UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period ended March 31, 2009
OR
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
.
Commission File No. 001-33601
GlobalSCAPE, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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74-2785449
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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4500 Lockhill-Selma, Suite 150
San Antonio, Texas
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78249
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(Address of Principal Executive Office)
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(Zip Code)
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(210) 308-8267
(Registrant’s 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
¨
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).
¨
Yes
¨
No
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 the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
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Large accelerated filer
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¨
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Accelerated filer
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¨
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Non-accelerated filer
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¨
(Do not check if a smaller reporting company)
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Smaller reporting company
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x
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Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
¨
Yes
x
No
As of April 30, 2009, there were 17,227,371 shares of common stock outstanding.
GlobalSCAPE Inc.
Quarterly Report on Form 10-Q
For the Quarter ended March 31, 2009
Index
GlobalSCAPE
®
and CuteFTP Pro
®
are registered trademarks of GlobalSCAPE, Inc. CuteFTP, GlobalSCAPE Enhanced File Transfer Server
TM
, and Enhanced File Transfer Server Enterprise
TM
are trademarks of GlobalSCAPE,
Inc. Other trademarks and tradenames in this quarterly report are the property of their respective owners.
1
Part I. Financial Information
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Item 1.
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Financial Statements
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GlobalSCAPE, Inc.
Condensed Balance Sheets
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March 31,
2009
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December 31,
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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6,221,773
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$
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6,318,604
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Accounts receivable (net of allowance for doubtful accounts of $287,645 and $330,916 on March 31, 2009 and December 31, 2008,
respectively)
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1,787,263
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2,021,293
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Federal income tax receivable
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125,529
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19,244
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Prepaid expenses
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92,700
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120,162
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Total current assets
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8,227,265
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8,479,303
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Fixed assets, net
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1,756,937
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1,642,776
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Intangible assets, net
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1,058,618
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1,134,000
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Goodwill
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619,065
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619,065
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Deferred tax asset
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—
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297,183
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Other assets
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52,458
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47,581
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Total assets
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$
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11,714,343
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$
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12,219,908
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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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454,885
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$
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512,256
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Accrued expenses
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399,210
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560,889
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Deferred revenue
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2,817,855
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2,755,698
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Deferred compensation
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—
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215,858
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Total current liabilities
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3,671,950
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4,044,701
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Deferred tax liability
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329,621
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545,169
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Other long term liabilities
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195,357
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151,497
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Commitments and contingencies
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—
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—
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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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—
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—
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Common stock, par value $0.001 per share, 40,000,000 authorized, 17,630,952 shares issued at March 31, 2009 and December 31, 2008
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17,631
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17,631
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Additional paid-in capital
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10,020,696
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9,737,380
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Treasury Stock, 403,581 shares, at cost, at March 31, 2009 and December 31, 2008.
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(1,451,805
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)
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(1,451,805
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Retained deficit
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(1,069,107
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(824,665
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Total stockholders’ equity
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7,517,415
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7,478,541
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Total liabilities and stockholders’ equity
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$
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11,714,343
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$
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12,219,908
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The accompanying notes are an integral part of these financial statements.
2
GlobalSCAPE, Inc.
Condensed Statements of Operations
(Unaudited)
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Three months ended March 31,
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2009
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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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1,947,149
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$
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2,889,058
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Maintenance and support
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1,293,245
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1,166,761
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Total Revenues
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3,240,394
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4,055,819
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Operating Expenses:
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Cost of revenues
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51,916
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30,025
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Selling, general and administrative expenses
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2,583,135
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2,981,809
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Research and development expenses
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675,192
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543,270
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Depreciation and amortization
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172,039
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174,019
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Total operating expenses
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3,482,282
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3,729,123
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(Loss) income from operations
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(241,888
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326,696
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Other income (expense), net
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10,419
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30,311
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(Loss) income before income taxes
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(231,469
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357,007
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Provision for income taxes
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12,973
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205,074
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Net (loss) income
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$
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(244,442
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$
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151,933
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Net (loss) income per common share—basic
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$
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(0.01
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$
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0.01
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Net (loss) income per common share—diluted
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$
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(0.01
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$
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0.01
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Weighted average shares outstanding:
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Basic
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17,227,371
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17,322,827
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Diluted
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17,227,371
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18,099,028
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The accompanying notes are an integral part of these financial statements
3
GlobalSCAPE, Inc.
Condensed Statement of Stockholders’ Equity
(Unaudited)
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Common
Stock
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Additional
paid-in
Capital
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Treasury
Stock
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Retained
Deficit
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Total
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Shares
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Amount
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Balance at December 31, 2008
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17,630,952
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$
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17,631
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$
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9,737,380
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$
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(1,451,805
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$
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(824,665
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$
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7,478,541
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Stock-based compensation expense
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—
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—
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283,316
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—
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—
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283,316
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Net loss
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—
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—
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—
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—
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(244,442
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(244,442
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Balance at March 31, 2009
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17,630,952
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$
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17,631
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$
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10,020,696
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$
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(1,451,805
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)
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$
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(1,069,107
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)
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$
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7,517,415
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The accompanying notes are an integral part of these financial statements.
4
GlobalSCAPE, Inc.
Condensed Statements of Cash Flows
(Unaudited)
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For the three months ended March 31,
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2009
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2008
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Operating Activities:
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Net (loss) income
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$
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(244,442
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)
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$
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151,933
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Adjustments to reconcile net income (loss) to net cash provided by operating activities:
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Bad debt (recoveries) expense
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(42,667
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56,387
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Depreciation and amortization
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172,039
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174,021
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Gain on disposition of assets
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(1,244
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)
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(234
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)
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Share-based compensation
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283,316
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287,126
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Deferred taxes
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81,635
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(113,086
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)
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Changes in operating assets and liabilities:
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Accounts receivable
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286,697
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603,343
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Prepaid expenses
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27,462
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304,990
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Federal income tax receivable
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(106,285
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)
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—
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Other assets
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(4,877
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)
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—
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Accounts payable
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(57,371
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52,599
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Accrued expenses
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(161,679
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)
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(69,010
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)
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Deferred revenues
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101,255
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48,476
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Deferred compensation
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(215,858
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)
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21,885
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Other long-term liabilities
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4,762
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—
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Net cash provided by operating activities
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122,743
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1,518,430
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Investing Activities:
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Proceeds from sale of property and equipment
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1,244
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234
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Purchase of property and equipment
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(220,818
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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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(219,574
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)
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(138,296
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)
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Financing Activities:
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Purchase of treasury stock
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—
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(978,382
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)
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Proceeds from exercise of stock options
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—
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6,600
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Net cash used in financing activities
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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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$
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(96,831
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)
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$
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408,352
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Cash at beginning of period
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6,318,604
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5,214,479
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Cash at end of period
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$
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6,221,773
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$
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5,622,831
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Supplemental disclosure of cash flow information:
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Cash paid during the period for:
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Interest
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$
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—
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$
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1,683
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Income taxes
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$
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37,623
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$
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10,000
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The accompanying notes are an integral part of these financial statements.
5
GlobalSCAPE, Inc.
Notes to Condensed Financial Statements
Three Ended March 31, 2009
(Unaudited)
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 company’s wide and local area networks, or WAN and LAN at
WAN and LAN speeds. In addition, we announced Managed E-mail Attachment and software-as-a-service, or SaaS, information sharing solutions in 2008. The e-mail attachment delivery and SaaS solutions broaden our product portfolio to address the
substantial installed base of IT systems with e-mail attachment size limitations and other file delivery infrastructure constraints.
Our
product portfolio facilitates delivery of critical information such as financial data, medical records, customer files and other similar documents while supporting a range of information protection approaches to meet privacy and other security
requirements. In addition, these solutions ensure compliance with some 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 products also provide data replication, acceleration of file transfer, sharing/collaboration and continuous data backup and recovery to our customers. We believe that we are strongly 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. We believe these business-to-business, or B2B, aspects of our solution
capabilities increasingly will allow us to address adjacent market demands beyond the traditional MFT market space.
The accompanying unaudited
condensed 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 information included in this Form 10-Q should be read in conjunction with the financial statements and the notes thereto included in the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as well as
Management’s Discussion and Analysis of Financial Condition and Results of Operations
also included in our 2008 Form 10-K.
The preparation of financial statements in accordance with US GAAP requires the use of estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with
respect to such estimates and assumptions are inherent in the preparation of the Company’s consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could
have a material effect on the reported amounts of the Company’s consolidated financial position and results of operation.
6
Significant Accounting Policies
There have been no changes in our significant accounting policies during the three months ended March 31, 2009 from those described in our 2008 Form
10-K. Listed below is a condensed version of the Company’s critical accounting policies.
Revenue Recognition
– The
Company markets and distributes software products; revenue is recognized when the following conditions have been met:
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•
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Persuasive evidence of an arrangement exists;
|
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|
•
|
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Delivery has occurred or services have been rendered;
|
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|
•
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The transaction has a fixed or determinable amount; and
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|
•
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Collection is reasonably assured
|
If
the Company determines that any one of the four criteria is not met, we will defer recognition of revenue until all the criteria are met.
License revenue is derived primarily from the licensing of various products and technology. Generally license revenue is recognized upon delivery of the product, assuming all other conditions for revenue recognition noted above have been
met.
The Company also enters into perpetual software license agreements through direct sales to customers and indirect sales with
distributors and resellers. The license agreements generally include product maintenance and support agreements, for which the related revenue is deferred and recognized ratably over the period of the agreements.
In arrangements that include multiple elements, including perpetual software licenses and maintenance and/or services revenue is allocated and deferred
for the undelivered items based on vendor specific objective evidence (“VSOE”). When VSOE of fair value exists for all elements in a multiple element arrangement, revenue is allocated to each element based on the relative fair value of
each of the elements. VSOE of fair value is established by the price charged when the same element is sold separately. In a multiple element arrangement whereby VSOE of fair value of all undelivered elements exists but VSOE of fair value does not
exist for one or more delivered elements, revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue,
assuming collection is probable. Deferred revenue consists primarily of the unamortized balance of product maintenance.
Goodwill and
Intangible Assets
– The Company accounts for goodwill and other intangible assets in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets,
which requires that goodwill and certain indefinite-lived assets no longer
be amortized, but instead be evaluated at least annually for impairment. The determination of whether the carrying value of goodwill and other intangible assets has been impaired requires the Company to make estimates and assumptions about future
business trends and growth. If an event occurs that would cause the Company to revise its estimates and assumptions used in analyzing the value of goodwill or other intangibles, such revision could result in an impairment charge that could have a
material impact on the Company’s financial condition or results of operations.
Recent Accounting Pronouncements
In April 2009 the FASB issued FASB Staff Position 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial
Instruments
(“FSP 107-1”)
.
This staff position amends FASB Statement No. 107
Disclosures about Fair Value of Financial Instruments
and APB Opinion No. 28
Interim Financial Reporting
. FSP 107-1 requires
companies to disclose in its interim and annual financial statements the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized, as required by FASB Statement No. 107.
FSP 107-1 is effective for interim reporting periods ending after June 15, 2009. The implementation of this pronouncement is not expected to have a material impact on our financial statements.
In April 2008, the FASB issued FASB Staff Position 142-3,
Determination of the Useful Life of Intangible Assets
(“FSP FAS 142-3”), which
amends the list of factors an entity should consider in developing renewal or
7
extension assumptions in determining the useful life of recognized intangible assets under SFAS No. 142,
Goodwill and Other Intangible Assets
.
The new guidance applies to (1) intangible assets that are acquired individually or with a group of other assets and (2) intangible assets acquired in both business combinations and asset acquisitions. Under FSP FAS 142-3, entities
estimating the useful life of a recognized intangible asset must consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would
use about renewal or extension. FSP FAS 142-3 will require certain additional disclosures beginning October 1, 2009 and prospective application to useful life estimates prospectively for intangible assets acquired after September 20, 2009.
The implementation of this pronouncement is not expected to have a material impact on our financial statements.
In December 2007, the FASB
issued SFAS No. 141 R (Revised 2007),
Business Combinations—Revised 2007
(“SFAS 141R”). 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. We do not expect the adoption of SFAS 141R to have a material impact on our financial statements unless we undertake an acquisition in 2009 and beyond.
|
3.
|
Goodwill and Other Intangible Assets
|
As of
March 31, 2009, GlobalSCAPE had goodwill of approximately $619,000 associated with the acquisition of Availl. No events occurred during the three months ended March 31, 2009 that would have been considered a triggering event under FAS 142
and require an impairment test as of that date.
Intangible assets represent amounts acquired in the acquisition of Availl, and consisted
of the following as of March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
Life (Years)
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Software acquired
|
|
$
|
1,774,554
|
|
$
|
(850,474
|
)
|
|
5
|
|
Customer list acquired
|
|
|
180,000
|
|
|
(51,000
|
)
|
|
5
|
|
Patent acquired
|
|
|
7,501
|
|
|
(1,963
|
)
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,962,055
|
|
$
|
(903,437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Amortization Expense
|
|
|
|
|
|
|
|
|
|
|
For remainder of 2009
|
|
|
|
|
$
|
226,149
|
|
|
|
|
For the Year-ended 12/31/2010
|
|
|
|
|
|
301,531
|
|
|
|
|
For the Year-ended 12/31/2011
|
|
|
|
|
|
301,531
|
|
|
|
|
For the Year-ended 12/31/2012
|
|
|
|
|
|
226,311
|
|
|
|
|
For the Year-ended 12/31/2013
|
|
|
|
|
|
652
|
|
|
|
|
Thereafter
|
|
|
|
|
|
2,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
1,058,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired intangibles are generally amortized on a straight-line basis over their weighted average lives.
Intangible assets amortization expense was approximately $75,000 and $125,000 for the three months ended March 31, 2009 and March 31, 2008, respectively. No events occurred during the three months ended March 31, 2009 that would have
caused the Company to evaluate the need to record an impairment.
8
|
4.
|
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.
There was approximately $283,000 and $287,000 of compensation cost related to stock options recognized in operating results in the three months ended
March 31, 2009 and 2008, respectively.
The fair value of each option award is estimated on the date of grant using the Black-Scholes
option-pricing model. Expected volatility is based on historical volatility of GlobalSCAPE stock. We used the simplified method to derive an expected term. The expected term represents an estimate of the time options are expected to remain
outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant. The following table sets forth the assumptions used to determine compensation cost for
our stock options consistent with the requirements of SFAS No. 123R:
|
|
|
|
|
|
|
|
Three-months
ended
March 31, 2009
|
|
|
Expected volatility
|
|
94
|
%
|
|
Expected annual dividend yield
|
|
0
|
|
|
Risk free rate of return
|
|
1.76
|
%
|
|
Expected option term (years)
|
|
6.01
|
|
The following table summarizes information about stock option activity for the three months ended
March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted
Average Share
Price
|
|
Weighted Average
Remaining
Contractual Term
(years)
|
|
Average Intrinsic
Value ($M)
|
|
Outstanding at December 31, 2008
|
|
2,926,267
|
|
|
$
|
1.70
|
|
8.31
|
|
$
|
—
|
|
Granted
|
|
457,240
|
|
|
|
0.85
|
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
|
0.00
|
|
|
|
|
|
|
Forfeited
|
|
(58,700
|
)
|
|
|
3.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2009
|
|
3,324,807
|
|
|
$
|
1.49
|
|
8.31
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2009
|
|
1,268,367
|
|
|
$
|
1.57
|
|
6.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of options granted during the three months ended March 31,
2009 was $0.65. 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, 2009 was $0. During the
three months ended March 31, 2009, the amount of cash received from the exercise of stock options was $0.
The following table
summarizes information about non-vested stock option awards as of March 31, 2009 and changes for the three months ended March 31, 2009.
9
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Non-vested at December 31, 2008
|
|
1,754,681
|
|
|
$
|
1.50
|
|
Granted
|
|
457,240
|
|
|
|
0.65
|
|
Vested
|
|
(131,725
|
)
|
|
|
2.58
|
|
Forfeited
|
|
(23,756
|
)
|
|
|
2.74
|
|
|
|
|
|
|
|
|
|
Non-vested at March 31, 2009
|
|
2,056,440
|
|
|
$
|
1.23
|
|
|
|
|
|
|
|
|
At March 31, 2009, there was $1.9 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 three years.
|
5.
|
Common Stock and Warrants
|
On November 13,
2006, GlobalSCAPE entered into a securities purchase agreement with accredited investors, who paid 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.
|
6.
|
Earnings per Common Share
|
The components of
earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Numerators
|
|
|
|
|
|
|
|
|
Numerators for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(244,442
|
)
|
|
$
|
151,933
|
|
|
|
|
|
Denominators
|
|
|
|
|
|
|
|
|
Denominators for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
|
17,227,371
|
|
|
|
17,322,827
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
|
|
|
|
|
|
Stock options (1)
|
|
|
0
|
|
|
|
725,786
|
|
Common stock warrants (2)
|
|
|
0
|
|
|
|
50,415
|
|
Denominator for dilutive earnings per share
|
|
|
17,227,371
|
|
|
|
18,099,028
|
|
Net (loss) income per common share – basic
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
Net (loss) income per common share – diluted
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
(1)
|
For the three months ended March 31, 2009, none of the outstanding options were included in dilutive shares, as the effect would be anti-dilutive. For the three months ended
March 31, 2008, 503,500 options were not included in dilutive shares, as the effect would be anti-dilutive.
|
|
(2)
|
For the three months ended March 31, 2009, none of the outstanding warrants were included in dilutive shares, as the effect would be anti-dilutive. For the three months
March 31, 2008, all outstanding warrants were included in the determination of dilutive shares.
|
10
|
Item 2.
|
Management’s 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 management’s 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 2008 Form 10-K and other documents filed with the Securities and Exchange Commission. GlobalSCAPE’s
actual results could differ materially from those discussed in any forward-looking statements included in this Quarterly Report.
Overview
We develop, distribute and maintain secure managed file transfer, or MFT, software for individuals and businesses to safely send files
over the internet, within an enterprise, or to business partners. We have also developed Wide-Area File Services, or WAFS, collaboration and Continuous Data Protection, or CDP, software. These solutions further enhance the ability to share and
backup files within the infrastructure of a company’s wide and local area networks, or WAN and LAN at local network speeds. In addition, we announced Managed E-mail Attachment and software-as-a-service, or SaaS, information sharing solutions in
2008. The e-mail attachment delivery and SaaS solutions broaden our product portfolio to address the substantial installed base of IT systems with e-mail attachment size limitations and other file delivery infrastructure constraints.
Our product portfolio facilitates delivery of critical information such as financial data, medical records, customer files and other similar documents
while supporting a range of information protection approaches to meet privacy and other security requirements. In addition, these solutions ensure compliance with some 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 products also provide data replication, acceleration of file transfer, sharing/collaboration and continuous data backup and recovery to our
customers. We believe that we are strongly 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. We believe these business-to-business, or B2B, aspects of our solution capabilities increasingly will allow us to address adjacent market demands beyond the traditional MFT market space.
The following is a brief description of our products and solutions:
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 Enhanced File Transfer (EFT) Server, EFT Server Enterprise, CuteFTP Professional, CuteFTP Home, and CuteFTP Lite. During the first quarter of 2009, we announced a major new release of our Enhanced
File Transfer (EFT) Server solution. The introduction of EFT Server Version 6.0 marks a rebranding of the Company’s flagship FTP solutions. Our legacy Secure FTP Server and EFT Server solutions are now available as EFT Server and EFT Server
Enterprise, respectively.
Wide-Area File Services and Continuous Data Protection Products — Our WAFS products provide a file sharing, collaboration,
and replication 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 prevent opening an old file version without user
conflicts. Changes made to data on any server are mirrored on all other servers. WAFS technology can have CDP added to it to provide enterprises with a file access and data protection combination that centralizes data storage and IT administration
facilities but doesn’t compromise data sharing and protection. As files change, file 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 immediate restore, as well as the ability to perform point-in-time snapshots.
11
Managed E-mail Attachment Solutions – Our managed e-mail attachment solution, Mail Express, addresses the needs of
businesses that prefer to use their legacy e-mail infrastructure to deliver and manage e-mail attachments. E-mail traditionally has been ill-suited to delivery of certain attachments due to typical infrastructure and administrator-defined
limitations on e-mail attachment size. In many cases, these limitations preclude sending or receiving e-mail attachments larger than even 10 or 20 MB. Mail Express allows delivery of multi-GB files as e-mail attachments by seamlessly replacing the
attachments with links to the files. This approach can ease the load on the e-mail infrastructure and the long-term storage requirements associated with e-mail attachments. Mail Express also allows enhanced tracking and auditing of the file
attachments through read receipts and log files.
Software as a Service Solution — Our SaaS solution, CuteSendIt, is a file transfer service for
individuals, professionals, and businesses. CuteSendIt uses cloud computing approaches to deliver files through a hosted web portal. This solution approach meets the needs of users who do not have, or wish to invest in, file transfer infrastructure
such as FTP servers or even client application software. Users access the CuteSendIt application over the Internet using a standard web browser, securely upload files (up to multi-GB) through the portal, and compose a brief message to accompany the
file delivery. CuteSendIt then sends the message to the recipients as the body of an e-mail message. This e-mail message also includes links to the files uploaded through the CuteSendIt web portal. Anyone with an Internet connection can access this
service at www.cutesendit.com. There is no software to install with CuteSendIt and no specific knowledge of file transfer is needed to use it. CuteSendIt currently is free to use for a limited number of transfers, and offers various monthly and
yearly fee-based plans that meet specific file transfer requirements.
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, and to expand into growing markets through strategic partnerships and future acquisitions of compatible companies and solutions.
Liquidity and Capital Resources
The Company continues to enjoy a strong working capital position
resulting from net profits from operations over 18 of the last 20 quarters. At March 31, 2009, the Company had net working capital of $4.56 million. The primary component of current liabilities at March 31, 2009 was $2.8 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, 2009, our principal commitments consisted of obligations outstanding under operating
leases as well as royalty agreements with third parties, 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. At March 31, 2009 we had cash available of $6.2 million. Although we continue to generate cash flows from operating
activities, the frequency and timing of our cash inflows has decreased compared to prior periods as our customers are slower to pay, which we believe is reflective of the current economic recession.
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 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 may sell equity securities or enter into credit arrangements in order to finance future acquisitions or licensing activities.
Net cash provided by operating activities for the three months ended March 31, 2009 and 2008 was approximately $123,000 and $1,518,000,
respectively. The decrease in 2009 was largely due to a decrease in sales from year to year with the remaining difference due to changes in working capital items such as accounts receivable, prepaid expenses and accounts payable and accrued
expenses. In addition, payments due under the deferred compensation agreement with our former CEO Charles Poole were paid in full in January 2009 which resulted in a significant use of cash.
12
Net cash used in investing activities for the three months ended March 31, 2009 and 2008 was
approximately $219,000 and $138,000, respectively. Cash used in investing activity for 2009 was largely for additional furniture and fixtures and leasehold improvements as we made renovations to our office space, with the remainder spent on computer
equipment and software.
Net cash used in financing activities during the three months ended March 31, 2009 and 2008 was approximately
$0 and $972,000 respectively. During 2008, cash was used to repurchase shares as part of a stock buyback program. This program ended in May 2008 and no further purchases of stock have been made. During 2009, the Company continues to be funded by its
operations and available resources and has not needed to obtain additional outside financing.
Contractual Obligations
There have been no significant changes in our contractual obligations during the three months ended March 31, 2009 as compared to the contractual obligations
disclosed in
Management’s Discussion and Analysis of Financial Condition and Results of Operations
, set forth in Part II, Item 7, of our 2008 Form 10-K. Our obligations mainly consist of the lease on our office space and leases on
equipment.
Comparison of the Three Months ended March 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended March 31,
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Total revenues
|
|
$
|
3,240,394
|
|
|
$
|
4,055,819
|
|
(815,425
|
)
|
|
-20.11
|
%
|
|
Cost of revenues
|
|
|
51,916
|
|
|
|
30,025
|
|
21,891
|
|
|
72.91
|
%
|
|
Selling, general and administrative expenses
|
|
|
2,583,135
|
|
|
|
2,981,809
|
|
(398,674
|
)
|
|
-13.37
|
%
|
|
Research and development expenses
|
|
|
675,192
|
|
|
|
543,270
|
|
131,922
|
|
|
24.28
|
%
|
|
Depreciation and amortization
|
|
|
172,039
|
|
|
|
174,019
|
|
(1,980
|
)
|
|
-1.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
3,482,282
|
|
|
|
3,729,123
|
|
(246,841
|
)
|
|
-6.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(241,888
|
)
|
|
|
326,696
|
|
(568,584
|
)
|
|
-174.04
|
%
|
|
Other Income (expense)
|
|
|
10,419
|
|
|
|
30,310
|
|
(19,891
|
)
|
|
-65.63
|
%
|
|
Income tax expense
|
|
|
12,973
|
|
|
|
205,074
|
|
(192,101
|
)
|
|
-93.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(244,442
|
)
|
|
$
|
151,932
|
|
(396,374
|
)
|
|
-260.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2009, total revenues decreased by approximately $815,000 or 20.11% from the same
quarter in 2008. This decrease was due to multiple factors, including decreased IT budgets of some of our customers, decreased sales of our CuteFTP suite of products, and a decline in our WAFS product sales.
13
The following table reflects revenue by product including the related maintenance and support for each product:
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Revenue for the Three Months ended March 31,
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Product
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2009
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2008
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EFT Server Enterprise
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$
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1,708,834
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52.7
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%
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$
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1,736,024
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42.8
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%
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EFT Server
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645,121
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19.9
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%
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862,191
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21.3
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%
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CuteFTP Professional
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379,749
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11.7
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%
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546,031
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13.5
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%
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CuteFTP Home
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143,623
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4.4
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%
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249,104
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6.1
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%
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WAFS
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406,628
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12.5
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%
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611,431
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15.1
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%
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CDP
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1,809
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0.1
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%
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14,066
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0.3
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%
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All Others
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10,076
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0.3
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%
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85,448
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2.1
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%
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Deferred Revenue adjustment
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(55,446
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)
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-1.7
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%
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(48,476
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)
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-1.2
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%
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Total Operating Revenues
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$
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3,240,394
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100.0
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$
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4,055,819
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100.0
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Maintenance and support
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$
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1,293,245
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39.9
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%
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$
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1,166,761
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28.8
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%
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Sales of our EFT Server and EFT Server Enterprise products decreased by $244,000 or 9.4% for the
quarter. These products represented approximately 73% of our total revenues in the three months ending March 31, 2009 as compared to 64% in the same period in 2008. The decrease in sales was due to two factors. First the general economic
downturn that began in the second half of 2008 has reduced the discretionary IT spending of many of our customers. Second, customers delayed their purchases until after March when version 6.0 of our EFT Server solution was released.
Revenues from CuteFTP Home and CuteFTP Professional decreased by 34.2% in the quarter ended March 31, 2009, as compared to the same period in 2008,
and accounted for approximately 16.2% and 19.6% of total revenues for the three months ended March 31, 2009 and 2008, respectively. This decline continues the general reduction in CuteFTP revenues experienced since the 2006 timeframe. The
consumer FTP product market has substantial low-cost, and even free, solutions that put increasing pressure on CuteFTP revenues. In addition, 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, EFT Server, EFT Server Enterprise, WAFS and CDP, purchasers require increased
maintenance and support. Our maintenance and support revenues for the quarter increased by 11% compared to the same period in 2008. As our enterprise products become a larger portion of our total revenues, maintenance and support revenues will
continue to increase, as well as represent a higher proportion of our total revenue as more enterprise product customers purchase support compared to our consumer product customers. 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 currently recognize additional deferred revenue and earn the revenue over the life of the
maintenance and support agreement.
Sales of our WAFS and CDP systems decreased $217,000 or 34.7% for the quarter. This decrease
corresponds with the decline in this product that was forecasted at the end of 2008, and was caused by the general economic decline as well as prospective customers delaying purchase while awaiting the new release of WAFS. These products accounted
for approximately 12.6% of total revenue for the first quarter of 2009 compared to 15.4% for the same period in 2008.
14
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. The increase in cost of revenues was largely due to two items: an increase in shipments and an increase in royalty payments. The increase in
shipments was due to an increase in customer requests as we only ship CD copies of our software on an as requested basis. While the recorded book expense for royalties has increased, actual royalty payments between Q1 2008 and Q1 2009 have
decreased. This decrease was consistent with our decrease in revenues as several of our contracts are based on the number of units sold. The increase in the recorded expense was due to an accounting adjustment that was booked during 2008 to true up
the balance at that time. Cost of revenues as a percent of total revenues was 1.6% for the three months ended March 31, 2009 as compared to 0.7% for the same period in 2008.
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. The net decrease in selling, general and administrative expenses of approximately $399,000 or 13.4% was largely caused by a decrease in two items, commissions and bad debt expense.
The decrease in commissions was due to the decrease in sales as well as a change in commission base. Prior to 2008 commissions were earned based on amounts collected, beginning February 2008, commissions are earned based on sales. In January 2008
additional commissions were paid to account for this change in policy. The decrease in bad debt expense was due to a change in the methodology of calculation. During 2008 bad debt was estimated based on revenues, whereas in 2009 bad debt was
estimated based on outstanding receivables. We believe that this change in methodology and estimate better reflects our credit risk exposure. There were also numerous small decreases in other items, mainly due to the Company’s concentrated cost
reduction effort in the face of slowing sales and the economy. These decreases were offset by increases in three main accounts: professional accounting fees, consulting fees, and advertising. The increase in accounting fees was due to the hiring of
Grant Thornton LLP as our auditors, the increased consulting fees were due to the hiring of a consultant to specifically drive sales in the government industry, and the increased advertising was largely due to annual fee increases.
Research and Development.
The increase in research and development expenses was due to additional personnel needed to support our product
releases. We hired several additional engineers/programmers during 2008 to deliver these releases and anticipate a continued business-driven focus on solution concept exploration and delivery activities.
Depreciation and Amortization.
Depreciation and amortization expense consists of depreciation expense related to our fixed assets and
amortization of capitalized development costs and intangible assets. Although depreciation and amortization combined has remained relatively stable between the years, depreciation increased with more property additions in the current year and
amortization has decreased due to the write down of intangible assets at the end of 2008, which resulted in a smaller amortizable base.
Other Income (Expense), net.
The largest portion of other income/expense relates to interest earned on our cash and cash equivalents. The interest earned has decreased in the first quarter of 2009 as compared to 2008 mainly
due to decreased interest rates. The average interest rate during the first quarter of 2008 was 6.42%. The average interest rate during the first quarter of 2009 was 3.25%.
Income Taxes.
Our effective tax rates were (5.6) % and 57.4% for the three months ended March 31, 2009 and 2008, respectively.
This decrease was largely due to the net loss realized in the first quarter of 2009 versus the net income realized in the first quarter of 2008. For both 2009 and 2008 the most significant item that effects our effective income tax rate relates to
granted incentive stock options, for which our recorded expense is generally not deductible.
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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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.
15
In the first three months ended March 31, 2009, approximately 33% of our revenues came from
customers outside the United States. All revenues are received in U.S. dollars so we have no material exchange rate risk with regard to the sales. 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. The impact of this currency translation has not been material to our business.
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Item 4.
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Controls and Procedures
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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 GlobalSCAPE’s “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 quarter ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
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Item 1.
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Legal Proceedings
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We are not currently involved in
any material legal proceedings.
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 2008 Form 10-K which could materially affect our business, financial condition or future results. The risks described
in our 2008 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.
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31.1
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Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32
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Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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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.
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GLOBALSCAPE, INC.
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May 12, 2009
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By:
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/s/ Mendy Marsh
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Date
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Mendy Marsh
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Vice President and Chief Financial Officer
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16
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