Table of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Number 1
x
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31,
2007
OR
o
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
.
Commission File No. 001-33601
GlobalSCAPE, Inc.
(Exact name of registrant as specified in its
charter)
Delaware
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74-2785449
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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4500 Lockhill-Selma, Suite 150
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San Antonio, Texas
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78249
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(Address of Principal Executive Office)
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(Zip Code)
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(210) 308-8267
(Registrants Telephone Number, Including
Area Code)
Securities registered pursuant to Section 12(b) of
the Act:
Common Stock, par value $0.001 per share
(Title of Class)
Securities registered pursuant to Section 12(g) of
the Act:
None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
o
Yes
x
No
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act.
o
Yes
x
No
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
o
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definition of accelerated
filer, large accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act (check one):
Large Accelerated filer
o
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Accelerated filer
o
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|
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Non-Accelerated filer
o
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Smaller Reporting Company
x
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(Do not check if a smaller reporting company)
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Indicate by check mark if the
registrant is a shell company (as defined in Rule 12b-2 of the Act).
o
Yes
x
No
The aggregate market value of
the registrants outstanding common stock held by non-affiliates was
approximately $33,192,000 as of the last business day of the registrants most
recently completed second fiscal quarter, based upon the closing sales price of
$2.69 per share on such date on the American Stock Exchange.
As of March 14, 2008
there were 17,024,711 shares of common stock outstanding.
Documents Incorporated by Reference
Portions of the Registrants Proxy Statement
for the 2008 Annual Meeting of Stockholders to be held on June 4, 2008,
are incorporated by reference in Part III hereof.
Table
of Contents
Explanatory Note:
GlobalSCAPE, Inc.
is filing this Amendment No. 1 to its Annual Report on Form 10-K for
the year ended December 31, 2007, which was originally filed with the
Securities and Exchange Commission on March 27, 2008 (Original Form 10-K),
to amend Item 1A Risk Factors, Item 6 Selected Financial Data, Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations (MD&A),
Item 8 Financial Statements and Supplementary Data, Item 9A Controls and
Procedures, and Item 15 Exhibits and Financial Statement Schedules.
Additionally, the Registrant added Note 12 regarding the restatement of the
Registrants financial statements and revised Note 6.
As
discussed in Note 1 to the Financial Statements, on August 15, 2008,
GlobalSCAPE and its Board of Directors, after consultation with GlobalSCAPEs
independent registered public accounting firm, concluded that GlobalSCAPE would
amend its Annual Report on Form 10-K for the year ended December 31,
2007 and restate its financial statements and financial information for the
year ended December 31, 2007. The restatement adjustments correct federal
income tax receivable, goodwill, deferred tax assets and liabilities, equity,
and the income tax provision for the year ended December 31, 2007. The errors wer caused by the Companys
failure to accurately identify incentive stock options an d track the sales of
stock by its employees who had exercised options and subsequently sold shares
of the Companys common stock; and the Companys failure to calculate deferred
taxes on identified intangible assets acquired as part of the 2006 purchase of
Availl, Inc. The errors have been
corrected. As a result of the
restatement federal income tax receivable has increased by $817,343, deferred
tax assets have decreased by $360,588, equity increased by $502,438 and income
tax provision has increased by $280,242 related to the correct calculation of
the tax effect on the exercise of employee stock options and the subsequent
sale of shares of stock. Goodwill and deferred tax liability increased by
$1,796,320 and $1,750,637, respectively related to the correct calculation of
deferred taxes on identified intangible assets related to the Availl
acquisition.
For
the convenience of the reader, this Form 10-K/A sets forth the Original Form 10-K,
as amended hereby, in its entirety. However, this Form 10-K/A amends and
restates only Items 1A, 6, 7, 8, 9A, and 15 of the Original Form 10-K, in
each case solely as a result of and to reflect the adjustments discussed above
and more fully in Note 1 of the accompanying financial statements, and no other
information in the Original Form 10-K is amended hereby.
As
required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended,
new certifications by GlobalSCAPEs principal executive officer and principal
financial officer are being filed with this Form 10-K/A as Exhibits 31.1, and
32.1. In addition, Exhibit 23.1 has been amended to contain a currently-dated
consent of independent registered public accounting firms.
Table
of Contents
Preliminary
Notes
GlobalSCAPE
®
, CuteFTP
®
, CuteFTP Pro
®
,
CuteMx
®
, CuteSITE Builder
®
,
PureCMS
®
, CuteZIP
®
,
CuteHTML
®
and
CuteMAP
®
are
registered trademarks of GlobalSCAPE, Inc.
GlobalSCAPE Secure FTP Server
TM
, GlobalSCAPE
Transfer Engine
TM
, and GlobalSCAPE Enhanced File Transfer
Server
TM
are
trademarks of GlobalSCAPE, Inc. Other trademarks and tradenames in
this Annual Report are the property of their respective owners.
In this report, we use the
following terms:
HTTP or Hyper Text
Transfer Protocol is a protocol commonly used to transfer hypertext documents
between a web server and a web browser.
S/Key is a security system
in which a one-time challenge-response password scheme is used to authenticate
access to data. The purpose of S/Key is
to eliminate the need for the same password to be sent over a network each time
a password is needed for access.
SSH2 or Secure Shell is a
protocol that provides encrypted network communications between two computers.
SSL or Secure Socket Layer
uses cryptography to encrypt data between the web server and the web browser.
Forward-Looking
Statements
This Annual
Report on Form 10-K and the documents incorporated by reference herein
contain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended. Forward-looking
statements are those statements that are not of historical fact, but describe
managements beliefs and expectations.
We have identified many of the forward-looking statements in this Annual
Report by using words such as anticipate, believe, could, estimate, may,
expect, and intend. Although we
believe these beliefs and expectations are reasonable, our operations involve a
number of risks and uncertainties, including those described in the Risk
Factors section of this Annual Report and other documents filed with the
Securities and Exchange Commission.
Therefore, GlobalSCAPEs actual results could differ materially from
those discussed in this Annual Report.
PART I
Item 1.
Business
Company Overview
We develop and
distribute secure managed file transfer, or MFT, software for individuals and
business users to safely send files over the internet. We have also developed
Wide-Area File System, or WAFS, collaboration and Continuous Data Protection,
or CDP, software which further enhance the ability to share and backup files
within the infrastructure of a companys wide and local area networks, or WAN
and LAN at WAN and LAN speeds. Our MFT
products ensure the privacy of critical information such as financial data,
medical records, customer files and other similar documents. In addition, these products ensure compliance
with government regulations relating to the protection of information while
allowing users to reduce IT costs, increase efficiency, track and audit
transactions and automate processes. Our
WAFS and CDP products provide data replication, acceleration of file transfer,
sharing/collaboration and continuous data backup and recovery to our
customers. We believe that we are
uniquely positioned to provide secure transfer, sharing, and replication of
files that need to be transmitted inside the users firewall to distributed
offices, or outside the users firewall to business and trading partners.
Our initial product,
CuteFTP, a file transfer protocol client program used mostly by individuals and
small businesses, was first distributed in 1996 over the internet and has
achieved significant success and popularity.
We built on this success by steadily adding complementary products such
as the enterprise versions of our file transfer programs, Secure FTP Server and
Enhanced File Transfer Server, and establishing an internal sales organization
and reseller network. We believe we now have a reputation as a provider of
easy-to use, affordable file transfer and collaboration software for
individual, small business and enterprise users. Since 2000, we have focused on enhancing our
portfolio of products to meet the increasing demand for data security,
overcoming the challenges of latency and bandwidth limitations for supporting
branch offices and geographically distributed locations, allowing enterprises
to backup data across their LAN and WAN as changes are made, and offering
solutions that permit non-technical personnel to contribute content to their
organizations
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Web
sites. Our software is used worldwide
across a wide range of industries.
Through the end of 2007, we had distributed over 1.9 million software
licenses to our customer base which includes individual consumers, small to
medium-sized businesses, as well as some of the largest corporations in the
world.
Recent Developments
In March 2008,
we announced the retirement of our President and Chief Executive Officer,
Charles R. Poole. During the fall of 2007, the Board of Directors began
having discussions with Mr. Poole, relating to his potential retirement or
reduction in his day-to-day role at December 31, 2008, when his current
contract expires, and the necessary steps for succession of the CEO position.
At this time, the Board also began focusing on some longer-term projects
designed to continue the Companys growth and profitability. We believe that
the future success of our business will be dependent upon our ability to
improve our current products and to introduce new products, through research
and development, innovations by our employees, strategic partnerships, and
acquisitions.
As a result of the longer term nature of the
Boards areas of focus for 2008 and Mr. Pooles wishes, it became apparent
to the Board that that it would be in the best interest of the Company and its
shareholders that Mr. Poole not spearhead our more product-focused
initiatives if he were not available to see them through implementation. As a
result, on March 7, we accepted Mr. Pooles decision to retire early.
Kelly E. Simmons, our CFO, was named interim President and we began to
accelerate the search for Mr. Pooles replacement.
Industry Background
The internet
has become an integral part of operations for companies of all sizes, not only
for e-commerce, but also as a means of managing information between central and
remote locations and with employees, partners and suppliers. Corporate information managers must protect
business assets, ensure that policies and processes meet regulations governing
the management of sensitive information, and ensure that the right people have
access to the right information at the right time. Global operations, diverse business partners
and networks further emphasize the need for common standards to ensure
compatibility, scalability and cost-effective integration.
Organizations
that use the internet for data transfer are also faced with a daunting array of
security challenges stemming from various regulatory and business requirements
for data privacy and confidentiality.
Regulatory and privacy requirements include legislation such as the
Health Insurance Portability and Accountability Act (HIPAA), California Senate
Bill (SB) 1386, and the Gramm-Leach-Bliley Act (GLBA) in the US, and the
European Unions Privacy Directive, some of which impose severe penalties for
improper disclosure of confidential information. Additionally, industry best-practices and
self-imposed business requirements include intellectual property and trade
secrets protection and controls regarding disclosure of proprietary information
to minimize corporate risk from the devastating consequences of security
breaches. As corporate Web operations
mature, we believe we will see an increasing demand for solutions to facilitate
secure file transfers on the internet and for products that provide data
replication, acceleration of file transfer, sharing/collaboration and
continuous data backup and recovery.
Products
Our products
include Windows
®
-based,
Mac based, browser-based and server software applications.
FTP Client Programs
File transfer
protocol, or FTP, is the language used for file transfers from computer to
computer across the internet. FTP is
most commonly used to download a file from a server using the internet or to
upload a file to a server.
CuteFTP
.
CuteFTP is a client-side program, meaning that
it permits a user to request a file from or send a file to an FTP server or
host computer. The user base for this
program ranges from corporate IT professionals who use it to transfer data
between locations via the internet, to individual Web site operators who use it
to upload their Web pages to their Web hosting provider. CuteFTP simplifies use of file transfer
protocol by hiding the technical processes behind a user-friendly, graphical
interface, which allows users to drag `n drop files between computers.
CuteFTP has won several awards, including the CNet Editors Choice award, and
has been favorably reviewed in leading online and print trade journals such as
PC Magazine, WindowsNT, Yahoo Internet Life, CNets Download.com and Tucows, as
being the most powerful, easy-to-use file transfer protocol program
available. We offer CuteFTP in German,
French, Spanish, Japanese and Traditional and Simplified Chinese. CuteFTP was first released in February 1995
by its original author, and was first distributed as a commercial product by
GlobalSCAPE in April 1996. In October 2003,
GlobalSCAPE released CuteFTP Mac, our easy-to use FTP client for the Macintosh
operating system. CuteFTP Mac
incorporates many of the popular features of CuteFTP for Windows, while
adhering to Apples Aqua
®
interface and usability guidelines.
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CuteFTP Pro
.
CuteFTP Pro is a secure FTP client program
designed for advanced users and information technology professionals. CuteFTP Pro incorporates standards for
encrypting data during transport and at rest, accelerating transfer of large
files, and automating common file transfer tasks. It includes various features
attractive to advanced users such as multi-part and concurrent file transfers
to maximize transfer speed, scheduled file transfers, automated site backups
and scripting ability for automating FTP tasks.
CuteFTP Pro has been favorably reviewed by leading online publications
including CNets Download.com, ZDNet and PC Review. CuteFTP Pro was released in March 2001
and CuteFTP MAC Pro was released in April 2004.
File Transfer Servers
FTP transfers
require two software programs: a client program to start a transfer and a
server to accept the connection. Our file transfer server programs are designed
to provide business with increased security and speedier file transport when
compared to e-mail.
Secure FTP Server
.
Secure FTP Server complements CuteFTP Pro and
other professional FTP clients by enabling encrypted transfers using SSL, SSH2
and advanced S/KEY password encryption.
When used with CuteFTP Pro, Secure FTP Server offers a complete digital certificate
management system, giving system administrators the ability to create, sign,
import, export and add digital certificates, as well as kick off back-end
processes. The latter functionality can
be used as a partial or total replacement for more complex enterprise-level
electronic data interchange systems, or (EDI).
Additional features include full remote management capability, the
ability to operate multiple FTP sites with unique directory structures from a
single server and manage user accounts with advanced restriction settings for maximum
security and control. Secure FTP Server
has been favorably reviewed by leading online publications including Server
Watch and File Forum. GlobalSCAPE Secure
FTP Server was first released in January 2002.
Enhanced File
Transfer Server.
Enhanced
File Transfer Server, EFT, is an
enterprise file server, building on the base features of Secure FTP Server by
providing digital certificate management, multiple secure protocols, remote
administration, flexible authentication choices, extensive automation and
advanced security options. The latest version, EFT Server 5, helps customers
achieve regulatory compliance with Payment Card Industry, or PCI, Data Security
Standard, or DSS, by providing hardened security settings and compliance
reporting options. EFT also offers modules that can be integrated into the base
software such as DMZ Gateway, which provides a multi-tiered security solution
for traversing network walls; OpenPGP, a dual-key encrypted storage solution;
Secure Ad-Hoc, which is an alternative solution to e-mail for sending large
file attachments; and auditing and reporting of server transactions.
Data Replication Products
Businesses
with multiple locations have a need to access data in a timely, efficient
manner and to be able to move and share data throughout their
organizations. Our data replication
products allow users to maintain and synchronize their live data files in
multiple remote server locations and to restore data to any point in time.
Wide Area File System (WAFS)
.
Our Wide Area File
System product delivers a unified and accelerated file access system, instant
file-sharing and server-to-server mirroring across any distance, with full
coherency and at LAN access speeds. WAFS
delivers a true wide area file solution for any distance, and any number and
any complexity of files. Continuous,
real-time multi-directional acceleration and mirroring technology ensures that
data exists in multiple places simultaneously and in complete synchronization, no
matter where a change in any file is made.
The data mirrors between servers on the LAN, virtual private network, or
VPN, or crossing firewalls in real time. In addition, users can leverage file locking capabilities
across the LAN and WAN. Our WAFS
ensures bandwidth efficient WAN utilization; that users have access to the most
recent data. The off-line mode ensures
continued data access in the event of WAN or server outage. Our WAFS software is easy to deploy and manage
remotely.
CDP
.
Our continuous
backup software inexpensively delivers true real-time continuous data
protection. Our software-only solution
supports the ability to backup any number of branch servers or remote laptops
to one or more centrally located systems.
CDP transparently and continuously captures data from local and remote
servers, eliminating the backup window and restoring data rapidly. Bandwidth
requirements are minimal since only file differences are transferred to the
backup system.
Enterprise
.
Enterprise is
designated for companies that need both WAFS or multi-directional mirroring and
real-time backup. It includes all the
features of the entire WAFS and CDP product line.
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Internet Products
We offer a variety of software products that
can be purchased and downloaded directly from our automated website. These products range in price from $3.99 to
$249.00 for a single license. These
products are easy to install and use, making them good products to attract
users to our website.
Maintenance
and Support
We offer
maintenance and support contracts for all of our products which includes
content, upgrades and technical support.
Standard technical support is
limited to the reporting and correction of product defects and installation and
configuration assistance. CuteFTP, EFT Server, and Secure Server support is
available 8:00 AM to 6:00 PM US Central Time, Monday-Friday, excluding major US
holidays. WAFS and CDP support is available 8:00 AM to 5:30 US Eastern Time,
Monday-Friday, excluding major US holidays.
Strategy
Our goal is to build upon
our successful market position in FTP, WAFS and CDP, to provide business users
with secure and efficient solutions for their growing file access, file
transfer, and data replication and protection needs. For example, in 2007, we introduced upgrades
to EFT 5.0, CuteFTP 8.0, the Secure Ad
Hoc Transfer module, and the HS-PCI module ensuring compliance with DSS. We continue to enhance and develop high
quality, affordable software that enables organizations and individuals to
easily create, move and manage Web and file-based data in a secure,
collaborative environment. We have
successfully established a brand in the market for internet software
productivity tools with our file management products, CuteFTP and CuteFTP
Pro. We believe that our continued
growth will come not only through the further development of our SecureFTP
Server and Enhanced File Transfer products and the growing demand for file
security when transferring information across the internet, but also through
the aggressive sales and marketing of our WAFS and CDP products, which we
believe represent two high growth markets.
Based upon estimates by Gartner, Inc., and other consulting groups
in our markets, we believe that the WAN optimization/WAFS market is currently
$300 million annually and growing at 20% - 30% per year, and the CDP market is
of similar size but in the early stages of adoption and growing rapidly. In addition, we believe that the WAFS and CDP
products are highly complementary to our traditional Secure File Transfer
products facilitating cross sales and new customer penetration.
GlobalSCAPE believes that
our products represent a low cost solution for businesses for their access,
secure file transfer, and data replication and protection requirements because
we do not require the purchase of a whole suite of products. Our Secure FTP
Server, Enhanced File Transfer, WAFS and CDP products offer modules to form the
comprehensive solutions needed by businesses to solve their particular needs.
Maintenance and support agreements are purchased with most of our higher-end
server products by businesses. We will also continue to market our content
management solutions that help non-technical professionals manage their
organizations Web sites without reliance on information technology
professionals.
Key elements of our strategy
are:
Continue to enhance and develop our products.
Corporate and individual users are increasingly concerned with security
and data replication and protection. We
have added the EFT enterprise solution to our product line for businesses to
meet the needs of security issues when transferring files in and out of their
servers across the internet and we acquired Availl in 2006 in order to offer
customers a data replication and protection solution. We believe that
the future success of our business will be dependent upon our ability to
improve our current products and to introduce new products, through research
and development, innovations by our employees, strategic partnerships, and
acquisitions. We intend to accelerate
the development and improvement of our current products throughout 2008 to meet
the demand for file transfer security and data replication and protection
through Enhanced File Transfer Server, WAFS and CDP and to consumers and
smaller businesses through our other well known FTP products, CuteFTP Home and
CuteFTP Professional and Secure FTP Server.
Pursue strategic product and acquisition opportunities
.
We
will continue to look for opportunities to develop, acquire or add synergistic
products or technologies that enhance the success of these products. In 2005, we added modules and further
developed our Secure FTP Server and EFT products. In September 2006, we acquired Availl
which allowed us to add our WAFS and CDP products. We continue to seek
potential acquisitions and strategic patnerships.
Continue to develop a more robust reseller channel
.
During 2007, we continued our emphasis on the development of third party
reseller channels by hiring sales people with reseller sales backgrounds and
developing relationships with new resellers. In particular, we attempt to reach
value-added resellers such as system design consultants.
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We
believe sales will be significantly enhanced if we are able to recruit numerous
resellers who have existing relationships with prospective customers.
Increase our maintenance and support business
.
Maintenance and support contracts are an important part of our product
offering for our Enhanced File Transfer Server, WAFS and CDP. Our maintenance and support revenues
increased by 171% from 2005 to 2006, and 112% from 2006 to 2007.
Develop internal sales staff
.
During 2007, we continued the development of
our internal direct sales force to better sell more complex products, such as
Enhanced File Transfer, Secure FTP Server, WAFS and CDP. We intend to continue
to develop our sales staff through additional employees, further training and
certification.
Continue to develop online marketing capabilities
.
We believe we have
significant expertise in driving online sales via online marketing activities,
including product placement on third party sites such as search engines and
referral sites, and electronic mail campaigns.
This type of sales activity is particularly well suited to certain lower
priced products because of the lower cost of sale. We intend to continue to leverage our
established Web presence to drive online sales as well as supporting direct and
reseller sales efforts.
Sales and Marketing
Since 2003, we
have increased our emphasis on developing our internal sales staff and reseller
channels to capture those sales that require personal attention, such as sales
of our more complex products Enhanced File Transfer Server, WAFS and CDP, sales
to larger enterprises and sales of maintenance and support contracts. We
require training, testing and professional development of our sales people to
insure that they are capable of meeting the needs of our customers.
We also sell
our FTP Client Programs, Secure FTP Server and our internet products via
download from our Web site,
www.globalscape.com
. Prospective buyers may use our software
products free during an evaluation period of up to thirty days. The programs are automatically disabled if a
license is not purchased by the end of the trial period. Our current products typically range in price
from $39.99 to $2,400 per license. Prior
to 2006, the majority of our software sales had been made online using a credit
card. While we continue to sell products
over the internet, this has become a less important sales channel as we have
grown our internal sales organization and reseller network. Our software is also available for download
from a variety of independent internet software sites such as CNets
Download.com, as well as sites in Western Europe, Canada, Australia, and
Asia. We distribute a limited number of
copies on CD in Frys and Micro Center stores in the United States and through
numerous international resellers. We
provide free customer support via a searchable knowledge base on our Web site
and sell live support and maintenance packages.
Customers
We had one
customer, the Army Contracting Agency ITEC4, whose purchase of $2.8 million
dollars accounted for 14.5% of our sales in 2007. The order was comprised of
Secure FTP Server with SSH Add On module, CuteFTP Pro, and the associated
maintenance and support covering first year installations. While the purchase
of the product would not be recurrent in the same volume, first year
maintenance and support will increase until all software installations have been
completed and thereafter in the form of renewals.
Seasonality
Our products are marketed to individuals as
well as large organizations.
As a result of this mix within our
customer base, we did not experience seasonality in our sales during 2007, nor
do we expect seasonality to have a significant impact on sales in 2008.
Network and Equipment
We have
contracted with various network providers for internet access. Our arrangements provide for redundancy in
the event of a failure, and also for rapid expansion of available bandwidth in
the event that there is a dramatic increase in demand. To protect critical customer data,
GlobalSCAPEs secure server utilizes Secure Sockets Layer encryption. We have dedicated servers on and off site and
expansion plans in place to allow rapid and cost effective scalability.
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Research and Development
Our internal
software engineers are responsible for software design, managing the
development process, testing and quality assurance. We utilize offshore developers for a large
portion of the coding phase of software development. All phases of development, including scope
approval, functional and implementation design, object modeling and
programming, are subject to internal quality assurance testing. Our use of external developers allows us to
tap into a highly skilled labor pool, maintain a 24-hour development schedule,
decrease time to market, and minimize programming costs.
For the years
2005, 2006 and 2007, GlobalSCAPE spent approximately $869,155, $1,230,400 and
$1,919,253, respectively, on research
and development, all of which were expensed. We expect to increase our research
and development spending in 2008 as we focus on improving our current products
and introducing new products.
Competition
The file
management, content management and Web development software market sectors are
intensely competitive, subject to rapid change and are significantly affected
by new product introductions and other activities of market participants. Our primary competitors vary by product and
are listed below.
CuteFTP
.
CuteFTP exists in a highly competitive
environment with several hundred FTP software utilities available on the
internet. We believe our primary
competitors are WS_FTP from Ipswitch, Inc. and FTP Voyager by Rhino
Software, Inc. CuteFTP was the
second Windows-based FTP client to market and is consistently the most
frequently downloaded FTP client on popular download sites. CuteFTP Mac, our FTP client for the Macintosh
platform, competes with Fetch, by Fetch Softworks, Interachry, by Stairways Software Pty Ltd., and Transmit FTP,
by Panic Inc.
CuteFTP Pro
.
CuteFTP Professional competes in the higher
end of the same market as CuteFTP, targeting the security-minded IT
professional. CuteFTP Professional is
positioned as one of the only secure FTP client programs that support a wide
range of security standards related to the FTP protocol. Competitors in the general FTP market offer
products that support a smaller subset of these security standards and address
a narrower segment of the secure FTP market.
Competitors include Van Dyke, Inc., Ipswitch, Inc., and Rhino
Software, Inc.
Secure FTP Server
. Secure FTP Server competes against a limited
number of secure Windows-based FTP servers.
We believe our primary competitors are WS_FTP Server and Serve-U. Secure FTP Server has the advantage of
leveraging the success of CuteFTP Pro through product integration, offering
proprietary extensions to the FTP protocol, and cross-marketing efforts to an
existing customer base.
Enhanced File
Transfer Server.
Enhanced
File Transfer Server competes in the managed file transfer server market. We believe our primary competitors are
Tumbleweed, Sterling, Proginet, and SSHs Tectia. Enhanced File Transfer Server has the
advantage of being very cost effective in its market while leveraging and
extending the security and file management features of our other FTP products.
WAFS.
WAFS competes in the Wide Area File
System/Storage market. We believe
our primary competitors are Riverbed, Packeteer and Cisco, who are delivering
proprietary based appliances. We
believe that WAFS has the advantage of being a software only solution which
leverages corporate infrastructure and minimizes the total cost of ownership.
CDP.
Continuous Data Protection competes in the
highly competitive CDP market. We
believe our primary competitors are CA XOsoft, Doubletake and
Symantec/Veritas. We believe that CDP
has the advantage of transparently and continuously capturing data from local
and remote servers, eliminating the backup window and restoring data rapidly.
CuteHTML
.
CuteHTML exists in a highly competitive environment
with approximately one hundred text-based HTML editors. CuteHTMLs competition includes HomeSite from
Allaire, Inc. CuteHTMLs advantage
is that it doesnt add extraneous code to Web pages, an attribute preferred by
many professional Web masters.
CuteHTML Pro
. CuteHTML Pro faces heavy competition from
visual or WYSIWYG editors such as Front Page, by Microsoft, Dreamweaver, by
Macromedia Inc, and competition from other direct editors
,
such as Homesite, also by Macromedia
Inc. CuteHTML Pros advantage is its
appeal to professional Webmasters who typically shun visual editors in favor of
the extra features and added control provided by direct editors such as
CuteHTML Pro.
CuteMAP
.
CuteMAP competes against approximately 65
image-mapping utilities, which exist in a niche market. Primary competitors include CoffeeCup Image
Mapper, Ulead Smart Saver and MapEdit.
CuteMAP has the advantage of
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being able to leverage the success of CuteHTML through product
integration and cross-marketing efforts to an existing customer base.
CuteZIP
.
CuteZIP exists in the highly competitive file
compression utility market, competing against several hundred file compression
utilities. Its main competitors include
WinZIP, the current market leader, and NetZIP.
CuteZIPs main advantage is that it is one of the only compression
utilities offering 128-bit encryption to secure compressed files. In addition, users can create self-extracting
encrypted archives that recipients may open even if they dont have a zip
utility installed.
We have
limited information regarding our products market shares in their respective
categories. Many of our competitors have
substantially greater financial, technical, sales, marketing, personnel, and
other resources, as well as greater name recognition and a larger customer base
than we do. Significant competition
characterizes the markets for our products and we anticipate that we will face
increasing pricing pressures from competitors in the future. Moreover, given that there are low barriers
to entry into the software market, and the market is rapidly evolving and
subject to rapid technological change, we believe that competition will persist
and intensify in the future. We have
experienced price declines on some products over the last several years. A reduction in the price of our products
would negatively affect gross margins as a percentage of net revenues, and
would require us to increase software unit sales, in order to maintain net
revenues at existing levels. For more
discussion on the risks associated with our competition, you should read the
information under Risk Factors Risks Related to Operations.
Governmental Regulation
All of our
products are subject to U.S. export control laws and applicable foreign
government import, export and/or use requirements. Minimal U.S. export
restrictions apply to all products, whether or not they perform encryption
functions.
The Export
Administration Regulations of the U.S. Department of Commerce regulate the
export of most commercial products with encryption features. Under regulations
issued by the Department of Commerce in January 2000, encryption products
of any key length may be exported, after a one-time technical review, to
non-governmental end-users around the world, except for embargoed countries and
specific prohibited end-users. Encryption products may be exported to
governmental end-users under special Encryption Licensing Arrangements or
individual export licenses that may be issued at the discretion of the
Department of Commerce. In October 2000, the Department of Commerce
further revised the Export Administration Regulations to relax some reporting
requirements and to remove the export licensing requirement for shipments to
governmental end-users in 23 countries, including most of the United States
major trading partners. In June 2002, the Department of Commerce amended
the encryption regulations again to conform them to the control lists
implemented by other countries that are also members of the Wassenaar
Arrangement. We believe that we have completed the necessary technical reviews
of the products and services we currently export, but new products that we
acquire or develop may require technical review before we can export them. For
the export of some of our products, we are subject to various post-shipment
reporting requirements.
The changes to
the export regulations allow our products to be exported more quickly and with
more strength and, therefore, be more competitive with products from foreign
producers. However, the export regulations may be modified at any time. In
light of the ongoing discussions regarding anti-terrorism legislation in the
U.S. Congress, there may be an increased risk that export regulations may be
modified in the future. Modifications to the export regulations could reduce or
eliminate our ability to export some or all of our products from the U.S. without
a license in the future, which could put us at a disadvantage in competing for
international sales compared to companies located outside of the U.S. that
would not be subject to these restrictions.
Intellectual Property
We regard some
of the features of our internal operations, software, and documentation as
proprietary and rely on copyright, patent, trademark and trade secret laws,
confidentiality procedures, contractual arrangements, and other measures to
protect our proprietary information. Our intellectual property is an important
and valuable asset that enables us to gain recognition for our products,
services, and technology and enhance our competitive position.
As part of our
confidentiality procedures, we generally enter into non-disclosure agreements
with our employees, distributors, and corporate partners, and we enter into
license agreements with respect to our software, documentation, and other
proprietary information. These license agreements are generally
non-transferable and have a perpetual term. We also educate our employees on
trade secret protection and employ measures to protect our facilities,
equipment, and networks.
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Our
trademarks, copyrights and technology are central to our business. We protect our intellectual property rights
through a combination of licenses, trademarks, service marks, copyrights, trade
secret laws and restrictions on disclosure.
We have U. S.
federal trademark registrations for GlobalSCAPE, CuteFTP, CuteFTP Pro, CuteMx,
PureCMS, CuteHTML, CuteZIP, CuteMAP, CuteSITE Builder and design,
SnapEdit and pending U. S. federal trademark applications for Availl and
Enhanced File Transfer Services. We have
obtained twenty-nine United States copyright registrations for all but the most
recent versions of our software applications, and have applied for registration
for the most recent versions.
We seek to
protect our software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy aspects of our
products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a
persistent problem. In selling our
products, we rely primarily on click-wrap licenses that are not signed by
licensees, and may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of
some foreign countries do not protect our proprietary rights to as great an
extent as do the laws of the United States.
In addition, the number of patents applied for and granted for software
inventions is increasing. Consequently,
there is a growing risk of third parties asserting patent claims against us. We
have received, and may receive in the future, communications from third parties
asserting that our products infringe, or may infringe, the proprietary rights
of third parties, seeking indemnification against such infringement or
indicating that we may be required to obtain a license or royalty from such
third parties.For more discussion on the risks associated with our intellectual
property, you should read the information under Risk Factors, especially Risks
Related to Legal Uncertainty.
Employees
As of March 1,
2008, we had 66 full-time and part-time employees organized within eight
functional areas. The employee
distribution according to function is as follows:
Department
|
|
Number of
Employees
|
|
Management and Administration
|
|
9
|
|
Research and Development
|
|
10
|
|
Quality Assurance
|
|
6
|
|
Marketing
|
|
4
|
|
Information Services
|
|
5
|
|
Professional Services
|
|
3
|
|
Sales
|
|
17
|
|
Customer Support
|
|
12
|
|
Total
|
|
66
|
|
None of our
employees are covered by collective bargaining agreements and we believe our
employee relations are good.
Available Information
We file
annual, quarterly and current reports, proxy statements and other information
with the Securities and Exchange Commission. You may read and copy any document
we file with the SEC at the SECs public reference room at 100 F Street, NE, Room 1580,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information
on the public reference room. The SEC maintains an internet web site that
contains annual, quarterly and current reports, proxy statements and other
information that issuers (including GlobalSCAPE) file electronically with the
SEC. The SECs web site is www.sec.gov.Our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other
reports and amendments filed with the Securities and Exchange Commission are
available free of charge on our web site at www.globalscape.com in the Investor
Relations section as soon as practicable after such reports are filed. Information on our website is not
incorporated by reference into this Form 10-K and should not be considered
part of this report or any other filing that we make with the SEC.
Item 1A. Risk Factors
We have
described below risks that we are aware of that could have a material adverse
effect on your stock ownership and our business.
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Risks Related to Operations
If we are unable to develop new
and enhanced products and services that achieve widespread market acceptance,
or if we are unable to continually improve the performance, features, and
reliability of our existing products and services, our business and operating
results could be adversely affected.
Our future success depends
on our ability to respond to the rapidly changing needs of our customers by
developing or introducing new products, product upgrades, and services on a
timely basis. We have in the past
incurred, and we believe that we will continue to incur, research and
development expenses as we strive to remain competitive. New product development and introduction
involves a significant commitment of time and resources and is subject to a
number of risks and challenges including:
Managing the length of the development cycle for new
products and product enhancements, which has frequently been longer than we
originally expected.
Adapting to emerging and evolving industry standards
and to technological developments by our competitors and customers.
Extending the operation of our products and services
to new platforms and operating systems.
Entering into new or unproven markets with which we
have limited experience.
Managing new product and service strategies, including
integrating our various security and file replication technologies, management
solutions, customer service, and support into unified enterprise security and
file replication solutions.
Incorporating acquired products and technologies.
Developing or expanding efficient sales channels.
Obtaining sufficient licenses to technology and
technical access from operating system software vendors on reasonable terms to
enable the development and deployment of interoperable products, including
source code licenses for certain products with deep technical integration into
operating systems.
If we are not successful in
managing these risks and challenges, or if our new products, product upgrades,
and services are not technologically competitive or do not achieve market
acceptance, we could have expended substantial resources and capital without
realizing sufficient revenues in return, and our business and operating results
could be adversely affected.
Fluctuations in demand for our
products and services are driven by many factors and a decrease in demand for
our products could adversely affect our financial results.
We are subject to
fluctuations in demand for our products and services due to a variety of
factors, including competition, product obsolescence, technological change,
budget constraints of our actual and potential customers, level of broadband
usage, awareness of security threats to IT systems, and other factors. While such factors may, in some periods,
increase product sales, fluctuations in demand can also negatively impact our
product sales. If demand for our
products declines, our revenues and gross margin could be adversely affected.
If we fail to manage our sales
and distribution channels effectively or if our partners choose not to market
and sell our products to their customers, our operating results could be
adversely affected
.
We sell our
products to customers primarily through our direct sales force and through
resellers. Sales through these different channels involve distinct risks,
including the following:
Direct Sales.
A significant portion of our revenues is derived from sales
by our direct sales force to end-users. Special risks associated with this
sales channel include:
Longer sales cycles associated with direct sales
efforts.
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Difficulty in hiring, retaining, and motivating our
direct sales force.
Substantial amounts of training for sales
representatives to become productive, including regular updates to cover new
and revised products.
Indirect Sales Channels.
A significant portion of our
revenues is derived from sales through indirect channels, including
distributors that sell our products to end-users and other resellers. This
channel involves a number of risks, including:
Our lack of control over the timing of delivery of our
products to end-users.
Our resellers and distributors are not subject to
minimum sales requirements or any obligation to market our products to their
customers.
Our reseller and distributor agreements are generally
nonexclusive and may be terminated at any time without cause.
Our resellers and distributors frequently market and
distribute competing products and may, from time to time, place greater
emphasis on the sale of these products due to pricing, promotions, and other
terms offered by our competitors
Our products are complex and operate in a wide variety of computer
configurations, which could result in errors or product failures.
Because we offer very
complex products, undetected errors, failures, or bugs may occur, especially
when products are first introduced or when new versions are released. Our products are often installed and used in
large-scale computing environments with different operating systems, system
management software, and equipment and networking configurations, which may
cause errors or failures in our products or may expose undetected errors,
failures, or bugs in our products. Our
customers computing environments are often characterized by a wide variety of
standard and non-standard configurations that make pre-release testing for
programming or compatibility errors very difficult and time-consuming. In addition, despite testing by us and
others, errors, failures, or bugs may not be found in new products or releases
until after commencement of commercial shipments. In the past, we have discovered software
errors, failures, and bugs in certain of our product offerings after their
introduction and have experienced delayed or lost revenues during the period
required to correct these errors.
Errors, failures, or bugs in
products released by us could result in negative publicity, product returns,
loss of or delay in market acceptance of our products, loss of competitive
position, or claims by customers or others.
Many of our end-user customers use our products in applications that are
critical to their businesses and may have a greater sensitivity to defects in
our products than to defects in other, less critical, software products. In addition, if an actual or perceived breach
of information integrity or availability occurs in one of our end-user customers
systems, regardless of whether the breach is attributable to our products, the
market perception of the effectiveness of our products could be harmed. Alleviating any of these problems could
require significant expenditures of our capital and other resources and could
cause interruptions, delays, or cessation of our product licensing, which could
cause us to lose existing or potential customers and could adversely affect our
operating results.
We have grown, and may continue
to grow, through acquisitions that give rise to risks and challenges that could
adversely affect our future financial results.
We have in the past
acquired, and we expect to acquire in the future, other businesses, business
units and technologies. Acquisitions
involve a number of special risks and challenges, including:
·
Complexity,
time, and costs associated with the integration of acquired business
operations, workforce, products, and technologies into our existing business,
sales force, employee base, product lines, and technology.
·
Diversion
of management time and attention from our existing business and other business
opportunities.
·
Loss or
termination of employees, including costs associated with the termination or
replacement of those employees.
·
Assumption
of debt or other liabilities of the acquired business, including litigation
related to alleged liabilities of the acquired business.
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·
The
incurrence of additional acquisition-related debt as well as increased expenses
and working capital requirements.
·
Dilution
of stock ownership of existing stockholders, or earnings per share.
·
Increased
costs and efforts in connection with compliance with Section 404 of the
Sarbanes-Oxley Act.
·
Substantial
accounting charges for restructuring and related expenses, write-off of
in-process research and development, impairment of goodwill, amortization of
intangible assets, and stock-based compensation expense.
If integration of our
acquired businesses is not successful, we may not realize the potential
benefits of an acquisition or undergo other adverse effects that we currently
do not foresee. To integrate acquired
businesses, we must implement our technology systems in the acquired operations
and integrate and manage the personnel of the acquired operations. We also must effectively integrate the
different cultures of acquired business organizations into our own in a way
that aligns various interests, and may need to enter new markets in which we
have no or limited experience and where competitions in such markets have
stronger market positions.
Any of the foregoing, and
other factors, could harm our ability to achieve anticipated levels of
profitability from acquired businesses or to realize other anticipated benefits
of acquisitions. In addition, because
acquisitions of high technology companies are inherently risky, no assurance
can be given that our previous or future acquisitions will be successful and
will not adversely affect our business, operating results, or financial
condition.
We utilize open source software
in some of our products.
The open source software
community develops software technology for free use by anyone. We have relied
on open source technology for the encryption features in our CuteFTP Pro and
Secure FTP Server products. Our reliance on open source code software may
impose limitations on our ability to commercialize our solution and may subject
us to possible intellectual property litigation.
We incorporate a limited
amount of open source code software into our products, and we may use more open
source code software in the future. Open source code may impose limitations on
our ability to commercialize our products because, among other reasons, open
source license terms may be ambiguous and may result in unanticipated
obligations regarding our solution, and open source software cannot be
protected under trade secret law. In addition, it may be difficult for us to
accurately determine the developers of the open source code and whether the
acquired software infringes third-party intellectual property rights. As a
result, we could be subject to suits by parties claiming ownership of what we
believe to be open source software. Claims of infringement or misappropriation
against us could be costly for us to defend and could require us to seek to
obtain licenses from third parties in order to continue offering our solution,
to re-engineer our solution or to discontinue the sale of our solution in the
event re-engineering could not be accomplished on a timely basis. If this
occurs, our business and operating results could be harmed.
In addition, from time to
time there have been claims challenging the ownership of open source software
against companies that incorporate open source software into their products. We
use a limited amount of open source software in our solution and may use more
open source software in the future. As a result, we could be subject to suits
by parties claiming ownership of what we believe to be open source software.
Any of this litigation could be costly for us to defend, hurt our results of
operations and financial condition or require us to devote additional research
and development resources to change our solution.
If we lose key personnel we may
not be able to execute our business plan.
Our future success depends
on the continued services of key members of our management team. These
individuals are difficult to replace because of the intense competition for
similarly skilled people. In addition, new members of the management team may
not be productive for weeks or months as they learn about our products and the
administration within GlobalSCAPE.
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We may not be able to compete
effectively with larger, better-positioned companies, resulting in lower
margins and loss of market share.
We operate in intensely competitive
markets that experience rapid technological developments, changes in industry
standards, changes in customer requirements, and frequent new product
introductions and improvements. If we
are unable to anticipate or react to these competitive challenges or if
existing or new competitors gain market share in any of our markets, our
competitive position could weaken and we could experience a drop in revenues
that could adversely affect our business and operating results. To compete successfully, we must maintain a
successful research and development effort to develop new products and services
and enhance existing products and services, effectively adapt to changes in the
technology or product rights held by our competitors, appropriately respond to
competitive strategy, and effectively adapt to technological changes and
changes in the ways that our information is accessed, used, and stored within
our enterprise and consumer markets. If
we are unsuccessful in responding to our competitors or to changing
technological and customer demands, we could experience a negative effect on
our competitive position and our financial results.
We compete with a variety of
companies who have significantly greater revenues and financial resources than
GlobalSCAPE as well as greater personnel and technical resources. For example,
CuteFTP and CuteFTP Pro compete with products offered by Ipswitch, Inc.
and Microsoft Corporation, EFT competes with products from Sterling Commerce
and several other vendors, and WAFS competes with Riverbed Technology which
recently completed an initial public offering.
Large companies may be able to develop new technologies more quickly
than we can, to offer a broader array of products, and to respond more quickly
to new opportunities, industry standards or customer requirements. For example,
Sterling Commerce receives approximately $50 million in maintenance contract
revenue annually, providing them with significant resources for product
development and marketing. Some
competitors may also be able to adopt more aggressive pricing strategies. For
example, Ipswitch gives an older version of its file transfer protocol program
away for free for non-commercial use, and Microsoft includes file transfer
protocol functionality in its internet browser, which it distributes for free.
Increased competition may result in lower operating margins and loss of market
share. Additional competitors may enter the market and may have significantly
greater capabilities and resources than we do.
It may be difficult for us to
recruit software developers and other technical and management personnel
because we are a relatively small company.
We compete
intensely with other internet software development and distribution companies
internationally to recruit and hire from a limited pool of qualified personnel.
Some qualified candidates prefer to work for larger, better known companies..
In order to attract and retain personnel in a competitive marketplace, we
believe that we must provide a competitive compensation package, including cash
and equity-based compensation. The volatility in our stock price may from time
to time adversely affect our ability to recruit or retain employees. In
addition, we may be unable to obtain required stockholder approvals of future
increases in the number of shares available for issuance under our equity
compensation plans, and recent changes in accounting rules require us to
treat the issuance of employee stock options and other forms of equity-based
compensation as compensation expense. As a result, we may decide to issue fewer
equity-based incentives and may be impaired in our efforts to attract and
retain necessary personnel. If we are unable to hire and retain qualified
employees, or conversely, if we fail to manage employee performance or reduce
staffing levels when required by market conditions, our business and operating
results could be adversely affected.
Key personnel
have left our company in the past and there likely will be additional
departures of key personnel from time to time in the future. The loss of any
key employee could result in significant disruptions to our operations,
including adversely affecting the timeliness of product releases, the
successful implementation and completion of company initiatives, the effectiveness
of our disclosure controls and procedures and our internal control over
financial reporting, and the results of our operations. In addition, hiring,
training, and successfully integrating replacement sales and other personnel
could be time consuming, may cause additional disruptions to our operations,
and may be unsuccessful, which could negatively impact future revenues.
Our ability to develop our
software will be seriously impaired if we are not able to use our foreign
subcontractors.
We rely on foreign
subcontractors to help us develop our software. If these programmers decided to
stop working for us, or if we were unable to continue using them because of
political or economic instability, we would have difficulty finding comparably
skilled developers. In addition, we would likely have to pay considerably more
for the same work, especially if we used U.S. personnel. If we could not
replace the programmers, it would take us significantly longer to develop our
products.
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We may incur losses as we attempt
to expand our business.
We intend to expand our
business and therefore expect to expend significant additional resources on
developing our sales force, developing a more robust reseller program, research
and development, marketing and product development. As a result, we may need to
expend significant resources to accomplish these goals. If we fail to successfully
develop and market new products or improve our direct and channel sales
results, we may not be able to achieve the necessary revenue growth and may not
be profitable.
Our operations are vulnerable to
security breaches that could harm the quality of our products and services or
disrupt our ability to deliver our products and services.
Third parties may breach our
system security and damage our products and services or misappropriate
confidential customer information. This might cause us to lose customers, or
even cause customers to make claims on us for damages to them. In addition, we
may be required to expend significant resources to protect against security
breaches and/or to address problems caused by such breaches.
Increased
customer demands on our technical support services may adversely affect our
relationships with our customers and our financial results.
We offer
technical support services with many of our products. We may be unable to
respond quickly enough to accommodate short-term increases in customer demand
for support services. We also may be unable to modify the format of our support
services to compete with changes in support services provided by competitors or
successfully integrate support for our customers. Further customer demand for
these services, without corresponding revenues, could increase costs and
adversely affect our operating results.
Our products may expose customers
to invasion of privacy, causing customer dissatisfaction.
Our Secure FTP Server and
Enhanced File Transfer are intended to provide outsiders access to a customers
computer, making the customer vulnerable to security breaches, which could
result in the loss of their privacy or property. Customers suffering invasions
of privacy or other harm could result in customer dissatisfaction and possible
claims against us for any resulting damages.
Risks Related to Stock Ownership
Our stock price is/may be
volatile.
The trading price of our
common stock has been and could continue to be subject to wide fluctuations in
response to certain factors, including:
Quarter-to-quarter variations in results of
operations;
Our announcements of new products;
Our competitors announcements of new products;
Our product development or release schedule;
General conditions in the software industry; and
Investor perceptions and expectations regarding our
products, plans and strategic position and those of our competitors and
customers.
In addition, the public
stock markets experience extreme price and trading volume volatility,
particularly in high-technology sectors of the market. This volatility has
significantly affected the market prices of securities of many technology
companies for reasons often unrelated to the operating performance of the
specific companies. The broad market fluctuations may adversely affect the
market price of our common stock.
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Accounting charges may cause fluctuations
in our quarterly financial results.
Our financial results may be
affected by non-cash and other accounting charges, including:
Amortization of intangible assets, including acquired
product rights
Impairment of goodwill
Stock-based compensation expense
Restructuring charges
Impairment of long-lived assets
For example,
in connection with our acquisition of Availl in 2006, we have recorded approximately $5.2 million
of acquired product rights and other intangible assets and $6.4 million of
goodwill. We have recorded and will continue to record future amortization
charges with respect to a portion of these intangible assets. In addition, we
will evaluate our long-lived assets, including property and equipment,
goodwill, acquired product rights, and other intangible assets, whenever events
or circumstances occur which indicate that these assets might be impaired.
We do not pay dividends on our
common stock.
We have not paid a dividend
on our common stock and have no plan to do so in the near future. In addition, the terms of our revolving
credit facility prohibit the payment of dividends.
Anti-takeover provisions in our
charter and Delaware law could inhibit others from acquiring us.
Some of the provisions of
our certificate of incorporation and bylaws and in Delaware law could, together
or separately:
discourage potential acquisition proposals;
delay or prevent a change in control; and
limit the price that investors may be willing to pay
in the future for shares of our common stock.
In particular, our
certificate of incorporation and bylaws prohibit stockholders from voting by
written consent or calling meetings of the stockholders. We are also subject to Section 203 of
the Delaware General Corporation Law, which generally prohibits a Delaware
corporation from engaging in any of a broad range of business combinations with
any interested stockholder, as defined in the statute, for a period of three
years following the date on which the stockholder became an interested
stockholder.
Our directors and executive
officers continue to have substantial control over us
Our
directors and executive officers, together with their affiliates and related
persons, beneficially own, in the aggregate, approximately 46% of our
outstanding common stock at December 31, 2007. As a result, these
stockholders, acting together, would have the ability to control GlobalSCAPE
and direct its policies including the outcome of matters submitted to our
stockholders for approval, such as the election of directors and any merger,
consolidation or sale of all or substantially all of our assets. In addition,
our certificate of incorporation and bylaws provide for our Board of Directors
to be divided into three classes of directors serving staggered three-year
terms. As a result, approximately one-third of our Board of Directors
will be elected each year.
Stockholders ownership of our
stock may be significantly diluted, affecting the value of the stock.
There were options for 1
,960,328
shares outstanding under our employee stock
option plans as March 1,
2008, of which 971,493 were
vested as of March 1, 2008.
We have filed a registration statement under the Securities Act, covering stock
issued upon the exercise of options by non-affiliates, and we may file a
registration statement covering options held by affiliates as well. If we do
not file a registration statement covering affiliates, affiliates who exercise
their options may choose
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to
sell the stock under an exemption from registration, such as Rule 144
under the Securities Act. The exercise of these options and sale of the
resulting stock could depress the value of our stock.
Risks Relate
d
to Legal Uncertainty
We are vulnerable to claims that
our products infringe third-party intellectual property rights particularly
because our products are partially developed by independent parties.
We may be exposed to future
litigation based on claims that our products infringe the intellectual property
rights of others. This risk is exacerbated by the fact that some of the code in
our products is developed by independent parties or licensed from third parties
over whom we have less control than we exercise over internal developers. In
addition, we expect that infringement claims against software developers will
become more prevalent as the number of products and developers grows and the
functionality of software programs in the market increasingly overlaps. Claims
of infringement could require us to re-engineer our products or seek to obtain
licenses from third parties in order to continue offering its products. In
addition, an adverse legal decision affecting our intellectual property, or the
use of significant resources to defend against this type of claim could place a
significant strain on our financial resources and harm our reputation.
We may not be able to protect our
intellectual property rights.
Our software code, and trade
and service marks are some of our most valuable assets. Given the global nature
of the internet and our business, we are vulnerable to the misappropriation of
this intellectual property, particularly in foreign markets, such as China and
Eastern Europe, where laws or law enforcement practices are less developed. The
global nature of the internet makes it difficult to control the ultimate
destination or security of our software making it more likely that unauthorized
third parties will copy certain portions of our proprietary information or
reverse engineer the proprietary information used in its programs. If our
proprietary rights were infringed by a third-party, and we did not have
adequate legal recourse, our ability to earn profits, which are highly
dependent on those rights, would be severely diminished.
Other companies may own, obtain
or claim trademarks that could prevent limit or interfere with our use of our
trademarks.
Our various trademarks are
important to our business. If we were to lose the use of any of our trademarks,
our business would be harmed and we would have to devote substantial resources
towards developing an independent brand identity. Defending or enforcing our
trademark rights at a local and international level could result in the expenditure
of significant financial and managerial resources.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate
office is located in a technical park in northwest San Antonio called
University Park Tech Center II. Our
lease for the 14,700 square foot facility expires in September 2008. Our annual rent is approximately $191,000. By
June 2008, the corporate office will relocate to a new 21,495 square foot
facility also located in northwest San Antonio. The annual rent on the eleven year
lease for this facility will average $584,000.
Availl is located in an office park in
Andover, Massachusetts called Brickstone Square. Our lease for the 3920 square foot facility
expires in October 2009. Our annual
rent is approximately $90,800. We
believe these facilities will be suitable for our current business needs and
that suitable additional space will be available on acceptable terms when
needed.
Item 3. Legal Proceedings
We are not
currently involved in any material pending legal proceedings, but may become
subject to legal proceedings in the ordinary course of our business. Such claims may result in the expenditure of
significant financial and managerial resources.
Item 4. Submission of Matters to
a Vote of Security Holders
None.
15
Table of Contents
Item 4A. Executive Officers of the Company
Kelly E. Simmons.
Mr. Simmons
serves as GlobalSCAPEs interim President and Chief Financial Officer and
Corporate Secretary. He is a Texas CPA and has over 27 years experience in
financial management including accounting, SEC reporting, mergers and
acquisitions, information systems, and investor relations. From 1988 to 2000,
Mr. Simmons held various positions, including CFO, with two affiliated
public companies, US Long Distance and Billing Concepts which grew from
revenues of $2 million in 1988 to over $500 million in 1999 with over 1,200
employees. Before joining GlobalSCAPE, he was CFO of Sino Swearingen
Aircraft Corporation, a manufacturer of light business jets from 2005 to 2007.
Mr. Simmons holds a B.S. degree in Finance from Louisiana State
University.
Jeffrey Gehring
.
Mr. Gehring serves as GlobalSCAPEs Vice
President of Sales and has been with GlobalSCAPE since November 2004 in
that capacity. Mr. Gehring is responsible for the companys inbound sales,
corporate sales and the reseller program. Mr. Gehring was employed by
Nextel Partners as Director of Sales in 2004, where he coordinated sales across
the country. From 2003 to 2004, Mr. Gehring was Sales Manager for
GlobalSCAPE, performing the duties he presently holds. From 2002 to 2003, Mr. Gehring
was a principal in a start up business, ConnectOne Telecom, where he got the
business off the ground from the organizational stage to operations. Prior to
2002, Mr. Gehring was Director of Sales and Marketing at UDP, a telecommunications
billing, order management and customer service software company. In addition to his UDP experience, he has more than
20 years of operational and sales management experience in large and
medium-sized businesses, including Unisys, Bell South and Metrocall. His
experience includes strategic planning and implementation for companies that require
rapid growth, as well as establishing processes and policies that foster
world-class sales organizations.
Timothy J. Barton
. Mr. Barton serves as
GlobalSCAPEs Vice President of Operations. He is responsible for product
definition, development, and testing, and for the GlobalSCAPE IT infrastructure
and web site development. Mr. Barton
joined GlobalSCAPE in March of 2006 as the Vice President of Product
Development and Quality Assurance. Prior to joining GlobalSCAPE, he served as
Chief Architect of Secure Logix Corporation, where he was responsible for
requirements definition and product design. Mr. Barton was employed by
Secure Logix form 1998 to 2006 and held positions of Director of Software
Engineering and ETM Development Manager prior to becoming Chief Architect in
2005. Prior to Secure Logix, Mr. Barton held positions of Research Analyst
and Senior Research Analyst at Southwest Research Institute where he developed
software for the US Military and NASA. Mr. Barton holds a B.S. in Computer
Science from Slippery Rock University.
Gregory Hoffer.
Mr. Hoffer serves as Vice
President and Chief Technology Officer and has been employed by GlobalSCAPE
since May 2000. Mr. Hoffer is responsible for overseeing all software
development and Web development at GlobalSCAPE. Before joining GlobalSCAPE, Mr. Hoffer
held software development positions at the consulting firm of Marotz, Inc.
Prior to that, Mr. Hoffer managed the IT department and was head of the
computer science department at Saint Marys Hall, a private school in San
Antonio, Texas. Mr. Hoffer received a bachelors degree in computer
science from Trinity University and is pursuing his masters degree in computer
science.
K. Earl Posey.
Mr. Posey serves as GlobalSCAPEs
Vice-President of Investor Relations/Business Operations. In this capacity he
is responsible for mergers and acquisitions, investor relations and human
resources. Mr. Poseys background includes time spent with Black and
Decker and Nortel Networks in various positions in human resources and
manufacturing. In addition, he has been a professor at the university level
teaching courses in management and labor relations. Immediately prior to
joining GlobalSCAPE Mr. Posey was managing principal and founder of
Gossyppia Partners, a consultancy that specialized in the development of
strategic plans for corporations. Mr. Posey did his graduate and
post-graduate work at Vanderbilt University.
Douglas
Conyers.
Mr. Conyers serves as
Vice President of Professional Services and has been employed by GlobalSCAPE
since March 2007. Mr. Conyers is responsible for total customer
satisfaction as they look to enhance and customize GlobalSCAPE solutions based
on their companys requirements. Prior to joining GlobalSCAPE, he held
positions as Chief Architect, Director of Systems Engineering and Senior
Software Engineer for SecureLogix Corp. Previous to that, he held software
engineering positions with both the Southwest Research Institute and Paradigm
Simulations. Conyers has a B.S. in Computer Science from Trinity University.
16
Table of Contents
PART II
Item 5.
Market
for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity
Our common stock is listed on the American Stock Exchange under the
symbol GSB and began trading on July 19,
2007. As of December 31,
2007, there were approximately 2,371 holders of record of our common
stock. GlobalSCAPE stock began trading
on February 15, 2002. The table
below sets forth the quarterly high and low bid prices for our common stock for
the last two fiscal years.
Common Stock Price
|
|
2006
|
|
2007
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
First Quarter (ending March 31)
|
|
$
|
3.20
|
|
$
|
1.05
|
|
$
|
3.35
|
|
$
|
2.63
|
|
Second Quarter (ending June 30)
|
|
$
|
3.75
|
|
$
|
2.21
|
|
$
|
4.00
|
|
$
|
2.13
|
|
Third Quarter (ending September 30)
|
|
$
|
3.25
|
|
$
|
2.50
|
|
$
|
5.90
|
|
$
|
2.85
|
|
Fourth Quarter (ending December 31)
|
|
$
|
3.50
|
|
$
|
2.16
|
|
$
|
7.71
|
|
$
|
3.85
|
|
|
|
|
|
|
|
|
|
|
|
Annual
|
|
$
|
3.75
|
|
$
|
1.05
|
|
$
|
7.71
|
|
$
|
2.13
|
|
The closing
price on March 14, 2008 was $2.15.
All prices listed above prior to July 19, 2007 are over-the-counter
market quotations which reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not necessarily represent actual transactions.
We have never
paid a cash dividend, and do not expect to do so in the foreseeable
future. The terms of our revolving
credit facility prohibit the payment of dividends.
Item 6. Selected Financial Data
The selected
financial data presented below for the years ended December 31, 2003,
2004, 2005, 2006 and 2007 are derived from our audited financial statements.
Statement of Operations Data:
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Software product revenues
|
|
$
|
4,734,105
|
|
$
|
4,713,191
|
|
$
|
6,096,045
|
|
$
|
9,395,445
|
|
$
|
14,826,197
|
|
Maintenance and support (net of deferred
revenue)
|
|
113,014
|
|
217,469
|
|
582,570
|
|
1,578,236
|
|
3,534,144
|
|
Total revenues
|
|
4,847,119
|
|
4,930,660
|
|
6,678,615
|
|
10,973,681
|
|
18,360,341
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation
and amortization shown separately below)
|
|
532,910
|
|
371,242
|
|
279,964
|
|
468,515
|
|
250,439
|
|
Selling, general and administrative
|
|
3,613,759
|
|
3,456,598
|
|
3,986,047
|
|
6,142,299
|
|
10,049,430
|
|
Research and development
|
|
945,395
|
|
727,423
|
|
869,155
|
|
1,230,400
|
|
1,919,253
|
|
Depreciation and amortization
|
|
390,154
|
|
171,834
|
|
98,071
|
|
99,213
|
|
279,573
|
|
Total operating expenses
|
|
5,482,218
|
|
4,727,097
|
|
5,233,237
|
|
7,940,427
|
|
12,498,695
|
|
Income (loss) from operations
|
|
(635,099
|
)
|
203,563
|
|
1,445,378
|
|
3,033,254
|
|
5,861,646
|
|
Interest expense, net
|
|
(5,016
|
)
|
(1,651
|
)
|
(620
|
)
|
(128,362
|
)
|
(34,893
|
)
|
Interest income
|
|
|
|
|
|
10,685
|
|
60,639
|
|
95,808
|
|
Gain (loss) on sale of assets
|
|
(1,486
|
)
|
|
|
1,242
|
|
619
|
|
365
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
2,269
|
|
Income (loss) before provision for income
taxes
|
|
(641,601
|
)
|
201,912
|
|
1,456,685
|
|
2,966,150
|
|
5,925,195
|
|
Total income tax provision (benefit)
|
|
1,400
|
|
1,489
|
|
9,981
|
|
1,003,618
|
|
2,282,928
|
|
Net income (loss)
|
|
$
|
(643,001
|
)
|
$
|
200,423
|
|
$
|
1,446,704
|
|
$
|
1,962,532
|
|
$
|
3,642,267
|
|
Net income (loss) per common share - basic
|
|
$
|
(0.05
|
)
|
$
|
0.01
|
|
$
|
0.10
|
|
$
|
0.13
|
|
$
|
0.21
|
|
Net income (loss) per common share -
assuming dilution
|
|
$
|
(0.05
|
)
|
$
|
0.01
|
|
$
|
0.09
|
|
$
|
0.12
|
|
$
|
0.20
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
342,433
|
|
$
|
572,959
|
|
$
|
2,029,473
|
|
$
|
4,632,666
|
|
$
|
5,214,479
|
|
Working capital
|
|
$
|
19,203
|
|
$
|
341,749
|
|
$
|
1,741,354
|
|
$
|
2,749,266
|
|
$
|
5,073,507
|
|
Total assets
|
|
$
|
918,278
|
|
$
|
971,857
|
|
$
|
2,901,671
|
|
$
|
16,367,749
|
|
$
|
20,361,858
|
|
Long term debt including capital lease
obligations, less current portion
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
3,076,698
|
|
$
|
|
|
Cash dividends per common share
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
17
Table of Contents
Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operation
The following
Managements Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our financial statements for the
years ended December 31, 2005, 2006 and 2007 and related notes included
elsewhere in this document.
Overview
We develop and
distribute secure managed file transfer, or MFT, software for individuals and
business users to safely send files over the internet. We have also developed
Wide-Area File System, or WAFS, collaboration and Continuous Data Protection or
CDP, software which further enhance the ability to share and backup files
within the infrastructure of a companys wide and local area networks, or WAN
and LAN at WAN and LAN speeds. Our MFT
products ensure the privacy of critical information such as financial data,
medical records, customer files and other similar documents. In addition, these products ensure compliance
with government regulations relating to the protection of information while
allowing users to reduce IT costs, increase efficiency, track and audit
transactions and automate processes. Our
WAFS and CDP products provide data replication, acceleration of file transfer,
sharing/collaboration and continuous data backup and recovery to our
customers. We believe that we are
uniquely positioned to provide secure transfer, sharing, and replication of
files that need to be transmitted inside the users firewall to distributed
offices, or outside the users firewall to business and trading partners.
The following
is a brief description of our products:
·
File Management Products Our File Management
products are best known for the CuteFTP product line. They primarily consist
of products that help users securely move and copy files on the internet. A
substantial portion of our revenues are derived from licensing our File
Management products. Some of our products encrypt the transfers for security
using technology similar to a Web browser. The products consist of three
product categories; client, server and compression transfer. Our File
Management product line includes CuteFTP Home, Cute FTP Professional, SecureFTP
Server, and Enhanced File Transfer.
·
Wide-Area File System (WAFS) Products Our WAFS
products provide a file sharing and collaboration solution over multiple
sites. By keeping all data updated on
each locations file server, each site has instant access to the very latest
version. Our WAFS products help ensure
that no one can ever open an old file version without user conflicts. Changes
made to data on any server are mirrored on all other servers.
·
Continuous Data Protection (CDP) Products Our
CDP products consolidate remote backup for file servers. As files change, the servers backup in real
time to the customers backup site which can be at the same or a remote
location. The backup server can keep
any number of past versions of each file (and deleted files) which gives the
customer immediate restore, as well as the ability to perform point-in-time
snapshots.
We believe that the
future success of our business will be dependent upon our ability to improve
our current products and to introduce new products, through research and development,
innovations by our employees, strategic partnerships, and acquisitions. We
intend to continue enhancing our file transfer products to meet the demands of
both individual and enterprise users, while improving the security features of
our current product line, and to expand into growing markets through the
acquisition of compatible companies and products and through strategic
partnerships. For example, in 2007, we introduced upgrades to EFT 5.0, CuteFTP 8.0, the Secure Ad Hoc Transfer
module, and the HS-PCI module ensuring compliance with DSS In 2006, we acquired Availl, a leading
provider of Wide-Area File System (WAFS) collaboration and continuous data
protection (CDP) products as part of this strategy. This acquisition expanded our technology base
into data replication, acceleration of file transfer, sharing/collaboration and
continuous data backup and recovery. We
believe that these products have give us entry into two large and rapidly
growing markets. Based upon estimates by Gartner, Inc., and other
consulting groups in our markets, we believe that the WAN optimization/WAFS
market is currently $300 million annually and growing at 20% - 30% per year,
and the CDP market is of similar size but in the early stages of adoption and
growing rapidly. In addition, we believe
that the WAFS and CDP products are highly complementary to our traditional
Secure File Transfer products facilitating cross sales and new customer
penetration. As described below, our WAFS/CDP revenues have not increased as
much as originally anticipated due to managements decision to delay the
aggressive marketing of those products to our existing customer base and to the
market in general as we had initially planned.
The amount of time required to make improvements to our WAFS and CDP
products that we believe are necessary has been greater than we had expected.
18
Table of Contents
Liquidity and Capital Resources
The Company
continues to enjoy a strong working capital position resulting from solid net
profits from operations over the last fifteen consecutive quarters, including
the quarter ended December 31, 2007.
At December 31, 2007, our net
working capital position was $5.0 million, which consists of current assets
less current liabilities. We had cash available of $5.2 million and we continue
to generate cash in excess of our operational needs. In addition, the Company has a $750,000 line
of credit with Silicon Valley Bank which is unused at this time. We rely
heavily on cash flows from operations to fund our business a a result of the
profitable history of the company.
Our capital
requirements principally relate to our need to enhance our existing products
and to develop new products, which primarily consist of research and
development expenses and expenses for people and the elements that support
their work. By comparison, we do not spend large sums on capital equipment.
Over the past three years, we spent $103,304 in 2005, $150,926 in 2006 and
$175,779 in 2007 for equipment. Capital expenditures will be higher in 2008 as
a result of the planned move to new office space.
Our total
revenues increased 67% in 2007 when compared to 2006. The principal drivers of
our sales are the enterprise level server products for MFT, which are EFT
Server and SecureFTP Server. These products accounted for 68% of our sales in
2007, not including maintenance and support agreements. Prior to 2006, we were
largely dependent upon sales of CuteFTP Home and CuteFTP Professional, which
accounted for 51%
of our revenue in the year ended December 31,
2005, and represented larger percentages of sales in earlier years. The actual
sales of these products have remained relatively flat over the three years
ended December 31, 2007 while becoming an increasingly smaller portion of
our total revenue. In 2007, sales of these products represented approximately
19.3 % of our total revenues
Since our
principal sources of capital are cash on hand and cash flow from operations, to
the extent that sales decline, our cash flow from operations will also
decline. If sales decline or if our
liquidity is otherwise under duress, management could substantially reduce
personnel and personnel-related costs, reduce or substantially eliminate
capital expenditures and/or reduce or substantially eliminate research and
development expenditures. We also have $750,000 of availability under our
revolving line of credit and, if necessary, we may also sell equity securities
or enter into other credit arrangements in order to finance future acquisitions
or licensing activities.
Net cash
provided by operating activities was $1,549,636, $2,604,274 and $5,213,674 in
2005, 2006 and 2007, respectively. This
increase in cash for each year was generated from the profitable operations of
our business. Some of the major non-cash items that were charged against net
income over this period are depreciation and amortization, stock-based
compensation and deferred revenues. While these items are expensed according to
Generally Accepted Accounting Principles, the cash impact from these charges
has occurred or will occur in other accounting periods and the difference
reflects a positive impact on cash in the Consolidated Statements of Cash
Flows. There is also a recurring timing difference between the time we record
sales and the time we actually receive payment for those sales. The increase in
Accounts Receivables during this period serve to negatively impact the cash
from operations in the Consolidated Statements of Cash Flows, and the Deferred
Revenues during this period serve to positively impact the cash from operations
in those statements.
Our financing
activities over the past three years have primarily related to funding the acquisition
of Availl. In 2006, we used $7.6 million in cash to acquire Availl. The cash
used to make this acquisition came from a $5 million term loan from Silicon
Valley Bank. We repaid $400,000 of the loan in 2006 and $4.6 million in 2007
from the cash generated from our operations and a stock offering completed in November 2006.
We have also sold stock through the exercise of employee stock options. We
received cash from stock option exercises of $8,940, $28,968, and $681,656 for
2005, 2006, and 2007, respectively. We also used our own cash for the
repurchase of treasury our common stock, in the amount of $527,558 in 2007.
At December 31,
2007, our principal commitments consisted of obligations outstanding under
operating leases as well as royalty agreements with third parties, federal
income tax and trade accounts payable.
The commitments related to royalty agreements are contingent on sales
volumes. We plan to continue to expend
significant resources on product development in future periods and may also use
our cash to acquire or license technology, products or businesses related to
our current business. We will move to a
new facility in 2008. We will likely purchase significant fixed assets and
lease hold improvements in connection with moving into this facility.
In order to
finance the cash portion of the purchase price in the merger with Availl,
GlobalSCAPE entered into a Loan and Security Agreement dated September 22,
2006 with Silicon Valley Bank. The Loan
Agreement with Silicon Valley Bank provides for a $5.0 million term loan and a
$750,000 revolving credit facility. We repaid the balance of the term loan on March 1,
2007. The entire amount of the
revolving credit facility remains available. The borrowings under the
19
Table of Contents
revolving credit facility bear interest at 1.00% above the Banks prime
rate and matures on September 22, 2008.
Interest payments are due on the first day of each calendar month. There
have been no borrowings under the revolving credit facility.
The revolving
credit facility is secured by substantially all of the assets of GlobalSCAPE, Inc. The Loan Agreement contains customary covenants
including covenants relating to maintaining legal existence and good standing,
complying with applicable laws, delivery of financial statements, maintenance
of inventory, payment of taxes, maintaining insurance, and protection of
intellectual property rights.
GlobalSCAPE is also prohibited from selling any of its assets other than
in the ordinary course of business, acquiring any other entities, changing the
types of business they are engaged in, incurring indebtedness other than that
permitted by the Loan Agreement, incurring any liens on their assets other than
those permitted by the Loan Agreement, making certain investments or paying any
dividends on, or acquiring, any shares of its capital stock. The Loan Agreement contains two financial
covenants. GlobalSCAPE and its
subsidiaries must maintain:
·
a ratio of (A) EBITDA
less the sum of (i) cash taxes paid and (ii) non-financed capital
expenditures (excluding non-cash stock options and taxes already accrued), to (B) the
sum of (i) principal plus (ii) interest paid to Bank, of at least 1.5
to 1.00; and
·
a ratio of total
funded debt to EBITDA of not more than 2.00 to 1.00.
The loan agreement also contains customary events of default including
the failure to make payments of principal and interests, the breach of
principal and interests, the breach of any covenants, the occurrence of a
material adverse change, certain bankruptcy and insolvency events, the breach
of other agreements creating indebtedness of $50,000 or more and the entry of a
judgment of $50,000 or more against GlobalSCAPE or any of its
subsidiaries. At March 21, 2008, we
were in compliance with these covenants.
The following
table summarizes our contractual obligations at December 31, 2007,
consisting of future minimum capital lease payments and future minimum payments
under operating leases:
|
|
Payments Due by Fiscal Year
|
|
Contractual Obligations
|
|
2008
|
|
2009
|
|
2010
|
|
Thereafter
|
|
Total
|
|
Operating Lease
|
|
$
|
578,181
|
|
$
|
606,465
|
|
$
|
538,587
|
|
$
|
4,939,948
|
|
$
|
6,663,181
|
|
Equipment Leases
|
|
$
|
7,392
|
|
$
|
7,392
|
|
$
|
7,392
|
|
$
|
9,056
|
|
$
|
31,232
|
|
Deferred Compensation
|
|
$
|
119,711
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
119,711
|
|
Total Cash Obligations
|
|
$
|
705,284
|
|
$
|
613,857
|
|
$
|
545,979
|
|
$
|
4,949,004
|
|
$
|
6,814,124
|
|
Critical Accounting Policies
Use of Estimates
Managements
Discussion and Analysis of Financial Condition and Results of Operations is
based upon the Companys financial statements, which have been prepared in
accordance with accounting principles generally accepted in the Unites
States. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities. On an ongoing basis, management evaluates its
estimates and judgments, including those related to revenue recognition, allowance
for doubtful accounts receivable, long-lived and intangible assets, valuation of stock based compensation, income taxes and contingencies. Management bases its estimates on historical
experience, observable trends, and various other assumptions that are believed
to be reasonable under the circumstances.
Management uses this information to make judgments about the carrying
values of assets and liabilities that are not readily apparent form other
sources. Actual results may differ from
the estimates under different assumptions or conditions.
Management
believes the following critical accounting policies affect its more significant
judgments and estimates used in the preparation of its financial statements.
Revenue
Recognition
Our revenue is generated
primarily by licensing our software products and providing support for those
products.
Revenues are comprised
of the gross selling price of the software, including shipping charges and the
earned portion of support and maintenance agreements. In periods where we had revenue from advertising,
we recognized the net proceeds received from advertisers as revenue. The Company recognizes revenue in accordance
with the American Institute of Certified Public Accountants Statement of
Position (SOP) 97-2,
Software Revenue
Recognition
, as modified by SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions
.
20
Table of Contents
Revenues from
the sale of software products are recognized and completely earned upon
shipment or electronic delivery of the product provided that persuasive
evidence of an arrangement exists, collection is probable, payment terms are
fixed and determinable and no significant obligations remain. The majority of our sales are delivered
electronically via email.
We also sell
technical support and maintenance agreements (post contract customer support PCS),
which are sometimes bundled with the software. When vendor specific objective evidence
(VSOE) of fair value exists for all elements in a multiple element
arrangement, revenue is allocated to each element based on the relative fair
value of each of the elements. VSOE of
fair value is established by the price charged when the same element is sold
separately. In a multiple element
arrangement whereby VSOE of fair value of all undelivered elements exists but
VSOE of fair value does not exist for one or more delivered elements, revenue
is recognized using the residual method.
Under the residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is recognized as
revenue, assuming collection is probable.
Revenue allocated to PCS is recognized ratably over the contractual
term, typically one year. We sometimes
sell installation and training services with our PureCMS and EFT products. Revenue for installation and training is
recognized when performed.
The Company
began selling technical support and maintenance services for some of its
software products in 2001. With higher
priced support and maintenance for our enterprise class software products and
our efforts to renew agreements upon their expiration, sales of these
agreements grew in 2005, 2006 and 2007 to $811,000, $2,032,000 and $4,486,000
respectively. Growth in the sales of
maintenance and support agreements may result in the deferred recognition of a
significant amount of revenue in future periods.
Allowance
for Doubtful Accounts
We provide
credit, in the normal course of business, to a number of companies and perform
ongoing evaluations of our credit risk.
We require no collateral from our customers and we estimate the
allowance for uncollectible accounts based on our historical experience and
current credit evaluations. No single
customer accounted for more than 2% of net revenues in 2006. We had one customer that accounted for
approximately 2.7% of net revenues in 2005, and one customer that accounted for
14.5% of net revenues in 2007.
Valuation
of Long-Lived and Intangible Assets
The Company
assesses the impairment of long-lived and intangible assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors considered
important which could trigger an impairment review included the following: significant underperformance relative to
historical or projected future cash flows; significant changes in the manner of
use of the assets or the strategy for the overall business; and significant
negative industry trends. When
management determines that the carrying value of long-lived and intangible
assets may not be recoverable, impairment is measured based on the excess of
the assets carrying value over the estimated fair value. No impairment was recognized in 2005, 2006 or
2007.
Stock-Based
Compensation
Effective January 1,
2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment (SFAS No.123R) requiring that compensation
cost relating to share-based payment transactions be recognized in the
financial statements. The cost is measured at the grant date, based on the
calculated fair value of the award, and is recognized as an expense over the
employees requisite service period (generally the vesting period of the equity
award). Prior to January 1, 2006, we accounted for share-based
compensation to employees in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25),
and related interpretations. We also followed the disclosure requirements of
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, as amended by Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure. We adopted SFAS No. 123R using the modified prospective
method and, accordingly, financial statement amounts for prior periods
presented in this Form 10-K have not been restated to reflect the fair
value method of recognizing compensation cost relating to stock options.
See note 8 to
the financial statements under the heading Stock Options and Stock Based
Compensation.
21
Table of Contents
Research
and Development
Research and
development expenses include all direct costs, primarily salaries for personnel
and expenditures with external development sources, related to the development
of new products and significant enhancements to existing products and are
expensed as incurred until such time as technological feasibility is
achieved. For the years 2005, 2006 and
2007, we spent approximately $869,000, $1,230,000 and $1,919,000, respectively,
on research and development. No research
and development expenses were capitalized in 2005, 2006 or 2007.
Income Taxes
GlobalSCAPE
accounts for income taxes using the liability method in accordance with
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes
. The liability method provides that the
deferred tax assets and liabilities are recorded based on the difference
between the tax bases of assets and liabilities and their carrying amount for
financial reporting purposes, as measured by the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Deferred tax assets and liabilities are
carried on the balance sheet with the presumption that they will be realizable
in future periods when pre-tax income is generated. GlobalSCAPE had a deferred tax asset of
$51,983, $8,724, and $80,044 at December 31, 2005, 2006 and 2007,
respectively
Statement of Financial
Accounting Standards (SFAS) No. 109 requires a valuation allowance to
reduce the deferred tax assets reported if, based on the weight of the
evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. After
consideration of all of the evidence, both positive and negative, management
determined that no allowance was considered necessary at December 31,
2005, 2006 or 2007.
Comparison of Year Ended December 31, 2007 to
Year Ended December 31, 2006
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
Software product revenues
|
|
$
|
18,360,341
|
|
$
|
10,973,681
|
|
$
|
7,386,660
|
|
67.31
|
%
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
250,439
|
|
468,515
|
|
(218,076
|
)
|
(46.55
|
)%
|
Selling, general and administrative
|
|
10,049,430
|
|
6,142,299
|
|
3,907,131
|
|
63.61
|
%
|
Research and development expenses
|
|
1,919,253
|
|
1,230,400
|
|
688,853
|
|
55.99
|
%
|
Depreciation and amortization
|
|
279,573
|
|
99,213
|
|
180,360
|
|
181.79
|
%
|
Total operating expense
|
|
12,498,695
|
|
7,940,427
|
|
4,558,268
|
|
57.41
|
%
|
Income from operations
|
|
5,861,646
|
|
3,033,254
|
|
2,828,392
|
|
93.25
|
%
|
Other Income (expense)
|
|
63,549
|
|
(67,104
|
)
|
130,653
|
|
(194.70
|
)%
|
Income tax expense
|
|
2,282,928
|
|
1,003,618
|
|
1,279,310
|
|
127.47
|
%
|
Net Income
|
|
$
|
3,642,267
|
|
$
|
1,962,532
|
|
$
|
1,679,735
|
|
85.59
|
%
|
Revenue.
We derive our revenues primarily from
software sales. Revenue is comprised of
the gross selling price of software, including shipping charges and the earned
portion of support and maintenance agreements.
Revenues increased from $10,973,681 in 2006 to $18,360,341 in 2007. The
increase of $7.4 million, or approximately 67%, in revenues was the result of
increased sales of our WAF Systems, Secure FTP Server Systems and EFT products.
In addition, in May 2007, we received
a substantial order from the U.S. Army for Secure FTP Server, SSH Module and
CuteFTP Professional software licenses, with maintenance, starting at an
initial purchase of $2.5 million in software licenses and $300,000 in initial
maintenance and support revenue. The fully deployed contract has maintenance
and support valued at $1 million annually This sale represented approximately
14.5% of our revenues in 2007.
22
Table of Contents
The following table reflects revenue by product including the related
maintenance and support for each product:
|
|
Revenue for the Year Ending December 31,
|
|
Product
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
CuteFTP Professional
|
|
$
|
2,438,085
|
|
13.28
|
%
|
$
|
2,405,970
|
|
21.92
|
%
|
CuteFTP Home
|
|
1,102,458
|
|
6.00
|
%
|
1,044,593
|
|
9.52
|
%
|
Enhanced File Transfer
|
|
6,691,982
|
|
36.45
|
%
|
4,170,938
|
|
38.01
|
%
|
SecureFTP Server
|
|
5,769,020
|
|
31.42
|
%
|
2,521,994
|
|
22.98
|
%
|
Wide-Area File Systems
|
|
2,711,605
|
|
14.77
|
%
|
600,373
|
|
5.47
|
%
|
Continuous Data Protection
|
|
187,996
|
|
1.02
|
%
|
34,298
|
|
0.31
|
%
|
All Others
|
|
411,274
|
|
2.24
|
%
|
649,219
|
|
5.92
|
%
|
Deferred Revenue adjustment
|
|
(952,079
|
)
|
(5.19
|
)%
|
(453,703
|
)
|
(4.13
|
)%
|
Total Operating Revenues
|
|
$
|
18,360,341
|
|
100.00
|
%
|
$
|
10,973,682
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
Gross maintenance and support included
above before recognition of the net adjustment to defer revenue
|
|
$
|
3,534,144
|
|
19.25
|
%
|
$
|
1,578,236
|
|
14.38
|
%
|
WAFS and CDP
products accounted for approximately 15.8% of total revenue for 2007. There
were only $683,934 in sales for these products in 2006 because we did not begin
selling these products until after completing the Availl acquisition in September 2006.
The WAFS/CDP revenues have not increased as originally anticipated due to
managements decision to delay the aggressive marketing of those products to
our existing customer base and to the market in general as soon as we had
initially planned. The amount of time
required to make improvements to our WAFS and CDP products that we believe are
necessary has been greater than we had expected. We believe that good progress is currently
being made on the product improvements and we anticipate a more aggressive
sales effort for these products in 2008.
Sales of our
SecureFTP Server and Enhanced File Transfer products grew by 86% in 2007 to
$12.5 million, from $6.7 million in 2006. This increase was the result
of the continuing emphasis of our internal sales group to market and sell these
products to meet the needs of businesses to transfer files in a secure fashion
using business or enterprise level software as well as the $2.5 million sale to
the US Army described above
. In
total, our Secure FTP Server and Enhanced File Transfer products represented
approximately 68% of our total revenues in 2007 as compared to 61% in
2006. Revenues from CuteFTP Home and
CuteFTP Professional increased by 3% and accounted for approximately 31% and
19% of total revenues 2006 and 2007, respectively.
Those changes were the result of the
continuing maturity of CuteFTP and CuteFTP Pro, and the availability of low
cost alternatives to occasional users.
We believe
that our reliance on the CuteFTP products will continue to decline as we
emphasize sales of our more complex enterprise products. In addition, because of the more complex
nature of SecureFTP Server, Enhanced File Transfer, WAFS and CDP, purchasers
require increased maintenance and support.
As a result, our maintenance and support revenues increased by 124% from
$1,578,236 in 2006 to $3,534,144 in 2007, net of deferred revenue. Maintenance and support pricing is reflective
of the license cost of the products and the additional support it takes to
maintain and support the products and customers. With higher maintenance and
support revenues, we will recognize additional deferred revenue as we earn the
revenue over the life of the maintenance and support agreement.
Cost of Revenues.
Cost of revenues consists primarily of
royalties, a portion of our bandwidth costs as well as production, packaging
and shipping costs for boxed copies of software products. Cost of revenues decreased by approximately
47% between periods from $468,515 in 2006 to $250,439 in 2007. Royalty
expenses, the major component of cost of revenues, declined as did the sale of
some of our internet products primarily as the result of the non-renewal of the
third party software distribution agreement with Hannon Hill, whose products,
Cascade Serve and Publish XML, had previously generated a significant revenue
contribution and related royalty expense.
Royalties that we pay on software products licensed from third parties,
which we resell, are expensed as a cost of sales when the software product is
sold or earlier if the recoverability of any prepaid royalties is in
doubt. Cost of sales as a percent of
total revenues was 4.3% and 1.4% respectively for 2006 and 2007.
Selling, General and
Administrative.
Selling, general and administrative expenses consist primarily of
personnel and related expenses, marketing, customer support, professional fees,
rent, bad debt and credit card transaction fees. Selling, general and administrative expenses
increased by approximately 64% from $6,142,299 in 2006 to $10,049,432 in
2007. As a percentage of revenue,
SG&A decreased to 55% of revenue in 2007 from 56% of revenue in 2006. A major portion of this increase was
attributable to increased wages and commissions which included a 12 person
employee headcount increase.
23
Table of Contents
Another large portion of the SG&A increase was caused by stock
based compensation expense for 2007 required by SFAS 123(R) totaling $937,546
in 2007 compared to $497,895 in 2006.
Research and
Development.
Research and development expenses increased by approximately 56% from
$1,230,400 in 2006 to $1,919,253 in
2007. Virtually all of the increase was caused by increases in wages, fringe
benefits and contract labor. A major
portion of the increased wages and fringe benefit cost was the result of
reclassification of a Vice President level employee from marketing to
R&D. Included in the research and
development expenses, external development costs increased approximately 16%
from 2006 to 2007, $469,565 to $545,183 respectively.
Depreciation and
Amortization.
Depreciation and amortization expense consists of depreciation expense
related to our fixed assets.
Depreciation and amortization expense increased by $180,360, or
approximately 182%, year over year.
Depreciation expense has increased due to replacement of equipment at
end of life cycle and as required for new employees.
Other Income
(Expense), Net.
In 2006, we had interest expense of $128,362 related primarily to the
financing of the Availl acquisition, interest income of $60,639 as a result of
interest earned on excess cash balances and a gain of $619 on sale of fully
depreciated fixed assets. During 2007, we had interest expense of $34,893
primarily related to the financing of the Availl acquisition, interest income
of $95,808 as a result of interest earned on excess cash balances and a gain of
$365 on sale of fully depreciated fixed assets.
Income Taxes.
The provision for state income taxes in 2006
was $3,533 and the provision for federal income taxes was $1,000,085 in
2006. GlobalSCAPEs effective income tax
rate is 34.5% and differs from the federal rate primarily because of state
taxes. The provision for state income
taxes in 2007 was $114,054 and the provision for federal income taxes was
$2,168,874 in 2007. GlobalSCAPEs
effective income tax rate is 38.5% and differs from the federal rate primarily
because of prior period credits for EIE Exclusion, Research &
Development and amended returns totaling $130,976.
Net Income.
In 2007, net income was primarily the result
of continued growth in our Enhanced File Transfer product and our Secure FTP
Server product, resulting in an increase in revenue, while we continued to
control expenses. In addition, our 2007 income tax expense was reduced by
taking advantage of Research & Development Credits and
Extra-territorial Income Exclusion Credits for 2004, 2005, and 2006. In 2007, we paid an additional $1,279,310 in
income taxes and still increased net income by $1,679,735 over the prior
year. The increase in net income was the
result of continued growth of sales of the Enhanced File Transfer and Secure
FTP Server products.
Comparison
of Year Ended December 31, 2006 to Year Ended December 31, 2005
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
|
Software product revenues
|
|
$
|
10,973,681
|
|
$
|
6,678,615
|
|
$
|
4,295,066
|
|
64.31
|
%
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
468,515
|
|
279,964
|
|
188,551
|
|
67.35
|
%
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses
|
|
6,142,299
|
|
3,986,047
|
|
2,156,252
|
|
54.09
|
%
|
Research and development expenses
|
|
1,230,400
|
|
869,155
|
|
361,245
|
|
41.56
|
%
|
Depreciation and amortization
|
|
99,213
|
|
98,071
|
|
1,142
|
|
1.16
|
%
|
Total operating expense
|
|
7,940,427
|
|
5,233,237
|
|
2,707,190
|
|
51.73
|
%
|
Income from operations
|
|
3,033,254
|
|
1,445,378
|
|
1,587,876
|
|
109.86
|
%
|
Other Income (expense)
|
|
(67,104
|
)
|
11,307
|
|
(78,411
|
)
|
(693.47
|
)%
|
Income tax expense
|
|
1,003,618
|
|
9,981
|
|
993,637
|
|
9,955.29
|
%
|
Net Income
|
|
$
|
1,962,532
|
|
$
|
1,446,704
|
|
$
|
515,828
|
|
35.66
|
%
|
Revenue.
We derive our revenues primarily from
software sales. Revenue is comprised of
the gross selling price of software, including shipping charges and the earned
portion of support and maintenance agreements.
Revenues increased from $6,678,615 in 2005 to $10,973,681 in 2006. The
increase of $4.3 million or approximately 64% in revenues was the result of
increased sales of our Secure FTP Server Systems and EFT products.
24
Table of Contents
The following
table reflects revenue by product including the related maintenance and support
for each product:
|
|
Revenue for the Year Ending December 31,
|
|
Product
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
CuteFTP Professional
|
|
$
|
2,405,970
|
|
21.92
|
%
|
$
|
2,285,416
|
|
34.22
|
%
|
CuteFTP Home
|
|
1,044,593
|
|
9.52
|
%
|
1,130,357
|
|
16.93
|
%
|
Enhanced File Transfer
|
|
4,170,938
|
|
38.01
|
%
|
1,407,792
|
|
21.08
|
%
|
SecureFTP Server
|
|
2,521,994
|
|
22.98
|
%
|
1,503,530
|
|
22.51
|
%
|
Wide-Area File Systems
|
|
600,373
|
|
5.47
|
%
|
|
|
0.00
|
%
|
Continuous Data Protection
|
|
34,298
|
|
0.31
|
%
|
|
|
0.00
|
%
|
All Others
|
|
649,218
|
|
5.92
|
%
|
579,548
|
|
8.68
|
%
|
Deferred Revenue adjustment
|
|
(453,703
|
)
|
(4.13
|
)%
|
(228,028
|
)
|
(3.41
|
)%
|
Total Operating Revenues
|
|
$
|
10,973,681
|
|
100.00
|
%
|
$
|
6,678,615
|
|
100.00
|
%
|
Gross maintenance and support included
above before recognition of the net adjustment to defer revenue
|
|
$
|
1,578,236
|
|
14.38
|
%
|
$
|
582,570
|
|
8.72
|
%
|
WAFS and CDP
products accounted for approximately 5.8% of total revenue for 2006. There were
only $634,671 in sales for these products in 2006 as we did not begin selling
these products until after completing the Availl acquisition in September 2006.
Sales of our
SecureFTP Server and Enhanced File Transfer products grew by 130% in 2006 to
$6.7 million, from $2.9 million in 2005. This increase was the result of
an increased emphasis of our internal sales group to market and sell these
products to meet the needs of businesses to transfer files in a secure fashion
using business or enterprise level software.
These products represented
approximately 61% of our total revenues in 2006 as compared to 44% in
2005. Revenues from CuteFTP Home and
CuteFTP Professional increased by 1% and accounted for approximately 51% and
31% of total revenues 2005 and 2006, respectively.
Those changes were the result of the
continuing maturity of CuteFTP and CuteFTP Pro, and the availability of low
cost alternatives to occasional users.
We believe
that our reliance on the CuteFTP products will continue to decline as we
emphasize sales of our more complex enterprise products. In addition, because of the more complex
nature of SecureFTP Server and Enhanced File Transfer product purchasers
require increased maintenance and support.
As a result, our maintenance and support revenues increased by 171% from
$582,570 in 2005 to $1,578,236 in 2006, net of deferred revenue. Maintenance and support pricing is reflective
of the license cost of the products and the additional support it takes to
maintain and support the products and customers. With higher maintenance and
support revenues, we will recognize additional deferred revenue as we earn the
revenue over the life of the maintenance and support agreement.
Cost of Revenues.
Cost of revenues consists primarily of
royalties, a portion of our bandwidth costs as well as production, packaging
and shipping costs for boxed copies of software products. Cost of revenues increased by approximately
67% between periods from $279,964 in 2005 to $468,515 in 2006 due to an
increase in royalty expenses related to our software distribution agreements
with third parties. Royalties that we
pay on software products licensed from third parties, which we resell, are
expensed as a cost of sales when the software product is sold or earlier if the
recoverability of any prepaid royalties is in doubt. Cost of sales as a percent of total revenues
was 4.2% and 4.3% respectively for 2005 and 2006.
Selling, General and
Administrative.
Selling, general and administrative expenses consist primarily of
personnel and related expenses, marketing, customer support, professional fees,
rent, bad debt and credit card transaction fees. Selling, general and administrative expenses
increased by approximately 54% from $3,986,047 in 2005 to $6,142,299 in
2006. A major portion of this increase
is attributable to increased wages and commissions which included the employee
headcount increase of fifteen, most of which was associated with the Availl
acquisition. Another large portion of
the SG&A increase was caused by compensation expense for 2006 required by
the adoption of SFAS 123(r) totaling $497,895 which had no effect on
expenses in the prior years.
Research and
Development.
Research and development expenses increased by approximately 42% from
$869,155 in 2005 to $1,230,400 in 2006. Virtually all of the increase was
caused by increases in wages, fringe benefits and contract labor. A major portion of the increased wages and
fringe cost was the result of reclassification of a Vice President level
employee from marketing to R&D.
Included in the research and development expenses, external development
costs decreased approximately 1% from 2005 to 2006.
25
Table of Contents
Depreciation and
Amortization.
Depreciation and amortization expense consists of depreciation expense
related to our fixed assets.
Depreciation and amortization expense increased by $1,142, or
approximately 1%, year over year.
Depreciation expense has declined due to a slowdown in additions to
fixed assets in current periods relative to prior periods.
Other Income
(Expense), Net.
In 2005, we had interest expense of $620 related primarily to the
financing of insurance premiums. During
2005, we had interest income of $10,685 as a result of interest earned on
excess cash balances, and a gain of $1,242 on the sale of fully depreciated
fixed assets. During 2006, we had interest expense of $128,362 related
primarily to the financing of the Availl acquisition, interest income of
$60,639 as a result of interest earned on excess cash balances and a gain of
$619 on sale of fully depreciated fixed assets.
Income Taxes.
The provision for state income taxes in 2005
was $1,065 and the provision for federal income taxes was $8,916 in 2005. GlobalSCAPEs effective income tax rate is
0.7% and differs from the federal rate primarily because of a change in the
valuation allowance for deferred tax assets.
The Company utilized remaining net operating loss carryforwards in 2005
to substantially reduce its Federal income tax expense. The provision for state
income taxes in 2006 was $3,533 and the provision for federal income taxes was
$1,000,085 in 2006. GlobalSCAPEs
effective income tax rate is 34.5% and differs from the federal rate primarily
because of state taxes.
Net Income.
In 2005, net income was primarily the result
of the introduction of our Enhanced File Transfer product and the features
added to our Secure FTP Server product, resulting in an increase in revenue,
while we continued to control expenses. In addition, our 2005 income tax
expense was minimized by the use of loss carry forwards from prior years. Without loss carry forwards in 2006, we paid
an additional $993,637 in income taxes and still increased net income by
$515,828 over the prior year. The
increase in net income was the result of continued growth of sales of the
Enhanced File Transfer and Secure FTP Server products.
26
Table of Contents
Item 8. Financial Statements and Supplementary Data
GlobalSCAPE, Inc.
Index to
Consolidated Financial Statements
Years ending December 31, 2005, 2006 and 2007
Contents
27
Table of Contents
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
GlobalSCAPE, Inc.
We have audited the accompanying consolidated
balance sheets of GlobalSCAPE, Inc. (the Company) as of December 31,
2006 and 2007, and the related consolidated statements of operations,
shareholders equity, and cash flows for the years ended December 31,
2005, 2006 and 2007. These consolidated financial statements are the
responsibility of the Companys management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of GlobalSCAPE, Inc. as of December 31,
2006 and 2007, and the results of its operations and its cash flows for the
years ended December 31, 2005, 2006 and 2007, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 12 to the financial statements,
the Company restated certain amounts previously reported as of and for the year
ended December 31, 2007.
PMB Helin Donovan, LLP
March 21, 2008 (August 28, 2008 as to Note 12 and the effects
of the restatement)
Austin, Texas
28
Table of Contents
GlobalSCAPE, Inc.
Consolidated Balance
Sheets
|
|
As of December 31,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
(Restated)
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,632,666
|
|
$
|
5,214,479
|
|
Accounts receivable (net of allowance for
doubtful accounts of $59,458 and $113,201 in 2006 and 2007, respectively)
|
|
1,592,846
|
|
2,232,927
|
|
Federal income tax receivable
|
|
73,525
|
|
940,327
|
|
Prepaid expenses
|
|
115,754
|
|
87,654
|
|
Total current assets
|
|
6,414,791
|
|
8,475,387
|
|
|
|
|
|
|
|
Fixed Assets, net
|
|
232,179
|
|
262,745
|
|
Intangible assets, net
|
|
|
|
5,071,640
|
|
Goodwill
|
|
9,653,059
|
|
6,392,075
|
|
Deferred tax asset
|
|
8,724
|
|
80,044
|
|
Other assets
|
|
58,996
|
|
79,967
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
16,367,749
|
|
$
|
20,361,858
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
371,093
|
|
$
|
329,817
|
|
Accrued expenses
|
|
377,940
|
|
742,946
|
|
Current portion of long term debt
|
|
1,539,455
|
|
|
|
Deferred revenue
|
|
1,377,037
|
|
2,329,117
|
|
Total current liabilities
|
|
3,665,525
|
|
3,401,880
|
|
|
|
|
|
|
|
Long-term liabilities, net of current
portion
|
|
3,129,185
|
|
119,711
|
|
Deferred tax liability
|
|
|
|
1,750,637
|
|
Total Liabilities
|
|
6,794,710
|
|
5,272,228
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
Preferred stock, par value $0.001 per
share, 10,000,000 authorized, no shares issued or outstanding
|
|
|
|
|
|
Common stock, par value $0.001 per share,
40,000,000 authorized, 16,490,146 and 17,432,352 shares outstanding at
December 31, 2006 and 2007, respectively
|
|
16,490
|
|
17,432
|
|
Treasury Stock, 159,873 shares at
December 31, 2007
|
|
|
|
(527,398
|
)
|
Additional paid-in capital
|
|
6,363,520
|
|
8,764,300
|
|
Retained earnings
|
|
3,193,029
|
|
6,835,296
|
|
Total stockholders equity
|
|
9,573,039
|
|
15,089,630
|
|
Total liabilities and stockholders equity
|
|
$
|
16,367,749
|
|
$
|
20,361,858
|
|
See accompanying notes.
29
Table of Contents
GlobalSCAPE, Inc.
Consolidated Statements
of Operations
|
|
For the Year Ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
(Restated)
|
|
Operating revenues:
|
|
|
|
|
|
|
|
Software product revenues
|
|
$
|
6,096,045
|
|
$
|
9,395,445
|
|
$
|
14,826,197
|
|
Maintenance and support (net of deferred
revenues)
|
|
582,570
|
|
1,578,236
|
|
3,534,144
|
|
Total revenues
|
|
6,678,615
|
|
10,973,681
|
|
18,360,341
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation
and amortization shown separately below)
|
|
279,964
|
|
468,515
|
|
250,439
|
|
Selling, general and administrative
expenses
|
|
3,986,047
|
|
6,142,299
|
|
10,049,430
|
|
Research and development expenses
|
|
869,155
|
|
1,230,400
|
|
1,919,253
|
|
Depreciation and amortization
|
|
98,071
|
|
99,213
|
|
279,573
|
|
Total operating expense
|
|
5,233,237
|
|
7,940,427
|
|
12,498,695
|
|
Income from operations
|
|
1,445,378
|
|
3,033,254
|
|
5,861,646
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
Interest expense
|
|
(620
|
)
|
(128,362
|
)
|
(34,893
|
)
|
Interest income
|
|
10,685
|
|
60,639
|
|
95,808
|
|
Gain on sale of assets
|
|
1,242
|
|
619
|
|
365
|
|
Other income
|
|
|
|
|
|
2,269
|
|
Total other income (expense)
|
|
11,307
|
|
(67,104
|
)
|
63,549
|
|
Income before income taxes
|
|
1,456,685
|
|
2,966,150
|
|
5,925,195
|
|
Total income tax provision
|
|
9,981
|
|
1,003,618
|
|
2,282,928
|
|
Net income
|
|
$
|
1,446,704
|
|
$
|
1,962,532
|
|
$
|
3,642,267
|
|
|
|
|
|
|
|
|
|
Net income per common share basic
|
|
$
|
0.10
|
|
$
|
0.13
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
Net income per common share assuming
dilution
|
|
$
|
0.09
|
|
$
|
0.12
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
13,778,989
|
|
14,744,635
|
|
17,199,618
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
assuming dilution
|
|
15,442,524
|
|
16,160,839
|
|
18,289,157
|
|
See accompanying notes.
30
Table of Contents
GlobalSCAPE, Inc.
Consolidated Statements
of Stockholders Equity
|
|
|
|
|
|
Additional
|
|
|
|
Retained
|
|
|
|
|
|
Common Stock
|
|
paid in
|
|
Treasury
|
|
Earnings
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Stock
|
|
(Deficit)
|
|
Total
|
|
Balances at December 31, 2004
|
|
13,773,219
|
|
13,773
|
|
675,365
|
|
|
|
(216,207
|
)
|
472,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
1,446,704
|
|
1,446,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of Options
|
|
24,900
|
|
25
|
|
8,915
|
|
|
|
|
|
8,940
|
|
Balance at December 31, 2005
|
|
13,798,119
|
|
13,798
|
|
684,281
|
|
|
|
1,230,497
|
|
1,928,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
1,962,532
|
|
1,962,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Compensation (FAS123R)
|
|
|
|
|
|
497,895
|
|
|
|
|
|
497,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares and warrants issued for cash
|
|
1,352,000
|
|
1,352
|
|
3,153,716
|
|
|
|
|
|
3,155,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued in acquisition of
Availl, Inc.
|
|
716,846
|
|
717
|
|
1,999,283
|
|
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of Options
|
|
623,181
|
|
623
|
|
28,345
|
|
|
|
|
|
28,968
|
|
Balance at December 31, 2006
|
|
16,490,146
|
|
16,490
|
|
6,363,520
|
|
|
|
3,193,029
|
|
9,573,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
3,642,267
|
|
3,642,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Compensation (FAS123R)
|
|
|
|
|
|
937,546
|
|
|
|
|
|
937,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for net share settlement of
warrants
|
|
35,000
|
|
35
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from exercise of ISO stock options
|
|
|
|
|
|
782,680
|
|
|
|
|
|
782,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of options
|
|
1,067,079
|
|
1,067
|
|
680,589
|
|
|
|
|
|
681,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock
|
|
(159,873
|
)
|
(160
|
)
|
|
|
(527,398
|
)
|
|
|
(527,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
(Restated)
|
|
17,432,352
|
|
17,432
|
|
8,764,300
|
|
(527,398
|
)
|
6,835,296
|
|
15,089,630
|
|
See accompanying notes.
31
Table of Contents
GlobalSCAPE, Inc.
Consolidated Statements
of Cash Flows
|
|
For the Year ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
(Restated)
|
|
Operating Activities:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,446,704
|
|
$
|
1,962,532
|
|
$
|
3,642,267
|
|
Adjustments to reconcile net income to net
cash provided by operating activities:
|
|
|
|
|
|
|
|
Bad debt expense
|
|
8,231
|
|
48,214
|
|
128,816
|
|
Depreciation and amortization
|
|
98,071
|
|
99,213
|
|
279,573
|
|
(Gain) on disposition of assets
|
|
(1,242
|
)
|
(619
|
)
|
(365
|
)
|
Stock-based compensation
|
|
|
|
497,895
|
|
937,546
|
|
Deferred taxes
|
|
(51,983
|
)
|
(27,780
|
)
|
(117,003
|
)
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(450,413
|
)
|
(496,547
|
)
|
(768,897
|
)
|
Prepaid expenses
|
|
25,828
|
|
(178,921
|
)
|
(56,022
|
)
|
Other assets
|
|
269
|
|
6,579
|
|
(169,667
|
)
|
Accounts payable
|
|
30,546
|
|
246,606
|
|
(41,276
|
)
|
Accrued expenses
|
|
60,258
|
|
(46,968
|
)
|
365,006
|
|
Deferred revenues
|
|
382,461
|
|
453,703
|
|
952,080
|
|
Other long-term liabilities
|
|
906
|
|
40,367
|
|
61,616
|
|
Net cash provided by operating activities
|
|
1,549,636
|
|
2,604,274
|
|
5,213,674
|
|
Investing Activities:
|
|
|
|
|
|
|
|
Proceeds from sale of property and
equipment
|
|
1,242
|
|
619
|
|
365
|
|
Purchase of property and equipment
|
|
(103,304
|
)
|
(150,926
|
)
|
(175,779
|
)
|
Purchase of Availl, Inc.
|
|
|
|
(7,776,932
|
)
|
|
|
Cash acquired in purchase of Availl, Inc.
|
|
|
|
181,276
|
|
|
|
Net cash used in investing activities
|
|
(102,062
|
)
|
(7,745,963
|
)
|
(175,414
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
Loan proceeds
|
|
|
|
5,000,000
|
|
|
|
Deferred loan costs
|
|
|
|
(38,484
|
)
|
|
|
Repayments on loan
|
|
|
|
(400,670
|
)
|
(4,610,545
|
)
|
Proceeds from exercise of stock options
|
|
8,940
|
|
28,968
|
|
681,656
|
|
Purchase of treasury stock
|
|
|
|
|
|
(527,558
|
)
|
Proceeds from the PIPE, net of issuance costs
|
|
|
|
3,155,068
|
|
|
|
Net cash provided by (used in) financing
activities
|
|
8,940
|
|
7,744,882
|
|
(4,456,447
|
)
|
Net increase in cash
|
|
1,456,514
|
|
2,603,193
|
|
581,813
|
|
Cash at beginning of period
|
|
572,959
|
|
2,029,473
|
|
4,632,666
|
|
Cash at end of period
|
|
$
|
2,029,473
|
|
$
|
4,632,666
|
|
$
|
5,214,479
|
|
Supplemental disclosure of cash flow
information:
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
620
|
|
$
|
89,323
|
|
$
|
29,719
|
|
Income taxes paid
|
|
$
|
1,065
|
|
$
|
1,162,289
|
|
$
|
2,414,094
|
|
|
|
|
|
|
|
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
Tax benefit from exercise of ISO stock
options included as an adjustment to additional paid in capital
|
|
$
|
|
|
$
|
|
|
$
|
782,680
|
|
Deferred tax liability and goodwill
resulting from reclass of intangible assets from goodwill
|
|
$
|
|
|
$
|
|
|
$
|
1,796,320
|
|
See accompanying notes.
32
Table of Contents
GlobalSCAPE, Inc.
Notes to Consolidated Financial Statements
December 31, 2006 and 2007 (Restated)
1.
Overview of the
Business and Significant Accounting Policies
Nature
of Business
GlobalSCAPE, Inc.
(GlobalSCAPE or the Company), founded in April 1996, develops and
distributes secure file management software that enables users to safely send
data over the internet. Our software is used worldwide across a wide range of
industries. Through the end of 2007, we had sold approximately 1.9 million
software licenses and our customer base includes individual consumers, small to
medium-sized businesses, as well as some of the largest corporations in the
world.
Our
file transfer products provide for the privacy of critical information such as
medical records, financial data, customer files and other similar documents. In
addition, our products provide for compliance with government regulations
relating to the protection of information while allowing users to reduce IT
costs, increase efficiency, track and audit transactions and automate
processes.
Through
Availl Inc. (Availl), our wholly-owned subsidiary, we also provide Wide Area
Files Systems (WAFS) and Continuous Data Protection (CDP) software. This addition expands GlobalSCAPEs
technology base into data replication, acceleration of file transfer,
sharing/collaboration and continuous data backup and recovery. We believe that our expanded product offering
uniquely positions us to provide comprehensive, secure transfer, sharing, and
replication of files that need to be transmitted inside the users firewall to
distributed offices, or outside the users firewall to business and trading
partners.
During
the year ended December 31, 2007, approximately 72% of our revenues were
generated from customers within the United States, with the remaining 28%
concentrated mostly in Western Europe, Canada and Australia. Virtually all of
our 2007 revenues were derived from sales of software licenses and support
agreements. The combined sales of CuteFTP Home and CuteFTP Pro accounted for
31% and 19% of our revenues in 2006 and 2007, respectively,. The combined sales
of our Secure Server and Enhanced File Transfer products grew from 61% of our
revenues in 2006 to 68% in 2007.
Corporate
Structure
Prior
to September 22, 2006, all of the Companys operations were conducted by
GlobalSCAPE Texas, LP, a Texas limited partnership. The partners of GlobalSCAPE Texas, LP were
two Nevada limited liability companies, which were both wholly-owned
subsidiaries of GlobalSCAPE, Inc., a Delaware corporation.
On
September 22, 2006, GlobalSCAPE acquired one hundred percent (100%) of the
issued and outstanding capital stock of Availl, a privately held corporation
based in Andover, Mass, pursuant to an Agreement and Plan of Merger with Availl
and its stockholders. The initial
purchase price was $9.65 million of which $7.65 million was paid in cash and
$2.0 million was paid in shares of GlobalSCAPE common stock. Availl operated as
a wholly-owned subsidiary of GlobalSCAPE, Inc. through the end of 2007.
Availl, Inc.
and all other partnerships and Limited Liability Corporations mentioned above
were either dissolved or effectively merged into GlobalSCAPE, Inc. on December 31,
2007. The stock of GlobalSCAPE, Inc.
is quoted on the American Stock Exchange. References to GlobalSCAPE or the Company
refer collectively to all of these entities unless otherwise indicated.
Basis of
Presentation
The
preparation of financial statements in conformity with accounting principles
generally accepted in the Unites States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could
differ from those estimates.
Principles
of Consolidation
The
consolidated financial statements include all subsidiaries. All inter-company transactions and balances
have been eliminated.
Availl became a subsidiary on September 22, 2006;
therefore the consolidated financial statements only include Availls financial
results and activities from the date of acquisition.
33
Table of Contents
As
discussed in Note 12 below, on August 15, 2008, GlobalSCAPE and its Board
of Directors, after consultation with GlobalSCAPEs independent registered
public accounting firm, concluded that GlobalSCAPE would restate its financial
statements and financial information for the year ended December 31, 2007.
Liquidity
The
use of capital resources is driven principally by the need to enhance existing
products and to develop or acquire new products. The amount of our expenditures has a direct impact
on the ability to offer enhanced and new products to customers. The Companys principal source of funds is
cash flow from operations which, in turn, is highly dependent on our sales
revenue. During the year ended December 31,
2007, the Company generated $5.2 million of cash from operations, which was
used along with other funds in the repayment of debt and purchase of treasury
shares.
At December 31, 2007, the Company had cash available of
$5.2 million and we continue to generate cash in excess of our operational
needs.
The
Company entered into a new loan agreement with Silicon Valley Bank on September 22,
2006. The loan agreement established a $750,000 revolving line of credit for
two years at an interest rate of prime plus 1.00%.
As
of December 31, 2007, the Company had cash and cash equivalents of $5.2
million and had net working capital of $5.0 million. Management believes this
level of working capital, together with availability under the Companys
revolving credit facility with Silicon Valley Bank and the excess cash
generated by the profitable operation of the business, is adequate to finance
the Companys current level of operations.
Reclassifications
Certain prior period
amounts have been reclassified to conform to the current year presentation.
These reclassifications had no impact on operating income as previously
reported.
Revenue
Recognition
The Company
recognizes revenue in accordance with the American Institute of Certified
Public Accountants Statement of Position (SOP) 97-2,
Software Revenue Recognition
, as modified
by SOP 98-9,
Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions
.
Revenues from
the sale of software products are recognized and completely earned upon
shipment or electronic delivery of the product provided that persuasive
evidence of an arrangement exists, collection is probable, payment terms are
fixed and determinable and no significant obligations remain.
The Company
also sells technical support and maintenance agreements (post contract customer
support PCS), which are sometimes bundled with the software. When vendor specific objective
evidence (VSOE) of fair value exists for all elements in a multiple element
arrangement, revenue is allocated to each element based on the relative fair
value of each of the elements. VSOE of
fair value is established by the price charged when the same element is sold
separately. In a multiple element
arrangement whereby VSOE of fair value of all undelivered elements exists but
VSOE of fair value does not exist for one or more delivered elements, revenue
is recognized using the residual method.
Under the residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is recognized as
revenue, assuming collection is probable.
Revenue allocated to PCS is recognized ratably over the contractual
term, typically one year.
The Company
began selling technical support and maintenance services for some of its
software products in 2001. In 2005, 2006
and 2007, sales of enterprise class products resulted in higher revenues from
maintenance and support agreements sold to customers and, as a result, deferred
revenue at December 31, 2006 and 2007 was $1,377,037 and $2,329,117
respectively.
The outbound
shipping charges charged to the customer are included in software product
revenues and amounted to approximately $17,673, $13,963 and $7,647 in 2005,
2006 and 2007, respectively. The costs
associated with these shipping charges are included in the software products
cost of revenue.
34
Table of Contents
Royalty
Costs
Royalties that
the Company pays on software products licensed from third parties, which it
resells, are expensed as a cost of sales when the software product is sold or
earlier if the recoverability of any prepaid royalties is in doubt. The Company has distribution agreements with
Hannon Hill Corp., Beehive Software, Inc., Visicom Media, Inc.,
ComponentOne LLC, and PGP Deutschland AG (formerly Glueck and Kanja). The GlobalSCAPE software products associated
with each of the companies are Cascade Server (formerly PublishXML), Mac FTP,
CuteHTML Pro and Enhanced File Transfer (EFT), respectively. The Company incurred approximately $191,970,
$392,494, and $188,419 in royalty expense in 2005, 2006 and 2007, respectively.
Concentrations
of Credit Risk and Significant Customers
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash and cash equivalents, and accounts
receivable.
Cash is deposited in demand accounts in
federally insured domestic institutions to minimize risk. The Company provides credit, in the
normal course of business, to a number of companies and performs ongoing
evaluations of its credit risk. The
Company requires no collateral from its customers. Management estimates the allowance for
uncollectible accounts based on their historical experience and credit
evaluation. In 2005 we had one customer
that accounted for 2.7% of net revenues, no single customer accounted for more
than 2% of revenues in 2006, and one customer accounted for approximately 14.5%
of revenues in 2007.
Cash and cash equivalents,
accounts receivable, employee advances, accounts payable, accrued expenses and
notes payable, related party are reflected in the accompanying financial
statements at cost, which approximates fair value because of the short term
maturity of these instruments.
Other
Concentrations
Sales in Foreign Markets.
In
2005, 2006 and 2007, approximately 33%, 33% and 28%, respectively, of the
Companys revenues were generated from sales to customers who provided
addresses in foreign countries. However, all revenues are received in
U.S. dollars so there is no exchange rate risk with respect to the sale of our
products. These sales were concentrated mostly in Western Europe, Canada,
and Australia. In 2005, 2006 and 2007, the UK accounted for approximately
9%, 8%, and 8%, respectively, of total revenues.
Labor.
GlobalSCAPE utilizes offshore developers for a
large portion of the coding phase of software development. If GlobalSCAPE were unable to continue using
these developers because of political or economic instability, GlobalSCAPE may
have difficulty finding comparably skilled developers or may have to pay
considerably more for the same work, which would have a material adverse impact
on results of operations.
Advertising
Costs
The Company
expenses advertising costs as incurred.
Advertising expenses charged to operations for the years ended December 31,
2005, 2006 and 2007 were approximately $159,000, $384,000, and $816,000, respectively, and are included
in selling, general and administrative expenses. Advertising costs are principally for the
purchase of keywords for internet searches, a direct mail campaign for EFT,
trade show participation and advertising in various publications.
Income
Taxes
The Company
accounts for income taxes using the liability method in accordance with
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes
. The liability method provides that the
deferred tax assets and liabilities are recorded based on the difference
between the tax bases of assets and liabilities and their carrying amount for
financial reporting purposes, as measured by the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Deferred
tax assets and liabilities are carried on the balance sheet with the
presumption that they will be realizable in future periods when pre-tax income
is generated. GlobalSCAPE had a deferred tax asset of $51,983, $8,724 and $80,044 at December 31, 2005,
2006 and 2007 respectively.
Statement of Financial
Accounting Standards (SFAS) No. 109 requires a valuation allowance to
reduce the deferred tax assets reported if, based on the weight of the
evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. After
consideration of all of the evidence, both positive and negative, management
determined that no valuation was considered necessary at December 31, 2006
or 2007.
35
Table of Contents
Massachusetts State Income
Taxes incurred $3,533 and $21,337 for 2006 and 2007 respectively. The Margin
Tax, enacted by the State of Texas as of January 1, 2007, is based on 1%
of revenue less the greater of cost of sales or W2 Wages. The Texas Margin Tax
for 2007 was $92,717.
Research
and Development
Research and
development expenses include all direct costs, primarily salaries for personnel
and expenditures with external development sources, related to the development
of new products and significant enhancements to existing products and are
expensed as incurred until such time as technological feasibility is
achieved. For the years 2005, 2006 and
2007, the Company expended approximately $869,000, $$1,230,000 and $1,919,000,
respectively, on research and development.
Typically technological feasibility is achieved very late in the
development cycle and as such no research and development expenses were
capitalized in 2005, 2006 or 2007.
Stock-Based
Compensation
Effective January 1, 2006,
GlobalSCAPE adopted the provisions of Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (SFAS No.123R)
requiring that compensation cost relating to share-based payment transactions
be recognized in the financial statements. The cost is measured at the grant
date, based on the calculated fair value of the award, and is recognized as an
expense over the employees requisite service period (generally the vesting
period of the equity award). Prior to January 1, 2006, the Company
accounted for share-based compensation to employees in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB No. 25), and related interpretations. We also followed
the disclosure requirements of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, as amended by Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. The Company adopted SFAS No. 123R
using the modified prospective method and, accordingly, financial statement
amounts for prior periods presented in this Form 10-K have not been
restated to reflect the fair value method of recognizing compensation cost
relating to stock options.
There was compensation cost related
to stock options recognized in operating results of $497,895 in 2006 and
$937,546 in 2007.
The fair value of each option award
is estimated on the date of grant using the Black-Scholes option-pricing model.
Expected volatility is based on historical volatility of GlobalSCAPE stock. The
Company used the simplified method to derive an expected term. The expected
term represents an estimate of the time options are expected to remain
outstanding. The risk-free rate for periods within the contractual life of the
option is based on the U.S. treasury yield curve in effect at the time of
grant. The following table sets forth the assumptions used to determine
compensation cost for our stock options consistent with the requirements of
SFAS No. 123R.
|
|
Year Ended
December 31, 2007
|
|
Expected
volatility
|
|
96%
|
|
Expected annual
dividend yield
|
|
0%
|
|
Risk free rate of
return
|
|
3.45%
|
|
Expected option
term (years)
|
|
5.5 - 6.0
|
|
Under APB No. 25 there was no
compensation cost recognized for our stock options awarded in the year ended December 31,
2005 as these stock options had an exercise price equal to the market value of
the underlying stock at the grant date. The following table sets forth pro forma
information as if compensation cost had been determined consistent with the
requirements of SFAS No. 123.
Net income, as reported for year ended
December 31, 2005
|
|
$
|
1,446,704
|
|
Stock based compensation included in the
determination of net income (loss) as reported, net of related tax effects
|
|
|
|
Stock-based compensation expense that would
have been included in the determination of net income (loss) had the fair
value based method been applied to all awards, net of related tax effects
|
|
(25,921
|
)
|
Pro forma net income
|
|
$
|
1,420,783
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
Basic as reported
|
|
$
|
0.10
|
|
Basic pro forma
|
|
$
|
0.10
|
|
|
|
|
|
Diluted as reported
|
|
$
|
0.09
|
|
Diluted pro forma
|
|
$
|
0.09
|
|
36
Table of Contents
Refer to
Note 8 - Stock
Options and
Stock Based Compensation for additional disclosures regarding our stock
compensation programs.
Cash and
cash equivalents
Cash includes
all cash and highly liquid investments with original maturities of three months
or less.
Property
and Equipment
Property and
equipment is comprised of furniture and fixtures, software, computer equipment
and leasehold improvements which are recorded at cost and depreciated using the
straight-line method over their estimated useful lives. Expenditures for maintenance and repairs are
charged to operations as incurred.
Property and equipment acquired under capital leases are depreciated
over their useful lives or the respective lease term, if shorter. Depreciation periods used for property and
equipment range from three to five years.
Leasehold
improvements are depreciated over the shorter of the lease term or the
estimated useful life of the asset.
Sale / Disposal of Assets
During 2007,
the Company disposed of equipment and software with an original price of
$20,531 and accumulated depreciation of $20,531. GlobalSCAPE recognized a gain
of $365 related to the disposal of these assets. During 2006, the Company
disposed of equipment and software with an original purchase price of $15,362
and accumulated depreciation of $15,362.
GlobalSCAPE recognized a gain of $619 related to the disposal of these
assets. During 2005 the Company disposed
of equipment and software with an original purchase price of $29,949 and accumulated depreciation of $29,949. GlobalSCAPE recognized a gain of $1,242
related to the disposal of these assets.
Goodwill
As
of December 31, 2006 and 2007, GlobalSCAPE had goodwill in the amount of
$9,653,059 and $6,392,075, respectively, associated with the acquisition of
Availl. This acquisition was accounted
for using the purchase method of accounting. See Acquisitions note for a
description of the acquisition. In accordance with SFAS No. 142
Goodwill and Other Intangible Assets
, the Company will
assess the impairment of goodwill annually in the fourth quarter, or more
frequently if other indicators of potential impairment arise. There was no
goodwill as of December 31, 2005.
No
allocation had been made to intangible assets as of the December 31,
2006. The Company obtained a valuation
report of its acquisition of Availl, Inc. which determined that the
acquisition included purchased software, which is an identifiable intangible asset.
The purchased software had a market value of approximately $5,000,000 and this
amount has been allocated to purchased software from Goodwill effective October 1,
2007. The purchased software is being amortized using the straight-line method
over its estimated useful life of 10 years.
Intangible Assets
The cost of purchased intangibles and the legal and
professional fees incurred related to patent filings and trademarks are
capitalized. Capitalized amounts are
amortized to expense using the straight-line method over the expected useful
life of the assets of three to fifteen years.
Capitalized
Software Development Costs
Capitalization
of software development costs begins upon the establishment of technological
feasibility and ceases when the product is available for general release. The establishment of technological
feasibility and the ongoing assessment of recoverability of capitalized
software development costs require considerable judgment by management concerning
certain external factors including, but not limited to, technological
feasibility, anticipated future gross revenue, estimated economic life and
changes in software and hardware technologies.
These software development costs were amortized using the straight-line
method over a three-year period and are only those costs incurred in the
development of products that are sold to external customers and not used for
internal purposes. No research and
development expenses were capitalized in 2005,
37
Table of Contents
2006 or 2007. These software
development costs are not related to those costs incurred for the acquisition
of software products or titles. For the
years 2005, 2006 and 2007, the Company spent approximately $869,000, $1,230,000
and $1,919,000, respectively, on research and development.
Other
Long-Term Assets
Other assets
include deposits for facilities, which are anticipated to be refunded to the
Company upon termination of the lease and deferred loan costs.
Deferred
Compensation
The
deferred compensation liability is related to an employment agreement with the
Companys President. The deferred
compensation is subject to certain terms and conditions related to his planned
retirement in December 2008.
Other
Long-Term Liabilities
Other
long-term liabilities relate to deferred payments of rent expense. The total amount of base lease
payments is being charged to expense on the straight-line method over the term
of the lease.
Earnings
Per Common Share
Basic and
diluted net income per common share is presented in conformity with Statement
of Financial Accounting Standards No. 128,
Earnings Per Share
(SFAS 128) for all periods
presented. Basic earnings per share is
based on the weighted effect of all common shares issued and outstanding, and
is calculated by dividing net income (loss) available to common stockholders by
the weighted average shares outstanding during the period. Diluted earnings per share is calculated by
dividing net income (loss) available to common stockholders by the weighted
average number of common shares used in the basic earnings per share
calculation plus the number of common shares that would be issued assuming
conversion of all potentially dilutive common shares outstanding. Awards of non vested options are considered
potentially dilutive common shares for the purpose of computing earnings per
common share. In applying the treasury
stock method to non vested options the assumed proceeds include the amount the
employee must pay to exercise the option plus the amount of unrecognized cost
attributable to future periods less any expected tax benefits. Below is a
reconciliation of the numerators and denominators of basic and diluted earnings
per share for each of the following years:
|
|
Year ended December 31,
|
|
|
|
2005 (1)
|
|
2006 (2)
|
|
2007 (3)
|
|
Numerators
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings
per share:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,446,704
|
|
$
|
1,962,532
|
|
$
|
3,642,267
|
|
Denominators
|
|
|
|
|
|
|
|
Denominators for basic earnings per share:
|
|
|
|
|
|
|
|
Weighed average shares outstanding Basic
|
|
13,778,989
|
|
14,744,635
|
|
17,199,618
|
|
Dilutive potential common shares:
|
|
|
|
|
|
|
|
Stock options
|
|
1,663,535
|
|
1,416,204
|
|
834,493
|
|
Warrants
|
|
|
|
|
|
255,046
|
|
Denominator for dilutive earnings per share
|
|
15,442,524
|
|
16,160,839
|
|
18,289,157
|
|
Net income per common share
|
|
$
|
0.10
|
|
$
|
0.13
|
|
$
|
0.21
|
|
Net income per commons share assuming
dilution
|
|
$
|
0.09
|
|
$
|
0.12
|
|
$
|
0.20
|
|
(1)
|
For the year ended December 31, 2005, all
options have been included in dilutive shares.
|
|
|
(2)
|
For the year ended December 31, 2006,
100,000 options and 1,352,000 warrants have not been included in dilutive
shares as the effect would be anti-dilutive.
|
|
|
(3)
|
For the year ended December 31, 2007, all
options and warrants have been included in dilutive shares and 241,000
options have not been included in dilutive shares as the effect would be
anti-dilutive.
|
38
Table of Contents
Recent
accounting pronouncements
Effective
at the beginning of the first quarter of 2007, the Company adopted the
provision of FIN 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109 (FIN 48). FIN 48 contains a two-step approach to
recognizing and measuring uncertain tax positions accounted for in accordance
with SFAS No. 109, Accounting for Income Taxes. The first step is to evaluate the tax
position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained
on audit, including resolution of related appeals or litigation processes, if
any. The second step is to measure the
tax benefit as the largest amount that is more than 50% likely of being
realized upon ultimate settlement.
As
a result of the implementation of FIN 48, the Company has not changed any of
its tax accrual estimates. The Company
files U.S. federal and U.S. state tax returns.
For state tax returns the Company is generally no longer subject to tax
examinations for years prior to 2003.
In
September 2006, the Financial Accounting Standards Board (FASB) issued
Statement No. 157, Fair Value Measurements (FAS 157), which addresses
how companies should measure fair value when they are required to use a fair
value measure for recognition or disclosure purposes under generally accepted
accounting principles (GAAP). As a result of FAS 157, there is now a common
definition of fair value to be used throughout GAAP, which is expected to make
the measurement of fair value more consistent and comparable. The Company must
adopt FAS 157 in fiscal 2008, and management currently does not expect the
impact to be material to its consolidated financial statements.
In
February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and
140, to permit fair value remeasurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation
in accordance with the provisions of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The Company adopted SFAS No. 155
in fiscal year 2007. SFAS 155 did not have a material impact on the Companys
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities, which
permits entities to choose to measure many financial instruments and certain
other items at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. The statement amends
SFAS No. 115, Accounting for Certain Investments in Debt and Equity.
In
December 2006, the FASB issued the FASB Staff Position (FSP) No. EITF
00-19-2, (FSP EITF 00-19-2), Accounting for Registration Payment
Arrangements. This FSP addresses an issuers accounting for registration
payment arrangements. This FSP specifies that the contingent obligation to make
future payments or otherwise transfer consideration under a registration
payment arrangement, whether issued as a separate agreement or included as a
provision of a financial instrument or other agreement, should be separately
recognized and measured in accordance with FASB Statement No. 5,
Accounting for Contingencies. The guidance in this FSP amends FASB Statements No. 133,
Accounting for Derivative Instruments and Hedging Activities, and No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, and FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, to include scope exceptions for
registration payment arrangements. This FSP further clarifies that a financial
instrument subject to a registration payment arrangement should be accounted
for in accordance with other applicable generally accepted accounting
principles (GAAP) without regard to the contingent obligation to transfer
consideration pursuant to the registration payment arrangement. This FSP shall
be effective immediately for registration payment arrangements and the
financial instruments subject to those arrangements that are entered into or
modified subsequent to the date of issuance of this FSP, or for financial
statements issued for fiscal years beginning after December 15, 2006, and
interim periods within those fiscal years.
The
Company adopted FSP EITF 00-19-2 beginning in 2007. The adoption of this FSP
did not have a material effect upon the Companys financial statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations - Revised 2007. SFAS 141 R provides guidance on improving the
relevance, representational faithfulness, and comparability of information that
a reporting entity provides in its financial reports about a business
combination and its effects. SFAS 141R applies to business combinations where
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The Company is in the
process of analyzing the effects SFAS 141R will have on the Companys financial
statements.
In
December 2007, the FASB also issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, which establishes accounting
and reporting standards to improve the relevance, comparability, and
transparency
39
Table of Contents
of
financial information in its consolidated financial statements that include an
outstanding noncontrolling interest in one or more subsidiaries. SFAS 160 is
effective for fiscal years, and the interim periods within those fiscal years,
beginning on or after December 15, 2008. Management of the Company does
not expect the adoption of this pronouncement to have a material impact on its
financial statements.
In February 2007, the
FASB issued Statement No. 159,
The
Fair Value Option for Financial Assets and Financial Liabilities
(Statement
No. 159). Statement No. 159 permits entities to choose to measure
many financial assets and financial liabilities at fair value. Unrealized gains
and losses on items for which the fair value option has been elected are
reported in earnings. Statement No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the
impact of Statement No. 159 on its financial position, results of
operations and cash flows.
2.
Acquisitions
On September 22, 2006, the Company completed the
acquisition of all of the issued and outstanding shares of Availl, a privately
held provider of Wide Area Files Systems (WAFS) and Continuous Data Protection
(CDP) software, for $7.65 million in cash and $2.0 million in the form of
716,846 shares of GlobalSCAPE common stock. The Company incurred direct
acquisition costs of approximately $127,000. In connection with the
acquisition, $850,000 of the cash consideration in this acquisition was placed
into an escrow account for purposes of settling indemnification claims for the
eighteen-month period following the closing. In accordance with EITF Issue No. 99-12,
Determination of the Measurement Date for the
Market Price of Acquirer Securities Issued in a Purchase Business Combination
,
the Company has used $2.79 as the per share amount to value the common stock
consideration paid to Availl shareholders (representing the average of the
closing prices of GlobalSCAPEs common stock for the thirty days before the
merger agreement date of September 22, 2006). Pursuant to the terms of the
acquisition, the Company granted stock options to the former Availl
stockholders who were also employees under the GlobalSCAPE, Inc. 2000
Stock Option Plan. Exercising the options under this plan is contingent upon
the individuals continued employment with the Company and will be vested over
three years in three annual installments.
The Availl acquisition was accounted for using the purchase
method of accounting. The purchase price was paid on the September 22,
2006 closing date. The purchase price
includes a provision for the former Availl stockholders to earn up to an
additional $100,000 in cash depending upon the achievement of certain revenue
targets for Availl for the third and fourth quarters of 2006. Since the revenue
targets were not attained, no additional payments were required.
Goodwill represents the excess of the purchase price over the
fair value of the net identifiable assets acquired. This premium paid for the
acquisitions is based on managements belief that the acquired technologies,
businesses and engineering talent were of strategic importance in the Companys
growth strategy. Operating results from the acquired business is included in
the consolidated statements of operations from the date of acquisition.
A summary of the purchase price allocation is as follows:
|
|
Availl
|
|
Purchase price
|
|
|
|
Cash paid
|
|
$
|
7,650,000
|
|
Stock issued
|
|
2,000,000
|
|
Legal and other acquisition costs
|
|
126,931
|
|
Acquisition costs
|
|
9,776,931
|
|
Net fair value of tangible assets acquired
and liabilities assumed
|
|
(123,872
|
)
|
|
|
|
|
Excess of cost over net fair value of
tangible assets acquired
|
|
9,653,059
|
|
Purchase price adjustment in 2007
|
|
148,696
|
|
Adjusted access of cost over fair value of
tangible assets acquired and liabilities assumed
|
|
9,801,755
|
|
|
|
|
|
Software acquired
|
|
5,000,000
|
|
Customer list acquired
|
|
180,000
|
|
Patent acquired
|
|
26,000
|
|
Deferred tax liability related to
intangible assets
|
|
1,796,320
|
|
|
|
|
|
Goodwill at December 31, 2007
|
|
$
|
6,392,075
|
|
40
Table of Contents
The
net fair value of assets acquired and liabilities assumed of Availl at the
acquisition date was as follows:
Cash
|
|
$
|
191,276
|
|
Accounts receivable, net
|
|
553,798
|
|
Fixed Assets
|
|
26,411
|
|
Other Assets
|
|
13,555
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
(226,719
|
)
|
Deferred tax liability
|
|
(71,693
|
)
|
Deferred revenue
|
|
(362,756
|
)
|
|
|
|
|
Net fair value of assets acquired and
liabilities assumed
|
|
$
|
123,872
|
|
Intangible assets represent amounts acquired in the
acquisition of Availl, Inc. as consist of the following as of December 31,
2007:
|
|
Gross Carrying
|
|
Accumulated
|
|
|
|
|
|
Amount
|
|
Amortization
|
|
Life (Years)
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
Software acquired
|
|
$
|
5,000,000
|
|
$
|
125,000
|
|
10
|
|
Customer list acquired
|
|
180,000
|
|
9,000
|
|
5
|
|
Patent acquired
|
|
26,000
|
|
360
|
|
18
|
|
Total
|
|
$
|
5,206,000
|
|
$
|
134,360
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Amortization Expense
|
|
|
|
|
|
|
|
For Year-ended 12/31/2008
|
|
|
|
$
|
537,444
|
|
|
|
For Year-ended 12/31/2009
|
|
|
|
537,444
|
|
|
|
For Year-ended 12/31/2010
|
|
|
|
537,444
|
|
|
|
For Year-ended 12/31/2011
|
|
|
|
537,444
|
|
|
|
For Year-ended 12/31/2012
|
|
|
|
528,444
|
|
|
|
Thereafter
|
|
|
|
2,393,420
|
|
|
|
Total
|
|
|
|
$
|
5,071,640
|
|
|
|
The following unaudited pro forma financial information
presents the results of operations for the years ended December 31, 2005
and 2006 as if the acquisition had occurred at the beginning of each period
presented. The pro forma financial information has been adjusted for the effect
of interest paid on the term loan. The pro forma financial information for the
combined entities has been prepared for comparative purposes only and is not
indicative of what actual results would have been if the acquisitions had taken
place at the beginning of each period presented, or of future results.
|
|
Year Ended December 31,
|
|
(in thousands, except per share data)
|
|
2005
|
|
2006
|
|
Pro forma net
revenues
|
|
$
|
7,981
|
|
$
|
12,088
|
|
Pro forma net
income
|
|
895
|
|
1,664
|
|
|
|
|
|
|
|
Pro forma net
income per share:
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
$
|
0.11
|
|
Diluted
|
|
$
|
0.06
|
|
$
|
0.10
|
|
41
Table of Contents
3.
Accounts Receivable
Accounts
receivable, which are primarily from sales of software licenses, are presented
net of an allowance for doubtful accounts.
The activity of the Companys allowance for doubtful accounts for the
years ended December 31, 2005, 2006 and 2007 is presented in the following
table:
|
|
Balance at
|
|
Charged to
|
|
|
|
Balance
|
|
Year Ended
|
|
Beginning
|
|
Income or
|
|
|
|
End of
|
|
31-Dec
|
|
of Period
|
|
Expense
|
|
Deductions (1)
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
10,195
|
|
$
|
8,231
|
|
$
|
(6,153
|
)
|
$
|
12,273
|
|
2006
|
|
$
|
12,273
|
|
$
|
48,214
|
|
$
|
(1,029
|
)
|
$
|
59,458
|
|
2007
|
|
$
|
59,458
|
|
$
|
128,816
|
|
$
|
(75,073
|
)
|
$
|
113,201
|
|
(1) Represents amounts written off as uncollectible accounts receivable.
4.
Debt
On September 22, 2006,
the company obtained a $5,000,000 term loan from Silicon Valley Bank. The term loan was used to finance part of the
cash portion of the purchase price of the Availl acquisition. The initial
interest rate is 9.5% and is subject to change as the banks prime rate
changes. Interest and principal were payable in 36 equal monthly installments
on the first day of each calendar month beginning October 1, 2006. The Company
made a $3.2 million
repayment under the term loan in January 2007 plus a $0.5 million
repayment in February 2007. There was no loan balance at December 31,
2007.
The Loan Agreement contains customary covenants including covenants
relating to maintaining legal existence and good standing, complying with
applicable laws, delivery of financial statements, maintenance of inventory,
payment of taxes, maintaining insurance, and protection of intellectual
property rights. GlobalSCAPE and its
subsidiaries are also prohibited from selling any of their assets other than in
the ordinary course of business, acquiring any other entities, changing the
types of business they are engaged in, incurring indebtedness other than that
permitted by the Loan Agreement, incurring any liens on their assets other than
those permitted by the Loan Agreement, making certain investments or paying any
dividends on, or acquiring, any shares of their capital stock. The Loan Agreement contains two financial
covenants. GlobalSCAPE and its
subsidiaries must maintain:
·
a ratio of
(A) EBITDA less the sum of (i) cash taxes paid and (ii) non-financed
capital expenditures (excluding non-cash stock options and taxes already
accrued), to (B) the sum of (i) principal plus (ii) interest
paid to Bank, of at least 1.5 to 1.00; and
·
a ratio of
total funded debt to EBITDA of not more than 2.00 to 1.00.
The loan agreement also contains
customary events of default including the failure to make payments of principal
and interests, the breach of any covenants, the occurrence of a material
adverse change, certain bankruptcy and insolvency events, the breach of other
agreements creating indebtedness of $50,000 or more and the entry of a judgment
of $50,000 or more against GlobalSCAPE or any of its subsidiaries. The Company
failed the first of the two covenants at December 31, 2006 and obtained a
waiver from the Bank. The Company is in compliance with all of its debt
covenants at December 31, 2007.
The loan
agreement provides for a $750,000 revolving credit facility. The entire amount
of the revolving credit facility remains available. Borrowings under the revolving credit
facility bear interest at 1.00% above the banks prime rate and mature on September 22,
2008. Interest payments are due on the
first day of each calendar month. The revolving credit facility is secured by
substantially all of the assets of GlobalSCAPE and its subsidiaries.
42
Table
of Contents
5.
Commitments and
Contingencies
Operating
Leases
Minimum future
lease payments on non-cancelable operating leases for office facilities are as
follows for the years ending December 31:
2008
|
|
$
|
578,181
|
|
2009
|
|
606,465
|
|
2010
|
|
538,587
|
|
2011
|
|
551,015
|
|
2012
|
|
565,670
|
|
Thereafter
|
|
3,823,263
|
|
Total
|
|
$
|
6,663,181
|
|
Operating
lease expense amounted to approximately $179,000 in 2005, $188,000 in 2006 and
$235,000 in 2007.
Contingencies
The
Company from time to time may be involved in litigation relating to claims
arising out of its ordinary course of business.
There are no pending claims against the Company that would have a
material adverse effect on the financial statements of the Company.
6.
Income Taxes
The provision
for income taxes on income before income taxes consists of:
|
|
Federal
|
|
State
|
|
Total
|
|
2005
|
|
|
|
|
|
|
|
Current
|
|
$
|
9,981
|
|
$
|
|
|
$
|
9,981
|
|
Deferred
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,981
|
|
$
|
|
|
$
|
9,981
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
Current
|
|
$
|
1,000,085
|
|
$
|
3,533
|
|
$
|
1,003,618
|
|
Deferred
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,000,085
|
|
$
|
3,533
|
|
$
|
1,003,618
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
Current
|
|
$
|
1,853,968
|
|
$
|
114,054
|
|
$
|
1,968,022
|
|
Deferred
|
|
314,905
|
|
|
|
314,905
|
|
Total
|
|
$
|
2,168,873
|
|
$
|
114,054
|
|
$
|
2,282,928
|
|
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
Significant components of the Companys deferred tax assets and
liabilities are related to the following:
|
|
2005
|
|
2006
|
|
2007
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Cash method to accrual adjustment
|
|
$
|
|
|
$
|
(91,884
|
)
|
$
|
(45,942
|
)
|
Intangible assets
|
|
|
|
|
|
(1,750,637
|
)
|
Depreciation
|
|
|
|
|
|
(3,427
|
)
|
Total deferred tax liabilities
|
|
$
|
|
|
$
|
(91,884
|
)
|
$
|
(1,800,006
|
)
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Accrued expenses
|
|
14,828
|
|
20,326
|
|
34,587
|
|
Allowance for doubtful accounts
|
|
4,173
|
|
20,216
|
|
38,488
|
|
Deferred compensation
|
|
4,121
|
|
17,846
|
|
56,338
|
|
Depreciation and amortization
|
|
28,861
|
|
7,491
|
|
|
|
Net operating loss carryforwards
|
|
|
|
34,729
|
|
|
|
Total deferred tax assets
|
|
51,983
|
|
100,608
|
|
129,413
|
|
Valuation allowance for deferred tax assets
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
51,983
|
|
$
|
8,724
|
|
$
|
1,670,593
|
|
43
Table of Contents
The net
deferred income tax liability is classified in the balance sheets as follows:
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
51,983
|
|
$
|
8,724
|
|
$
|
80,044
|
|
Long term liabilities
|
|
|
|
|
|
(1,750,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
A
reconciliation of income tax expense and the amount computed by applying the
statutory federal income tax rate (34%) to income before income taxes is as
follows:
|
|
2005
|
|
2006
|
|
2007
|
|
Taxes computed at federal statutory rate
|
|
$
|
494,911
|
|
$
|
1,007,289
|
|
$
|
2,014,564
|
|
|
|
|
|
|
|
|
|
Increases in taxes resulting from:
|
|
|
|
|
|
|
|
State taxes, net of federal benefit
|
|
703
|
|
2,333
|
|
75,276
|
|
Other non-deductible expenses
|
|
5,653
|
|
2,142
|
|
19,715
|
|
Change in valuation allowance
|
|
(484,853
|
)
|
|
|
|
|
Research & Development Credit
|
|
|
|
(10,000
|
)
|
17,167
|
|
Amortization of intangible Assets
|
|
|
|
|
|
45,683
|
|
Prior period adjustment for EIE Exclusion,
Research & Development Credit and Amended Tax Returns
|
|
|
|
|
|
(130,976
|
)
|
Stock based compensation
|
|
|
|
|
|
325,925
|
|
Other
|
|
(6,433
|
)
|
1,854
|
|
(38,743
|
)
|
Total
|
|
$
|
9,981
|
|
$
|
1,003,618
|
|
$
|
2,282,928
|
|
7.
Employee Benefit Plan
The Company
has a 401(k) plan that covers substantially all employees with at least
six months of service. Under the plan,
employees may elect to contribute a percentage of their annual salary subject
to the Internal Revenue Code maximum limitations. The plan provides for employer matching and
discretionary contributions, the amounts of which are to be determined annually
by the Board of Directors. The Company
made contributions to the plan of $15,864, $16,296 and $27,523 for the years
ended December 31, 2005, 2006 and 2007, respectively.
8.
Stock Options and
Stock Based Compensation
GlobalSCAPE has stock-based
compensation plans available to grant incentive stock options to employees.
Under the GlobalSCAPE, Inc. 2000 Stock Option Plan (the Plan), which was
approved by the Board of Directors and became effective on May 17, 2001, a
maximum of 3,660,000 shares of GlobalSCAPE common stock may be awarded. Through
December 31, 2007 options have been granted for approximately 2,780,000
shares, net of granted and cancelled. There are approximately 880,000 shares
available for grant under the 2000 Plan.
The exercise price, term and other
conditions applicable to each stock option granted under the Plan are generally
determined by the Board of Directors. The exercise price of stock options is
set on the grant date and may not be less than the fair market value per share
of our stock on that date. The options generally become exercisable over a
three-year period and expire after ten years.
There was $497,895 of compensation
cost related to stock options recognized in operating results in the year ended
December 31, 2006, and $937,546 recognized in 2007.
The following table summarizes
information about stock option activity through the year ended December 31,
2007.
44
Table of Contents
|
|
|
|
Weighted
|
|
Weighted Average
|
|
Aggregate
|
|
|
|
Number of
|
|
Average Exercise
|
|
Remaining Contractual
|
|
Intrinsic
|
|
|
|
Options
|
|
Price
|
|
Term (years)
|
|
Value ($M)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
|
1,970,071
|
|
$
|
0.24
|
|
6.50
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Granted
|
|
469,000
|
|
0.32
|
|
|
|
|
|
Expired
|
|
20,000
|
|
0.16
|
|
|
|
|
|
Exercised
|
|
24,900
|
|
0.36
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
2,394,171
|
|
$
|
0.25
|
|
6.50
|
|
$
|
2.06
|
|
2006
|
|
|
|
|
|
|
|
|
|
Granted
|
|
935,000
|
|
2.81
|
|
|
|
|
|
Exercised
|
|
623,181
|
|
0.05
|
|
|
|
|
|
Lapsed or canceled
|
|
225,350
|
|
1.47
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
2,480,640
|
|
$
|
1.16
|
|
7.25
|
|
$
|
4.34
|
|
2007
|
|
|
|
|
|
|
|
|
|
Granted
|
|
456,000
|
|
3.45
|
|
|
|
|
|
Exercised
|
|
1,067,079
|
|
0.64
|
|
|
|
|
|
Lapsed or canceled
|
|
135,033
|
|
3.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
1,734,528
|
|
$
|
1.94
|
|
7.64
|
|
$
|
6.17
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
722,985
|
|
$
|
0.95
|
|
6.74
|
|
$
|
3.29
|
|
45
Table of Contents
The weighted average fair value of
options granted during the year ended December 31, 2007 was $2.64. The
total intrinsic value of options (which is the amount by which the stock price
exceeded the exercise price of the options on the date of exercise) exercised
during the year ended December 31, 2007 was $3,694,476. During the year
ended December 31, 2007, the amount of cash received from the exercise of
stock options was $681,656. The following table summarizes information about
nonvested stock option awards as of December 31, 2007 and changes for the
year.
|
|
Number
|
|
Weighted Average
|
|
|
|
Of
|
|
Grant Date
|
|
|
|
Options
|
|
Fair Value
|
|
Non-vested at December 31, 2006
|
|
1,180,580
|
|
$
|
1.52
|
|
Granted
|
|
456,000
|
|
$
|
2.64
|
|
Vested
|
|
(490,004
|
)
|
$
|
1.52
|
|
Forfeited
|
|
(135,033
|
)
|
$
|
2.60
|
|
Non-vested at December 31, 2007
|
|
1,011,543
|
|
$
|
2.22
|
|
At December 31, 2007, there
was $1,504,345 of total unrecognized compensation cost related to non-vested
stock option awards which is expected to be recognized over a weighted-average
period of 3 years. There were 490,004 options that became vested during the
year ended December 31, 2007.
The following table shows
information about outstanding stock options at December 31, 2007.
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Remaining
|
|
Average
|
|
|
|
Average
|
|
Range of
|
|
Options
|
|
Contractual
|
|
Exercise
|
|
Number of
|
|
Exercise
|
|
Exercise Prices
|
|
Outstanding
|
|
Life
|
|
Price
|
|
Options
|
|
Price
|
|
$ .01 -
$1.00
|
|
675,461
|
|
6.4
|
|
$
|
0.29
|
|
518,484
|
|
$
|
0.28
|
|
$ 1.01 -
$2.00
|
|
100,000
|
|
7.6
|
|
$
|
1.10
|
|
33,000
|
|
$
|
1.10
|
|
$ 2.01 -
$3.00
|
|
210,000
|
|
8.0
|
|
$
|
2.72
|
|
69,300
|
|
$
|
2.72
|
|
$ 3.01 -
$4.25
|
|
749,067
|
|
8.7
|
|
$
|
3.32
|
|
102,201
|
|
$
|
3.11
|
|
|
|
1,734,528
|
|
7.6
|
|
$
|
1.94
|
|
722,985
|
|
$
|
0.95
|
|
9.
Common Stock and Warrants
On November 13,
2006, the Company entered into a securities purchase agreement with accredited
investors, who paid us an aggregate of $3.4 million in gross proceeds in
consideration for 1,352,000 shares of our common stock at a price of $2.50 per
share. The Company also granted warrants
to purchase 1,352,000 shares of our common stock to the investors with an
exercise price of $3.15 per share.
The warrants
have a 5-year term and will be exercisable beginning May 15, 2007.
As part of the securities purchase agreement the Company was required to
file a registration statement to register the common stock and warrants. This
registration was declared effective on April 15, 2007.
During 2007,
the Company issued 35,000 common shares in exchange for warrants for 85,000
shares on a net share settlement for which the company received no proceeds.
There
is an adjustment provision in which the warrants exercise price can be reduced
to a minimum of $2.81 (which could reduce cash proceeds by $459,680 to
$3,799,120) in the event that from November 13, 2006 (the closing date) to
six months later (or May 13, 2007) the Company issues or is deemed to
issue additional shares of Common Stock for a consideration per share less than
the Exercise Price in effect immediately prior to the issuance of such shares,
the Exercise Price shall be reduced by the Company to the price equal to the
consideration per share received or receivable.
46
Table of Contents
10.
Quarterly Financial
Information (unaudited)
|
|
Fiscal Year 2006
|
|
|
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
2,414,923
|
|
$
|
2,445,327
|
|
$
|
2,603,236
|
|
$
|
3,510,195
|
|
Total operating expenses
|
|
$
|
1,605,516
|
|
$
|
1,723,395
|
|
$
|
1,792,007
|
|
$
|
2,819,509
|
|
Other Income (expense)
|
|
$
|
14,352
|
|
$
|
22,902
|
|
$
|
21,412
|
|
$
|
(125,770
|
)
|
Net income (loss) before provision for
income taxes
|
|
$
|
823,759
|
|
$
|
744,834
|
|
$
|
832,641
|
|
$
|
564,916
|
|
Net income (loss)
|
|
$
|
548,932
|
|
$
|
500,056
|
|
$
|
538,085
|
|
$
|
375,459
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
$
|
0.03
|
|
$
|
0.04
|
|
$
|
0.02
|
|
Diluted
|
|
$
|
0.03
|
|
$
|
0.03
|
|
$
|
0.03
|
|
$
|
0.02
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
14,284,348
|
|
14,379,061
|
|
14,484,319
|
|
15,821,575
|
|
Diluted
|
|
15,971,013
|
|
15,081,666
|
|
15,891,298
|
|
17,251,219
|
|
|
|
Fiscal Year 2007
|
|
|
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
3,623,147
|
|
$
|
6,418,025
|
|
$
|
3,900,300
|
|
$
|
4,418,869
|
|
Total operating expenses
|
|
$
|
2,826,217
|
|
$
|
3,233,719
|
|
$
|
3,098,065
|
|
$
|
3,304,351
|
|
Other Income (expense)
|
|
$
|
(62,902
|
)
|
$
|
9,743
|
|
$
|
41,540
|
|
$
|
38,823
|
|
Net income before provision for income
taxes
|
|
$
|
734,028
|
|
$
|
3,194,049
|
|
$
|
843,775
|
|
$
|
1,153,341
|
|
Net income (loss)
|
|
$
|
473,214
|
|
$
|
2,114,876
|
|
$
|
702,875
|
|
$
|
351,300
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
$
|
0.12
|
|
$
|
0.04
|
|
$
|
0.02
|
|
Diluted
|
|
$
|
0.03
|
|
$
|
0.12
|
|
$
|
0.04
|
|
$
|
0.02
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
17,183,552
|
|
17,204,922
|
|
17,161,519
|
|
17,293,946
|
|
Diluted
|
|
17,972,115
|
|
18,036,354
|
|
18,108,829
|
|
18,872,912
|
|
11.
Subsequent
Events
In March 2008,
we announced the retirement of our President and Chief Executive Officer,
Charles R. Poole. During the fall of 2007, the Board of Directors began
having discussions with Mr. Poole, relating to his potential retirement or
reduction in his day-to-day role at December 31, 2008, when his current
contract expires, and the necessary steps for succession of the CEO position.
At this time, the Board also began
focusing on some longer-term projects designed to continue the Companys growth
and profitability. We believe that the future success of our business will be
dependent upon our ability to improve our current products and to introduce new
products, through research and development, innovations by our employees,
strategic partnerships, and acquisitions.
As a result of the longer term
nature of the Boards areas of focus for 2008 and Mr. Pooles wishes, it
became apparent to the Board that that it would be in the best interest of the
Company and its shareholders that Mr. Poole not spearhead our more
product-focused initiatives if he were not available to see them through
implementation. As a result, on March 7, we accepted Mr. Pooles
decision to retire early. Kelly E. Simmons, our CFO, was named interim
President and we began to accelerate the search for Mr. Pooles
replacement..
On May 22, 2007, the Company announced that its Board of Directors
authorized the repurchase of up to $3 million of the companys outstanding
common shares. The repurchase plan is designed to increase shareholders value
and reduce the dilutive effect of GlobalSCAPEs stock option plans. The stock
repurchase authorization has an expiration date of May 22, 2008 with the
repurchase activity tied to such factors as cash generation from operations,
current stock price, and other factors. GlobalSCAPE may repurchase shares from
time to time on the open market or in private transactions, including
structured transactions. This program may be modified or discontinued at any
time. From January 1, 2008 through March 19, 2008, the Company spent
$978,382 under this program to acquire 263,708 shares of the companys
outstanding common stock. Since the inception of the program, the Company has
spent $1,505,884 under this program to acquire 423,581 shares of the companys
outstanding common stock.
47
Table of Contents
12.
Restatement of Financial
Statements
The
Company has restated its 2007 financial statements from the amounts previously
reported by the filing this amended Annual Report on Form 10-K. The
restatements include adjustments (a) to record a deferred tax liability, (b) to
decrease previously recorded deferred tax assets (c) adjust income taxes
and (d) adjust additional paid in capital. Following is a summary of the
restatement adjustments:
|
|
As
|
|
|
|
As
|
|
|
|
Reported
|
|
Adjustments
|
|
Restated
|
|
2007 Summary Balance Sheet
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
7,658,044
|
|
817,343
|
|
$
|
8,475,387
|
|
Property and equipment (net)
|
|
262,745
|
|
|
|
262,745
|
|
Intangible assets, net
|
|
5,071,640
|
|
|
|
5,071,640
|
|
Goodwill
|
|
4,595,755
|
|
1,796,320
|
|
6,392,075
|
|
Deferred tax asset
|
|
440,632
|
|
(360,588
|
)
|
80,044
|
|
Other assets
|
|
79,967
|
|
|
|
79,967
|
|
Total Assets
|
|
$
|
18,108,783
|
|
$
|
2,253,075
|
|
$
|
20,361,858
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
329,817
|
|
|
|
$
|
329,817
|
|
Accrued expenses
|
|
742,946
|
|
|
|
742,946
|
|
Deferred revenue
|
|
2,329,117
|
|
|
|
2,329,117
|
|
Total current liabilities
|
|
3,401,880
|
|
|
|
3,401,880
|
|
Long-term liabilities
|
|
119,711
|
|
|
|
119,711
|
|
Deferred tax liability
|
|
|
|
1,750,637
|
|
1,750,637
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
Common stock
|
|
17,432
|
|
|
|
17,432
|
|
Treasury stock
|
|
(527,398
|
)
|
|
|
(527,398
|
)
|
Additional paid in capital
|
|
7,981,620
|
|
782,680
|
|
8,764,300
|
|
Retained earnings
|
|
7,115,538
|
|
(280,242
|
)
|
6,835,296
|
|
Total liabilities and stockholders equity
|
|
$
|
18,108,783
|
|
$
|
2,253,075
|
|
$
|
20,361,858
|
|
|
|
As
|
|
|
|
As
|
|
|
|
Reported
|
|
Adjustments
|
|
Restated
|
|
2007 Summary Consolidated Statement of Operations
|
|
|
|
|
|
|
|
Software Product Revenues
|
|
$
|
14,826,197
|
|
$
|
|
|
$
|
14,826,197
|
|
Maintenance and support (net of deferred
revenues)
|
|
3,534,144
|
|
|
|
3,534,144
|
|
Total Revenues
|
|
18,360,341
|
|
|
|
18,360,341
|
|
Operating expenses
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation
and amortization shown seperately below)
|
|
250,439
|
|
|
|
250,439
|
|
Selling, general and administrative
expenses
|
|
10,049,430
|
|
|
|
10,049,430
|
|
Research and development expenses
|
|
1,919,253
|
|
|
|
1,919,253
|
|
Depreciation and amortization
|
|
279,573
|
|
|
|
279,573
|
|
Total operating expenses
|
|
12,498,695
|
|
|
|
12,498,695
|
|
Income from operations
|
|
5,861,646
|
|
|
|
5,861,646
|
|
Other income (expense)
|
|
63,549
|
|
|
|
63,549
|
|
Income before income taxes
|
|
5,925,195
|
|
|
|
5,925,195
|
|
Income tax provision
|
|
2,002,686
|
|
280,242
|
|
2,282,928
|
|
Net Income
|
|
$
|
3,922,509
|
|
$
|
(280,242
|
)
|
$
|
3,642,267
|
|
|
|
|
|
|
|
|
|
Basic per common share
|
|
$
|
0.23
|
|
|
|
$
|
0.21
|
|
Diluted per common share
|
|
$
|
0.21
|
|
|
|
$
|
0.20
|
|
48
Table of Contents
Item 9.
Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A (T).
Controls and Procedures
Conclusion Regarding the Effectiveness of
Disclosure Controls and Procedures
During a test by our
independent auditors, PMB Helin Donovan, L.L.P., the independent auditors noted
some inconsistencies in the method that was used to account for stock option
compensation expense which had been prepared by a third party firm hired to
help us prepare our federal income tax return. The Company decided that
in order to thoroughly investigate the matter it should hire a new independent
tax preparation firm to assist in the investigation of the proper treatment of
stock based compensation. In addition,
as part of the engagement the new firm was tasked with reviewing the entire tax
provision calculation appearing in the Companys financial statements. The new tax firm discovered that stock based
compensation expense had previously not been treated properly for tax purposes
and also that appropriate deferred tax balances had not been established for
the intangible assets acquired with Availl.
Based upon these discoveries, we evaluated the design and operation of
our disclosure controls and procedures as of December 31, 2007 to
determine whether they were effective in ensuring that we disclose the required
information in a timely manner and in accordance with the Securities Exchange
Act of 1934, as amended, or the Exchange Act, and the rules and forms of
the Securities and Exchange Commission. Management, including our
principal executive officer, supervised and participated in the
evaluation. Our principal executive officer and principal financial
officer concluded based on their review that:
·
W
e had previously not treated
the recorded stock compensation expense as a permanent difference when
reconciling book income with taxable income which would have increased our
income tax expense.
·
W
e had previously not taken
the appropriate deductions allowed when an employee exercised his or her stock
options and then subsequently sold the shares of stock.
·
T
he appropriate deferred tax
liabilities were not calculated and booked at the time of the Availl
acquisition in 2006.
Our review was concluded in August 2008,
after the filing of our 10-K for the 2007 fiscal year and after the filing of
our 10-Q for the quarter ended March 31, 2008 but before the filing of our
10-Q for the quarter ended June 30, 2008. As a result of our
evaluation, we concluded that our yearend financial statements for 2007 would
require approximately a $2.2 million increase in total assets in our balance
sheet and an increase in the income tax provision of approximately $280,000 on
our income statement. Following discussions regarding the matter
with our independent auditors and our audit committee the amounts of the
adjustment were deemed to be material based on quantitative factors by our
independent auditors, but were not deemed to be material based on qualitative
factors. However, in order to provide the utmost transparency with
respect to our financial statements we decided to restate voluntarily our
financial results for the year ended December 31, 2007.
Subsequent to the end of the
second quarter of 2008, we also corrected our controls and procedures. The correction to our controls and procedures
was accomplished by hiring a new third party firm to assist in the preparation
of our federal income tax returns as well as a more thorough review of the tax
schedules by internal accounting staff.
Additional procedures have also been added to keep track of when
employees exercise their stock options and when and if they subsequently sell
the stock within a year of exercise.
Based upon the corrective
action taken, our restatement of our 2007 financial results through the filing
of a report on Form 10-K/A, and the fact that corrections were made to
subsequent financial results prior to their public disclosure, our principal
executive officer and principal financial officer were able to conclude that
our financial statements for our year ended December 31, 2007, as included
in our report on Form 10-K, as amended, and the subsequent fiscal periods
covered by our quarterly reports on Form 10-Q, as amended, fairly present
in all material respects the financial condition, results of operations and
cash flows of GlobalSCAPE.
As of the end of the period
covered by this report, our principal executive officer and principal financial
officer carried out an evaluation of the effectiveness of GlobalSCAPEs disclosure
controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e)and
15d-15(e)) and concluded that the disclosure controls and procedures, as
corrected in connection with the review discussed above, were effective and
designed to ensure that material information relating to GlobalSCAPE which is
required to be included in our periodic Securities and Exchange Commission
filings would be made
49
Table of Contents
known to them by others within those entities.
There were no changes in our internal controls over financial reporting during
the period covered by this report that could materially affect, or are
reasonably likely to materially affect, our financial reporting.
There
were no changes in our internal control over financial reporting during the
last fiscal year and/or up to and including the date of this filing that we
believe materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting, except for improvements in the
internal controls to strengthen the process of calculating and reporting
deferred taxes and stock compensation expense.
Managements Report on Internal Control Over
Financial Reporting
Our management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f). Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of our internal control over financial
reporting as of December 31, 2007 based on the framework in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on that evaluation, our
management concluded that our internal control over financial reporting was
effective as of December 31, 2007.
Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
This annual
report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting. Managements report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules of
the Securities and Exchange Commission that permit us to provide only
managements report in this annual report.
There were no
changes in our internal control over financial reporting, other than those
mentioned above, during the last fiscal year and/or up to and including the
date of this filing that we believe materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
None
.
Item 9B. Other Information
None.
PART III
Item 10.
Directors, Executive
Officers and Corporate Governance
The
information called for by Item 10 of Form 10-K as to Directors is
incorporated herein by reference to such information included in our Proxy
Statement for the 2008 Annual Meeting of Stockholders to be held on June 1,
2008 under the caption Election of Directors.
Also see Item 4A of Part I of this Form 10-K. The information called for by Item 10 of Form 10-K
as to compliance with Section 16(a) of the Exchange Act is
incorporated herein by reference to such information included in our Proxy
Statement for the 2008 Annual Meeting of Stockholders to be held on June 4,
2008 under the caption Executive Officers.
GlobalSCAPE
has adopted a Code of Ethics that applies to all its employees, including its
President (its chief executive officer) and its Vice President of Finance and
Operations (its chief financial officer). GlobalSCAPE will provide a copy
of its Code of Ethics to any person without charge upon written request to:
David L. Mann
President
GlobalSCAPE, Inc.
4500 Lockhill-Selma, Suite 150
San Antonio, Texas 78249
50
Table of Contents
Item 11.
Executive Compensation
The
information called for by Item 11 of Form 10-K is incorporated herein by
reference to such information included in our Proxy Statement for the 2008
Annual Meeting of Stockholders to be held on June 1, 2008, under the
caption Executive Compensation except for those parts under the captions
Compensation Committee Report on Executive Compensation.
Item 12.
Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters
The
information called for by Item 12 of Form 10-K is incorporated herein by
reference to such information included in our Proxy Statement for the 2008
Annual Meeting of Stockholders to be held on June 1, 2008, under the
caption Security Ownership of Certain Beneficial Owners and Management.
Item 13.
Certain Relationships and
Related Transactions, and Director Independence
The
information called for by Item 13 of Form 10-K is incorporated herein by
reference to such information included in our Proxy Statement for the 2008
Annual Meeting of Stockholders to be held on June 1, 2008, under the
caption Certain Relationships and Related Transactions and Election of
Directors Board Independents.
Item 14.
Principal Accountant Fees
and Services.
The information called for
by Item 14 of Form 10-K is incorporated herein by reference to such
information included in our Proxy Statement for the 2008 Annual Meeting of
Stockholders
to be held on June 1, 2008 under the caption Principal
Accountant Fees and Services.
51
Table of Contents
PART IV
Item 15.
Exhibits, Financial
Statement Schedules
(a)(1)
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Financial Statements and Schedules
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The following financial statements of
GlobalSCAPE, Inc. are included in Item 8:
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·
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Consolidated balance sheets December 31, 2006 and 2007
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Consolidated statements of operations Years ended December 31, 2005, 2006 and 2007
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·
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Consolidated statements of stockholders equity Years ended December 31, 2005, 2006 and 2007
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·
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Consolidated statements of cash flows Years ended December 31, 2005, 2006 and 2007
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·
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Notes to consolidated financial statements December 31, 2007
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(2)
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Schedules not listed above have been omitted because they are not applicable or required, or the information required to be set forth therein is included in the Financial Statements or Notes thereto.
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(3)
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Exhibits
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Exhibit
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Number
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Description
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3.1
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Amended Restated Certificate of Incorporation (Filed as
Exhibit 3.1 to Form 8-Kfiled November 17, 2006).
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3.2
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Amended and Restated Bylaws of the Company effective as of
November 13, 2006 (Filed as Exhibit 3.2 to Form 8-K filed
November 17, 2006).
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4.1
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Specimen of Stock Certificate (Filed as Exhibit 4.1 to Annual
Report on Form 10-K filed April 2, 2001).
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4.2
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Registration Rights Agreement dated November 16, 2006 by and
between GlobalSCAPE, Inc. and the Purchasers signatory thereto (filed as
Exhibit 4.1 to Form 8-K filed November 17, 2006)
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*10.1
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1998 Stock Option Plan as amended May 13, 1999 (Filed as
Exhibit 4.2 to Form 10 filed May 12, 2000).
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*10.2
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2000 Stock Option Plan dated May 8, 2000 (Filed as
Exhibit 4.3 to Form 10 filed May 12, 2000).
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*10.3
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Form of 1998 Stock Option Plan Rights Termination Letter
Agreement of Directors to Agree Not to Claim Any Right of Adjustment dated
February 4, 2000 (Filed as Exhibit 4.6 to Form 10 filed
May 12, 2000).
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*10.4
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Form of 1998 Stock Option Plan Rights Termination Letter
Agreement for Employees and Consultants to Cancel Options dated
February 8, 2000 (Filed as Exhibit 4.7 to Form 10, filed
May 12, 2000).
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*10.5
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Form of 1998 Stock Option Plan Rights Termination Letter of
Officer to Agree Not to Claim Any Right of Adjustment dated February 8,
2000 (Filed as Exhibit 4.8 to Form 10 filed May 12, 2000).
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*10.6
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Form of 1998 Stock Option Plan Rights Termination Letter
Agreement of Officer to Agree Not to Exercise Options dated February 8,
2000 (Filed as Exhibit 4.9 to Form 10 filed May 12, 2000).
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*10.7
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Form of 1998 Stock Option Plan Reinstatement and Adjustment
Letter for Employees dated December 19, 2000 (Filed as
Exhibit 10.17 to Annual Report on Form 10-K filed April 2,
2001).
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*10.8
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Form of Release and Indemnity Agreement between
GlobalSCAPE, Inc. and Employees dated December 19, 2000 (Filed as
Exhibit 10.18 to Annual Report on Form 10-K filed April 2,
2001).
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10.9
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Commercial Lease Agreement between ACLP University Park S.A. II, L.P.
and the Company dated April 13, 1999 (Filed as Exhibit 10.1 to
Form 10 filed May 12, 2000).
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52
Table of Contents
*10.10
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Release and Indemnity Agreement between GlobalSCAPE, Inc. and
Sandra Poole-Christal dated April 2, 2001 (Filed as Exhibit 10.17
to Annual Report on Form 10-K filed April 1, 2002).
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*10.11
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Form of Incentive Stock Option Agreement under
GlobalSCAPE, Inc. 2000 Stock Option Plan (Filed as Exhibit 10.21 to
Annual Report on Form 10-K filed April 1, 2002).
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*10.12
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Employment Agreement between GlobalSCAPE, Inc. and Charles R.
Poole dated effective July 1, 2005 (Filed as exhibit 10.1 on
Form 8-K filed June 20, 2005).
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*10.13
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Incentive Stock Option Agreement between GlobalSCAPE, Inc. and
Charles R. Poole dated June 15, 2005 (Filed as Exhibit 10.2 on
Form 8-K filed June 20, 2005).
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10.14
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Securities
Purchase Agreement dated November 13, 2006 by and among
GlobalSCAPE, Inc., the Stockholders named in Schedule I thereto and the
Purchasers named therein (Filed as Exhibit 10.1 to Form 8-K filed
November 17, 2006).
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10.15
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Form of
Common Stock Purchase Warrant (Filed as Exhibit 10.2 to Form 8-K
filed November 17, 2006).
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10.16
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Loan
and Security Agreement dated September 22, 2006 by and between
GlobalSCAPE, Inc. and Silicon Valley Bank (filed as Exhibit 10.1 to
Form 8-K filed September 27, 2006).
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*10.17
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Form of
Non-Qualified Stock Option Agreement under the GlobalSCAPE, Inc. 2000
Stock Option Plan (Filed as Exhibit 10.2 to Form 10-Q filed
November 13, 2006)
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*10.18
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GlobalSCAPE, Inc.
2006 Non-Employee Directors Long-Term Equity Incentive Plan (Previously filed
as Exhibit 10.1 to Current Report on Form 8-K filed June 5,
2007).
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*10.19
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Form of
Non-Statutory Stock Option Agreement under GlobalSCAPE, Inc. 2006
Non-Employee Directors Long-Term Equity Incentive Plan (Previously filed as
Exhibit 10.1 to Form 10-Q filed November 14, 2007).
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*10.20
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Form of
Employment Agreement for Executive Officers at Vice President-level and above
(Previously filed as Exhibit 10.1 to Current Report on Form 8-K
filed January 7, 2008).
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14.1
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Code
of Ethics (Previously filed as Exhibit 14.1 to Form 10-K filed March 27,
2008)
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23.1
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Consent of PMB Helin Donovan, LLP (filed herewith).
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31.1
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Rule 13a-14(a)/15d 14(a) Certification of David L. Mann,
President (filed herewith).
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32.1
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Certificate pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed
herewith).
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* Management Compensatory Plan or Agreement
53
Table
of Contents
Signatures
Pursuant to
the requirements of Section 13 or 15(d) 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, in San Antonio, Texas on August 28,
2008.
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GlobalSCAPE, Inc.
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By:
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/s/
David L. Mann
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David
L. Mann
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President
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Pursuant to the
requirements
of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on August 28, 2008.
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Signature
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Title
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/s/ Thomas W. Brown
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Chairman of the Board and Director
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Thomas W. Brown
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/s/ Charles R. Poole
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Director
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Charles R. Poole
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/s/ David L. Mann
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President and Director (Principal Executive Officer
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David L. Mann
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and
Principal Financial Officer)
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/s/ Phillip M. Renfro
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Director
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Phillip M. Renfro
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/s/ Frank M. Morgan
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Director
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Frank M. Morgan
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54
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