Three Months ended June 30, 2000 and 2001
Sales. We derive our revenues primarily from software sales, comprised of the gross selling price of the software including shipping charges. For the three months ended June 30, 2000 and 2001, total revenues decreased 12% from $1.54 million to $1.35 million due to an almost complete elimination of advertising revenue. However, revenues from the sale of software products increased 3% over the comparable periods. Unit sales of our software products increased 19% from 42,236 to 50,292 due primarily to large volume site license sales. Without site license sales, unit sales actually fell about 7%. This shortfall in volume was overcome by the higher average selling price of CuteFTP Pro, which accounted for approximately 24% of revenues in the second quarter of 2001. As we expected, advertising revenue continued to decline both in total dollars and as a percentage of revenues. In the second quarter of 2001 advertising revenue was no longer a meaningful percentage of total revenue.
Cost of Revenues. Cost of revenues consists primarily of production, packaging and shipping costs for boxed copies of software products as well as a portion of our bandwidth costs, certain licensing expenses and royalties. Cost of revenues increased 7% for the three months ended June 30, 2001 as compared to the same period in 2000 primarily due to the recognition of royalty expenses related to the distribution agreement with Trellix Corporation announced on June 6, 2001. We expect cost of revenues to increase as a percentage of sales in future periods relative to historical levels due to royalties payable under this agreement.
Selling, General and Administrative. Selling, general and administrative expenses consist primarily of personnel and related expenses, marketing, customer support, professional fees, rents, bad debt and credit card transaction fees. Selling, general and administrative expenses decreased slightly in the second quarter of 2001 when compared to the same period in 2000. As a percentage of total revenues, selling, general and administrative expenses increased from 56% to 63%. Salaries and related costs such as insurance and taxes increased between periods while professional fees and recruiting fees decreased. We incurred non-cash compensation charges of approximately $12,000 during the second quarter of 2001 related to the issuance of stock options in the fourth quarter of 2000 (see Stock-Based Compensation). The number of persons employed by GlobalSCAPE increased from approximately 30 at June 30, 2000 to 40 on June 30, 2001. However, we have reduced staffing levels by about 12% and should experience cost savings related to these reductions in the third quarter of 2001.
Research and Development. Research and development expenses more than doubled over the same period last year due primarily to personnel expansion in our research and development and quality assurance departments. However, these expenses increased only 5% from the previous quarter.
Depreciation and Amortization. Depreciation and amortization expense consists of depreciation expense related to our fixed assets, the amortization of goodwill associated with our purchase of the assets of QMC in 1998 and amortization of the trademark associated with our purchase of CuteFTP. Depreciation and amortization expense increased 33% over the comparable periods due to the purchase of furniture, software, computer hardware and leasehold improvements between periods.
Interest Expense, net. The majority of interest expenses incurred during the three months ended June 30, 2001 were related to interest on capital leases while in the same period in 2000 these expenses were comprised of both interest on capital leases and working capital borrowings. In addition to the above, for the three months ended June 30, 2001, we recognized interest income of approximately $4,900 related to loans made to our parent ATSI Communications, Inc. (see Related Party Transactions).
Income Taxes. In periods prior to September 12, 2000, ATSI has filed a consolidated federal income tax return to include the tax information for it and for its affiliates, including GlobalSCAPE. Effective September 12, 2000, ATSI distributed approximately 27% of its ownership in GlobalSCAPE, resulting in a deconsolidation from the ATSI tax return filing group for federal income tax purposes. From that date forward, GlobalSCAPE will file a separate return for income taxes. For financial accounting purposes and in accordance with the tax sharing agreement which was in effect by and between ATSI and GlobalSCAPE for the periods prior to deconsolidation our financial statements have and will continue to reflect the costs of income taxes as if GlobalSCAPE was filing separate income tax returns. The provision for federal income taxes was $82,980 and ($463) for the three-month periods ending June 30, 2000 and 2001, respectively. The provision for state income taxes was $11,500 and ($41) over the same periods.
Net Income. Net income decreased from $157,783 in the second quarter of 2000 to a net loss of $16,761 in the second quarter of 2001 as a result of the loss of advertising revenues and greater expenditures on research and development which were slightly offset by reduced selling, general and administrative expenses.
Six Months ended June 30, 2000 and 2001
Sales. For the six months ended June 30, 2000 and 2001, total revenues decreased 6% due to the sharp reductions in advertising revenue in the first quarter and almost complete elimination in the second quarter. Despite a more than $330,000 reduction in advertising revenue, total revenue declined only $166,000 due to increased sales of software products over the comparable period a year ago. Unit sales of our software products increased 4% from 95,163 to 98,711, slightly less than the 6% increase in software product revenues.
Cost of Revenues. Cost of revenues consists primarily of production, packaging and shipping costs for boxed copies of software products as well as a portion of our bandwidth costs, certain licensing expenses and royalties. Cost of revenues increased 35% between periods for two reasons. First, we expensed certain software licensing costs, prepaid for the year, entirely in the first quarter. The structure of the licensing agreement requires pre-payment of a non-refundable amount for the entire year subject to additional fees if certain distribution levels are exceeded. The entire amount of the licensing fee was expensed in the first quarter because the licensed material will not be distributed with our product in future periods. Second, we recognized royalty expenses related to the distribution agreement with Trellix Corporation announced on June 6, 2001. We expect cost of revenues to increase as a percentage of sales in future periods relative to historical levels due to royalties payable under this agreement.
Selling, General and Administrative. Selling, general and administrative expenses consist primarily of personnel and related expenses, marketing, customer support, professional fees, rents, bad debt, credit card transaction fees and non-cash compensation expenses related to stock options. Selling, general and administrative expenses increased 57% for the six months ended June 30, 2001 over the same period in 2000. As a percentage of total revenues, selling, general and administrative expenses grew from 46% to 77%. There are two primary reasons for the increase. We did not move into our new facility until the second quarter of 2000, resulting in lower operating costs for the first quarter of 2000 when compared to the first quarter of 2001. Secondly, we incurred non-cash compensation charges of about $430,000 in the six-month period ended June 30, 2001 (see Stock-Based Compensation). We will recognize an additional $16,500 in non-cash compensation related to the issuance of stock options below fair market value as these options vest throughout 2001. Exclusive of non-cash compensation charges, selling, general and administrative expenses increased only 26% over the comparable periods. The number of persons employed by GlobalSCAPE increased from approximately 30 at June 30, 2000 to 40 on June 30, 2001. However, we reduced staffing levels by about 12% and should experience cost savings related to these reductions in the third quarter of 2001.
Research and Development. Research and development expenses increased 69% for the six months ended June 30, 2001 over the same period in 2000 due to the expansion of both the research and development and quality assurance departments.
Depreciation and Amortization. Depreciation and amortization expense consists of depreciation expense related to our fixed assets, the amortization of goodwill associated with our purchase of the assets of QMC in 1998 and amortization of the trademark associated with our purchase of CuteFTP. Depreciation and amortization expense increased 41% over the comparable periods due to the purchase of furniture, software, computer hardware and leasehold improvements between periods.
Interest Expense, net. The majority of interest expenses incurred during the six months ended June 30, 2001 were related to capital leases while in the same period in 2000 interest expense was comprised of both interest on capital leases and working capital borrowing. For the three months ended June 30, 2001, we also recognized interest income of approximately $4,900 related to loans made to our parent ATSI Communications, Inc. (see Related Party Transactions).
Income Taxes. In periods prior to September 12, 2000, ATSI has filed a consolidated federal income tax return to include the tax information for it and for its affiliates, including GlobalSCAPE. Effective September 12, 2000, ATSI distributed approximately 27% of its ownership in GlobalSCAPE, resulting in a deconsolidation from the ATSI tax return filing group for federal income tax purposes. From that date forward, GlobalSCAPE will file a separate return for income taxes. For financial accounting purposes and in accordance with the tax sharing agreement which was in effect by and between ATSI and GlobalSCAPE for the periods prior to deconsolidation our financial statements have and will continue to reflect the costs of income taxes as if GlobalSCAPE was filing separate income tax returns. The provision for federal income taxes was $290,033 and $23,087 for the six-month periods ending June 30, 2000 and 2001, respectively. The provision for state income taxes was $40,195 and $2,037 over the same periods. The increase in the effective income tax rate for the six month period ended June 30, 2001 is due primarily to the financial accounting recognition of compensation expense related to stock option grants.
Net Income. Net income decreased from $602,303 in the six months ended June 30, 2000 to a net loss of $392,722 in the same period 2001 as a result of the loss of advertising revenues, greater expenditures on research and development and higher selling, general and administrative expenses, $430,000 of which were non-cash expenses. These expenses combined to reduce our income before taxes. In addition, the compensation charge related to stock options did not reduce our tax liability, as it is not deductible for federal income tax purposes.
Liquidity and Capital Resources
On March 20, 2001 GlobalSCAPE established a line of credit with The Frost National Bank in the amount of $200,000. The interest rate is subject to change and is indexed to the bank’s prime rate. The initial rate is 9.5%. If a default occurs under the note, the lender can accelerate all or a portion of the debt. In connection with the line of credit, GlobalSCAPE entered into a Commercial Security Agreement with The Frost National Bank whereby GlobalSCAPE granted a security interest in all its accounts and equipment. In the event of default under the Security Agreement, the bank may sell the collateral in which they hold a security interest. GlobalSCAPE has not used any of the available credit under this facility as of the date of this report.
GlobalSCAPE is a co-borrower for a capital lease obligation of ATSI with NTFC Capital Corporation (“NTFC”) entered into August 26, 1999 in the amount of $2,000,000. In connection with this obligation GlobalSCAPE signed a Note and a Loan and Security Agreement whereby it has granted a security interest to NTFC in the equipment purchased with the loan proceeds. GlobalSCAPE does not use any of that equipment in its business and none of its stock or assets is collateral securing the obligation. As of June 30, 2001, the outstanding balance including capitalized interest was approximately $1,696,900.
The NTFC lease facility requires that ATSI meet certain financial covenants on a quarterly basis beginning October 31, 1999, including minimum revenue levels, gross margin levels, earnings before interest, taxes and depreciation and amortization (EBITDA) results and debt to equity ratios. ATSI was in default of financial covenants of the lease as of April 30, 2001 and has classified the entire capital lease as a current liability. ATSI has requested a waiver for non-compliance of the financial covenants and has asked that NTFC re-set the covenants to prevent future defaults. Although ATSI has received waivers in the past, there is no guarantee that NTFC will grant a waiver for ATSI’s April 30, 2001 non-compliance.
On April 16, 2001, GlobalSCAPE loaned $200,000 to ATSI pursuant to a Note having a final maturity of April 30, 2001. The Note provided for interest at 12% per annum and was secured by a receivable from a third party owing to ATSI’s subsidiary, TeleSpan, Inc. This Note was paid in full on April 23, 2001.
On April 27, 2001, GlobalSCAPE loaned $200,000 to ATSI pursuant to a Note having a final maturity of May 31, 2001. The Note provided for interest at 12% per annum and is secured by a receivable from a third party owing to ATSI’s subsidiary, TeleSpan, Inc. The entire amount of this Note is outstanding as of the date of this report.
On May 4, 2001, GlobalSCAPE loaned $50,000 to ATSI pursuant to a Note having a final maturity of May 31, 2001. The Note provided for interest at 12% per annum and was secured by a receivable from a third party owing to ATSI’s subsidiary, TeleSpan, Inc. This Note was paid in full on May 7, 2001.
On a consolidated basis as of April 30, 2001, ATSI had a working capital deficit, had suffered recurring losses from operations since inception, had negative cash flows from operations and had limited capital resources to support further development of its operations. ATSI may be unable to repay the $200,000 loan from GlobalSCAPE and the NTFC obligation. If ATSI were unable to pay the $200,000 loan, GlobalSCAPE could foreclose on the receivable securing the loan. GlobalSCAPE believes the value of the receivable securing this loan is sufficient to pay this loan in full. If ATSI were unable to pay the NTFC obligation, NTFC would likely exercise its rights under the Loan and Security Agreement to sell the equipment and apply the proceeds to its loan balance. If ATSI were unable to pay any loan balance remaining after the sale of the equipment, NTFC would have recourse against GlobalSCAPE for repayment. As a result, assets which otherwise would be used to execute GlobalSCAPE’s business strategy may have to be used to satisfy this debt.
The financial condition of our parent company may impede or eliminate our ability to execute our plan by impairing our ability to obtain financing. ATSI might be motivated by financial stress to sell its stock of GlobalSCAPE for less than what it might sell for under other circumstances, which may depress the value of the stock in general
Net cash provided by operating activities in the six months ended June 30, 2000 and 2001 was $728,026 and $189,133 respectively. Net cash provided by operating activities in the six months ended June 30, 2000 was primarily the result of net income and adjustments related to depreciation and amortization offset by increased accounts receivable. Net cash provided by operating activities in the six months ended June 30, 2001 resulted primarily from adjustments related to non-cash compensation charges and depreciation and amortization, reduced by the net loss for the period.
Net cash used in investing activities for the six months ended June 30, 2000 and 2001 was $412,388 and $170,023 respectively. Net cash used in investing activities in the period for 2000 was primarily for furniture and fixtures, leasehold improvements and computer hardware related to our move into the facility we currently occupy. Cash used in the six months ended June 30, 2001 was for additional furniture and computer equipment to accommodate our employee growth, license fees paid to Trellix Corp., as well as software necessary for product development and quality assurance testing.
Net cash used in financing activities in the six months ended June 30, 2000 and 2001 was $117,940 and $82,083 respectively. Net cash used in financing activities for the six months ended June 30, 2000 consisted of $70,000 in bank borrowings, $147,000 in principal payments on notes payable and $41,000 in principal payments on capital lease obligations. Net cash used in financing activities for the six months ended June 30, 2001 consisted of $47,000 in principal payments on notes payable and $35,000 in principal payments on capital lease obligations.
As of June 30, 2001, we had $50,618 in cash and cash equivalents, current assets of $632,720 and current liabilities of $381,720, resulting in working capital of $251,000. Our principal commitments consisted of obligations outstanding under capital leases. In February 2001 we paid off all balances owed related to bank borrowings. We anticipate a rate of capital expenditures consistent with our anticipated growth in operations, infrastructure and personnel. The facility that we currently occupy is expected to be sufficient for our growth through December 31, 2001. Consequently, capital expenditures for leasehold improvements and furniture should be less in 2001 than in 2000. We anticipate that we will continue to add computer hardware resources and that we will expend significant resources on product development and development staff. We may also use cash to acquire or license technology, products or businesses related to our current business. In addition, we anticipate that our operating expenses in general will continue to be a material use of our cash resources, however, we have no formal commitments to incur such expenses other than those disclosed in this Quarterly Report and in documents previously filed with the SEC and therefore do not have an identified need for external financing for the next 12 months. We will manage to the current and immediately foreseeable cash flows generated internally until such time as some external source of capital is identified.
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 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 second quarter of 2001, approximately 38% of our revenues came from customers outside the United States. However, all revenues are received in U.S. dollars so we have no exchange rate risk.
Part II. Other Information
Item 1. Legal Proceedings
We are not currently involved in any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
None in the second quarter of 2001.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Effective June 1, 2001, ATSI Communications, Inc., which holds 73.24% of the outstanding shares of GlobalSCAPE, Inc., elected Arthur L. Smith, H. Douglas Saathoff and Tim Nicolaou as Directors of GlobalSCAPE by written consent.
Item 5. Other Information
None in the second quarter of 2001.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
On June 11, 2001 GlobalSCAPE, Inc. mailed notice to its shareholders of record as of June 1, 2001 of the election of Arthur L. Smith, H. Douglas Saathoff and Tim Nicolaou as Directors of GlobalSCAPE, Inc.
Signature
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.
| | By: /s/ Tim Nicolaou | |
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| | Tim Nicolaou | |
| | Chief Executive Officer | |
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| | By: /s/ Daniel McRedmond | |
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| | Daniel McRedmond | |
| | Director of Finance and Accounting
(Principal Accounting and Financial Officer) | |
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