<PAGE>
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 SEPTEMBER 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 ____________
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 (I.R.S. Employer
or organization) Identification No.)
6000 NORTHWEST PARKWAY, SUITE 101 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. /X/ Yes / / No
The number of shares outstanding of the registrant's common stock at
September 30, 2000 was 12,936,190.
<PAGE>
GLOBALSCAPE INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited)
Balance Sheets as of December 31, 1999 and September 30, 2000 3
Statements of Operations for the three and nine months ended
September 30, 1999 and 2000 5
Statements of Cash Flows for the nine months ended September 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
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 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
</TABLE>
2
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GLOBALSCAPE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash $ 16,361 $ 122,220
Accounts receivable (net of allowance for
doubtful accounts of $70,000 and $104,955
at December 31, 1999 and September 30, 2000
respectively) 368,353 362,949
Due from parent - 157,345
Prepaid expenses 25,216 38,438
--------------- ---------------
Total current assets 409,930 680,952
Property and equipment:
Furniture and fixtures 54,720 297,102
Software 28,554 65,887
Equipment 203,480 468,419
Leasehold improvements 1,426 144,388
Software development costs 102,686 158,285
--------------- ---------------
390,866 1,134,081
Accumulated depreciation and amortization: (106,866) (236,806)
--------------- ---------------
Net property and equipment 284,000 897,275
Other assets:
Core software technology (net of accumulated
amortization of $224,736 and $358,957 at
December 31, 1999 and September 30, 2000
respectively) 674,207 539,986
Goodwill (net of accumulated amortization of
$18,837 and $24,123 at December 31, 2000
and September 30, 2000 respectively) 30,287 25,001
Deferred tax assets 36,230 82,935
Other 36,645 27,880
--------------- ---------------
Total other assets 777,369 675,802
--------------- ---------------
Total assets $ 1,471,299 $ 2,254,029
=============== ===============
</TABLE>
See accompanying notes.
<PAGE>
GLOBALSCAPE INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
(Unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 202 $ 107,172
Accrued liabilities 64,764 259,573
Due to parent 265,253 -
Current maturities of long-term debt 215,710 105,868
Current portion of capital lease obligation 24,172 61,293
--------------- ---------------
Total current liabilities 570,101 533,906
Long-term liabilities
Long-term debt, less current portion 24,667 -
Capital lease obligations, less current portion 32,257 170,654
--------------- ---------------
56,924 170,654
Commitments and contingencies
Stockholders' 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
and 12,936,190 shares issued and
outstanding at December 31, 1999 and
September 30, 2000 respectively 12,920 12,936
Additional paid-in capital 49,112 50,715
Accumulated earnings 782,242 1,485,818
--------------- ---------------
Total stockholders' equity 844,274 1,549,469
--------------- ---------------
Total liabilities and stockholders' equity $ 1,471,299 $ 2,254,029
=============== ===============
</TABLE>
See accompanying notes.
4
<PAGE>
GLOBALSCAPE INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000 1999 2000
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Operating revenues:
Software product revenues $ 698,697 $ 1,354,386 $ 2,087,915 $ 3,980,112
Advertising revenues 95,193 172,200 130,732 537,743
------------------------------- ------------------------------
Total revenues 793,890 1,526,586 2,218,647 4,517,855
Operating expenses:
Cost of revenues (exclusive of
depreciation and amortization shown separately below) 28,638 43,639 82,009 130,431
Selling, general and administrative expenses 504,727 975,240 1,245,376 2,473,967
Research and development expenses 37,410 217,686 84,492 481,774
Depreciation and amortization 65,479 116,595 192,932 303,632
------------------------------- ------------------------------
Total operating expense 636,254 1,353,160 1,604,809 3,389,804
------------------------------- ------------------------------
Income from operations 157,636 173,426 613,838 1,128,051
Other income (expense):
Interest expense, net (9,487) (11,889) (50,137) (26,448)
Gain (loss) on sale of assets - - - (7,535)
------------------------------- ------------------------------
Income before income taxes 148,149 161,537 563,701 1,094,068
Income tax provision:
Current:
Federal 51,607 66,312 196,272 383,981
State 7,152 9,190 27,201 53,215
Deferred:
Federal (3,374) (13,383) (12,831) (41,019)
State (467) (1,855) (1,778) (5,685)
------------------------------- ------------------------------
Total income tax provision 54,918 60,264 208,864 390,492
------------------------------- ------------------------------
Net income $ 93,231 $ 101,273 $ 354,837 $ 703,576
=============================== ==============================
Net income per common share $ 0.01 $ 0.01 $ 0.03 $ 0.05
Net income per common share - assuming dilution $ 0.01 $ 0.01 $ 0.03 $ 0.05
Number of shares used in per share calculations
Basic 12,920,000 12,923,168 12,920,000 12,921,064
Assuming Dilution 13,304,499 12,923,168 13,289,842 12,974,301
</TABLE>
See accompanying notes.
5
<PAGE>
GLOBALSCAPE INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 2000
-------------------- -------------------
<S> <C> <C>
Operating Activities
Net Income $ 354,837 $ 703,576
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 192,932 303,632
Loss on disposition of assets - 7,535
Changes in operating assets and liabilities:
Accounts receivable (138,175) 5,404
Prepaid expenses (11,769) (13,222)
Deferred tax assets (14,609) (46,705)
Other assets (13,214) 8,765
Accounts payable 61,537 106,970
Accrued liabilities 64,654 194,809
Due to/from parent 44,097 (422,598)
-------------------- -------------------
Net cash provided by operating activities 540,290 848,166
Investing Activities
Purchase of property and equipment (76,300) (558,070)
-------------------- -------------------
Net cash (used in) investing activities (76,300) (558,070)
Financing activities
Borrowings under notes payable 180,000 70,000
Principal payments on notes payable (688,117) (204,509)
Principal payments on capital lease obligations (4,560) (51,347)
Issuance of common stock - 1,619
-------------------- -------------------
Net cash (used in) financing activities (512,677) (184,237)
Net increase in cash and cash equivalents (48,687) 105,859
Cash at beginning of period 65,480 16,361
-------------------- -------------------
Cash at end of period $ 16,793 $ 122,220
==================== ===================
</TABLE>
See accompanying notes.
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NATURE OF BUSINESS
GlobalSCAPE, Inc. develops, markets and supports leading
Internet-based software products in a variety of categories including
client-server applications, Internet utilities and Web development tools
targeting both business and consumer markets. GlobalSCAPE was incorporated in
April 1996 and is a majority owned subsidiary of American TeleSource
International, Inc., (ATSI) a public company. GlobalSCAPE is best known for
its popular file transfer program, CuteFTP-Registered Trademark-.
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
September 30, 2000, the results of operations for the three and nine months
ended September 30, 1999 and 2000, and cash flows for the nine months ended
September 30, 1999 and 2000. All adjustments are of a normal recurring
nature. It is recommended that these interim consolidated financial
statements be read in conjunction with the financial statements and the notes
thereto for the year ended December 31, 1999 included in GlobalSCAPE's
amended filing on Form 10 filed with the SEC on September 12, 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 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. GlobalSCAPE has reviewed the guidance of this SAB and
believes that our accounting policies and the disclosures in the financial
statements are appropriate and adequately address the requirements of this
SAB.
DEBT
In February 2000, GlobalSCAPE 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, the Company 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
7
<PAGE>
bargain purchase option at the end of the lease term. The equipment was
delivered and installed in March 2000.
RELATED PARTY TRANSACTIONS
GlobalSCAPE is 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 July 31, 2000 and has classified the entire capital lease as a
current liability. ATSI has requested a waiver for non-compliance of the
financial covenants and has asked that NTFC re-set the covenants to prevent
future defaults. Although ATSI has received waivers in the past, there is no
guarantee that NTFC will grant a waiver for ATSI's July 31, 2000
non-compliance. Neither GlobalSCAPE's assets nor its stock secure the capital
lease obligation with NTFC. Please see the Liquidity and Capital Resources
section of Management's Discussion and Analysis of Financial Condition for an
expanded discussion of the implications of this obligation.
From the period from January 1, 2000 through September 11, 2000, the
day prior to ATSI's distribution of approximately 27% of its ownership of
GlobalSCAPE stock, ATSI will file a consolidated return for income taxes for
it and its affiliates including GlobalSCAPE. GlobalSCAPE's financial
statements reflect income tax expense on a separate company basis, with these
provisions being due to ATSI from GlobalSCAPE. From time to time GlobalSCAPE
has transferred amounts to ATSI to satisfy these obligations as well as other
charges ATSI may incur on its behalf. On December 31, 1999 GlobalSCAPE's
accumulated obligation to ATSI was $265,253 resulting primarily from
provisions for income taxes. During the nine month period ended September 30,
2000, GlobalSCAPE transferred approximately $1.175 million to ATSI, resulting
in a balance of $157,345 due to GlobalSCAPE. During this period,
GlobalSCAPE's provision for both federal and state income taxes was $437,196.
In addition, ATSI incurred expenses on GlobalSCAPE's behalf of approximately
$318,000 during the nine month period ended September 30, 2000. These
expenses are reflected in GlobalSCAPE's Statements of Operations. From
September 12, 2000 forward, GlobalSCAPE will file a separate return for
income taxes and will make estimated quarterly tax payments to the
appropriate governmental agencies.
STOCK OPTIONS UNDER THE 1998 PLAN
In January 1998, the Board of Directors approved the 1998 Stock
Option Plan for officers, other employees, directors and consultants of
GlobalSCAPE. Under the terms of the Plan, up to 728,571 shares of the
Company's common stock may be granted in the form of incentive stock options
or non-qualified stock options, awarded, or sold to officers, other
employees, directors and consultants. The Company awarded 384,499 options
under the Plan, all of which were subsequently cancelled or modified to such
a degree that for accounting and reporting purposes they are considered to be
cancelled. The Company is currently in discussions with the previous option
holders regarding the issuance of replacement options and is evaluating the
ramifications of any subsequent re-issuance with its legal counsel and
auditors.
STOCK OPTIONS UNDER THE 2000 PLAN
Pursuant to our Employment Agreement with Tim Nicolaou, we have
agreed to issue him an option to purchase 700,000 shares of GlobalSCAPE stock
at an exercise price of $1.00 per share. The options will vest as follows:
200,000 of these options will vest on the date of GlobalSCAPE's initial
public offering or at the end of the first year of employment, whichever
comes first, 200,000 will vest one year from the date of GlobalSCAPE's
initial public offering or at the end of the second year of employment,
whichever comes first, and 300,000 will vest ratably over a three-year
schedule from the date of hire, October 16, 2000.
8
<PAGE>
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. This calculation does not include the 700,000 shares for
which we have agreed to issue an option in favor of Tim Nicolaou as that
option has not yet been issued as of September 30, 2000. Below is a
reconciliation of the numerators and denominators of basis earnings per share
for each of the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1999 2000 1999 2000
<S> <C> <C> <C> <C>
NUMERATORS
Numerators for basic and diluted earnings per share:
Net Income $ 93,231 $ 101,273 $ 354,837 $ 703,576
Numerator for basic and diluted
earnings per share 93,231 101,273 354,837 703,576
DENOMINATORS
Denominators for basic and diluted earnings per share:
Weighted average shares
outstanding - Basic 12,920,000 12,923,168 12,920,000 12,921,064
DILUTIVE POTENTIAL COMMON SHARES
Stock Options 384,499 0 369,842 53,237
Denominator for dilutive earnings per
share 13,304,499 12,923,168 13,289,842 12,974,301
Net Income per common share
Net Income $ 0.01 $ 0.01 $ 0.03 $ 0.05
Net Income per common share - assuming
dilution
Net Income $ 0.01 $ 0.01 $ 0.03 $ 0.05
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10Q includes 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. Forward-looking statements
are those that describe our intent or our beliefs and expectations concerning
our future, and our operating and growth strategy. Forward-looking statements
are based on information currently available to management, and involve risks
and uncertainties including without limitation, our reliance on one product
for a substantial portion of our revenues, the intensely competitive nature
of the market for Internet software, our ability to compete with larger or
better positioned companies, our ability to attract qualified personnel, the
financial difficulties of our majority shareholder, ATSI, and other factors
set forth under the caption "Risk Factors" in the amended Form 10 filed
September 12, 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 these significant uncertainties you should not regard
forward-looking statements as a representation by us that any events
described in the statements will actually occur.
OVERVIEW
GlobalSCAPE develops, markets and supports Internet-based software
products in a variety of categories including client-server applications,
Internet utilities and Web development tools targeting both 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 increases our business risk. 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
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 ad banners are disabled.
In addition to software sales, we generate revenues through
advertising from within our software products and Web sites. 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. 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.
In 1999, approximately 24% of our total revenues were earned outside
the United States. In the three-month periods ended March 31, June 30, and
September 30, 2000 this number was 30%, 32% and 34% respectively. Foreign
sales in all periods were concentrated in Western Europe, Canada and
Australia. All receipts are in U.S. currency.
We rely on programmers 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 development process including project scope,
quality assurance, localization and logistics. This strategy exposes us to
some risk. If access to these programmers ceases or becomes difficult, it
would increase the time and cost of bringing products to market.
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
10
<PAGE>
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 decided not to make a public offering of
GlobalSCAPE common stock contemporaneously with the spin-off in light of
current market conditions. ATSI completed the spin-off on September 12th of
this year, distributing 3,444,833 shares of its 12,920,000 shares to ATSI
shareholders. The distribution represented approximately 27% of ATSI's
ownership and does not include 477,760 additional shares reserved to be
distributed to shareholders of Genesis, Inc. pending the close of this
acquisition by ATSI. This distribution did not generate any proceeds to ATSI
or GlobalSCAPE. The distribution resulted in approximately $300,000 of
expense to GlobalSCAPE for legal and accounting fees, printing and
distribution costs. No commissions, finders fees or other fees of this type
were paid in connection with the distribution.
Effective October 16, 2000 Tim Nicolaou became our Chief Executive
Officer. Mr. Nicolaou had served as Vice President, Product Management of the
Web Services Division for Chicago-based Comdisco, Inc. (NYSE: CDO; market cap
of approximately $3 billion). He was responsible for the development and
implementation of the marketing plan for the company's new services division,
managing product development, product marketing and sales support functions.
Comdisco provides global technology services including continuity, Web
services, network services, and IT Control and Predictability solutions.
Prior to Comdisco, Mr. Nicolaou served as Executive Vice President of Sales
and Marketing for Computer Concepts Corp., (renamed Direct Insite Corp.
trading on NASDAQ Small Cap: DIRI), Vice President of Sales, Industrial
Products Division for United States Data Corporation, and Management
Consultant for Perot Systems (NYSE: PER). He has an MBA from Southern
Methodist University, Edwin L. Cox School of Business Administration and a BA
in Computer Science from the University of Texas.
Effective October 16, 2000 we entered into an Employment Agreement
with Tim Nicolaou, our Chief Executive Officer.
On October 9, 2000 GlobalSCAPE amended its Bylaws to remove the
restriction on the transfer of its common stock no later than January 1,
2002. Prior to amendment, the Bylaws provided that the restriction was to be
lifted 180 days after the Company (i) closed an initial public offering of
its stock, and (ii) listed and registered the stock on a national securities
exchange or caused the stock to be quoted on the automatic quotation system
of a national securities association. The Bylaws now provide that the common
stock may not be traded until the earlier of the occurrence of the
above-mentioned events, or January 1, 2002.
On July 27, 2000 we restricted access to our file-sharing program
CuteMX in light of developments in a legal controversy involving Napster,
Inc., the developer of a music file-sharing product. CuteMX had not generated
any significant revenue prior to that time, so our decision to restrict
access has not affected our results of operations. On November 6, 2000 we
re-released CuteMX in a controlled environment with enhanced filtering
technology designed to prevent the sharing of un-secure user-created content
and promote the sharing of secure content. The program is currently limited
to a small user community to demonstrate the effectiveness of the filtering
process and gather marketing data. Our strategy is to be a technology partner
to those with media content already in place in support of their digital
distribution strategies. The outcome of this legal controversy and other
factors will determine whether and how we continue to develop and market
CuteMX.
11
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GLOBALSCAPE, INC.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000 1999 2000
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Operating revenues:
Software product revenues $ 698,697 $ 1,354,386 $ 2,087,915 $ 3,980,112
Advertising revenues 95,193 172,200 130,732 537,743
------------------------------- ------------------------------
Total revenues 793,890 1,526,586 2,218,647 4,517,855
Operating expenses:
Cost of revenues (exclusive of
depreciation and amortization shown
separately below) 28,638 43,639 82,009 130,431
Selling, general and administrative
expenses 504,727 975,240 1,245,376 2,473,967
Research and development expenses 37,410 217,686 84,492 481,774
Depreciation and amortization 65,479 116,595 192,932 303,632
------------------------------- ------------------------------
Total operating expense 636,254 1,353,160 1,604,809 3,389,804
------------------------------- ------------------------------
Income from operations 157,636 173,426 613,838 1,128,051
Other income (expense):
Interest expense, net (9,487) (11,889) (50,137) (26,448)
Gain (loss) on sale of assets - - - (7,535)
------------------------------- ------------------------------
Income before income taxes 148,149 161,537 563,701 1,094,068
Income tax provision:
Current:
Federal 51,607 66,312 196,272 383,981
State 7,152 9,190 27,201 53,215
Deferred:
Federal (3,374) (13,383) (12,831) (41,019)
State (467) (1,855) (1,778) (5,685)
------------------------------- ------------------------------
Total income tax provision 54,918 60,264 208,864 390,492
------------------------------- ------------------------------
Net income $ 93,231 $ 101,273 $ 354,837 $ 703,576
=============================== ==============================
</TABLE>
12
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
SALES. We derive our revenues primarily from software sales and from
advertising from within our software products and Web sites. 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 from advertising sales is recognized as revenue. For the three months
ended September 30, 1999 and 2000, total revenues increased 92% from $793,890
to $1,526,586. Sales of licenses during these periods increased from $698,697
to $1,354,386, a 94% increase. Unit sales of our software products increased
121% from 25,655 to 56,656. The average selling price per unit decreased due
to increased sales of multi-seat licenses. Advertising revenue in the
three-month period ending September 30, 2000 was $172,200, an 81% increase
from the comparable period a year ago and accounted for 11% of total revenues
as compared to 12% in the same period of 1999. 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 CPM of $2.21. This number fell to $1.09 for the first
quarter of 2000 but rebounded to $1.32 in the second quarter. CPM fell in the
third quarter of 2000 to an average of $0.62. This decline in CPM was offset
by very strong growth in the number of ads displayed, accounting for the 81%
increase in advertising revenues over the comparable period a year ago.
During the three months ending September 30, 1999 we displayed approximately
42 million ads while more than 266 million were displayed in the same period
of 2000. Some of the decline in CPM from 1999 to 2000, we believe, was due to
the seasonality of advertising. However, we believe much of the decline in
the third quarter may be attributable to increases in supply and questions
about the effectiveness of banner ads, which may keep prices depressed in
future periods. In addition, in September specifically, our third party
partners did not sell available space at the same level as prior periods,
leaving a higher ratio of unsold advertising banners to sold banners.
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 52% between
periods from $28,638 to $43,639 primarily due to increased unit sales of our
software licenses and increased bandwidth capacity. As a percentage of
revenues, cost of revenues declined from 4% to 3%.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses consist primarily of personnel and related expenses,
marketing, customer support, rents, bad debt and credit card transaction
fees. Selling, general and administrative expenses increased from $504,727 in
the three months ended September 30, 1999 to $975,240 in the same period in
2000, a 93% increase. As a percentage of total sales, selling, general and
administrative expenses remained at 64% during these periods. Expenses
increased primarily as a result of increased personnel costs including
salaries, payroll taxes and insurance as well as increased rents associated
with our move to a larger facility. In addition, we incurred a number of
one-time legal and printing fees related to the amended Form 10 filed
September 12, 2000. The number of persons employed by GlobalSCAPE increased
from approximately 22 at September 30, 1999 to 34 on September 30, 2000.
RESEARCH AND DEVELOPMENT. Research and development expenses
increased 482% between periods, from $37,410 to $217,686. The increase was
due to the rapid expansion of our internal research and development staff
used for new product development and the maintenance of existing products 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
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and amortization expense increased from $65,479 in the three months ended
September 30, 1999 to $116,595 in the same period for 2000, an increase of
78%. This increase was due primarily to the addition of office furniture,
leasehold improvements, phone systems, computers and computer related
equipment.
INTEREST EXPENSE, NET. For the three months ended September 30, 1999
and 2000, interest expense increased from $9,487 to $11,889 between periods,
an increase of 25%. The majority of interest expense incurred during the
period ended September 30, 1999 was related to the purchase of CuteFTP. The
Company's debt related to this purchase was satisfied in January 2000.
Interest expense recognized during the three-month period ended September 30,
2000 is related primarily to capital leases and working capital borrowings.
INCOME TAXES. In previous periods, ATSI has filed a consolidated
return for income taxes for it and its affiliates, including GlobalSCAPE.
However, ATSI distributed approximately 27% of its ownership in GlobalSCAPE
on September 12th of this year, resulting in a deconsolidation from the ATSI
tax return filing group for federal income tax purposes. From this date
forward, GlobalSCAPE will file a separate return for income taxes. Our
financial statements reflect the costs had income taxes been paid by
GlobalSCAPE whether filing separately or consolidated with ATSI. The
provision for federal income taxes for the three months ended September 30,
1999 was $51,607, whereas for the same period 2000 it was $66,312. The
provision for state income taxes increased from $7,152 to $9,190 over the
same periods. Our deferred tax expenses for the three months ended September
30, 1999 for federal and state taxes were $3,374 and $467, respectively,
whereas for 2000 those expenses were $13,383 and $1,855 respectively. Income
taxes were higher in 2000 due primarily to higher income before income taxes.
NET INCOME. Net income increased approximately 9% from period to
period. Net income for the three months ended September 30, 1999 was $93,231
and $101,273 for the three months ended September 30, 2000. The growth in
revenues of 92% was offset by the 113% increase in total operating expenses.
These expenses, selling, general and administrative, research and development
and depreciation and amortization collectively were 80% of total revenues in
third quarter of 1999 and 89% in the third quarter of 2000.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
SALES. For the nine months ended September 30, 1999 and 2000, total
revenues increased 104% from $2,218,647 to $4,517,855. Sales of licenses
during these periods increased from $2,087,915 to $3,980,112, a 91% increase.
Unit sales of our software products increased 95% from 76,762 to 149,596. The
average selling price per unit remained relatively the same between periods.
We recognized advertising revenues of $130,732 in the nine month period
ending September 30,1999, displaying approximately 56 million banners.
Advertising revenue in the nine-month period ending September 30, 2000 was
$537,743, a 311% increase from the comparable period a year ago. Advertising
revenue accounted for 6% of total revenues in the nine months ended September
30, 1999 and 12% of total revenues during the same period of 2000. During the
nine months ended September 30, 2000 we displayed more than 550 million
banners.
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 59% between
periods from $82,009 to $130,431 primarily due to increased unit sales of our
software licenses and increased bandwidth capacity. As a percentage of total
revenues, cost of revenues declined slightly from 4% to 3%.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses consist primarily of personnel and related expenses,
marketing, customer support, rents, bad debt and credit card transaction
fees. Selling, general and administrative expenses increased from $1,245,376
in the nine months ended September 30, 1999 to $2,473,967 in the same period
in 2000, a 99% increase. As a percentage of total sales, selling, general and
administrative expenses decreased from 56% to 55% 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
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addition, we incurred a number of legal and printing fees related to the Form
10 and amendments filed during the period. The number of persons employed by
GlobalSCAPE increased from approximately 22 at September 30, 1999 to 34 on
September 30, 2000.
RESEARCH AND DEVELOPMENT. Research and development expenses
increased 470% between periods, from $84,492 to $481,774. The increase was
due to the rapid expansion of our internal research and development staff
used for new product development and the maintenance of existing products as
well as increased expenditures on external development resources.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
consists primarily 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 $192,932 in the
nine months ended September 30, 1999 to $303,632 in the same period 2000, an
increase of 57%. This increase was due primarily to the addition of office
furniture, leasehold improvements, phone systems, computers and computer
related equipment.
INTEREST EXPENSE, NET. Interest expense declined from $50,137 to
$26,448 between periods, a decline of 47%. 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 nine-month period ending
September 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. In previous periods, ATSI has filed a consolidated
return for income taxes for it and its affiliates, including GlobalSCAPE.
However, ATSI distributed approximately 27% of its ownership in GlobalSCAPE
on September 12th of this year, resulting in a deconsolidation from the ATSI
filing group for federal income tax purposes. From this date forward,
GlobalSCAPE will file a separate return for income taxes. Our financial
statements reflect the costs had income taxes been paid by GlobalSCAPE
whether filing separately or consolidated with ATSI. The provision for
federal income taxes for the nine months ended September 30, 1999 was
$196,272, whereas for the same period 2000 it was $383,981. The provision for
state income taxes increased from $27,201 to $53,215 over the same periods.
Our deferred tax expenses for the nine months ended September 30, 1999 for
federal and state taxes were $12,831 and $1,778, respectively, whereas for
2000 those expenses were $41,019 and $5,685 respectively. Income taxes were
higher in 2000 due primarily to higher income before income taxes.
NET INCOME. Net income increased from period to period as a result
of revenue growth. Net income for the nine months ended September 30, 1999
was $354,837 and $703,576 for the nine months ended September 30, 2000, a 98%
increase. Total revenues grew 104% while total operating expenses grew 111%,
increasing only 3% 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
September 30, 2000, the outstanding balance was approximately $30,198. 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. The interest rate was 10.50% per annum for the quarter ended
September 30, 2000. There are no prepayment penalties. 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
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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.
We are a co-borrower for a capital lease obligation of ATSI with
NTFC Capital Corporation ("NTFC") entered into August 26, 1999 in the amount
of $2,000,000. In connection with this obligation we signed a Note and a Loan
and Security Agreement whereby we have granted a security interest to NTFC in
the equipment purchased with the loan proceeds. GlobalSCAPE does not use any
of that equipment in its business and none of our stock or assets is
collateral securing the obligation. Interest on the obligation was
capitalized for the first six months and is calculated at a fixed rate per
annum 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 to be amortized and repaid
quarterly. As of September 30, 2000, the outstanding balance including
capitalized interest was approximately $1,957,371.
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.
ATSI was in default of financial covenants of the lease as of July 31, 2000
and has classified the entire capital lease as a current liability. ATSI has
requested a waiver for non-compliance of the financial covenants and has
asked that NTFC re-set the covenants to prevent future defaults. Although
ATSI has received waivers in the past, there is no guarantee that NTFC will
grant a waiver for ATSI's July 31, 2000 non-compliance.
On a consolidated basis as of July 31, 2000, 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. 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.
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
ATSI has arranged for $10 million in financing from a single
institutional investor. On October 16, 2000 the investor purchased ATSI
preferred stock for $2.5 million and committed to the purchase of another
$7.5 million of preferred stock contingent upon i) ATSI closing the
acquisition of Genesis Communications International, Inc., ii) registration
with the SEC of the preferred stock, and iii) an investment in ATSI by an
additional investor acceptable to the institutional investor. The investor
may, but is not obligated to purchase up to an additional $8 million in
preferred stock.
Net cash provided by operating activities in the nine months ended
September 30, 1999 and 2000 was $540,290 and $848,166 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 and payables. Operating cash flows in the
nine months ended September 30, 2000 were reduced by reductions in amounts
due to our parent company, ATSI, Inc.
Net cash used in investing activities for the nine months ended
September 30, 1999 and 2000 was $76,300 and $558,070 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, office furniture, leasehold
improvements and computer hardware and software for our new facility during
the nine months ended September 30, 2000.
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Net cash used in financing activities in the nine months ended
September 30, 1999 and 2000 was $512,677 and $184,237 respectively. Net cash
used in financing activities for the nine months ended September 30, 1999
consisted of $180,000 in bank borrowings, $688,117 in principal payments on
notes payable and $4,560 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 nine
months ended September 30, 2000 consisted primarily of $70,000 in bank
borrowings, $204,509 in principal payments on notes payable and $51,347 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. The increase in principal payments
on capital lease obligations is a reflection of the capital leases entered
into for computer hardware in the fourth quarter of 1999 and office furniture
in 2000.
As of September 30, 2000, we had approximately $122,220 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 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.
As we have stated, it is our intention to increase expenditures on
personnel, sales and marketing, research and development and infrastructure.
We have, however, no formal commitments to such expenses other than those
disclosed in this document and in previously filed documents and therefore do
not have an identified need for external financing for the next 12 months. We
will manage to the current and immediately foreseeable cash flows generated
internally until such time as some external source of capital is identified.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not face any material risk related to changes in financial
market prices, such as exchange rate risk or interest rate risk. We invest
our cash in money market funds, which are subject to minimal credit and
market risk. Although approximately 34% of our revenues are attributable to
sales to persons outside the United States, all of those sales are made in
U.S. dollars.
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PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Effective September 5, 2000 we amended our Certificate of Incorporation
to provide that the company's obligation to indemnify its officers and
directors and other persons was limited by the provisions of the
company's bylaws.
Effective September 1, 2000 we amended our bylaws as follows:
- to provide that issues of indemnification with regard to
liability under the Securities Act of 1933 be submitted to a
court for a determination of whether the indemnification is
against public policy.
- to clarify that if a quorum is present at a stockholder
meeting, a majority of the shares present may decide questions
brought before the meeting;
- to provide that notice of special meetings of the Board of
Directors may be given by facsimile and must be given at least
24 hours in advance of the meeting;
- to clarify that dividends may be paid in accordance with the
provisions of the Delaware General Corporation Law, as it may
be amended from time to time;
- to clarify the provisions regarding the advancement of
expenses to directors and officers in connection with
proceedings for which they may be indemnified, and to provide
that the Corporation may advance expenses to persons other
than officers and directors upon resolution of its Board of
Directors;
- to provide for mandatory rather than optional indemnification
of officers of the Corporation to the fullest extent permitted
by the General Corporation Law of the State of Delaware, and
to make indemnification of other persons optional; and
The bylaws, as amended, were filed as an exhibit to our Form 10,
Amendment No. 2 filed on September 12, 2000
Effective October 9, 2000 we amended our bylaws as follows:
- to provide that stockholders holding not less than ten percent
(10%) of the issued and outstanding stock of GlobalSCAPE may,
upon proper notice, require the Secretary of GlobalSCAPE to
call a special meeting of the stockholder.
- to provide that the restriction on transfer of our common
stock will be removed no later than January 1, 2002. Prior to
amendment, the bylaws provided that the restriction was to be
lifted 180 days after we (i) closed an initial public offering
of our stock, and (ii) listed and registered the stock on a
national securities exchange or caused the stock to be quoted
on the automatic quotation system of a national securities
association. The bylaws now provide that the common stock may
not be traded until the earlier of the occurrence of these
events or January 1, 2002. The bylaws, as amended, were filed
as an exhibit to our Form 8-K filed on October 10, 2000.
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(b) not applicable
(c) and (d) On September 13, 2000 we issued 16,190 shares of common stock to
former director Craig K. Clement upon exercise of his option under the 1998
Stock Option Plan. Mr. Clement paid the exercise price of $.10 per share, for
a total of $1,690.00. These proceeds were used for general corporate
purposes. These shares were issued under Section 4(2) of the Securities Act
of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ATSI, as sole shareholder of GlobalSCAPE, approved an amendment to
GlobalSCAPE's Certificate of Amendment by unanimous written consent on
August 30, 2000. The amendment provided that GlobalSCAPE's obligation
to indemnify its officers and directors was limited by the provisions
of the Bylaws.
ITEM 5. OTHER INFORMATION
None in the third quarter of fiscal 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation (exhibit 3.5
to Form 10, Amendment No. 2 filed with SEC on September 12,
2000)
3.2 Amended and Restated Bylaws (effective August 30, 2000)
(exhibit 3.6 to Form 10, Amendment No. 2 filed with SEC on
September 12, 2000)
3.3 Amended and Restated Bylaws of GlobalSCAPE, Inc. (effective
October 10, 2000) (exhibit 10.1 to Form 8-K filed with SEC on
October 10, 2000)
10.1 Employment Agreement between GlobalSCAPE, Inc. and Tim
Nicolaou
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed one report on Form 8-K during the third quarter of
fiscal 2000.
1 GlobalSCAPE, Inc. announces Tim Nicolaou as CEO (September
29, 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/ Tim Nicolaou
-----------------------------------
Tim Nicolaou
Chief Executive Officer
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