SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY
REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31,
2008
OR
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from
to
.
Commission File No.
001-33601
GlobalSCAPE, Inc.
(Exact name of registrant as specified in its
charter)
Delaware
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74-2785449
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(State or other
jurisdiction of
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(I.R.S. Employer
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incorporation or
organization)
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Identification No.)
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6000
Northwest Parkway, Suite 100
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San
Antonio, Texas
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78249
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(Address of Principal
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(Zip Code)
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Executive Office)
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(210)
308-8267
(Registrants Telephone Number, Including Area
Code)
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for
the past 90 days.
x
Yes
o
No
Indicate by check mark if the
registrant is a shell company (as defined in Rule 12b-2 of the Act).
o
Yes
x
No
As of March 31, 2008, there were 17,184,584
shares of common stock outstanding
.
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting
company
x
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(Do not check if a smaller
reporting company)
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GlobalSCAPE Inc.
Quarterly Report on Form 10-Q
For the Quarter ended March 31, 2008
Index
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
quarterly report are the property of their respective owners.
Part I. Financial Information
Item1.
Financial Statements
GlobalSCAPE, Inc.
Consolidated Balance Sheets
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December 31,
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March 31,
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2007
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2008
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(unaudited)
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Assets
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Current assets:
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Cash and cash
equivalents
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$
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5,214,479
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$
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5,622,832
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Accounts
receivable (net of allowance for doubtful accounts of $113,201 and $168,368
on December 31, 2007 and March 31, 2008, respectively)
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2,232,927
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1,573,197
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Federal income
tax receivable
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122,984
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Prepaid expenses
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87,654
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72,438
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Total current
assets
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7,658,044
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7,268,467
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Fixed assets,
net
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262,745
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361,616
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Intangible
assets, net
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5,071,640
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4,937,278
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Goodwill
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4,595,755
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4,595,755
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Deferred tax
asset
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440,632
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568,193
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Other assets
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79,967
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79,967
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Total assets
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$
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18,108,783
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$
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17,811,276
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Liabilities
and Stockholders Equity
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Current
liabilities:
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Accounts payable
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$
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329,817
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$
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382,416
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Accrued expenses
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742,946
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672,502
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Federal income
tax payable
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159,222
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Deferred revenue
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2,329,117
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2,377,593
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Deferred
compensation
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141,596
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Total current
liabilities
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3,401,880
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3,733,329
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Long-term
liabilities, net of current portion
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119,711
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Commitments and
contingencies
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Stockholders
equity:
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Preferred stock,
par value $0.001 per share, 10,000,000 authorized, no shares issued or
outstanding
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Common stock,
par value $0.001 per share, 40,000,000 authorized, 17,432,352 and 17,184,584
shares outstanding at December 31, 2007 and March 31, 2008,
respectively
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17,432
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17,184
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Treasury Stock,
159,873 and 423,581 shares at December 31, 2007 and March 31, 2008,
respectively
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(527,398
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)
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(1,505,516
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)
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Additional
paid-in capital
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7,981,620
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8,275,330
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Retained
earnings
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7,115,538
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7,290,949
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Total
stockholders equity
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14,587,192
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14,077,947
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Total
liabilities and stockholders equity
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$
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18,108,783
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$
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17,811,276
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See accompanying
notes.
1
GlobalSCAPE, Inc.
Condensed Consolidated Statement of
Operations
(Unaudited)
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Three months ended March 31,
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2007
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2008
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Operating
Revenues:
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Software product
revenues
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$
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2,946,822
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$
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2,889,058
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Maintenance and
support (net of deferred revenues)
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676,325
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1,166,761
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Total Revenues
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3,623,147
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4,055,819
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Operating
Expenses:
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Cost of revenues
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58,942
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30,025
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Selling, general
and administrative expenses
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2,298,146
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2,981,809
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Research and
development expenses
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437,544
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543,270
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Depreciation and
amortization
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31,585
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174,019
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Total operating
expenses
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2,826,217
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3,729,123
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Income from
operations
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796,930
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326,696
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Other income
(expense):
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Income before
income taxes
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734,028
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357,007
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Provision for
income taxes
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260,814
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181,596
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Net Income
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$
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473,214
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$
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175,411
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Net income per common
share - basic
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$
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0.03
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$
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0.01
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Net income per
common share - assuming dilution
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$
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0.03
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$
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0.01
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Average shares
outstanding:
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Basic
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17,138,780
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17,322,827
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Diluted
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17,950,681
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18,099,028
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See accompanying notes.
2
GlobalSCAPE, Inc.
Condensed Consolidated Statements of
Cash Flows
(Unaudited)
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For the three months ended March 31,
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2007
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2008
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Operating
Activities:
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Net income
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$
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473,214
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$
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175,411
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Adjustments to
reconcile net income to net cash provided by operating activities:
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Bad debt expense
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(11,995
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)
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56,387
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Depreciation and
amortization
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31,585
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174,021
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Amortization of
deferred loan costs
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36,345
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(Gain) loss on
disposition of assets
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(234
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)
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Stock-based
compensation
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223,347
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287,126
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Deferred taxes
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(102,474
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)
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(127,561
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)
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Changes in
operating assets and liabilities:
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Accounts
receivable
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(3,571
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)
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603,343
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Prepaid expenses
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(627
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)
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15,216
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Accounts payable
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(103,289
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)
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52,599
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Accrued expenses
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21,842
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(70,444
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)
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Federal income
tax payable
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338,591
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282,206
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Deferred
revenues
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165,191
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48,476
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Deferred
compensation
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13,670
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21,885
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Other long-term
liabilities
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(3,130
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)
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Net cash
provided by operating activities
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1,078,699
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1,518,431
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Investing
Activities:
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Proceeds from
sale of property and equipment
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234
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Purchase of
property and equipment
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(72,428
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)
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(138,530
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)
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Net cash used in
investing activities
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(72,428
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)
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(138,296
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)
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Financing
Activities:
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Loan payments
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(4,610,212
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)
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Proceeds from
exercise of stock options
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326,758
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6,600
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Purchase of
treasury stock
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(978,382
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)
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Net cash used in
financing activities
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(4,283,454
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)
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(971,782
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)
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Net increase
(decrease) in cash
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(3,277,183
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)
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408,353
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Cash at
beginning of period
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4,632,666
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5,214,479
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Cash at end of
period
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$
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1,355,483
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$
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5,622,832
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Supplemental
disclosure of cash flow information:
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Cash paid during
the year for:
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Interest
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$
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29,929
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$
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1,683
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Income taxes
paid
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$
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14,132
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$
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10,000
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See accompanying
notes.
3
GlobalSCAPE, Inc.
Notes to Consolidated Financial Statements
Nature of Business
GlobalSCAPE, Inc.
(GlobalSCAPE or the Company), founded in April 1996, develops and
distributes
secure managed file transfer, or MFT, software for
individuals and business users to safely send files over the internet. We have
also developed Wide-Area File System, or WAFS, collaboration and Continuous
Data Protection, or CDP, software which further enhance the ability to share
and backup files within the infrastructure of a companys wide and local area
networks, or WAN and LAN at WAN and LAN speeds.
Our MFT products ensure 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 users firewall to distributed
offices, or outside the users firewall to business and trading partners
.
During the
three months ended March 31, 2008, approximately 65% of our revenues were
generated from customers within the United States, with the remaining 35%
concentrated mostly in Western Europe, Canada and Australia. During the three
months ended March 31 virtually all of our revenues were derived from
sales of software licenses and support agreements. The combined sales of
CuteFTP Home and CuteFTP Pro accounted for 24% of our revenues for the first
three months of 2007 and 20% of our revenues for the same period of 2008. The combined sales of our SecureFTP Server
and Enhanced File Transfer products
represented 55% and 69% of
our revenues for the three months ended March 31, 2007 and 2008,
respectively. The combined sales of WAFS and CDP products for the three months
ended March 31, 2007 and 2008
represented 22% and 15% of the total, respectively.
Corporate Structure
Prior
to September 22, 2006, all of the Companys operations were conducted by
GlobalSCAPE Texas, LP, a Texas limited partnership. The partners of GlobalSCAPE Texas, LP were
two Nevada limited liability companies, which were both wholly-owned
subsidiaries of GlobalSCAPE, Inc., a Delaware corporation.
On
September 22, 2006, GlobalSCAPE acquired one hundred percent (100%) of the
issued and outstanding capital stock of Availl,Inc. a privately held
corporation based in Andover, Mass, pursuant to an Agreement and Plan of Merger
with Availl and its stockholders. Availl
operated as a wholly-owned subsidiary of GlobalSCAPE, Inc. through the end
of 2007.
Availl, Inc.
and all other partnerships and limited liability corporations mentioned above
were either dissolved or effectively merged into GlobalSCAPE, Inc. on December 31,
2007. The stock of GlobalSCAPE, Inc.
is quoted on the American Stock Exchange. References to GlobalSCAPE or the Company
refer collectively to all of these entities unless otherwise indicated.
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
4
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, 2007 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 GlobalSCAPEs Annual Report on Form 10-K for the year ended December 31,
2007.
Principles of
Consolidation
The consolidated financial
statements include all subsidiaries. All
inter-company transactions and balances have been eliminated.
Adoption of New Accounting Standards
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). 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.
For state tax returns the Company is generally no longer subject to tax
examinations for years prior to 2003.
In September 2006, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair
Value Measurements. The Statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosure related to the use of fair value measures in financial
statements. The provisions of SFAS No. 157 were to be effective
for fiscal years beginning after November 15, 2007. On February 6,
2008, the FASB agreed to defer the effective date of SFAS No. 157 for one
year for certain nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). Effective January 1, 2008,
the Company adopted SFAS No. 157 except as it applies to those
nonfinancial assets and nonfinancial liabilities. The adoption of
SFAS No. 157 did not have any material impact on the Companys results of
operations or financial position.
Effective January 1, 2008, the Company adopted SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities including an
amendment of FASB Statement No. 115. SFAS No. 159 allows
an entity the irrevocable option to elect fair value for the initial and
subsequent measurement of certain financial assets and liabilities under an
instrument-by-instrument election. Subsequent measurements for the
financial assets and liabilities an entity elects to fair value will be
recognized in the results of operations. SFAS No. 159 also
establishes additional disclosure requirements. The Company did not
elect the fair value option under SFAS No. 159 for any of its financial
assets or liabilities upon adoption. The adoption of SFAS No. 159
did not have a material impact on the Companys results of operations or
financial position.
5
Reclassifications
Certain prior period amounts have
been reclassified to conform to the current period presentation. These
reclassifications had no impact on operating income as previously reported.
Sale / Disposal of Assets
The Company had no asset disposals in the first three months
ending March 31, 2007. During the three months ending March 31, 2008
the Company disposed of equipment with an original purchase price of $72,081
and accumulated depreciation of $72,081. GlobalSCAPE recognized a gain of $234
related to the disposal of these assets.
Goodwill and Intangible Assets
As of March 31, 2008, GlobalSCAPE had goodwill in the amount of $4
.6
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.
The Company
obtained a valuation report of its acquisition of Availl, which determined
that the acquisition included purchased software, which is an identifiable
intangible asset. The purchased software had a market value of approximately
$5,000,000 and this amount has been allocated to purchased software from
Goodwill effective October 1, 2007. The purchased software is being
amortized using the straight-line method over its estimated useful life of 10
years. In 2007 the Company amortized $134,360 for the period between October 1,
2007 and December 31, 2007. For the three months ended March 31, 2008
the Company amortized $134,362.
Intangible assets represent amounts
acquired in the acquisition of Availl, and consisted of the following as of March 31,
2008:
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Life (Years)
|
|
Amortized
intangible assets:
|
|
|
|
|
|
|
|
Software
acquired
|
|
$
|
5,000,000
|
|
$
|
250,002
|
|
10
|
|
Customer list
acquired
|
|
180,000
|
|
18,000
|
|
5
|
|
Patent acquired
|
|
26,000
|
|
720
|
|
18
|
|
Total
|
|
$
|
5,206,000
|
|
$
|
268,722
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Amortization Expense
|
|
|
|
|
|
|
|
For the nine
months ended 12/31/2008
|
|
|
|
$
|
403,082
|
|
|
|
For Year-ended
12/31/2009
|
|
|
|
537,444
|
|
|
|
For Year-ended
12/31/2010
|
|
|
|
537,444
|
|
|
|
For Year-ended
12/31/2011
|
|
|
|
537,444
|
|
|
|
For Year-ended
12/31/2012
|
|
|
|
528,444
|
|
|
|
Thereafter
|
|
|
|
2,393,420
|
|
|
|
Total
|
|
|
|
$
|
4,937,278
|
|
|
|
6
Recent Accounting
Pronouncements
In December 2007,
the FASB issued SFAS No. 141 (Revised 2007), Business Compinations-Revised
2007. SFAS 141R provides guidance on improving the relevance, representational
faithfulness, and comparability of information that a reporting entity provides
in its financial reports about a business combination and its effects. SFAS
141R applies to business combinations where the acquisition date is on or after
the beginning of the first annual reporting period beginning on or after December 15,
2008. GlobalSCAPE is in the process of analyzing the effects SFAS 141R will
have on the Companys financial statements.
In April 2008, the
FASB issued FSP 142-3,
Determination of the
Useful Life of Intangible Assets
, which amends the factors that must
be considered in developing renewal or extension assumptions used to determine
the useful life over which to amortize the cost of a recognized intangible
asset under SFAS No. 142. The FSP amends paragraph 11(d) of SFAS No. 142
to require an entity to consider its own assumptions about renewal or extension
of the term of the arrangement, consistent with its expected use of the asset.
The FSP also requires the
following incremental disclosures for renewable intangible assets:
·
The
weighted-average period prior to the next renewal or extension (whether
explicit and implicit) for each major intangible asset class
·
The entitys
accounting policy for the treatment of costs incurred to renew or extend the
term of a recognized intangible asset
·
For intangible
asset renewed or extended during the period:
·
For entities
that capitalize renewal or extension costs, the costs incurred to review or
extend the asset, for each major intangible asset class
·
The
weighted-average period prior to the next renewal or extension (whether
explicit and implicit) for each major intangible asset class
The FSP is effective for
financial statements for fiscal years beginning after December 15, 2008.
The guidance for determining the useful life of a recognized intangible asset
must be applied prospectively to intangible assets acquired after the effective
date. Early adoption is prohibited. Accordingly, the FSP would not serve as a
basis to change the useful life of an intangible asset that was acquired prior
to the effective date (January 1, 2009 for a calendar year company).
However, the incremental disclosure requirements described above would apply to
all intangible assets, including those recognized in periods prior to the
effective date of the FSP. The Company is currently evaluating the impact that
the adoption of this FSP will have on its consolidated financial statements.
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 three months ended March 31, 2008, 262,500
stock options were granted and at March 31, 2008, a total of 1,813,254
stock options had been granted of which 694,068 were vested. The exercise price, term and other conditions
applicable to each stock option granted under the Employees Plan are
7
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 June 1, 2007, a maximum of 500,000
shares of GlobalSCAPE common stock may be awarded.
During the three months
ended March 31, 2008, there were no stock options granted and at March 31,
2008, a total of 160,000 stock options were outstanding of which 80,000 were
vested. 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. The Directors Plan provides that each year,
at the first regular meeting of the Board of Directors following the Companys
annual stockholders meeting, each non-employee director shall be granted awards
of 20,000 shares of common stock for participation in the Board and Committee
meetings during the prior year. The
maximum annual award for any one person is 20,000 shares of common stock.
The Company accounts for stock options according to
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123R) which requires 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 employees requisite service
period (generally the vesting period of the equity award).
There was $223,347 and $287,126 of compensation cost
related to incentive stock options recognized in operating results in the three
months ended March 31, 2007 and 2008, respectively.
The fair value of each option award is estimated on
the date of grant using the Black-Scholes option-pricing model. Expected
volatility is based on historical volatility of GlobalSCAPE stock. We used the
simplified method to derive an expected term. The expected term represents an
estimate of the time options are expected to remain outstanding. The risk-free
rate for periods within the contractual life of the option is based on the U.S.
treasury yield curve in effect at the time of grant. The following table sets
forth the assumptions used to determine compensation cost for our non-qualified
stock options consistent with the requirements of SFAS No. 123R for the
three months ended March 31, 2007 and 2008:
|
|
Three months
ended
March 31, 2007
|
|
Three months
ended
March 31, 2008
|
|
Expected
volatility
|
|
98.00
|
%
|
99.00
|
%
|
Expected annual
dividend yield
|
|
0.00
|
%
|
0.00
|
%
|
Risk free rate
of return
|
|
4.67
|
%
|
2.96
|
%
|
Expected option
term (years)
|
|
6.010
|
|
6.005
|
|
The following table summarizes information about stock
option activity for the three months ended March 31, 2008:
8
|
|
Number of
Options
|
|
Weighted
Average
Share Price
|
|
Weighted
Average
Remaining
Contractual
|
|
Average
Intrinsic Value
($M)
|
|
Outstanding at
December 31, 2007
|
|
1,734,528
|
|
$
|
1.94
|
|
7.64
|
|
$
|
6.17
|
|
Granted
|
|
262,500
|
|
3.91
|
|
|
|
|
|
Exercised
|
|
15,940
|
|
0.41
|
|
|
|
|
|
Lapsed or
canceled
|
|
7,834
|
|
0.36
|
|
|
|
|
|
Outstanding at
March 31, 2008
|
|
1,973,254
|
|
$
|
2.22
|
|
7.69
|
|
$
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
March 31, 2008
|
|
772,831
|
|
$
|
1.04
|
|
6.63
|
|
$
|
1.35
|
|
The weighted average fair value of options granted
during the three months ended March 31, 2008 was $3.91. The total
intrinsic value of options (which is the amount by which the stock price
exceeded the exercise price of the options on the date of exercise) exercised
during the three months ended March 31, 2008 was approximately
$75,000. During the three months ended March 31,
2008, the amount of cash received from the exercise of stock options was $6,600
with no associated tax benefit.
The following table summarizes information about
non-vested stock option awards for the three-month period ended March 31,
2008:
|
|
Number of
Options
|
|
Weighted
Average Grant
Date Fair Value
|
|
Non-vested at
December 31, 2007
|
|
1,011,543
|
|
$
|
2.22
|
|
Granted
|
|
262,500
|
|
$
|
3.21
|
|
Vested
|
|
(69,266
|
)
|
$
|
2.04
|
|
Forfeited
|
|
(4,354
|
)
|
$
|
0.30
|
|
|
|
|
|
|
|
|
Non-vested at
March 31, 2008
|
|
1,200,423
|
|
$
|
2.45
|
|
At March 31, 2008, there was $2.0 million of
total unrecognized compensation cost related to non-vested stock option awards
which is expected to be recognized over a weighted-average period of 3.00
years. There were 69,266 options that became vested during the three months
ended March 31, 2008.
Common Stock and Warrants
On November 13, 2006, GlobalSCAPE entered into a
securities purchase agreement with accredited investors, who paid it an
aggregate of $3.4 million in gross proceeds in consideration for 1,352,000
shares of GlobalSCAPE common stock at a price of $2.50 per share. The Company also granted warrants to purchase
1,352,000 shares of its common stock to the investors with an exercise price of
$3.15 per share, subject to certain adjustments. The exercise price will not,
in any event, be adjusted to a price of less than $2.81 per share except in the
event of stock dividends, stock splits or similar events. The warrants have a 5-year term and are
currently exercisable. As part of this
transaction, GlobalSCAPE filed a registration statement to register the resale
of these shares by the investors. The
registration statement was declared effective by the SEC on April 16, 2007
and a post-effective amendment to the registration statement was declared
effective on April 20, 2008.
Earnings per Common Share
Basic and diluted net income
per common share is presented in conformity with Statement of Financial
Accounting Standards No. 128, Earnings Per Share (SFAS 128) for all
9
periods
presented. Basic earnings per share is based on the weighted effect of all
common shares issued and outstanding, and is calculated by dividing net income
(loss) available to common stockholders by the weighted average shares
outstanding during the period. Diluted earnings per share is calculated by
dividing net income (loss) available to common stockholders by the weighted
average number of common shares used in the basic earnings per share
calculation plus the number of common shares that would be issued assuming
conversion of all potentially dilutive common shares outstanding. Below is a reconciliation of the numerators
and denominators of basic and diluted earnings per share for each of the
periods presented:
|
|
Three months ended March 31,
|
|
|
|
2007
|
|
2008
|
|
Numerators
|
|
|
|
|
|
Numerators for
basic and diluted earnings per share:
|
|
|
|
|
|
Net income
|
|
$
|
473,214
|
|
$
|
175,411
|
|
|
|
|
|
|
|
Denominators
|
|
|
|
|
|
Denominators for
basic and diluted earnings per share:
|
|
|
|
|
|
Weighted average
shares outstanding basic
|
|
17,138,780
|
|
17,322,827
|
|
|
|
|
|
|
|
Dilutive
potential common shares
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
(1)
|
|
811,901
|
|
725,786
|
|
|
|
|
|
|
|
Common stock
warrants (2)
|
|
|
|
50,415
|
|
|
|
|
|
|
|
Denominator for
dilutive earnings per share
|
|
17,950,681
|
|
18,099,028
|
|
|
|
|
|
|
|
Net income per
common share
|
|
$
|
0.03
|
|
$
|
0.01
|
|
|
|
|
|
|
|
Net income per
common share assuming dilution
|
|
$
|
0.03
|
|
$
|
0.01
|
|
(1)
In
the three months ended March 31, 2008, there were 503,500 options not
included as dilutive shares, as the effect would be anti-dilutive.
(2)
For
the three months ended March 31, 2007, no warrants have been included in
dilutive shares, as the effect would be anti-dilutive. For the three months ended March 31,
2008, all outstanding warrants were included in the determination of dilutive
shares.
Fair Value Measurements
As described in Adoption
of New Accounting Standards, the Company adopted SFAS No. 157 effective January 1,
2008. SFAS 157 established a framework for measuring fair value in
GAAP and clarified the definition of fair value within that framework. SFAS 157
does not require assets and liabilities that were previously recorded at cost
to be recorded at fair value or for assets and liabilities that are already
required to be disclosed at fair value, SFAS 157 introduced, or reiterated, a
number of key concepts which form the foundation of the fair value measurement
approach to be used for financial reporting purposes. The fair value of the
Companys financial
10
instruments
reflects the amounts that the Company estimates to receive in connection with
the sale of an asset or paid in connection with the transfer of a liability in
an orderly transaction between market participants at the measurement date
(exit price). SFAS 157 also established a fair value hierarchy that prioritizes
the use of inputs used in valuation techniques into the following three levels:
Level 1quoted
prices in active markets for identical assets and liabilities.
Level 2observable
inputs other than quoted prices in active markets for identical assets and
liabilities.
Level
3unobservable inputs.
The adoption of
FAS 157 did not have an effect on the Companys financial condition or results
of operations, but SFAS 157 introduced new disclosures about how we value
certain assets and liabilities. Much of the disclosure is focused on the inputs
used to measure fair value, particularly in instances where the measurement
uses significant unobservable (Level 3) inputs. As of March 31, 2008, the
Company did not have financial assets or liabilities that would require
measurement on a recurring basis based on the guidance in SFAS 157. At March 31,
2008 all financial assets consisted of cash and cash equivalents at financial
institutions in the United States.
11
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q
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 describe managements beliefs and
expectations about the future. We have
identified forward-looking statements by using words such as anticipate, believe,
could, estimate, may, expect, and intend. Although we believe these expectations are
reasonable, our operations involve a number of risks and uncertainties,
including those described in the Risk Factors section of our Annual Report on
Form 10-K and other documents filed with the Securities and Exchange
Commission. GlobalSCAPEs actual results
could differ materially from those discussed in any forward-looking statements
included in this Quarterly Report.
Overview
We develop and
distribute secure managed file transfer, or MFT, software for individuals and
business users to safely send files over the internet. We have also developed
Wide-Area File System, or WAFS, collaboration and Continuous Data Protection or
CDP, software which further enhance the ability to share and backup files
within the infrastructure of a companys wide and local area networks, or WAN
and LAN at WAN and LAN speeds. Our MFT
products ensure 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 users firewall to distributed offices, or outside the
users 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 (WAFS) Products Our WAFS products provide a file sharing and
collaboration solution over multiple sites.
By keeping all data updated on each locations 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 (CDP) Products Our CDP products consolidate remote backup for file
servers. As files change, the servers
backup in real time to the customers 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 immediate restore, as well as the ability to perform point-in-time
snapshots.
12
We
believe that the future success of our business will be dependent upon our
ability to improve our current products and to introduce new products, through
research and development, innovations by our employees, strategic partnerships,
and acquisitions. We intend 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 and through strategic partnerships. For example, in
2007, we introduced upgrades to EFT 5.0,
CuteFTP 8.0, the Secure Ad Hoc Transfer module, and the HS-PCI module
ensuring compliance with DSS In 2006, we
acquired Availl, a leading provider of Wide-Area File System (WAFS)
collaboration and continuous data protection (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 products have give us
entry into two large and rapidly growing 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. As described below, our WAFS/CDP revenues have not
increased as much as originally anticipated due to managements 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.
Liquidity
and Capital Resources
The Company
continues to enjoy a strong working capital position resulting from solid net
profits from operations over the last sixteen consecutive quarters, including
the quarter ended March 31, 2008.
At March 31, 2008, our net
working capital position was $3.6 million, which consists of current assets
less current liabilities. We had cash available of $5.6 million and we continue
to generate cash in excess of our operational needs. In addition, the Company has a $750,000 line
of credit with Silicon Valley Bank which is unused at this time. We rely
heavily on cash flows from operations to fund our business a a result of the
profitable history of the company.
Net cash used
in investing activities for the three months ended March 31, 2007 and 2008
was $72,428 and $138,530, respectively.
In both periods, the cash used in investing activity was primarily for
the purchase of computer equipment and software. Our capital requirements
principally relate to our need to enhance our existing products and to develop
new products, which primarily consist of research and development expenses and
expenses for people and the elements that support their work. By comparison, we
do not spend large sums on capital equipment. Capital expenditures will be
higher in 2008 as a result of the planned move to new office space.
Our total
revenues increased 12% in the three months ending March 31, 2008 when compared to the same period in 2007. The
principal drivers of our sales are the enterprise level server products for
MFT, which are EFT Server and SecureFTP Server. These products accounted for
71% of our sales in the three months ending March 31, 2008 . Prior to
2006, we were largely dependent upon sales of CuteFTP Home and CuteFTP
Professional, which accounted for 51%
of our revenue
in the year ended December 31, 2005, and represented larger percentages of
sales in earlier years. The actual sales of these products have remained
relatively flat over the three years ended December 31, 2007 while
becoming an increasingly smaller portion of our total revenue. In the first
quarter of 2007 and 2008, sales of these products represented
approximately 24.2% and 21.9 % of our total revenues, respectively
Since our principal sources of capital are
cash on hand and cash flow from operations, to the extent that sales decline,
our cash flow from operations will also decline. If sales decline or if
13
our liquidity
is otherwise under duress, 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 also have $750,000 of availability under our revolving line of credit and,
if necessary, we may also sell equity securities or enter into other credit
arrangements in order to finance future acquisitions or licensing activities.
Net cash
provided by operating activities for the three months ended March 31 2007
and 2008 was $1,078,699 and $1,518,341, respectively. This increase in cash was generated from the
profitable operation of our business. Some of the major non-cash items that
were charged against net income over this period are depreciation and
amortization, stock-based compensation and deferred revenues. While these items
are expensed according to Generally Accepted Accounting Principles, the cash
impact from these charges has occurred or will occur in other accounting
periods and the difference reflects a positive impact on cash in the
Consolidated Statements of Cash Flows. The decrease in Accounts Receivables
during this period and the Deferred Revenues during this period served to
positively impact the cash from operations in those statements.
Our financing
activities in the prior two years have primarily related to funding the
acquisition of Availl. In 2006, we used $7.6 million in cash to acquire Availl.
The cash used to make this acquisition came from a $5 million term loan from
Silicon Valley Bank. The combination of cash generated from our operations and
the stock offering completed in November 2006 allowed repayment of
$400,000 of the loan in 2006 and $4.6 million in the three months ended March 31,2007.
We have also sold stock through the exercise of employee stock options. We
received cash from stock option exercises of $326,758 and $6,600 for the
periods ended March 31, 2007 and 2008, respectively. In the three month
period ended March 31, 2008 cash from operations was used in the
repurchase of $978,382 of treasury stock.
Net cash
provided in financing activities during the three months ended March 31,
2007 and 2008 were $4,283,454 and $971,782
respectively.
In 2007, the decrease in cash from financing activities was primarily the
result of the payoff of the term loan with Silicon Valley Bank. In 2008, the
decrease resulted through the use of cash in the purchase of shares of our
common stock under our share purchase program.
In order to
finance the cash portion of the purchase price in the merger with Availl,
GlobalSCAPE entered into a Loan and Security Agreement dated September 22,
2006 with Silicon Valley Bank. The Loan
Agreement with Silicon Valley Bank provides for a $5.0 million term loan and a
$750,000 revolving credit facility. We repaid the balance of the term loan on March 1,
2007. The entire amount of the
revolving credit facility remains available. The borrowings under the revolving
credit facility bear interest at 1.00% above the Banks prime rate and matures
on September 22, 2008. Interest
payments are due on the first day of each calendar month. There have been no
borrowings under the revolving credit facility.
The revolving
credit facility is secured by substantially all of the assets of GlobalSCAPE, Inc. 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 is also prohibited from selling any of its assets other than
in the ordinary course of business, acquiring any other entities, changing the
types of business they are engaged in, 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 its capital stock. The Loan Agreement contains two financial
covenants. GlobalSCAPE and its
subsidiaries must maintain:
14
·
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.
The loan
agreement also contains customary events of default including the failure to
make payments of principal and interests, the breach of principal and
interests, 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. At March 23, 2008, we were in compliance
with these covenants.
As of March 31,
2008, we had $5.6 million in cash and cash equivalents, total current assets of
$7.3 million and current liabilities of $3.7 million, resulting in working
capital of $3.6 million. The primary component of current liabilities at March 31,
2008 was $2.4 million of deferred revenues which will be recognized over the
remaining term (generally one to twelve months) of the maintenance and support
contracts. At March 31, 2008, our
principal commitments consisted of obligations outstanding under operating
leases as well as royalty agreements with third parties, federal income tax and
trade accounts payable. The commitments
related to royalty agreements are contingent on sales volumes. 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. We have recently moved to new corporate offices in San Antonio, and
we anticipate spending approximately $500,000 toward equipment, furniture,
fixtures, and leasehold improvements in the second quarter of 2008 due to this
move.
Contractual
Obligations
The following
table sets forth the future minimum payments required under contractual
commitments at March 31, 2008
:
|
|
Payments Due by Fiscal Year
|
|
|
|
2008 (1)
|
|
2009
|
|
2010
|
|
Thereafter
|
|
Total
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease
|
|
$
|
479,679
|
|
$
|
606,465
|
|
$
|
537,692
|
|
$
|
4,968,160
|
|
$
|
6,591,996
|
|
Equipment Leases
|
|
$
|
6,252
|
|
$
|
7,392
|
|
$
|
7,392
|
|
$
|
9,056
|
|
$
|
30,092
|
|
Deferred
Compensation
|
|
$
|
141,596
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
141,596
|
|
Term Note
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Total Cash
Obligations
|
|
$
|
627,527
|
|
$
|
613,857
|
|
$
|
545,084
|
|
$
|
4,977,216
|
|
$
|
6,763,684
|
|
(1) Amounts for 2008
reflect the future minimum payments for the remaining nine months of the fiscal
year.
Critical
Accounting Policies
Except as set forth below,
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,
2007 during the three months ended March 31, 2008.
15
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.
Comparison
of the Three Months ended March 31, 2007 and 2008
|
|
2007
|
|
2008
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Software product
revenues
|
|
$
|
3,623,147
|
|
$
|
4,055,819
|
|
$
|
432,672
|
|
11.9
|
%
|
Cost of revenues
|
|
58,942
|
|
30,025
|
|
(28,917
|
)
|
(49.1
|
)%
|
Selling, general
and administrative expenses
|
|
2,298,146
|
|
2,981,809
|
|
683,663
|
|
29.8
|
%
|
Research and
development expenses
|
|
437,544
|
|
543,270
|
|
105,726
|
|
24.2
|
%
|
Depreciation and
amortization
|
|
31,585
|
|
174,019
|
|
142,434
|
|
451.0
|
%
|
Total operating
expense
|
|
2,826,217
|
|
3,729,123
|
|
902,906
|
|
32.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
from operations
|
|
796,930
|
|
326,696
|
|
(470,234
|
)
|
(59.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
Other Income
(expense)
|
|
(62,902
|
)
|
30,310
|
|
93,212
|
|
(148.2
|
)%
|
Income tax
expense
|
|
260,814
|
|
181,596
|
|
(79,218
|
)
|
(30.4
|
)%
|
Net income
(loss)
|
|
$
|
473,214
|
|
$
|
175,411
|
|
$
|
(297,803
|
)
|
(62.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales %
of Sales
|
|
1.6
|
%
|
0.7
|
%
|
|
|
|
|
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 March 31, 2008, total revenues increased by
$432,672 or approximately 11.9% from the same quarter in 2007 due to an
increase in revenues from sales of our SecureFTP Server and EFT products.
The following
table reflects revenue by product including the related maintenance and support
for each product:
16
|
|
Revenue for the Quarter ending March 31,
|
|
Product
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Enhanced File
Transfer
|
|
$
|
1,244,114
|
|
34.3
|
%
|
$
|
1,736,024
|
|
42.8
|
%
|
SecureFTP Server
|
|
741,889
|
|
20.5
|
%
|
862,191
|
|
21.3
|
%
|
CuteFTP
Professional
|
|
562,877
|
|
15.5
|
%
|
546,031
|
|
13.5
|
%
|
CuteFTP Home
|
|
315,372
|
|
8.7
|
%
|
249,104
|
|
6.1
|
%
|
WAFS
|
|
714,930
|
|
19.7
|
%
|
611,431
|
|
15.1
|
%
|
CDP
|
|
81,444
|
|
2.2
|
%
|
14,066
|
|
0.3
|
%
|
All Others
|
|
127,711
|
|
3.5
|
%
|
85,448
|
|
2.1
|
%
|
Deferred Revenue
adjustment
|
|
(165,190
|
)
|
(4.6
|
)%
|
(48,476
|
)
|
(1.2
|
)%
|
Total Operating
Revenues
|
|
$
|
3,623,147
|
|
100.0
|
%
|
$
|
4,055,819
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Maintenance and
support (net of deferred revenues)
|
|
$
|
676,325
|
|
17.9
|
%
|
$
|
1,166,761
|
|
28.4
|
%
|
Sales of our WAFS and CDP
Systems were $796,000 and $625,000 for the three months ended March 31,
2007 and 2008 respectively, a decrease of $170,877 or 21.5% for the quarter.
These products accounted for approximately 15.4% of total revenue for the first
quarter of 2008 compared to 22.0% for the same period in 2007.
Sales of our SecureFTP Server
and Enhanced File Transfer products were $1,986,000 and $2,598,000 for the
three months ended March 31, 2007 and 2008 respectively an increase of
$612,000 or 30.8% for the quarter. These products represented approximately 64% of our total
revenues in the three months ending March 31, 2008 as compared to 55% in
the same period in 2007. Revenues from
CuteFTP Home and CuteFTP Professional decreased by 2% as compared to the
quarter ended March 31, 2007 and accounted for approximately 24% and 19%
of total revenues for the three months ended March 31, 2007 and 2008,
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 72% from the first quarter of 2007 compared to the same
period in 2008. Maintenance and support revenues were $676,325 and $1,166,761,
net of deferred revenue, for the three months ended March 31, 2007 and
2008, respectively. 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.
We have previously announced
through press releases and investor conference calls that we believe our
revenues will remain in a range of $4.0 million to $4.5 million for the next
two quarters. Beginning in the fourth quarter of 2008, we anticipate generating
revenues from new products that we may build ourselves and/or resell from other
software companies, and that our revenues will increase from prior periods due
to these new products
Cost of Revenues.
Cost of revenues consists primarily of
royalties, a portion of our bandwidth costs as well as production, packaging
and shipping costs for boxed copies of software products. Cost of revenues decreased by approximately
$29,000 or 49% between periods from $59,000 for the three months ended March 31,
2007 to $30,000 for the three months ended March 31, 2008. 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 2% for the three months ended March 31,
2007 as compared to 1% for the same period in 2008.
17
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 March 31, 2007 and 2008, selling,
general and administrative expenses were $2.3 million and $3.0 million,
respectively, an increase of approximately $700,000. Of this increase,
83%, or $571,000, was attributable to expenses incurred in connection with
increased salaries, payroll taxes, and other associated benefits. Coverage for
health insurance, for example, increased by 43% in 2008 over the same period in
2007. We have hired new employees in order to support current and projected growth. Payment
of commissions on current month sales rather than on collected sales caused
$144,000 of the increase. In the three months ended March 31, 2007 and
2008, we expensed $223,347 and $287,126 respectively, for stock based
compensation related to the granting of stock options to employees and
directors as required by FAS123R. The expense for the Allowance for Doubtful
Accounts increased from ($11,995) to $56,387 for the period ended March 31,
2007 and 2008, respectively.
The company
has recently relocated its offices into a larger, more expensive space. This
additional occupancy expense will be reflected in SG&A in the future.
Research and Development.
Research and development expenses increased by $105,000 or 24% between periods,
from $438,000 to $543,000. The increase was due to additional personnel
needed to support our products. We anticipate that this expense will be higher
in the future due to a more aggressive schedule of introducing new products for
sale in 2008. We are hiring several additional programmers to accomplish this
work.
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 $32,000 to $174,000, an
increase of approximately 24%. This increase was the result of acquiring
$139,000 of equipment and software during the first three months of 2008, and
the amortization of the intangible assets associated with the acquisition of
Availl.
Other Income, Expense.
We earned $2,000 and $32,000 in interest income during the first quarter of
2007 and 2008 respectively from investing our excess cash. For the three
months ended March 31, 2007 and 2008, interest expense decreased from
$30,000 to $2,000, respectively, as a result of the payment during the first
quarter of 2007 of the balance outstanding under our term loan with Silicon
Valley Bank. The interest expense incurred during the first quarter of
2008 was paid on deferred income per an employment agreement between
GlobalSCAPE and one of its key executives.
Income Taxes.
Increased revenue of $432,000, increased operating expense of $903,000, and
increased other income of $93,000 yielded approximately $377,000 less taxable
income. The provision for federal income taxes for the quarter ended March 31,
2007 and 2008 was $236,000 and $155,000, respectively, a decrease of $106,000.
Beginning January 1, 2007,
the state of Texas imposed a new margin tax equal to 1% of the Companys
revenue less compensation expense (based on Texas source income). In the
three months ended March 31, 2007 and 2008 the combined Margin Tax and
Massachusetts State Income Tax was $24,480 and $26,950, respectively.
Net Income.
GlobalSCAPE recorded net income of $473,000 and $175,000 for the three months
ended March 31, 2007 and 2008, respectively. The $298,000 decrease
in net income was the result of increased expenses associated with building the
infra-structure required to sustain future growth.
18
Item 3. 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 three months ended March 31,
2008, approximately 35% 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.
Item 4T. Controls and Procedures
As of the end of the
period covered by this report, our Chief Executive Officer and Chief Financial
Officer carried out an evaluation of the effectiveness of GlobalSCAPEs disclosure
controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e)and
15d-15(e)) and concluded that the disclosure controls and procedures were
effective.
There were no changes in our internal controls
over financial reporting during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, our
financial reporting.
19
Part II. Other Information
Item 1.
Legal
Proceedings
We are not currently involved
in any material legal proceedings.
Item 1A. Risk
Factors.
In addition to the other information set
forth in this report, you should carefully consider the factors discussed in Part I,
Item 1A. Risk Factors in our Annual Report on Form 10-K for the year
ended December 31, 2007, which could materially affect our business,
financial condition or future results.
The risks described in our Annual Report on Form 10-K are not the
only risks facing GlobalSCAPE.
Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds.
Period
|
|
Total Number
of Shares
Purchased
|
|
Average Price
Paid Per
Share
|
|
Total Nmber of
Shares Purchased
as Part of a
Publicly
Announced Plan
(1)
|
|
Maximum
Number of
Shares that may
yet be
Purchased
Under the Plan
|
|
|
|
|
|
|
|
|
|
|
|
February, 2008
|
|
254,096
|
|
$
|
3.6830
|
|
254,096
|
|
437,914 (2
|
)
|
March, 2008
|
|
9,612
|
|
$
|
3.5998
|
|
9,612
|
|
684,934 (3
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
(1)
|
On May 21, 2007,
we announced a plan to purchase up to $3.0 million of our common stock. This
plan is scheduled to terminate on May 20, 2008.
|
(2)
|
At February 29,
2008, there were 437,914 shares yet to be purchased based on the price of
$3.52 per share on that date.
|
(3)
|
At March 31, 2008,
there were 684,934 shares yet to be purchased based on the price of $2.20 per
share on that date.
|
Item 6.
|
|
Exhibits
|
|
|
|
(a)
|
|
Exhibits
|
|
|
|
31.1
Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
Certificate pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
20
Signatures
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
GLOBALSCAPE,
INC.
|
|
|
|
|
May 15,
2008
|
|
By:
|
/s/ Kelly E. Simmons
|
Date
|
|
Kelly E. Simmons
|
|
President and Chief
Financial Officer
|
|
|
|
|
21
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