Filed pursuant to Rule
424(b)(3)
Registration Statement No. 333-139401
PROSPECTUS SUPPLEMENT NO. 3
TO PROSPECTUS DATED APRIL 16, 2007
GlobalSCAPE, Inc.
4,732,000 Shares of
Common Stock
We are supplementing the prospectus, dated April 16, 2007, as supplemented
by Prospectus Supplement No. 1, dated May 18, 2007, and Prospectus
Supplement No. 2, dated August 20, 2007, to add certain information contained
in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.
This prospectus supplement is not complete without, and may not be delivered or
utilized except in connection with, the prospectus, dated April 16, 2007,
Prospectus Supplement No. 1, dated May 18, 2007, and Prospectus Supplement No.
2, dated August 20, 2007, with respect to the securities described above,
including any amendments or supplements thereto.
This prospectus supplement, together with the prospectus, Prospectus
Supplement No. 1 and Prospectus Supplement No. 2, is to be used by certain
holders of the above-referenced securities or by their transferees, pledges,
donees or their successors in connection with the offer and sale of the above
referenced securities. This prospectus
supplement should be read in conjunction with the prospectus, Prospectus
Supplement No. 1 and Prospectus Supplement No. 2, which are to be delivered
with this prospectus supplement. All
capitalized terms used but not defined in this prospectus supplement shall have
the meanings given them in the prospectus, dated April 16, 2007.
Our common stock is quoted on the American Stock Exchange under the
symbol “GSB.”
Investing in these securities involves risks. You should carefully
review the information contained under the heading “Risk Factors” beginning on
page 2 of the prospectus dated April 16, 2007.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THE PROSPECTUS, DATED APRIL 16, 2007, AS SUPPLEMENTED BY
PROSPECTUS SUPPLEMENT NO. 1, DATED MAY 18, 2007, PROSPECTUS SUPPLEMENT NO. 2,
DATED AUGUST 20, 2007, AND THIS PROSPECTUS SUPPLEMENT NO. 3, IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this supplement to the prospectus is November 26,
2007.
Notice About Information Presented In This Supplement
•
This supplement
may be used by the Selling Security Holders to offer their shares only if
accompanied by the prospectus, dated April 16, 2007, Prospectus Supplement No.
1, dated May 18, 2007, and Prospectus Supplement No. 2, dated August 20, 2007.
•
Information
included in our quarterly report on Form 10-Q for the interim period ended
September 30, 2007, filed with the Securities and Exchange Commission on
November 14, 2007, is included in this supplement.
•
This supplement
provides information that supersedes, or is in addition to, information
presented in the prospectus, Prospectus Supplement No. 1 and Prospectus
Supplement No. 2. If there is any
difference between the information presented in this supplement and the
information contained in the prospectus, Prospectus Supplement No. 1 and
Prospectus Supplement No. 2, you should rely on the information in this
supplement.
•
You should rely
only on the information provided in this supplement, the prospectus, Prospectus Supplement No. 1, and Prospectus
Supplement No. 2. We have not authorized anyone to provide you with different
information.
•
We do not claim
the information contained in this supplement or the accompanying prospectus and
Prospectus Supplement No. 1 and Prospectus Supplement No. 2 is accurate as of
any date other than the dates on their respective covers.
Forward Looking Information
This prospectus supplement contains “forward-looking statements” within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended. “Forward-looking
statements” are those statements that are not of historical fact, but describe
management’s beliefs and expectations. We have identified many of the
forward-looking statements in this prospectus by using words such as “anticipate,”
“believe,” “could,” “estimate,” “may,” “expect,” and “intend.” Although
we believe these beliefs and expectations are reasonable, our operations
involve a number of risks and uncertainties, including those described in the “Risk
Factors” section of the prospectus dated April 16, 2007 and other
documents filed with the Securities and Exchange Commission. Therefore, our
actual results could differ materially from those discussed in the prospectus,
this prospectus supplement and such other documents.
GlobalSCAPE®, CuteFTP Pro®, CuteZIP®, and CuteMAP® are registered trademarks of
GlobalSCAPE Texas, LP. CuteFTP, CuteHTML, GlobalSCAPE Secure FTP Server,
GlobalSCAPE Transfer Engine, ContentXML, and Enhanced File Transfer Server are
trademarks of GlobalSCAPE Texas, LP. Other trademarks and tradenames in this
prospectus supplement are the property of their respective owners.
S-2
Availl operates as a wholly-owned subsidiary of
GlobalSCAPE, Inc. based in Andover, Massachusetts. GlobalSCAPE, Inc. is a holding company and
conducts no operations; however, references to “GlobalSCAPE” or the “Company”
refer collectively to GlobalSCAPE Texas, LP, its partners and Availl unless
otherwise indicated.
On July 19, 2007 the common stock of GlobalSCAPE,
Inc. began trading on the American Stock Exchange (AMEX) under the symbol GSB.
Basis of Presentation
The accompanying unaudited consolidated financial
statements have been prepared in accordance with Rule 10-01 of Regulation S-X, “Interim
Financial Statements.” Accordingly, they
do not include all information and footnotes required under generally accepted
accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments
(consisting of normally recurring accruals) considered necessary for a fair
presentation have been made. The results
of operations for any interim period are not necessarily indicative of the
results to be expected for the full year.
The consolidated balance sheet at December 31, 2006 has been derived
from the audited consolidated financial statements at that date but does not
include all the information and footnotes required by generally accepted
accounting principles for complete consolidated financial statements. For further information, refer to the
consolidated financial statements and footnotes included in GlobalSCAPE’s
Annual Report on Form 10-K for the year ended December 31, 2006.
Principles of
Consolidation
The consolidated financial statements include all subsidiaries. All inter-company transactions and balances
have been eliminated.
Liquidity
The
use of capital resources is driven principally by the need to enhance existing
products and to develop or acquire new products. The amount of such expenditures has a direct
impact on the ability to offer enhanced and new products to customers. The Company’s principal source of funds is
cash flow from operations which, in turn, is highly dependent on sales
revenue. During the nine months ended
September 30, 2007, the Company generated $4.9 million of cash from operations,
$1.4 million of which was used along with other funds to repay a $4.6 million
term loan incurred in connection with the Availl acquisition. We continue to generate cash in excess of our
operational needs. As of September 30, 2007, the Company had cash and cash
equivalents of $4.6 million and had net working capital of $3.1 million. Management believes this level of working
capital, together with availability under the Company’s revolving credit
facility with Silicon Valley Bank and the excess cash generated by the
profitable operation of the business, is adequate to finance the Company’s
current level of operations.
The
Company entered into a loan agreement with Silicon Valley Bank on September 22,
2006 which involved a $5,000,000 term loan agreement which we used to finance
part of the cash portion of the purchase price for Availl. The term loan was fully repaid in the first
quarter of 2007. The loan agreement also established a $750,000 revolving line
of credit for two years at
S-8
an
interest rate of prime plus 1.00%. At
September 30, 2007, the entire amount of this line of credit was available.
On
May 21, 2007, the Board of Directors approved a plan to repurchase up to $3.0
million of GlobalSCAPE common stock. The repurchase plan is designed to
increase shareholders’ value and reduce the dilutive effect of GlobalSCAPE’s
stock option plans. As of September 30, 2007, the Company had repurchased a
total of 159,873 shares at an average cost of $3.35 per share for a total cost
of $527,528. We base our level of stock
repurchases on internal cash management decisions and this level may fluctuate
from quarter to quarter. At September 30, 2007, approximately $2.5 million
remained available for repurchase under the existing repurchase authorization.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current year
presentation. These reclassifications had no impact on operating income as
previously reported.
Sale / Disposal of
Assets
During
the first nine months of 2006, the Company disposed of equipment with an
original purchase price of $15,362 and accumulated depreciation of $15,362.
GlobalSCAPE recognized a gain of $619 related to the disposal of these assets.
During the first nine months of 2007, the Company disposed of equipment with an
original purchase price of $20,532 and accumulated depreciation of $20,532.
GlobalSCAPE recognized a gain of $221 related to the disposal of these assets
Goodwill
As of September 30, 2007, GlobalSCAPE had goodwill
in the amount of $9.8 million associated with the acquisition of Availl. This acquisition was accounted for using the
purchase method of accounting. See Acquisitions note for a description of the
acquisition. In accordance with SFAS No. 142
Goodwill and
Other Intangible Assets
, the Company will assess the impairment of
goodwill annually in the fourth quarter, or more frequently if other indicators
of potential impairment arise.
No allocation has been made to intangible assets as
of September 30, 2007. Management will
determine the proper value of intangible assets acquired from Availl, Inc. and
allocate a portion of the goodwill to intangible assets within the next three
months.
Acquisitions
On
September 22, 2006, the Company completed the acquisition of all of the issued
and outstanding shares of Availl, a privately held provider of WAFS and CDP
software, for $7.65 million in cash and $2.0 million in the form of 716,846
shares of GlobalSCAPE common stock. The Company incurred direct acquisition
costs of approximately $127,000. In connection with the acquisition, $850,000
of the cash consideration was placed into an escrow account for purposes of
settling indemnification claims for the eighteen-month period following the
closing. In accordance with EITF Issue No. 99-12, Determination of the
Measurement Date for the
S-9
Stock-Based Compensation
GlobalSCAPE has stock-based
compensation plans available to grant incentive stock options, non-qualified
stock options and restricted stock to employees and non-employee members of the
Board of Directors.
Under the GlobalSCAPE, Inc.
2000 Stock Option Plan (the “Employees Plan”), which was approved by the Board
of Directors and became effective on May 17, 2001, a maximum of 3,660,000
shares of GlobalSCAPE common stock may be awarded.
During
the nine months ended September 30, 2007, 450,000 stock options were
granted.
The exercise price, term and
other conditions applicable to each stock option granted under the Employees
Plan are determined by the Board of Directors. The exercise price of stock
options is set on the grant date and may not be less than the fair market value
per share of our stock on that date. The Employees Plan options generally
become exercisable over a three-year period and expire after ten years.
Under the GlobalSCAPE, Inc. 2006 Non-Employee Directors Long-term Equity
Incentive Plan (the “Directors Plan”), which was approved by the stockholders
and became effective on September 1, 2007, a maximum of 500,000 shares of
GlobalSCAPE common stock may be awarded.
During
the nine months ended September 30, 2007, 80,000 stock options were granted.
The exercise price, term and other conditions
applicable to each stock option granted under the Directors Plan are determined
by the Compensation Committee of the Board of Directors. The exercise price of
stock options is set on the grant date and may not be less than the fair market
value per share of our stock on that date. The most recently awarded Directors
Plan options become exercisable over a one-year period and expire after ten
years.
Effective January 1, 2006,
we adopted the provisions of Statement of Financial Accounting Standards No.
123 (revised 2004), “Share-Based Payment” (SFAS No. 123R) requiring that
compensation cost relating to share-based payment transactions be recognized in
the financial statements. The cost is measured at the grant date, based on the
calculated fair value of the award, and is recognized as an expense over the
employee’s requisite service period (generally the vesting period of the equity
award). Prior to January 1, 2006, we accounted for share-based compensation to
employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting
for Stock Issued to Employees” (APB No. 25), and related interpretations. We
also followed the disclosure requirements of Statement of Financial Accounting
Standards No. 123, “Accounting for Stock-Based Compensation”, as amended by
Statement of Financial Accounting Standards No. 148, “Accounting for
Stock-Based Compensation-Transition and Disclosure”. We adopted SFAS No. 123R
using the modified prospective method and, accordingly, financial statement
amounts for prior periods presented in this Form 10-Q have not been restated to
reflect the fair value method of recognizing compensation cost relating to
non-qualified stock options.
There
was $204,935 and $759,014 of compensation cost related to incentive stock
options recognized in operating results in the nine months ended September 30,
2006 and 2007, respectively.
The fair value of each
option award is estimated on the date of grant using the Black-Scholes
option-pricing model. Expected volatility is based on historical volatility of
GlobalSCAPE stock. We used the simplified method to derive an expected term.
The expected
S-11
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We develop and distribute secure file management
software for individuals and business users to safely send data over the
internet and Wide-Area File System (“WAFS”) collaboration and Continuous Data
Protection (“CDP”) products. Our file
management products guarantee the privacy of critical information such as
financial data, medical records, customer files and other similar
documents. In addition, these products
ensure compliance with government regulations relating to the protection of
information while allowing users to reduce IT costs, increase efficiency, track
and audit transactions and automate processes.
Our WAFS and CDP products provide data replication, acceleration of file
transfer, sharing/collaboration and continuous data backup and recovery to our
customers. We believe that we are
uniquely positioned to provide secure transfer, sharing, and replication of files
that need to be transmitted inside the user’s firewall to distributed offices,
or outside the user’s firewall to business and trading partners.
The following is a brief description of our products:
•
File Management
Products — Our File Management products are best known for the “CuteFTP” product
line. They primarily consist of products that help users securely move and copy
files on the internet. A substantial portion of our revenues are derived from
licensing our File Management products. Some of our products encrypt the
transfers for security using technology similar to a Web browser. The products
consist of three product categories: client, server and compression transfer.
Our File Management product line includes CuteFTP Home, Cute FTP Professional,
SecureFTP Server, and Enhanced File Transfer.
•
Wide-Area File
System Products — Our WAFS products provide a file sharing and collaboration
solution over multiple sites. By keeping
all data updated on each location’s file server, each site has instant access
to the very latest version. Our WAFS
products help ensure that no one can ever open an old file version without user
conflicts. Changes made to data on any server are mirrored on all other
servers.
•
Continuous Data
Protection Products — Our CDP products consolidate remote backup for file servers. As files change, the servers backup in real
time to the customer’s backup site which can be at the same or a remote
location. The backup server can keep
any number of past versions of each file (and deleted files) which gives the
customer instant restore, as well as the ability to perform point-in-time
snapshots.
Our strategy is to continue enhancing our file
transfer products to meet the demands of both individual and enterprise users,
while improving the security features of our current product line, and to
expand into growing markets through the acquisition of compatible companies and
products. We acquired Availl, a leading
provider of WAFS collaboration and CDP products, as part of this strategy. This acquisition expanded our technology base
into data replication, acceleration of file transfer, sharing/collaboration and
continuous data backup and recovery. We
believe that these new products give us entry into two large and rapidly
growing markets.
S-15
We believe that our continued growth will come not
only through the further development of our SecureFTP Server and Enhanced File
Transfer products and the growing demand for file security when transferring
information across the internet, but also through the aggressive exploitation
of the data replication and protection markets.
Based upon estimates by Gartner, Inc., and other consulting groups in
our markets, we believe that the WAN optimization/WAFS market is currently $300
million annually and growing at 20% - 30% per year, and the CDP market is of
similar size, but in the early stages of adoption and growing rapidly. In addition, we believe that the WAFS and CDP
products are highly complementary to our traditional Secure File Transfer products
facilitating cross sales and new customer penetration.
Liquidity
and Capital Resources
Our capital requirements principally relate to our
need to enhance our existing products and to develop or acquire new
products. The amount of our capital expenditures
has a direct impact on our ability to offer enhanced and new products to our
customers. We rely heavily on cash flows
from operations to fund our capital expenditures and prior to 2006, these cash
flows were significantly dependent upon sales of CuteFTP Home and CuteFTP
Professional, which accounted for 50% and 30% of our revenues in the years
ended December 31, 2005 and 2006, respectively, and 33% and 18% for the nine
months end September 30, 2006 and 2007, respectively. Much of the percentage decline of revenues
from the sale of these two products was caused by continued significant
increases in the sales of our other products in 2006, particularly, SecureFTP
Server and Enhanced File Transfer, which collectively accounted for 61% of our
revenues in the year ended December 31, 2006, and 63 % and 67 % for the nine
months ended September 30, 2006 and 2007, respectively. Revenues in total increased 87% when
comparing the nine months ended September 30, 2006 and 2007.
Our principal sources of capital are cash on hand,
cash flow from operations and availability under our revolving line of
credit. At September 30, 2007, we had
cash on hand of $4.6 million and we continue to generate cash in excess of our
operational needs. To the extent that
sales decline, our cash flow from operations will also decline. If sales or liquidity decline, management may
substantially reduce personnel and personnel-related costs, reduce or
substantially eliminate capital expenditures and/or reduce or substantially
eliminate research and development expenditures. We may also sell equity
securities or enter into other credit arrangements in order to finance future
acquisitions or licensing activities.
At September 30, 2007, we had $750,000 of availability under our
revolving line of credit. Borrowings
under our revolving credit facility bear interest at 1.00% above the Bank’s
prime rate and mature on September 22, 2008.
Interest payments are due on the first day of each calendar month.
The revolving credit facility is secured by substantially all of the
assets of GlobalSCAPE and its subsidiaries including Availl. The loan agreement contains customary
covenants including covenants relating to maintaining legal existence and good
standing, complying with applicable laws, delivery of financial statements,
maintenance of inventory, payment of taxes, maintaining insurance, and
protection of intellectual property rights.
GlobalSCAPE and its subsidiaries are also prohibited from selling any of
their assets other than in the ordinary course of business, acquiring any other
entities, changing the types of business they are engaged in,
S-16
incurring indebtedness other than that permitted by
the loan agreement, incurring any liens on their assets other than those
permitted by the loan agreement, making certain investments or paying any
dividends on, or acquiring, any shares of their capital stock. The loan agreement contains two financial
covenants. GlobalSCAPE and its
subsidiaries must maintain:
•
a ratio of (A)
EBITDA less the sum of (i) cash taxes paid and (ii) non-financed capital
expenditures (excluding non-cash stock options and taxes already accrued), to
(B) the sum of (i) principal plus (ii) interest paid to Bank, of at least 1.5
to 1.00; and
•
a ratio of
total funded debt to EBITDA of not more than 2.00 to 1.00.
At
September 30, 2007, we were in compliance with these covenants.
The loan agreement also contains customary events of default including
the failure to make payments of principal and interest, the breach of any
covenants, the occurrence of a material adverse change, certain bankruptcy and
insolvency events, the breach of other agreements creating indebtedness of
$50,000 or more and the entry of a judgment of $50,000 or more against
GlobalSCAPE or any of its subsidiaries.
Net cash provided by operating activities was
approximately $4.9 million for the nine months ended September 30, 2007 as
compared to $2.0 million in the nine months ended September 30, 2006. Cash provided by operations for the nine
months ended September 30, 2007 was primarily the result of increasing sales of
the software products without a corresponding increase in operating expenses.
Net cash used in investing activities for the nine
months ended September 30, 2006 and 2007 was $7.7 million and $148,171,
respectively. Of all the cash used in
2006, $7.6 million was for the acquisition of Availl and the balance used was
primarily for the purchase of computer equipment and software. The cash used in
2007 was primarily $148,000 spent for computer equipment.
Net cash provided by (used in) financing activities
during the nine months ended September 30, 2006 and 2007 were $5.0 million and
($4.8 million)
respectively. In 2006, the increase in cash provided from
financing activities was attributable to the proceeds from the term loan
borrowed in connection with the acquisition of Availl and the issuance of stock
from exercised options. In 2007, the
decrease in cash from financing activities was the result of the repayment of
the term loan with Silicon Valley Bank of $4.6 million and the repurchase of
treasury stock of $527,528, which was partially offset by the issuance of
common stock from employee stock options of $334,453.
As of September 30, 2007, we had in excess of $4.5 million in cash and
cash equivalents, total current assets of $6.4 million and total current
liabilities of $3.3 million, resulting in working capital of $3.1 million. The
primary component of current liabilities at September 30, 2007 was $2.0 million
of deferred revenues which will be recognized over the remaining term
(generally one to twelve months) of the maintenance and support contracts. At September 30, 2007, our principal
commitments consisted of obligations outstanding under operating leases as well
as accrued expenses, federal income tax and trade accounts payable. We plan to continue to expend significant
resources on product development in future periods and may also use our cash to
acquire or license technology, products or businesses related to our current
business.
S-17
The facilities that we currently occupy are expected to be sufficient
for the remainder of 2007. Consequently,
we do not anticipate significant expenditures for leasehold improvements or
furniture for our current facility in 2007.
Our lease on the current facility will expire in mid-2008. On September
21, 2007, the Company obtained new office space through a new lease agreement
for 21,495 square feet. The term of the new agreement is for 132 months, and
the basic monthly rental ranges from $27,317 to $30,003 over the life of the
lease. We believe that we will occupy this space by July of 2008.
On May 21, 2007, the Board of Directors approved a plan to repurchase
up to $3.0 million of GlobalSCAPE common stock. The repurchase plan is designed
to increase shareholders’ value and reduce the dilutive effect of GlobalSCAPE’s
stock option plans. As of September 30, 2007, the company had repurchased a
total of 159,873 shares at an average cost of $3.35 per share for a total cost
of $527,528. We base our level of stock
repurchases on internal cash management decisions and this level may fluctuate
from quarter to quarter. At September 30, 2007, approximately $2.5 million remained
available for repurchase under the existing repurchase authorization.
Contractual Obligations
The following table sets forth the future minimum
payments required under contractual commitments at September 30, 2007
:
|
|
|
Payments Due by Fiscal Year
|
|
|
Contractual Obligations
|
|
2007 (1)
|
|
2008
|
|
2009
|
|
2010
|
|
Thereafter
|
|
Total
|
|
|
Operating Lease
|
|
$
|
70,858
|
|
$
|
190,063
|
|
$
|
81,667
|
|
$
|
0
|
|
$
|
0
|
|
$
|
342,588
|
|
|
Equipment Leases
|
|
$
|
2,002
|
|
$
|
7,392
|
|
$
|
7,392
|
|
$
|
7,392
|
|
$
|
9,056
|
|
$
|
33,234
|
|
|
Total Cash Obligations
|
|
$
|
72,860
|
|
$
|
197,455
|
|
$
|
89,059
|
|
$
|
7,392
|
|
$
|
9,056
|
|
$
|
375,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Amounts for 2007 reflect the future minimum payments for the
remaining three months of the fiscal year.
Critical Accounting Policies
Uncertain Tax Issues
Effective
at the beginning of the first quarter of 2007, the Company adopted the
provision of FIN 48, “Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109.”
FIN 48 contains a two-step approach to recognizing and measuring
uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting
for Income Taxes.” The first step is to
evaluate the tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not that the position
will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second
step is to measure the tax benefit as the largest amount that is more than 50%
likely of being realized upon ultimate settlement.
As
a result of the implementation of FIN 48, the Company has not changed any of
its tax accrual estimates. The Company
files U.S. federal and U.S. state tax returns.
S-18
There were no other changes in our critical accounting
policies from those set forth in our Annual Report on Form 10-K for the year
ended December 31, 2006 during the nine months ended September 30, 2007.
Inflation
Increases in inflation generally result in higher
interest rates and operating costs. Our greatest
exposure is to the cost of salaries and general and administrative expenses. To
date we believe that inflation has not had a significant impact on our
operations.
Seasonality
Historically,
our internet
sales have been subject to seasonal variations. We experience significantly
less sales volume during national holidays and weekends when compared to normal
business days. In the fourth quarter of
2005, our sales revenues decreased approximately 5% over the prior
quarter. However, this trend did not
exist in 2006 as internet sales increased in the fourth quarter by 7% over the
third quarter of the same year. Over the
past two calendar years the total dollar value of internet sales has remained
relatively flat while sales of our file transfer server products have increased
by 130% growing to become 61% of total sales.
As a result of this change in mix of products and the apparent lessoning
of the internet sales seasonality in 2006, we do not expect seasonality to have
a significant impact on sales in 2007.
In the nine months ended September 30, 2007, seasonality had no material
effect on internet sales volume.
Comparison
of the Three Months ended September 30, 2006 and 2007
|
|
|
2006
|
|
2007
|
|
$ Change
|
|
% Change
|
|
|
Software product revenues
|
|
$
|
2,603,236
|
|
$
|
3,900,300
|
|
$
|
1,297,064
|
|
50
|
%
|
|
Cost of revenues
|
|
145,646
|
|
85,711
|
|
(59,935
|
)
|
(41
|
)%
|
|
Selling, general and administrative Expenses
|
|
1,318,952
|
|
2,529,956
|
|
1,211,004
|
|
92
|
%
|
|
Research and development expenses
|
|
302,363
|
|
443,433
|
|
141,070
|
|
47
|
%
|
|
Depreciation and amortization
|
|
25,046
|
|
38,965
|
|
13,919
|
|
56
|
%
|
|
Total operating expense
|
|
1,792,007
|
|
3,098,065
|
|
1,306,058
|
|
73
|
%
|
|
Income (loss) from operations
|
|
811,229
|
|
802,235
|
|
(8,994
|
)
|
(1
|
)%
|
|
Other Income (expense)
|
|
21,412
|
|
41,540
|
|
20,128
|
|
94
|
%
|
|
Income tax expense
|
|
294,556
|
|
140,900
|
|
(153,656
|
)
|
(52
|
)%
|
|
Net income (loss)
|
|
$
|
538,085
|
|
$
|
702,875
|
|
$
|
164,790
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue.
We derive
revenues primarily from software sales.
Revenues are comprised of the gross selling price of software, including
shipping charges and the earned portion of support and maintenance agreements.
For the three months ended September 30, 2007, total revenues increased by $1.3
million or approximately 50% from the same quarter in 2006 due to an increase
in revenues from sales of our Wide-Area File Systems, SecureFTP Server and
Enhanced File Transfer products.
S-19
The
following table reflects revenue by product including the related maintenance
and support for each product:
|
|
|
Revenue
for the Quarter Ending September 30,
|
|
|
Product
|
|
2006
|
|
2007
|
|
|
CuteFTP Professional
|
|
$
|
531,647
|
|
20
|
%
|
$
|
493,535
|
|
13
|
%
|
|
CuteFTP Home
|
|
237,862
|
|
9
|
%
|
247,799
|
|
6
|
%
|
|
Enhanced File Transfer
|
|
1,010,912
|
|
39
|
%
|
1,587,228
|
|
41
|
%
|
|
SecureFTP Server
|
|
707,736
|
|
27
|
%
|
801,858
|
|
21
|
%
|
|
Wide-Area File Systems
|
|
—
|
|
—
|
|
601,434
|
|
15
|
%
|
|
Continuous Data Protection
|
|
—
|
|
—
|
|
80,203
|
|
2
|
%
|
|
All Others
|
|
207,870
|
|
8
|
%
|
181,626
|
|
5
|
%
|
|
Deferred Revenue adjustment
|
|
(92,791
|
)
|
(4
|
)%
|
(93,383
|
)
|
(2
|
)%
|
|
Total Operating Revenues
|
|
$
|
2,603,236
|
|
100
|
%
|
$
|
3,900,300
|
|
100
|
%
|
|
Gross maintenance and support included above before recognition of
the net adjustment to defer revenue
|
|
$
|
785,829
|
|
30.2
|
%
|
$
|
1,074,699
|
|
27.6
|
%
|
Our Wide-Area File Systems and Continuous Data Protection products
accounted for approximately 17.5% of total revenue for the third quarter of
2007. There were no sales for these products in the same quarter of 2006
because we did not begin selling these products until after completing the
Availl acquisition in September 2006. The WAFS/CDP revenues have not increased
as originally anticipated due to management’s decision to delay the aggressive
marketing of those products to our existing customer base and to the market in
general as we had initially planned. The
amount of time required to make improvements to our WAFS and CDP products that
we believe are necessary has been greater than we had expected. We believe that good progress is currently
being made on the product improvements and we anticipate a more aggressive
sales effort for these products in 2008.
Sales of our SecureFTP Server and Enhanced File Transfer products grew
by 39% in the three months ended September 30, 2007 to $2.4 million, from $1.7
million in the same period in 2006. These products represented approximately 62% of our total
revenues in the three months ending September 30, 2007 as compared to 66% in
the same period in 2006. Revenues from
CuteFTP Home and CuteFTP Professional decreased by 4% as compared to the
quarter ended September 30, 2006 and accounted for approximately 29% and 19% of
total revenues for the three months ended September 30, 2006 and 2007,
respectively.
We believe that our reliance on the CuteFTP products will continue to
decline as we emphasize sales of our more complex enterprise products. In addition, because of the more complex
nature of SecureFTP Server, Enhanced File Transfer, WAFS and CDP, purchasers
require increased maintenance and support.
As a result, our maintenance and support revenues increased by 42% from
the second quarter of 2006 to the same period in 2007, and from $693,038 in
2006 to $981,316 in 2007, net of deferred revenue. Maintenance and support pricing is reflective
of the license cost of the products and the additional support it takes to
maintain and support the products and customers. With higher maintenance and
support revenues, we will recognize additional deferred revenue as we earn the
revenue over the life of the maintenance and support agreement.
Cost of Revenues.
Cost of revenues consists primarily of
royalties and production, packaging and shipping costs for boxed copies of
software products. Cost of revenues
decreased
S-20
by approximately $60,000 or 41% between periods from
$146,000 for the three months ended September 30, 2006 to $86,000 for the three
months ended September 30, 2007.
Royalties that we pay on software products licensed from third parties,
which we resell, are expensed as a cost of sale when the software product is
sold or earlier if the recoverability of any prepaid royalties is in
doubt. Cost of revenues as a percent of
total revenues was 6% for the three months ended September 30, 2006 as compared
to 2% for the same period in 2007.
Selling, General
and Administrative.
Selling, general and administrative
expenses consist primarily of personnel and related expenses, marketing,
customer support, rents, bad debt and professional fees. For the three
months ended September 30, 2006 and 2007, selling, general and administrative
expenses were $1.3 million and $2.5 million, respectively, an increase of $1.2
million. Of this increase, 45% or $538,000 was attributable to
Availl. In addition to the new Availl expenses, salaries and fringe
benefit costs increased by 5% as we have hired new employees in order to
support current and projected growth. Commissions and bonuses increased
by 85% as a result of the increase in revenues and income before taxes.
In the three months ended September 30, 2006 and 2007, we expensed $84,000 and
$323,000 respectively, for stock based compensation related to the granting of
stock options to employees and directors as required by FAS123R. In addition,
we incurred a one-time fee of $75,750 for joining the American Stock Exchange.
Research and
Development.
Research and development expenses increased
by $141,000 or 147% between periods, from $302,000 to $443,000. The
increase was due largely to Availl’s R&D cost in 2007 which were not
included in the same period of 2006, plus additional expenditures for external
development resources and hiring of additional personnel needed to support the
Availl products.
Depreciation and
Amortization.
Depreciation and amortization expense
consists of depreciation expense related to our fixed assets and amortization
of capitalized development costs. Depreciation and amortization expense
increased from $25,000 to $39,000, an increase of approximately 56%. This
increase was the result of acquiring $148,000 of equipment and software
acquired during the first nine months of 2007, and the corresponding
depreciation of these assets.
Other Income,
Expense.
We earned $21,000 and $43,000 in interest
income during the third quarter of 2006 and 2007 respectively from investing
our excess cash. For the three months ended September 30, 2006 and 2007,
interest expense increased from $0 to $2,000, respectively. The interest
expense incurred during 2007 was paid on deferred income per an employment
agreement between GlobalSCAPE and one of its key executives.
Income Taxes.
The
provision for federal income taxes for the quarter ended September 30, 2006 and
2007 respectively was $295,000 and $141,000. The decrease in federal income
taxes versus last year is the result of $158,436 of nonrecurring Research &
Development Credits and Extraterritorial Income Exclusion accumulated from
prior periods.
These net credits were discovered and
calculated in the third quarter of 2007, so they are also being recognized in
this quarter as a reduction to tax expense. There is also a fee of $40,924
recorded in SG&A related to these credits.
S-21
Beginning January 1, 2007, the state of Texas imposed a new margin tax
equal to 1% of the Company’s revenue less compensation expense (based on Texas
source income). In the three months ended September 30, 2007, this tax
plus the Massachusetts state tax for Availl equaled approximately $21,000
.
Net Income.
GlobalSCAPE recorded net income of
$538,000 and $703,000 for the three months ended September 30, 2006 and 2007,
respectively. The $165,000 increase in net income is positively affected
by approximately $46,000 by the net of some one-time items such as tax credits
and the American Stock Exchange fees. Without the positive impact of these
one-time items, net income would be 17% of revenue in the 2007 quarter compared
to 21% of revenue in the 2006 quarter. In general, the reduction of Net Income
as a percentage of revenue is due to the additional expenses incurred by
bringing the Availl products to market.
Comparison
of the Nine Months ended September 30, 2006 and 2007
|
|
|
2006
|
|
2007
|
|
$ Change
|
|
% Change
|
|
|
Software product revenues
|
|
$
|
7,463,486
|
|
$
|
13,941,472
|
|
$
|
6,477,986
|
|
87
|
%
|
|
Cost of revenues
|
|
372,565
|
|
204,881
|
|
(167,684
|
)
|
(45
|
)%
|
|
Selling, general and administrative expenses
|
|
3,879,460
|
|
7,451,676
|
|
3,572,216
|
|
92
|
%
|
|
Research and development expenses
|
|
799,168
|
|
1,432,394
|
|
633,226
|
|
79
|
%
|
|
Depreciation and amortization
|
|
69,726
|
|
105,393
|
|
35,667
|
|
51
|
%
|
|
Total operating expense
|
|
5,120,919
|
|
9,194,344
|
|
4,073,425
|
|
80
|
%
|
|
Income (loss) from operations
|
|
2,342,567
|
|
4,747,128
|
|
2,404,561
|
|
103
|
%
|
|
Other Income (expense)
|
|
58,666
|
|
24,726
|
|
(33,940
|
)
|
(58
|
)%
|
|
Income tax expense
|
|
814,162
|
|
1,480,887
|
|
666,725
|
|
82
|
%
|
|
Net income (loss)
|
|
$
|
1,587,072
|
|
$
|
3,290,967
|
|
$
|
1,703,896
|
|
107
|
%
|
Revenue.
We derive
revenues primarily from software sales.
Revenues are comprised of the gross selling price of software, including
shipping charges and the earned portion of support and maintenance agreements.
For the nine months ended September 30, 2006 and 2007, total revenues increased
by $6.5 million or approximately 87% from $7.5 million to $13.9 million due to
the increase in revenues from sales of our Wide-Area File Systems, SecureFTP
Server and Enhanced File Transfer products, a major portion of which was a $2.8
million order from the US Army. Unit volume increased with approximately
137,000 licenses and support agreements sold in the nine months ended September
30, 2006 versus 208,000 sold in the same period in 2007. The 52% increase in unit volumes resulted
from the large number of individual licenses and support agreements associated
with the US Army order.
S-22
The following table reflects
revenue by product including the related maintenance and support for each
product.
|
|
|
Revenue
for the Nine Months Ending September 30,
|
|
|
Product
|
|
2006
|
|
2007
|
|
|
CuteFTP Professional
|
|
$
|
1,688,022
|
|
23
|
%
|
$
|
1,723,003
|
|
12
|
%
|
|
CuteFTP Home
|
|
749,754
|
|
10
|
%
|
845,680
|
|
6
|
%
|
|
Enhanced File Transfer
|
|
2,849,088
|
|
38
|
%
|
4,332,954
|
|
31
|
%
|
|
SecureFTP Server
|
|
1,869,512
|
|
25
|
%
|
5,011,402
|
|
36
|
%
|
|
Wide-Area File Systems
|
|
—
|
|
—
|
|
2,075,052
|
|
15
|
%
|
|
Continuous Data Protection
|
|
—
|
|
—
|
|
139,545
|
|
1
|
%
|
|
All Others
|
|
686,113
|
|
9
|
%
|
471,815
|
|
3
|
%
|
|
Deferred Revenue adjustment
|
|
(379,001
|
)
|
(5
|
)%
|
(657,979
|
)
|
(5
|
)%
|
|
Total Operating Revenues
|
|
$
|
7,463,488
|
|
100
|
%
|
$
|
13,941,472
|
|
100
|
%
|
|
Gross maintenance and support included above before recognition of
the net adjustment to defer revenue
|
|
$
|
1,506,665
|
|
20.2
|
%
|
$
|
3,683,721
|
|
26.4
|
%
|
Sales of our SecureFTP Server and Enhanced File Transfer products grew
by 98% in the nine months ended September 30, 2007 to $9.3 million from $4.7
million in the same period in 2006, and represented approximately 67% of our
total revenues in the first nine months of 2007 as compared to 63% in the same
period in 2006. The increase in revenues
from these products was the result of increased emphasis of our internal sales
group on the enterprise level software needs of businesses and the US Army
order which was heavily weighted in the SecureFTP Server product.
Our Wide-Area File Systems and Continuous Data Protection products,
which we began selling after completing the Availl acquisition in September
2006, accounted for approximately 16% of total revenue for the nine months
ended September 30, 2007. The WAFS/CDP
revenues have not increased as originally anticipated due to management’s
decision to delay the aggressive marketing of those products to our existing
customer base and to the market in general as we had initially planned. The amount of time required to make
improvements to our WAFS and CDP products that we believe are necessary has
been greater than we had expected. We
believe that good progress is currently being made on the product improvements
and we anticipate a more aggressive sales effort for these products 2008.
Revenues from CuteFTP Home and CuteFTP Professional increased by 5% as
compared to the nine months ended September 30, 2006 and accounted for
approximately 33% and 18% of total revenues for the nine months ended September
30, 2006 and 2007, respectively. We
believe that our reliance on the CuteFTP products will continue to decline as
we emphasize sales of our more complex enterprise products.
Because of the more complex nature of SecureFTP Server, Enhanced File
Transfer, WAFS and CDP, purchasers require increased maintenance and
support. As a result, our
S-23
maintenance and support sales increased by 168% from
the first nine months of 2006 to the same period in 2007 from $1.1 million in
2006 to $3.0 million in 2007, net of the deferred revenue adjustment. Maintenance and support pricing is reflective
of the license cost of the products and the additional support it takes to
maintain and support the products and customers. With higher maintenance and
support revenues, we will recognize additional deferred revenue as we earn the
revenue over the life of the maintenance and support agreement.
Cost of Revenues.
Cost of revenues consists primarily of
royalties and production, packaging and shipping costs for boxed copies of
software products. Cost of revenues
decreased $168,000 or 45% between periods from $372,000 for the nine months
ended September 30, 2006 to $205,000 for the nine months ended September 30,
2007. Royalties that we pay on software
products licensed from third parties, which we resell, are expensed as a cost
of sale when the software product is sold or earlier if the recoverability of
any prepaid royalties is in doubt. Cost
of revenues as a percent of total revenues was 5% for the nine months ended
September 30, 2006 as compared to 1% for the same period in 2007.
Selling, General and Administrative.
Selling,
general and administrative expenses consist primarily of personnel and related
expenses, marketing, customer support, rents, bad debt and professional
fees. For the nine months ended September 30, 2006 and 2007, selling,
general and administrative expenses were $3.9 million and $7.5 million,
respectively, an increase of $3.6 million. Of this increase, 41% or $1.6
million was attributable to Availl. Of the non-Availl expenses, salaries
and fringe benefit costs increased 13% as we have hired new employees in order
to support current and projected growth. Commissions and bonuses
increased 75% as a result of the increase in revenues and income before
taxes. In the nine months ended September 30, 2006 and 2007, we expensed
$205,000 and $759,000 respectively, for stock based compensation related to the
granting of stock options to employees and directors as required by FAS123R.
Research and
Development.
Research and development expenses increased
$633,000 or 79% between periods, from $799,000 to $1.4 million. The
increase was due largely to Availl’s R&D cost in 2007 which were not
included in the same period of 2006, plus additional expenditures for external
development resources and hiring of additional personnel needed to support the
Availl products.
Depreciation and
Amortization.
Depreciation and amortization expense
consists of depreciation expense related to our fixed assets and amortization
of capitalized development costs. Depreciation and amortization expense
increased from $70,000 to $105,000, an increase of approximately 50%.
This increase was due primarily to the purchase of $148,000 of equipment and
software during the first nine months of 2007, and the corresponding
depreciation of those assets.
Other Income,
Expense.
For the nine months ended September 30, 2006
and 2007, interest expense increased from $0 to $33,000, respectively.
The interest expense incurred during 2007 was paid on the term loan related to
the acquisition of Availl. We earned $58,000 and $56,000 in interest during the
first nine months of 2006 and 2007, respectively, from investing our excess
cash.
S-24
Income Taxes.
The
provision for federal income taxes for the nine months ended September 30, 2006
and 2007 respectively was $814,000 and $1.4 million. The increase in federal
income taxes versus last year is the result of increased income upon which tax
is due.
Beginning January 1,
2007, the state of Texas imposed a new margin tax equal to 1% of the Company’s
revenue less compensation expense (based on Texas source income). In the
nine months ended September 30, 2007, this tax plus the Massachusetts state tax
for Availl equaled approximately $87,000
.
Net Income.
GlobalSCAPE recorded net income of $1.6 million and $3.3 million for the nine
months ended September 30, 2006 and 2007, respectively. The $1.7 million
increase in net income was attained even though the Company incurred
substantial increases in SG&A and R&D expenses related to Availl, plus
had an additional expense of $554,000 over the nine months in 2006 in
compensation expense as required by FAS 123R for grants of employee and
directors stock options.
Quantitative and
Qualitative Disclosures About Market Risk
To date, we have not utilized derivative financial instruments or
derivative commodity instruments. We do
not expect to employ these or other strategies to hedge market risk in the
foreseeable future. We may invest our
cash in money market funds, which are subject to minimal credit and market
risk. We believe that the interest rate
risk and other relevant market risks associated with these financial
instruments are immaterial.
In the nine months ended September 30, 2007, approximately 18% of our
revenues came from customers outside the United States. All revenues are received in U.S. dollars so
we have no exchange rate risk with regard to the sale. However, in July 2003, the European Union
(EU) enacted Value Added Taxes (VAT) on electronic purchases. These taxes are charged to our non-business
customers in the EU and, in our case, are remitted quarterly in pound
sterling. We expect that the impact of
this currency translation will not be material to our business.
S-25