UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number:
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GlobalSCAPE Inc.
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(Exact name of registrant as specified in its charter)
Delaware 74-2785449
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) No.
6000 Northwest Parkway, Suite 100 78249
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(Address of principal executive offices) (Zip Code)
(210) 308-8267
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(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
The number of shares outstanding of the registrant's common stock at June 30,
2000 was 12,920,000.
GlobalSCAPE Inc.
Quarterly Report on Form 10-Q
For the Quarter ended June 30, 2000
Index
Page
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Part I. Financial Information
Item 1. Interim Financial Statements (Unaudited)
Balance Sheets as of December 31, 1999 and
June 30, 2000 3
Statements of Operations for the three and
six months ended June 30, 1999 and 2000 5
Statements of Cash Flows for the six months
ended June 30, 1999 and 2000 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security
Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
2
GlobalSCAPE, Inc.
Balance Sheets
December 31, 1999 June 30, 2000
(Unaudited)
Assets
Current assets:
Cash $ 16,361 $ 214,059
Accounts receivable (net of allowance for doubtful accounts of
$70,000 and $126,581 in December and June respectively) 368,353 632,121
Prepaid expenses 25,216 48,166
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Total current assets 409,930 894,346
Property and equipment:
Furniture and fixtures 54,720 230,924
Software 28,554 29,344
Equipment 203,480 441,919
Leasehold improvements 1,426 110,781
Software development costs 102,686 158,285
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390,866 971,253
Accumulated depreciation and amortization: (106,866) (166,818)
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Net property and equipment 284,000 804,435
Other assets:
Core software technology (net of accumulated amortization of
$224,736 and $314,113 in December and June respectively) 674,207 584,830
Goodwill (net of accumulated amortization of $18,837 and
$22,359 in December and June respectively) 30,287 26,765
Deferred tax assets 36,230 67,697
Other 36,645 29,562
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Total other assets 777,369 708,854
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Total assets $1,471,299 $2,407,635
========== ==========
See accompanying notes.
3
GlobalSCAPE Inc.
Balance Sheets
December 31, 1999 June 30, 2000
(Unaudited)
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable $ 202 $ 75,275
Accrued liabilities 64,764 143,240
Due to parent 265,253 353,957
Current maturities of long-term debt 215,710 164,130
Current portion of capital lease obligation 24,172 58,560
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Total current liabilities 570,101 795,162
Long-term liabilities
Long-term debt, less current portion 24,667 --
Capital lease obligations, less current portion 32,257 165,896
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56,924 165,896
Commitments and contingencies
Stockholder's equity:
Preferred Stock, par value $0.001 per share, 10,000,000 shares
authorized, no shares issued or outstanding -- --
Common stock, par value $0.001 per share, 40,000,000 shares
authorized, 12,920,000 shares issued and outstanding 12,920 12,920
Additional paid-in capital 49,112 49,112
Accumulated earnings 782,242 1,384,545
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Total stockholder's equity 844,274 1,446,577
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Total liabilities and stockholder's equity $1,471,299 $2,407,635
========== ==========
See accompanying notes.
4
GlobalSCAPE Inc.
Statements of Operations
(Unaudited)
Three months ended June 30, Six months ended June 30,
1999 2000 1999 2000
--------------------------------- -------------------------------
Operating revenues:
Software product revenues $ 708,088 $ 1,309,728 $1,389,218 $ 2,625,726
Advertising revenues 35,539 231,528 35,539 365,543
--------------------------------- -------------------------------
Total revenues 743,627 1,541,256 1,424,757 2,991,269
Cost of revenue:
Software products 25,451 51,993 53,371 86,792
--------------------------------- -------------------------------
Total cost of revenues 25,451 51,993 53,371 86,792
--------------------------------- -------------------------------
Gross profit 718,176 1,489,263 1,371,386 2,904,477
Operating expenses:
Selling, general and
administrative expenses 358,321 984,405 740,650 1,498,726
Research and development expenses 21,857 140,817 47,082 264,088
Depreciation and amortization 65,020 97,896 127,453 187,037
--------------------------------- -------------------------------
Total operating expense 445,198 1,223,118 915,185 1,949,851
--------------------------------- -------------------------------
Income from operations 272,978 266,145 456,201 954,626
Other income (expense):
Interest expense, net (18,415) (6,914) (40,650) (14,560)
Gain (loss) on sale of assets -- (6,968) -- (7,535)
--------------------------------- -------------------------------
Income before income taxes 254,563 252,263 415,551 932,531
Income tax provision:
Current:
Federal 88,606 95,578 144,665 317,669
State 12,280 13,246 20,049 44,025
Deferred:
Federal (5,792) (12,598) (9,457) (27,636)
State (803) (1,746) (1,311) (3,830)
-------------------------------- --------------------------------
Total income tax provision 94,291 94,480 153,946 330,228
-------------------------------- --------------------------------
Net income $ 160,272 $ 157,783 $ 261,605 $ 602,303
================================ ================================
Net income per common share $ 0.01 $ 0.01 $ 0.02 $ 0.05
Net income per common share -
assuming dilution $ 0.01 $ 0.01 $ 0.02 $ 0.05
Number of shares used in per
share calculations
Basic 12,920,000 12,920,000 12,920,000 12,920,000
Assuming Dilution 13,287,029 13,259,999 13,282,514 13,269,159
All per share amounts have been adjusted to reflect the 7.6 for 1 stock split
effected in May 2000.
See accompanying notes.
5
GlobalSCAPE Inc.
Statements of Cash Flows
(Unaudited)
Six month period ending June 30,
1999 2000
Operating Activities
Net Income $ 261,605 $ 602,303
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 127,453 187,037
Loss on disposition of assets -- 7,535
Changes in operating assets and liabilities:
Accounts receivable (52,626) (263,768)
Prepaid expenses (2,155) (22,950)
Deferred tax assets (10,768) (31,467)
Other assets 5,923 7,083
Accounts payable (14,847) 75,073
Accrued liabilities 68,643 78,476
Due to parent (8,881) 88,704
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Net cash provided by operating activities 374,347 728,026
Investing Activities
Purchase of property and equipment (28,302) (412,388)
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Net cash (used in) investing activities (28,302) (412,388)
Financing activities
Borrowings under notes payable 180,000 70,000
Principal payments on notes payable (495,828) (147,065)
Principal payments on capital lease obligations (1,493) (40,875)
--------- ---------
Net cash (used in) financing activities (317,321) (117,940)
Net increase in cash and cash equivalents 28,724 197,698
Cash at beginning of period 65,480 16,361
------------------------------------
Cash at end of period $ 94,204 $ 214,059
====================================
See accompanying notes.
6
Notes to Financial Statements
Nature of Business
GlobalSCAPE, Inc. develops, markets, distributes and supports leading web-
based software products in a variety of categories including file management,
multimedia utilities and web application development tools. We were
incorporated in April 1996 and are a wholly owned subsidiary of American
TeleSource International, Inc., (ATSI) a public company, and are best known for
our popular file transfer program, CuteFTP.
On a consolidated basis as of July 31, 1999, 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. These conditions, as noted by ATSI's
auditors in their report dated October 5, 1999, raise substantial doubt about
ATSI's ability to continue as a going concern at July 31, 1999. Management of
ATSI believes the ability of ATSI to continue as a going concern is dependent
upon the ongoing support of its stockholders and customers, its ability to
obtain capital resources to support operations and its ability to successfully
market its services. In addition, ATSI is likely to require additional
financial resources to support its ongoing operations. There can be no
assurances, however, that such equity offerings or long-term debt financing
arrangements will be sufficient to support existing operations.
We have a history of earnings and positive cash flow. Our assets and stock
do not secure any obligations of ATSI. In addition, ATSI has represented it has
no plans or intentions that would adversely affect the operations or financial
position of GlobalSCAPE.
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with Rule 10-01 of Regulation S-X, "Interim Financial Statements",
and accordingly do not include all information and footnotes required under
generally accepted accounting principles for complete financial statements. In
the opinion of management, these interim financial statements contain all
adjustments, without audit, necessary to present fairly the financial position
of GlobalSCAPE Inc. as of December 31, 1999 and June 30, 2000, the results of
operations for the three and six months ended June 30, 1999 and 2000, and cash
flows for the six months ended June 30, 1999 and 2000. All adjustments are of a
normal recurring nature. It is recommended that these interim financial
statements be read in conjunction with the financial statements and the notes
thereto for the year ended December 31, 1999 included in our amended filing on
Form 10 filed with the SEC on July 28, 2000. The results of operations for any
interim period are not necessarily indicative of the results to be expected for
the full year.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
SFAS 133 as amended by SFAS 137, is effective for all years beginning after June
15, 2000, with earlier application encouraged. We do not currently nor do we
intend in the future to use derivative instruments and therefore do not expect
that the adoption of SFAS 133 will have any impact on our financial position or
results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101,
Revenue Recognition in Financial Statements, which currently must be adopted by
the fourth quarter of the year 2000. SAB 101 provides additional guidance on
revenue recognition as well as criteria for when revenue is generally realized
and earned and also requires the deferral of incremental direct selling costs.
We are currently assessing the impact of SAB 101.
7
Debt
In February 2000, we entered into a loan agreement with a bank for $70,000
with the principal and interest payable in twelve monthly installments of $6,142
beginning March 1, 2000, including interest at prime rate plus 1%. The loan is
secured by substantially all of our assets.
Capital Leases
In September 1999, we entered into a capital lease agreement for office
equipment for $250,000. The payment terms are for 48 months after receipt of
the equipment and include a one dollar bargain purchase option at the end of the
lease term. The equipment was delivered and installed in March 2000.
Operating Leases
We entered into a lease for new facilities in April 1999. The monthly lease
term began in April 2000. The terms of this lease include an escalation clause
whereby no payments are due from April 2000 to September 2000. Monthly lease
payments are $15,888 and begin in October of 2000.
Related Party Transactions
We are a co-borrower for a capital lease obligation of ATSI with NTFC
Capital Corporation ("NTFC"). The lease obligation at December 31, 1999 totaled
$2,000,000. ATSI was in default of financial covenants of the lease as of April
30, 2000 and received a waiver from NTFC stating that it waived ATSI's
compliance requirement as of that date. ATSI believes it will likely be in
default of the same covenants at July 31, 2000 and has requested NTFC to re-set
the covenants to prevent future defaults. NTFC is reviewing the request. ATSI
has classified the lease obligation as long-term. Neither our assets nor our
stock secure the capital lease obligation with NTFC.
Stock Options under the 1998 Plan
Subsequent to December 31, 1999, the Company canceled options to purchase
44,500 shares of common stock under the plan. In consideration for canceling
these options, the Company paid $5,000 in cash consideration to the option
holders. In addition, the Company agreed to issue 38,500 shares to the option
holders when and if a public offering of the Company is completed. If a public
offering of our stock is not completed by August 31, 2000, the options
previously held by these employees are restated.
2000 Stock Option Plan
In May 2000, the board of directors approved the 2000 stock option plan
(the "Plan") for key employees, nonemployee directors, and advisors of the
Company. Under the terms of the Plan, up to 3,660,000 shares of the Company's
common stock may be granted in the form of incentive stock options or non-
qualified stock options. The maximum aggregate number of shares of common stock
which may be granted to any optionee during the term of the Plan shall not
exceed 2,000,000. The Plan provides that the purchase price per share for
incentive stock options and non-qualified stock options shall not be less than
the fair market value of the common stock on the date of grant. The maximum
term for an option granted is ten years from the date of grant.
Stockholder's Equity
In May 2000, the board of directors amended the certificate of
incorporation to increase the number of authorized shares of capital stock which
the corporation has the authority to issue to 50,000,000 shares consisting of
40,000,000 shares of common stock, par value $0.001 per share and 10,000,000
shares of preferred stock, par value $.001 per share. The board of directors
also declared a 7.6 for 1 stock split of the shares of the Company's issued and
outstanding common stock. All information in the accompanying financial
statements and notes to the financial statements has been retroactively adjusted
to reflect the effects of this stock split.
8
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 available to common stockholders by the weighted average
shares outstanding during the period. Diluted earnings per share is calculated
by dividing net income 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 basis earnings per share for each of the periods
presented:
Three month's ended June 30, Six month's ended June 30,
1999 2000 1999 2000
Numerators
Numerators for basic and diluted
earnings per share:
Net Income $ 160,272 $ 157,783 $ 261,605 $ 602,303
Numerator for basic and
diluted earnings per share 160,272 157,783 261,605 602,303
Denominators
Denominators for basic and diluted
earnings per share:
Weighted average shares
outstanding - Basic 12,920,000 12,920,000 12,920,000 12,920,000
Dilutive potential common shares
Stock Options 367,029 339,999 362,514 349,159
Denominator for dilutive earnings per
share 13,287,029 13,259,999 13,282,514 13,269,159
Net Income per common share
Net Income $ 0.01 $ 0.01 $ 0.02 $ 0.05
Net Income per common share - assuming
dilution
Net Income $ 0.01 $ 0.01 $ 0.02 $ 0.05
9
Item 2. Management's Discussion and Analysis and Analysis of Financial
Condition and Results of Operations
Except for the historical information contained herein, the matters
discussed in our Form 10Q include certain forward-looking statements within the
meaning of Section 27A of the Securities Act, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Those statements include, but may not be
limited to, all statements regarding our intent, beliefs and expectations, such
as statements concerning our future and our operating and growth strategy.
Investors are cautioned that all forward-looking statements involve risks and
uncertainties including without limitation, the factors set forth under the
caption "Risk Factors" in the Form 10 filed July 28, 2000. One or more of these
factors have affected, and in the future could affect our business and financial
results and could cause actual results to differ materially from those
anticipated in these forward-looking statements. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by us
or any other person that our objectives will be achieved. All forward-looking
statements made in this Form 10-Q are based on information presently available
to our management. We assume no obligation to update any forward-looking
statements.
Overview
GlobalSCAPE develops, markets and distributes Internet- based software
products in a variety of categories including file management, file searching
and sharing and web application development tools to business and consumer
markets. We derive our revenue primarily through sales of software via the
Internet. A small percentage of our products are sold through traditional retail
channels. Revenues from the sale of software products are recognized upon
shipment or electronic delivery and we bear full credit risk with respect to all
sales. The installation process for our software products is simple and requires
little or no support. To date, more than 97% of our revenues have been
generated from one product, CuteFTP. This reliance on one product makes our
business risky. It is our strategy to grow our revenues by introducing new
products to the market but we have not proven our ability to do so. Our
products are available for free trial periods and can be downloaded from our
website as well as many shareware sites. All products with the exception of
CuteMX have some or all functionality disabled after the trial period to
encourage the user to pay the license fee. For example, in the case of CuteFTP
if the consumer chooses not to pay, the program limits functionality and
continues to display advertising banners when used. If the consumer pays for
the product, full functionality is restored and the consumer can choose to turn
the ad banners off.
In addition to software sales, we generate revenues through
advertising from within our software products. We also sponsor complementary
products and services from within our products and receive payment from the
sponsored company when a product or service is downloaded from our web site or
accepted through our product. It is our expectation that advertising will grow
as a percentage of total sales in future periods. We have agreements with third
parties who sell the advertising space generated in our products and facilitate
the display of the banners. These third parties sell on a best efforts basis and
retain a portion of the gross sales as their fee. Neither party makes guarantees
regarding the number of displays or the response rates generated from those
displays. We recognize only the net proceeds remitted to us as revenue and
consider it earned in the period in which the ads are displayed. We began
displaying ad banners in our products for the first time in the second quarter
of 1999 and earned an average of $2.30 per thousand banners displayed (CPM). For
all of 1999, we earned an average of $2.21 per 1,000 banners displayed. This
number fell to $1.09 for the first quarter of 2000 but rebounded to $1.32 in the
second quarter. The average for the six months ended June 30, 2000 was $1.23 per
thousand. This decline was offset by very strong growth in the number of ads
displayed. During the three months ending June 30, 1999 we displayed
approximately 14.5 million ads while more than 286 million were displayed in the
first half of 2000. Some of the decline in CPM, we believe, is due to the
seasonality of advertising. However, some of the decline may be attributable to
increases in supply which may keep prices depressed in future periods. Our
strategy is to reduce our reliance on intermediaries to increase the amounts
earned per display. However, we have not yet begun this process and cannot
predict our success in this endeavor. In addition, the acceptance by our
consumers of advertising is difficult to predict. Because our advertisers
10
direct these ads based on demographic and other data collected from the consumer
during the installation and use of the products, right to privacy concerns may
be raised which could lead to decreased use of our products.
Our strategy relies on our ability to bring new products to market and
generate revenues from both the sale of licenses and from advertising. As
stated previously, most of our revenues are generated from one product, CuteFTP.
In addition, the market for advertising is new and unpredictable. We could fail
in our attempt to eliminate intermediaries, and we could suffer a decline in
rates due to increased supply or a reduction in volume due to reduced acceptance
of advertising from within software products.
In 1999, approximately 24% of our total revenues were earned outside
the United States. In the three month periods ended March 31 and June 30, 2000
this number was 30% and 32%, respectively. Foreign sales in all periods were
concentrated in Western Europe, Canada and Australia. All receipts are in U.S.
currency.
We rely on developers outside the United States for a large portion of
the coding burden. This, we believe, is a cost effective and time efficient
method of product development. Our internal developers are responsible for
managing the process and quality control. This strategy exposes us to some risk.
If access to these developers ceases or becomes difficult, it would increase the
time and cost of bringing products to market.
There is considerable legal controversy surrounding media file sharing
programs such as CuteMX, as illustrated by the lawsuit brought by the Recording
Industry Association of America against the distributor of an MP3 file sharing
program, Napster, Inc. The RIAA believes that Napster is violating various laws
by distributing a product which has allowed the widespread exchange of
copyrighted music files. We have developed CuteMX as a mainstream application
that discourages improper transfers of copyrighted materials. For example,
CuteMX allows end users to transfer all file types, rather than just MP3's, it
allows end users to flag MP3 files as copyrighted, in which case they are not
transferable across the CuteMX network, and displays end user Internet protocol,
or IP, addresses to encourage personal responsibility. The program respects
security features embedded in transferred files, such as features which allow
files to be played only on the computer on which they were created or which lay
the foundation for copyright owners to obtain payment for access to their
intellectual property, such as requiring an e-mail address, demographic
information or a subscription to a monthly service. Additionally, cutemx.com
offers a variety of content authorized for distribution by independent and
mainstream artists, who are able to earn revenue from the distribution of their
songs through advertisements placed within music files. On July 27, 2000 we
restricted public access to our CuteMX service pending further review of the
controversy surrounding file sharing programs such as CuteMX and Napster. While
the legal issues are being resolved we will continue to develop the product and
the technology behind it.
In January of 2000, ATSI's Board of Directors decided that a portion
of the GlobalSCAPE shares held by ATSI would be spun-off to the shareholders of
ATSI. The spin-off was to occur contemporaneously with a public offering of
GlobalSCAPE stock as part of a plan to raise funds for GlobalSCAPE's growth and
ATSI's general corporate purposes. GlobalSCAPE and ATSI have decided not to make
a public offering of GlobalSCAPE common stock contemporaneously with the spin-
off in light of current market conditions. ATSI will complete the spin-off at
this time, and ATSI and GlobalSCAPE will continue to evaluate a public offering
as well as other alternatives to finance GlobalSCAPE's growth and raise funds
for ATSI.
11
GlobalSCAPE Inc.
Results of Operations
(Unaudited)
Three months ended June 30, Six months ended June 30,
1999 2000 1999 2000
Operating revenues:
Software product revenues $ 708,088 $ 1,309,728 $ 1,389,218 $ 2,625,726
Advertising revenues 35,539 231,528 35,539 365,543
------------------------------ ----------------------------
Total revenues 743,627 1,541,256 1,424,757 2,991,269
Cost of revenue:
Software products 25,451 51,993 53,371 86,792
------------------------------ ----------------------------
Total cost of revenues 25,451 51,993 53,371 86,792
------------------------------ ----------------------------
Gross profit 718,176 1,489,263 1,371,386 2,904,477
Operating expenses:
Selling, general and
administrative expenses 358,321 984,405 740,650 1,498,726
Research and development expenses 21,857 140,817 47,082 264,088
Depreciation and amortization 65,020 97,896 127,453 187,037
------------------------------ ----------------------------
Total operating expense 445,198 1,223,118 915,185 1,949,851
------------------------------ ----------------------------
Income from operations 272,978 266,145 456,201 954,626
Other income (expense):
Interest expense, net (18,415) (6,914) (40,650) (14,560)
Gain (loss) on sale of assets - (6,968) - (7,535)
------------------------------ ----------------------------
Income before income taxes 254,563 252,263 415,551 932,531
Income tax provision:
Current:
Federal 88,606 95,578 144,665 317,669
State 12,280 13,246 20,049 44,025
Deferred:
Federal (5,792) (12,598) (9,457) (27,636)
State (803) (1,746) (1,311) (3,830)
------------------------------ ----------------------------
Total income tax provision 94,291 94,480 153,946 330,228
------------------------------ ----------------------------
Net income $ 160,272 $ 157,783 $ 261,605 $ 602,303
============================== ============================
Net income per common share $ 0.01 $ 0.01 $ 0.02 $ 0.05
Net income per common
share - assuming dilution $ 0.01 $ 0.01 $ 0.02 $ 0.05
Number of shares used in
per share calculations
Basic 12,920,000 12,920,000 12,920,000 12,920,000
Assuming Dilution 13,287,029 13,259,999 13,282,514 13,269,159
All per share amounts have been adjusted to reflect the 7.6 for 1 stock split
effected in May 2000.
12
Three Months ended June 30, 1999 and 2000
Sales. We derive our revenues primarily from software sales and from
advertising from within our software products. We recognize revenue from the
sale of software products upon delivery through electronic software distribution
or shipment of the physical product to the end-user. For advertising sales,
revenue is recognized as services are performed. Sales are comprised of the
gross selling price of software, including shipping charges and the net proceeds
received from advertisers. We contract with third parties for the delivery and
sales of advertising. Only the net amount earned is recognized as revenue. For
the three months ended June 30, 1999 and 2000, total revenues increased 107%
from $743,627 to $1,541,256. Sales of licenses during these periods increased
from $708,088 to $1,309,728, an 85% increase. Unit sales of our software
products increased 52% from 27,862 to 42,236. The average selling price per unit
increased period to period due to a shift in the mix of sales away from multi-
seat licenses. We recognized advertising revenues for the first time in the
three month period ending June 30,1999, displaying approximately 14.5 million
banners and generating $35,539 in revenue. Advertising revenue in the three
month period ending June 30, 2000 was $231,528, a 552% increase from the
comparable period a year ago and accounted for 15% of total revenues as compared
to only 5% in the same period of 1999. During the three month period ended June
30, 2000 we displayed more than 173 million banners which accounted for the
majority of advertising revenues. In addition, we generated approximately 2,700
responses for sponsored products which are reported as part of advertising
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. Cost of revenues increased 104% between periods
primarily due to increased unit sales of our software licenses and increased
bandwidth capacity. The gross margin remained the same for each period, 96.6%.
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of personnel and related expenses, rents, advertising
and promotional expenses, bad debt expense and credit card transaction fees.
Selling, general and administrative expenses increased from $358,321 in the
three months ended June 30, 1999 to $984,405 in the same period in 2000, a 175%
increase. As a percentage of total sales, selling, general and administrative
expenses increased from 48% to 64% during these periods. Expenses increased
primarily as a result of increased personnel costs including salaries, payroll
taxes, insurance and recruiting fees as well as increased rents associated with
our move to a larger facility. In addition, we incurred a number of legal fees
related to the Form 10 filed May 12, 2000. The number of persons employed by
GlobalSCAPE increased from approximately 19 at June 30, 1999 to 30 on June 30,
2000.
Research and Development. Research and development expenses increased 544%
between periods, from $21,857 to $140,817. The increase is due to the rapid
expansion of our internal research and development staff as well as increased
expenditures on external development resources.
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 from $65,020 in the three months
ended June 30, 1999 to $97,896 in the same period 2000, an increase of 51%.
This increase was due primarily to the addition of office furniture, computers
and computer related equipment.
Interest Expense, net. Interest expense consists primarily of interest
expense related to the purchase of CuteFTP and interest expense related to our
various capital leases and working capital borrowings. Interest expense
declined from $18,415 to $6,914 between periods, a decline of 63%. The decline
is due primarily to a reduction in the interest expense recognized as part of
the purchase of CuteFTP. The Company's debt related to this purchase was
satisfied in January 2000. Other interest expense recognized during the periods
is related to capital leases and working capital borrowings.
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Loss on Sale of Assets. During the second quarter of 2000, we disposed of
furniture and other assets resulting in a loss of $6,968. No losses on the
disposition of assets were incurred in the same period of 1999.
Income Taxes. ATSI files a consolidated return for it and its affiliates,
including GlobalSCAPE, for income taxes. Since ATSI has had and continues to
have net operating losses, no income taxes have been due in any reported period.
Our financial statements reflect the costs had income taxes been paid by
GlobalSCAPE. Current federal income taxes for the three months ended June 30,
1999 would have been $88,606, whereas for the same period 2000 they would have
been $95,578, an 8% increase. Current Delaware state income taxes would have
increased from $12,280 to $13,246 over the same periods. Our deferred tax
expenses for the three months ended June 30, 1999 for federal and state taxes
were $5,792 and $803, respectively, whereas for 2000 those expenses were
$12,598 and $1,746 respectively.
Net Income. Net income decreased slightly from period to period as a
result of increased operating expenses. Net income for the three months ended
June 30, 1999 was $160,272 and $157,783 for the three months ended June 30,
2000, a 2% decrease. The growth in revenues of 107% was offset by the 175%
increase in operating expenses. These expenses, selling, general and
administrative, research and development and depreciation and amortization
collectively were 60% of total revenues in second quarter of 1999 and 79% in the
second quarter of 2000.
Six Months ended June 30, 1999 and 2000
Sales. We derive our revenues primarily from software sales and from
advertising from within our software products. We recognize revenue from the
sale of software products upon delivery through electronic software distribution
or shipment of the physical product to the end-user. For advertising sales,
revenue is recognized as services are performed. Sales are comprised of the
gross selling price of software, including shipping charges and the net proceeds
received from advertisers. We contract with third parties for the delivery and
sales of advertising. Only the net amount earned is recognized as revenue. For
the six months ended June 30, 1999 and 2000, total revenues increased 110% from
$1,424,757 to $2,991,269. Sales of licenses during these periods increased from
$1,389,218 to $2,625,726, an 89% increase. Unit sales of our software products
increased 86% from 51,107 to 95,163. The average selling price per unit remained
relatively the same between periods. We recognized advertising revenues of
$35,539 in the six month period ending June 30,1999, displaying approximately
14.5 million banners. Advertising revenue in the six month period ending June
30, 2000 was $365,543, a 929% increase from the comparable period a year ago.
Advertising revenue accounted for 2.5% of total revenues in the six months ended
June 30, 1999 and 12% of total revenues during the same period of 2000. During
the six months ended June 30, 2000 we displayed more than 286 million banners
which accounted for the majority of advertising revenues. In addition, we
generated more than 16,000 responses for sponsored products which are reported
as part of advertising 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. Cost of revenues increased 63% between periods
primarily due to increased unit sales of our software licenses and increased
bandwidth capacity. Gross margin increased slightly from 96% to 97%.
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of personnel and related expenses, rents, advertising
and promotional expenses, bad debt expense and credit card transaction fees.
Selling, general and administrative expenses increased from $740,650 in the six
months ended June 30, 1999 to $1,498,726 in the same period in 2000, a 102%
increase. As a percentage of total sales, selling, general and administrative
expenses decreased from 52% to 50% during these periods. Expenses increased
primarily as a result of increased personnel costs including salaries, payroll
taxes, insurance and recruiting fees as well as increased rents associated with
our move to a larger facility. In addition, we incurred a number of legal fees
related to the Form 10 filed May 12, 2000. The number of persons employed by
GlobalSCAPE increased from approximately 19 at June 30, 1999 to 30 on June 30,
2000.
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Research and Development. Research and development expenses increased 461%
between periods, from $47,082 to $264,088. The increase is due to the rapid
expansion of our internal research and development staff as well as increased
expenditures on external development resources.
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 from $127,453 in the six months
ended June 30, 1999 to $187,037 in the same period 2000, an increase of 47%.
This increase was due primarily to the addition of office furniture, computers
and computer related equipment.
Interest Expense, net. Interest expense consists primarily of interest
expense related to the purchase of CuteFTP and interest expense related to our
various capital leases and working capital borrowings. Interest expense
declined from $40,650 to $14,560 between periods, a decline of 64%. The decline
is due primarily to a reduction in the interest expense recognized as part of
the purchase of CuteFTP. The Company's debt related to this purchase was
satisfied in January 2000. Other interest expense recognized during the periods
is related to capital leases and working capital borrowings.
Loss on Sale of Assets. During the six month period ending June 30, 2000,
we disposed of furniture and other assets resulting in a loss of $7,535. No
losses on the disposition of assets were incurred in the same period of 1999.
Income Taxes. ATSI files a consolidated return for it and its affiliates,
including GlobalSCAPE, for income taxes. Since ATSI has had and continues to
have net operating losses, no income taxes have been due in any reported period.
Our financial statements reflect the costs had income taxes been paid by
GlobalSCAPE. Current federal income taxes for the six months ended June 30,
1999 would have been $144,665, whereas for the same period 2000 they would have
been $317,669, a 120% increase. Current Delaware state income taxes would have
increased from $20,049 to $44,025 over the same periods. Our deferred tax
expenses for the six months ended June 30, 1999 for federal and state taxes were
$9,457 and $1,311, respectively, whereas for 2000 those expenses were $27,636
and $3,830 respectively.
Net Income. Net income increased from period to period as a result of
revenue growth. Net income for the six months ended June 30, 1999 was $261,605
and $602,303 for the six months ended June 30, 2000, a 115% increase. Total
revenues grew 110% while total operating expenses grew 113%, increasing only 1%
as a percentage of sales.
Liquidity and Capital Resources
On February 1, 2000, we entered into a note payable for $70,000 as
evidenced by a Promissory Note with The Frost National Bank as Lender. As of
June 30, 2000, the outstanding balance was approximately $47,492. We began
making monthly principal and interest payments in the amount of $6,142 on March
1, 2000 and will continue to make such payments for a period of twelve months,
through February 1, 2001. The interest rate is subject to change. On March 1,
2000, the interest rate was 9.50% per annum. There are no prepayment penalties
so we can pay all or a portion of the loan at any time without owing a penalty
amount. If a default occurs under the Note, Lender may accelerate all or a
portion of the debt. Both parties have agreed to arbitrate any dispute that
arises under the Note in the City of San Antonio, Bexar County.
In connection with the $70,000 note payable described above, we have
entered into a Commercial Security Agreement, dated February 1, 2000, with The
Frost National Bank as Lender whereby we granted Lender a security interest in
all of our accounts and equipment. In the event of a default under the Security
Agreement, Lender may sell the collateral in which they hold a security
interest.
On August 26, 1999, we, as a subsidiary of ATSI, entered into a Promissory
Note along with American TeleSource International, Inc., a Texas corporation,
and TeleSpan, Inc., a Texas corporation. The Note is in the amount of
$2,000,000 payable to NTFC Capital Corporation, or NTFC. Interest was
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capitalized for the first six months and is calculated at a fixed rate per annum
of interest equal to the five year bank swap rate as reported on the first
borrowing date on the Dow Jones & Company Telerate screen, plus 495 basis
points. All principal amounts borrowed are amortized and repaid quarterly with
the first quarterly payment due June 2000. As of July 31, 2000, the outstanding
balance including capitalized interest was approximately $2,039,347.
In connection with the $2 million note payable described above we have
entered into a Loan and Security Agreement along with American TeleSource
International, Inc., a Texas corporation, and TeleSpan, Inc., dated July 31,
1999, whereby we have granted a security interest to NTFC in the equipment
purchased with the loan proceeds, all proceeds from insurance policies, monies
received from governmental bodies or agencies in connection with seizure of the
collateral property, any amounts payable in connection with the collateral, and
all cash proceeds and non-cash proceeds of the collateral in the form of
equipment, inventory, accounts, general intangibles, chattel paper or other
proceeds.
The 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. As of April 30, 2000,
ATSI was in default of quarterly financial covenants related to revenues, gross
margins and EBITDA. ATSI has received a waiver from NTFC stating that it waived
the ATSI's compliance requirements as of April 30, 2000. However, based upon
ATSI's results before and after the period ended April 30, 2000, ATSI will most
likely be in default of these same covenants at the end of its next fiscal
quarter and year end, July 31, 2000. ATSI has incurred losses since inception,
had negative cash flows for most of its history, and currently has only limited
resources to support its operations. If ATSI is unable to pay this obligation,
the lender 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, the lender would have recourse against us for repayment. As a
result, assets which otherwise would be used to execute our business strategy
may have to be used to satisfy this debt.
Net cash provided by operating activities in the six months ended June 30,
1999 and 2000 was $374,347 and $728,026 respectively. Net cash provided by
operating activities in these periods was primarily the result of net income and
adjustments related to depreciation and amortization as well as increases in
accrued liabilities. Operating cash flows in the six months ended June 30, 2000
was further bolstered by increases in accounts payable and amounts due to our
parent, ATSI. Positive operating cash in both periods was reduced by increases
in accounts receivable, prepaid expenses and deferred tax assets.
Net cash used in investing activities for the six months ended June 30,
1999 and 2000 was $28,302 and $412,388 respectively. Net cash used in investing
activities in each of these periods was related to the purchase of property and
equipment. The property and equipment purchased consisted primarily of phone
systems and computer hardware and software for our new facility during the six
months ended June 30, 2000.
Net cash used in financing activities in the six months ended June 30, 1999
and 2000 was $317,321 and $117,940 respectively. Net cash used in financing
activities for the six months ended June 30, 1999 consisted of $180,000 in bank
borrowings, $495,828 in principal payments on notes payable and $1,493 in
principal payments on capital lease obligations. The majority of principal
payments on notes payable were related to the purchase of CuteFTP. Net cash
used in financing activities for the six months ended June 30, 2000 consisted of
$70,000 in bank borrowings, $147,065 in principal payments on notes payable and
$40,875 in principal payments on capital lease obligations. The final payment
for CuteFTP was made in January 2000 and accounts for the reduction in principal
payments on notes payable between periods.
As of June 30, 2000, we had approximately $214,059 in cash and cash
equivalents. Our principal commitments consisted of obligations outstanding
under capital leases and bank borrowings. We anticipate an increase in the rate
of capital expenditures consistent with our anticipated growth in operations,
infrastructure and personnel. We anticipate that we will continue to add
computer hardware resources and
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that we will expend significant resources on product development and the
expansion of our management team and development staff. GlobalSCAPE may also use
cash to acquire or license technology, products or businesses related to our
current business. We also anticipate that we will continue to experience
significant growth in our operating expenses for the foreseeable future and that
our operating expenses will be a material use of our cash resources.
On a consolidated basis as of July 31, 1999, 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 is likely to require additional
financial resources in the near term and could require additional financial
resources in the long-term to support its ongoing operations. These conditions
raise substantial doubt about ATSI's ability to continue as a going concern.
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.
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Item II. Other Information.
Item 1. Legal Proceedings
There is no litigation pending and we are not aware of any disputes
that may lead to litigation.
Item 2. Changes in Securities and Use of Proceeds
(a) In May 2000, the board of directors amended the certificate of
incorporation to increase the number of authorized shares of
capital stock which the corporation has the authority to issue to
50,000,000 shares consisting of 40,000,000 shares of common
stock, par value $0.001 per share and 10,000,000 shares of
preferred stock, par value $.001 per share. The board of
directors also declared a 7.6 for 1 stock split of the shares of
the Company's issued and outstanding common stock.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities
None in the second quarter of fiscal 2000.
Item 4. Submission of Matters to a Vote of Security Holders
Each of the items described in "Changes in Securities and Use of
Proceeds" was approved by ATSI, as the sole shareholder by unanimous
written consent in May 2000.
Item 5. Other Information
None in the second quarter of fiscal 2000.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
27 Financial Data Schedule
(B) Reports on Form 8-K
The Company filed no reports on Form 8-K during the second
quarter of fiscal 2000.
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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/ Sandra Poole-Christal
----------------------------
Sandra Poole-Christal
President
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