10-K 1 globalscape10k123114.htm 10-K globalscape10k123114.htm


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


FORM 10-K
 

 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

OR

o
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
(Title of Class)

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.
o Yes   x 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.
o Yes   x No

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes   o No
 
Indicate by check mark whether disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Large Accelerated filer o
 
Accelerated filer o
     
Non-Accelerated filer o
 
Smaller Reporting Company x
(Do not check if a smaller reporting company)
   

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

As of June 30, 2014, the last day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the common stock held by non-affiliates of the registrant was $31,163,000 based on the closing sale price as reported on the NYSE MKT.
 
As of March 13, 2015, there were 20,738,636 shares of common stock outstanding.
 
Documents Incorporated by Reference

Portions of the Registrant’s Proxy Statement for the 2015 Annual Meeting of Stockholders to be held on May 14, 2015, are incorporated by reference in Part III hereof.
 
 
TABLE OF CONTENTS

 
Page
PART I
     
Item 1.
2
     
Item 1A.
15
     
Item 1B.
33
     
Item 2.
33
     
Item 3.
33
     
Item 4.
33
     
PART II
     
Item 5.
34
     
Item 6.
34
     
Item 7.
35
     
Item 8.
58
     
Item 9.
80
     
Item 9A.
80
     
Item 9B.
80
     
PART III
     
Item 10.
81
     
Item 11.
81
     
Item 12.
81
     
Item 13.
81
     
Item 14.
81
     
PART IV
     
Item 15.
82

 
Preliminary Notes
 
GlobalSCAPE®, CuteFTP®, CuteFTP Pro®, CuteBackup®, DMZ Gateway®, CuteSendIt®, Mail Express® and  SMS PASSCODE® are registered trademarks of GlobalSCAPE, Inc.  
 
Secure FTP Server™, Wide Area File Services™, WAFS™, CDP™, Advanced Workflow Engine™, AWE™, Enhanced File Transfer™, Managed Information Xchange™, MIX™, Hosted Enhanced File Transfer Server™, EFT Server™, CuteFTP Lite™, CuteFTP Home™, Secure Ad Hoc Transfer™, SAT™, Total Path Security™, Enhanced File Transfer Server™, EFT Server Enterprise™, Enhanced File Transfer Server Enterprise ™, GlobalSCAPE Securely Connected™, Desktop Transfer Client™, DTC™, Mobile Transfer Client™, MTC™, Web Transfer Client™, WTC™, appShield™ and Content Integrity Control™ are trademarks of GlobalSCAPE, Inc. 
 
TappIn® and TappIn and design are registered trademarks of TappIn, Inc., our wholly-owned subsidiary. 
 
TappIn Secure Share ™, Social Share ™, Now Playing ™, and Enhanced A La Carte Playlist ™, are trademarks of TappIn, Inc., our wholly-owned subsidiary. 
 
Other trademarks and trade names in this Annual Report are the property of their respective owners.
 
In this report, we use the following terms:

“B2B” means business-to-business.

“Cloud” or “cloud computing” refers to pooled computing resources, delivered on-demand, over the Internet.  In the same manner that electricity is delivered on-demand from large scale power plants, cloud computing is delivered from centralized data centers to users all over the world.

“DMZ” or Demilitarized Zone refers to a computer host or perimeter network inserted between a trusted internal network and an untrusted public network such as the Internet.

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

“LAN” or Local Area Network provides networking capability to a group of computers in close proximity to each other, such as in an office building or home.

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

“RFC” or Request for Comment is a memorandum published by the Internet Engineering Task Force describing methods, research, or innovations applicable to the working of the Internet and Internet-connected systems.

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

 “SSL” or Secure Sockets Layer and “TLS” or Transport Layer Security uses cryptography to encrypt data between the web server and the web browser.

“WAN” or Wide Area Network is a computer network that spans a relatively large geographical area, and typically connects multiple LANs. The largest WAN in existence is the Internet.

Forward-Looking Statements

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

 
PART I

Item 1.  Business

Company Overview
 
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. We have thousands of enterprise customers and more than one million individual consumers in over 150 countries.
 
We believe we are well-positioned to provide secure transfer, sharing, and replication of files that need to be transmitted inside the user’s firewall to distributed locations, or outside the user’s firewall to business and trading partners, including network-enabled mobile devices. Our solution portfolio addresses data and information management, movement, security and accessibility across a broad range of environments encompassing data and information in motion (for example, with traditional Managed File Transfer, or MFT, solutions delivered as on-premises software or as a cloud service) and at rest (for example, through securely deleting or purging files or securely accessing stored data from mobile tablet or smartphone devices).
 
Our solution portfolio facilitates transmission of critical information such as financial data, medical records, customer files, vendor files, personnel files, transaction activity, and other similar documents between diverse and geographically separated network infrastructures while supporting a range of information protection approaches to meet privacy and other security requirements. In addition to enabling secure, flexible transmission of critical information using servers, desktop and notebook computers, and a wide range of network-enabled mobile devices, our products also provide customers with the ability to monitor and audit file transfer activities.
 
Our solutions facilitate compliance with government regulations and industry standards relating to the protection of information while allowing users to reduce IT costs, increase efficiency, track and audit transactions, and automate processes. Our solutions also provide data replication, acceleration of file transfer, sharing/collaboration and continuous data backup and recovery to our customers.
 
Our Enhanced File Transfer, or EFT, solutions are currently our primary product. These “server side” solutions provide a common, scalable MFT platform that accommodates a broad family of add-on modules to provide small and medium-sized businesses, or SMB’s, as well as larger enterprise customers, with increased security, automation, and performance when compared to traditional FTP-based and e-mail delivery systems. The add-on modules allow customers to select the solution configuration most applicable to their requirements for auditing and reporting, encryption, ad hoc and web-based file transfers, operability in or through a DMZ network, and integration with back-end business processes, including workflow automation capabilities. 
 
Our Wide-Area File Services, or WAFS, software product uses data synchronization to further enhance the ability to replicate, share and backup files within a wide area network or local area network, which allows users to access their data at higher speeds than possible with alternate approaches. We believe this technology enables collaboration at greater efficiency levels than solutions available from our competitors or with native operating system connectivity.
 
Our Mail Express product offers managed e-mail attachment solutions for information sharing. We believe our managed e-mail attachment solution addresses the needs of customers who are constrained by the typical limits on e-mail attachment size or who require additional security, auditing, and reporting for file attachments shared through e-mail.
 
CuteFTP was our original product.  It is a file transfer program used mostly by individuals and small businesses that was first distributed in 1996 over the Internet. It remains popular today and generates revenue for us at a relatively low cost.
 
We also offer, both directly and through our partners, our software products in both a software-as-a-service, or SaaS, and cloud-based subscription solutions for information sharing. Our SaaS and cloud-based subscription solutions allow customers to reduce their upfront and total cost of ownership and achieve other recognized benefits of cloud-based solutions, including service elasticity and strong service level agreements for IT infrastructure reliability and performance.   We believe that our managed, cloud-based subscription solutions could become a larger part of our future revenue because these solutions provide recurring revenue which potentially builds over time, as compared to sales of on-premises software licenses which must be reconstituted every period. We have the capability to deliver these services in North America as well as internationally in Europe and Latin America.
 
 
We began serving the secure content mobility market with the acquisition of our TappIn solutions in 2011. Secure content mobility provides users with the ability to easily and securely access and share data and information using a web-browser, tablet or other mobile device such as a smartphone. Secure content mobility integrates aspects of ad hoc file transfer, broader MFT capabilities, cloud services, and remote accessibility to address growing market demand for secure, ‘anytime and anywhere’, device-independent access to distributed content. We believe that the inclusion of secure content mobility capability in our portfolio, and specifically the introduction of the capability to enterprise-level organizations, will contribute to the future growth of our business due to the continuing adoption of tablet computers and smartphones.
 
As a corporation, we have won multiple awards for performance and reputation, including:
 
·  
In 2014: 
 
-  
Info Security Product Guide Global Excellence Gold and Bronze Awards.
-  
CISCO Developer-Preferred Solution Award.
-  
Named as one of the best companies to work for in Texas for the fifth year in a row, ranking us #22 in the small size category by Texas Monthly.
-  
Named one of the best places to work in the information technologies small business category by Computerworld for the third time.
-  
Named as one of San Antonio’s top employers in the Top Workplaces survey conducted by the San Antonio Express-News.
 
·  
In 2013:
 
-  
Named in Software Magazine’s Software 500 revenue-based ranking of the world’s largest software and service providers for the third year in a row.
-  
Listed in the highest ranking category of “Champion” in Info-Tech Research Group’s Vendor Landscape Report for managed file transfer for the second year in a row.
-  
Recognized by the San Antonio Business Journal for fast growth in revenue for the second consecutive year and as a top-ranked, public company based on revenue growth.
 
GlobalSCAPE was incorporated in Delaware in 1996.  Our address is 4500 Lockhill-Selma Road, Suite 150, San Antonio, Texas 78249. Our phone number is (210) 308-8267.
 
Industry Background

The Internet has become an integral part of daily operations for individual users and companies of all sizes, not only for e-commerce, but also as a means of managing information between central and remote locations and with associates, employees, partners, suppliers, and customers. Corporate information managers must protect business assets, ensure that policies and processes meet regulations governing the management of sensitive information, and ensure that the right people have access to the right information, at the right place and at the right time. Global operations, diverse business partners and networks further emphasize the need for common standards to ensure compatibility, scalability, privacy, security and cost-effective integration. These requirements have created the need for maintaining the security of data and information in motion (for example, with traditional MFT solutions delivered as on-premises software or as a cloud service) and at rest (for example, through securely deleting or purging files or securely accessing stored data from mobile tablet or smartphone devices).
 
High-profile and large scale data breaches at major retailers, along with systems at large organizations and government agencies being accessed in an unauthorized manner, have created a heightened awareness of the vulnerability of critical and confidential data. As a result, attention at an unprecedented level is being paid to the security and integrity of systems that store and transfer data electronically. In many cases, this emphasis involves assessing the adequacy of the security, reliability and accountability provided by existing MFT systems.
 
The need for MFT and secure content mobility solutions is particularly strong for organizations faced with a daunting array of privacy, security, and remote accessibility challenges stemming from various regulatory and business requirements for data privacy and confidentiality. Regulatory and privacy requirements include federal legislation and regulations such as the Health Insurance Portability and Accountability Act (HIPAA), the Gramm-Leach-Bliley Act (GLBA),the Federal Trade Commission Red Flags Rules, as well as state legislation and regulations in the U.S such as California Senate Bill (SB) 1386 and the data security regulations issued by the Massachusetts Office of Consumer Affairs and Business, as well as the extraterritorial requirements such as the European Union Data Privacy Directive. Some of these statutes and regulations impose severe penalties for improper disclosure of confidential information.  Industry best-practices such as the Payment Card Industry Data Security Standard (PCI DSS) and self-imposed business requirements lead to the need to secure and protect consumer information, intellectual property and trade secrets. These measures offer protection against disclosure of proprietary information and also reduce corporate risks associated with the potentially devastating consequences of security breaches.
 
 
Markets for MFT and secure remote access grew from mainstream adoption of the Internet, the subsequent exponential growth in data and information sharing, and the growing realization that information is a significant business currency requiring appropriate security, management, auditing, and reporting, and is also subject in many cases to regulatory and privacy requirements. Similarly, the cloud services market arose from recognition that the Internet allows ubiquitous, global access to data and information services. By leveraging Internet technologies and delivering services through appropriately secured and managed shared resources, cloud-based solutions allow businesses and other organizations to achieve economies of scale and greater operational agility. Cloud solutions also can support individual consumer needs for information access and sharing at affordable costs. Secure content mobility solutions provide these same benefits but extend the information delivery model to and from the broadest range of network-enabled devices, including smartphones and tablets.
 
Our primary industry is known as managed file transfer. The MFT industry has its technical origin in the file transfer protocol, or FTP.  FTP dates back to 1980 (RFC 765, later superseded by RFC 959), with even earlier RFCs guiding prior attempts to establish standards for file transfer protocols. The use of file transfer protocols increased dramatically with the explosive growth of the Internet and the World Wide Web during the 1990s. The MFT industry arose from recognition that FTP, alone, does not provide adequate security and management capabilities for file transfers. MFT solutions offer a greater degree of security and control than FTP. Features available in MFT solutions include integrated security, auditing capabilities, performance monitoring, and reporting. The MFT industry includes low cost, or even free, solutions that offer basic capabilities. However, we believe businesses and even individuals require more advanced solutions that provide scalability, enhanced security options, automated workflow, dedicated maintenance and support, and other features that facilitate high-confidence, secure and cost effective file transfers.
 
Cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned, released, and scaled to meet requirements.  We believe the continuing movement to cloud services is analogous to the telecommunications shift from dedicated point-to-point circuits to a delivery model in which the entire telecommunications infrastructure potentially can be used to establish, maintain, and manage individual connections on an as-needed basis.
 
The secure content mobility market has emerged from a confluence of the same primary market forces that drove demand for MFT and cloud services, with those forces magnified by the exponential, worldwide proliferation of mobile devices. We believe secure content mobility solutions will become increasingly necessary to allow business and consumers to securely access and share data, potentially across multiple network-enabled devices to include smartphones and tablets. We also believe the content delivery model will include solutions like TappIn that provide access directly to and from on-premises or personal devices, with those solutions possibly interoperating with cloud-based data repositories.
 
Strategy

We intend to build upon our leadership position in the MFT market to provide businesses, other organizations, and individual users with the solutions necessary to meet their growing need for secure information exchange. From our perspective, fully addressing this need for secure information exchange requires consideration of capabilities beyond traditional MFT, including the sharing of content between both people and businesses, work group collaboration, access to content outside the data center, business-to-business partner enablement, electronic data interchange, integration between systems and information, solution-wide governance, and advanced visibility including analytics, dashboards, and transaction-level control. We believe we must consider ongoing, fundamental changes in customer technologies and processes, such as the rapidly increasing use of mobile devices and “bring your own device”, or BYOD, activities in the workplace.
 
We continually evolve our strategic focus based on our vision for product innovation and development, our assessment of visibility to and demand for our products in the marketplace and our evaluation of desired approaches for selling and delivering our products.  For 2015, our strategic focus consists of:
 
 
Continuing innovation of core products and introducing enhanced collaboration and sharing tools.

 
Enhancing marketing programs to expand solution awareness.

 
Leveraging and expanding third party, channel distribution partnerships.
 
 
Continuing Innovation of Core Products and Introduction of Enhanced Collaboration and Sharing Tools
 
Gartner Inc., a notable industry analyst, and International Data Corporation have stated that the annual MFT market is in excess of $700 million. We are a leader in MFT products and services. In both 2013 and 2012, we achieved one of the highest ratings in the Managed File Transfer Vendor Landscape Report from Info-Tech Research Group by being designated a “Champion” in its Vendor Landscape matrix. Info-Tech Research Group evaluated criteria such as strategy, viability, sales and support reach, and channel partner programs. Their evaluation of our strategy garnered one of the highest possible scores due in part to our secure content mobility solutions. Also playing a role in our rating was the assessment of our EFT Enterprise Edition, one of our primary MFT solutions. EFT Enterprise Edition was commended for its ability to meet advanced security requirements, its flexible deployment options and our responsive customer support. We also received the highest marks for our available features and flexible system architecture. In addition, we also were positioned in the leader’s quadrant of the Gartner Magic Quadrant for Managed File Transfer in the latest years for which Gartner published this magic quadrant. We have added adjacent-market capabilities, such as business automation and business activity monitoring, to the EFT software using our modular solution architecture. These capabilities are helping underpin the consistent growth in revenue from the EFT solution suite.

Our Mail Express solution was recognized by Info Security Products Guide as a “Global Excellence Award” winner in the Email Management and Security category in 2012 and by Network Products Guide as a Best Products and Services winner in the Email, Security and Management Category in 2013. We believe strengthening our ad hoc file transfer solutions remains a key strategy element. We intend to pursue solution enhancements in this area in future periods. Our secure content mobility competencies provide another potentially compelling complement to traditional MFT capabilities, including ad hoc file transfer solutions. We regard secure content mobility potentially as a unifying concept for our solution portfolio given the central position and importance of content (i.e., data and information) in the market drivers for our solutions. We intend to further integrate our solution capabilities, for example as demonstrated by the integration in 2013 of Mail Express functionality as a module within the EFT solution suite, to take advantage of potential synergies and strengths across our solution portfolio, while also possibly simplifying our marketing and sales processes.
 
With MFT capabilities increasingly being integrated into B2B gateways, data integration, service oriented architecture, and other technical solutions, the need to keep evolving our solutions and entering adjacent markets also is clear. We continue to believe the market will shift toward consideration of traditional MFT as more of a “feature” than a solution. This shift may take many years, but we believe early recognition of the trend and appropriate strategic planning increase our potential for evolving our solutions in front of the ongoing market changes. Placing our MFT offerings in a unified framework that provides comprehensive solutions to our clients’ information exchange requirements in a secure manner, while enabling users to perform their duties wherever and whenever needed, will be a key strategic element to further establish GlobalSCAPE’s market leadership in the broader markets. Key features such as collaboration, integration of disparate capabilities and systems into the MFT framework, and enhanced application support around the edge of MFT will increase client value and expand revenue opportunities.
 
We have allocated significant resources in recent years to enhancing our existing products and developing new solutions. This strategic focus has delivered additional features and functionality in our EFT, WAFS and Mail Express solutions, our MIX and Hosted EFT cloud-based offerings, our secure content mobility products and our professional services. We intend to maintain our focus on developing our solution portfolio and, as appropriate, enhancing our existing solutions.
 
Our solution portfolio may evolve over time, for example, through development of new offerings in adjacent markets or through acquisitions. We maintain an active research and development program and work closely with partners and others in the industry to identify new solution opportunities.
 
One of our primary areas of focus for enhancing the existing solutions is to establish a framework of capabilities that our clients can use to address all of their secure information exchange requirements.  Aligning the solutions by capability rather than just as a specific application, our clients can choose which parts of the solution they wish to use and can add capabilities across the product lines that work together and can grow over time.  This approach will allow us not only to satisfy the needs of clients who are new to GlobalSCAPE but also to expand coverage within our existing client base. This process will involve advancing the capabilities of each of the product lines by frequently integrating functionality from one product to expand capabilities in another.  It may also involve adding new capabilities that do not currently exist in the product lines to fulfill the client needs of the broader software portfolio including enhanced collaboration features to existing products as well as on-premises options for secure content mobility.
 
  
We believe the addition of secure content mobility capability to our portfolio potentially has profound implications due to the continuing growth of tablet computers and smartphone sales and their increasing adoption by business users. While storing and accessing data in a cloud environment is viable in many circumstances, we believe there also is a significant demand in the marketplace for the ability to access data in a manner similar to that offered by cloud computing but with the data being accessed and stored within the security of computers, servers or data centers owned by or dedicated solely to a particular individual or enterprise, rather than in the cloud. Many of our customers already using our EFT solution and other products have expressed a desire to have the flexibility to access their data from anywhere using a tablet computer or smartphone with security protocols at least equivalent to that offered by our EFT software and other products within our portfolio. Our secure content mobility technology potentially can provide or contribute to that functionality. Therefore, we intend to expand and enhance these capabilities and appeal for enterprise customers including merging the legacy SaaS technology and functionality with our other MFT capabilities to create an enterprise content mobility solution.
 
As we evolve our solution portfolio, we intend to maintain an appropriate balance between legacy and new solutions, including making choices about transitioning, sustaining, or retiring solutions as necessary to best operate under prevailing business conditions. Transitioning or sustaining solutions may involve consolidating capabilities within our solution portfolio, releasing upgrades in response to market or customer needs, or making bug fixes in accordance with our communicated End of Life, or EOL, Policy. We also may phase out solutions periodically in accordance with the EOL Policy.

Enhancing Marketing Programs to Expand Solution Awareness
 
We will continue to emphasize ongoing initiatives to elevate our product and corporate profiles and awareness under the GlobalSCAPE brand. The transformation of our product lines into a more comprehensive solution architecture will continue to elevate this brand awareness with larger enterprises while still serving the needs of our traditional clients.  We will use internal resources as well as outside marketing, communications and investor relations professionals to support this work.
 
Until recently, our marketing efforts used a more traditional inbound, demand capture model based primarily on using paid search engines on the internet. Going forward, we will emphasize a multi-channel, go-to-market model leveraging the latest methods applied across multiple platforms including social media, channel partner events, industry thought-leadership exposure and trade journal placements. We will continue to invest in marketing efforts that produce verifiable results that grow our pipeline for both incremental sales to new clients and follow-on opportunities with our existing customers.  We intend to participate in analyst briefings and investor conferences to increase our recognition within the investor and analyst communities. We have revised, and will continue to enhance, our website, logos, and other areas to more prominently emphasize our corporate brand. Through these activities both directly and combined with the efforts of our world-class channel partners, we believe we will establish a more consistent, recognizable brand that may better support future growth and market visibility.
 
From the perspective of a human capital brand, we believe we have continued to grow our brand through additional national and regional attention resulting from the numerous corporate awards we have received including:
 
·  
In 2014: 
 
-  
Info Security Product Guide Global Excellence Gold and Bronze Awards.
-  
CISCO Developer-Preferred Solution Award
-  
Named by as one of the best companies to work for in Texas for the fifth year in a row, ranking us #22 in the small size category by Texas Monthly.
-  
Named one of the best places to work in the information technologies small business category by Computerworld for the third time.
-  
Named as one of San Antonio’s top employers in the Top Workplaces survey conducted by the San Antonio Express-News.
 
·  
In 2013:
 
-  
Named in Software Magazine’s Software 500 revenue-based ranking of the world’s largest software and service providers for the third year in a row.
-  
Listed in the highest ranking category of “Champion” in Info-Tech Research Group’s Vendor Landscape Report for managed file transfer for the second year in a row.
-  
Recognized by the San Antonio Business Journal for fast growth in revenue for the second consecutive year and as a top ranked public companies based on revenue growth.
 
 
Leveraging and Expanding Third-Party Sales Channel Reseller Relationships

GlobalSCAPE conducts business with thousands of organizations around the world. We provide solutions to some of the world’s largest manufacturers, distributors, banks, insurance companies, healthcare providers, automakers, film companies and technology providers. Given the breadth and depth of these market opportunities, the effectiveness of a direct sales approach using only our in-house personnel to sell our products is limited by the number of qualified sales people we can hire and the number of prospective clients to whom they can present our products.

By utilizing and expanding our third-party sales channel relationships, we believe we can leverage the already-installed base of sales people in place in those companies. In addition to exposing our products to hundreds, and potentially thousands, of sales people employed by those third-party resellers, our products can benefit from proven sales programs and methodologies in those organizations that are financed and supported by those selling partners.  We believe operating an aggressive channel reseller program will provide an opportunity for our products to be presented to a notably larger number of potential buyers and in a more rapid fashion than if we attempted the same effort using only our direct salespersons.  We will continue to expand and enhance our existing channel relationships while at the same time identifying and engaging additional channel partners. Using this approach, we believe we can achieve, in the foreseeable future, a level of exposure for our products in the marketplace that would probably take several years for us to accomplish on our own.
 
We believe this channel sales program will help us establish a lower-touch delivery model through which we train these partners to sell and distribute our solutions and provide them sales and marketing tools to support that effort. We utilize this approach to reduce our overall cost of marketing and selling our solutions in areas where it would be costly to establish a presence with our own employees. To facilitate this approach, we host channel partner conferences to provide a forum for exchanging ideas and delivering partner-specific sales education and training. Additionally, channel partners supplement our own demand generation efforts and provide access to client bases that previously would not have been available to us.

Historically, a notable portion of our revenue has been derived from sales by our direct sales force.  Our strategy is to increase revenue beyond historical trends by focusing on and expanding third-party channel reseller relationships.

Software Products and Services
 
Managed File Transfer Solutions (On Premises and Cloud-based)
 
Our MFT products and solutions allow customers to move large files and large numbers of files securely. We facilitate management, monitoring, and reporting on the file transfers and deliver advanced workflow capabilities to move data and information into, out of, and throughout an enterprise.
 
EFT Standard and Enterprise Editions
 
We earn most of our software license revenue from sales of our suite of EFT products and solutions. These “server side” solutions provide a common, scalable MFT platform that accommodates a broad family of add-on modules to provide SMBs, as well as larger enterprise customers, with increased security, automation, and performance when compared to traditional FTP-based and e-mail delivery systems. The add-on modules allow customers to select the solution configuration most applicable to their requirements for auditing and reporting, encryption, ad hoc and web-based file transfers, operability in or through a DMZ network, and integration with back-end business processes, including workflow automation capabilities. During 2014, we have released new versions of our EFT platform which added several enhancements and capabilities including, among others:
 
·  
Active-active high availability, or HA, which maximizes uptime and performance of critical information technology systems.
·  
Enhanced compatibility of WTC file transfers through HTML5 support in addition to the existing Java Runtime Environment.
·  
Increased scalability and business continuity with more flexible, uninterrupted file transfer service.
 
 
·  
Improved facilitation of PCI DSS version 3.0 compliance with updates to security components, such as PGP and AS2.
·  
Addition of new Content Integrity Control providing an Internet Content Adaptation Protocol (ICAP) connector to anti-malware scanners and data loss prevention (DLP) solutions.
·  
Integration with SMS PASSCODE for Mobile-Based 2 Factor Authentication.
 
We continue to develop these products and solutions by, for example, improving their speed and responsiveness of performance, providing additional administration flexibility supporting cross-platform implementation with our DMZ Gateway solution, implementing business activity monitoring, and providing additional language support. We have sustained the year-to-year increase in our revenue from these products and solutions as a result of both our ongoing development of this product line that has continued to enhance its appeal in the marketplace and by delivering quality service and support for these products.  We are maintaining a renewed focus on our EFT Standard and Enterprise products to ensure that innovation continues with these highly valued products and that the needs of our clients are met in timely and quality fashion.
  
Cloud-Based MFT
 
We have agreements with third-party hosting providers under which we deliver cloud-based, managed file transfer solutions (MIX, Hosted Mail Express, and Hosted EFT) for the secure exchange of business-to-business data, including large files and sensitive data. Our cloud-based solutions allow customers to outsource all or part of their complex and demanding information exchange needs to reduce costs, improve operational efficiencies, track and audit transactions, and provide a greater level of security.
 
The cloud-based solutions established an additional delivery method for our MFT products and solutions and potentially for other solution capabilities. Through our cloud services, we offer new and existing customers “pay as you go”, flexible pricing under one, two, and three-year contracts that help them eliminate upfront capital expenditures. This subscription revenue provides us with a growing revenue stream visible into future periods. While our cloud-based MFT revenue has grown from year-to-year, it does not yet constitute a material portion of our overall revenue.
 
CuteFTP
 
CuteFTP is a ‘“client side” software product, installed on a user’s local computer that enables file transfers from or to a file transfer server. The target market for the CuteFTP product includes, among others, corporate IT professionals who use it to transfer data between locations via the internet and individual website operators who use it to upload their web pages to their web hosting provider.
 
CuteFTP continues to have significant brand recognition in the market.  Our current CuteFTP Version 9 introduced several notable new features including:
 
·  
Support for Unicode (UTF-8) characters that allows greater international use.
 
·  
Web Distributed Authoring and Versioning (WebDAV) support to facilitate collaboration between users in editing and managing documents and files stored on World Wide Web servers.
 
·  
Integration with TappIn, enabled by the WebDAV support.
 
Version 9 simplified our CuteFTP product line by consolidating all the features of our previous multi-product CuteFTP product line for Windows operating systems into this single version. We continue to offer CuteFTP Version 3.1 software for Mac platforms. We believe current versions of CuteFTP appeal to users wanting features more robust than offered in free alternatives such that it will be a product competitive in the marketplace for the foreseeable future.
 
Wide Area File Services
 
Our WAFS software provides a file sharing, collaboration, and replication solution over multiple sites. WAFS technology provides enterprises with a file access and data protection combination that centralizes data storage and IT administration facilities without compromising data sharing and protection. A key feature and benefit of WAFS is its byte-level differencing architecture that continually transmits only changed bytes (versus an entire file) thereby allowing rapid update of large files accessed by widely dispersed, multiple users. Other key features of WAFS include native file locking, replication to multiple locations simultaneously and adherence to access control list file permissions, and full UTF-8 support. We have an ongoing product development program to expand the WAFS operating specifications so we can introduce it to a continuously broader spectrum of the marketplace and increase our revenue from this product.
 
 
Our WAFS Version 4.3, released in April 2014, improved the performance of various WAFS features such as file-based filters, accessing folders that contain a large number of files, and file copying processes. Our latest WAFS Version 4.4 released in September 2014 incorporated several upgrades including:
 
·  
Support for Windows Server 2012 R2.
·  
Improved performance.
·  
Enhanced reporting.
·  
Greater driver stability.
·  
Faster and more reliable collaboration and multi-user access to files.
 
We believe WAFS will be competitive in the marketplace for the foreseeable future as a product for file sharing, collaboration, and replication solution over multiple sites
 
Managed E-mail Attachment Solution
 
Our managed e-mail attachment solution, Mail Express, is a client-server application that allows users to send and receive e-mail attachments of virtually unlimited size easily and transparently without resorting to unapproved and potentially insecure methods such as USB drives or social media sites.  The ability of Mail Express to transmit multi-terabyte and larger attachments, which is well beyond the operation range of typical competing approaches to sending email attachments, means the user is limited only by the available bandwidth when sending files as an email attachment.  
 
Mail Express provides increased benefits for information technology organizations by offering greater visibility into email-based file movement across the enterprise, including robust tracking and auditing. The Mail Express application provides flexible, customer-defined administration privileges to allow e-mail administrators and end users to configure specific parameters for handling e-mail attachments in accordance with corporate policy.
 
During 2014, we introduced new Mail Express features and versions that included:
 
·  
Support of FIPS 140-2 encryption protocols to provide a level of security which, in particular, supports compliance with HIPPA regulations.
·  
Improved password and user account administration and control.
·  
Up to 100,000 licenses per server instance.
·  
Flexibility to integrate with the EFT product suite or deploy as a stand-alone application.
·  
Flexible language support to enhance international appeal.
·  
A dashboard allowing additional administrator visibility into all connected clients.
·  
Updated integration with EFT 7.0.
·  
Optional management of the content of a message providing encrypted transmission of the message body in addition to attachments.
·  
An updated user experience.
 
We believe Mail Express will be competitive in the marketplace for the foreseeable future as a product for securely sharing and managing large e-mail attachments.
 
Secure Content Mobility Solution
 
Our secure content mobility solutions provide the ability to easily and securely connect to and share documents, pictures, videos and music anytime, anywhere while minimizing the storage of data in the cloud and the associated security and privacy concerns. From the office, at home, or on the road, customers can connect to and access their files, stored in multiple locations, using any web browser and most internet-enabled tablets, smartphones and similar mobile devices. With these solutions, users can minimize uploading and/or syncing to a cloud storage location and eliminate the need to pay for additional cloud storage. Instead, our products securely leverage the user’s existing in-house storage devices (such as a desktop computer, in-house network servers or network-attached storage devices), allow sharing of large files, and provide encryption to safeguard content.
 
 
These solutions incorporate elements of on-premises software, cloud and SaaS delivery models. Unlike other remote access products that can consume significant amounts of storage capacity on a smartphone or tablet, we make content available through a secure pathway that gives users access to files on their existing in-house storage devices without having to download those files to their mobile device. This delivery method not only saves storage space on the mobile device but also ensures content remains secure and private on the user’s existing in-house storage devices without being required to upload files to a cloud repository as is required by competitive products.
 
We believe secure content mobility is a rapidly emerging, central feature of the markets we serve. We believe growth in smartphone and tablet sales and adoption, combined with rapid growth in retained content and BYOD expectations, potentially will drive strong revenue growth in this market segment particularly in the enterprise space. In order to capitalize on these trends, our emphasis continues to be on extending the TappIn technology and functionality with our existing enterprise capabilities to create a secure enterprise content mobility solution.
 
Professional Services
 
We offer a range of professional services to complement our software and cloud-based solutions. These professional services include product customization and system integration, solution “quickstart” implementations, business process and workflow, policy development, education and training, and solution health checks. In addition, we may provide longer-term engineering services, including supporting multi-year contracts, if necessary to support certain solution implementations and integrations.
 
Our professional services revenue is directly correlated to certain components of our cost of revenues because the services necessarily are labor intensive. For this reason, professional services typically have significantly lower margins than product sales or subscription services. However, we believe professional services allow us to better establish and maintain our solution implementations while also providing our customers with the training and education services that help them make more complete use of our solution capabilities.
 
Maintenance and Support
 
We offer maintenance and support, or M&S, contracts to licensees of all of our software products. These M&S contracts entitle the licensee to software upgrades and technical support services in accordance with the terms of our M&S contract.  Standard technical support services are provided via e-mail and telephone during our regular business hours.  For certain of our products, we offer a Platinum M&S contract which provides access to emergency technical assistance 24 hours per day, 7 days a week.
 
Our websites were recently redesigned and provide an effective means of facilitating certain post-sale customer support functions. To facilitate self-help for common inquiries and issues, we provide free self-service support via searchable knowledge bases on our websites. We also sell maintenance and support plans to customers requiring assistance from our support services team.
 
Sales and Marketing
 
We emphasize developing our direct sales staff and reseller channels to capture sales through a high level of individual attention to the customer.  For example, sales of our more complex enterprise solutions, such as EFT Server, WAFS and Mail Express, to larger enterprises, and sales of managed solutions and M&S contracts are delivered by our direct sales staff and resellers in an environment of personal interaction with the customer.
 
We provide our sales staff and resellers with training and professional development opportunities to ensure they are capable of meeting the needs of our prospects and customers. These sales team development activities focus on technical and process-oriented topical areas to enhance their ability to identify prospects, best position our solutions and develop pipeline opportunities into sales.
 
Our reseller and distributor relationships allow us to leverage those third-party resources to increase our market penetration. We have established such relationships throughout the world and across industry lines. In particular, we are focusing on growing our domestic reseller channel.
 

We offer our TappIn solutions for trial and subscription activation from our websites. Prospective subscribers may use the TappIn service for free during an evaluation period. At the end of the evaluation period, the TappIn service is automatically downgraded to a limited feature and functionality status unless the prospective customer activates a paid subscription.

Our marketing efforts focus on building brand awareness and capturing demand for our solutions.  We take a three-pronged approach that includes a blend of digital, field and channel marketing.  Through our digital marketing initiatives, we have reduced our reliance on online paid advertising by conducting ongoing search-engine optimization to enhance our ranking for particular key words in natural search results of major search engines.  As a result, we are able to more heavily invest in outbound targeted campaigns that more effectively reach the right audience with white papers, case studies and competitor comparisons.  In addition to attending key industry trade shows, we are enhancing our field marketing initiatives by increasing our presence at regional product and trade shows specifically targeting audiences in the mobility and security markets. We are increasing our investment in channel marketing through programs designed to recruit and enable our target partners in a manner that creates joint initiatives that drive demand through them for our products.
 
Our corporate website is www.globalscape.com . It provides a variety of sales and marketing information for our enterprise solutions as well as an ability to purchase some of our products online. We also have product-specific websites at www.cuteftp.com and www.tappin.com.  We continually update the design of our websites to be responsive to the evolving marketplace and to provide a more solution-oriented perspective of our business, improve site navigation and provide additional opportunities for visitors to contact us through the websites.
 
Customers
 
Our solutions have been sold to most of the Fortune 100 companies.  Our products have been sold into more than 150 countries. No single customer accounts for more than 10 percent of our revenue.

We derive a significant portion of our revenue from risk averse and heavily regulated commercial customers in North America, Europe and Latin America. Our primary commercial vertical markets include finance, health care, energy, retail, manufacturing, and engineering. We also have a customer base in the local, state, and federal government spaces. We continue to pursue additional government business by leveraging our certifications and industry validations.

Seasonality
 
Our products are marketed to individuals as well as large organizations. As a result of this mix within our customer base, we typically have not experienced significant seasonality in our sales other than a typical modest decline from time-to-time in first quarter sales as compared to sales in the preceding fourth quarter. We believe this sales profile is related to our continued growth as an enterprise solution provider operating in an environment where first quarter sales possibly slow as prospective customers begin to execute their business activities, including purchases of our solutions, in accordance with new-year budgets and plans.

Network and Equipment
 
We have contracted with various Tier 1 internet services providers.  Our arrangements provide for redundancy in the event of a failure and for expansion of available bandwidth in the event there is a dramatic increase in demand.  To protect critical customer data, our online shopping cart utilizes SSL encryption. We maintain technical and physical measures and procedures compliant with the PCI DSS. We use a certified Approved Scanning Vendor for security scans and PCI scan attestation.

We have dedicated servers on and off site and expansion plans in place to allow rapid and cost effective scalability.  Our offsite servers and data backup procedures provide a warm backup to our onsite servers for contingency purposes.  The backups are performed in accordance with our disaster recovery plan.
 

Research and Development
 
The technology industry is characterized by rapid technological change in computer hardware, operating systems and software. Our customers’ requirements and preferences rapidly evolve, as do their expectations of the performance of our software. To keep pace with these changes, we maintain an ongoing program of new product development to remain competitive and to address demands in the marketplace for our products.

Our internal software engineers are responsible for creating and building our software products. They do so by combining their expertise with input from our sales, marketing and product development groups as to market trends and needs. Our software engineers design and write software and manage the testing and quality assurance of that software. We refer to these collective activities as research and development or R&D.  We utilize third-party software developers both domestically and overseas working under our supervision to supplement our software engineers. Using these external software developers in a strategic manner allows us to access highly-skilled labor pools, maintain a 24-hour development schedule, decrease time to market, and minimize programming costs.

All phases of R&D, including scope approval, functional and implementation design, object modeling and programming, are subject to extensive internal quality assurance testing.  We maintain an ongoing focus on improving our quality assurance testing infrastructure and practices. Technical reporting and customer support feedback from customers confirm the continuing positive effect of our ongoing enhancement of research and development and quality assurance processes.

Our R&D expenditures profile has been as follows ($ in thousands):

   
Year ending December 31,
 
   
2014
   
2013
   
2012
 
R&D expenditures
  $ 5,030     $ 4,665     $ 3,861  
R&D expenditures expensed
    2,183       3,766       3,531  
R&D expenditures capitalized
    2,847       899       330  

The majority of our R&D expenditures relate to our EFT Standard and Enterprise Edition products with the remainder related to our other products collectively. We expect to continue to increase our research and development spending in future years as we focus on improving our current products and introducing new products.
 
Competition
 
The file management, content management and Web development software market sectors are intensely competitive, subject to rapid change, and significantly affected by new product introductions and other activities of market participants.  Our primary competitors vary by product.

The software industry has limited barriers to entry. The availability of computing power with continually expanding performance at progressively lower prices contributes to the ease of market entry. The software market is characterized by vigorous competition in each of the vertical markets in which we compete both from existing competitors and by entry of new competitors with innovative technologies. Competition is increasingly enhanced by consolidation of companies with complementary products and technologies and the possibility that competitors in one vertical segment may enter other vertical segments that we serve. In addition, some of our competitors in certain markets have greater financial, technical, sales and marketing and other resources than we do. Because of these and other factors, competitive conditions in these industries are likely to continue to intensify in the future. Increased competition could result in price reductions, reduced net revenue and profit margins and loss of market share, any of which could harm our business. See “Risk Factors – Risks to Our Operations” for further discussion of risks regarding competition.

We believe that our future results depend largely upon our ability to better serve customers by offering new products, including mobile computing products, whether by internal development or acquisition. We also believe we must continue to provide existing product offerings that compete favorably with respect to ease of use, reliability, performance, range of useful features, continuing product enhancements, reputation, price and training.
 

There is limited information regarding the market shares of our solutions in their respective categories.  Many of our competitors have substantially greater financial, technical, sales, marketing, personnel, and other resources, as well as greater name recognition and a larger customer base than we do.  Significant competition characterizes the markets for our traditional MFT products. We anticipate we will continue to face increasing pricing pressures from competitors in the future. Given there are low barriers to entry into the software market and the market is subject to rapid technological change, we believe that competition will persist and intensify in the future.  For more discussion on the risks associated with our competition, see “Risk Factors — Risks Related to Our Operations”.

EFT Standard Edition.  EFT Standard Edition competes against a limited number of secure, Windows-based FTP servers.  We believe our primary competitors are products sold by Ipswitch, SolarWinds/Serv-U, and JSCAPE.  EFT Standard Edition has the advantage of leveraging the success of CuteFTP through product integration, offering proprietary extensions to the FTP protocol, and cross-marketing efforts to an existing customer base. EFT Standard Edition also benefits from being part of our EFT platform, which includes add-on modules, including the DMZ Gateway solution, and an upgrade path to EFT Enterprise Edition.

EFT Enterprise Edition.  EFT Enterprise Edition competes in the managed file transfer server market.  We believe our primary competitors are Axway, Ipswitch, IBM-Sterling and Tibco (including through their acquisition of Proginet).  EFT Enterprise Edition has the advantage of being very cost effective in its market and allowing customers to flexibly evolve their MFT implementation by procuring add-on modules such as our DMZ Gateway and Advanced Workflow Engine solutions.

CuteFTP.  CuteFTP exists in a highly competitive environment with numerous FTP software utilities available on the Internet for both the personal and professional user.  CuteFTP is positioned as one of the only secure FTP client programs that support a wide range of security standards related to the FTP protocol. We believe our primary competitors are consumer file transfer solutions sold by Ipswitch, SolarWinds/Serv-U and Van Dyke Software, Inc.  CuteFTP was an early Windows-based FTP client to market and is consistently among the most frequently downloaded FTP clients on popular download sites.  CuteFTP Mac, our FTP client for the Macintosh platform, competes with products offered by Fetch Softworks, Interachry, Nolobe Software Pty Ltd, and Panic, Inc.

WAFS.  WAFS competes in the Wide Area File Services/Storage market.  We believe our primary competitors are Panzura, Peer Sync, Riverbed and Cisco, each of whom is delivering proprietary appliances.  We believe that WAFS has the advantage of being a software-only solution which leverages corporate infrastructure and minimizes the total cost of ownership.

Mail Express.  Mail Express competes in areas of the file transfer market associated with e-mail attachment offloading.  We believe our primary competitors are Accellion, Tibco (Proginet), Leapfile and Biscom.  Mail Express has the advantage of centralized policies for outbound file attachments and a transparent end-user experience, which allows for rapid customer deployments. Mail Express also has the benefit of integration with our most recent EFT release which provides customers with a more uniform administration experience for e-mail attachment offloading and traditional MFT operations.

Cloud-based Managed Solutions for Secure Information Exchange. Our MIX and Hosted Enhanced File Transfer solutions compete with MFT SaaS solutions.  We believe our primary competitors are Ipswitch, Axway, IBM-Sterling, Thru, Inc. and Accellion.   MIX and Hosted Enhanced File Transfer have the advantage of leveraging cost effective, secure hosting and cloud infrastructures, as well as Enhanced File Transfer management services provided by GlobalSCAPE’s experts.

TappIn.  The TappIn solution has direct competitors such as PogoPlug and FileTek. In addition, TappIn competes for mindshare in the market with pure-play cloud data repositories like Dropbox and Box and with computer remote control solutions such as Citrix Systems (GoToMyPC) and LogMeIn.
 
Governmental Regulation
 
Export Control Regulations.  All of our products are subject to U.S. export control laws and applicable foreign government import, export and/or use requirements.   The level of control generally depends on the nature of the goods and services in question. For example, the level of control is impacted by the nature of the software and encryption incorporated into our products.  Where controls apply, the export of our products may require an export license or authorization or that the transaction qualifies for a license exception or the equivalent, and may also be subject to corresponding reporting requirements.  For the export of some of our products, we may be subject to various post-shipment reporting requirements.  Minimal U.S. export restrictions apply to all of our products, whether or not they perform encryption functions.   Additionally, because we are a Department of Defense contractor, there are certain registration requirements that may be triggered by our sales.  In addition, certain of our items and/or transactions may be subject to the International Traffic in Arms Regulations (ITAR) if our software or services are specifically designed or modified for defense purposes.  Companies engaged in manufacturing or exporting ITAR-controlled goods and services (even if these companies do not export such items) are required to register with the U.S. State Department.
 

Enhancements to existing products may, and new products will, be subject to review under the Export Administration Act to determine what export classification they will receive. In light of the ongoing discussions regarding anti-terrorism legislation in the U.S. Congress, there continues to be discussions regarding the correct level of export control. Export regulations may be modified at any time. Modifications to the export regulations could reduce or eliminate our ability to export some or all of our products from the U.S. without a license in the future, which could put us at a disadvantage in competing for international sales compared to companies located outside of the U.S. that would not be subject to these restrictions.  Modifications to the export regulations could prevent us from exporting our existing and future products in an unrestricted manner without a license or make it more difficult to receive the desired classification. If export regulations were to be modified in such a way, we may be put at a competitive disadvantage with respect to selling our products internationally.  We are working on enhancing our systems to address the impact of these regulations on our products and services and understand the need to comply.  We will complete technical reviews on any new products that we acquire or develop that may be subject to the requirements before we can export them.

Privacy Laws.    As our business evolves to incorporate more cloud and SaaS solutions, we will receive, transmit, and store a greater volume and diversity of information. As a result, we may be subject to various federal and State regulations regarding the protection of personally identifying information. Applicable laws may include, without limitation, federal laws such as the GLBA and HIPAA, as well as state and regulations in the U.S. and as international laws and regulations including the European Union Data Privacy Directive. In the event our systems are compromised by an unauthorized party, many of these privacy laws require that we provide notices to our customers whose personally identifiable data we reasonably believe may have been compromised. To mitigate the risk of compromised information, we use encryption and other security to protect our databases.

Intellectual Property
 
We regard some of the features of our internal operations, software, and documentation as proprietary and rely on copyright, patent, and trademark and service mark laws and trade secret protection, such as confidentiality procedures, contractual arrangements, non-disclosure agreements and other measures to protect our proprietary information. Our intellectual property is an important and valuable asset that enables us to gain recognition for our products, services, and technology and enhance our competitive position and market value.

As part of our confidentiality procedures, we generally enter into non-disclosure agreements with our employees and independent contractors, resellers, and corporate partners. We enter into license or subscription services agreements with respect to our software, documentation, and other proprietary information. Our standard license agreements are transferable only in limited circumstances and have a perpetual term. Our subscription services agreement for our hosted solutions restrict access and have a definite term. We also educate our employees on trade secret protection and employ measures to protect our facilities, equipment, and networks.

Our trademarks and copyrights are central to our business. We have the following trademarks in the United States:
 
·  
GlobalSCAPE®, CuteFTP®, CuteFTP Pro®, CuteBackup®, DMZ Gateway®, CuteSendIt®, Mail Express® and SMS PASSCODE® are registered trademarks of GlobalSCAPE, Inc.
·  
Secure FTP Server™, Wide Area File Services™, WAFS™, CDP™, Advanced Workflow Engine™, AWE™, Enhanced File Transfer™, Managed Information Xchange™, MIX™, Hosted Enhanced File Transfer Server™, EFT Server™, CuteFTP Lite™, CuteFTP Home™, Secure Ad Hoc Transfer™, SAT™, Total Path Security™, Enhanced File Transfer Server™, EFT Server Enterprise™, Enhanced File Transfer Server Enterprise ™, GlobalSCAPE Securely Connected™, Desktop Transfer Client™, DTC™, Mobile Transfer Client™, MTC™, Web Transfer Client™, WTC™, appShield™ and Content Integrity Control™ are trademarks of GlobalSCAPE, Inc.
·  
TappIn® and TappIn and design are registered trademarks of TappIn, Inc., our wholly-owned subsidiary.
·  
TappIn Secure Share ™, Social Share ™, -Now Playing ™, and Enhanced A La Carte Playlist™, are trademarks of TappIn, Inc., our wholly-owned subsidiary.
 
In addition to the United States trademarks listed above, we have trademarks registered in Canada and the European Union for GlobalSCAPE and a registration for TappIn in China. We have obtained United States copyright registrations for all but the most recent versions of our software applications.  We have two patents in the U.S.
 

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary.  Policing unauthorized use of our products, which are licensed by the thousands and sold world-wide, is difficult.  While we are unable to determine the extent to which piracy of our software products exists, software piracy is a persistent problem.  In selling our products, we rely primarily on click-wrap licenses which are not signed in writing by licensees and may be unenforceable under the laws of certain jurisdictions.  The laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States.  Companies in the software industry, and other patent and trademark holders seeking to profit from royalties in connection with grants of licenses, own large numbers of patents, copyrights, trademarks, service marks, and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights.  We have received, and may receive in the future, communications from third parties asserting that our products infringe, or may infringe, the proprietary rights of third parties, seeking damages resulting from such infringement or indicating that we may be required to obtain a license or royalty from such third parties.  For more discussion on the risks associated with our intellectual property, you should read the information under “Risk Factors,” especially “Risks Related to Legal Uncertainty.”

Employees
 
As of March 13, 2015, we had 105 full-time employees and 0 part-time employee organized as follows:

   
Number of
 
Department
 
Employees
 
Sales and Marketing
    30  
Engineering
    31  
Professional Services
    11  
Customer Support
    15  
Management and Administration
    18  
Total
    105  
 
None of our employees are covered by collective bargaining agreements. We believe our employee relations are good.

Available Information
 
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet web site that contains annual, quarterly and current reports, proxy statements and other information that issuers (including GlobalSCAPE) file electronically with the SEC. The SEC’s web site is www.sec.gov.  Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and amendments filed with the Securities and Exchange Commission are available free of charge on our web site at www.globalscape.com in the Investor Relations section as soon as practicable after such reports are filed.  Information on our website is not incorporated by reference into this Form 10-K and should not be considered part of this report or any other filing that we make with the SEC.
 
Item 1A.  Risk Factors
 
We have described below risks we are aware of that could have a material adverse effect on our business, financial results of operations and financial condition and the value of our stock owned by our shareholders.
 
 
Risks Related to Our Operations

A significant portion of our revenue is generated through maintenance and support revenue. Decreases in maintenance and support sales or renewal rates, or a decrease in the number of new licenses we sell, will negatively impact our future revenue and financial results.

Revenue from maintenance and support services, or M&S, we provide our customers comprised 56%, 57% and 49% of our total revenue in 2014, 2013 and 2012, respectively. We earn M&S revenue from new M&S contracts, typically sold with new software licenses, and from renewals of such contracts. Any reduction in the number of new software licenses that we sell, or a reduction in sales of associated initial M&S contracts, therefore may have a long-term negative impact on our future M&S revenue, even if our customers continue to renew M&S contracts at historical rates. This situation, in turn, would impact our business and harm our financial results.

Our customers have no obligation to purchase M&S with their initial software license or renew their M&S contract after the expiration of their initial M&S period, which is typically one year.  Our customers’ purchases of M&S, and our renewal rates, may decline or fluctuate as a result of a number of factors, including the overall global economy, the health of their businesses, and the perceived value of the M&S program.  If our customers do not purchase M&S with their initial software license or renew their M&S contract for our products, our M&S revenue will decline and our financial results will suffer.  In addition, customers are generally entitled to reduced annual maintenance fees for entering into long-term maintenance contracts, i.e. those contracts with a term longer than one year. Declines in our license bookings, increases in the proportion of long-term maintenance contracts and/or increased discounting could lead to declines in our maintenance revenue growth rates. Should customers migrate from systems and applications which our products support, utilize alternatives to our products, including solutions offering free maintenance, or become dissatisfied with our maintenance services, increased cancellations could lead to declines in our maintenance revenue.

A substantial portion of our quarterly M&S revenue is attributable to M&S agreements entered into during previous quarters.  As a result, if there is a decline in renewed M&S agreements in any one quarter, only a small portion of the decline will be reflected in our M&S revenue recognized in that quarter and the remainder will be reflected in our M&S revenue recognized in the following four quarters or more and in a decrease in deferred revenue on our balance sheet.  For more information, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Our ability to sell our products is highly dependent on the quality of our support and services offerings. Our failure to offer high-quality support and services could have a material and adverse effect on our business and results of operations.

Once our products are deployed at our end customers’ locations, our end customers may depend on our support organization and our channel partners to resolve issues relating to our products. High-quality support is critical for the successful marketing and sale of our products. If we or our channel partners do not assist our end customers in deploying our products effectively, succeed in helping our customers resolve post-deployment issues quickly, or provide ongoing support, it could adversely affect our ability to sell our products to existing end customers and could harm our reputation with other potential end customers. As we expand our operations internationally, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English. Our failure or the failure of our channel partners to maintain high-quality support and services could have a material and adverse effect on our business and operating results.
 
If we are unable to develop, offer and deliver new and enhanced products and services that achieve widespread market acceptance, or if we are unable to continually improve the performance, features, and reliability of our existing products and services, our business and operating results could be adversely affected.

Rapid technological changes, as well as changes in customer requirements and preferences, characterize the software industry.  Just as the transition from mainframes to personal computers transformed the industry, we believe our industry may transform in response to continued adoption of mobile devices and cloud services, growth of big data, and potential emergence of capabilities resulting from disruptive innovation.  In response, we have devoted significant resources to the development of new solutions, such as our cloud-based and secure content mobility services. We are making such investments through our internal efforts, including further development and enhancement of our existing products, as well as through potential acquisitions of new product lines.  Innovation, new product development or acquisition, and go-to-market activities involve a significant commitment of time and resources and are subject to a number of risks and challenges including:
 

•  
Developing, sustaining, and appropriately leveraging market intelligence to identify areas of market need that offer potentially high return on investment for solution development.
•  
Managing the length of the development cycle for new products and product enhancements, which may be longer than originally expected.
•  
Adapting to emerging and evolving industry standards and to technological developments by our competitors and customers.
•  
Addressing the evolution of operating systems and industry platforms that presently may not be served by our existing products.
•  
Entering into 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 acquired products and technologies acquired through mergers, acquisitions or other relationships with third-parties.
•  
Developing or expanding efficient sales channels.
•  
Obtaining sufficient licenses to technology and technical access from operating system software vendors on reasonable terms to enable the development and deployment of interoperable products, including source code licenses for certain products with deep technical integration into operating systems.

Investments in new products may not result in sufficient revenue generation to justify their costs or may cause short or long-term harm to our financial results.  For example, customer adoption of our cloud and mobile computing services may not occur as rapidly as anticipated, or competitors may introduce new products and services that achieve acceptance among our current customers, adversely affecting our competitive position, or we may not be successful in future attempts to achieve disruptive innovation.

Further, given the rapid speed of changing customer expectations and advancement of technology inherent in the software industry, the extensive and complex efforts required to create useful and widely accepted products and the rapid evolution of cloud computing, mobile devices, new computing platforms and other technologies, our executive management team must act quickly, continuously and with vision.  Although we have articulated a strategy that we believe will fulfill these challenges, if we fail to execute properly on that strategy, adapt that strategy as market conditions evolve, or fail to internalize and execute on that strategy, we may fail to meet our customers’ expectations, fail to compete with our competitors’ products and technology and lose the confidence of our channel partners and employees.  This in turn could adversely affect our business and financial performance.

We earn the large majority of our revenue and operating margins from our Enhanced File Transfer, licensed software solution suite and related maintenance and support services and, as a result, are highly dependent upon the continued success of this product line.

Our Enhanced File Transfer solution, or EFT, is one of our on-premises, managed file transfer solutions targeted primarily to the enterprise and small and medium business user environments. License and M&S revenue from this product line was responsible for 80% of our total revenue in 2014 and has provided substantially all of our recent revenue growth and most of the operating margin necessary to fund our operations including, most notably, our sales and marketing and research and development activities.  Declines and variability in demand for the EFT solution 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 change that we are unable to address with file transfer products or that changes the way enterprises utilize our products.
•  
General economic conditions.

Due to our product concentration, our business, results of operations, financial condition, and cash flows would therefore be adversely affected by a decline in demand for the EFT solution suite.
 

We may not achieve our expected future financial results from our Mail Express, Wide Area File Services, CuteFTP and TappIn  product lines or from our professional services.
 
Revenue from our products and services other than the EFT solution accounted for 20% of our total revenue in 2014, which is a decline from 21% in 2013 and 22% in 2012.  Improving, and possibly even sustaining, our financial results is dependent upon achieving additional success in the marketplace with our products and services that complement and supplement our EFT solution suite. These products include CuteFTP, Mail Express, WAFS, and TappIn and our professional services. These solutions involve serving markets that in some ways differ from the markets we encounter when selling EFT software and M&S.  Gaining additional traction in such markets will require that we market, sell, and support these solutions effectively.  Each of these success factors has inherent risks due to, for example, evolving corporate expertise in the adjacent markets and the possibility that the specific buyers of solutions in these adjacent markets may be different from the buyers with whom we interact throughout our traditional EFT solution sales cycle.  Entering, obtaining traction, and sustaining growth in these markets requires investments in engineering, marketing, sales, customer support, and internal business systems. If we do not effectively penetrate these markets, or if the resources necessary to effectively address these markets exceed our expectations, our business and financial results could be adversely affected.
 
We may engage third parties to develop products on our behalf. These engagements may involve reliance on resources owned and managed by those third parties over which we have no direct control.

In addition to researching and developing new products ourselves, we engage third parties to conceive, design and develop products on our behalf.  Arrangements of this type involve high levels of risk due to inherent uncertainties about the timely delivery and ultimate viability of those products due to the reliance we must place on third parties to plan, perform and successfully complete work for us.  These are processes for which we could have notably less direct control than if we performed the work ourselves.  These arrangements also involve us relying on the ongoing financial viability of the enterprise performing the work.  This risk is challenging to manage because we do not always have clear visibility as to the overall condition of the third-party enterprise.  These risks could result in the product not being successfully completed within the expected timeframe, or at all. If actual results from these type endeavors we may undertake in the future differ materially from original and ongoing expectations, our business, operating results and financial position could be harmed.

Seasonality may cause fluctuations in our revenue.
 
We believe there are significant seasonal factors that may cause us to record higher revenue in some quarters compared with others. We believe this variability is largely due to our customers’ budgetary and spending patterns, as many customers spend the unused portions of their discretionary budgets prior to the end of their fiscal years. For example, we have historically recorded our highest level of revenue in our fourth quarter, which we believe corresponds to the fourth quarter of a majority of our customers. If our rate of growth slows over time, seasonal or cyclical variations in our operations may become more pronounced, and our business, results of operations and financial position may be adversely affected.
 
Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales and revenue are difficult to predict and may vary substantially from period to period, which may cause our results of operations to fluctuate significantly.
 
Our results of operations may fluctuate, in part, because of the resource intensive nature of our sales efforts, the length and variability of our sales cycle, and the short-term difficulty in adjusting our operating expenses. Our results of operations depend in part on sales to large organizations. The length of our sales cycle, from proof of concept to delivery of and payment for our platform, is typically three to nine months but can be more than a year. To the extent our competitors develop products that our prospective customers view as equivalent to ours, our average sales cycle may increase. Because the length of time required to close a sale varies substantially from customer to customer, it is difficult to accurately predict when, or even if, we will make a sale with a potential customer. As a result, large individual sales have, in some cases, occurred in quarters subsequent to those we anticipated, or have not occurred at all. The loss or delay of one or more large transactions in a quarter could impact our results of operations for that quarter and any future quarters for which revenue from that transaction is delayed. As a result of these factors, it is difficult for us to forecast accurately our revenue for any quarter or other period in the future. Because a substantial portion of our expenses are relatively fixed in the short term, our results of operations will suffer if our revenue falls below expectations in a particular quarter, which could cause the price of our common stock to decline.
 
 
Reliance on shipments at the end of each quarter could cause our revenue for the applicable period to fall below expected levels.
 
As a result of customer buying patterns and the efforts of our sales force and channel partners to meet or exceed their sales objectives, we have historically received a substantial portion of sales orders and generated a substantial portion of revenue during the last few weeks of each quarter. A significant interruption in our IT systems, which manage critical functions such as order processing, revenue recognition, financial forecasts, inventory and supply chain management, and trade compliance reviews, could result in delayed order fulfillment and decreased revenue for that quarter. If expected revenue at the end of any quarter 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 quarter-end to fulfill purchase orders received near the end of the quarter, our inability to release new products on schedule, any failure of our systems related to order review and processing, or any delays in shipments based on trade compliance requirements, our revenue for that quarter could fall below our expectations and the estimates of market analysts, if any, which could adversely impact our business and results of operations and cause a decline in the trading price of our common stock.

Our ability to develop our software will be seriously impaired if we are not able to use our foreign subcontractors.

We rely on foreign subcontractors to help us develop some aspects of some of our software. If these programmers decided to stop working for us, or if we were unable to continue using them because of political or economic instability, we would have difficulty finding comparably skilled developers in a timely manner. In addition, we would likely have to pay considerably more for the same work, especially if we used U.S. personnel. If we could not replace the contract programmers, it could take us significantly longer to develop certain products and product upgrades and at a higher cost.

Our subscription services, such as our Managed Information Xchange and Hosted Enhanced File Transfer solutions, may impact our revenue trends as some opportunities that otherwise would have materialized as software license sales could  potentially shift to subscription-based sales.

Much of our revenue growth in recent years has been attributable to license and maintenance and support sales of our EFT solution.  License fees for software to be installed at a customer site, such as our EFT solution, are typically recognized in full as revenue at the time the software is delivered to the customer. Subscription services, on the other hand, are recognized as revenue over time as the services are delivered (assuming collection is deemed probable), typically on a monthly basis. Therefore, only a ratable portion of the total value of a subscription services sale is recognized as revenue each month with the remainder recorded as deferred revenue.  Any significant increase in the percentage of our business generated from such a subscription model could, as a result, delay revenue recognition and have a negative impact on our operating results.

The impact of subscription services on prior revenue growth trends depends on several key factors, including the number of customers who may shift from software licenses to subscription services, the rate at which they may do so, the subscription term and fees, and the comparative value of the opportunity had it materialized as a software license sale instead of as a subscription service.  Generally, for a fixed number of opportunities (that is, without considering the possibility that a new service offering may result in additional sales opportunities), addition of subscription services reduces revenue growth rates for several quarters for the associated solutions until cumulative subscription revenue increases and, potentially, surpasses comparable software license revenue. The revenue impacts are particularly pronounced early in the introduction of subscription services because there has been only a short time period for accumulation of the recurring revenue stream.  As we continue to promote subscription-based services, the risk of this revenue shift will continue with  revenue derived from sales of our EFT solution, the comparable on-premises MFT software in our portfolio, most subject to ongoing transitory risk from the introduction of these subscription services.  However, to date, we have seen no material impact from this potential revenue shift in light of the continued strength of our EFT sales and the pace at which our managed and hosted products and services have gained market acceptance.

Subscription offerings create risks related to the timing of revenue recognition.

Although the subscription model is designed to increase the number of customers who purchase our products and services and create a recurring revenue stream that is more predictable, it creates certain risks related to the timing of revenue recognition and potential reductions in cash flows.
 
 
A portion of the subscription-based revenue we report each quarter results from the recognition of deferred revenue relating to subscription agreements entered into during previous quarters. A decline in new or renewed subscriptions in any period may not be immediately reflected in our reported financial results for that period but may result in a decline in our revenue in future quarters. If we were to experience significant downturns in subscription sales and renewal rates, our reported financial results might not reflect such downturns until future periods. Our subscription model could also make it difficult for us to rapidly increase our revenues from subscription or SaaS-based services through additional sales in any period, as revenue from new customers will be recognized over the applicable subscription term. Increases in sales under our subscription sales model could result in decreased revenues over the short term if they are offset by a decline in sales from perpetual license customers.
 
Our cloud and SaaS offerings bring new business and operational risks.

We have several products that provide secure file transfer and mobile computing solutions  that we deliver using a SaaS model. Our SaaS offerings provide our customers with existing and new software management through a hosted service as opposed to traditional software deployments. There can be no assurance that SaaS revenue will be significant in the future despite our levels of investment in developing this product delivery method. Margins associated with our SaaS offerings are generally lower than margins associated with our on-premise solutions.
 
Our customers may not renew their subscriptions after the expiration of their subscription agreements and in fact, some customers elect not to do so. Our customers may opt for a lower-priced edition of our offerings or for fewer subscriptions. Renewal rates in the future may differ from historical trends such that we may not be able to accurately predict customer renewal rates. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our services and their ability to continue their operations and spending levels. If we experience a decline in the renewal rates for our customers or they opt for lower-priced editions of our offerings or fewer subscriptions, our operating results may be adversely impacted.
 
There is a risk that our customer support teams could find it difficult or costly to support both traditional software installed by customers and software delivered as a service. To the extent that our SaaS offerings are defective or there are disruptions to our services, demand for our SaaS offerings could diminish, and we could be subject to substantial liability.
 
Interruptions or delays in service from our third party service delivery hosts could impair the delivery of our services and harm our business. If we or our third party service delivery hosts experience security breaches and unauthorized access is obtained to a customer’s data or our data, our services may be perceived as not being secure, customers may curtail or stop using our services and we may incur significant legal and financial exposure and liabilities.
 
Our success with our SaaS solutions depends on organizations and customers perceiving technological and operational benefits and cost savings associated with the increasing adoption of virtual infrastructure solutions for on-premise data centers. Concerns about security, privacy, availability, data integrity, retention and ownership may negatively impact the rate of adoption of these solutions. SaaS software solutions can be complex, and the deployment of our secure file transfer solutions in that manner may require additional professional services and implementation services for which we may not have the ability to provide at an appropriate margin. Our SaaS products are dependent upon third party hardware, software and hosting vendors, all of which must interoperate for end users to achieve their computing goals. We expect other companies to enter this market and to introduce their own initiatives that may compete with, or not be compatible with, our cloud solutions.
 
If any of these events were to occur, it could adversely affect our business, results of operations and financial condition.
 
We rely on third parties to provide us with a number of operational services, including hosting and delivery, certain of our customer services and other operations.  Any interruption or delay in service from these third parties, breaches of security or privacy, or failures in data collection could expose us to liability, harm our reputation and adversely impact our financial performance.

We rely on hosted computer services from third parties for certain services that we provide our customers.  As we gather customer data and host certain customer data in third-party facilities, a security breach could compromise the integrity or availability or result in the theft of customer data.  In addition, our operations could be negatively affected in the event of a security breach, and we could be subject to the loss or theft of confidential or proprietary information.
 

Unauthorized access to this data may be obtained through break-ins, breach of our secure network by an unauthorized party, employee theft or misuse, or other misconduct.  We rely on a number of third party suppliers in the operation of our business for the provisioning of various services and materials that we use in the production of our products.  Although we seek to diversify our third party suppliers, we may from time to time rely on a single or limited number of suppliers, or upon suppliers in a single country, for these services or materials.  The inability of such third parties to satisfy our requirements could disrupt our business operations or make it more difficult for us to implement our business strategy.  If any of these situations were to occur, our reputation could be harmed, we could be subject to third party liability, including under data protection and privacy laws in certain jurisdictions, and our financial performance could be negatively impacted.

Fluctuations in professional services revenue may be greater than experienced in previous reporting periods and have a disproportionate impact on our financial results.  For example, increased professional services sales, especially to the government, may result in lower earnings as a percentage of revenue.

Our solution portfolio includes software licenses, subscription services, and professional services.  Because they are relatively labor intensive, professional services typically have substantially lower margins than software license sales, maintenance and support sales and SaaS solutions.  However, professional services represent a strategic capability that helps customers plan, implement, and sustain our solutions and also provide us with the demonstrated past performance necessary to participate in certain procurements. Professional services were 5% of our total revenue in 2014.  However, this percentage can fluctuate significantly from period to period depending on the needs of our customers.

Depending on our mix of software licenses, subscription, and professional services revenue in a given reporting period, our earnings as a percentage of revenue may fluctuate from historical norms. For example, if we were to derive a relatively large (compared to historical norms) component of our revenue from professional services in a reporting period, earnings as a percentage of revenue may decline in that period due to lower margin contribution from the labor-intensive services as compared to software license and subscription service revenue.

An inability to establish vendor specific objective evidence of the selling price of one or more components of a software sale with multiple components could result in our having to change from recognizing software license revenue in full at the time the software is delivered to recognizing that same software license revenue ratably in the future over an extended number of accounting periods.
 
For software sales with multiple components (typically a sale involving both a license to software that will be delivered immediately and M&S that will be delivered over an extended period of time), generally accepted accounting principles require that vendor specific objective evidence of selling price (“VSOE”) be established for at least all but one of the components of that sale before the software license revenue can be recognized in full at the time of delivery to the customer. If VSOE cannot be established, recognition of the software license revenue must deferred and recognized ratably in the future over an extended number of accounting periods, the length of which would typically be the time period covered by the related M&S contract. We currently have established VSOE in a manner that supports our recognizing software license revenue in full at the time we deliver the software to our customers for substantially all of our products.
 
Situations can arise where a change in product pricing that improves our cash flow and financial position has an unintended consequence of our not being able to establish VSOE where it existed before.  If that set of circumstances were to occur, we could be required by generally accepted accounting principles to defer recognition of software license revenue to future periods. That requirement could cause us to experience an immediate decline in software license revenue recognized in our financial statements in the period in which the licensed software was delivered to our customer even though the timing and amount of cash flow from the transaction would be the same as when we had established VSOE.  If this collection of events were to occur, it could have a material, adverse effect on our revenue, results of operations and financial condition we present in our financial statements.
 
 
We may not be able to compete effectively with larger, better-positioned companies, resulting in lower margins and loss of market share.
 
We operate in intensely competitive markets that experience rapid technological developments, market consolidation, changes in industry standards, changes in customer requirements, and frequent new product introductions and product improvements by existing and new competitors.  If we are unable to anticipate or react to these competitive challenges or if existing or new competitors take or gain additional market share in any of our markets, our competitive position could weaken, and we could experience a decrease in revenues that could adversely affect our business and operating results.  To compete successfully, we must maintain a successful research and development effort to develop new products and services and enhance existing products and services, effectively adapt to changes in the technology or product rights held by our competitors, appropriately respond to competitor strategies as such strategies become apparent, and effectively adapt to technological changes and changes in the ways that our information is accessed, used, and stored within our enterprise and consumer markets.  If we are unsuccessful in responding to our competitors or to changing technological and customer demands, we could experience a negative effect on our competitive position and our financial results.
 
We compete with a variety of companies who have significantly greater revenues and financial resources, more partners, resellers and distribution channels than we have and greater quantities of personnel and technical resources. For example, our EFT solution suite competes with products from IBM Sterling, Ipswitch, Axway and several other vendors. Our WAFS product competes with Riverbed Technology and Cisco.  TappIn competes with a variety of cloud file storage and collaboration companies such as Dropbox. Large companies may be able to develop new technologies, across multiple solution spaces, and on more operating systems, more quickly than we can, to offer a broader array of products, and to respond more quickly to new opportunities, industry standards or customer requirements.

Additional competitors may enter the market and also may have significantly greater capabilities and resources than we do. Some existing competitors also may be able to adopt more aggressive pricing strategies. For example, Ipswitch provides an older version of its consumer file transfer protocol program for free for non-commercial use, and Microsoft includes file transfer protocol functionality in its Internet browser, which it also distributes for free. Increased competition may result in lower operating margins and loss of market share.

As we attempt to expand our business, our operating expenses may increase, and we may incur losses.

We intend to expand our business, specifically with regard to new license sales of our products. To do so, we plan to increase our research and development expenditures to accelerate our introduction of new features, functions and capabilities for our products to the marketplace. We intend to enhance the presence and visibility of those products by increasing our sales and marketing expenditures to expand our sales force, particularly through a broader reseller program involving more third-parties, and by implementing new sales lead generation and marketing initiatives.

These expanded research and development and sales and marketing activities may result in an increase in our operating expenses. If we do not successfully develop new features, functions and capabilities for our products in a manner that increases license sales of our products, and if our enhanced sales and marketing activities, including expansion of our third-party reseller programs, are not successful, our revenue may not increase. In that event, our net income could decline or we may incur losses.

Our products are complex and operate in a wide variety of computer configurations, which could result in errors or product failures.

Addressing MFT, file synchronization, managed email attachment, hosted services and secure content mobility typically requires very complex products.  Undetected errors, failures, or bugs may occur, especially when products are first introduced or when new versions are released.  Our products are often installed and used in large-scale computing environments with different operating systems, system management software, and equipment and networking configurations, which may cause errors or failures in our products or may expose undetected errors, failures, or bugs in our products.  Our customers’ computing environments also are often characterized by a wide variety of standard and non-standard configurations that make pre-release testing for programming or compatibility errors very difficult and time-consuming.  In addition, despite testing by us and others, errors, failures, or bugs may not be found in new products or releases until after commencement of commercial shipments.  In the past, we have discovered software errors, failures, and bugs in certain of our product offerings after their introduction and have experienced delayed or lost revenues during the time required to correct these errors.
 

Errors, failures, or bugs in products released by us could result in negative publicity, product returns, loss of or delay in market acceptance of our products, loss of competitive position, or claims by customers or others.  Many of our end-user customers use our products in applications that are critical to their businesses and may have a greater sensitivity to defects in our products than to defects in other, less critical, software products.  In addition, if an actual or perceived breach of information integrity or availability occurs in one of our end-user customer’s systems, regardless of whether the breach is attributable to our products, the market perception of the effectiveness of our products could be harmed.  Alleviating any of these problems could require significant expenditures of our capital and other resources and could cause interruptions, delays, or cessation of our product licensing, which could cause us to lose existing or potential customers and could adversely affect our operating results.

Our business is subject to the risks of warranty claims, product returns, product liability and product defects.

Real or perceived errors, failures or bugs in our products could result in claims by customers for losses that they sustain.  If customers make these types of claims, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem. Liability provisions in our standard terms and conditions of sale, and those of our resellers and distributors, may not be enforceable under some circumstances or may not fully or effectively protect us from customer claims and related liabilities and costs, including indemnification obligations under our agreements with resellers and distributors. The sale and support of our products also entail the risk of product liability claims.  We maintain insurance to protect against certain types of claims associated with the use of our products, but our insurance coverage may not adequately cover any such claims. Even claims that ultimately are unsuccessful could result in expenditures of funds in connection with litigation and divert management’s time and other resources.
 
Possible future acquisitions give rise to risks and challenges that could adversely affect our future financial results.

Acquisitions involve a number of risks and challenges, including:

·  
Complexity, time, and costs associated with integration of the acquired business operations, workforce, products, and technologies into our existing business, sales force, employee base, product lines, marketing and technology.  The possibility exists that such integration ultimately may not be successful.

·  
Diversion of management time and attention from our existing business and other business opportunities throughout the integration.

·  
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 the acquired 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.

·  
Potentially substantial accounting charges for restructuring and related expenses, write-off of in-process research and development, impairment of goodwill, amortization of intangible assets, and share-based compensation expense.

The ongoing integration of any acquired business, involves continually determining and leveraging the actual market synergies, sustaining and even extending the business performance of the acquired entity, implementing our technology systems in the acquired operations and integrating and managing the personnel of the acquired operations.  We also must continue to effectively integrate the different cultures of acquired business organizations into our own culture in a way that aligns various interests.
 

Any of the foregoing, and other factors, could harm our ability to achieve anticipated levels of financial performance or to realize other anticipated benefits of an acquisition.  In addition, because acquisitions of technology companies are inherently risky, no assurance can be given that our previous, current, or future acquisitions will be successful and will not adversely affect our business, operating results, or financial condition.
 
Turmoil and uncertainty in U.S. and international economic markets could adversely affect our business and operating results.

Demand for our products depends in large part upon the level of capital and maintenance expenditures by many of our customers.  Economic downturns could have an adverse effect on spending on information technology projects since in such environments, prospects and customers may reduce, sometimes greatly, their discretionary spending to focus on preserving mandatory spending budgets.

These adverse impacts to customer spending may be directly, and adversely, reflected in our future business and operating results because we believe a substantial part of the MFT spending budget is considered discretionary by our prospects and customers. The perception of MFT solutions spending as discretionary is further reinforced by the existence of low cost, or even free, products that deliver some subset of the capabilities found in our solutions.  In the event of an economic downturn, some customers may decide to defer spending for our solutions or may elect to obtain low cost or free “good enough” products as an interim measure.  The potential adverse impacts of such decisions may persist for an extended period of time, even well into a period of economic recovery, given that many prospects will not change their IT infrastructure for a considerable period of time after that infrastructure has been installed and is operating adequately.

Adverse financial results from another economic downturn and uncertainty could include flat, or even decreasing, sales, lower gross and net margins, and impairment of current or future goodwill and long-lived assets.  In addition, some of our customers could delay paying their obligations to us.  Potentially reduced sales and margins and customer payment problems could limit our ability to fund research and development, marketing, sales, and other activities necessary to sustain and expand our market position.

In past economic downturns, we have sometimes experienced a decrease in our stock price. If investors have concerns that our business, financial condition and results of operations will be negatively impacted by another economic downturn, our stock price could decrease again.

Regardless of economic conditions, fluctuations in demand for our products and services are driven by many factors and a decrease in demand for our products could adversely affect our financial results.

We are subject to fluctuations in demand for our products and services due to a variety of factors, including competition, product obsolescence, technological change, budget constraints of our actual and potential customers, awareness of security threats to IT systems, and other factors.  While such factors may, in some periods, increase product sales, fluctuations in demand can also negatively impact our product sales.  If demand for our products declines, our revenues, as well as our gross and net margins, could be adversely affected.  CuteFTP, in particular, competes in some ways with social media services for image and video sharing. As social media has increased in popularity, sales of our CuteFTP product line have declined.

Sales to the U.S. Government make up a portion of our business and changes in government defense spending could have consequences on our financial position, results of operations and business.

Our revenues from the U.S. Government largely result from contracts awarded to us under various U.S. Government programs, primarily defense-related programs with the Department of Defense (“DoD”). The funding of our programs is subject to the overall U.S. Government foreign policy, budget and appropriation decisions, and processes which are driven by numerous factors, including geo-political events and macroeconomic conditions, and are beyond our control. Projected defense spending budgets are uncertain and difficult to predict.

Significant changes in defense spending could have long-term consequences for our size and structure. Changes in government priorities and requirements could impact the funding, or the timing of funding, of our programs which could negatively impact our results of operations and financial condition.  Government contracts typically have long sales cycles such that closure of such contracts is difficult to predict.
 

U.S. Government contracts generally also permit the government to terminate the contract, in whole or in part, without prior notice, at the government’s convenience or for default based on performance. A termination arising out of our default could expose us to liability and have a negative impact on our ability to obtain future contracts and orders. Furthermore, on contracts for which we are a subcontractor and not the prime contractor, the U.S. Government could terminate the prime contract for convenience or otherwise, irrespective of our performance as a subcontractor.

Because we are a DoD contractor, certain of our items and/or transactions may be subject to the International Traffic in Arms Regulations (“ITAR”) if our software or services are specifically designed or modified for defense purposes.  Companies engaged in manufacturing or exporting ITAR-controlled goods and services (even if these companies do not export such items) are required to register with the U.S. State Department.  Failure to comply with these requirements could result in fines and sanctions which could negatively impact our results of operations and financial condition.

Changes to our sales organization can be disruptive and may negatively impact our results of operations.

From time to time, we make significant changes in the organizational structure and compensation plans of our sales organization, which may increase the risk of sales personnel turnover. To the extent that we experience turnover within our direct sales force or sales management, there is a risk that the productivity of our sales force would be negatively impacted which could lead to revenue declines. Turnover within our sales force can cause disruption in sales cycles leading to delay or loss of business. It can take time to implement new sales management plans and to effectively recruit and train new sales representatives. We review and modify our compensation plans for the sales organization periodically. Changes to our sales compensation plans could make it difficult for us to attract and retain top sales talent.
 
If we are unable to generate significant volumes of sales leads from our various marketing and demand generation efforts then our revenue may not grow as expected or may decline.
 
We generate leads through various marketing activities such as targeted email campaigns, attending networking-based trade shows, purchasing information and services from third-party experts in generating leads, and hosting webinars on enterprise IT management issues. Our marketing efforts may be unsuccessful resulting in fewer sales leads. If we fail to generate a sufficient volume of leads from these activities and/or such sales leads do not result in actual sales, our revenue may not grow as expected or could decrease and our operating results could suffer
 
Some of our sales leads are generated through visits to our websites by potential end-users interested in purchasing or downloading evaluations of our products. Many of these potential end-users find our websites by searching for secure file transfer products through Internet search engines, such as Google. A critical factor in attracting potential customers to our websites is how prominently our websites are displayed in response to search inquiries. If we are listed less prominently or fail to appear in search result listings for any reason, visits to our websites by customers and potential customers could decline significantly. We may not be able to replace this traffic, and, if we attempt to replace this traffic, we may be required to increase our sales and marketing expenses, which may not be offset by additional revenue and could adversely affect our operating results.
 
If we fail to manage our sales and distribution channels effectively or if our partners choose not to market and sell our products to their customers, our operating results could be adversely affected.

We sell our products to customers through our direct sales force and third-party resellers. Sales through these different channels involve distinct risks, including the following:

Direct Sales.   Risks associated 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 revised products; and
 

·  
Leads obtained from paid advertising (for example, Google ads) impacting direct sales should the marketing and advertising effectiveness decline due to non-attributable declines in leads,  unforeseen search engine algorithm changes, or other occurrences that may adversely impact the lead generation aspects of the direct sales cycle.  Increased competition may materially impact the costs associated with such marketing and advertising.

Indirect Sales Channels.   This channel that involves sales through third-party resellers involves a number of risks, including:

·  
Our lack of control over the timing of delivery of our products to end-users;

·  
Our resellers and distributors currently not being subject to minimum sales requirements or any obligation to market our products to their customers;

·  
Our reseller and distributor agreements generally being nonexclusive and terminable at any time without cause; and

·  
Our resellers and distributors frequently marketing and distributing competing products and, from time to time, placing greater emphasis on the sale of these products due to pricing, promotions, and other terms offered by our competitors.

We cannot be certain that our third-party resellers will continue to market or sell our products effectively.  If we are not successful, we may lose sales opportunities, customers and revenues.

If we lose key personnel we may not be able to execute our business plan.

Our future success depends on the continued services of key members of our management team. These individuals are difficult to replace because of the intense competition for similarly skilled people. New members of the management team may not be productive for weeks or months as they learn about our solutions, our personnel and the administrative practices within our company.

It may be difficult for us to recruit and retain software developers and other technical and management personnel because we are a relatively small company.

We compete intensely with other software development and distribution companies internationally and information technology departments supporting larger businesses to recruit and hire from a limited pool of qualified personnel. Some qualified candidates prefer to work for larger, better known companies or in another geographic area. In order to attract and retain personnel in a competitive marketplace, we believe that we must provide a competitive compensation package, including cash and equity-based compensation. The volatility in our stock price may from time to time adversely affect our ability to recruit or retain employees. In addition, we may be unable to obtain required stockholder approvals of future increases in the number of shares available for issuance under our equity compensation plans. Also, accounting rules require us to treat the issuance of employee stock options and other forms of equity-based compensation as compensation expense. As a result, we may decide to issue fewer equity-based incentives and may be impaired in our efforts to attract and retain necessary personnel. If we are unable to hire and retain qualified employees, or conversely, if we fail to manage employee performance or reduce staffing levels when required by market conditions, our business and operating results could be adversely affected.

Key personnel have left our company in the past. There likely will be additional departures of key personnel from time to time in the future. The loss of any key employee could result in significant disruptions to our operations, including adversely affecting the timeliness of product releases, the successful implementation and completion of company initiatives, the effectiveness of our disclosure controls and procedures and our internal control over financial reporting, and the results of our operations. Hiring, training, and successfully integrating replacement sales, engineering, and other personnel could be time consuming, may cause additional disruptions to our operations, and may be unsuccessful, which could negatively impact future revenues.
 

Our operations potentially are vulnerable to security breaches that could harm the quality of our products and services or disrupt our ability to deliver our products and services.

Information security is a dynamic discipline that historically has faced a threat that develops and emerges in sometimes-unpredictable ways. Third parties may breach our system and information security and damage our products and services or misappropriate confidential customer information. This might cause us to lose customers, or even cause customers to make claims against us for damages. We may be required to expend significant resources to protect against potential or actual security breaches and/or to address problems caused by such breaches.
 
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-premise delivery of our products, we now also offer our products on third party hosted platforms. As we continue to execute our strategy of increasing the number and scale of our cloud-based offerings, we store and process increasingly large amounts of personally identifiable information of our customers. At the same time, the continued occurrence of high-profile data breaches provides evidence of an external environment increasingly hostile to information security. This environment demands that we continuously improve our design and coordination of security controls. It is possible our security controls over personal data, our training of employees and vendors on data security, and other practices we follow may not prevent the improper disclosure of personally identifiable information. Improper disclosure of this information could harm our reputation, lead to legal exposure to customers, or subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue.  We believe consumers using our subscription services increasingly will want efficient, centralized methods of choosing their privacy preferences and controlling their data. Perceptions that our products or services do not adequately protect the privacy of personal information could inhibit sales of our products or services, and could constrain consumer and business adoption of cloud-based solutions.
 
Breaches of our cybersecurity systems could degrade our ability to conduct our business operations and deliver products and services to our customers, delay our ability to recognize revenue, compromise the integrity of our software products, result in significant data losses and the theft of our intellectual property, damage our reputation, expose us to liability to third parties and require us to incur significant additional costs to maintain the security of our networks and data.

We increasingly depend upon our IT systems to conduct virtually all of our business operations, ranging from our internal operations and product development activities to our marketing and sales efforts and communications with our customers and business partners.  Cyber threats may attempt to penetrate our network security, or that of our website, and misappropriate our proprietary information or cause interruptions of our service.  Because the techniques used by such attackers to access or sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques.  In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system.  We have also outsourced a number of our business functions to third party contractors. Therefore, our business operations also depend, in part, on the success of our contractors' own cybersecurity measures. Similarly, we rely upon distributors, resellers, system vendors and systems integrators to sell our products and our sales operations depend, in part, on the reliability of their cybersecurity measures. Additionally, we depend upon our employees to appropriately handle confidential data and deploy our IT resources in safe and secure fashion that does not expose our network systems to security breaches and the loss of data. Accordingly, if our cybersecurity systems and those of our contractors fail to protect against unauthorized access, sophisticated cyber-attacks and the mishandling of data by our employees and contractors, our ability to conduct our business effectively could be damaged in a number of ways, including:
 
·  
Sensitive data regarding our business, including intellectual property and other proprietary data, could be stolen;
 
·  
Our electronic communications systems, including email and other methods, could be disrupted, and our ability to conduct our business operations could be seriously damaged until such systems can be restored;
 
·  
Our ability to process customer orders and electronically deliver products and services could be degraded, and our distribution channels could be disrupted, resulting in delays in revenue recognition;
 
·  
Defects and security vulnerabilities could be introduced into our software products, thereby damaging the reputation and perceived reliability and security of our products and potentially making the data systems of our customers vulnerable to further data loss and cyber incidents; and
 
·  
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, regulatory actions from governmental agencies, our ability to protect our intellectual property rights could be compromised and our reputation and competitive position could be significantly harmed. Also, the regulatory and contractual actions, litigations, investigations, fines, penalties and liabilities relating to data breaches that result in losses of personally identifiable or credit card information of users of our services can be significant in terms of fines and reputational impact and necessitate changes to our business operations that may be disruptive to us. Additionally, we could incur significant costs in order to upgrade our cybersecurity systems and remediate damages. Consequently, our financial performance and results of operations could be adversely affected.

Certain components of the software code comprising some of our products are licensed from third parties making us dependent upon those licenses remaining in place for those products to operate in their current form.

Certain key components of the software code comprising certain of our products are licensed from unrelated, third parties.  These licenses are not perpetual such that, with advance notice as provided in the license agreements, those third parties could terminate those licenses.  Even with advance notice, termination of those licenses could create a severe hardship for us due to the need to locate substitute software code from other third parties or create alternative software code ourselves in order for our products to continue to operate in the manner designed or for us to keep pace with customer requirements, including our obligations under maintenance and support agreements.  There is no assurance we could achieve either of those alternative solutions in a timely and effective manner that would not disrupt our ability to continue selling and supporting those products, or without the consumption of significant company resources in the form of time spent by our personnel creating alternative solutions or cash paid to third parties to assist us.  Such a situation could delay the completion and introduction to the marketplace of other products we are developing to remain competitive due to the diversion of the attention of certain of our key personnel away from that work.  If any of these events occur, our future business and financial results could be adversely affected.

We utilize “open source” software in some of our products.

The open source software community develops software technology for free use by anyone. We incorporate a limited amount of open source code software into our products.  We may use more open source code software in the future.

Our use, in some instances, of open source code software may impose limitations on our ability to commercialize our solutions and may subject us to possible intellectual property litigation.  Open source code may impose limitations on our ability to commercialize our products because, among other reasons, open source license terms may be ambiguous and may result in unanticipated obligations regarding our solution, and open source software cannot be protected under trade secret law. In addition, it may be difficult for us to accurately determine the developers of the open source code and whether the acquired software infringes third-party intellectual property rights. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. From time to time, companies that incorporate open source software into their products have been subject to such claims.

Claims of infringement or misappropriation against us could be costly for us to defend and could require us to re-engineer our solution or to seek to obtain licenses from third parties in order to continue offering our solution. We also might need to discontinue the sale of our solution in the event re-engineering could not be accomplished on a timely or cost-effective basis. If any such claim, attempted remediation, or solution discontinuance occur, our business and operating results could be harmed.

Our products may expose customers to invasion of privacy, causing customer dissatisfaction.

Our products and solutions are intended to facilitate data and information transfer and sharing, sometimes by providing outsiders access to a customer’s computer. Such access potentially may make the customer vulnerable to security breaches, which could result in the loss of their privacy or property.  Invasions of privacy or other customer harm occurring in an environment where our solutions are operating could result in customer dissatisfaction and possible claims against us for any resulting damages.
 

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.

All products that are exported, re-exported or that are worked on by foreign nationals are subject to export controls.  Such controls include prohibitions on end uses, end users and exports to certain sanctioned countries.  In addition, incorporation of encryption technology into our products increases the level of U.S. export controls.  We are subject to these requirements as certain of our products include the ability for the end user to encrypt data.  Therefore, our products may be exported outside the United States or revealed to foreign nationals only by complying with the required level of export controls/restrictions. Restrictions applicable to our products may include a requirement to have a license to export the technology, a requirement to have software licenses approved before export is allowed and outright bans on the licensing of certain encryption technology to particular end users or to all end users in a particular country.  In addition, various countries regulate the import of certain technology and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to implement our products in those countries.
 
There can be no assurance that we will be successful in obtaining or maintaining the licenses and other authorizations required to export our products from applicable government authorities. Any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the list of countries to which we cannot export, changes in persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations.  Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations.
 
Export laws and regulations can be extremely complex in their application.  If we are found not to have complied with applicable export control laws, we may be sanctioned, fined or penalized by, among other things, having our ability to obtain export licenses curtailed or eliminated, possibly for an extended period of time. Our failure to receive or maintain any required export licenses or authorizations or our penalization for failure to comply with applicable export control laws would hinder our ability to sell our products, could result in financial penalties, and could materially adversely affect our business, financial condition, and results of operations.  Any failure on our part or the part of our distributors to comply with encryption or other applicable export control requirements could harm our business and operating results.
 
Import and export regulations of encryption/decryption technology vary from country to country. We may be subject to different statutory or regulatory controls in different foreign jurisdictions, and as such, importation of our technology may not be permitted in these foreign jurisdictions. Violations of foreign regulations or regulation of international transactions could prevent us from being able to sell our products in international markets. Our success depends in large part to having access to international markets. A violation of foreign regulations could limit our access to such markets and have a negative effect on our results of operations.

As our international sales grow, we could become increasingly subject to additional risks that could harm our business.

We conduct significant sales and customer support, in countries outside of the United States.  During the year ended December 31, 2014, approximately 28% of our sales were to purchasers outside the United States.  Our continued growth and profitability could require us to further expand our international operations.  To successfully expand international sales, we must establish additional foreign operations, hire additional personnel and recruit additional international resellers.  We may also incur additional expense translating our applications into additional languages. In addition, there is significant competition for entry into high growth markets.  Our international operations are subject to a variety of risks, which could cause fluctuations in the results of our international operations.  These risks include:
 
·  
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.
 
·  
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.

We are subject to risks associated with compliance with laws and regulations globally which may harm our business.
 
We are a global company subject to varied and complex laws, regulations and customs domestically and internationally. These laws and regulations relate to a number of aspects of our business, including trade protection, import and export control, data and transaction processing security, payment card industry data security standards, records management, user-generated content hosted on websites we operate, corporate governance, employee and third-party complaints, gift policies, conflicts of interest, employment and labor relations laws, securities regulations and other regulatory requirements affecting trade and investment. The application of these laws and regulations to our business is often unclear and may at times conflict. Compliance with these laws and regulations may involve significant costs or require changes in our business practices that result in reduced revenue and profitability. Non-compliance could also result in fines, damages, or criminal sanctions against us, our officers or our employees, prohibitions on the conduct of our business, and damage to our reputation. We incur additional legal compliance costs associated with our global operations and could become subject to legal penalties if we fail to comply with local laws and regulations in U.S. jurisdictions or in foreign countries, which laws and regulations may be substantially different from those in the U.S. In many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by U.S. regulations applicable to us, including the Foreign Corrupt Practices Act. Although we implement policies and procedures designed to ensure compliance with these laws, there can be no assurance that all of our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, including those based in or from countries where practices that violate such U.S. laws may be customary, will not take actions in violation of our internal policies. Any such violation, even if prohibited by our internal policies, could have an adverse effect on our business.
 
Failure to maintain proper and effective internal controls could affect our ability to produce accurate financial statements which could result in the restatement of our financial statements or adversely affect our operating results, our ability to operate our business, and our stock price.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud.  We maintain a system of internal control over financial reporting, which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

If we are unable to establish and maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information, and have a negative effect on the market price for shares of our common stock.

The amount of income taxes we compute as payable on our income tax returns filed with the Internal Revenue Service and certain states could be challenged by those taxing authorities resulting in us paying more taxes than anticipated.

We file income tax returns with the Internal Revenue Service and taxing authorities in certain states. We prepare and file those returns based on our interpretations of the relevant tax code as to revenue to be reported and deductions and credits allowed. We use third-party experts to assist us in preparing our tax returns and computing our tax liabilities to help us ensure we pay the proper amount of tax due. Our tax returns are subject to examination by taxing authorities who could interpret the tax code in a different manner from us and conclude we are obligated to pay more taxes than we originally computed and paid. While we would defend the position taken on our tax returns as filed, a challenge from a taxing authority can be costly to defend with no assurance of a favorable outcome for us. In the event of an unfavorable result under these circumstances, our business, operating results and financial position could be harmed.
 

The amount of sales tax we collect on sales could be challenged by taxing authorities both in jurisdictions in which we have a corporate presence as well as by taxing authorities in areas where we have no corporate presence.

We collect and remit sales tax on sales in jurisdictions where we have a corporate or physical presence that results in an obligation to do so.  We sell our products to customers in numerous locations where we do not have a corporate or physical presence and, therefore, do not collect sales tax on those sales.  States in which we collect sales tax could audit our activities and assess us with additional tax based on them interpreting the sales tax code differently than we interpret it. Various states in which we do not collect sales tax are aggressive in interpreting their sales tax codes in determining if a company with no apparent presence in those states is obligated to collect and remit sales taxes, particularly on sales made across the Internet.  States where we do not collect sales tax could make an assertion that we should have been collecting sales tax and could assess us with that tax.  While we would defend the position taken as to our obligation to collect sales tax and the amount of sales tax collected, a challenge from a taxing authority can be costly to defend with no assurance of a favorable outcome for us. In the event of an unfavorable result under these circumstances, our business, operating results and financial position could be harmed.

Risks Related to Stock Ownership

Our stock price is/may 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 with operating 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 and customers.

In addition, the public stock markets experience extreme price and trading volume volatility, particularly in high-technology sectors of the market. This volatility has significantly affected the market prices of securities of many technology companies for reasons often unrelated to the operating performance of the specific companies. The broad market fluctuations may adversely affect the market price of our common stock.

Accounting charges may cause fluctuations in our annual or quarterly financial results.

Our financial results may be affected by non-cash and other accounting charges, including:

·  
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.

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 the stockholders.  We are also subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any interested stockholder, as defined in the statute, for a period of three years following the date on which the stockholder became an interested stockholder.

Our directors and executive officers continue to have substantial control over us.

Our directors and executive officers, together with their affiliates and related persons, beneficially owned, in the aggregate, approximately 29% of our outstanding common stock as of December 31, 2014. These stockholders would have the ability to substantially control GlobalSCAPE and direct its policies including the outcome of matters submitted to our stockholders for approval, such as the election of directors and any acquisition or merger, consolidation or sale of all or substantially all of our assets. In addition, our certificate of incorporation and bylaws provide for our Board of Directors to be divided into three classes of directors serving staggered three-year terms.  As a result, approximately one-third of our Board of Directors will be elected each year.

Stockholders’ ownership of our stock may be significantly diluted, affecting the value of the stock.

There were options for 2,157,025 shares outstanding under our employee and director stock option plans as of March 13, 2015, of which 1,306,869 were vested. We have filed a registration statement under the Securities Act, covering stock issued upon the exercise of options by non-affiliates, and we may file a registration statement covering options held by affiliates as well. If we do not file a registration statement covering affiliates, affiliates who exercise their options may choose to sell the stock under an exemption from registration, such as Rule 144 under the Securities Act. The exercise of these options and sale of the resulting stock could depress the value of our stock.

Risks Related to Intellectual Property

We are vulnerable to claims that our products infringe third-party intellectual property rights particularly because our products are partially developed by independent parties.

From time to time, we experience claims that our products infringe third-party intellectual property rights.  We may be exposed to future litigation based on claims that our products infringe the intellectual property rights of others. This risk is exacerbated by the fact that some of the code in our products is developed by independent parties or licensed from third parties over whom we have less control than we exercise over internal developers. In addition, we expect that infringement claims against software developers will become more prevalent as the number of products and developers grows and the functionality of software programs in the market increasingly overlaps.  Companies in the technology industry, and other patent and trademark holders seeking to profit from royalties in connection with grants of licenses, own large numbers of patents, copyrights, trademarks, service marks, and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights.  In addition, we may be the target of aggressive and opportunistic enforcement of patents by third parties, including non-practicing entities.
 

Responding to and defending against such claims may cause us to incur significant expense and divert the time and efforts of our management and employees. Successful assertion of such claims could require that we pay substantial damages or ongoing royalty payments, prevent us from selling our products and services, damage our reputation, or require that we comply with other unfavorable terms, any of which could materially harm our business. In addition, we may decide to pay substantial settlement costs in connection with any claim or litigation, whether or not successfully asserted.

While it is not possible to predict the outcome of patent litigation incidents to our business, defense costs may be significant, and we believe the costs associated with this litigation or other claims of infringement could generally have a material adverse impact on our results of operations, financial position or cash flows.  Regardless of the merit of such claims, responding to infringement claims can be expensive and time-consuming.
 
For any intellectual property rights claim against us or our customers, we may have to pay damages and indemnify our customers against damages.
 
Claims of infringement could require us to re-engineer our products or seek to obtain licenses from third parties in order to continue offering its products. In addition, an adverse legal decision affecting our intellectual property, or the use of significant resources to defend against this type of claim could place a significant strain on our financial resources and harm our reputation.

We may not be able to protect our intellectual property rights.

Our software code, and trade and service marks are some of our most valuable assets. Given the global nature of the Internet and our business, we are vulnerable to the misappropriation of this intellectual property, particularly in foreign markets, such as China and Eastern Europe, where laws or law enforcement practices are less developed. The global nature of the Internet makes it difficult to control the ultimate destination or security of our software making it more likely that unauthorized third parties will copy certain portions of our proprietary information or reverse engineer the proprietary information used in its programs. If our proprietary rights were infringed by a third-party and we did not have adequate legal recourse, our ability to earn profits, which are highly dependent on those rights, would be severely diminished.

Other companies may own, obtain or claim trademarks that could prevent, limit or interfere with our use of our trademarks.

Our various trademarks are important to our business. If we were to lose the use of any of our trademarks, our business would be harmed and we would have to devote substantial resources towards developing an independent brand identity. Defending or enforcing our trademark rights at a local and international level could result in the expenditure of significant financial and managerial resources.

Item 1B.  Unresolved Staff Comments
 
None
 
Item 2.  Properties
 
Our corporate office is in San Antonio, Texas.  That office contains approximately 21,000 square feet for which the average annual rent under the lease is $347,000. We believe these facilities are suitable for our current business needs and that suitable, additional space would be available if needed in the future under acceptable terms.
 
Item 3.  Legal Proceedings
 
None

Item 4.  Mine Safety Disclosures

Not Applicable.
 
 
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 MKT Exchange under the symbol “GSB” The following table sets forth the quarterly high and low closing sale prices for our common stock for the last two fiscal years.

   
2014
   
2013
 
   
High
   
Low
   
High
   
Low
 
First Quarter (ending March 31)
  $ 3.90     $ 2.15     $ 1.85     $ 1.36  
Second Quarter (ending June 30)
  $ 2.63     $ 2.05     $ 1.75     $ 1.40  
Third Quarter (ending September 30)
  $ 2.66     $ 2.29     $ 1.88     $ 1.46  
Fourth Quarter (ending December 31)
  $ 2.60     $ 2.22     $ 2.45     $ 1.52  
                                 
High and Low for the Year
  $ 3.90     $ 2.05     $ 2.45     $ 1.36  
 
On March 13, 2015, the last reported sales price of our common stock on the NYSE MKT Exchange was $3.15 per share.  As of March 13, 2015, we had approximately 1,872 stockholders of record of our common stock.
 
We paid a special cash dividend of $.05 per share on December 3, 2014, and $.05 per share on December 3, 2013, to shareholders of record as of the close of business on November 19, 2014, and November 19, 2013, respectively. In February 2015, we announced the initiation of a quarterly cash dividend program commencing the second quarter of 2015. The initial cash dividend will be $0.015 per share with the applicable second quarter record and payment dates to be determined. The timing and amount of dividends to be paid in subsequent quarters will be determined on future dates by the Board of Directors.
 
While we cannot predict whether we will pay dividends in the future, in the event we have sufficient net cash flow and cash on hand, our Board of Directors may consider paying dividends in the future.

Item 6.  Selected Financial Data
 
The following selected financial data is derived from the Financial Statements included in this annual report. This data is qualified in its entirety by and should be read in conjunction with the more detailed Financial Statements and related notes included in this annual report and with Item 8, “Financial Statements and Supplementary Data”. Historical results may not be indicative of future results.
 
On December 2, 2011 we acquired TappIn, Inc.  This acquisition was accounted for as a stock purchase and, accordingly, the operating results of that business have been included in the Financial Statements included in this annual report since the date of acquisition.
 
 
Statement of Operations Data:
                             
($ in thousands except per share amounts)
                             
   
2014
   
2013
   
2012
   
2011
   
2010
 
                               
Total revenues
  $ 26,770     $ 24,339     $ 23,372     $ 20,894     $ 18,565  
Operating expenses:
                                       
  Cost of revenues
    1,018       1,011       1,296       1,723       601  
  Selling, general and administrative
    18,071       14,881       16,761       14,466       12,815  
  Research and development
    2,183       3,766       3,531       3,124       3,016  
  Affiliated entity asset impairment
    -       -       3,264       -       -  
  TappIn intangible asset impairment and
     earnout liability elimination
    -       (128 )     (1,303 )     -       -  
  Depreciation and amortization
    883       908       1,217       790       852  
     Total operating expenses
    22,155       20,438       24,766       20,103       17,284  
Income (loss) from operations
    4,615       3,901       (1,394 )     791       1,281  
Net income (loss)
  $ 3,026     $ 3,840     $ (1,800 )   $ 635     $ 881  
                                         
Net income (loss) per common share - basic
  $ 0.15     $ 0.21     $ (0.10 )   $ 0.04     $ 0.05  
Net income (loss) per common share - diluted
  $ 0.15     $ 0.20     $ (0.10 )   $ 0.03     $ 0.05  

Balance Sheet Data:
                             
($ in thousands)
                             
   
2014
   
2013
   
2012
   
2011
   
2010
 
                               
Cash and cash equivalents
  $ 11,358     $ 9,455     $ 8,079     $ 8,861     $ 11,087  
Working capital
    4,072       1,824       73       1,662       8,607  
Total assets
    38,387       33,092       33,588       38,378       20,547  
Long term debt, less current portion
    -       2,989       4,389       5,667       -  
 
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operation
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements for the years ended December 31, 2014, 2013 and 2012, and related notes included elsewhere in this document.

Overview
 
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. We have thousands of enterprise customers and more than one million individual consumers in over 150 countries.
 
We believe we are well-positioned to provide secure transfer, sharing, and replication of files that need to be transmitted inside the user’s firewall to distributed locations, or outside the user’s firewall to business and trading partners, including network-enabled mobile devices. Our solution portfolio addresses data and information management, movement, security and accessibility across a broad range of environments encompassing data and information in motion (for example, with traditional Managed File Transfer, or MFT, solutions delivered as on-premises software or as a cloud service) and at rest (for example, through securely deleting or purging files or securely accessing stored data from mobile tablet or smartphone devices).
 
Our solution portfolio facilitates transmission of critical information such as financial data, medical records, customer files, vendor files, personnel files, transaction activity, and other similar documents between diverse and geographically separated network infrastructures while supporting a range of information protection approaches to meet privacy and other security requirements. In addition to enabling secure, flexible transmission of critical information using servers, desktop and notebook computers, and a wide range of network-enabled mobile devices, our products also provide customers with the ability to monitor and audit file transfer activities.
 
 
Our solutions facilitate compliance with government regulations and industry standards relating to the protection of information while allowing users to reduce IT costs, increase efficiency, track and audit transactions, and automate processes. Our solutions also provide data replication, acceleration of file transfer, sharing/collaboration and continuous data backup and recovery to our customers.
 
Our Enhanced File Transfer, or EFT, solutions are currently our primary product. These “server side” solutions provide a common, scalable MFT platform that accommodates a broad family of add-on modules to provide small and medium-sized businesses, or SMB’s, as well as larger enterprise customers, with increased security, automation, and performance when compared to traditional FTP-based and e-mail delivery systems. The add-on modules allow customers to select the solution configuration most applicable to their requirements for auditing and reporting, encryption, ad hoc and web-based file transfers, operability in or through a DMZ network, and integration with back-end business processes, including workflow automation capabilities. 
 
Our Wide-Area File Services, or WAFS, software product uses data synchronization to further enhance the ability to replicate, share and backup files within a wide area network or local area network, which allows users to access their data at higher speeds than possible with alternate approaches. We believe this technology enables collaboration at greater efficiency levels than solutions available from our competitors or with native operating system connectivity.
 
Our Mail Express product offers managed e-mail attachment solutions for information sharing. We believe our managed e-mail attachment solution addresses the needs of customers who are constrained by the typical limits on e-mail attachment size or who require additional security, auditing, and reporting for file attachments shared through e-mail.
 
CuteFTP was our original product.  It is a file transfer program used mostly by individuals and small businesses that was first distributed in 1996 over the Internet. It remains popular today and generates revenue for us at a relatively low cost.
 
We also offer, both directly and through our partners, our software products in both a software-as-a-service, or SaaS, and cloud-based subscription solutions for information sharing. Our SaaS and cloud-based subscription solutions allow customers to reduce their upfront and total cost of ownership and achieve other recognized benefits of cloud-based solutions, including service elasticity and strong service level agreements for IT infrastructure reliability and performance.  We intend for our managed, cloud-based subscription solutions to be an integral part of our future revenue because these solutions provide recurring revenue which potentially builds over time, as compared to sales of on-premises software licenses which must be reconstituted every period. We have the capability to deliver these services in North America as well as internationally in Europe and Latin America.
 
We began serving the secure content mobility market with the acquisition of our TappIn solutions in 2011. Secure content mobility provides users with the ability to easily and securely access and share data and information using a web-browser, tablet or other mobile device such as a smartphone. Secure content mobility integrates aspects of ad hoc file transfer, broader MFT capabilities, cloud services, and remote accessibility to address growing market demand for secure, ‘anytime and anywhere’, device-independent access to distributed content. We believe that the inclusion of secure content mobility capability in our portfolio, and specifically the introduction of the capability to enterprise-level organizations, will contribute to the future growth of our business due to the continuing adoption of tablet computers and smartphones.
 
Key Business Metrics

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

We provide products and solutions to small, medium and large multinational corporations as well as to individual consumers. We have a broad product line that has allowed us to grow revenue through software products and solutions either installed at a customer’s location or delivered through a hosted, SaaS model. We have grown our professional services capabilities to enhance our customers’ implementation, training and overall user experience. Sales of our enterprise products, solutions, and services comprise a substantial majority of our revenue. While our CuteFTP software and other consumer products are a relatively minor component of our overall revenue, they are recognized brands in the marketplace that we believe continue to have a positive effect on our overall product offerings and corporate franchise.
 
 
We believe annual revenue growth is a key metric for monitoring our continued success in developing our business in future periods. Given our diverse solution portfolio, we review our revenue mix and changes in revenue, across all solutions, on a regular basis to identify key trends and adjust resource allocations. We believe our revenue growth is primarily dependent upon executing our business strategies described in the Strategy section above which include:

•  
Continuing innovation of core products and introducing enhanced collaboration and sharing tools.

•  
Enhancing marketing programs to expand solution awareness.

•  
Leveraging and expanding third party, channel distribution partnerships.

To support product innovation, we continue to enhance our software engineering group and our focus on optimizing the manner in which we assess the development of new technologies, our approach to managing those projects, and the timelines over which we do that work. We increased our research and development spending during 2014 to create and introduce new features, functions and capabilities for our products.
 
In sales and marketing, we have made and continue to make ongoing changes including:
 
·   Increasing sales staff headcount as needed to address our markets.
·   Aligning our sales group to enhance its industry and geographic focus.
·   Implementing new sales and marketing campaigns.
·   Using third party search engine optimization experts to enhance our efforts in that area.
·   Using third party lead-generation experts to increase our sales staff’s exposure to potential purchasers.
·   Recruiting industry channel partners and enabling them to sell our products through training and orientation programs.
 
As part of growing revenue in total, we are focused on increasing license revenue both in terms of absolute dollars and as a percent of total revenue. When we sell our licensed products, we also typically create a recurring revenue stream from M&S since almost all purchasers of our licensed products, particularly EFT, also purchase an M&S contract. Our M&S contracts are typically for one year, with some customers buying two or three year contracts. The customer pays us the M&S fee for the entire term of the agreement at the time the contract begins. We recognize that amount as revenue ratably in future periods over the term of the contract. We typically experience a high renewal rate for M&S services so long as a customer continues using the licensed product they purchased from us. As a result, growing license revenue not only contributes to increasing revenue growth at the time the license is sold but also provides a foundation for future recurring revenue as the purchasers of our licensed products renew M&S agreements to support their ongoing product support needs. This pattern of activity can create a cumulative effect for M&S renewals as a result of the cumulative number of licensed software installations sold over multiple years that create M&S renewals in any single year predictably (and in line with our expectations) exceeding the number of new software licenses we sell in a single year. We expect this cumulative effect to continue to grow if we continue to increase software license revenue in future periods.
 
The trends in the profile of our revenue components are illustrated and discussed below under Solution Perspective and Trends as well as under Comparison of the Statement of Operations for the Year Ended December 31, 2014 and 2013 and Comparison of the Statement of Operations for the Year Ended December 31, 2014 and 2013.
 
Bookings (Non-GAAP Measurement)

We consider business “booked” when we issue an invoice to a customer for their purchase of our products or services. Bookings consist of invoiced amounts for which we recognize revenue currently and invoiced amounts for which we defer revenue recognition to future periods. Our bookings trends and the reconciliation of bookings to revenue are as follows:
 
   
Year Ended December 31,
 
   
2014
   
2013
 
             
Bookings
  $ 30,774     $ 25,366  
Change in deferred revenue
    (4,004 )     (1,027 )
Revenue
  $ 26,770     $ 24,339  
 
 
Bookings is a business metric we use to measure the success of our sales and marketing programs and the effectiveness of our sales and marketing teams. Bookings is not a measure of financial performance under generally accepted accounting principles, or GAAP, and should not be considered a substitute for revenue. Bookings has limitations as an analytical tool and when assessing our operating performance. Bookings should not be considered in isolation or as a substitute for revenue or other income statement data prepared in accordance with GAAP.

Measurement of Income and Expense Excluding Infrequent Events (Non-GAAP Measurement)
 
We use supplemental measurements of income and expense excluding infrequent items to monitor the financial performance of our core operating activities prior to consideration of significant events that occur infrequently. These measurements of income and expense excluding infrequent items include:
 
·  
Operating expenses excluding infrequent items.
·  
Operating income excluding infrequent items.
·  
Net income excluding infrequent items.
·  
Earnings per share excluding infrequent items.
 
We exclude infrequent items from these income and expense measurements because we do not consider them part of our core operating results when assessing our ongoing operational performance, allocating resources to our business activities and preparing operating budgets. We believe that by comparing such income and expense measurements across historical periods, our operating results can be evaluated exclusive of the effects of certain infrequent items that may not be indicative of our core operations in the future.
 
Income and expense excluding infrequent items are not measures of financial performance under GAAP and should not be considered a substitute for the similar items that include infrequent items. While we believe these non-GAAP income and expense measures provide useful supplemental information, there are limitations associated with the use of these non-GAAP income and expense measures. These non-GAAP income and expense measures are not prepared in accordance with GAAP and may not be comparable to similarly titled measures of other companies since there is no standard for preparing these non-GAAP income and expense measures. Items excluded in preparing these non-GAAP income and expense measures individually and collectively can have a material impact on operating expenses, operating income, net income and earnings per share. As a result, these non-GAAP income and expense measures have limitations and should not be considered in isolation from, or as a substitute for, financial statements prepared in accordance with GAAP.
 
Income and expense excluding infrequent items are as follows (in thousands except per share data):
 
   
Year Ended
 
   
December 31
 
   
2014
   
2013
   
2012
 
                   
Non-GAAP Operating Expenses
                 
GAAP total operating expenses
  $ 22,155     $ 20,438     $ 24,766  
Add: TappIn intangible asset impairment and earnout liability elimination
    -       128       1,343  
Less: Affiliated entity asset impairment
    -       -       (3,264 )
Operating expenses excluding infrequent items
  $ 22,155     $ 20,566     $ 22,845  
                         
Non-GAAP (Loss) Income From Operations
                       
GAAP income (loss) from operations
  $ 4,615     $ 3,901     $ (1,394 )
Less: TappIn intangible asset impairment and earnout liability elimination
    -       (128 )     (1,343 )
Add: Affiliated entity asset impairment
    -       -       3,264  
Operating income excluding infrequent items
  $ 4,615     $ 3,773     $ 527  
                         
Non-GAAP Net Income (Loss)
                       
GAAP net income (loss)
  $ 3,026     $ 3,840     $ (1,800 )
Less: TappIn intangible asset impairment and earnout liability elimination
    -       (1,341 )     (1,343 )
Add: Affiliated entity asset impairment
    -       -       3,264  
Net income (loss) excluding infrequent items
  $ 3,026     $ 2,499     $ 121  
                         
Non-GAAP Earnings Per Share
                       
Net income excluding infrequent items
  $ 3,026     $ 2,499     $ 121  
Weighted average share outstanding:
                       
Basic
    20,163       18,626       18,358  
Diluted
    20,693       19,082       19,016  
Net income per common share excluding infrequent items:
                       
Basic
  $ 0.15     $ 0.13     $ 0.01  
Diluted
  $ 0.15     $ 0.13     $ 0.01  
 
 
 
Adjusted EBITDA Excluding Infrequent Items (Non-GAAP Measurement)

We utilize Adjusted EBITDA (Earnings Before Interest, Taxes, Total Other Income/Expense, Depreciation, Amortization, other than amortization of capitalized software development costs, and Share-Based Compensation Expense) Excluding Infrequent Items to measure profitability and cash flow from our core operating activities. We exclude infrequent items because they typically do not directly impact profitability and cash flow resulting from our core activities. We monitor and review cost of revenues, selling, general, and administrative, or SG&A, expenses and research and development, or R&D, expenses to assess conformance with established budget expectations and to identify specific variances. Identifying and, if necessary, addressing variances above budget is important for the purpose of staying within budget ceilings. However, even variances below budget may indicate imbalances in resource allocations or deviation of operating activities from established expectations.

Adjusted EBITDA Excluding Infrequent Items is not a measure of financial performance under GAAP and should not be considered a substitute for net income. Adjusted EBITDA Excluding Infrequent Items has limitations as an analytical tool and when assessing our operating performance. Adjusted EBITDA Excluding Infrequent Items should not be considered in isolation or as a substitute for net income or other income statement data prepared in accordance with GAAP.

During 2013, we modified our computation of Adjusted EBITDA Excluding Infrequent Items to exclude amortization of capitalized software development costs from the amortization amount we add to net income in this calculation. We made that change because amortization of capitalized software development costs is derived from expenditures that are part of our core operating activities related to the development and release of our products. We have recomputed Adjusted EBITDA Excluding Infrequent Items for 2013 from amounts previously reported for that period to exclude amortization of capitalized software development costs from the amortization amount we add to net income. This change resulted in Adjusted EBITDA Excluding Infrequent Items for 2013 being $87,000 less than the amount we previously reported for that period.
 
We compute Adjusted EBITDA Excluding Infrequent Items as follows ($ in thousands):

   
Year Ended
 
   
December 31
 
   
2014
   
2013
   
2012
 
Income (loss) from operations (before interest and taxes)
  $ 4,615     $ 3,901     $ (1,394 )
Add (subtract):
                       
Depreciation and amortization:
                       
Total depreciation and amortization
    883       908       1,217  
Amortization of capitalized software development costs
    (577 )     (174 )     (87 )
Stock-based compensation expense
    521       666       915  
Infrequent item:
                       
Affiliated entity asset impairment
    -       -       3,264  
TappIn intangible asset impairment and earnout liability elimination
    -       (128 )     (1,303 )
Adjusted EBITDA Excluding Infrequent Items
  $ 5,442     $ 5,173     $ 2,612  
 
See Comparison of the Statement of Operations for the Year Ended December 31, 2014 and 2013 and Comparison of the Statement of Operations for the Year Ended December 31, 2013 and 2012 for discussion of the variances between periods in the components comprising Adjusted EBITDA Excluding Infrequent Items.
 
 
Solution Perspective and Trends
 
Our discussion of the business trends of our products is based on the following profile of our revenue components ($ in thousands):
 
   
Revenue for the Year Ended December 31,
 
   
2014
   
2013
   
2012
 
         
Percent of
         
Percent of
         
Percent of
 
   
Amount
   
Total
   
Amount
   
Total
   
Amount
   
Total
 
Revenue by Product
                                   
EFT Enterprise and Standard
  $ 21,353       79.8 %   $ 19,254       79.1 %   $ 18,109       77.5 %
Wide Area File Services
    1,448       5.4 %     1,277       5.2 %     1,577       6.7 %
Professional Services
    1,445       5.4 %     1,479       6.1 %     1,547       6.6 %
CuteFTP
    904       3.4 %     1,205       5.0 %     1,059       4.5 %
Other
    1,620       6.0 %     1,124       4.6 %     1,080       4.7 %
Total Revenue
  $ 26,770       100.0 %   $ 24,339       100.0 %   $ 23,372       100.0 %
                                                 
Revenue by Type
                                               
Software licenses
  $ 10,292       38.4 %   $ 9,093       37.4 %   $ 10,277       44.0 %
M&S
    15,033       56.2 %     13,767       56.6 %     11,352       48.6 %
Professional services
    1,445       5.4 %     1,479       6.0 %     1,743       7.4 %
Total Revenue
  $ 26,770       100.0 %   $ 24,339       100.0 %   $ 23,372       100.0 %
 
We earn revenue from the following activities:
 
•  
License revenue from sales of our EFT and Mail Express products that we deliver as either (1) software installed at the customer’s premises for which we earn the full amount of the license revenue at the time the licensed is delivered or (2) as a managed or hosted service under our MIX and Hosted EFT brands delivered using a SaaS model for which we earn monthly subscription revenue as these services are delivered over a contract period that is typically one year.

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

•  
License revenue from delivery of our TappIn products using a SaaS model in which case we earn monthly subscription revenue as these services are delivered under typically month-to-month subscriptions.

•  
M&S revenue under contracts to provide ongoing product support and software updates to our customers who have purchased license software which we recognize ratably over the contractual period, which is typically one year, but can be up to three years.
 
•  
Professional services revenue from a variety of customization, implementation, and integration services, as well as delivery of education and training associated with our solutions, which we recognized as the services are performed and accepted by the client.
 
We have made and continue to make changes in our business to increase the rate of growth of our total revenue and, in particular, our revenue across all our product lines. With respect to our sales and marketing activities, those changes have included:
 
·   Increasing sales staff headcount as needed to address our markets.
·   Aligning our sales group to enhance its industry and geographic focus.
·   Implementing new sales and marketing campaigns.
 
 
·   Using third party search engine optimization experts to enhance our efforts in that area.
·   Recruiting industry channel partners and enabling them to sell our products through training and orientation programs.
 
As a complement to these sales and marketing actions, we have continued to expand the capabilities of our software engineering group through increased headcount and improved skillsets to optimize the manner in which we assess the development of new technologies, our approach to managing those projects and the timelines over which we do that work. We have increased our research and development spending to create and introduce new features, functions and capabilities for our products.
 
Our total revenue increased 10% in 2014 compared to 2013. This overall increase was primarily a result of the changes we have made, and continue to make, in the sales, marketing and software engineering areas of our business as described above. In addition to those factors, our revenue from specific products changed for the following additional reasons:
 
·  
Our EFT Enterprise and Standard revenue increased 11% primarily due to our focusing a substantial portion of our resources and efforts on this product line that we believe offers the highest potential for future revenue growth.
 
·  
Our WAFS revenue increased 13% primarily due to ongoing improvements we made and continue to make to this product to support its functioning more effectively and efficiently across a broader range of environments. These improvements resulted in customers being able to use the WAFS product without encountering many of the legacy WAFS issues that were previously experienced. These improvements were included in WAFS Version 4.3 that we released in April 2014.
 
·  
CuteFTP revenue decreased 25% primarily a result of our decision to focus most of our attention and resources on the EFT and WAFS product lines which we believe have a higher potential for future growth.
 
·  
Professional services decreased 2%. In 2013, we earned a significant portion of our professional services revenue under a contract supporting the Standard Army Maintenance System-Enhanced logistics program. We completed the terms of the final option year of this contract in September 2013 such that we did not have this revenue from this source in 2014. We have been able to offset the effects of this event by continuing to increase deliveries of our higher margin, commercial (non-government) professional services primarily in connection with sales of our EFT products.

·  
Other revenue arises from sales of our Mail Express and TappIn products and increased 44% primarily due to an increase in TappIn revenue arising from OEM sales of the TappIn solution to storage device manufacturers.
 
M&S revenue continued its trend of increasing period-to-period. We are able to grow this revenue as a result of:
 
·  
Increased licenses sales since a majority of license sales, particularly those related to EFT, 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 believe these renewals result from our programs designed to provide high-quality and responsive M&S services to our customers.
 
 
As illustrated in the table above, M&S revenue increased as a percent of our total revenue from 48.6% in 2012 to 56.6% in 2013 followed by a decrease to 56.2% of our total revenue in 2014. As part of growing revenue in total, we are focused on increasing license revenue both in terms of absolute dollars and as a percent of total revenue. When we sell our licensed products, we also typically create a recurring revenue stream from M&S since almost all purchasers of our licensed products, particularly EFT, also purchase an M&S contract. Our M&S contracts are typically for one year, with some customers buying two or three year contracts. The customer pays us the M&S fee for the entire term of the agreement at the time the contract begins. We recognize that amount as revenue ratably in future periods over the term of the contract. We typically experience a high renewal rate for M&S services so long as a customer continues using the licensed product they purchased from us. As a result, growing license revenue not only contributes to increasing revenue growth at the time the license is sold but also provides a foundation for future recurring revenue as the purchasers of our licensed products continually renew M&S agreements to support their ongoing product support needs. This pattern of activity can create a cumulative effect for M&S renewals as a result of the cumulative number of licensed software installations sold over multiple years that create M&S renewals in any single year predictably (and in line with our expectations) exceeding the number of new software licenses we sell in a single year. We expect this cumulative effect to continue to grow if we continue to increase software license revenue in future periods.
 
Liquidity and Capital Resources
 
Our cash and working capital positions were as follows (in thousands):
 
   
December 31, 2014
   
December 31, 2013
 
Cash and cash equivalents
  $ 11,358     $ 9,455  
Long term investments
    3,185       3,122  
Total cash, cash equivalents and long term investments
  $ 14,543     $ 12,577  
                 
Working capital
  $ 4,072     $ 1,824  
Deferred revenue, current portion
    11,411       9,092  
Working capital plus current deferred revenue (non-GAAP presentation)
  $ 15,483     $ 10,916  
 
During 2014, we repaid-in-full and retired our notes payable to a bank in order to reduce our interest expense. We made this payment using our available cash balances. As a result of the retirement of these notes payable, there is no longer a lien on our long term investments such that we can convert them to cash and cash equivalents at our discretion at any time to meet the needs of our business. There are no liens on any of our other assets.
 
Deferred revenue, unlike the other liability components of our working capital, is an obligation we will satisfy by providing services in the future to our customers as part of our ongoing operating activities from which we have historically generated cash flow. Our deferred revenue does not involve a disbursement of cash as a direct payment of that liability. Working capital plus deferred revenue is not a measure of financial position under GAAP, has limitations as an analytical tool and when assessing our financial position, and should not be considered a substitute for working capital computed in accordance with GAAP.
 
Our capital requirements principally relate to our need to fund our ongoing operating expenditures, which are primarily related to employee salaries and benefits. We make these expenditures to enhance our existing products, develop new products, sell those products in the marketplace and support our customers after the sale.

We rely on cash and cash flows from operations to fund our operating activities and believe those items will be our principal sources of capital for the foreseeable future. Because our principal sources of capital are cash on hand and cash flow from operations, to the extent that sales decline, our cash flow from operations could also decline.  We plan to expend significant resources in the future for research and development of our products and expansion and enhancement of our sales and marketing activities. If sales decline or if our liquidity is otherwise under duress, we could substantially reduce personnel and personnel-related costs, reduce or substantially eliminate capital expenditures and/or reduce or substantially eliminate certain research and development and sales and marketing expenditures.   We may also sell equity or debt securities or enter into credit arrangements in order to finance future acquisitions or licensing activities, to the extent available.
 

The agreement under which we purchased TappIn, Inc. provided for future milestone payments to the previous owners of that company upon the achievement of certain future events subsequent to the date of purchase. In 2012, the TappIn shareholders earned an additional milestone payment of $2.0 million of which we paid $1.5 million in 2012 and $500,000 in 2013 from our cash on hand. On December 31, 2014, our obligation to make any additional milestone payments expired with no additional milestone payments being due or payable.

Cash provided or used by our various activities consisted of the following ($ in thousands):

   
Cash Provided (Used) During the Year Ended December 31,
 
   
2014
   
2013
   
2012
 
Operating activities
  $ 8,463     $ 4,531     $ 3,844  
Investing activities
    (3,162 )     (1,600 )     (2,103 )
Financing activities
    (3,398 )     (1,555 )     (2,325 )
 
Our cash provided by operating activities increased during 2014 compared to 2013 primarily due to:
 
·  
Net income after considering adjustments to reconcile net income to net cash provided by operating activities, as set forth on our Condensed Consolidated Statements of Cash Flow, increasing from $4.5 million in 2013 to $6.1 million in 2014. See the section below under Comparison of the Statement of Operations for the Year Ended December 31, 2014 and 2013 for a discussion of the changes in the components of these amounts.
·  
Deferred revenue increasing $4.0 million during 2014 compared to increasing $1.0 million during 2013 primarily due to increased M&S sales for which we collect cash at the beginning of the period over which we provide M&S services to our customers and recognize the revenue in future periods as we deliver these services.
·  
Accrued expenses increasing $693,000 during 2014 compared to decreasing $455,000 during 2013 primarily due to higher bonuses payable to certain of our personnel as a result of our improved financial performance in 2014 compared to 2013.
·  
Accounts payable increasing $456,000 in 2014 compared to increasing $223,000 in 2013 primarily due to normal variations of the timing of payments to our vendors.
 
Offset by
 
·  
Accounts receivable increasing $2.6 million in 2014 compared to increasing $444,000 in 2013 primarily due to an increase in our sales of licenses and M&S agreements in 2014 compared to 2013.
·  
Prepaid expenses increasing $139,000 in 2014 compared to decreasing $77,000 in 2013 due to normal variations of the timing of payments to our vendors.
 
 The increased use of cash for investing activities during 2014 compared to 2013 was primarily due to:
 
·  
An increase in capitalized software development costs due to enhanced product development programs resulting in a greater number of our software development projects having progressed to a stage of having a detailed program design or working prototype.
·  
An increase in purchases of property and equipment, and in particular computer equipment, to support the growth of our business.
 
Offset by:
 
·  
A $500,000 disbursement during 2013 to satisfy the payment of part of the TappIn earn-out liability, which is an event that did not occur in the 2014.
 
 
The increased use of cash for financing activities during 2014 compared to 2013 was primarily due to:
 
·  
The payment in full during 2014 of our notes payable to a bank.
 
Offset by:
 
·  
An increase in cash received from the exercise of stock options primarily as a result of changes in management leadership in early 2014 that resulted in certain former employees exercising their stock options after the end of their employment.
 
Our primary obligations at December 31, 2014 were:
 
·  
An obligation to deliver services in the future to satisfy our right to earn our deferred revenue of $14.8 million. Those future services primarily relate to our obligations under M&S contracts for which we have received advance payment. We will recognize this deferred revenue as revenue over the remaining life of those contracts which generally ranges from one to three years. Deferred revenue, unlike the other liability components of our working capital, is an obligation we will satisfy through providing services in the future to our customers as part of our ongoing operating activities from which we have historically generated cash flow. Our deferred revenue does not involve a disbursement of cash as a direct payment of that liability.
·  
Trade accounts payable and accrued liabilities (which include our contractual obligations to pay software royalties to third parties), obligations under operating leases, and federal and state taxes all incurred in the normal course of business.
 
Loan Agreements
 
During 2014, we repaid-in-full and retired our notes payable to a bank. This payment eliminated the financial covenants and other terms and conditions of the related loan agreements. It also eliminated the lien on our long-term investments such that we can convert them to cash and cash equivalents at our discretion at any time to meet the needs of our business.
 
Contractual Obligations and Commitments
 
At December 31, 2014, our contractual obligations and commitments consisted primarily of the following items:
 
·  
Trade accounts payable and accrued liabilities which include our contractual obligations to pay software royalties to third parties that vary in amount based on our sales volume of products upon which royalties are payable.
 
·  
Operating leases for our office space.
 
·  
Federal and state taxes.
 
We plan to continue to expend significant resources on product development, sales and marketing in future periods which may require that we enter into additional contractual arrangements and use our cash to acquire or license technology, intellectual property, products, services or businesses related to our current business strategy.
 
Our non-cancellable, contractual obligations at December 31, 2014, consisted of the following (in thousands):
 
   
Amounts Due for the Period
 
   
Fiscal Years
 
    2015 - 2017     2018 - 2020    
Thereafter
   
Total
 
                             
Operating leases
  $ 1,075     $ 480     $ -     $ 1,555  
 

TappIn Intangible Assets and Earnout Liability – Reduction of Amounts During 2013
 
In December 2011, we acquired all of the issued and outstanding shares of TappIn.  At the time of this acquisition, we allocated the total purchase price of this acquisition to assets and liabilities based on their estimated fair values at the acquisition date.  That allocation resulting in us recording intangible assets consisting of the following (in thousands):
 
   
Gross Carrying
Amount
   
Accumulated
Amortization
Through
September 30, 2013
   
Net Book Value
as of
September 30, 2013
 
Customer relationship
 
$
1,863
   
$
(342
)
 
$
1,521
 
Developed technology
   
2,771
     
(726
)
   
2,045
 
Total
 
$
4,634
   
$
(1,068
)
 
$
3,566
 
 
Our acquisition of all of the issued and outstanding shares of TappIn provided for the possible payment of $4.5 million of contingent consideration to the former shareholders of TappIn if our TappIn product line achieved certain revenue milestones by no later than December 31, 2014. We made no such payments during 2014. As of December 31, 2014, our obligation to make any additional such payments expired. We have no future payment obligations related to our acquisition of TappIn.
 
During the quarter ended September 30, 2013, we evaluated input from our customers and the marketplace as a whole relative to the TappIn product line and concluded that our future emphasis would be on enhancing the TappIn technology and functionality by leveraging our existing enterprise capabilities to create a an enterprise-level application mobility solution.  We concluded that offering the TappIn technology through this integration would maximize the return on our investment in this product line. While we decided to continue to offer TappIn as a standalone product in its Standard and Professional Editions, we concluded that revenue earned from the TappIn product line sold in those configurations would not be significant to our results of operations and financial position in the future.
 
For accounting and financial statement presentation purposes, the value assigned to the developed technology intangible asset as of the date we acquired TappIn and subsequent thereto related only to the TappIn Standard Edition developed technology that existed on the date we acquired TappIn.  Under GAAP, none of the value of this intangible asset could be derived from the TappIn Professional Edition or from other uses of the TappIn technology.  Specifically, none of the TappIn core technology, enabling technology or the migration of that technology, including the application of that technology to our enterprise capabilities as mentioned above, could be relied upon to ascribe value to the developed technology intangible asset. Since we concluded that revenue earned from the TappIn Standard Edition would not be significant to our results of operations and financial position in the future, we concluded it to be more-likely-than-not that the intangible asset arising from this developed technology was of nominal future value. Accordingly, we reduced its value to zero on our balance sheet as of September 30, 2013, and recorded a corresponding expense during the three and nine months ended September 30, 2013.
 
For accounting and financial statement purposes, the value assigned to the customer relationship intangible asset related to one contract with a third-party as it stood and was in place on the date we acquired TappIn.  Under GAAP, none of the value of that intangible could be derived from future modifications of this contract or from other, subsequent customer relationships.  The value of the contract that gave rise to this customer relationship intangible was dependent upon both continued shipments of that customer’s products as they existed at the time we acquired TappIn and the purchasers of that customer’s products subscribing to TappIn Professional Edition.  We concluded that revenue earned from the activities upon which the value of the customer relationship intangible asset was derived would not be significant to our results of operations and financial position in the future. Our relationship with that customer remained in place relative to products they were currently selling that did not exist at the time we acquired TappIn and that were not part of determining the intangible value of this customer relationship at that time.  We concluded it to be more-likely-than-not that the intangible asset arising from this customer relationship and the products it covered as they existed at the time we acquired TappIn were of nominal future value.  Accordingly, we reduced its value to zero on our balance sheet as of September 30, 2013, and recorded a corresponding expense for the three and nine months ended September 30, 2013.
 
 
When we acquired TappIn in December 2011, we recorded a deferred tax liability resulting in our recording of the intangible assets described above as of the acquisition date for which there was no corresponding change in the tax basis of the TappIn common stock that we purchased.  The balance of this deferred tax liability was $1.2 million as of September 30, 2013.  Our reduction of the TappIn intangible assets to zero eliminated this deferred tax liability with a corresponding credit to federal income tax expense during the three and nine months ended September 30, 2013.
 
As of September 30, 2013, we evaluated the likelihood of the TappIn product lines achieving the revenue milestones by December 31, 2014, necessary for the contingent consideration described above to be paid.  We concluded it remote and more-likely-than-not that those revenue milestones would be achieved and that the contingent consideration would not have to be paid.  Accordingly, we reduced the TappIn earn out liability on our balance sheet to zero as of September 30, 2013 and recorded a corresponding credit to income during the three and nine months ended September 30, 2013.
 
The effects of the above items on our financial results for 2013 are summarized as follows (amounts in $000’s):
 
Reduction of intangible assets:
     
Customer relationship
 
$
(1,521
)
Developed technology
   
(2,045
)
Elimination of earn out liability
   
3,694
 
Net TappIn asset impairment and earnout liability elimination before taxes
   
128
 
Federal income taxes
   
1,213
 
Net TappIn asset impairment and earnout liability elimination after taxes
 
$
1,341
 
 
Recent Accounting Pronouncements
 
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09 entitled Revenue from Contracts with Customers (Topic 606). The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for those goods or services. We are subject to this guidance effective with financial statements we issue for the year ending December 31, 2017, and the quarterly periods during that year. We do not expect the amounts or timing of revenue we report in those future periods under this guidance to be materially affected relative to current guidance.
 
In July 2013, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) No. 2013-11, Income Taxes (Topic 740)-Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward except under certain circumstances when one or more of these items is not available at the reporting date under the tax law of the applicable jurisdiction. ASU 2013-11 is applicable for fiscal years beginning after December 15, 2013. Our adoption of this ASU did not have a material impact on our financial statements.

In February 2013, the FASB issued FASB ASU No. 2013-04,Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements to the extent such obligations are not already addressed within existing guidance under GAAP. ASU 2013-04 is applicable for fiscal years beginning after December 15, 2013. Our adoption of this ASU did not have a material impact on our financial statements.
 

In July 2012, the FASB issued FASB ASU No. 2012-02, Intangibles—Goodwill and Other (Topic 350)—Testing Indefinite-Lived Intangible Assets for Impairment. ASU 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30. If an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then no further action is required. If an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test. ASU 2012-02 became effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Our adoption of this ASU did not have a material impact on our financial statements.

Critical Accounting Policies

Our financial statements and accompanying notes are prepared in accordance with GAAP applicable to public companies in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. We discuss our critical accounting areas and policies below, all of which we apply in accordance with GAAP.

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

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

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

We earn the majority of our software license revenue from software products sold under perpetual software license agreements. At the time our customers purchase these products, they typically also purchase a product maintenance and support, or M&S, agreement. These transactions are multiple element software sales for which we assess the presence of vendor specific objective evidence (“VSOE”) of the fair value of the undelivered elements to determine the portion of these sales to recognize as revenue upon delivery of the software product and the portion of these sales to record as deferred revenue at the time the product is delivered. We amortize the deferred revenue component to revenue in future periods as we deliver the related future services to the customer. For transactions, if any, for which we cannot establish VSOE of fair value of the undelivered elements, we initially record the entire transaction as deferred revenue and amortize that amount to revenue in future periods as we deliver the related future services to the customer.
 
Our deferred revenue consists primarily of revenue to be earned in the future as we deliver services under M&S agreements. Certain of our customers will accept, and sometimes pay, our invoices for M&S services prior to the commencement of the M&S period. In such cases, we record accounts receivable and deferred revenue in the same amount at the time we submit an invoice to the customer and commence recognition of the deferred revenue as revenue only after the M&S period begins.
 
For our products delivered under a software-as-a-service transaction on a monthly or other periodic subscription basis, we recognize subscription revenue, including initial setup fees, on a monthly basis over the contractual term of the customer contract as we deliver our products and services. These amounts are reported in other revenue. Amounts invoiced or paid prior to this revenue recognition are presented as deferred revenue until earned.
 
We provide professional services to our customers consisting primarily of software installation support, operations support and training. We recognize revenue from these services as they are completed and accepted by our customers.
 
We collect sales tax on many of our sales. We do not include sales tax collected in our revenue. We record it as a liability payable to taxing authorities.
 

Property and Equipment

Property and equipment is comprised of furniture and fixtures, software, computer equipment and leasehold improvements which are recorded at cost and depreciated using the straight-line method over their estimated useful lives.    Furniture, fixtures and equipment generally have a useful life of 5 to 7 years, computer equipment and software generally have a life of 3 years and leasehold improvements are depreciated over the shorter of the term of the lease under which the improvements were made or the estimated useful life of the asset.

Expenditures for maintenance and repairs are expensed as incurred.
 
Goodwill

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

•  
Macroeconomic conditions.
•  
Industry and market considerations.
•  
Cost factors and trends for labor and other expenses of operating our business.
•  
Our overall financial performance and outlook for the future.
•  
Trends in the quoted market value and trading of our common stock.
 
In considering these and other factors, we consider the extent to which any adverse events and circumstances identified could affect the comparison of our reporting unit’s fair value with its carrying amount. We place more weight on events and circumstances that most affect our reporting unit’s fair value or the carrying amount of our net assets. We consider positive and mitigating events and circumstances that may affect our determination of whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. We evaluate, on the basis of the weight of the evidence, the significance of all identified events and circumstances in the context of determining whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount.
 
If, after assessing the totality of these qualitative events and circumstances, we determine it is not more likely than not that the fair value of our reporting unit is less than its carrying amount, we conclude there is no impairment of goodwill and perform no further testing in accordance with GAAP. If we conclude otherwise, we proceed with performing the first step, and if necessary, the second step, of the two-step goodwill impairment test prescribed by GAAP.
 
As of December 31, 2014, after assessing the totality of the relevant events and circumstances, we determined it not more likely than not that the fair value of our reporting unit was less than its carrying amount. Accordingly, we concluded there was no impairment of goodwill as of that date.
  
Capitalized Software Development Costs
 
When we complete research and development for a software product and have completed a detail program design or a working model of that software product, we capitalize production costs incurred for that software product from that point forward until it is ready for general release to the public. Thereafter, we amortize capitalized software production costs to expense using the straight-line method over the estimated useful life of that product, which is generally three years.
 
Research and Development
 
We expense research and development costs as incurred.
 
 
Stock-Based Compensation
 
We measure the cost of share-based payment transactions at the grant date based on the calculated fair value of the award. We recognize this cost as an expense ratably over the recipient’s requisite service period during which that award vests or becomes unrestricted.
 
For stock option awards, we estimate their fair value at the grant date using the Black-Scholes option-pricing model considering the following factors:
 
•  
We estimate expected volatility based on historical volatility of our common stock.
•  
We use primarily the simplified method to derive an expected term which represents an estimate of the time options are expected to remain outstanding. We use this method because our options are plain-vanilla options, and we believe our historical option exercise experience is not adequately indicative of our future expectations.
•  
We base the risk-free rate for periods within the contractual life of the option on the U.S. treasury yield curve in effect at the time of grant.
 
For restricted stock awards, we use the quoted price of our common stock on the grant date as the fair value of the award.
 
Income Taxes
 
We account for income taxes using the asset and liability method.  We record deferred tax assets and liabilities based on the difference between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes, as measured by the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets and liabilities are carried on the balance sheet with the presumption that they will be realizable in future periods in which we generate taxable income.
 
We assess the likelihood that deferred tax assets will be realized from future taxable income. Based on this assessment, we provide any necessary valuation allowance on our balance sheet with a corresponding increase in the tax provision on our statement of operations.   Any valuation allowances we establish are determined based upon a number of assumptions, judgments, and estimates, including forecasted earnings, future taxable income, and the relative proportions of revenue and income before taxes in the various domestic jurisdictions in which we operate.
 
We account for uncertainty in income taxes using a two-step process to determine the amount of tax benefit to be recognized. First, we evaluate the tax position to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, we assess the tax position to determine the amount of benefit to recognize in the financial statements. The amount of the benefit we recognize is the largest amount that we believe has a greater than 50% likelihood of being realized upon ultimate settlement. Unrecognized tax benefits represent tax positions for which reserves have been established.
 
Earnings Per Share
 
We compute basic earnings per share using the weighted-average number of common shares outstanding during the periods.  We compute diluted earnings per share using the weighted-average number of common shares outstanding plus the number of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding.  Awards of non-vested options are considered potentially dilutive common shares for the purpose of computing earnings per common share.  In applying the treasury stock method to non-vested options, the assumed proceeds include the amount the employee must pay to exercise the option plus the amount of unrecognized cost attributable to future periods less any expected tax benefits.
 
 
Results of Operations
 
Comparison of Year Ended December 31, 2014 to Year Ended December 31, 2013
 
   
2014
   
2013
   
$ Change
 
   
($ in thousands)
 
Total revenues
  $ 26,770     $ 24,339     $ 2,431  
                         
Cost of revenues
    1,018       1,011       7  
Selling, general and administrative
    18,071       14,881       3,190  
Research and development
    2,183       3,766       (1,583 )
TappIn intangible asset impairment
  and earnout liability elimination
    -       (128 )     128  
Depreciation and amortization
    883       908       (25 )
Total operating expenses
    22,155       20,438       1,717  
Income from operations
    4,615       3,901       714  
Other income (expense), net
    (42 )     (165 )     123  
Income tax expense
    1,547       (104 )     1,651  
Net Income
  $ 3,026     $ 3,840     $ (814 )
 
In the discussions below, we refer to the year ended December 31, 2014 as “2014” and the year ended December 31, 2013, as “2013”. The percentage changes cited in our discussions below comparing our results of operations for the year ended December 31, 2014, to the year ended December 31, 2013, are based on 2014 amounts compared to 2013 amounts.

Revenue.  We derive our revenue primarily from the following activities:
 
•  
License revenue from sales of our EFT and Mail Express products that we deliver as either software installed at the customer’s premises for which we earn the full amount of the license revenue at the time the licensed is delivered or as a managed or hosted service under our MIX and Hosted EFT brands delivered using a SaaS model for which we earn monthly subscription revenue as these services are delivered over a contract period that is typically one year.
•  
License revenue from sales of our WAFS and CuteFTP products that are installed at the customer’s premises for which we earn the full amount of the license revenue at the time the license is delivered.
•  
License revenue from delivery of our TappIn products using a SaaS model in which case we earn monthly subscription revenue as these services are delivered under typically month-to-month subscriptions.
•  
M&S revenue under contracts to provide ongoing product support and software updates to our customers who have purchased license software which we recognize ratably over the contractual period, which is typically one year, but can be up to three years.
•  
Professional services revenue from a variety of customization, implementation, and integration services, as well as delivery of education and training associated with our solutions, which we recognized as the services are performed and accepted by the client.
 
The components of our revenues are as follows ($ in thousands):
 
   
Revenue for the Year Ended December 31,
 
   
2014
   
2013
 
   
Amount
   
Percent of
Total
   
Amount
   
Percent of
Total
 
Revenue by Product
                       
EFT Enterprise and Standard
  $ 21,353       79.8 %   $ 19,254       79.1 %
Wide Area File Services
    1,448       5.4 %     1,277       5.2 %
Professional Services
    1,445       5.4 %     1,479       6.1 %
CuteFTP
    904       3.4 %     1,205       5.0 %
Other
    1,620       6.0 %     1,124       4.6 %
Total Revenue
  $ 26,770       100.0 %   $ 24,339       100.0 %
                                 
Revenue by Type
                               
Software licenses
  $ 10,292       38.4 %   $ 9,093       37.4 %
M&S
    15,033       56.2 %     13,767       56.6 %
Professional services
    1,445       5.4 %     1,479       6.0 %
Total Revenue
  $ 26,770       100.0 %   $ 24,339       100.0 %
 
 
We have made and continue to make changes in our business to increase the rate of growth of our total revenue and, in particular, our license revenue across all our product lines. With respect to our sales and marketing activities, those changes have included:
 
·   Increasing sales staff headcount as needed to address our markets.
·   Aligning our sales group to enhance its industry and geographic focus.
·   Implementing new sales and marketing campaigns.
·   Using third party search engine optimization experts to enhance our efforts in that area.
·   Recruiting industry channel partners and enabling them to sell our products through training and orientation programs.
 
As a complement to these sales and marketing actions, we have continued to expand the capabilities of our software engineering group through increased headcount and improved skillsets to optimize the manner in which we assess the development of new technologies, our approach to managing those projects and the timelines over which we do that work. We have increased our research and development spending to create and introduce new features, functions and capabilities for our products.
 
Our total revenue increased 10% in 2014 compared to 2013. In addition to the factors discussed above that affect all of our products, our revenue from specific products changed for the following additional reasons:
 
·  
Our EFT Enterprise and Standard revenue increased 11% primarily due to us focusing a substantial portion of our resources and efforts on this product line that we believe offers the highest potential for future revenue growth.
 
·  
Our WAFS revenue increased 13% primarily due to ongoing improvements we made and continue to make to this product to support it functioning more effectively and efficiently across a broader range of environments. These improvements resulted in customers being able to use the WAFS product without encountering many of the legacy WAFS issues that were previously experienced. These improvements were included in WAFS Version 4.3 that we released in April 2014.
 
·  
CuteFTP revenue decreased 25% primarily a result of our decision to focus most of our attention and resources on the EFT and WAFS product lines which we believe have a higher potential for future growth.
 
·  
Professional services decreased 2%. In 2013, we earned a significant portion of our professional services revenue under a contract supporting the Standard Army Maintenance System-Enhanced logistics program. We completed the terms of the final option year of this contract in September 2013 such that we did not have this revenue from this source in 2014. We have been able to offset the effects of this event by continuing to increase deliveries of our higher margin, commercial (non-government) professional services primarily in connection with sales of our EFT products.

·  
Other revenue arises from sales of our Mail Express and TappIn products and increased 31% primarily due to an increase in TappIn revenue arising from OEM sales of the TappIn solution to storage device manufacturers.
 
Software licenses revenue in total increased 13%. This increase was primarily due our focus on creating and introducing new features, functions and capabilities for our products, particularly EFT and WAFS, combined with the changes we have made in our sales and marketing activities as described above.
 
M&S revenue increased 9% primarily as a result of:
 
·  
Increased licenses sales since a majority of license sales, particularly those related to EFT, are accompanied by an M&S contract, and
 
·  
Sustaining high renewal rates of M&S contracts by customers who initially purchased these services in earlier periods. We believe these renewals result from our programs designed to provide high-quality and responsive M&S services to our customers.
 
 
M&S revenue remained substantially steady as a percent of total revenue in 2014 compared to 2013. As part of growing revenue in total, we are focused on increasing license revenue both in terms of absolute dollars and as a percent of total revenue. When we sell our licensed products, we also typically create a recurring revenue stream from M&S since almost all purchasers of our licensed products, particularly EFT, also purchase an M&S contract. Our M&S contracts are typically for one year, with some customers buying two or three year contracts. The customer pays us the M&S fee for the entire term of the agreement at the time the contract begins. We recognize that amount as revenue ratably in future periods over the term of the contract. We typically experience a high renewal rate for M&S services so long as a customer continues using the licensed product they purchased from us. As a result, growing license revenue not only contributes to increasing revenue growth at the time the license is sold but also provides a foundation for future recurring revenue as the purchasers of our licensed products continually renew M&S agreements to support their ongoing product support needs. This pattern of activity can create a cumulative effect for M&S renewals as a result of the cumulative number of licensed software installations sold over multiple years that create M&S renewals in any single year predictably (and in line with our expectations) exceeding the number of new software licenses we sell in a single year. We expect this cumulative effect to continue to grow if we continue to increase software license revenue in future periods.
 
Cost of Revenues.  Cost of revenues consists primarily of royalties, a portion of our internet access costs, hosted service expenses for our products delivered as a SaaS offering, and expenses directly associated with professional services delivery.  Cost of revenues remained relatively unchanged due to:

·  
Increased royalties of $142,000 due to increased sales of our licensed products,

Offset by:

·  
Decreased hosted server expenses of $156,000 associated with the optimization of data centers utilized for our MIX and Hosted EFT Server product delivery solutions.

Selling, General and Administrative.  These expenses increased 21.4% primarily due to the overall changes we made in our sales and marketing activities to increase the rate of growth of our revenue as described above in the discussion of our revenue trends.  Changes in certain individual expenses that contributed to the overall increase in these expenses included:

·  
An increase in salaries, wages, sales commissions and management bonuses of $1.5 million as a result of adding sales and marketing personnel, increasing salaries and sales commissions for certain positions to attract more experienced and more qualified personnel and increases in management bonuses due to higher revenue and earnings before taxes that resulted in personnel participating in this bonus plan earning higher bonuses.
·  
An increase in sales and marketing expenses of $1.3 million resulting from new programs to identify third-party resellers for our products and establish relationships with them, new sales lead generation programs to increase exposure to potential customers for our products, and additional travel and entertainment expenses to support new, proactive outbound sales programs.
 
Research and Development.   The overall profile of our research and development activities was as follows (in thousands):
 
   
Year ending December 31,
 
   
2014
   
2013
 
R&D expenditures
  $ 5,030     $ 4,665  
R&D expenditures expensed
    2,183       3,766  
R&D expenditures capitalized
    2,847       899  
 
R&D expenditures increased 7.8% from $4.7 million to $5.0 million. This increase was primarily due to our enhanced activities to develop and introduce new features, functions and capabilities for our products, particularly EFT Standard and Enterprise Editions and WAFS. These increased expenses were in the form of increased salaries expense to support a larger software engineering staff and additional amounts paid to third parties for software development.
 
 
R&D expense decreased 42% from $3.8 million to $2.2 million, and R&D expenditures capitalized increased 317% from $899,000 to $2.8 million. Due to the increased quality of our products, there was a decrease in the amount of resources we expended for maintenance of our products after they were released for sale, which are expenditures that are expensed when incurred. A greater amount of our resources were focused on developing new features, functions and capabilities for products that had progressed beyond the R&D stage and had moved into preparation for production based on detailed program designs or working prototypes, which are expenditures that are capitalized when incurred. Capitalized software development costs are excluded from expenses at the time of capitalization but are included in expenses in subsequent periods through amortization when the products to which the capitalized costs relate are completed and ready for sale.

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

TappIn Intangible Asset Impairment and Earnout Liability Elimination.  This credit to expense in 2013 relates to the elimination of the TappIn intangible assets and earnout liability as discussed under Liquidity and Capital Resources above in the section titled TappIn Intangible Assets and Earnout Liability – Reduction of Amounts During 2013.  This item is zero in 2014 because there was no similar event in that year.
 
Depreciation and Amortization.  Depreciation and amortization expense decreased 2.8% primarily due to:

·  
Increased amortization of capitalized software development costs of $513,000 due to a greater number of our products for which development costs were capitalized being completed and brought to market in 2014 as compared to 2013,
·  
Increased fixed asset depreciation expense of $11,000 due to additional equipment purchases

Offset by:

·  
Decreased amortization of intangible assets of $549,000 due to there being no such expense in 2014 due to the elimination of the TappIn intangible assets during 2013.

Other Income (Expense), Net.  Other income (expense) was lower in 2014 than in 2013 primarily due to lower interest expense as a result of our payment-in-full and retirement of our notes payable to a bank in 2014.
 
Income Taxes.  For 2014, we had an effective tax rate of 33.8%, which differed from the statutory federal income tax rate of 34% primarily due to the domestic production tax credits and research and experimentation tax credits that totaled $80,000.
 
Comparison of Year Ended December 31, 2013 to Year Ended December 31, 2012
 
   
2013
   
2012
   
$ Change
 
   
($ in thousands)
 
Total revenues
  $ 24,339     $ 23,372     $ 967  
                         
Cost of revenues
    1,011       1,296       (285 )
Selling, general and administrative
    14,881       16,761       (1,880 )
Research and development
    3,766       3,531       235  
Affiliated entity asset impairment
    0       3,264       (3,264 )
TappIn earnout liability not earned
    (128 )     (1,303 )     1,175  
Depreciation and amortization
    908       1,217       (309 )
Total operating expenses
    20,438       24,766       (4,328 )
Income from operations
    3,901       (1,394 )     5,295  
Other income, net
    (165 )     (189 )     24  
Income tax expense
    (104 )     217       (321 )
Net Income
  $ 3,840     $ (1,800 )   $ 5,640  
 
 
In the discussions below, we refer to the year ended December 31, 2013, as “2013” and the year ended December 31, 2012, as “2012”. The percentage changes cited in our discussions below comparing our results of operations for are based on 2013 amounts compared to 2012 amounts.

Revenue.  We derive our revenue primarily from the following activities:
 
·  
License revenue from sales of our EFT and Mail Express products that we deliver as either software installed at the customer’s premises for which we earn the full amount of the license revenue at the time the licensed is delivered or as a managed or hosted service under our MIX and Hosted EFT brands delivered using a SaaS model for which we earn monthly subscription revenue as these services are delivered over a contract period that is typically one year.
·  
License revenue from sales of our WAFS and CuteFTP products that are installed at the customer’s premises for which we earn the full amount of the license revenue at the time the license is delivered.
·  
License revenue from delivery of our TappIn products using a SaaS model in which case we earn monthly subscription revenue as these services are delivered under typically month-to-month subscriptions.
·  
M&S revenue under contracts to provide ongoing product support and software updates to our customers who have purchased license software which we recognize ratably over the contractual period, which is typically one year, but can be up to three years.
·  
Professional services revenue from a variety of customization, implementation, and integration services, as well as delivery of education and training associated with our solutions, which we recognized as the services are performed and accepted by the client.
 
The components of our revenues are as follows ($ in thousands):

   
Revenue for the Year Ended December 31,
 
   
2013
   
2012
 
         
Percent of
         
Percent of
 
   
Amount
   
Total
   
Amount
   
Total
 
Revenue by Product
                       
EFT Enterprise and Standard
  $ 19,254       79.1 %   $ 18,109       77.5 %
Wide Area File Services
    1,277       5.2 %     1,577       6.7 %
Professional Services
    1,479