If any of the securities being registered on this Form are
to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.
x
If this Form is filed to register additional securities for
an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering.
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If this Form is a post-effective amendment filed pursuant
to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
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If this Form is a post-effective amendment filed pursuant
to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
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Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
If an emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided
pursuant to Section 7(a)(2)(B) of the Securities Act.
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Risk
Factors
Investing in
our securities involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together
with all of the other information in this prospectus, including our consolidated financial statements and related notes, before
deciding whether to purchase any of our securities. Any of these risks may have a material adverse effect on our business, financial
condition, results of operations and cash flows and our prospects could be harmed. In that event, the price of our securities could
decline and you could lose part or all of your investment.
Risks Related to
Our Operations
A significant
portion of our revenue is generated through maintenance and support services. Decreases in maintenance and support sales or renewal
rates, or a decrease in the number of new licenses we sell, will negatively impact our future revenue and financial results.
Revenue
from maintenance and support services, or M&S, we provide our customers comprised approximately 63%, 61% and 57% of our total
revenue during the first nine months of 2018 and the years 2017 and 2016, respectively. We earn M&S revenue from new M&S
contracts, typically sold with new software licenses, and from renewals of such contracts. Any reduction in the number of new software
licenses that we sell, or a reduction in sales of associated initial M&S contracts, therefore may have a long-term negative
impact on our future M&S revenue, even if our customers continue to renew M&S contracts at historical rates. This situation,
in turn, would impact our business and harm our financial results.
Our
customers have no obligation to purchase M&S with their initial software license or to renew their M&S contract after the
expiration of their initial M&S period, which is typically one year, but may also be for two or three years. Our customers’
purchases of M&S, and our renewal rates, may decline or fluctuate as a result of a number of factors, including the overall
global economy, the health of their businesses, and the perceived value of the M&S program. If our customers do not purchase
M&S with their initial software license or do not renew their M&S contract for our products, our M&S revenue will decline,
and our financial results will suffer. In addition, customers are generally entitled to reduced annual maintenance fees for entering
into long-term maintenance contracts (i.e., those contracts with a term longer than one year). Declines in our license sales, increases
in the proportion of long-term maintenance contracts and/or increased discounting could lead to declines in our M&S revenue
growth rates. Should customers migrate away from systems and applications which our products support, utilize alternatives to our
products, including solutions offering free maintenance, or become dissatisfied with our maintenance services, increased cancellations
could lead to declines in our maintenance revenue.
Our business
and growth depend on our ability to obtain M&S renewals from existing customers. A decline in the percent of our M&S contracts
that are renewed could adversely affect our future operating results.
A
substantial portion of our annual M&S revenue is attributable to M&S contracts entered into during previous periods. As
a result, if there is a decline in the renewal rate of M&S contracts in any particular period, it is possible that only a small
portion of the decline will be reflected in our M&S revenue recognized in that period and the remainder will be reflected in
our M&S revenue recognized in subsequent periods. Our customers’ renewal rates may decline or fluctuate as a result of
a number of factors including customer dissatisfaction with our products’ functionality, features or performance, the level
and quality of our M&S services, or our pricing. Renewal rates may also change due to competitors’ product offerings,
customers converting to in-house developed solutions, customers’ inability to continue their operations and spending levels,
migration path issues for new versions of our products, and other factors, a number of which are beyond our control. Our customers
have no obligation to renew their M&S contracts after the expiration of the initial term, and they may elect not to renew their
M&S or to reduce the product quantity covered under their M&S contracts, thereby potentially reducing our future revenue.
A decline in the renewal rate of M&S contracts may also result in a decrease in deferred revenue on our balance sheet as of
the end of the period in which the decline in renewals occurred which, in turn, could result in a decrease in our future revenue.
If we are unable
to develop, offer and deliver new and enhanced products and services that achieve widespread market acceptance, or if we are unable
to continually improve the performance, features, and reliability of our existing products and services, our business and operating
results could be adversely affected.
Rapid
technological changes, as well as changes in customer requirements and preferences, characterize the software industry. Just as
the transition from mainframes to personal computers transformed the industry, we believe our industry will continue to transform
in response to continued adoption of mobile devices and cloud-based SaaS, growth of big data, and potential emergence of capabilities
resulting from disruptive innovation. In response, we have devoted significant resources to the development of new solutions, such
as our SaaS solutions. We are making such investments through our internal efforts, including further development and enhancement
of our existing products, as well as through potential acquisitions of new product lines. Innovation, new product development or
acquisition, and go-to-market activities involve a significant commitment of time and resources and are subject to a number of
risks and challenges including:
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Developing, sustaining, and appropriately leveraging market intelligence to identify areas of market
need that offer potentially high return on investment for solution development.
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Managing the length of the development cycle for new products and product enhancements which may
be longer than originally expected.
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Adapting to emerging and evolving industry standards and to technological developments by our competitors
and customers.
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Addressing the evolution of operating systems and industry platforms that presently may not be
served by our existing products.
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Entering into new or unproven markets with which we have limited experience.
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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.
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Incorporating acquired products and technologies acquired through mergers, acquisitions or other
relationships with third parties.
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Developing or expanding efficient sales channels.
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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.
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Changing purchasing trends such as purchasing through on-line marketplaces such as Amazon Web Services
and Microsoft AZURE rather than direct sales or traditional channels.
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Investments
in new products may not result in sufficient revenue generation to justify their costs or may cause short or long-term harm to
our financial results. For example, customer adoption of our SaaS products may not occur as rapidly as anticipated, or competitors
may introduce new products and services that achieve acceptance among our current customers thereby adversely affecting our competitive
position, or we may not be successful in future attempts to achieve disruptive innovation.
Our
executive management team must act quickly, continuously and with vision due to the rapid speed of changing customer expectations
and advancement of technology inherent in the software industry, the extensive and complex efforts required to create useful and
widely accepted products, the rapid evolution of cloud computing, mobile devices, and new computing platforms, and the creation
of other new technologies. Although we have adopted a strategy that we believe will fulfill these challenges, if we fail to execute
properly on that strategy, adapt that strategy as market conditions evolve, or internalize and execute on that strategy, we may
fail to meet our customers’ expectations, fail to compete with our competitors’ products and technology, and lose the
confidence of our channel partners and employees. Such circumstances could adversely affect our business and financial performance.
We earn most
of our revenue and operating margins from our Enhanced File Transfer licensed software solution suite and related maintenance and
support services and, as a result, are highly dependent upon the continued success of this product line.
Our
Enhanced File Transfer product platform, or EFT platform, is our MFT solution targeted primarily to the enterprise and small and
medium business user environments. Our customers may purchase EFT as an on-premise license or may subscribe to it as software-as-a-service
(or SaaS). License (both on-premise and SaaS), M&S, and professional services revenue from this product line was responsible
for approximately 96%, 95% and 93% of our total revenue in the first nine months of 2018 and the years 2017 and 2016, respectively.
This product has provided substantially all of our recent revenue growth and most of the operating margin necessary to fund our
operations including, most notably, our sales and marketing and research and development activities. Declines and variability in
demand for our EFT products could occur as a result of:
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Improved products or product versions being offered by competitors in our markets.
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Competitive pricing pressures.
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Failure to release new or enhanced versions of the EFT solution on a timely basis or at all.
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Technological change that we are unable to address with file transfer products or that changes
the way enterprises utilize our products.
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General economic conditions.
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Due
to our product concentration, our business, results of operations, financial condition, and cash flows would be adversely affected
by a decline in demand for the EFT solution suite.
The
transition from an on-premise to a cloud-based, SaaS subscription business model is subject to numerous risks and uncertainties.
We
believe that there will be a continuing shift away from sales of on-premise software licenses to sales of subscriptions for our
cloud-based, SaaS solutions, which provide our customers the right to access certain of our software in a hosted environment for
a specified subscription period. This shift, and our pursuit of a SaaS strategy, may give rise to a number of risks, including
the following:
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If customers are uncomfortable with cloud-based solutions and desire only perpetual licenses, we
may experience longer than anticipated sales cycles and sales of our cloud-based solutions may lag behind our expectations;
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Our cloud-based strategy may raise concerns among our customer base, including concerns regarding
changes to pricing over time, service availability, information security of a cloud-based solution and access to files while offline
or once a subscription has expired;
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We may be unsuccessful in maintaining our target pricing, adoption and projected renewal rates;
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We may select a target price that is not optimal and could negatively affect our sales or earnings;
and
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We may incur costs at a higher than forecasted rate as we expand our cloud-based solutions.
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The
shift of our customers’ preference to cloud-based, SaaS solutions may also require a considerable investment of technical,
financial, legal and sales resources, and a scalable organization. Market acceptance of such offerings is affected by a variety
of factors, including but not limited to: security, reliability, scalability, customization, performance, current license terms,
customer preference, customer concerns with entrusting a third party to store and manage their data, public concerns regarding
privacy and the enactment of restrictive laws or regulations. Whether our business model transition will prove successful and will
accomplish our business and financial objectives is subject to numerous uncertainties, including but not limited to: customer demand,
renewal rates, channel acceptance, our ability to further develop and scale infrastructure, our ability to include functionality
and usability in such solutions that address customer requirements, tax and accounting implications, pricing and our costs. In
addition, the metrics we use to gauge the status of our business may evolve over the course of the transition as significant trends
emerge.
If
we are unable to successfully establish our cloud-based solutions and navigate our business model transition in light of the foregoing
risks and uncertainties, our results of operations could be negatively impacted.
Cloud-based
computing trends present competitive and execution risks.
Customers
are transitioning to a hybrid computing environment utilizing various cloud-based software and services accessed via various smart
client devices. Pricing and delivery models are evolving, and our competitors are developing and deploying cloud-based services
for customers. We are devoting significant resources to develop and deploy our own competing cloud-based software and services
strategies. While we believe our expertise and investments in software for cloud-based services provides us with a strong foundation
to compete, it is uncertain whether our strategies will attract the customers or generate the revenue required to be successful.
Delivering our products through cloud-based, SaaS solutions requires that we pay third parties, such as Microsoft Azure, to host
our products and make them available to our customers. As a result, we incur ongoing, recurring third-party hosting expenses associated
with delivering SaaS solutions that we do not incur with respect to our on-premise license products. These expenses may cause the
gross margin we realized from our SaaS software products to be lower than the gross margin we realized from our on-premises software
products. Whether we are successful in this new business model depends on our execution in a number of areas, including:
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Continuing to innovate and bring to market compelling cloud-based services that generate increasing
traffic and market share;
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Maintaining the utility, compatibility and performance of our software on the growing array of
cloud computing platforms and the enhanced interoperability requirements associated with orchestration of cloud computing environments;
and
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Successfully deploying our SaaS products on platforms hosted by third-party services upon which
we rely for delivery of those computing solutions to our customers.
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These
new business models may reduce our revenues or operating margins and could have a material adverse effect on our business, results
of operations and financial condition.
If the market
for cloud-based software develops more slowly than we expect or declines, our business could be materially adversely affected.
The
market for cloud-based software is not as mature as the market for on-premise enterprise software, and it is uncertain whether
cloud-based software will achieve and sustain high levels of customer demand and market acceptance. Our success will depend to
a substantial extent on the widespread adoption of cloud-based software solutions. Many enterprises have invested substantial personnel
and financial resources to integrate traditional enterprise software into their businesses and, therefore, may be reluctant or
unwilling to migrate to cloud computing. Other enterprises have not elected to move from traditional processes that are not cloud-based
to automated cloud-based processes. It is difficult to predict customer adoption rates and demand for our products and services,
the future growth rate and size of the cloud-based software market or the entry of competitive applications. The expansion of the
cloud-based software market depends on a number of factors, including the cost, performance, and perceived value associated with
cloud-based software, as well as the ability of cloud-based software companies to address heightened security and privacy concerns.
If we have a security incident or other cloud-based software providers experience security incidents, loss of customer data, disruptions
in delivery or other similar problems, which is an increasing focus of the public and investors in recent years, the market for
cloud-based applications as a whole, including our offerings, may be negatively affected. If cloud-based software does not achieve
widespread adoption, or there is a reduction in demand for cloud-based software caused by a lack of customer acceptance, technological
challenges, weakening economic conditions, increasing security or privacy concerns, competing technologies and offerings, decreases
in corporate spending or otherwise, it could result in decreased revenues and our business could be materially adversely affected.
Potential customers
may be unwilling to implement the business changes attendant to the use of some of our cloud-based software and services.
The
use of our cloud-based software and services often requires customers to implement changes to their existing business process or
to adopt new business processes with which they are unfamiliar. Some of our potential customers may continue to rely on existing
internal solutions or other non-cloud-based solutions rather than implement the business changes called for by our solutions.
We must keep
up with rapid and ongoing technological change to remain competitive in the rapidly evolving cloud-based technology industry.
The
cloud-based technology industry is characterized by rapid and ongoing technological change, frequent new product and service introductions,
and evolving industry standards. Our future success will depend on our ability to adapt quickly to rapidly changing technologies,
to adapt our solutions to evolving industry standards and to improve the performance and reliability of our applications and services.
To maintain and increase market acceptance of our applications and services, we must anticipate subscriber need and offer solutions
that meet changing subscriber demands quickly and effectively. Subscribers may require features and functionality that our current
applications and services do not have or that our platforms are not able to support. If we fail to develop solutions that satisfy
subscriber preferences in a timely and cost-effective manner, our ability to renew our agreements with existing subscribers and
our ability to increase demand for our solutions will be harmed.
If we are required
to and fail to successfully manage any changes to our business model, including the transition of our products to cloud offerings,
our results of operations could be harmed.
We
are beginning to transition from an on-premise to a cloud-based, SaaS subscription business model. This adjustment to our business
model requires a considerable investment of technical, financial, legal and sales resources. Our transition to cloud offerings
will continue to divert resources and increase costs, especially in cost of license and other revenues, in any given period. Such
investments may not improve our long-term growth and results of operations. Further, the increase in some costs associated with
our cloud services may be difficult to predict over time, especially in light of our lack of historical experience with the costs
of delivering cloud-based versions of our applications. We may assume greater responsibilities for implementation related services
during this transition. As a result, we may face risks associated with new and complex implementations, the cost of which may differ
from original estimates. The consequences in such circumstances could include: monetary credits for current or future service engagements,
reduced fees for additional product sales, and a customer’s refusal to pay its contractually-obligated subscription or service
fees.
Our focus on
cloud services may result in the loss of other business opportunities and negatively impact our revenue growth.
We
have allocated significant resources related to our sales and marketing activities, software product development, management team
and other personnel toward growing our cloud business. This strategic direction and redirection of resources could potentially
result in the loss of sales opportunities in our traditional perpetual license and M&S sales business. If our cloud business
does not grow in accordance with our expectations and we are not able to cover the shortfall with other sales opportunities, then
our business could be harmed. Although the subscription model used for our cloud business is designed to create a recurring revenue
stream that is more predictable, the shift to this model may reduce our license sales, spread revenue over a longer period and
negatively affect future license and M&S sales revenue.
Our subscription
services, such as EFT Arcus, may impact our revenue trends as some opportunities that otherwise would have materialized as software
license sales for on-premises installation at our customers’ sites could potentially shift to subscription-based sales.
Most
of our revenue, and the growth of our revenue, has been attributable to perpetual license and M&S sales of our EFT solution.
Perpetual license fees for software to be installed at a customer site are typically recognized in full as revenue at the time
the software is delivered to the customer. On the other hand, subscription services are recognized as revenue over time as the
services are delivered (assuming collection is deemed probable), typically on a monthly basis. Any significant increase in the
percentage of our business generated from such a subscription model could, as a result, delay revenue recognition and have a negative
impact on our operating results.
The
impact of subscription services on prior revenue growth trends depends on several key factors, including the number of customers
who may shift from on-premise software licenses to subscription services, the rate at which they may do so, the subscription term
and fees, and the comparative value of the opportunity had it materialized as a software license sale instead of as a subscription
service. Generally, for a fixed number of opportunities (that is, without considering the possibility that a new service offering
may result in additional sales opportunities), the addition of subscription services reduces revenue growth rates for several quarters
for the associated solutions until cumulative subscription revenue increases and, potentially, surpasses comparable software license
revenue. The revenue impacts are particularly pronounced early in the introduction of subscription services because there has been
only a short time period for accumulation of the recurring revenue stream. For this reason, we may experience decreased revenue
during the time period that our customers shift to subscription services, which may be a period of multiple years. As we continue
to promote subscription-based services, the risk of a negative impact on revenue will continue, with revenue derived from sales
of our EFT solution, the comparable on-premises MFT software in our portfolio, most subject to this ongoing risk from the introduction
of these subscription services.
Subscription
offerings create risks related to the timing of revenue recognition.
Although
the subscription model is designed to increase the number of customers who purchase our products and services and create a recurring
revenue stream that is more predictable, it creates certain risks related to the timing of revenue recognition and potential reductions
in cash flows.
A
decline in new or renewed subscriptions in any period may not be immediately reflected in our reported financial results for that
period but may result in a decline in our revenue in future periods. If we were to experience significant downturns in subscription
sales and renewal rates, our reported financial results might not reflect such downturns until future periods. Our subscription
model could also make it difficult for us to rapidly increase our revenues from subscription or SaaS-based services through additional
sales in any period as revenue from new customers will be recognized over the applicable subscription term. Increases in sales
under our subscription sales model could result in decreased revenues over the short term if they are offset by a decline in sales
from perpetual license customers.
Our cloud and
SaaS offerings bring additional business and operational risks.
We
offer delivery of several of our products using a SaaS model. Our SaaS offerings provide our customers with existing and new software
management through a cloud service as opposed to traditional on-premises software deployments. There can be no assurance that SaaS
revenue will be significant in the future despite our levels of investment in developing this product delivery method. Margins
associated with our SaaS offerings are generally lower than margins associated with our on-premises solutions.
SaaS
subscription arrangements are under month-to-month agreements. Accordingly, our customers generally have no long-term obligation
to us and may cancel their SaaS subscription at any time. Even if our customers are satisfied with our SaaS products and services,
they may elect not to continue their SaaS subscription. Renewal rates in the future may differ from historical trends such that
we may not be able to accurately predict customer renewal rates. Our customers’ renewal rates may decline or fluctuate as
a result of a number of factors, including their level of satisfaction with our services and their ability to continue their operations
and spending levels. If we experience a decline in the renewal rates for our customers or they opt for lower-priced editions of
our offerings or fewer subscriptions, our operating results may be adversely impacted.
There
is a risk that we could find it difficult or costly to support both traditional software installed by customers and software delivered
as a service. To the extent that our SaaS offerings are defective or there are disruptions to our services, demand for our SaaS
offerings could diminish, and we could be subject to substantial liability.
Interruptions
or delays in service from our third-party service delivery hosts could impair the delivery of our services and harm our business.
If we or our third-party service delivery hosts experience security breaches and unauthorized access is obtained to a customer’s
data or our data, our services may be perceived as not being secure, customers may curtail or stop using our services, and we may
incur significant legal and financial exposure and liabilities.
Our
success with our SaaS solutions depends on organizations and customers perceiving technological and operational benefits and cost
savings associated with the increasing adoption of virtual infrastructure solutions in lieu of on-premises data centers. Concerns
about security, privacy, availability, data integrity, retention and ownership may negatively impact the rate of adoption of these
solutions. SaaS software solutions can be complex, and the deployment of our secure file transfer solutions in the desired manner
may require additional professional services and implementation services for which we may not have the ability to provide at an
appropriate margin. Our SaaS products are dependent upon third-party hardware, software and hosting vendors, all of which must
interoperate for end users to achieve their computing goals. We expect other companies to enter this market and to introduce their
own initiatives that may compete with, or not be compatible with, our cloud solutions.
If
any of these events were to occur, our business, results of operations and financial condition could be adversely affected.
We rely on third
parties to provide us with a number of operational services, including hosting and delivery of our SaaS products, certain of our
customer support services, and other operations. Any interruption or delay in service from these third parties, breaches of security
or privacy, or failures in data collection could expose us to liability, harm our reputation and adversely impact our financial
performance.
We
rely on hosted computer services from third parties for certain services that we provide our customers. As we gather customer data
and host certain customer data in third-party facilities, a security breach could compromise the integrity or availability or result
in the theft of customer data. In addition, our operations could be negatively affected in the event of a security breach, and
we could be subject to the loss or theft of confidential or proprietary information.
Unauthorized
access to this data may be obtained through break-ins, breach of our secure network by an unauthorized party, employee theft or
misuse, or other misconduct. We rely on a number of third-party suppliers in the operation of our business for the provisioning
of various services and materials that we use in the production of our products. Although we seek to diversify our third-party
suppliers, we may from time to time rely on a single or limited number of suppliers, or upon suppliers in a single country, for
these services or materials. The inability of such third parties to satisfy our requirements could disrupt our business operations
or make it more difficult for us to implement our business strategy. If any of these situations were to occur, our reputation could
be harmed, we could be subject to third-party liability, including under data protection and privacy laws in certain jurisdictions,
and our financial performance could be negatively impacted.
If we are unable
to generate significant volumes of sales leads from our various marketing and demand generation efforts then our revenue may not
grow as expected or may decline.
We
generate leads through various marketing activities such as targeted email campaigns, attending networking-based trade shows, purchasing
information and services from third-party experts in generating leads, and hosting webinars on enterprise IT management issues.
Our marketing efforts may be unsuccessful, resulting in fewer sales leads. If we fail to generate a sufficient volume of leads
from these activities and/or such sales leads do not result in actual sales, our revenue may not grow as expected or could decrease
and our operating results could suffer.
Some
of our sales leads are generated through visits to our websites by potential end-users interested in purchasing or downloading
evaluations of our products. Many of these potential end-users find our websites by searching for secure file transfer products
through Internet search engines, such as Google. A critical factor in attracting potential customers to our websites is how prominently
our websites are displayed in response to search inquiries. If we are listed less prominently or fail to appear in search result
listings for any reason, visits to our websites by customers and potential customers could decline significantly. We may not be
able to replace this traffic, and, if we attempt to replace this traffic, we may be required to increase our sales and marketing
expenses, which may not be offset by additional revenue and could adversely affect our operating results.
We
rely heavily on third-party service providers to help us identify sales leads. If those service providers become unavailable to
us, or if the cost of their services become more costly than we could afford to pay, our ability to generate a sufficient volume
of sales leads could be compromised, and our ability to sustain or increase our revenue could be adversely affected.
Our sales cycles
can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales and revenue
are difficult to predict and may vary substantially from period to period, which may cause our results of operations to fluctuate
significantly.
Our
results of operations may fluctuate, in part, because of the resource intensive nature of our sales efforts, the length and variability
of our sales cycle, and the short-term difficulty in adjusting our operating expenses. Our results of operations depend in part
on sales to large organizations. The length of our sales cycle, from proof of concept to delivery of and payment for our products,
is typically three to nine months but can be more than a year. If our competitors offer or develop products that our prospective
customers may want to compare to our products, that situation could cause our average sales cycle to become longer. Because the
length of time required to close a sale varies substantially from customer to customer, it is difficult to accurately predict when,
or even if, we will make a sale to a potential customer. As a result, large individual sales have, in some cases, occurred in periods
subsequent to those periods in which we anticipated they would occur or have not occurred at all. The loss or delay of one or more
large transactions in a period could impact our results of operations for that period and any future periods for which revenue
from that transaction is delayed. As a result of these factors, it is difficult for us to forecast accurately our revenue for any
particular period in the future. Because a substantial portion of our expenses are relatively fixed in the short term, our results
of operations will suffer if our revenue falls below expectations in a particular period, which could cause the price of our common
stock to decline.
We may acquire
new products, capabilities or entire business enterprises in the future that could give rise to risks and challenges that could
adversely affect our future financial results.
Acquisitions
of new products, capabilities or entire business enterprises involve a number of risks and challenges, including:
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Complexity, time, and costs associated with integration of the acquired business operations, workforce,
products, and technologies into our existing business, sales force, employee base, product lines, marketing and technology which
ultimately may not be successful.
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Diversion of management time and attention from our existing business and other business opportunities
throughout the integration.
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Potential loss or termination of employees, including costs associated with the termination or
replacement of those employees.
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Assumption of debt or other liabilities of the acquired business, including any future litigation
related to alleged liabilities of the acquired business.
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The incurrence of additional acquisition-related debt as well as increased expenses and working
capital requirements.
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Potential dilution of earnings per share.
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Increased costs and efforts in connection with compliance with Section 404 of the Sarbanes-Oxley
Act of 2002.
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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.
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The
ongoing integration of any acquired products, capabilities or entire business enterprises involves continually determining and
leveraging the actual market synergies, sustaining and even extending the business performance of the acquired entity, implementing
our technology systems in the acquired operations, and integrating and managing the personnel related to the acquired products
and/or operations. We also must continue to effectively integrate the different cultures of acquired business organizations into
our own culture in a way that aligns various interests.
Any
of the foregoing, and other factors, could harm our ability to achieve anticipated levels of financial performance or to realize
other anticipated benefits of an acquisition. In addition, because acquisitions of technology-based products and companies are
inherently risky, no assurance can be given that our previous, current, or future acquisitions will be successful and will not
adversely affect our business, operating results, or financial condition.
Our ability
to sell our products is highly dependent on the quality of our support and services offerings. Our failure to offer high-quality
support and services could have a material and adverse effect on our business and results of operations.
Once
our products are deployed for use by our end customers, our end customers may depend on our support organization and our channel
partners to resolve issues relating to our products. High-quality support is critical for the successful marketing and sale of
our products. If we or our channel partners do not assist our end customers in deploying our products effectively, succeed in helping
our customers resolve post-deployment issues quickly, or provide ongoing support, it could adversely affect our ability to sell
our products to existing end customers and could harm our reputation with other potential end customers. As we expand our operations
internationally, our support organization will face additional challenges, including those associated with delivering support,
training and documentation in languages other than English. Our failure or the failure of our channel partners to maintain high-quality
support and services could have a material and adverse effect on our business and operating results.
If we fail to
manage our sales and distribution channels effectively, our operating results could be adversely affected.
We
sell our software products both directly to end-users and through a network of distributors and resellers that we collectively
refer to as the channel as well as through marketplaces such as Amazon Web Services and Microsoft Azure. Sales through these different
methods involve distinct risks. Risks associated with direct sales include:
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Challenges in scaling the size of the direct sales team to levels required for revenue growth.
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Difficulty in hiring, retaining, and motivating our direct sales force.
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Substantial amounts of training for sales representatives to become productive, including regular
updates to cover new and revised products.
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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.
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From
time-to-time, we make significant changes in the organizational structure and compensation plans of our sales organization, which
may increase the risk of sales personnel turnover. To the extent that we experience turnover within our direct sales force or sales
management, there is a risk that the productivity of our sales force would be negatively impacted which could lead to revenue declines.
Turnover within our sales force can cause disruption in sales cycles leading to delay or loss of business. It can take time to
implement new sales management plans and to effectively recruit and train new sales representatives. We review and modify our compensation
plans for the sales organization periodically. Changes to our sales compensation plans could make it difficult for us to attract
and retain top sales talent.
Sales
through third-party distributors and resellers involve a number of risks, including:
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Our lack of control over the timing of delivery of our products to end-users.
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Our resellers and distributors currently not being subject to minimum sales requirements or any
obligation to market our products to their customers.
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Our reseller and distributor agreements generally being nonexclusive and terminable at any time
without cause.
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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.
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For
the first nine months of 2018 and the years 2017 and 2016, approximately 36%, 35% and 37%, respectively, of our revenue was derived
from indirect channel sales through distributors and resellers. We expect that a significant portion of our revenue will continue
to be derived from indirect channel sales in the future. Our ability to effectively distribute our products through those channels
depends in part upon the financial and business condition of our distributor and reseller network. Computer software distributors
and resellers typically are not highly capitalized, have previously experienced difficulties during times of economic contraction,
and have experienced difficulties during the past several years. If our distributors and resellers were not be able to sustain
their business at a level necessary to sell our products or provide customer support services, our business and revenue could be
negatively impacted.
We
rely upon major distributors and resellers in both the U.S. and international regions. Our largest distributor accounted for approximately
13% of our total revenues during the first nine months of 2018 and approximately 14% for the years 2017 and 2016. Although we believe
that we are not substantially dependent on this distributor, if it were to experience a significant disruption with its business
or if our relationship with it were to significantly deteriorate, it is possible that our ability to sell to end users would be,
at least temporarily, negatively impacted. This could, in turn, negatively impact our financial results.
Over
time, we have modified and will continue to modify aspects of our relationship with our distributors and resellers, such as their
incentive programs, pricing to them and our distribution model, to motivate and reward them for aligning their businesses with
our strategy and business objectives. Changes in these relationships and underlying programs could negatively impact their business
and/or harm our business. In addition, the loss of or a significant reduction in business with those distributors or resellers
or the failure to achieve anticipated levels of sell-through with any one of our major international distributors or large resellers
could harm our business. In particular, if one or more of such distributors or resellers were unable to meet their obligations
with respect to our accounts receivable from them, we could be forced to write off such accounts receivables and may be required
to delay the recognition of revenue on future sales to these customers. These events could have a material adverse effect on our
financial results.
Revenue from
our Mail Express, Wide Area File Services, CuteFTP and TappIn product lines will likely decline in the future and become a smaller
part of our total revenue.
Revenue
from our products and services other than our EFT solution was $917,000, $1.6 million and $2.2 million in the first nine months
of 2018 and during the years 2017 and 2016, respectively, and accounted for approximately 3.6%, 4.6% and 6.9% of our total revenue
in the first nine months of 2018 and the years 2017 and 2016, respectively. As we increase our focus and emphasis on our EFT platform
products, our revenue from these products will likely continue to decline. We incur costs and expenses supporting these products
for our customers who are currently using them. If revenue from these products continues to decline, we may begin to incur losses
from these products. The potential for such losses may cause us to decide to sell or discontinue one or more of these product lines.
If we cannot effectively reduce our costs to support these products, or if see decide to sell one or more of these product lines
but cannot find a buyer for them, we may begin incurring losses on these products that could materially affect our results of operations
and financial condition.
We may engage
third parties to develop products on our behalf. These engagements may involve reliance on resources owned and managed by those
third parties over which we have no direct control.
In
addition to research and development of new products by our employees, we engage third parties from time-to-time to conceive, design
and develop products on our behalf. Arrangements of this type involve high levels of risk as a result of inherent uncertainties
about the timely delivery and ultimate viability of those products due to the reliance we must place on third parties to plan,
perform and successfully complete work for us. These are processes for which we could have notably less direct control than if
we performed the work ourselves. These arrangements involve our reliance on the ongoing financial viability of the enterprise performing
the work. This risk is challenging to manage because we do not always have clear visibility as to the overall condition of the
third-party enterprise. These risks could result in the product not being successfully completed within the expected timeframe,
or at all. If actual results from these types of endeavors that we may undertake in the future differ materially from original
and ongoing expectations, our business, operating results and financial position could be harmed.
Our ability
to develop our software will be seriously impaired if we are not able to use our foreign subcontractors.
We
rely on foreign subcontractors to help us develop some aspects of some of our software. If these programmers decided to stop working
for us, or if we were unable to continue using them because of political or economic instability, we would have difficulty finding
comparably skilled developers in a timely manner. In addition, we would likely have to pay considerably more for the same work,
especially if we used U.S. personnel. If we could not replace the contract programmers, it could take us longer to develop certain
products and product upgrades and at a higher cost.
Seasonality
may cause fluctuations in our revenue.
We
believe there could be notable seasonal factors in the future that may cause us to record higher revenue in some quarters compared
with others. We believe this variability is possible largely due to our customers’ budgetary and spending patterns, as many
customers spend the unused portions of their discretionary budgets prior to the end of their fiscal years. For example, we have
historically recorded our highest level of revenue in our fourth quarter, which we believe corresponds to the fourth quarter of
a majority of our customers. If our rate of growth slows over time, seasonal or cyclical variations in our operations may become
more pronounced, and our business, results of operations and financial position may be adversely affected.
Reliance on
delivery of our products near or at the end of each quarter could cause our revenue for the applicable period to fall below expected
levels.
As
a result of customer buying patterns and the efforts of our sales force and channel partners to meet or exceed their sales objectives,
we have historically received a substantial portion of orders from our customers and generated a substantial portion of revenue
during the last few weeks of each period. A significant interruption in our IT systems, which manage critical functions such as
order processing, trade compliance reviews, delivery of our products, billings, collections, revenue recognition, and financial
reporting, among others, could result in delayed order fulfillment and decreased revenue for that period. If expected revenue at
the end of any period is delayed for any reason, including the failure of anticipated purchase orders to materialize, our logistics
or channel partners’ inability to deliver products prior to period-end to fulfill purchase orders received near the end of
the period, our inability to release new products on schedule, any failure of our systems related to order review and processing,
or any delays in product delivery based on trade compliance requirements, our revenue for that period could fall below our expectations
and the estimates of market analysts, if any, which could adversely impact our business and results of operations and cause a decline
in the trading price of our common stock.
Fluctuations
in professional services revenue may be greater than experienced in previous reporting periods and have a disproportionate impact
on our financial results. For example, increased professional services sales, especially to the government, may result in lower
earnings as a percentage of revenue.
Our
solution portfolio includes software licenses, subscription services, M&S, and professional services. Because they are relatively
labor intensive, professional services typically have substantially lower margins than software license sales, M&S and subscription
services. Professional services were approximately 6%, 6% and 8% of our total revenue in the first nine months of 2018 and the
years 2017 and 2016, respectively. However, this percentage can fluctuate significantly from period to period depending on the
needs of our customers.
Depending
on our mix of software licenses, subscription, M&S, and professional services revenue in a given reporting period, our earnings
as a percentage of revenue may fluctuate from historical norms. For example, if we were to derive a relatively large (compared
to historical norms) component of our revenue from professional services in a reporting period, earnings as a percentage of revenue
may decline in that period due to lower margin contribution from those labor-intensive services as compared to software license,
subscription, and M&S revenue.
We may not be
able to compete effectively with larger, better-positioned companies, resulting in lower margins and loss of market share.
We
operate in intensely competitive markets that experience rapid technological developments, market consolidation, changes in industry
standards, changes in customer requirements, and frequent new product introductions and product improvements by existing and new
competitors. If we are unable to anticipate or react to these competitive challenges or if existing or new competitors take or
gain additional market share in any of our markets, our competitive position could weaken, and we could experience a decrease in
revenues that could adversely affect our business and operating results. To compete successfully, we must maintain a successful
research and development effort to create new products and services and enhance existing products and services, effectively adapt
to changes in the technology or product rights held by our competitors, appropriately respond to competitor strategies as such
strategies become apparent, and effectively adapt to technological changes and changes in the ways that our information is accessed,
used, and stored within our enterprise and consumer markets. If we are unsuccessful in responding to our competitors or to changing
technological and customer demands, we could experience a negative effect on our competitive position and our financial results.
We
compete with a variety of companies that have significantly greater revenues and financial resources, more partners, resellers
and distribution channels than we have, and greater quantities of personnel and technical resources. For example, our EFT solution
suite competes with products from IBM Sterling, Ipswitch, Axway and several other vendors. Our WAFS product competes with Riverbed
Technology, Panzura, and Peer Sync. Large companies may be able to develop new technologies, across multiple solution spaces, and
on more operating systems, more quickly than we can, to offer a broader array of products, and to respond more quickly to new opportunities,
industry standards or customer requirements.
Additional
competitors may enter the market and also may have significantly greater capabilities and resources than we do. Some existing competitors
also may be able to adopt more aggressive pricing strategies. For example, Ipswitch provides an older version of its consumer file
transfer protocol program for free for non-commercial use, and Microsoft includes file transfer protocol functionality in its Internet
browser, which it also distributes for free. Increased competition may result in lower operating margins and loss of market share.
As we attempt
to expand our business, our operating expenses may increase, and we may incur losses.
We
intend to expand our business, specifically with regard to new on-premise license sales and SaaS delivery of our products, with
increased focus on SaaS delivery. To do so, we plan to increase our research and development expenditures to accelerate our introduction
of new features, functions and capabilities for our products to the marketplace. We intend to enhance the presence and visibility
of those products by increasing our sales and marketing expenditures to expand our sales force, particularly through a broader
reseller program involving more third parties, and by implementing new sales lead generation and marketing initiatives.
These
expanded research and development and sales and marketing activities may result in an increase in our operating expenses. If we
do not successfully develop new features, functions and capabilities for our products in a manner that increases license sales
of our products, and if our enhanced sales and marketing activities, including expansion of our third-party reseller programs,
are not successful, our revenue may not increase. In that event, our net income could decline, or we may incur losses.
As we develop
new products or new features, functions and capabilities for existing products, we capitalize certain of our costs related to those
activities and defer the expense arising from those activities to future periods.
In
accordance with GAAP, we capitalize certain of our costs related to the development of new products or new features, functions
and capabilities for existing products. We present these capitalized costs as an asset on our balance sheet. We amortize these
costs to expense in future periods after these work products are completed and released for sale so as to match these expenses
the associated revenue we earn in the future. If we were to deem these capitalized costs not to be realizable through future revenue
and accordingly had to reduce the carrying value of these assets, possibly to zero, we could incur significant expenses earlier
than anticipated.
Our products
are complex and operate in a wide variety of computer configurations, which could result in errors or product failures.
Addressing
MFT both on-premise licenses and SaaS models typically requires very complex products. Undetected errors, failures, or bugs may
occur, especially when products are first introduced or when new versions are released. Our products are often installed and used
in large-scale computing environments with different operating systems, system management software, and equipment and networking
configurations, which may cause errors or failures in our products or may expose undetected errors, failures, or bugs in our products.
Our customers’ computing environments also are often characterized by a wide variety of standard and non-standard configurations
that make pre-release testing for programming or compatibility errors very difficult and time-consuming. In addition, despite testing
by us and others, errors, failures, or bugs may not be found in new products or releases until after commencement of commercial
shipments. In the past, we have discovered software errors, failures, and bugs in certain of our product offerings after their
introduction and have experienced delayed or lost revenues during the time required to correct these errors.
Errors,
failures, or bugs in products released by us could result in negative publicity, product returns, loss of or delay in market acceptance
of our products, loss of competitive position, or claims by customers or others. Many of our end-user customers use our products
in applications that are critical to their businesses and may have a greater sensitivity to defects in our products than to defects
in other, less critical, software products. In addition, if an actual or perceived breach of information integrity or availability
occurs in one of our end-user customer’s systems, regardless of whether the breach is attributable to our products, the market
perception of the effectiveness of our products could be harmed. Alleviating any of these problems could require significant expenditures
of our capital and other resources and could cause interruptions, delays, or cessation of our product licensing, which could cause
us to lose existing or potential customers and could adversely affect our operating results.
Our business
is subject to the risks of warranty claims, product returns, product liability and product defects.
Real
or perceived errors, failures or defects in our products could result in claims by customers for losses that they sustain. If customers
make these types of claims, we may be required, or may choose, for customer relations or other reasons, to expend additional resources
in order to help correct the problem. Liability provisions in our standard terms and conditions of sale, and those of our resellers
and distributors, may not be enforceable under some circumstances or may not fully or effectively protect us from customer claims
and related liabilities and costs, including indemnification obligations under our agreements with resellers and distributors.
The sale and support of our products also entail the risk of product liability claims. We maintain insurance to protect against
certain types of claims associated with the use of our products, but our insurance coverage may not adequately cover any such claims.
Even claims that ultimately are unsuccessful could result in expenditures of funds in connection with litigation and divert management’s
time and other resources.
Turmoil and
uncertainty in U.S. and international economic markets could adversely affect our business and operating results.
Demand
for our products depends in large part upon the level of capital and maintenance expenditures by many of our customers. Economic
downturns could have an adverse effect on spending on information technology projects since in such environments, prospects and
customers may reduce, sometimes greatly, their discretionary spending to focus on preserving mandatory spending budgets.
These
adverse impacts to customer spending may be directly, and adversely, reflected in our future business and operating results because
we believe a substantial part of their MFT spending budget is considered discretionary by our prospects and customers. The perception
of MFT solutions spending as discretionary is further reinforced by the existence of low cost, or even free, products that deliver
some subset of the capabilities found in our solutions. In the event of an economic downturn, some customers may decide to defer
spending for our solutions or may elect to obtain low cost or free “good enough” products as an interim measure. The
potential adverse impacts of such decisions may persist for an extended period of time, even well into a period of economic recovery,
given that many prospects will not change their IT infrastructure for a considerable period of time after that infrastructure has
been installed and is operating adequately.
Adverse
financial results from another economic downturn and uncertainty could include flat, or even decreasing, sales, lower gross and
net margins, and impairment of current or future goodwill and long-lived assets. In addition, some of our customers could delay
paying their obligations to us. Potentially reduced sales and margins and customer payment problems could limit our ability to
fund research and development, marketing, sales, and other activities necessary to sustain and expand our market position.
In
past economic downturns, we have sometimes experienced a decrease in our stock price. If investors have concerns that our business,
financial condition and results of operations will be negatively impacted by another economic downturn, our stock price could decrease
again.
Regardless of
economic conditions, fluctuations in demand for our products and services are driven by many factors and a decrease in demand for
our products could adversely affect our financial results.
We
are subject to fluctuations in demand for our products and services due to a variety of factors, including competition, product
obsolescence, technological change, budget constraints of our actual and potential customers, awareness of security threats to
IT systems, and other factors. While such factors may, in some periods, increase product sales, fluctuations in demand can also
negatively impact our product sales. If demand for our products declines, our revenues, as well as our gross and net margins, could
be adversely affected.
Sales to the
U.S. Government make up a portion of our business, and changes in government defense spending could have consequences on our financial
position, results of operations and business.
Our
revenues from the U.S. Government largely result from contracts awarded to us under various U.S. Government programs, primarily
defense-related programs with the Department of Defense (“DoD”). The funding of our programs is subject to the overall
U.S. Government foreign policy, budget and appropriation decisions, and processes which are driven by numerous factors, including
geo-political events and macroeconomic conditions, and are beyond our control. Projected defense spending budgets are uncertain
and difficult to predict.
Significant
changes in defense spending could have long-term consequences for our size and structure. Changes in government priorities and
requirements could impact the funding, or the timing of funding, of our programs which could negatively impact our results of operations
and financial condition. Government contracts typically have long sales cycles such that closure of such contracts is difficult
to predict.
U.S.
Government contracts generally also permit the government to terminate the contract, in whole or in part, without prior notice,
at the government’s convenience or for default based on performance. A termination arising out of our default could expose
us to liability and have a negative impact on our ability to obtain future contracts and orders. Furthermore, on contracts for
which we are a subcontractor and not the prime contractor, the U.S. Government could terminate the prime contract for convenience
or otherwise, irrespective of our performance as a subcontractor.
Because
we are a DoD contractor, certain of our items and/or transactions may be subject to the International Traffic in Arms Regulations
(“ITAR”) if our software or services are specifically designed or modified for defense purposes. Companies engaged
in manufacturing or exporting ITAR-controlled goods and services (even if these companies do not export such items) are required
to register with the U.S. State Department. Failure to comply with these requirements could result in fines and sanctions which
could negatively impact our results of operations and financial condition.
If we lose key
personnel, we may not be able to execute our business plan.
Our
future success depends on the continued services of our employees. If employees leave, it can be difficult to replace them because
of the intense competition in the marketplace for people with the skillsets we need to operate our business. New employees may
not be productive for weeks or months as they learn about our solutions, our personnel and the administrative practices within
our company.
It may be difficult
for us to recruit and retain software developers and other technical and management personnel because we are a relatively small
company.
We
compete intensely with other software development and distribution companies domestically and internationally as well as information
technology departments supporting larger businesses all of whom strive to recruit and hire employees from a limited pool of qualified
personnel. Some qualified candidates prefer to work for larger, better known companies or in another geographic area. In order
to attract and retain personnel in a competitive marketplace, we believe that we must provide a competitive compensation package,
including cash, equity-based compensation, and other employee benefits including medical insurance and healthcare plans. The volatility
in our stock price may from time to time adversely affect our ability to recruit or retain employees. In addition, we may be unable
to obtain required stockholder approvals of future increases in the number of shares available for issuance under our equity compensation
plans. Also, accounting rules require us to treat the issuance of employee stock options and other forms of equity-based compensation
as compensation expense. As a result, we may decide to issue fewer equity-based incentives and may be impaired in our efforts to
attract and retain necessary personnel. If we are unable to hire and retain qualified employees, or conversely, if we fail to manage
employee performance or reduce staffing levels when required by market conditions, our business and operating results could be
adversely affected.
Key
personnel have left our company in the past. There likely will be additional departures of key personnel from time to time in the
future. The loss of any key employee could result in significant disruptions to our operations, including adversely affecting the
timeliness of product releases, the successful implementation and completion of company initiatives, the effectiveness of our disclosure
controls and procedures and our internal control over financial reporting, and the results of our operations. Hiring, training,
and successfully integrating replacement sales, engineering, and other personnel could be time consuming, may cause additional
disruptions to our operations, and may be unsuccessful, which could negatively impact future revenues.
Our
operations potentially are vulnerable to security breaches that could harm the quality of our products and services or disrupt
our ability to deliver our products and services.
Information
security is a dynamic discipline that historically has faced threats that develop and emerge in ways that are sometimes unpredictable.
Third parties may breach our systems and information security and damage our products and services or misappropriate confidential
customer information. This might cause us to lose customers, or even cause customers to make claims against us for damages. We
may be required to expend significant resources to protect against potential or actual security breaches and/or to address problems
caused by such breaches.
Improper disclosure
of personal data could result in liability and harm our reputation.
While
we have derived the majority of our historical revenues from on-premises delivery of our products, we now also offer our products
on third-party, hosted platforms. As we continue to execute our strategy of increasing the number and scale of our cloud-based
offerings, we may store and process increasingly large amounts of personally identifiable information of our customers. At the
same time, the continued occurrence of high-profile data breaches provides evidence of an external environment increasingly hostile
to information security. This environment demands that we continuously improve our design and coordination of security controls.
It is possible our security controls over personal data, our training of employees and vendors on data security, and other practices
we follow may not prevent the improper disclosure of personally identifiable information. Improper disclosure of this information
could harm our reputation, lead to legal exposure to customers, or subject us to liability under laws that protect personal data,
resulting in increased costs or loss of revenue. We believe consumers using our subscription services increasingly will want efficient,
centralized methods of choosing their privacy preferences and controlling their data. Perceptions that our products or services
do not adequately protect the privacy of personal information could inhibit sales of our products or services and could constrain
consumer and business adoption of cloud-based solutions.
Breaches of
our cybersecurity systems could degrade our ability to conduct our business operations and deliver products and services to our
customers, delay our ability to recognize revenue, compromise the integrity of our software products, result in significant data
losses and the theft of our intellectual property, damage our reputation, expose us to liability to third parties and require us
to incur significant additional costs to maintain the security of our networks and data.
We
increasingly depend upon our IT systems to conduct virtually all of our business operations, ranging from our internal operations
and product development activities to our marketing and sales efforts and communications with our customers and business partners.
Cyber threats may attempt to penetrate our network security, or that of our website, and misappropriate our proprietary information
or cause interruptions of our service. Because the techniques used by such attackers to access or sabotage networks change frequently
and may not be recognized until launched against a target, we may be unable to anticipate these techniques. In addition, sophisticated
hardware and operating system software and applications that we produce or procure from third parties may contain defects in design
or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system.
We have also outsourced a number of our business functions to third-party contractors. Therefore, our business operations also
depend, in part, on the success of our contractors’ own cybersecurity measures. Similarly, we rely upon distributors, resellers,
system vendors and systems integrators to sell our products and our sales operations depend, in part, on the reliability of their
cybersecurity measures. Additionally, we depend upon our employees to appropriately handle confidential data and deploy our IT
resources in a safe and secure fashion that does not expose our network systems to security breaches and the loss of data. Accordingly,
if our cybersecurity systems and those of our contractors fail to protect against unauthorized access, sophisticated cyber-attacks
and the mishandling of data by our employees and contractors, our ability to conduct our business effectively could be damaged
in a number of ways, including:
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Sensitive data regarding our business, including intellectual property and other proprietary data,
could be stolen.
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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.
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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.
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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.
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Personally identifiable data of our customers, employees and business partners could be lost.
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Should
any of the above events occur, we could be subject to significant claims for liability from our customers or from regulatory actions
of governmental agencies, our ability to protect our intellectual property rights could be compromised and our reputation and competitive
position could be significantly harmed. Also, the regulatory and contractual actions, litigations, investigations, fines, penalties
and liabilities relating to data breaches that result in losses of personally identifiable or credit card information of users
of our services could be significant in terms of fines and reputational impact and necessitate changes to our business operations
that may be disruptive to us. Additionally, we could incur significant costs in order to upgrade our cybersecurity systems and
remediate damages. Consequently, our financial performance and results of operations could be adversely affected.
Certain components
of the software code comprising some of our products are licensed from third parties making us dependent upon those licenses remaining
in place for those products to operate in their current form.
Certain
key components of the software code comprising certain of our products are licensed from unrelated third parties. These licenses
are not perpetual and, as such, with advance notice as provided in the license agreements, these third parties could terminate
these licenses. Even with advance notice, termination of these licenses could create a severe hardship for us due to the need to
locate substitute software code from other third parties or create alternative software code ourselves in order for our products
to continue to operate in the manner designed or for us to keep pace with customer requirements, including our obligations under
maintenance and support agreements. There is no assurance we could achieve either of those alternative solutions in a timely and
effective manner that would not disrupt our ability to continue selling and supporting those products, or without the consumption
of significant company resources in the form of time spent by our personnel creating alternative solutions or cash paid to third
parties to assist us. Such a situation could delay the completion and introduction to the marketplace of other products we are
developing to remain competitive due to the diversion of the attention of certain of our key personnel away from that work. If
any of these events occur, our future business and financial results could be adversely affected.
We utilize “open
source” software in some of our products.
The
open source software community develops software technology for free use by anyone. We incorporate a limited amount of open source
code software into our products. We may use more open source code software in the future.
Our
use, in some instances, of open source code software may impose limitations on our ability to commercialize our solutions and may
subject us to possible intellectual property litigation. Open source code may impose limitations on our ability to commercialize
our products because, among other reasons, open source license terms may be ambiguous and may result in unanticipated obligations
regarding our solution, and open source software cannot be protected under trade secret law. In addition, it may be difficult for
us to accurately determine the identities of the developers of the open source code and whether the acquired software infringes
third-party intellectual property rights. As a result, we could be subject to suits by parties claiming ownership of what we believe
to be open source software. From time to time, companies that incorporate open source software into their products have been subject
to such claims.
Claims
of infringement or misappropriation against us could be costly for us to defend and could require us to re-engineer our solution
or to seek to obtain licenses from third parties in order to continue offering our solution. We also might need to discontinue
the sale of our solution in the event re-engineering could not be accomplished on a timely or cost-effective basis. If any such
claim, attempted remediation, or solution discontinuance occur, our business and operating results could be harmed.
Our products
may expose customers to invasion of privacy, causing customer dissatisfaction or possible claims against us for damages.
Our
products and solutions are intended to facilitate data and information transfer and sharing, sometimes by providing outsiders access
to a customer’s computer. Such access potentially may make the customer vulnerable to security breaches, which could result
in the loss of the customer’s privacy or property. Invasions of privacy or other customer harm occurring in an environment
where our solutions are operating could result in customer dissatisfaction and possible claims against us for any resulting damages.
We are subject
to governmental export and import controls, and sanctions laws that could subject us to liability or impair our ability to compete
in international markets.
All
products that are exported, re-exported or that are worked on by foreign nationals are subject to export controls. Such controls
include prohibitions on end uses, end users and exports to certain sanctioned countries. In addition, incorporation of encryption
technology into our products increases the level of U.S. export controls. We are subject to these requirements as certain of our
products include the ability for the end user to encrypt data. Therefore, our products may be exported outside the United States
or revealed to foreign nationals only by complying with the required level of export controls/restrictions. Restrictions applicable
to our products may include a requirement to have a license to export the technology, a requirement to have software licenses approved
before export is allowed, and outright bans on the licensing of certain encryption technology to particular end users or to all
end users in a particular country. In addition, various countries regulate the import and re-export of certain technology and have
enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to implement our
products in those countries or that make it a violation for us to comply with U.S. sanctions requirements.
There
can be no assurance that we will be successful in obtaining or maintaining the licenses and other authorizations required to export
our products from applicable government authorities. Any change in export or import regulations or related legislation, shift in
approach to the enforcement or scope of existing regulations, changes in the list of countries to which we cannot export, or changes
in persons or technologies targeted by such regulations could result in decreased use of our products by, or in our decreased ability
to export or sell our products to, existing or potential customers with international operations. Changes in our products or changes
in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers
with international operations from deploying our products throughout their global systems or, in some cases, prevent the export
or import of our products to certain countries, companies or individuals altogether. Any change in export, import or sanctions
regulations or related legislation, a shift in approach to the enforcement or scope of existing regulations, or change in the countries,
persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability
to export or sell our products to, existing or potential customers with international operations.
Export
and sanctions laws and regulations can be extremely complex in their application. If we are found not to have complied with applicable
export control or sanctions laws, we may be sanctioned, fined or penalized by, among other things, having our ability to obtain
export licenses curtailed or eliminated, possibly for an extended period of time. Our failure to receive or maintain any required
export licenses or authorizations or our being penalized for failure to comply with applicable export control or sanctions laws
would hinder our ability to sell our products, could result in financial penalties, and could materially adversely affect our business,
financial condition, and results of operations. Any failure on our part or the part of our distributors to comply with encryption
or other applicable export control or sanctions requirements could harm our business and operating results.
Import
and export regulations of encryption/decryption technology vary from country to country. We may be subject to different statutory
or regulatory controls, including licensing requirements, in different foreign jurisdictions, and as such, importation or re-exportation
of our technology may not be permitted in these foreign jurisdictions. Violations of foreign regulations or regulation of international
transactions could prevent us from being able to sell our products in international markets. Our success depends in large part
on our having access to international markets. A violation of foreign regulations could limit our access to such markets and have
a negative effect on our results of operations.
As our international
sales grow, we could become increasingly subject to additional risks that could harm our business.
We
conduct significant sales and customer support in countries outside of the United States. Approximately 29%, 25% and 23% of our
sales were to purchasers outside the United States in the first nine months of 2018 and the years 2017 and 2016, respectively.
If our sales outside the United States increase, we may be required to further expand our international operations. To successfully
expand international sales, we must establish additional foreign operations, hire additional personnel, including regulatory compliance
professionals, and recruit additional international resellers. We may also incur additional expense translating our applications
into additional languages. In addition, there is significant competition for entry into high growth markets. Our international
operations are subject to a variety of risks, which could cause fluctuations in the results of our international operations. These
risks include:
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Compliance with foreign regulatory and market requirements.
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Variability of foreign economic, political and labor conditions.
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Changing restrictions imposed by regulatory requirements, tariffs or other trade barriers or by
U.S. export laws.
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Potential increase in expenses to comply with international data protection laws.
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The imposition by the United States government of sanctions on countries, individuals or business
entities.
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Longer accounts receivable payment cycles.
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Potentially adverse tax consequences.
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Difficulties in protecting intellectual property.
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Burdens of complying with a wide variety of foreign laws.
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Difficulty transferring funds to the U.S. in a tax efficient manner from non-U.S. jurisdictions
in which the cash flow originates.
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We are subject
to risks associated with compliance with laws and regulations globally which may harm our business.
We
are a global company subject to varied and complex laws, regulations and customs domestically and internationally. These laws and
regulations relate to a number of aspects of our business, including trade protection, import and export control, sanctions laws,
data and transaction processing security, payment card industry data security standards, records management, user-generated content
hosted on websites we operate, corporate governance, employee and third-party complaints, gift policies, conflicts of interest,
employment and labor relations laws, securities regulations and other regulatory requirements affecting trade and investment. The
application of these laws and regulations to our business is often unclear and may at times conflict. Compliance with these laws
and regulations may involve significant costs or require changes in our business practices that result in reduced revenue and profitability.
Non-compliance could also result in fines, damages, or criminal sanctions against us, our officers or our employees, prohibitions
on the conduct of our business, and damage to our reputation. We incur additional legal compliance costs associated with our global
operations and could become subject to legal penalties if we fail to comply with local laws and regulations in U.S. jurisdictions
or in foreign countries, which laws and regulations may be substantially different from those in the U.S.
In
many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are
prohibited by U.S. regulations applicable to us, including the Foreign Corrupt Practices Act. Although we implement policies and
procedures designed to ensure compliance with these laws, there can be no assurance that all of our employees, contractors and
agents, as well as those companies to which we outsource certain of our business operations, including those based in or from countries
where practices that violate such U.S. laws may be customary, will not take actions in violation of our internal policies. Any
such violation, even if prohibited by our internal policies, could have an adverse effect on our business.
Our
interaction with foreign parties can also increase our costs with respect to compliance. For example, the EU has recently adopted
a comprehensive overhaul of its data protection regime from the current national legislative approach to a single European Economic
Area Privacy Regulation, the GDPR, which came into effect in May 2018. The EU data protection regime extends the scope of the EU
data protection law to all foreign companies processing data of EU residents. It imposes a strict data protection compliance regime
with severe penalties of up to the greater of 4% of worldwide turnover and €20 million and includes new rights such as the
“portability” of personal data. Although the GDPR will apply across the EU without a need for local implementing legislation,
as has been the case under the current data protection regime, local data protection authorities (“DPAs”) will still
have the ability to interpret the GDPR, which has the potential to create inconsistencies on a country-by-country basis. Since
we act as a data processor for our SaaS customers, we are taking steps to cause our processes to be compliant with applicable portions
of the GDPR, but we cannot assure you that such steps will be effective. We have adopted policies to comply with the GDPR, but
ongoing implementation and maintenance of compliance regimes could require changes to certain of our business practices, thereby
increasing our costs.
Failure
to comply with existing or future privacy and data use and security laws, regulations, and requirements to which we are subject
or could become subject, including by reason of inadvertent disclosure of confidential information, could result in fines, sanctions,
penalties or other adverse consequences and loss of consumer confidence, which could materially adversely affect our results of
operations, overall business and reputation especially since we market our products as a means by which compliance can be achieved.
Failure to maintain
proper and effective internal controls has affected, and could in the future affect, our ability to produce accurate financial
statements which has resulted, and could in the future result, in the restatement of our consolidated financial statements, and
such failure to maintain proper and effective internal controls could adversely affect our operating results, our ability to operate
our business, and our stock price.
Effective
internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We maintain a system
of internal control over financial reporting, which is defined as a process designed by, or under the supervision of, our principal
executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with GAAP. Our management has determined that our internal control
over financial reporting was not effective to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external reporting purposes in accordance with GAAP as of December 31, 2017 and September
30, 2018.
Failure
to establish and maintain appropriate internal financial reporting controls and procedures has caused us to fail to meet our reporting
obligations, resulted in the restatement of our financial statements, harmed our operating results, subjected us to regulatory
scrutiny and investigation, potentially caused investors to lose confidence in our reported financial information, and had a negative
effect on the market price for shares of our common stock. Failure to remediate our material weaknesses and control deficiencies
with respect to our internal control over financial reporting could result in similar consequences in the future.
There are inherent
limitations in all control systems, and misstatements due to error or fraud have occurred and may occur again in the future and
not be detected.
The
ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 require us to identify material weaknesses
in internal control over financial reporting, which is a process to provide reasonable assurance regarding the reliability of financial
reporting for external purposes in accordance with GAAP. Our management, including our principal executive officer and principal
financial officer, does not expect that our internal controls and disclosure controls, even once all material weaknesses and control
deficiencies are remediated, will prevent all errors and all fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design
of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their
costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud in our company have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Further, controls
can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls.
The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions. Over
time, a control may be inadequate because of changes in conditions, such as growth of the company or increased transaction volume,
or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur again in the future and not be detected.
In
addition, discovery and disclosure of a material weakness, such as those material weaknesses we have previously discovered and
disclosed, by definition, could have a material adverse impact on our financial statements. Such an occurrence could discourage
certain customers or suppliers from doing business with us and affect how our stock trades. This could, in turn, negatively affect
our ability to access public debt or equity markets for capital.
The amount of
income taxes we compute as payable on our income tax returns filed with the Internal Revenue Service and certain states could be
challenged by those taxing authorities resulting in us paying more taxes than anticipated.
We
file income tax returns with the Internal Revenue Service and taxing authorities in certain states. We prepare and file those returns
based on our interpretations of the relevant tax code as to revenue to be reported and deductions and credits allowed. We use third-party
experts to assist us in preparing our tax returns and computing our tax liabilities to help us ensure we pay the proper amount
of tax due. Our tax returns are subject to examination by taxing authorities that could interpret the tax code in a different manner
from us and conclude we are obligated to pay more taxes than we originally computed and paid. While we would defend the position
taken on our tax returns as filed, a challenge from a taxing authority can be costly to defend with no assurance of a favorable
outcome for us. In the event of an unfavorable result under these circumstances, our business, operating results and financial
position could be harmed.
The amount of
sales tax we collect on sales could be challenged by taxing authorities both in jurisdictions in which we have a corporate presence
as well as by taxing authorities in areas where we have no corporate presence.
We
collect and remit sales tax on sales in jurisdictions where we have a corporate or physical presence that results in an obligation
to do so. We sell our products to customers in numerous locations where we do not have a corporate or physical presence and, therefore,
do not collect sales tax on those sales. States in which we collect sales tax could audit our activities and assess us with additional
tax based on their interpreting the sales tax code differently than we interpret it. Various states in which we do not collect
sales tax are aggressive in interpreting their sales tax codes in determining if a company with no apparent presence in those states
is obligated to collect and remit sales taxes, particularly on sales made across the Internet. States where we do not collect sales
tax could make an assertion that we should have been collecting sales tax and could assess us with that tax. While we would defend
our position taken as to our obligation to collect sales tax and the amount of sales tax collected, a challenge from a taxing authority
can be costly to defend with no assurance of a favorable outcome for us. In the event of an unfavorable result under these circumstances,
our business, operating results and financial position could be harmed.
Risks Related to
Stock Ownership
Our stock price
is, and may continue to be, volatile.
The
trading price of our common stock has been and could continue to be subject to wide fluctuations in response to certain factors,
including:
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U.S. and global economic conditions leading to general declines in market capitalizations, with
such declines not associated with operating performance.
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Quarter-to-quarter variations in results of operations.
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Our announcements of new products.
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Our announcements of acquisitions.
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Our announcements of significant new customers or contracts.
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Our competitors’ announcements of new products.
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Our product development or release schedule.
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Changes in our management team.
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General conditions in the software industry.
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Investor perceptions and expectations regarding our products, plans and strategic position and
those of our competitors and customers.
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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:
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Amortization of intangible assets, including acquired technology and product rights.
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Impairment of goodwill and intangibles.
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Share-based compensation expense.
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Impairment of long-lived assets.
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Reserves for uncertain tax positions.
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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:
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Discourage potential acquisition proposals.
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Delay or prevent a change in control.
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Limit the price that investors may be willing to pay in the future for shares of our common stock.
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In
particular, our certificate of incorporation and bylaws prohibit stockholders from voting by written consent or calling meetings
of the stockholders. We are also subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware
corporation from engaging in any of a broad range of business combinations with any interested stockholder, as defined in the statute,
for a period of three years following the date on which the stockholder became an interested stockholder.
Our directors
and executive officers continue to have substantial control over us.
Our
directors and executive officers, together with their affiliates and related persons, beneficially owned, in the aggregate, approximately
34% of our outstanding common stock as of October 26, 2018. These stockholders would have the ability to substantially control
our operations and direct our policies including the outcome of matters submitted to our stockholders for approval, such as the
election of directors and any acquisition or merger, consolidation or sale of all or substantially all of our assets. In addition,
our certificate of incorporation and bylaws provide for our Board of Directors to be divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of our Board of Directors will be elected each year.
Stockholders’
ownership of our stock may be significantly diluted as a result of the exercise of stock options, thereby affecting the value of
the stock.
There
were options to purchase 2,134,655 shares of our common stock outstanding under our employee and director stock option plans as
of September 30, 2018, of which options to purchase 1,163,958 shares were vested. We have filed registration statements under the
Securities Act of 1933, as amended (the “Securities Act”), covering stock issued upon the exercise of options by non-affiliates,
and we may file a registration statement covering options held by affiliates as well. If we do not file a registration statement
covering affiliates, affiliates who exercise their options may choose to sell the stock under an exemption from registration, such
as Rule 144 under the Securities Act. The exercise of these options and sale of the resulting stock could depress the value of
our stock.
Risks Related to
Intellectual Property
We are vulnerable
to claims that our products infringe third-party intellectual property rights particularly because our products are partially developed
by independent parties.
From
time to time, we experience claims that our products infringe third-party intellectual property rights. We may be exposed to future
litigation based on claims that our products infringe the intellectual property rights of others. This risk is exacerbated by the
fact that some of the code in our products is developed by independent parties or licensed from third parties over whom we have
less control than we exercise over internal developers. In addition, we expect that infringement claims against software developers
will become more prevalent as the number of products and developers grows and the functionality of software programs in the market
increasingly overlaps. Companies in the technology industry, and other patent and trademark holders seeking to profit from royalties
in connection with grants of licenses, own large numbers of patents, copyrights, trademarks, service marks, and trade secrets and
frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. In addition,
we may be the target of aggressive and opportunistic enforcement of patents by third parties, including non-practicing entities.
Responding
to and defending against such claims may cause us to incur significant expense and divert the time and efforts of our management
and employees. Successful assertion of such claims could require that we pay substantial damages or ongoing royalty payments, prevent
us from selling our products and services, damage our reputation, or require that we comply with other unfavorable terms, any of
which could materially harm our business. In addition, we may decide to pay substantial settlement costs in connection with any
claim or litigation, whether or not successfully asserted.
While
it is not possible to predict the outcome of patent litigation incidents to our business, defense costs may be significant, and
we believe the costs associated with this litigation or other claims of infringement could generally have a material adverse impact
on our results of operations, financial position or cash flows. Regardless of the merit of such claims, responding to infringement
claims can be expensive and time-consuming.
For
any intellectual property rights claim against us or our customers, we may have to pay damages and indemnify our customers against
damages.
Claims
of infringement could require us to re-engineer our products or seek to obtain licenses from third parties in order to continue
offering our products in a manner that may include licensing technologies from others. In addition, an adverse legal decision affecting
our intellectual property, or the use of significant resources to defend against this type of claim could place a significant strain
on our financial resources and harm our reputation.
We may not be
able to protect our intellectual property rights.
Our
software code and trade and service marks are some of our most valuable assets. Given the global nature of the Internet and our
business, we are vulnerable to the misappropriation of this intellectual property, particularly in foreign markets, such as China
and Eastern Europe, where laws or law enforcement practices are less developed. The global nature of the Internet makes it difficult
to control the ultimate destination or security of our software making it more likely that unauthorized third-parties will copy
certain portions of our proprietary information or reverse engineer the proprietary information used in our programs. If our proprietary
rights were infringed by a third-party and we did not have adequate legal recourse, our ability to earn profits, which are highly
dependent on those rights, would be severely diminished.
Other companies
may own, obtain or claim trademarks that could prevent, limit or interfere with our use of our trademarks.
Our
various trademarks are important to our business. If we were to lose the use of any of our trademarks, our business would be harmed,
and we would have to devote substantial resources towards developing an independent brand identity. Defending or enforcing our
trademark rights at a local and international level could result in the expenditure of significant financial and managerial resources.
Risks Related to
the Investigation and the Restatement
Matters relating
to or arising from our Audit Committee investigation, including regulatory proceedings, litigation matters and potential additional
expenses, may adversely affect our business and results of operations.
As
previously disclosed in our public filings, the Audit Committee has recently completed the investigation relating to revenue recognition.
We are also the subject of an investigation by the SEC and United States Attorney’s Office for the Western District of Texas
related to these matters.
We
have incurred significant expenses related to legal, accounting, and other professional services in connection with the Audit Committee
investigation and related matters and related remediation efforts. The expenses incurred, and expected to be incurred, in connection
with the Audit Committee investigation and related matters, the impact of our delay in 2017 and through June 14, 2018 in meeting
our periodic reporting requirements on the confidence of investors, employees and customers, and the diversion of the attention
of the management team that has occurred, and is expected to continue, has adversely affected, and could continue to adversely
affect, our business, financial condition and results of operations or cash flows.
As
a result of the matters reported above, we are exposed to greater risks associated with litigation, regulatory proceedings and
government enforcement actions. In addition, we have incurred significant legal expenses in connection with a securities class
action that has been filed against us and certain of our directors and officers, which we recently settled in August 2018. Any
future investigations or additional lawsuits may adversely affect our business, financial condition, results of operations and
cash flows.
We have restated
our consolidated financial statements, which may lead to additional risks and uncertainties.
We
have restated our consolidated financial statements as of and for the years ended December 31, 2016 and 2015. The determination
to restate these consolidated financial statements was made by our Audit Committee upon management’s recommendation. As a
result of these events, we have become subject to a number of additional risks and uncertainties, including substantial unanticipated
accounting and legal fees in connection with or related to the Restatement. Likewise, such events might cause a diversion of our
management’s time and attention. We are also subject to claims, investigations and proceedings arising out of the Restatement.
The restatement
of our previously issued financial results has resulted in private litigation and could result in private litigation judgments
that could have a material adverse impact on our results of operations and financial condition.
We
are subject to shareholder litigation relating to the restatement of our previously filed financial statements and to certain of
our previous public disclosures. Our management has been, and may in the future be, required to devote significant time and attention
to this litigation, and this and any additional matters that arise could have a material adverse impact on our results of operations
and financial condition as well as on our reputation. While we cannot estimate our potential exposure in these matters at this
time, we have already incurred significant expense defending this litigation and expect to continue to need to incur significant
expense in the defense.
The
existence of the litigation may have an adverse effect on our reputation with our customers, which could have an adverse effect
on our results of operations and financial condition.
We have identified
material weaknesses in our internal control over financial reporting which could, if not remediated, result in additional material
misstatements in our consolidated financial statements.
Our
management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Management has identified
material weaknesses in our internal control over financial reporting.
A
material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements
will not be prevented or detected on a timely basis. In connection with our management’s assessment of our internal control
over financial reporting, our management identified the following deficiencies that constituted individually, or in the aggregate,
material weaknesses in our internal control over financial reporting as of December 31, 2017.
We
had material weaknesses in our control environment and monitoring:
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We did not implement effective oversight of our finance and accounting processes (including organizational
structure and reporting hierarchy), which impacted our ability to make appropriate decisions regarding revenue recognition.
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We did not effectively design and implement appropriate oversight controls over our period-end
financial closing and reporting processes, and our review controls were not sufficient to ensure that errors regarding revenue
recognition would be detected.
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We did not effectively monitor (review, evaluate and assess) the risks associated with key internal
control activities that provide the revenue information contained in our financial statements.
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We had material weaknesses related to internal control monitoring and activities to support the
financial reporting process:
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We did not maintain effective controls over the invoicing process to ensure that proper supporting
documentation was received prior to preparing invoices.
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We did not maintain effective controls over the revenue recognition process to ensure revenue was
only recognized when all four criteria of our revenue recognition policy were met.
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Because
of these material weaknesses, our management concluded that our internal control over financial reporting was not effective based
on criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission in Internal Control-An Integrated
Framework (2013).
We
have developed and are in the process of implementing remediation plans designed to address these material weaknesses. If our remedial
measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies
in our internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatements
and we could be required to restate our financial results, which could lead to substantial additional costs for accounting and
legal fees.
Any
additional revisions or restatements of our consolidated financial statements may lead to a further loss of investor confidence
and have a negative impact on the trading prices of our securities. Any of these matters could adversely affect our business, reputation,
revenues, results of operations and financial condition and limit our ability to access the capital markets through equity or debt
issuances.
We face risks
related to an ongoing Securities and Exchange Commission investigation.
On
January 11, 2018, we received a subpoena from the SEC which has since opened a formal investigation relating to, among other things,
the Restatement (the “SEC Investigation”). We are cooperating fully with the SEC Investigation. At this point, we are
unable to predict what the outcome of the SEC Investigation may be or what, if any, consequences the SEC Investigation may have
with respect to the Company or any current or former Company personnel. However, the SEC Investigation could result in considerable
legal expenses, divert management’s attention from other business concerns and harm our business. If the SEC were to determine
that legal violations occurred, we could be required to pay significant civil and/or criminal penalties and/or other amounts and
we could become subject to a cease and desist order and/or other remedies, or conditions imposed as part of any resolution. We
can provide no assurances as to the outcome of the SEC Investigation.
We face risks
related to an ongoing investigation by the United States Attorney’s Office for the Western District of Texas.
On
May 31, 2018, we were served with a subpoena issued by a grand jury sitting in the United States District Court for the Western
District of Texas (the “Grand Jury Subpoena”). The Grand Jury Subpoena requests all documents and emails relating to
the Company’s investigation of the potential improper recognition of software license revenue. We intend to fully cooperate
with the Grand Jury Subpoena and related investigation being conducted by the United States Attorney’s Office for the Western
District of Texas (the “U.S. Attorney’s Investigation”). At this time, we are unable to predict the duration,
scope, result or related costs of the U.S. Attorney’s Investigation. We are also unable to predict what, if any, further
action may be taken in connection with the Grand Jury Subpoena and the U.S. Attorney’s Investigation, or what, if any, penalties,
sanctions or remedial actions may be sought. Any determination by the U.S. Attorney’s office that the Company’s activities
were not in compliance with existing laws or regulations, however, could result in the imposition of fines, penalties, disgorgement,
equitable relief, or other losses, which could have a material adverse effect on the Company’s consolidated financial position,
liquidity, or results of operations.
Our indemnification
obligations and limitations of our director and officer liability insurance may have a material adverse effect on our financial
condition, results of operations and cash flows.
Under
Delaware law, our certificate of incorporation and bylaws and certain indemnification agreements to which we are a party, we have
an obligation to indemnify, or we have otherwise agreed to indemnify, certain of our current and former directors and officers
with respect to current and future investigations and litigation. In connection with some of these pending matters, we are required
to, or we have otherwise agreed to, advance, and have advanced, legal fees and related expenses to certain of our current and former
directors and officers and expect to continue to do so while these matters are pending. Certain of these obligations may not be
“covered matters” under our directors’ and officers’ liability insurance, or there may be insufficient
coverage available. Further, in the event the directors and officers are ultimately determined not to be entitled to indemnification,
we may not be able to recover the amounts we previously advanced to them.
In
addition, we have incurred significant expenses in connection with the Audit Committee’s independent investigation, the pending
SEC Investigation, the pending investigation by the United States Attorney’s Office for the Western District of Texas and
shareholder litigation. We cannot provide any assurances that past or future claims related to those or other matters, including
the cost of fees, penalties or other expenses, will not exceed the limits of our insurance policies, that such claims are covered
by the terms of our insurance policies or that our insurance carrier will be able to cover our claims. Additionally, to the extent
there is coverage of these claims, the insurers also may seek to deny or limit coverage in some or all of these matters. Furthermore,
the insurers could become insolvent and unable to fulfill their obligation to defend, pay or reimburse us for insured claims. Accordingly,
we cannot be sure that claims will not arise that are in excess of the limits of our insurance or that are not covered by the terms
of our insurance policy. Due to these coverage limitations, we may incur significant unreimbursed costs to satisfy our indemnification
obligations, which may have a material adverse effect on our financial condition, results of operations or cash flows.