UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
For the quarterly period ended March 31, 2004 |
Or | |
| |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-30617
GlobalSCAPE, Inc.
(Exact name of registrant as specified in its charter)
Delaware | | 74-2785449 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification
No.) |
| | |
6000 Northwest Parkway, Suite 100 | | 78249 |
(Address of principal executive offices) | | (Zip Code) |
| | |
(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. ý Yes o No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No
The number of shares outstanding of the registrant’s common stock at May 13, 2004 was 13,738,619.
GlobalSCAPE Inc.
Quarterly Report on Form 10-Q
For the Quarter ended March 31, 2004
Index
GlobalSCAPE®, PureCMS®, CuteFTP Pro®, CuteFTP®, CuteZIP®, CuteHTML®, CuteMAP® and CuteSITE Builder® are registered trademarks of GlobalSCAPE Texas, LP. GlobalSCAPE Secure FTP Server, WebSurvey, and GlobalSCAPE Transfer Engine are trademarks of GlobalSCAPE Texas, LP. Other trademarks and tradenames in this quarterly report are the property of their respective owners.
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GlobalSCAPE, Inc.
Consolidated Balance Sheets
| | December 31,
2003 | | March 31,
2004 | |
| | | | (unaudited) | |
Assets | | | | | |
Current assets: | | | | | |
Cash | | $ | 342,433 | | $ | 162,444 | |
Accounts receivable (net of allowance for doubtful accounts of $43,581 and $27,215 at December 31, 2003 and March 31, 2004, respectively) | | 240,615 | | 223,121 | |
Prepaid expenses | | 46,428 | | 32,552 | |
Total current assets | | 629,476 | | 418,117 | |
| | | | | |
Property and equipment: | | | | | |
Furniture and fixtures | | 332,920 | | 332,920 | |
Software | | 235,436 | | 236,513 | |
Equipment | | 590,019 | | 597,263 | |
Leasehold improvements | | 154,376 | | 154,376 | |
| | 1,312,751 | | 1,321,072 | |
Accumulated depreciation and amortization | | 1,035,830 | | 1,091,624 | |
Net property and equipment | | 276,921 | | 229,448 | |
| | | | | |
Other assets: | | | | | |
Other | | 11,881 | | 11,881 | |
| | | | | |
Total assets | | $ | 918,278 | | $ | 659,446 | |
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GlobalSCAPE, Inc.
Consolidated Balance Sheets
| | December 31,
2003 | | March 31,
2004 | |
| | | | (unaudited) | |
Liabilities and Stockholders’ Equity | | | | | |
Current liabilities: | | | | | |
Accounts payable | | $ | 180,555 | | $ | 175,772 | |
Accrued expenses | | 173,935 | | 237,474 | |
Deferred revenue | | 140,489 | | 146,599 | |
Notes payable | | 100,000 | | — | |
Current portion of capital lease obligation | | 15,294 | | — | |
Total current liabilities | | 610,273 | | 559,845 | |
| | | | | |
Long-term liabilities: | | | | | |
Other long-term liabilities | | 39,253 | | 36,449 | |
Total long-term liabilities | | 39,253 | | 36,449 | |
| | | | | |
Commitments and contingencies | | | | | |
| | | | | |
Stockholders’ equity: | | | | | |
Preferred stock, par value $0.001 per share, 10,000,000 authorized, no shares issued or outstanding | | — | | — | |
Common stock, par value $0.001 per share, 40,000,000 shares authorized, 13,488,619 and 13,488,619 shares issued and outstanding at December 31, 2003 and March 31, 2004, respectively | | 13,489 | | 13,489 | |
Additional paid-in capital | | 671,893 | | 671,893 | |
Retained earnings (deficit) | | (416,630 | ) | (622,230 | ) |
Total stockholders’ equity | | 268,752 | | 63,152 | |
Total liabilities and stockholders’ equity | | $ | 918,278 | | $ | 659,446 | |
See accompanying notes.
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GlobalSCAPE, Inc.
Consolidated Statements of Operations
(Unaudited)
| | Three months ended
March 31, | |
| | 2003 | | 2004 | |
Operating revenues: | | | | | |
Software product revenues | | $ | 1,120,186 | | $ | 1,172,137 | |
| | | | | |
Operating expenses: | | | | | |
Cost of revenues (exclusive of depreciation and amortization shown separately below) | | 141,990 | | 98,678 | |
Selling, general and administrative expenses | | 1,251,720 | | 976,914 | |
Research and development expenses | | 217,218 | | 245,631 | |
Depreciation and amortization | | 117,040 | | 55,794 | |
Total operating expense | | 1,727,968 | | 1,377,017 | |
Loss from operations | | (607,782 | ) | (204,880 | ) |
| | | | | |
Other income (expense): | | | | | |
Interest expense | | (1,148 | ) | (720 | ) |
Loss on disposition of assets | | (1,486 | ) | — | |
Total other income (expense) | | (2,634 | ) | (720 | ) |
Loss before income taxes | | (610,416 | ) | (205,600 | ) |
| | | | | |
Income tax expense (benefit): | | | | | |
Current: | | | | | |
Federal | | — | | — | |
State | | — | | — | |
Deferred: | | | | | |
Federal | | — | | — | |
State | | — | | — | |
Total income tax provision (benefit) | | — | | — | |
| | | | | |
Net loss | | $ | (610,416 | ) | $ | (205,600 | ) |
| | | | | |
Net loss per common share- basic | | $ | (0.05 | ) | $ | (0.02 | ) |
Net loss per common share- assuming dilution | | $ | (0.05 | ) | $ | (0.02 | ) |
Average shares outstanding: | | | | | |
Basic | | 13,358,619 | | 13,488,619 | |
Diluted | | 13,358,619 | | 13,488,619 | |
See accompanying notes.
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GlobalSCAPE, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
| | Three months ended
March 31, | |
| | 2003 | | 2004 | |
Operating Activities: | | | | | |
Net loss | | $ | (610,416 | ) | $ | (205,600 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
Bad debt expense | | 789 | | (7,258 | ) |
Depreciation and amortization | | 117,040 | | 55,794 | |
Loss on sale of assets | | 1,486 | | — | |
Changes in operating assets and liabilities: | | | | | |
Accounts receivable | | 30,732 | | 24,752 | |
Prepaid expenses | | 45,690 | | 13,876 | |
Accounts payable | | 171,454 | | (4,783 | ) |
Accrued expenses | | 35,993 | | 63,539 | |
Deferred revenues | | 76,296 | | 6,110 | |
Other long-term liabilities | | (2,803 | ) | (2,804 | ) |
Net cash used by operating activities | | (133,739 | ) | (56,374 | ) |
Investing Activities: | | | | | |
Purchase of property and equipment | | (6,809 | ) | (8,321 | ) |
Net cash used in investing activities | | (6,809 | ) | (8,321 | ) |
Financing Activities: | | | | | |
Principal payments on notes payable | | — | | (100,000 | ) |
Principal payments on capital lease obligations | | (14,963 | ) | (15,294 | ) |
Net cash used in financing activities | | (14,963 | ) | (115,294 | ) |
Net decrease in cash | | (155,511 | ) | (179,989 | ) |
Cash at beginning of period | | 480,609 | | 342,433 | |
Cash at end of period | | $ | 325,098 | | $ | 162,444 | |
See accompanying notes.
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GlobalSCAPE, Inc.
Notes to Consolidated Financial Statements
Nature of Business
GlobalSCAPE, founded in April 1996, develops, distributes and supports Internet related software including content management, file management and Web development solutions. The Company is best known for its popular file transfer program, CuteFTP. The Company derives its revenues primarily from sales of licenses to use its software products. Sales of CuteFTP and CuteFTP Pro accounted for approximately 75% and 71% of total revenues in 2003 and the first three months of 2004, respectively. The Company is organized and operates as one segment and markets its products through the Internet, an internal sales force and through resellers.
Corporate Structure
All of the Company’s operations are conducted by GlobalSCAPE Texas, LP, a Texas limited partnership. The partners of GlobalSCAPE Texas, LP are two Nevada limited liability companies, which are both wholly-owned subsidiaries of GlobalSCAPE, Inc., a Delaware corporation. GlobalSCAPE, Inc. is approximately 70% owned by the Brown and Mann-GlobalSCAPE Joint Venture, with the remainder held publicly. GlobalSCAPE, Inc. is a holding company and conducts no operations, however, the stock of GlobalSCAPE, Inc. is quoted on the OTC Bulletin Board. References to “GlobalSCAPE” or the “Company” refer collectively to all of these entities unless otherwise indicated.
Basis of Presentation
The accompanying unaudited 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 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 Balance Sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes included in GlobalSCAPE’s Annual Report on Form 10-K for the year ended December 31, 2003.
Principles of Consolidation
The consolidated financial statements include all subsidiaries. All inter-company transactions and balances have been eliminated.
Liquidity
The Company incurred significant operating losses during the last three years and in the first quarter of 2004. In February 2004 GlobalSCAPE reduced its workforce by 20%, laying off 9 of the 45 people then employed by the Company. This workforce reduction was a necessary step in improving the overall financial health of the organization. The Company had anticipated stronger revenue performance in the first quarter of 2004 after poorer than expected sales in the fourth quarter of 2003 and had maintained staffing levels with this objective. These higher revenue targets were not met, further reducing the Company’s liquidity position.
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The Company is highly dependent on the sale of two software products, CuteFTP and CuteFTP Pro, which are subject to technological and competitive obsolescence. Sales of these two products, which represented 71% of the Company’s revenues in the first quarter of 2004, declined approximately 13% from the same quarter in the previous year. This decline in combined sales was due to a 27% decline in sales of CuteFTP. Sales of CuteFTP Pro increased approximately 15% from the first quarter of 2003 to the first quarter of 2004. The combined sales of CuteFTP and CuteFTP Pro increased approximately 6% from the fourth quarter of 2003 to the first quarter of 2004. Individually, sales of CuteFTP fell 5% between these periods and sales of CuteFTP Pro increased approximately 25%. Sales of Secure Server, the companion product to CuteFTP Pro, increased approximately 7.5% from the fourth quarter of 2003 to the first quarter of 2004 and 63% from the first quarter of 2003 to the first quarter of 2004. Sales of Secure Server accounted for approximately 9% of total revenues in the first quarter of 2004.
Substantially all software products ultimately reach a point in their lifecycle in which sales can be expected to plateau or decline. While it cannot be determined with certainty, these products may have reached such a point their lifecycles. Management believes that the market for stand-alone FTP clients for home consumers may be declining. However, we have not seen the same decline in the market for secure FTP clients and servers such as CuteFTP Pro and Secure Server which we believe better target the needs of businesses.
The Company’s liquidity could be further reduced in 2004 if sales of CuteFTP continue to decline and the Company is unable to successfully introduce new products or increase sales of existing products.
If sales decline or the Company’s liquidity position otherwise requires, management has the intent and ability to substantially reduce personnel and personnel-related costs, reduce or substantially eliminate capital expenditures and/or reduce or substantially eliminate research and development expenditures.
In addition, the Company could draw on its $250,000 line of credit, if necessary. This line of credit, which originally matured in March 2004, has been extended through June 2004. The interest rate is subject to change and is indexed to the bank’s prime rate. In connection with the line of credit, GlobalSCAPE entered into a commercial security agreement with the bank whereby GlobalSCAPE granted a security interest in all its accounts and equipment. The Company borrowed $100,000 on September 11, 2003 under this agreement. This amount was repaid in February 2004. The credit facility is available to the Company at any point during its term.
On March 30, 2004, the Company obtained a $200,000 line of credit with the Brown and Mann-GlobalSCAPE Joint Venture. The line of credit is available after June 21, 2004 if the Company fails to extend a line of credit with a bank and matures on December 31, 2004. The interest rate is subject to change and is indexed to the prime rate published in the Wall Street Journal. In connection with the line of credit, GlobalSCAPE entered into a Commercial Security Agreement with the Brown and Mann-GlobalSCAPE Joint Venture whereby GlobalSCAPE granted a security interest in all its accounts and equipment.
The Company’s flexibility in reacting to changes in the operating environment and to changing economic conditions may be limited by the Company’s current liquidity position. However, management believes that, if required, it will be able to effect some or all of the components of the plan set forth above, which are sufficient in the aggregate to enable the Company to continue as a going concern through at least December 31, 2004. Accordingly, the financial statements of the Company do not include any adjustments to reflect the possible future effects or the recoverability and classification of assets or the amounts and classification of liabilities that may result if the Company cannot improve its working capital position.
Accrued Expenses
Accrued expenses increased approximately $64,000 from December 31, 2003 to March 31, 2004. This increase is due primarily to increased accruals for salaries, commissions and bonuses.
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Stock-Based Compensation
Statement of Financial Accounting Standards 123, Accounting for Stock-Based Compensation (SFAS 123), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans based on the fair market value of options granted. The Company chose to account for stock based compensation using the intrinsic value method prescribed in APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation expense is recorded to the extent that the current market price of the underlying stock exceeds the exercise price. In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard 148, Accounting for Stock Based Compensation - Transition and Disclosure (SFAS 148), which amends SFAS 123. SFAS 148 requires more prominent and frequent disclosures about the effects of stock-based compensation. The Company will continue to account for its stock-based compensation according to the provisions of APB Opinion No. 25.
Pro forma information regarding net income and earnings per share is required by Statement 148, which also requires that the information be determined as if the Company had accounted for its stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value of these options was estimated at the date of grant using a Black-Scholes option-pricing model.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information for the three months ended March 31, 2003 and 2004 follows:
| | Three months ended
March 31, | |
| | 2003 | | 2004 | |
Net loss, as reported | | $ | (610,416 | ) | $ | (205,600 | ) |
Stock-based compensation expense that would have been included in the determination of net income (loss) had the fair value based method been applied to all awards, net of related tax effects | | (22,296 | ) | (8,886 | ) |
Pro forma net loss | | $ | (632,712 | ) | $ | (214,486 | ) |
| | | | | |
Loss per share: | | | | | |
Basic- as reported | | $ | (0.05 | ) | $ | (0.02 | ) |
Basic- pro forma | | $ | (0.05 | ) | $ | (0.02 | ) |
| | | | | |
Diluted- as reported | | $ | (0.05 | ) | $ | (0.02 | ) |
Diluted- pro forma | | $ | (0.05 | ) | $ | (0.02 | ) |
During the first quarter of 2004, no options were granted, none were forfeited and none expired.
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Earnings per Common Share
Basic and diluted net income per common share is presented in conformity with Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (SFAS 128) for all periods presented. Basic earnings per share is based on the weighted effect of all common shares issued and outstanding, and is calculated by dividing net income (loss) available to common stockholders by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing net income (loss) available to common stockholders by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding. Below is a reconciliation of the numerators and denominators of basic and diluted earnings per share for each of the periods presented:
| | Three months ended March 31, | |
| | 2003 | | 2004 | |
Numerators | | | | | |
Numerators for basic and diluted earnings per share: | | | | | |
Net loss | | $ | (610,416 | ) | $ | (205,600 | ) |
| | | | | |
Denominators | | | | | |
Denominators for basic and diluted earnings per share: | | | | | |
Weighted average shares outstanding – basic | | 13,358,619 | | 13,488,619 | |
| | | | | |
Dilutive potential common shares | | | | | |
Stock options (1) | | — | | — | |
Denominator for dilutive earnings per share | | 13,358,619 | | 13,488,619 | |
| | | | | |
Net loss per common share | | $ | (0.05 | ) | $ | (0.02 | ) |
Net loss per common share - assuming dilution | | $ | (0.05 | ) | $ | (0.02 | ) |
(1) For the three months ended March 31, 2003, 1,965,671 options have not been included in dilutive shares, as the effect would be anti-dilutive. For the three months ended March 31, 2004, 1,856,171 options have not been included in dilutive shares, as the effect would be anti-dilutive.
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Overview
GlobalSCAPE develops and distributes Internet related software including file management, content management and Web development tools. We distribute our software primarily via download from our Internet website. During 2003 and the first three months of 2004, approximately 65% and 63% of our revenues, respectively, were generated from customers within the United States, with the remaining 35% and 37% concentrated mostly in Western Europe, Canada and Australia.
CuteFTP and CuteFTP Pro accounted for approximately 75% and 71% of total revenues in 2003 and in the first quarter of 2004, respectively. Sales of these products declined approximately 13% when comparing the first quarter of 2003 to the first quarter of 2004. This decline in combined sales was due to a 27% decline in sales of CuteFTP. However, sales of CuteFTP Pro increased approximately 15% over the same periods. Total revenues increased almost 5% from the first quarter of 2003 to the first quarter of 2004 due to stronger sales of PureCMS and Secure Server and the introduction of Web Survey, CuteHTML Pro, and a Mac version of CuteFTP.
The combined sales of CuteFTP and CuteFTP Pro increased approximately 6% from the fourth quarter of 2003 to the first quarter of 2004. Individually, sales of CuteFTP fell 5% during these periods and sales of CuteFTP Pro increased approximately 25%. Sales of Secure Server, the companion product to CuteFTP Pro, increased approximately 7.5% from the fourth quarter of 2003 to the first quarter of 2004 and 63% from the first quarter of 2003 to the first quarter of 2004. Sales of Secure Server accounted for approximately 9% of total revenues in the first quarter of 2004.
Substantially all software products ultimately reach a point in their lifecycle in which sales can be expected to plateau or decline. While it cannot be determined with certainty, CuteFTP and CuteFTP Pro may have reached such a point their lifecycles. Management believes that the market for stand-alone FTP clients for home consumers may be declining. However, we have not seen the same decline in the market for secure FTP clients and servers such as CuteFTP Pro and Secure Server which we believe better target the needs of businesses.
Our strategy is to continue to introduce new products while enhancing the features of our current product line. We dedicated considerable resources in the fourth quarter of 2002 and in 2003 to the development and market launch of PureCMS, our content management product. To date, we have not been as successful in selling this product as we had anticipated. We laid out a plan in our 2002 Annual Report to address the liquidity issues caused by the expense of the PureCMS market launch and disappointing revenue figures in the first quarter of 2003. We successfully executed the plan and produced positive net income in both the second and third quarters. We fell short of our revenue expectations in the fourth quarter of 2003 and again addressed the liquidity issues caused by this shortfall. We laid off 9 of 45 employees on February 12, 2004 in order to bring our expenses in line with our current operating performance. We have the ability to make further cuts in external development, capital expenditures and, if necessary, in employees in order to manage the financial health of GlobalSCAPE.
Our success in 2004 is, to a great extent, dependent on our ability to market and sell our content management products effectively as well as our ability to maintain the revenues generated by CuteFTP. We also believe that we have an opportunity to increase sales of CuteFTP Pro and Secure Server. In general, our success depends on our ability to introduce new products and the market’s acceptance of these products. We released new versions of CuteFTP, CuteFTP Pro and Secure Server early in 2004 and we believe we can slow the decline in sales of CuteFTP and improve sales of CuteFTP Pro and Secure Server.
Our current products include:
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• PureCMS, a content management product targeting companies with small to medium-size Web site development teams. Content management solutions permit contributors from various disciplines within a company to directly control designated content on the company’s Web site, more efficiently manage resources and reduce maintenance costs;
• Publish XML, an enterprise content management (ECM) solution designed around XML. PublishXML enables distributed content creation and publication, while streamlining the process of repurposing content to multiple formats;
• GlobalSCAPE Secure FTP Server, a secure file server solution for technology professionals, complementing the CuteFTP Pro client application;
• CuteFTP Home, an easy-to-use file transfer application that allows users to quickly transfer files between computers, available for both Windows and Macintosh operating systems;
• CuteFTP Professional, a business class secure file transfer application for security-conscious professionals. The GlobalSCAPE transfer engine technology used in the product is also available as a software developers kit (SDK) allowing developers to incorporate the technology in their own applications;
• CuteZIP, an easy-to-use compression utility that allows users to shrink and encrypt files for secure transfer and storage;
• CuteSITE Builder, an easy-to-use WYSIWIG (What You See Is What You Get) Web site building tool targeting the novice user;
• CuteHTML Pro, CuteHTML and CuteMAP, productivity enhancing tools for Web site development;
• Web Survey, an easy way to create, manage and analyze Web site surveys;
Liquidity and Capital Resources
The Company incurred significant operating losses during the last three years and in the first quarter of 2004. In February 2004 GlobalSCAPE reduced its workforce by 20%, laying off 9 of the 45 people then employed by the Company. This workforce reduction was a necessary step in improving the overall financial health of the organization. The Company had anticipated stronger revenue performance in the first quarter of 2004 after poorer than expected sales in the fourth quarter of 2003 and had maintained staffing levels with this objective. These higher revenue targets were not met, further reducing the Company’s liquidity position.
The Company is highly dependent on the sale of two software products, CuteFTP and CuteFTP Pro, which are subject to technological and competitive obsolescence. Sales of these two products, which represented 71% of the Company’s revenues in the first quarter of 2004, declined approximately 13% from the same quarter in the previous year and the combined sales of these products have declined each of the last several years.
The Company’s liquidity could be further reduced in 2004 if sales of CuteFTP continue to decline and the Company is unable to successfully introduce new products or increase sales of existing products.
If sales continue to decline or the Company’s liquidity position otherwise requires, management has the intent and ability to substantially reduce personnel and personnel-related costs, reduce or substantially eliminate capital expenditures and/or reduce or substantially eliminate research and development expenditures.
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In addition, the Company could draw on its $250,000 line of credit, if necessary. This line of credit, which originally matured in March 2004, has been extended through June 2004. The interest rate is subject to change and is indexed to the bank’s prime rate. In connection with the line of credit, GlobalSCAPE entered into a commercial security agreement with the bank whereby GlobalSCAPE granted a security interest in all its accounts and equipment. The Company borrowed $100,000 on September 11, 2003 under this agreement. This amount was repaid in February 2004. The credit facility is available to the Company at any point during its term.
On March 30, 2004, the Company obtained a $200,000 line of credit with the Brown and Mann-GlobalSCAPE Joint Venture. The line of credit is available after June 21, 2004 if the Company fails to extend a line of credit with a bank and matures on December 31, 2004. The interest rate is subject to change and is indexed to the prime rate published in the Wall Street Journal. In connection with the line of credit, GlobalSCAPE entered into a Commercial Security Agreement with the Brown and Mann-GlobalSCAPE Joint Venture whereby GlobalSCAPE granted a security interest in all its accounts and equipment.
The Company’s flexibility in reacting to changes in the operating environment and to changing economic conditions may be limited by the Company’s current liquidity position. However, management believes that, if required, it will be able to effect some or all of the components of the plan set forth above, which are sufficient in the aggregate to enable the Company to continue as a going concern through at least December 31, 2004. Accordingly, the financial statements of the Company do not include any adjustments to reflect the possible future effects or the recoverability and classification of assets or the amounts and classification of liabilities that may result if the Company cannot improve its working capital position.
Net cash used by operating activities was $133,739 and $56,374 in three months ended March 31, 2003 and 2004, respectively. For the three months ended March 31, 2003, negative operating cash flow was the result of the net loss for the period offset somewhat by adjustments related to depreciation and amortization as well as increases in accounts payable and deferred revenues. Net cash used by operating activities in the three months ended March 31, 2004 was primarily due to the net loss for the period offset by adjustments related to depreciation and an increase in accrued expenses for the period.
Net cash used in investing activities for the three months ended March 31, 2003 and 2004 was $6,809 and $8,321, respectively. In both periods, the cash used in investing activity was primarily for the purchase of computers and software.
Net cash used in financing activities during the three months ended March 31, 2003 and 2004 was $14,963 and $115,294, respectively. We made principal payments of $14,963 and $15,294 on capital lease obligations during the three months ended March 31, 2003 and 2004, respectively. In addition, we made a principal payment of $100,000 on our line of credit in February of 2004, eliminating the balance.
As of March 31, 2004, we had $162,444 in cash, current assets of $418,117 and current liabilities of $559,845, resulting in a working capital deficit of $141,728. Our principal commitments consisted of obligations outstanding under operating leases as well as royalty agreements with third parties. The commitments related to royalty agreements are not fixed, rather they are contingent on sales. We expect that operating expenses will continue to be a material use of our cash resources and will manage the business based on the immediately foreseeable operating cash flows. The facility that we currently occupy is expected to be sufficient for the next twelve months. Consequently, we do not anticipate significant expenditures for leasehold improvements or furniture for 2004.
Critical Accounting Policies
Use of Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the Unites States. The preparation of these financial statements requires
11
management to make estimates and assumptions that affect the reported amount of assets and liabilities. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts receivable, long-lived and intangible assets, income taxes and contingencies. Management bases its estimates on historical experience, observable trends, and various other assumptions that are believed to be reasonable under the circumstances. Management uses this information to make judgments about the carrying values of assets and liabilities that are not readily apparent form other sources. Actual results may differ from the estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its financial statements.
Revenue Recognition
Our revenue is generated primarily by licensing our software products and providing support for those products. Revenues are comprised of the gross selling price of the software, including shipping charges and the earned portion of support and maintenance agreements. The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as modified by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.
Revenues from the sale of software products are recognized and completely earned upon shipment or electronic delivery of the product provided that persuasive evidence of an arrangement exists, collection is probable, payment terms are fixed and determinable and no significant obligations remain. The majority of our sales are delivered electronically via email.
We also sell technical support and maintenance agreements (post contract customer support “PCS”), which are sometimes bundled with the software. When vendor specific objective evidence (“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. Revenue allocated to PCS is recognized ratably over the contractual term, typically one year. We sometimes sell installation and training services with our PureCMS product. Revenue for installation and training is recognized when performed.
The Company began selling technical support and maintenance services for some of its software products in 2001 and had deferred recognition of approximately $11,000 in revenue at the end of that year. Deferred revenue grew to a balance of approximately $142,000 at December 31, 2002 and has remained relatively flat, with a balance of approximately $147,000 at March 31, 2004. The rate of growth in deferred revenue in 2002 was due primarily to the rapid growth in the sale of technical support and maintenance agreements in the fourth quarter of 2002. Sales of these agreements continued to grow into the first quarter of 2003 but have flattened out since that time, resulting in relatively little change year over year in the amount of deferred revenue. Growth in the sales of maintenance and support agreements may result in the deferred recognition of a significant amount of revenue in future periods.
Allowance for Doubtful Accounts
We provide credit, in the normal course of business, to a number of companies and perform ongoing evaluations of our credit risk. We require no collateral from our customers and we estimate the allowance for uncollectible accounts based on our historical experience and current credit evaluations. No single customer accounted for more than 2.5% of net revenues in 2003 or the first three months of 2004.
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Valuation of Long-Lived and Intangible Assets
The Company assesses the impairment of long-lived and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important which could trigger an impairment review included the following: significant underperformance relative to historical or projected future cash flows; significant changes in the manner of use of the assets or the strategy for the overall business; and significant negative industry trends. When management determines that the carrying value of long-lived and intangible assets may not be recoverable, impairment is measured based on the excess of the assets’ carrying value over the estimated fair value. No impairment was recognized in 2003 or the first three months of 2004.
Stock-Based Compensation
Statement of Financial Accounting Standards 123, Accounting for Stock-Based Compensation (SFAS 123), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans based on the fair market value of options granted. The Company chose to account for stock based compensation using the intrinsic value method prescribed in APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation expense is recorded to the extent that the current market price of the underlying stock exceeds the exercise price. In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard 148, Accounting for Stock Based Compensation - Transition and Disclosure (SFAS 148), which amends SFAS 123. SFAS 148 requires more prominent and frequent disclosures about the effects of stock-based compensation. The Company will continue to account for its stock-based compensation according to the provisions of APB Opinion No. 25. The pro forma disclosure requirements prescribed by SFAS 123, as amended by SFAS 148 are included in the Notes to the Financial Statements.
In the first quarter of 2004, no options were granted, none were forfeited and none expired.
Research and Development
Research and development expenses include all direct costs, primarily salaries for personnel and expenditures with external development sources, related to the development of new products and significant enhancements to existing products and are expensed as incurred until such time as technological feasibility is achieved. For the three months ended March 31, 2003 and 2004, we spent approximately $217,218 and $245,631, respectively, on research and development. No research and development expenses were capitalized in either period and all previously capitalized research and development expenses were fully amortized at December 31, 2002.
Income Taxes
GlobalSCAPE accounts for income taxes using the liability method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. The liability method provides that the deferred tax assets and liabilities are recorded based on the difference between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes, as measured by the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are carried on the balance sheet with the presumption that they will be realizable in future periods when pre-tax income is generated. Predicting the ability to realize these assets in future periods requires a great deal of judgment by management.
Statement of Financial Accounting Standards (SFAS) No. 109 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on these criteria, management has concluded that no income tax benefits are to be recorded related to the net loss for the three months ended March 31, 2004, because we cannot be certain of the future period recoverability of tax assets generated from any available net operating losses.
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Comparison of the Three Months ended March 31, 2003 and 2004
Revenue. For the three months ended March 31, 2003 and 2004, total revenues increased $51,951 or approximately 5% from $1,120,186 to $1,172,137 due to an increase in sales of PureCMS and Secure Server and the introduction of CuteFTP Mac, Web Survey and CuteHTML Pro subsequent to the first quarter of 2003. Combined revenues from CuteFTP and CuteFTP Pro declined approximately 13% over the comparable periods and accounted for approximately 71% of total revenues for the three months ended March 31, 2004. Sales of CuteFTP fell approximately 27% between periods while sales of CuteFTP Pro increased approximately 15%.
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 decreased $43,312 or 31% between periods from $141,990 for the three months ended March 31, 2003 to $98,678 for the three months ended March 31, 2004. Royalties that the Company pays on software products licensed from third parties, which it resells, are expensed as a cost of sale when the software product is sold or earlier if the recoverability of any prepaid royalties is in doubt. The Company has distribution agreements with Hannon Hill Corp., Trellix Corp., Perseus Development Corp., Beehive Software, Inc., Visicom Media, Inc., and Xnet Communications GmbH. The GlobalSCAPE software products associated with each of the companies are PureCMS / Publish XML, CuteSITE Builder, Web Survey, Mac FTP, CuteHTML Pro, and Mac FTP Pro, respectively. GlobalSCAPE’s agreement with Hannon Hill Corp. required a minimum royalty of $16,667 per month, as prepayment of royalties, for 12 months beginning in December 2002. These payments were expensed as paid because the lower than expected sales of PureCMS raised doubt as to the realization of benefit from these prepayments. The total amount expensed in 2003 relating to these prepayments was $183,337. As a result, we expect the cost of revenues to decline both as a percentage of sales and in gross terms in 2004 when compared to 2003 as we recover benefit from these minimum royalties.
Selling, General and Administrative. Selling, general and administrative expenses consist primarily of personnel and related expenses, marketing, customer support, rents, credit card transaction fees, bad debt and professional fees. For the three months ended March 31, 2003 and 2004, selling, general and administrative expenses were $1,251,720 and $976,914, respectively, a decrease of $274,806 or 22%. In the first quarter of 2003, we incurred approximately $460,000 in product launch expenses related to PureCMS. We spent considerably less on advertising and promotional activity in the first quarter of 2004 but these savings were offset somewhat by increased salaries and related costs such as bonuses, payroll taxes and healthcare costs. The number of persons employed on March 31, 2003 and 2004 declined slightly over the comparable periods from 38 to 35, respectively.
Research and Development. Research and development expenses increased $28,413 or 13% between periods, from $217,218 to $245,631. The increase was due to greater expenditures for external development resources as part of the development of new versions of CuteFTP, CuteFTP Pro and Secure Server. These increased external development expenses were offset somewhat by lower costs for internal staff.
Depreciation and Amortization. Depreciation and amortization expense consists of depreciation expense related to our fixed assets and amortization of the trademark associated with our purchase of CuteFTP. Depreciation and amortization expense decreased from $117,040 to $55,794, a decline of approximately 52%. This decrease was due primarily to a reduction in amortization expense. The purchase of CuteFTP was fully amortized as of September 30, 2003. In addition, depreciation expense has declined due to a slowdown in additions to fixed assets in current periods relative to prior periods.
Other Income, Expense. For the three months ended March 31, 2003 and 2004, interest expense decreased from $1,148 to $720, respectively. The majority of interest expense incurred during these periods was related to capital leases. During the three months ended March 31, 2003, we incurred charges of $1,486 related to the disposition of certain fixed assets.
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Income Taxes. We recognized no benefit related to the net loss in the first three months ended March 31, 2003 and 2004 because we cannot be certain of the future period recoverability of tax assets generated from available net operating losses.
Net Loss. GlobalSCAPE incurred a net loss of $610,416 in the first quarter of 2003 and a net loss of $205,600 in the first quarter of 2004. The improvement in operating performance over the respective periods was due to an approximate 5% increase in revenues and an approximate 20% improvement in overall operating expenses.
Inflation
Increases in inflation generally result in higher interest rates and operating costs. Our greatest exposure is to the cost of salaries and general and administrative expenses. To date we believe that inflation has not had a significant impact on our operations.
Seasonality
We believe our sales are subject to seasonal variations. We experience significantly less sales volume during national holidays and weekends when compared to normal business days. We expect that in future periods we will see weakness in the fourth quarter when compared to the third quarter due to the holiday season.
To date, we have not utilized derivative financial instruments or derivative commodity instruments. We do not expect to employ these or other strategies to hedge market risk in the foreseeable future. We may invest our cash in money market funds, which are subject to minimal credit and market risk. We believe that the interest rate risk and other relevant market risks associated with these financial instruments are immaterial.
In the three months ended March 31, 2004, approximately 37% of our revenues came from customers outside the United States. All revenues are received in U.S. dollars so we have no exchange rate risk with regard to the sale. However, in July 2003, the European Union (EU) enacted Value Added Taxes (VAT) on electronic purchases. These taxes are charged to our non-business customers in the EU and, in our case, are remitted quarterly in pound sterling. We expect that the impact of this currency translation will not be material to our business.
a) Evaluation of disclosure controls and procedures. Within the 90 days prior to the filing date of this report, our President and Vice President of Finance and Operations carried out an evaluation of GlobalSCAPE’s disclosure controls and procedures (as defined SEC Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) and concluded that the controls and procedures are effective in recording, processing, summarizing and reporting the information required to be disclosed by GlobalSCAPE in the reports it files with the SEC under the Exchange Act within the time periods specified in the SEC’s rules and forms.
b) Changes in internal controls. There were no material changes in GlobalSCAPE’s internal controls subsequent to the evaluation described above.
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We are not currently involved in any material legal proceedings.
None in the first quarter of 2004.
Not applicable.
None in the first quarter of 2004.
None in the first quarter of 2004.
(a) Exhibits
31.1 Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certificate pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
1. Form 8-K dated February 13, 2004 announcing the resignation of Sandra Poole-Christal from her position as President and Chief Operating Officer as well as her position on the Board of Directors and the election of Charles R. Poole to the open Director position and his appointment as President and Chief Operating Officer. In addition, a workforce reduction of approximately 20% was announced.
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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.
| | GLOBALSCAPE, INC. |
| | |
| | |
May 17, 2004 | | By: | /s/ Charles R. Poole | |
Date | | | Charles R. Poole |
| | President and Chief Operating Officer |
| | |
May 17, 2004 | | By: | /s/ Daniel McRedmond | |
Date | | | Daniel McRedmond |
| | Vice President of Finance & Operations |
| | (Principal Accounting & Financial
Officer) |
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