. Deferred Revenue Classification and Activity Deferred revenue related to services we will deliver within one year is presented as a current liability. Deferred revenue related to services that wewill deliver more than one year into the future is presented as a non-current liability. The activity in our deferred revenue balances has been as follows ($in thousands): Year Ended December 31, 2018 2017 Deferred revenue, beginning of period $17,050 $17,445 Deferred revenue resulting from new contracts with customers 21,577 20,451 Deferred revenue at the beginning of the period that was amortized torevenue (20,244) (19,248)Deferred revenue arising during the period that was amortized to revenue (2,146) (1,598)Deferred revenue, end of period $16,237 $17,050 Multi-Element Transactions At the time customers purchase perpetual software licenses, they also typically purchase M&S although it is not mandatory. We do not sellseparate M&S to subscribers to our SaaS solutions as M&S is provided as part of their SaaS subscription. Customers may also purchase professionalservices at the time they purchase perpetual software licenses or a SaaS subscription. Each of the components of these multi-element transactions is aseparately identifiable performance obligation. For multi-element transactions, we allocate the transaction price to each performance obligation on a relative stand-alone selling price basis. Wedetermine that stand-alone selling price for each item at the inception of the transaction involving these multiple elements. 56Table of Contents We sell, as stand-alone transactions, renewals of pre-existing M&S contracts, professional services to customers seeking assistance withproducts they have previously purchased from us, or SaaS subscriptions to customers not requiring any of our other products or services. Accordingly,we are able to estimate the stand-alone selling price of these items based upon our observation of those transactions. Since most of our sales of perpetualsoftware licenses are part of multi-element transactions that also involve M&S and/or professional services, and because the selling price of thoselicenses can vary significantly among customers, we use the residual approach under FASB Accounting Standards Codification Top 606, or ASC 606, toestimate the selling price of perpetual software licenses in a multi-element transaction by reference to the total transaction price less the sum of theobservable stand-alone selling prices of M&S and/or professional services. We allocate discounts proportionally to all of the components of a multi-element transaction. Sales Tax We collect sales tax on many of our transactions with customers as required under applicable law. We do not include sales tax collected in ourrevenue. We record it as a liability payable to taxing authorities. Allowance for Sales Returns We provide an allowance for sales returns. We estimate this allowance based upon our historical experience and the nature of recenttransactions with customers. This amount is included in accrued liabilities in our consolidated balance sheet. Contract Assets We generally bill customers for professional services when we have fully delivered the services specified in the contract. We may incur costs indelivering the services prior to that time. Such costs are generally not material. Accordingly, we do not record a contract asset for professional serviceengagements in process but not yet billed. Incremental Costs of Obtaining a Contract to Deliver Goods and Services We incur incremental costs in the form of sales commissions paid to our sales personnel and royalties on certain products paid to third parties.These are costs we would not incur if we did not obtain a contract to deliver our goods and services. We account for these costs as follows: ●If the costs are associated with products and services for which we recognize revenue at a fixed point in time (primarily sales ofperpetual software licenses and professional services), we expense these costs in full at the time we recognize that revenue. ●If the costs are associated with services for which we recognize revenue over time (primarily sales of M&S and SaaS subscriptions)for which we believe it is likely that the contract for those services will be renewed for additional terms in the future, provided wedeem these costs to be recoverable, we record these costs as a deferred expense asset and amortize that cost to expense as follows: oFor the portion of the cost that we determine benefits us primarily only over the term of the specific underlying contractcurrently in force (such as the term of an M&S contract), we recognize expense ratably each month over that term. oFor the portion of the cost that we determine benefits us over an overall customer relationship that is likely to span a periodof time that is longer than an initial contract term (for example, an M&S contract renewed for multiple terms in the future), werecognize expense ratably monthly over the estimated life of the customer relationship. Our activity in deferred costs of obtaining a contract to deliver goods and services has been as follows ($in thousands): Year EndedDecember 31, 2018 Deferred cost, beginning of period $1,240 Deferred cost resulting from new contracts with customers 674 Deferred cost amortized to expense (905)Deferred cost, end of period $1,009 At December 31, 2018, $571,000 was recorded in prepaid and other current assets and $438,000 was recorded in noncurrent other assets in ourconsolidated balance sheet. 57Table of Contents GlobalSCAPE, Inc.Condensed Consolidated Balance Sheet(in thousands)As of December 31, 2018 The following tables present our reported results under ASC 606 and a reconciliation to results using the historical accounting method: As Reported Effect of ASC 606 ASC 605Historical Assets Current assets: Cash and cash equivalents $9,173 $9,173 Certificates of deposit, short term - - Accounts receivable, net 6,657 (75) 6,582 Federal income tax receivable - - Prepaid and other current assets 1,521 (571) 950 Total current assets 17,351 (646) 16,705 Capitalized software development costs, net 3,133 3,133 Goodwill 12,712 12,712 Deferred tax asset, net 395 137 532 Property and equipment, net 399 399 Other assets 502 (438) 64 Total assets $34,492 $(947) $33,545 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable 820 820 Accrued expenses 1,214 (75) 1,139 Federal income tax payable 148 (66) 82 Deferred revenue 13,301 13,301 Total current liabilities 15,483 (141) 15,342 Deferred revenue, non-current portion 2,936 2,936 Other long term liabilities 117 117 Stockholders' Equity: Preferred stock - - Common stock 22 22 Additional paid-in capital 25,584 25,584 Treasury stock (22,712) (22,712)Retained earnings 13,062 (806) 12,256 Total stockholders’ equity 15,956 (806) 15,150 Total liabilities and stockholders’ equity $34,492 $(947) $33,545 58Table of Contents GlobalSCAPE, Inc.Condensed Consolidated Statement of Operations and Comprehensive Income(in thousands, except per share amounts)For the Year Ended December 31, 2018 As Reported Effect of ASC 606 ASC 605Historical Operating revenues: Software licenses $10,512 $10,512 Maintenance and support 21,587 21,587 Professional services 2,317 2,317 Total revenues 34,416 - 34,416 Costs of revenues Software licenses 2,978 (26) 2,952 Maintenance and support 2,093 2,093 Professional services 1,165 1,165 Total costs of revenues 6,236 (26) 6,210 Gross Profit 28,180 26 28,206 Operating expenses Sales and marketing 10,009 (205) 9,804 General and administrative 6,382 6,382 Legal and professional 4,623 4,623 Severance 488 488 Research and development 1,883 1,883 Total operating expenses 23,385 (205) 23,180 Income from operations 4,795 231 5,026 Interest income (expense), net 86 86 Income before income taxes 4,881 231 5,112 Income tax expense 1,227 58 1,285 Net income $3,654 $173 $3,827 Comprehensive income $3,654 $173 $3,827 Net income per common share - basic $0.18 $0.01 $0.18 Net income per common share - diluted $0.17 $0.01 $0.18 59Table of Contents GlobalSCAPE, Inc.Condensed Consolidated Statements of Cash Flows(in thousands)For the Year Ended December 31, 2018 As Reported Effect of ASC 606 ASC 605Historical Operating Activities: Net Income $3,654 173 $3,827 Items not involving cash at the time they are recorded in the statement ofoperations: Provision (recoveries) for doubtful accounts receivable (88) (88)Depreciation and amortization 2,173 2,173 Share-based compensation 1,269 1,269 Deferred taxes (4) (4)Subtotal before changes in operating assets and liabilities 7,004 173 7,177 Changes in operating assets and liabilities: Accounts receivable (644) (75) (719)Prepaid and other current assets (216) (107) (323)Deferred revenues (813) (813)Accounts payable (1,080) (1,080)Accrued expenses (457) 75 (382)Other assets 191 191 Accrued interest receivable - - Other long-term liabilities (59) (59)Federal income tax payable 970 (66) 904 Net cash provided by operating activities 4,896 - 4,896 Investing Activities: Software development costs (1,276) (1,276)Purchase of property and equipment (162) (162)Redemption of Certificates of Deposit 15,794 15,794 Net cash provided by investing activities 14,356 - 14,356 Financing Activities: Proceeds from exercise of stock options 522 522 Purchase of treasury stock (21,260) (21,260)Dividends paid (924) (924)Net cash used in financing activities (21,662) - (21,662)Net increase in cash (2,410) (2,410)Cash at beginning of period 11,583 - 11,583 Cash at end of period $9,173 $- $9,173 Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $- $- Income tax payments $253 $253 60Table of Contents 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 fromthe balance sheet date. These certificates of deposit are stated at amortized cost, which approximates fair value of these investments. In 2018, weredeemed our certificates to assist with funding the modified Dutch tender offer. Long-Term Investments Long-term investments consist of certificates of deposit held with financial institutions with contractual maturity dates greater than one yearfrom the balance sheet date. These certificates of deposit are stated at amortized cost, which approximates the fair value of these investments. Fair Value of Financial Instruments For financial assets and liabilities recorded at fair value on a recurring or non-recurring basis, fair value is the price we would receive to sellan asset, or pay to transfer a liability, in an orderly transaction with a market participant at the measurement date. In the absence of such data, fairvalue is estimated using internal information consistent with what market participants would use in a hypothetical transaction. In determining fairvalue, observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions;preference is given to observable inputs. These two types of inputs create the following fair value hierarchy: Level 1:Quoted prices for identical instruments in active markets. Level 2:Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active;and model derived valuations whose inputs are observable or whose significant value drivers are observable. Level 3:Significant inputs to the valuation model are unobservable. As of December 31, 2018, we did not have any assets measured at fair value on a recurring basis that would require disclosure based on thefair value hierarchy of valuation techniques. In addition, certain non-financial assets and liabilities are to be initially measured at fair value on a non-recurring basis. This includes items such as non-financial assets and liabilities initially measured at fair value in a business combination (but notmeasured at fair value in subsequent periods) and non-financial, long-lived assets measured at fair value for an impairment assessment. In general,non-financial assets and liabilities including goodwill, capitalized software and property and equipment are measured at fair value using Level 3inputs, which result in management’s best estimate of fair value from the perspective of a market participant, when there is an indication of impairmentand are recorded at fair value only when impairment is recognized. Our financial instruments consist principally of cash and cash equivalents, certificates of deposit, accounts receivable and accounts payable.The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable, approximates fair value due to the short term maturityof these instruments, all of which mature within 12 months. The carrying amount of our certificates of deposit approximates fair value based oninterest rates readily available in the market with similar terms. Property and Equipment Property and equipment is comprised of furniture and fixtures, software, computer equipment and leasehold improvements which are recorded atcost and depreciated using the straight-line method over their estimated useful lives. Furniture, fixtures and equipment have a useful life of five to sevenyears, 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 ofthe lease under which the improvements were made or the estimated useful life of the asset. Expenditures for maintenance and repairs are expensed as incurred. 61Table of Contents 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 themeasurement 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 50percent) that the fair value of our reporting unit is less than its carrying amount, including goodwill. In performing this qualitative assessment, we assessevents and circumstances relevant to us including, but not limited to: ●Macroeconomic conditions. ●Industry and market considerations. ●Cost factors and trends for labor and other expenses of operating our business. ●Our overall financial performance and outlook for the future. ●Trends in the quoted market value and trading of our common stock. In considering these and other factors, we consider the extent to which any adverse events and circumstances identified could affect thecomparison of our reporting unit’s fair value with its carrying amount. We place more weight on events and circumstances that most affect our reportingunit’s fair value or the carrying amount of our net assets. We consider positive and mitigating events and circumstances that may affect our determinationof 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 theevidence, the significance of all identified events and circumstances in the context of determining whether it is more likely than not that the fair value ofour 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 ourreporting unit is less than its carrying amount, we conclude there is no impairment of goodwill and perform no further testing in accordance with GAAP. Ifwe conclude otherwise, we proceed with performing the first step, and if necessary, the second step, of the two-step goodwill impairment test prescribedby GAAP. As of December 31, 2018, after assessing the totality of the relevant events and circumstances, we determined it not more likely than not that thefair value of our reporting unit was less than its carrying amount. Accordingly, we concluded there was no impairment of goodwill as of that date. Therehave been no material events or changes in circumstances since that time indicating that the carrying amount of goodwill may exceed its fair market valueand 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 workingmodel of that software product, we capitalize production costs incurred for that software product from that point forward until it is ready for generalrelease to the public. Thereafter, we amortize capitalized software production costs to expense using the straight-line method over the estimated useful lifeof that product, which is generally three years. We periodically assess the carrying value of capitalized software development costs and our method ofamortizing 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 licenserevenue consists primarily of amortization of the capitalized software development costs we incur when producing our software products, royalties wepay to use software developed by others for certain features of our products, and fees we pay to third parties who provide services supporting our SaaSsolutions. Cost of M&S revenue and cost of professional services revenue consist primarily of salaries and related costs of our employees and thirdparties we use to deliver these services. Research and Development We expense research and development costs as incurred. 62Table of Contents Advertising Expense We expense advertising costs as incurred as a component of our sales and marketing expenses. Advertising expense was approximately $807,000and $1.9 million 2018 and 2017, respectively. Share-Based Compensation We measure the cost of share-based payment transactions at the grant date based on the calculated fair value of the award. We recognize thiscost 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 followingfactors: ●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 toremain outstanding. We use this method because our options are plain-vanilla options, and we believe our historical option exerciseexperience 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 ofgrant. ●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 betweenthe 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 bein effect when the differences are expected to reverse. Deferred tax assets and liabilities are carried on the balance sheet with the presumption that theywill 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 anynecessary valuation allowance on our consolidated balance sheet with a corresponding increase in the tax provision on our statement of operations. Anyvaluation allowances we establish are determined based upon a number of assumptions, judgments, and estimates, including forecasted earnings, futuretaxable 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 evaluatethe 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 besustained, we assess the tax position to determine the amount of benefit to recognize in the financial statements. The amount of the benefit we recognizeis the largest amount that we believe has a greater than 50 percent likelihood of being realized upon ultimate settlement. Unrecognized tax benefitsrepresent tax positions for which reserves have been established. 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 computediluted earnings per share using the weighted-average number of common shares outstanding plus the number of common shares that would be issuedassuming conversion of all potentially dilutive common shares outstanding. 63Table of Contents Awards of non-vested restricted stock and options are considered potentially dilutive common shares for the purpose of computing earnings percommon share. We apply the treasury stock method to non-vested options under which the assumed proceeds include the amount the employee mustpay 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 consolidatedfinancial statements. To ensure comparability between periods, we revise previous period consolidated financial statements presented to conform them tothe method of presentation in our current period consolidated financial statements. If the changes increase or decrease previously reported amounts ofrevenue or expenses, we adjust retained earnings as of the beginning of the earliest period presented for the cumulative effect, if any, on that balance. Ifthese changes affect our financial statements for previously reported interim periods not presented herein, we present revised consolidated financialstatements for those periods when they are reported in the future. Recent accounting pronouncements ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (issued September 2017) – This updateprovides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Itstates 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 theoriginal award immediately before the original award was modified, the vesting conditions of the modified award are the same as the vesting conditions ofthe original award immediately before the original award was modified, and the classification of the modified award as equity or a liability is the same asthe classification of the original award immediately before the original award was modified. This update is effective for all entities for annual periodsincluding interim periods within those annual periods beginning after December 15, 2017. The adoption of this pronouncement did not have a materialimpact on our consolidated financial statements. ASU 2017-04, Intangibles – Goodwill and Other (issued January 2017) - To simplify the subsequent measurement of goodwill, Step 2 waseliminated from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures todetermine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedurethat would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendmentsin this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carryingamount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Any lossrecognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects fromany tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This update alsoeliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails thatqualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity isrequired 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 theoption to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. A public business entitythat 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 beginningafter December 15, 2019. We expect that the application of the provisions of this update will not have a material effect on our consolidated financialstatements. ASU 2016-13, Financial Instruments – Credit Losses (issued June 2016) - Among the provisions of this ASU is a requirement that assetsmeasured at amortized cost, which includes trade accounts receivable, be presented at the net amount expected to be collected. This pronouncementrequires that an entity reflect all of its expected credit losses based on current estimates which will replace the current standard requiring that an entityneed consider only past events and current conditions in measuring an incurred loss. We are subject to this guidance effective with consolidatedfinancial statements we issue for the year ending December 31, 2020, and the quarterly periods during that year. We do not expect the amounts we reportas accounts receivable in those future periods under this guidance to be materially affected relative to current guidance. 64Table of Contents ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (issued March 2016) – This standard discontinued the recordingin equity of tax benefits or tax deficiencies that arise from differences between share-based payment compensation expense recorded for financialstatement purposes and that expense deductible for tax purposes. This new standard requires that the tax effect of all such differences be recorded andreported in the statement of operations. This standard also requires that tax-related cash flows resulting from share-based payments be reported asoperating activities in the statement of cash flows which is a change from the current requirement to present such tax-related items as an inflow fromfinancing activities and an outflow from operating activities. As prescribed by this standard, we adopted it beginning January 1, 2017, and followed it inthe preparation of our consolidated 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 paymentawards. Forfeitures may be either estimated (as has been the requirement in the past) or recognized when they occur. We elected to continue estimatingforfeitures consistent with our existing practices thereby resulting in no change to our application of GAAP for this aspect of computing share-basedcompensation. ASU 2016-02, Leases (issued February 2016) - The main difference between existing GAAP and this ASU 2016-02 is the presentation bylessees on their financial statements of lease assets and lease liabilities arising from operating leases. Since this new standard retains the distinctionbetween finance and operating leases, the effect of leases in the statement of operations and the statement of cash flows will be largely unchanged fromexisting 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 alease liability on our balance sheet when we implement this standard. In accordance with this standard, we will implement it beginning with our interimand annual financial statements for 2019. The extent of the effect of this standard on our consolidated financial statements for 2019 and later will dependupon the leases, if any, that we have in effect at that date. ASU 2014-09, Revenue from Contracts with Customers (issued May 2014) - The core principle of this guidance is that an entity shouldrecognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects consideration to which the entity expectsto be entitled in exchange for those goods or services. We have implemented these new principles using the modified retrospective transition method andrecorded an increase (tax effected) to retained earnings at January 1, 2018 of $979,000. We also recorded as an asset deferred expense of approximately$1.2 million. We are accounting for these costs we incur to obtain a contract as follows: ●If the costs are associated with products and services for which we recognize revenue at a fixed point in time (primarily sales ofperpetual software licenses and professional services), we expense these costs in full at the time we recognize that revenue. ●If the costs are associated with services for which we recognize revenue over time (primarily sales of M&S and SaaS subscriptions)for which we believe it is likely that the contract for those services will be renewed for additional terms in the future, provided wedeem these costs to be recoverable, we record these costs as a deferred expense asset and amortize that cost to expense as follows: oFor the portion of the cost that we determine benefits us primarily only over the term of the specific underlying contractcurrently in force (such as the term of an M&S contract), we recognize expense ratably each month over that term. oFor the portion of the cost that we determine benefits us over an overall customer relationship that is likely to span a periodof time that is longer than an initial contract term (for example, an M&S contract renewed for multiple terms in the future), werecognize expense ratably monthly over the estimated life of the customer relationship. 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 ourcustomers 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 deliveringthose services. In that event, we exclude from accounts receivable (and from the related deferred revenue, see Note 6) the invoices we have issued forwhich 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. Wecontinually 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 thatbalance against our allowance for doubtful accounts. 65Table of Contents We determine our accounts receivable, net, as follows ($ in thousands): December 31, 2018 2017 Total invoices issued and unpaid $7,990 $6,644 Less: Unpaid invoices relating to M&S contracts with a start datesubsequent to the balance sheet date (1,233) (441)Gross accounts receivable 6,757 6,203 Allowance for sales returns - (100)Allowance for doubtful accounts (100) (178)Accounts receivable, net $6,657 $5,925 The activity in our allowance for doubtful accounts and sales returns has been as follows ($ in thousands): Year Ended December 31, 2018 2017 Balance, beginning of period $278 $263 ASC 606 Adjustment (100) - Provision for sales returns - - Provision for doubtful accounts (88) 17 Accounts written off 10 (2)Balance, end of period $100 $278 4. Property and Equipment, Net Property and equipment, at cost, and the related accumulated depreciation consist of the following ($ in thousands): December 31, 2018 2017 Furniture and fixtures $835 $786 Software 669 662 Equipment 1,558 1,469 Leasehold improvements 559 559 3,621 3,476 Less accumulated depreciation (3,222) (2,995)Property and equipment, net $399 $481 5. Capitalized Software Development Costs, Net Our capitalized software development costs balances and activity were as follows ($ in thousands): December 31, 2018 2017 Gross capitalized cost $10,454 $9,179 Accumulated amortization (7,321) (5,393)Net balance $3,133 $3,786 66Table of Contents Year Ended December 31, 2018 2017 Amount capitalized $1,276 $1,926 Amortization expense $(1,929) $(1,883) Released Unreleased Products Products Gross capitalized at December 31, 2018 $9,624 $830 Accumulated amortization (7,321) - Net balance $2,303 $830 Future amortization expense forthe year ending December 31, 2019 $1,328 2020 857 2021 118 Total $2,303 The future amortization expense of the gross capitalized software development costs related to unreleased products will be determinable at afuture date when those products are ready for general release to the public. 6. Deferred Revenue As described in Note 3 regarding accounts receivable, when our customers agree to purchase or renew M&S services, we bill and invoice ourcustomers at that time which could be before the date we begin delivering those services. In that event, we exclude from deferred revenue (and from therelated accounts receivable) the invoices we have issued for which the M&S services commencement date is in the future and which have not been paidby the customer as of the date of our consolidated financial statements. Accordingly, we determine our deferred revenue as follows ($ in thousands): December 31 2018 2017 Total invoiced for M&S contracts for which revenue will be recognized infuture periods $17,470 $17,491 Less: Unpaid invoices at December 31 relating to M&S agreements with astart date subsequent to the balance sheet date (1,233) (441)Total deferred revenue at December 31 $16,237 $17,050 Deferred revenue, current portion $13,301 $13,315 Deferred revenue, non-current portion 2,936 3,735 Total deferred revenue $16,237 $17,050 7. Commitments and Contingencies Leases We have an operating lease related to our office space. Minimum rental commitments under operating leases at December 31, 2018 are as follows($ in thousands): Year Ending December 31, 2019 120 Total $120 67Table of Contents Rent expense under operating leases was $347,000 in 2018 and 2017. We had a deferred rent liability of $4,000 at December 31, 2018, which weamortize to rent expense on a straight-line basis over the remaining life of the applicable lease. Subsequent to year end we entered into a memorandum ofunderstanding to extend the lease for 10 years at an average annual rent of $408,000. 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, asdefined in those agreements, and their employment is terminated in connection with that change in control. In such event, our aggregate severancepayments to those employees would be approximately $1.3 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 actioncomplaint, Anthony Giovagnoli v. GlobalSCAPE, Inc., et. al., Case No. 5:17-cv-00753, was filed against the Company in the United States District Court forthe Western District of Texas. On November 6, 2017, the Court appointed Irfan Rahman as lead plaintiff, and he filed the First Amended Complaint on July26, 2018. The Amended Complaint named the Company, Matthew Goulet, James Albrecht, Thomas Brown, David Mann, Frank Morgan, and ThomasHicks as defendants for allegedly making materially false and misleading statements regarding, inter alia, the Company’s previously reported financialstatements. The Amended Complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), and Rule 10b-5 promulgated thereunder. The Amended Complaint sought unspecified damages, costs, attorneys’ fees, and equitable relief. Theparties reached a settlement and submitted a Stipulation of Settlement to the Court on September 13, 2018. Under this settlement, the Company’s andIndividual Defendants’ insurance carrier has provided the Class with a cash payment of $1,400,000, which includes the cash amount of any attorney’s feesor litigation expenses that the Court may award Lead Plaintiff’s counsel and costs Lead Plaintiff may incur in administering and providing notice of thesettlement. In exchange, Lead Plaintiff has agreed that the settlement will include a dismissal of the Class Action with prejudice and a release of all claimsagainst the Company and the Individual Defendants by the Class. The Court entered an Order and Final Judgment approving the settlement on December18, 2018. On December 18, 2018, the Court also awarded Plaintiff’s Lead Counsel and Liaison Counsel 25% of the settlement fund ($350,000) in fees and$12,721 in reimbursement of expenses, which was paid from the settlement fund. On October 20, 2017, the Company received a demand letter from a stockholder seeking the inspection of books and records of the Companypursuant to Section 220 of the Delaware General Corporation Law (the “Section 220 Demand”). This stockholder’s stated purpose for the demand is, interalia, to investigate whether the Company’s Board of Directors and officers engaged in an illegal scheme to misrepresent the Company’s performance byfalsely reporting accounts receivable, license revenue, total current assets and total assets, total stockholders’ equity, and total liabilities for the yearended December 31, 2016, as well as the Board’s independence to consider a stockholder derivative demand. The Company intends to fully respond tothe Section 220 Demand to the extent required under Delaware law. On October 12, 2018, and November 30, 2018 the Company received letters from stockholders demanding that the Company take action toremedy alleged harm caused to the Company, including to remedy alleged breaches of fiduciary duties by certain current and/or former directors andexecutive officers of the Company. The stockholder alleges, inter alia, that certain current and former directors and executive officers violated theirfiduciary duties beginning at least in July 2016, causing the Company to suffer damages by overstating financial results for the fourth quarter of 2016. The Board has established a special litigation committee (“Special Litigation Committee”) consisting of Thomas Hicks and Frank Morgan toanalyze and investigate claims that could potentially be asserted in stockholder derivative litigation related to facts connected to the claims andallegations asserted in the litigation related to the Restatement and the Section 220 Demand (the “Potential Derivative Litigation”). The Special LitigationCommittee will determine what actions are appropriate and in the best interests of the Company, and decide whether it is in the best interests of theCompany to pursue, dismiss, or consensually resolve any claims that may be asserted in the Potential Derivative Litigation. The Board determined thateach 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 reviewrelevant documents relating to the claims, to interview persons who may have knowledge of the relevant information, to prepare a report setting forth itsconclusions 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 thebest interests of the Company in connection with the Potential Derivative Litigation. The Special Litigation Committee’s findings and determinations shallbe final and not subject to review by the Board and in all respects shall be binding upon the Company. 68Table of Contents 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 formalinvestigation of issues relating to the Restatement, with which the Company is cooperating fully. At this time, the Company is unable to predict theduration, scope, result or related costs associated with the SEC’s investigation. The Company is also unable to predict what, if any, action may be takenby 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 compliancewith existing laws or regulations, however, could result in the imposition of fines, penalties, disgorgement, equitable relief, or other losses, which couldhave 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 WesternDistrict of Texas (the “Grand Jury Subpoena”). The Grand Jury Subpoena requests all documents and emails relating to the Company’s investigation ofthe potential improper recognition of software license revenue. The Company intends to fully cooperate with the Grand Jury Subpoena and relatedinvestigation 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 predictwhat, 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 withexisting laws or regulations, however, could result in the imposition of fines, penalties, disgorgement, equitable relief, or other losses, which could have amaterial 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-qualifiedstock options, and restricted stock to employees and non-employee members of the Board of Directors. Our share-based compensation expense was asfollows ($ in thousands): Year Ended December 31, 2018 2017 Share-based compensation expense $1,269 $1,566 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 2018 and 2017, we granted stock options only under the 2016 plan. Provisions and characteristics of the options granted to our officers and employees under our long-term equity incentive plans include thefollowing: ●The exercise price, term and other conditions applicable to each stock option or stock award granted are determined by theCompensation Committee of the Board of Directors. ●The exercise price of stock options is set on the grant date and may not be less than the fair market value per share of our stock atmarket close on that date. ●Stock options we issue generally become exercisable ratably over a three-year period, expire ten years from the date of grant, andare exercisable for a period of ninety days after the end of employment. ●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 5,000,000shares of common stock for stock-based incentives including stock options and restricted stock awards. As of December 31, 2018, stock-based incentivesfor up to 3,473,667 shares remained available for issuance in the future under this plan. We have not issued any restricted stock under any of these plans. 69Table of Contents Our stock option activity has been as follows: Weighted Weighted Average Average Remaining Aggregate Number of Exercise Contractual Intrinsic Shares Price Terms Value (Years) (000's) Outstanding at December 31, 2016 2,407,005 $3.00 7.19 $2,574 2017 Granted 975,000 $3.98 Forfeitures (600,995) $3.35 Exercised (195,800) $2.41 Outstanding at December 31, 2017 2,585,210 $3.34 6.77 $1,015 2018 Granted 1,052,737 $3.87 Forfeitures (896,479) $3.58 Exercised (205,148) $2.55 Outstanding at December 31, 2018 2,536,320 $3.53 6.97 $2,464 Exercisable at December 31, 2018 1,103,631 $3.07 4.08 $1,577 Additional information about our stock options is as follows: 2018 2017 Weighted average fair value of options granted during the year $1.57 $1.67 Intrinsic value of options exercised during the year $266,010 $351,893 Cash received from stock options exercised during the year $522,189 $471,789 Number of options that vested during the year 555,574 528,734 Fair value of options that vested during the year $929,480 $850,044 Unrecognized compensation expense related to non-vested options at end of year $1,874,762 $1,751,077 Weighted average years over which non-vested option expense will be recognized 2.60 1.93 Plan Shares outstanding 2000 Stock Option Plan 15,000 2010 Employee LT Equity Incentive Plan 994,987 2016 Employee LT Equity Incentive Plan 1,526,333 Total shares outstanding at December 31, 2018 2,536,320 70Table of Contents As of December 31, 2018 Options Outstanding Options Exercisable Weighted Average Weighted Weighted Underlying Remaining Average Number of Average Range of Shares Contractual Exercise Underlying Exercise Exercise Prices Outstanding Life Price Shares Price $1.43 - 2.34 277,350 1.98 $1.87 277,350 $1.87 $2.35 - 3.53 771,637 5.12 $3.32 571,195 $3.27 $3.54 - 5.28 1,487,333 8.85 $3.95 255,086 $3.94 Total options 2,536,320 1,103,631 We used the following assumptions to determine compensation expense for our stock options using the Black-Scholes option-pricing model: Year Ended December 31, 2018 2017 Expected volatility 48% 49% Expected annual dividend yield 1.5% 1.5% Risk free rate of return 2.88% 1.95% Expected option term (years) 5.33 6.00 Due to the Investigation, during a portion of 2017 and 2018, we had in place a moratorium on issuing shares of our common stock in connectionwith 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 recordedshare-based compensation expense of $255,000 for these modifications for which there was no associated cash payment. None of those options wereexercised prior to December 31, 2017, their expiration dates were not extended beyond that date, and they were allowed to expire. As consideration forcertain of those expired options, we made cash payments to the option holders and recorded expense totaling $78,000 which was determined based uponthe difference between the quoted market price of our common stock as of December 31, 2017, and the exercise price of the stock options. Restricted Stock Awards Our 2015 Non-Employee Directors Long-Term Equity Incentive Plan (“2015 Directors Plan”) provides for the issuance of either stock options orrestricted stock awards for up to 500,000 shares of our common stock. Provisions and characteristics of this plan include the following: ●The exercise price, term and other conditions applicable to each stock option or stock award granted are determined by theCompensation Committee of the Board of Directors. ●Restricted stock awards are initially issued as restricted shares with a legend restricting transferability of the shares until the recipientsatisfies the vesting provision of the award, which is generally continuing service for one year subsequent to the date of the award, afterwhich time the restrictive legend is removed from the shares. ●Restricted shares participate in dividend payments and may be voted. ●As of December 31, 2018, 240,000 shares of restricted stock have vested and stock based incentives for up to 160,000 shares remainedavailable for issuance in the future under this plan. 71Table of Contents Our restricted stock awards activity has been as follows: Total Grant Date Fair Value of Number of Fair Value Shares That Shares Per Share Vested Restricted Shares Outstanding at December 31, 2016 80,000 $3.31 2017 Shares granted with restrictions 80,000 $4.24 Shares vested and restrictions removed (80,000) $3.31 $320,000 Restricted Shares Outstanding at December 31, 2017 80,000 $4.24 2018 Shares granted with restrictions 100,000 $4.06 Shares vested and restrictions removed (80,000) $4.24 $297,600 Restricted Shares Outstanding at December 31, 2018 100,000 $4.06 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 anyadditional stock or stock options under the 2006 Plan. At December 31, 2018, we had $313,929 of unrecognized compensation expense related to non-vested stock awards. We expect to recognize thatexpense 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): 2018 2017 Current Deferred Total Current Deferred Total Federal $993 $(21) $972 $1,008 $416 $1,424 State 238 17 255 140 (17) 123 Total $1,231 $(4) $1,227 $1,148 $399 $1,547 The difference between income tax expense and the amount computed by applying the federal statutory income tax rate of 21% for 2018 and 34%for 2017 to income before income taxes consists of the following (amounts in thousands): Year Ended December 31, 2018 2017 Income tax expense at federal statutory rate $1,025 $992 Increase (decrease) in taxes resulting from: State taxes, net of federal benefit 218 86 Stock based compensation 182 294 Change in US tax rate due to tax reform - 355 R&D tax credit uncertain tax position (net) (46) 37 Research and development credit (72) (208)Domestic production activities deduction - (35)Foreign derived intangible income (105) Other 25 26 Income tax expense per the statement of operations $1,227 $1,547 72Table of Contents 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 aflat 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 ourdeferred 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 recordeddeferred 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 TaxReform 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 ourconsolidated financial statements. The components of our deferred income tax assets and liabilities are as follows (amounts in thousands): As of December 31, 2018 2017 Deferred tax assets: Deferred revenue $809 $775 Share-based compensation 329 351 Compensation and benefits 49 111 Texas franchise tax R&D credit 194 185 Prepaid expenses not deducted for tax - 84 Allowance for doubtful accounts 37 58 Net operating loss carryforward - 20 State deferred tax asset 45 61 Accrued expenses not deducted for tax 6 9 Valuation allowance (194) (185)Total deferred tax assets 1,275 1,469 Deferred tax liabilities: Intangible assets 667 805 Deferred expenses 213 - Depreciation - 13 Total gross deferred tax liabilities 880 818 Net deferred tax assets $395 $651 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 assetwill not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in whichthose temporary differences become deductible. We have concluded it is more-likely-than-not that our ability to generate future taxable income will allowus to realize those deferred tax assets. As of December 31, 2018, we have Texas Research and Development tax credit carryforwards of $194,000. We believe it uncertain that we willhave sufficient Texas Franchise Tax in the future to support utilization of these carryforward credits. Accordingly, have provided a valuation allowance forthe full amount of these credit carryforwards. These carryforwards expire in years 2034 through 2039. A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows (amounts in thousands): 2018 2017 Balance, beginning of year $158 $121 Increases for tax positions related to the current year - 22 Increases for tax positions related to prior years 2 15 Decreases for tax positions due to expiring statue (47) Balance, end of year $113 $158 73Table of Contents Our unrecognized tax benefit is related to research and development credits taken on our U.S. income tax returns from 2012 to 2017 and theuncertainty related to the realization of a portion of those credits based on prior experience. We believe it reasonably possible that we will not recognizeany of our unrecognized tax benefits at least through December 31, 2017. If we realized and recognized any of our unrecognized tax benefits such benefitswould 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, 2018, no interest orpenalties have been or are required to be accrued. Our open tax years are 2012 and forward for our federal income tax returns and 2014 and forward formost 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): Year ended December 31, 2018 2017 Numerators Numerator for basic and diluted earnings per share: Net income $3,654 $1,371 Denominators Denominators for basic and diluted earnings per share: Weighted average shares outstanding - basic 20,721 21,702 Dilutive potential common shares Stock options and awards 296 452 Denominator for diluted earnings per share 21,017 22,154 Net income per common share - basic $0.18 $0.06 Net income per common share – diluted $0.17 $0.06 Our weighted average shares outstanding has decreased due to the repurchase of our outstanding common stock through a modified Dutchauction tender offer (the “Tender Offer”) and the stock repurchase program announced on October 29, 2018. 11. Dividends We paid dividends as follows: Year ended December 31, 2018 2017 Dividend per share of common stock $0.045 $0.060 12. Stockholder’s Equity On August 20, 2018, the Company announced the launch of a Tender Offer to repurchase for cash up to $15 million in value of outstandingshares of our common stock. The Tender Offer expired on September 19, 2018 and resulted in the purchase of 4,011,013 shares for an aggregate cost ofapproximately $16.8 million. Included with the shares accepted for purchase were 439,585 shares that the Company elected to purchase pursuant to theright to increase the size of the Tender Offer by up to 2.0% of the Company’s outstanding common stock. On October 29, 2018 the Board of Directorsauthorized a stock repurchase program in compliance with Rules 10b5-1(c)(1)(i)(B) and 10b-18 under the Securities and Exchange Act, which resulted inthe purchased of an additional 896,348 shares at an approximate cost of $4.0 million. 74Table of Contents 13. Employee Benefit Plan We provide our employees a 401(k) plan under which we make employer matching contributions in amounts determined by our Board ofDirectors. Our matching contributions were $132,000 and $156,000, for 2018 and 2017, respectively. 14. Segment and Geographic Disclosures We view our operations and manage our business as principally one segment. As a result, the financial information disclosed herein representsall 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 74% and 75% of our total revenues for2018 and 2017, respectively. The remaining revenues were from customers and partners located in foreign countries, and each individual foreign countryaccounted 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 orpartner is located. We have no property or equipment located outside the United States. 15. 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 InsuranceCorporation for $750,000. Our balances in excess of that amount are not insured. We may withdraw our cash deposits upon demand. We maintain our cashwith 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 accountsreceivable from those customers. We do not require collateral from our customers. We perform ongoing evaluations of the credit risk related to offeringthese payment terms. We provide an allowance for uncollectible accounts based on our historical collections experience and the profile of our accountsreceivable. In order to leverage the resources of third parties, we make our products available for purchase by end users through third-party channelresellers even though those end users can also purchase those products directly from us. During 2018 and 2017, we earned approximately 14% of ourrevenue from such sales through our largest, third-party, channel reseller. In 2018 and 2017, approximately 26% and 25%, respectively, of our revenues resulted from sales to customers in foreign countries. We receivedsubstantially all of our revenues from foreign customers in U.S. dollars resulting in limited exchange rate risks. Our foreign sales are concentrated mostlyin 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 softwareproducts. If we were unable to continue using these developers because of political or economic instability, we may have difficulty finding comparablyskilled developers or may have to pay considerably more for the same work, which could have a material adverse impact on our financial position andresults of operations. 16. Subsequent Events On February 27, 2019 we entered into an Option Termination Agreement with our former Chief Financial Officer to terminate certain options andoption agreements that resulted in a payment of $548,000 to the option holder. We will account for this payment as a reduction of equity during the firstquarter of 2019. 75Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 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, wasdismissed 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 FinancialStatements”). In connection with the preparation of the 2016 Financial Statements, the Company changed certain accounting methods and theclassification and presentation of its business activities in its financial statements. To ensure comparability between periods the Company revised the2015 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 FinancialStatements did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accountingprinciples. In connection with the audit of the 2016 Financial Statements and through the date of its dismissal, there were: (i) no disagreements between theCompany and RSM on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, whichdisagreements, if not resolved to the satisfaction of RSM, would have caused RSM to make reference to the subject matter of the disagreement in theirreport 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 itsindependent registered public accounting firm to audit the Company’s financial statements subject to completion of its standard client acceptanceprocedures. Effective as of April 11, 2017, BDO notified the Company that it had completed such client acceptance procedures. On April 12, 2017, the AuditCommittee formally engaged BDO as the Company’s independent registered public accounting firm to audit the Company’s financial statements. OnAugust 1, 2017, the Company informed BDO that it had been dismissed as the Company’s independent registered public accounting firm. The AuditCommittee 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, whoprovided information about conduct that in BDO’s view indicated an illegal act, as defined by Section 10A of the Exchange Act, may have occurred. BDOstated 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 theCompany’s corporate outside counsel, along with forensic accountants, to conduct an investigation into the conduct and that additional informationwould be provided as the investigation continued. In a separate communication to the Audit Committee Chairman on July 6, 2017, BDO advisedGlobalSCAPE of both its and BDO’s obligations under Section 10A of the Exchange Act and auditing standards of the Public Company AccountingOversight Board, and that BDO would recommend that the Audit Committee engage independent counsel to conduct the investigation, which BDOdefined as counsel who had not previously performed substantial work for the Company. BDO communicated that it did not believe the counselGlobalSCAPE 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’scorporate outside counsel on July 10, 2017, noting that employees of the Company had entered into “side agreements” with customers of the Company inDecember 2016 which increased revenue recorded, and accounts receivable, by amounts that had not yet been fully quantified. BDO was engaged byGlobalSCAPE on April 12, 2017, and was not the Company’s independent registered public accounting firm during the period in which the misconductwas alleged to have occurred. 76Table of Contents BDO stated in the 10A Letter that in a discussion with the Audit Committee Chairman on July 10, 2017, BDO discussed its request for theCompany to engage other counsel to lead the investigation, and was told that the Company considered the engaged counsel to be independent. BDOstated in the 10A Letter that during that discussion BDO detailed the reasons for its concern, and that BDO viewed the Company’s failure to engagealternate 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 absentaction by the Company, BDO would not be in a position to assess the adequacy of the investigation, which BDO would consider a disagreement with theCompany as it would limit the scope of BDO’s audit, warranting either a departure from its standard report or resignation from the audit engagement. Inthe 10A Letter, BDO stated that since July 10, 2017, in response to multiple requests by BDO, the Audit Committee reiterated their position that theywould continue the investigation being performed by their corporate outside counsel, who they believe were sufficiently independent. In the 10A Letter, BDO stated its belief that the Company had not been forthcoming with details regarding the investigation or the conclusions, ifany, 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 beenprovided regarding the investigation, and its dismissal as the Company’s independent registered public accounting firm, it was unable to determinewhether it was likely that an illegal act had occurred, and whether the impact of any misstatements resulting from the alleged misconduct had a materialimpact 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 filedwith 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 bynot having the investigation performed by counsel with no prior affiliation with the Company and by not sharing information from the investigation withBDO 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 adeparture 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 theSEC. 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-Kdisclosing our receipt of the 10A Letter, except for the matters described above, there were no disagreements between the Company and BDO on anymatters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to thesatisfaction of BDO, would have caused BDO to make reference to the subject matter of the disagreement in its report on the Company’s financialstatements for such year. On August 2, 2017, BDO reported that it considered the use of non-independent counsel to lead the investigation describedabove to be a material weakness in internal control over financial reporting, as such counsel could be influenced by the Company’s existing relationshipwith 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 reportableevents 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 independentregistered public accounting firm to audit the Company’s financial statements. During the two most recent fiscal years prior to such appointment andthrough August 1, 2017, the Company (or someone on its behalf) had not consulted with Weaver with respect to: (i) the application of accountingprinciples to a specified transaction, either completed or proposed; (ii) the type of audit opinion that might be rendered on the Company’s financialstatements; 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 (asdescribed 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 bythe Audit Committee to reissue its audit report on the 2016 Financial Statements. On November 21, 2017, RSM delivered a withdrawal letter to theChairman of the Audit Committee. In its withdrawal letter, RSM stated that (x) as of November 21, 2017, it had not completed the audit proceduresnecessary 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. 77Table of Contents The audit report originally issued by RSM on the 2016 Financial Statements, when previously filed, did not contain an adverse opinion or adisclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. However, as previously disclosed in ourCurrent 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-Koriginally filed on March 27, 2017 (the “Original 2016 10-K Filing”), including the auditor’s report on the 2016 Financial Statements included in the Original2016 10-K Filing, should no longer be relied upon in light of the Restatement. In connection with the audit of the Company’s consolidated financialstatements for the fiscal year ended December 31, 2016 and through the date of RSM’s dismissal on March 27, 2017, there were: (i) no disagreementsbetween 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 intheir 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) ofRegulation S-K. During the period from August 15, 2017, when RSM was re-engaged to reissue its audit report on the restated consolidated financialstatements for the year ended December 31, 2016 until November 21, 2017, there were: (i) no disagreements between the Company and RSM on anymatters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to thesatisfaction of RSM, would have caused RSM to make reference to the subject matter of the disagreement in their report on the Company’s financialstatements 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. On December 1, 2017, the Chairman of the Audit Committee received a letter from Padgett, Stratemann & Co., L.L.P., or Padgett, in which Padgettstated that based on the circumstances described in the August 8-K surrounding the dismissal of BDO as the Company’s independent registered publicaccounting firm and the previously disclosed withdrawal of RSM from its engagement by the Audit Committee to reissue its audit report on the 2016Financial Statements, and based on the fact that current management is substantially the same as the management in place in 2015, Padgett hadconcluded that it could not rely on management’s representations that would be necessary for Padgett to complete the audit procedures necessary toissue consents to the inclusion of its audit report on our consolidated financial statements as of and for the year ended December 31, 2015 (the “2015Financial 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 timeaware of whether any of the circumstances described in the August 8-K with respect to the 2016 Financial Statements could have been applicable to theCompany’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 the2015 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 adisclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. In connection with the audit of the 2015Financial Statements and through the date of Padgett’s resignation as the Company’s independent registered public accounting firm on October 19, 2016as a result of the partners of Padgett becoming partners of RSM, there were: (i) no disagreements between the Company and Padgett on any matters ofaccounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to thesatisfaction of Padgett, would have caused Padgett to make reference to the subject matter of the disagreement in its report on the Company’s financialstatements 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 October19, 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 causedPadgett 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 setforth 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 registeredpublic 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 theCompany’s independent registered public accounting firm with respect to the audit of the 2015 Financial Statements and the 2016 Financial Statements. Inconnection with the expansion of the initial appointment of Weaver to include serving as the Company’s independent registered public accounting firmwith respect to the audit of 2015 Financial Statements and the 2016 Financial Statements, the Audit Committee made Weaver aware of the mattersdiscussed by RSM and Padgett in their communications to the Chairman of the Audit Committee. 78Table of Contents During 2015 and 2016 and through August 1, 2017, the date that Weaver was appointed as the Company’s independent registered publicaccounting firm with respect to the audit of the Company’s financial statements for the year ended December 31, 2017, the Company (or someone on itsbehalf) had not consulted with Weaver with respect to: (i) the application of accounting principles to a specified transaction, either completed orproposed; (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 adisagreement (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 ExchangeAct is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information isaccumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate, toallow 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 controlsare met. No evaluation of controls can provide absolute assurance that the system of controls has operated effectively in all cases. Our disclosurecontrols and procedures are designed to provide reasonable assurance that the objectives of disclosure controls and procedures are met. Our management, including our President and Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the designand operation of our disclosure controls and procedures and concluded that our disclosure controls and procedures were effective as of December 31,2018 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in SEC’s rules and forms and is accumulated and communicated to our management, includingour 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 offinancial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods aresubject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate. Our management, including our President and Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our internalcontrol over financial reporting as of December 31, 2018 using the criteria set forth in the Internal Control – Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that evaluation, our management concluded that our internalcontrol over financial reporting was effective as of December 31, 2018. The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by Weaver and Tidwell, L.L.P., anindependent registered public accounting firm, as stated in their report included herein. Changes in Internal Control Over Financial Reporting In our 2017 Management Report on Internal Control Over Financial Reporting, our management concluded that our controls were not effective toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes inaccordance with GAAP as of December 31, 2017 due to material weaknesses in our internal controls related to revenue recognition. 79Table of Contents We designed a remediation plan to strengthen our internal control over financial reporting and have taken remediation steps to address thematerial weaknesses related to revenue recognition. We also continue to take meaningful steps to enhance our disclosure controls and procedures andour internal controls over financial reporting. Our remediation plan included the following: ●Clearly defining and communicating the management-approved, standard terms and conditions that may be offered to customersduring the sales process and requiring appropriate management approval of requested deviations from these standard terms andconditions before a sale is consummated with a customer and a sales invoice is created. ●Creating and implementing a policy clearly stating that all terms and conditions of agreements with customers are to be recorded inwriting, communicated to finance and accounting personnel, and recorded in our permanent records prior to the creation of a salesinvoice. ●Conducting periodic training sessions and briefings to communicate our policies and procedures regarding our standard terms andconditions that we offer to customers and how we document and communicate approved deviations from those standard terms andconditions. ●Enhancing the breadth and depth of the review by finance and accounting personnel of sales invoices and underlying supportingdocumentation to ensure that unusual items are identified and considered when determining revenue recognition. ●Establishing a total invoice dollar amount threshold over which finance and accounting personnel must examine all actual invoicesand supporting documentation to confirm the purchase by the customer and the appropriate revenue recognition profile. ●Publishing guidelines that personnel can reference which set forth the requirements to be met for revenue to be recognized from asale transaction and conducting periodic meetings with personnel to educate and remind them of these guidelines. Our management has monitored the effectiveness of these and other processes, procedures and controls and has successfully completed thetesting necessary to conclude that the material weaknesses have been remediated. With the exception of the remediation efforts described above, there has been no change in our internal control over financial reporting thatoccurred during the annual period covered by this Annual Report and during the subsequent time period through the filing of this Annual Report thatmaterially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 80Table of Contents Report of Independent Registered Public Accounting Firm Board of Directors and StockholdersGlobalSCAPE, 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, 2018, based oncriteria established in Internal Control—Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the TreadwayCommission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the TreadwayCommission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidatedbalance sheets of the Company as of December 31, 2018 and 2017, 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, 2018 and the related notes (collectively, the consolidatedfinancial statements) and our report dated March 18, 2019 expressed an unqualified opinion 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 effectivenessof internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable 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 obtainreasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal controlover financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also includedperforming such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for ouropinion. 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 reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expendituresof the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a materialeffect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate. /s/WEAVER AND TIDWELL LLP Austin, Texas March 18, 2019 81Table of Contents Item 9B. Other Information None. 82Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this item is incorporated by reference to GlobalSCAPE’s Proxy Statement for its 2019 Annual Meeting ofStockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2018. GlobalSCAPE has adopted a Code of Ethics that applies to all its employees, including its President and Chief Executive Officer and its ChiefFinancial Officer. GlobalSCAPE will provide a copy of its Code of Ethics to any person without charge upon written request to: Karen J. YoungChief Financial OfficerGlobalSCAPE, Inc.4500 Lockhill-Selma, Suite 150San Antonio, Texas 78249 Item 11. Executive Compensation The information required by this item is incorporated by reference to GlobalSCAPE’s Proxy Statement for its 2019 Annual Meeting ofStockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2018. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is incorporated by reference to GlobalSCAPE’s Proxy Statement for its 2019 Annual Meeting ofStockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2018. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item is incorporated by reference to GlobalSCAPE’s Proxy Statement for its 2019 Annual Meeting ofStockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2018. Item 14. Principal Accountant Fees and Services. The information required by this item is incorporated by reference to GlobalSCAPE’s Proxy Statement for its 2019 Annual Meeting ofStockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2018. 83Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules (a)(1) Financial Statements and Schedules The following financial statements of GlobalSCAPE are included in Item 8: ●Consolidated Balance Sheets — December 31, 2018 and 2017 ●Consolidated Statements of Operations and Comprehensive Income — Years ended December 31, 2018 and 2017 ●Consolidated Statements of Stockholders’ Equity — Years ended December 31, 2018 and 2017 ●Consolidated Statements of Cash Flows — Years ended December 31, 2018 and 2017 ●Notes to Consolidated Financial Statements — December 31, 2018 and 2017 (2) Schedules not listed above have been omitted because they are not applicable or required, or the information required to be set forth therein isincluded in the Financial Statements or Notes thereto. (3) Exhibits Exhibit Number Description3.1 Amended Restated Certificate of Incorporation (Filed as Exhibit 3.1 to Form 8-K filed November 17, 2006). 3.2 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). 4.1 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 Form of 1998 Stock Option Plan Rights Termination Letter Agreement of Directors to Agree Not to Claim Any Right of Adjustment datedFebruary 4, 2000 (Filed as Exhibit 4.6 to Form 10 filed May 12, 2000). *10.4 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). *10.5 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). *10.6 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). *10.7 Form of 1998 Stock Option Plan Reinstatement and Adjustment Letter for Employees dated December 19, 2000 (Filed as Exhibit 10.17 toAnnual Report on Form 10-K filed April 2, 2001). *10.8 Form of Release and Indemnity Agreement between GlobalSCAPE, Inc. and Employees dated December 19, 2000 (Filed as Exhibit 10.18 toForm 10-K filed April 2, 2001). 84Table of Contents *10.9 Form of Incentive Stock Option Agreement under GlobalSCAPE, Inc. 2000 Stock Option Plan (Filed as Exhibit 10.21 to Form 10-K filedApril 1, 2002). *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-Qfiled 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 5, 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 GlobalSCAPE, Inc. 2010 Employee Long Term Equity Incentive Plan dated June 3, 2010 (Filed as Appendix A to the Definitive ProxyStatement filed April 22, 2010). *10.15 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). *10.16 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). 10.17 Form of Indemnification Agreement by and between GlobalSCAPE and each of its directors and named executive officers (Filed as Exhibit10.1 to Form 8-K filed on May 14, 2015). *10.18 GlobalSCAPE, Inc. 2015 Non-Employee Directors Long-Term Equity Incentive Plan (Filed as Appendix A to the Definitive Proxy Statementfiled April 2, 2015). *10.19 Form of Restricted Stock Award Agreement pursuant to the GlobalSCAPE, Inc. 2015 Non-Employee Directors Long-Term Equity IncentivePlan (Filed as Exhibit 10.2 to Form 8-K filed on May 14, 2015). *10.20 Form of Incentive Stock Option Agreement GlobalSCAPE, Inc. 2010 Employee Long-Term Equity Incentive Plan dated June 3, 2010 (Filedas Exhibit 10.1 to Form 8-K filed on February 4, 2016). 10.21 Stock Purchase Agreement dated January 9, 2017 by and between Thomas H Brown, David L. Mann and 210 Capital LLC (filed as Exhibit10.1 to Form 8-K filed January 9, 2017). *10.22 Employment Agreement between the Company and Peter S. Merkulov, dated as of October 18, 2017 (filed as Exhibit (d)(2) to Schedule TO-I filed August 22, 2018). *10.23 Employment Agreement between the Company and Michael P. Canavan, dated as of July 10, 2017 (filed as Exhibit (d)(3) to Schedule TO-Ifiled August 22, 2018). *10.24 Employment Agreement between the Company and David C. Mello, dated as of September 18, 2017 (filed as Exhibit (d)(4) to Schedule TO-I filed August 22, 2018). 10.25 Severance Agreement and Release of Claims, effective as of August 28, 2018, by and between the Company and Peter Merkulov (filed asExhibit 10.1 to Form 8-K filed September 4, 2018). *10.26 GlobalSCAPE, Inc. 2016 Employee Long-Term Equity Incentive Plan (filed as Annex A to Schedule 14A, filed March 31, 2017). *10.27 Amendment to 2016 Employee Long-Term Equity Incentive Plan (filed as Exhibit 10.1 to Form 8-K filed October 31, 2018). 14.1 Code of Ethics (Filed as Exhibit 14.1 to Form 10-K filed March 27, 2008). 21.1 Subsidiaries of GlobalSCAPE, Inc. (Filed as Exhibit 21.1 to Form 10-K filed March 29, 2012). 85Table of Contents 23.1 Consent of Weaver and Tidwell, L.L.P. (Filed herewith). 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith). 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith). 32.1 Certification of Chief Executive and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith) 101 Interactive Data File. * Management Compensatory Plan or Agreement 86Table of Contents 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 besigned on its behalf by the undersigned, thereunto duly authorized, in San Antonio, Texas on March 18, 2019. 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 ofthe registrant in the capacities indicated on March 18, 2019. Signature Title /s/ Matthew C. Goulet President and Chief Executive Officer and Director Matthew C. Goulet (Principal Executive Officer) /s/ Karen J. Young Chief Financial Officer Karen J. Young (Principal Finance and Accounting Officer) /s/ Robert H. Alpert Director, Chairman Robert H. Alpert /s/ David L. Mann Director David L. Mann /s/ Frank M. Morgan Director Frank M. Morgan /s/ Dr. Thomas E. Hicks Director Dr. Thomas E. Hicks /s/ C. Clark Webb Director C. Clark Webb 87Table of Contents EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statements (No. 333-61180, No. 333-61160, No. 333-145771, No. 333-168871, No. 333-204163, and No. 333-226758) on Form S-8 of GlobalSCAPE, Inc., of our reports dated March 18, 2019, relating to our audits of the consolidated financialstatements and the effectiveness of internal control over financial reporting, which appear in this Annual Report on Form 10-K of GlobalSCAPE, Inc. forthe year ended December 31, 2018. /s/ WEAVER AND TIDWELL LLPAustin, TexasMarch 18, 2019 EXHIBIT 31.1 CERTIFICATIONS I, Matthew C. Goulet, certify that: 1. I have reviewed this annual report on Form 10-K of GlobalSCAPE, Inc.; 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 tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered bythis report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in allmaterial 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 (asdefined 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 underour supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by otherswithin 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 designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting whichare reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting. Date: March 18, 2019 /s/Matthew C. Goulet Matthew C. GouletPresident and Chief Executive Officer EXHIBIT 31.2 CERTIFICATIONS I, Karen J. Young, certify that: 1. I have reviewed this annual report on Form 10-K of GlobalSCAPE, Inc.; 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 tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered bythis report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in allmaterial 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 (asdefined 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 underour supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by otherswithin 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 designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during theregistrant’s most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting whichare reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting. Date: March 18, 2019 /s/Karen J. Young Karen J. YoungChief Financial Officer Exhibit 32.1 CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THESARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of GlobalSCAPE, Inc. on Form 10-K for the period ending December 31, 2018, as filed with the Securitiesand Exchange Commission on the date hereof (the “Report”), the undersigned, Matthew C. Goulet, Chief Executive Officer and Karen J. Young, ChiefFinancial 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 ofGlobalSCAPE, Inc. March 18, 2019 /s/ Matthew C. Goulet Matthew C. Goulet President and Chief Executive Officer /s/ Karen J. Young Karen J. Young Chief Financial Officer

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