#### ** **

#### **UNITED STATES**

#### **SECURITIES AND EXCHANGECOMMISSION**

#### **Washington, D.C. 20549**

 

### **FORM 10-Q**

### ** **

| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|------------|---------------------------------------------------------------------------------------------------------|

 

**For thequarterly period ended June 30, 2005**

** **

**Or**

****
| **o** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------------|

 

**For the transition period from               to               **

 

**Commission File Number: 000-30617**

 

**GlobalSCAPE, Inc.**

(Exact name of registrantas specified in its charter)

 
| **Delaware**                                                     | ** ** | **74-2785449**                         |
|------------------------------------------------------------------|------------|----------------------------------------|
| (State or other  jurisdiction of incorporation or  organization) |       | (I.R.S. Employer  Identification  No.) |
|                                                             |       |                                   |
| **6000  Northwest Parkway, Suite 100**                      | ** ** | ** **                             |
| **San  Antonio, TX**                                             | ** ** | **78249**                              |
| (Address of principal  executive offices)                        |       | (Zip Code)                             |
|                                                             |       |                                   |
| **(210)  308-8267**                                              |
| (Registrant’s telephone  number, including area code)       |

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.   ý  Yes   o  No

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).   o  Yes   ý  No

 

## **Thenumber of shares outstanding of the registrant’s common stock at July 29,2005 was 13,773,219.**

 

 

----

 

## **GlobalSCAPEInc.**

## ** **

## **QuarterlyReport on Form 10-Q**

## **Forthe Quarter ended June 30, 2005**

## ** **

## **Index**

 
| **Part I.**              | **Financial Information**                                                                   |
|-------------------------------|---------------------------------------------------------------------------------------------|
|                          |                                                                                        |
| Item 1.                       | Interim Financial Statements (Unaudited)                                                    |
|                          | Balance Sheets as of  December 31, 2004 and June 30, 2005                         |
|                          | Statements  of Operations for the three and six months ended June 30, 2004 and 2005    |
|                          | Statements  of Cash Flows for the six months ended June 30, 2004 and 2005              |
|                          | Notes  to Financial Statements                                                              |
|                          |                                                                                        |
| Item 2.                       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |
|                          |                                                                                        |
| Item 3.                       | Quantitative and Qualitative  Disclosures About Market Risk                                 |
|                          |                                                                                        |
| Item 4.                       | Controls and Procedures                                                                     |
|                          |                                                                                        |
| **Part II.**             | **Other Information**                                                                       |
|                          |                                                                                        |
| Item 1.                       | Legal Proceedings                                                                           |
|                          |                                                                                        |
| Item 2.                       | Changes in Securities and  Use of Proceeds                                                  |
|                          |                                                                                        |
| Item 3.                       | Defaults Upon Senior  Securities                                                            |
|                          |                                                                                        |
| Item 4.                       | Submission of Matters to a  Vote of Security Holders                                        |
|                          |                                                                                        |
| Item 5.                       | Other Information                                                                           |
|                          |                                                                                        |
| Item 6.                       | Exhibits and Reports on  Form 8-K                                                      |
|                          |                                                                                        |
| Signatures and Certifications |

 

GlobalSCAPE®,CuteFTP®, CuteSITE Builder®, PureCMS®, CuteZIP®, CuteHTML® and CuteMAP® areregistered trademarks of GlobalSCAPE Texas, LP.  GlobalSCAPE Secure FTPServer, GlobalSCAPE Transfer Engine, ContentXML and SnapEdit are trademarks ofGlobalSCAPE Texas, LP.  Other trademarks and tradenames in this quarterlyreport are the property of their respective owners.

 

ii

----

 

**GlobalSCAPE, Inc.**

** **

**Balance Sheets**

** **
| ** **                                                                                                                                           | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                           | ** ** | **2004**              | ** ** | **2005**          | ** ** |
| ** **                                                                                                                                           | ** ** | ** **            | ** ** | **(unaudited)**   | ** ** |
| Assets                                                                                                                                               |       |                  |       |              |       |
| Current assets:                                                                                                                                      |       |                  |       |              |       |
| Cash                                                                                                                                                 |       | $                     | 572,959    |              | $          | 985,263 |   |
| Accounts  receivable (net of allowance for doubtful accounts of $10,195 and $18,029 at  December 31, 2004 and June 30, 2005, respectively) |       | 148,534               |       | 574,728           |       |
| Prepaid expenses                                                                                                                                     |       | 91,144                |       | 44,434            |       |
| Total current  assets                                                                                                                                |       | 812,637               |       | 1,604,425         |       |
|                                                                                                                                                 |       |                  |       |              |       |
| Property and  equipment:                                                                                                                             |       |                  |       |              |       |
| Furniture and  fixtures                                                                                                                              |       | 332,920               |       | 332,920           |       |
| Software                                                                                                                                             |       | 245,601               |       | 273,197           |       |
| Equipment                                                                                                                                            |       | 608,718               |       | 593,032           |       |
| Leasehold  improvements                                                                                                                              |       | 167,762               |       | 167,761           |       |
|                                                                                                                                                 |       |                  |       |              |       |
|                                                                                                                                                 |       | 1,355,001             |       | 1,366,910         |       |
| Accumulated  depreciation and amortization                                                                                                           |       | 1,207,663             |       | 1,209,234         |       |
| Net property and  equipment                                                                                                                          |       | 147,338               |       | 157,676           |       |
|                                                                                                                                                 |       |                  |       |              |       |
| Other assets:                                                                                                                                        |       |                  |       |              |       |
| Other                                                                                                                                                |       | 11,882                |       | 11,882            |       |
| Total other  assets                                                                                                                                  |       | 11,882                |       | 11,882            |       |
| Total assets                                                                                                                                         |       | $                     | 971,857    |              | $          | 1,773,983 |   |

 

1

----

 

**GlobalSCAPE, Inc.**

** **

**Balance Sheets**

 
| ** **                                                                                                                                                                                        | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **2004**              | ** ** | **2005**          | ** ** |
| ** **                                                                                                                                                                                        | ** ** | ** **            | ** ** | **(unaudited)**   | ** ** |
| Liabilities and  Stockholders’ Equity                                                                                                                                                        |       |                  |       |              |       |
| Current  liabilities:                                                                                                                                                                             |       |                  |       |              |       |
| Accounts payable                                                                                                                                                                                  |       | $                     | 122,117    |              | $          | 61,099 |   |
| Accrued expenses                                                                                                                                                                                  |       | 170,654               |       | 277,681           |       |
| Deferred revenue                                                                                                                                                                                  |       | 178,117               |       | 255,658           |       |
| Total current  liabilities                                                                                                                                                                        |       | 470,888               |       | 594,438           |       |
|                                                                                                                                                                                              |       |                  |       |              |       |
| Long-term  liabilities:                                                                                                                                                                           |       |                  |       |              |       |
| Other long-term  liabilities                                                                                                                                                                      |       | 28,038                |       | 22,430            |       |
| Total long-term  liabilities                                                                                                                                                                      |       | 28,038                |       | 22,430            |       |
|                                                                                                                                                                                              |       |                  |       |              |       |
| Total  Liabilities                                                                                                                                                                                |       | 498,926               |       | 616,868           |       |
|                                                                                                                                                                                              |       |                  |       |              |       |
| Stockholders’  equity:                                                                                                                                                                       |       |                  |       |              |       |
| Preferred stock,  par value $0.001 per share, 10,000,000 authorized, no shares issued or  outstanding                                                                                             |       | —                |       | —            |       |
| Common stock,  par value $0.001 per share, 40,000,000 shares authorized, 13,773,219 and  13,773,219 shares issued and outstanding at December 31, 2004 and  June 30, 2005, respectively |       | 13,773                |       | 13,773            |       |
| Additional  paid-in capital                                                                                                                                                                       |       | 675,365               |       | 675,365           |       |
| Retained  earnings (deficit)                                                                                                                                                                      |       | (216,207              | )          | 467,977           |       |
|                                                                                                                                                                                              |       |                  |       |              |       |
| Total  stockholders’ equity                                                                                                                                                                  |       | 472,931               |       | 1,157,115         |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                  |       | $                     | 971,857    |              | $          | 1,773,983 |   |

 

See accompanying notes.

 

2

----

 

**GlobalSCAPE, Inc.**

** **

**Statements of Operations**

** **

**(Unaudited)**

** **
| ** **                                                                            | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                             | ** ** | **2005**                           | ** ** | **2004** | ** ** | **2005** | ** ** |
| Operating  revenues:                                                                  |       |                                 |       |                               |       |   |   |   |   |
| Software product  revenues                                                            |       | $                                    | 1,258,209  |                               | $          | 1,612,687 |   | $ | 2,377,281 |   | $ | 2,921,553 |   |
| Maintenance,  support and other revenues (net of deferred revenue)                    |       | 29,588                               |       | 206,689                            |       | 82,653 |   | 320,204 |   |
| Total operating  revenues                                                             |       | 1,287,797                            |       | 1,819,376                          |       | 2,459,934 |   | 3,241,757 |   |
|                                                                                  |       |                                 |       |                               |       |   |   |   |   |
| Cost of revenues  (exclusive of depreciation and amortization shown separately below) |       | 93,837                               |       | 77,819                             |       | 192,515 |   | 159,377 |   |
| Selling, general  and administrative expenses                                         |       | 798,436                              |       | 986,570                            |       | 1,775,351 |   | 1,959,374 |   |
| Research and  development expenses                                                    |       | 141,102                              |       | 205,043                            |       | 386,733 |   | 383,809 |   |
| Depreciation and  amortization                                                        |       | 50,220                               |       | 24,315                             |       | 106,014 |   | 53,415 |   |
| Total operating  expense                                                              |       | 1,083,595                            |       | 1,293,747                          |       | 2,460,613 |   | 2,555,975 |   |
| Income (loss)  from operations                                                        |       | 204,202                              |       | 525,629                            |       | (679 | ) | 685,782 |   |
|                                                                                  |       |                                 |       |                               |       |   |   |   |   |
| Other income  (expense):                                                              |       |                                 |       |                               |       |   |   |   |   |
| Interest expense                                                                      |       | —                               |       | (206                               | )          | (720 | ) | (725 | ) |
| Gain (loss) on sale  of assets                                                        |       | —                               |       | 191                                |       | — |   | 191 |   |
| Total other  income (expense)                                                         |       | —                               |       | (15                                | )          | (720 | ) | (534 | ) |
| Income (loss)  before income taxes                                                    |       | 204,202                              |       | 525,614                            |       | (1,399 | ) | 685,248 |   |
|                                                                                  |       |                                 |       |                               |       |   |   |   |   |
| Income tax  expense (benefit):                                                        |       |                                 |       |                               |       |   |   |   |   |
| Current:                                                                              |       |                                 |       |                               |       |   |   |   |   |
| Federal                                                                               |       | —                               |       | —                             |       | — |   | — |   |
| State                                                                                 |       | —                               |       | —                             |       | — |   | 1,065 |   |
| Deferred:                                                                             |       |                                 |       |                               |       |   |   |   |   |
| Federal                                                                               |       | —                               |       | —                             |       | — |   | — |   |
| State                                                                                 |       | —                               |       | —                             |       | — |   | — |   |
| Total income tax  provision (benefit)                                                 |       | —                               |       | —                             |       | — |   | 1,065 |   |
|                                                                                  |       |                                 |       |                               |       |   |   |   |   |
| Net income                                                                            |       | $                                    | 204,202    |                               | $          | 525,614 |   | ($1,399 | ) | $ | 684,183 |   |
|                                                                                  |       |                                 |       |                               |       |   |   |   |   |
| Net income  (loss) per common share- basic                                            |       | $                                    | 0.01       |                               | $          | 0.04 |   | $ | 0.00 |   | $ | 0.05 |   |
| Net income  (loss) per common share- assuming dilution                                |       | $                                    | 0.01       |                               | $          | 0.04 |   | $ | 0.00 |   | $ | 0.05 |   |
| Weighted average  shares outstanding:                                                 |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                                                 |       | 13,638,995                           |       | 13,773,219                         |       | 13,638,995 |   | 13,773,219 |   |
| Diluted                                                                               |       | 14,154,174                           |       | 14,584,284                         |       | 13,638,995 |   | 14,515,873 |   |

 

See accompanying notes.

 

3

----

 

**GlobalSCAPE, Inc.**

** **

**Statements of Cash Flows**

** **

**(Unaudited)**

** **
| ** **                                                                                | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                | ** ** | **2004**                           | ** ** | **2005** | ** ** |
| Operating  Activities:                                                                    |       |                               |       |   |   |
| Net income  (loss)                                                                        |       | ($1,399                            | )          | $ | 684,183 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                               |       |   |   |
| Bad debt expense                                                                          |       | (11,324                            | )          | 9,717 |   |
| Depreciation and  amortization                                                            |       | 106,014                            |       | 53,415 |   |
| Changes in  operating assets and liabilities:                                             |       |                               |       |   |   |
| Accounts  receivable                                                                      |       | 32,118                             |       | (435,911 | ) |
| Prepaid expenses                                                                          |       | 3,888                              |       | 46,710 |   |
| Accounts payable                                                                          |       | (148,316                           | )          | (61,018 | ) |
| Accrued expenses                                                                          |       | 23,399                             |       | 107,027 |   |
| Deferred  revenues                                                                        |       | 31,312                             |       | 77,541 |   |
| Other long-term  liabilities                                                              |       | (5,607                             | )          | (5,607 | ) |
| Net cash  provided by operating activities                                                |       | 30,085                             |       | 476,057 |   |
| Investing  Activities:                                                                    |       |                               |       |   |   |
| Purchase of  property and equipment                                                       |       | (29,625                            | )          | (63,753 | ) |
| Net cash used in  investing activities                                                    |       | (29,625                            | )          | (63,753 | ) |
| Financing  Activities:                                                                    |       |                               |       |   |   |
| Issuance of  common stock                                                                 |       | 3,756                              |       | — |   |
| Repayment of  notes payable                                                               |       | (100,000                           | )          | — |   |
| Principal  payments on capital lease obligations                                          |       | (15,294                            | )          | — |   |
| Net cash used in  financing activities                                                    |       | (111,538                           | )          | — |   |
| Net increase  (decrease) in cash                                                          |       | (111,078                           | )          | 412,304 |   |
| Cash at  beginning of period                                                              |       | 342,433                            |       | 572,959 |   |
| Cash at end of  period                                                                    |       | $                                  | 231,355    |   | $ | 985,263 |   |
|                                                                                           |            |                                    |            |  |  |  |  |

 

See accompanying notes.

 

4

----

 

**GlobalSCAPE, Inc.**

** **

**Notes to Financial Statements**

** **

# **Natureof Business**

 

GlobalSCAPE, Inc.(collectively referred to as “GlobalSCAPE” or “the Company”), founded in April 1996,develops and distributes Internet related software.  The Company is best known for its popularfile transfer program, CuteFTP.  TheCompany derives its revenues primarily from sales of licenses to use itssoftware products.  Sales of CuteFTP Homeand CuteFTP Professional accounted for approximately 70% and 56% of totalrevenues in 2004 and the first six months of 2005, respectively.  The Company is organized and operates as oneoperating segment and markets its products through the Internet, an internalsales force and through resellers.

 

***Corporate Structure***

 

All of theCompany’s operations are conducted by GlobalSCAPE Texas, LP, a Texas limitedpartnership.  The partners of GlobalSCAPETexas, LP are two Nevada limited liability companies, which are bothwholly-owned subsidiaries of GlobalSCAPE, Inc., a Delawarecorporation.  GlobalSCAPE, Inc. isapproximately 71% owned by Directors, Thomas W. Brown and David L. Mann, withthe remainder held publicly.  GlobalSCAPE, Inc.is a holding company and conducts no operations, however, the stock ofGlobalSCAPE, Inc. is quoted on the OTC Bulletin Board.  References to “GlobalSCAPE” or the “Company”refer collectively to all of these entities unless otherwise indicated.

 

# **Basisof Presentation**

 

Theaccompanying unaudited financial statements have been prepared in accordancewith Rule 10-01 of Regulation S-X, “Interim Financial Statements.”  Accordingly, they do not include allinformation and footnotes required under generally accepted accountingprinciples for complete financial statements. In the opinion of management, all adjustments (consisting of normallyrecurring accruals) considered necessary for a fair presentation have beenmade.  The results of operations for anyinterim period are not necessarily indicative of the results to be expected forthe full year.

 

The BalanceSheet at December 31, 2004 has been derived from the audited financialstatements at that date but does not include all the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  For further informationrefer to the financial statements and footnotes included in GlobalSCAPE’sAnnual Report on Form 10-K for the year ended December 31, 2004.

 

# **Principlesof Consolidation**

 

Theconsolidated financial statements include all subsidiaries.  All inter-company transactions and balanceshave been eliminated.

 

***Liquidity***

 

The Companyhas improved its positive working capital position through a combination ofrevenue growth, expense control and improved net income over the last 5quarters, including the quarter ended June 30, 2005. The Company incurredsignificant operating losses during the year ended December 31, 2003 andthe quarter ended March 31, 2004. In February 2004 GlobalSCAPEreduced its workforce by 20%, laying off 9 of the 45 people then employed bythe Company.  This workforce reductionwas a necessary step in improving the overall financial health of theorganization.  The Company is meeting itshigher revenue targets, further improving the Company’s liquidity position.

 

5

----

 

The Company ishighly dependent on the sale of two software products, CuteFTP Home and CuteFTPProfessional, which may be subject to technological and competitiveobsolescence.  Sales of these twoproducts, which represented 71% of the Company’s revenues in the second quarterof 2004, represented 51% of the Company’s revenues in the second quarter of2005. Although the percentage of total revenue has decreased, revenue for thesetwo products has increased by approximately 1% from the same quarter in theprevious year. Total revenues increased by approximately 41% when comparing thesecond quarter of 2005 to the same period in 2004. Revenues from the sale of EnhancedFile Transfer introduced in late 2004, represented approximately 21% of revenuein the second quarter of 2005.  Management is concentrating its efforts toincrease market penetration of its Enhanced File Transfer products.

 

The Companyrenewed a $250,000 revolving line of credit agreement in December 2004,which is due on demand, but if no demand is made, then on March 31, 2006. Theinterest rate is subject to change and is indexed to the bank’s prime rate. Theinitial rate is 7.25%. In connection with the line of credit, GlobalSCAPEentered into a commercial security agreement with the bank whereby GlobalSCAPEgranted a security interest in all its accounts and equipment.  The Company has not borrowed under thisagreement in 2005. The credit facility is available to the Company at any pointduring its term.

 

***Reclassifications***

 

Certain priorperiod amounts have been reclassified to conform to the current yearpresentation. These reclassifications had no impact on operating income aspreviously reported.

 

# **Sale/ Disposal of Assets**

 

During thefirst and second quarters of 2005, the Company sold or disposed of $20,351 infixed assets, mainly older computer related equipment.

 

# **Stock-BasedCompensation**

 

Statement ofFinancial Accounting Standards 123, *Accountingfor Stock-Based Compensation* (SFAS 123), encourages, but does not require, companies to recordcompensation cost for stock-based employee compensation plans based on the fairmarket value of options granted. The Company chose to account for stock basedcompensation using the intrinsic value method prescribed in APB Opinion No. 25,*Accounting for Stock Issued to Employees*,and related interpretations. Accordingly, compensation expense is recorded tothe extent that the current market price of the underlying stock exceeds theexercise price.  In December 2002,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standard 148, *Accounting forStock Based Compensation - Transition and Disclosure* (SFAS 148),which amends SFAS 123.  SFAS 148 requiresmore prominent and frequent disclosures about the effects of stock-basedcompensation. The Company will continue to account for its stock-basedcompensation according to the provisions of APB Opinion No. 25.

 

Pro formainformation regarding net income and earnings per share is required byStatement 148, which also requires that the information be determined as if theCompany had accounted for its stock options granted subsequent to December 31,1994 under the fair value method of that Statement.  The fair value of these options was estimatedat the date of grant using a Black-Scholes option-pricing model.

 

For purposesof pro forma disclosures, the estimated fair value of the options is amortizedto expense over the options’ vesting period. The Company’s pro forma information for the three months ended June 30,2004 and 2005 follows:

 

6

----

 
| ** **                                                                                                                                                                                         | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                                                                         | ** ** | **2004**                              | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net Income, as  reported                                                                                                                                                                           |       | $                                     | 204,202    |                                | $          | 525,614 |   | $ | (1,399 | ) | $ | 684,183 |   |
| 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 |       | (3,289                                | )          | (4,438                              | )          | (12,175 | ) | (8,485 | ) |
| Pro forma net  income (loss)                                                                                                                                                                       |       | $                                     | 200,913    |                                | $          | 521,176 |   | $ | (13,574 | ) | $ | 675,698 |   |
|                                                                                                                                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Income (Loss)  per share:                                                                                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Basic- as  reported                                                                                                                                                                                |       | $                                     | 0.01       |                                | $          | 0.04 |   | $ | 0.00 |   | $ | 0.05 |   |
| Basic- pro forma                                                                                                                                                                                   |       | $                                     | 0.01       |                                | $          | 0.04 |   | $ | 0.00 |   | $ | 0.05 |   |
|                                                                                                                                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Diluted- as  reported                                                                                                                                                                              |       | $                                     | 0.01       |                                | $          | 0.04 |   | $ | 0.00 |   | $ | 0.05 |   |
| Diluted- pro  forma                                                                                                                                                                                |       | $                                     | 0.01       |                                | $          | 0.04 |   | $ | 0.00 |   | $ | 0.05 |   |

 

During thesecond quarter ended June 30, 2005, 469,000 options were granted tovarious employees at an average exercise price of $0.3172 per share. During thesecond quarter of 2005, there were no options exercised by employees and therewere no stock options forfeited.

 

# **Earningsper Common Share**

 

Basic anddiluted net income per common share is presented in conformity with Statementof Financial Accounting Standards No. 128, “Earnings Per Share” (SFAS 128)for all periods presented. Basic earnings per share is based on the weightedeffect of all common shares issued and outstanding, and is calculated bydividing net income (loss) available to common stockholders by the weightedaverage shares outstanding during the period. Diluted earnings per share iscalculated by dividing net income (loss) available to common stockholders bythe weighted average number of common shares used in the basic earnings pershare calculation plus the number of common shares that would be issued assumingconversion of all potentially dilutive common shares outstanding.  Below is a reconciliation of the numeratorsand denominators of basic and diluted earnings per share for each of theperiods presented:

 
| ** **                                                   | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                   | ** ** | **2004**                             | ** ** | **2005**                           | ** ** | **2004** | ** ** | **2005** | ** ** |
| **Numerators**                                               |       |                                 |       |                               |       |   |   |   |   |
| Numerators for  basic and diluted earnings per share:        |       |                                 |       |                               |       |   |   |   |   |
| Net income  (loss)                                           |       | $                                    | 204,202    |                               | $          | 525,614 |   | ($1,399 | ) | $ | 684,183 |   |
|                                                         |       |                                 |       |                               |       |   |   |   |   |
| **Denominators**                                             |       |                                 |       |                               |       |   |   |   |   |
| Denominators for  basic and diluted earnings per share:      |       |                                 |       |                               |       |   |   |   |   |
| Weighted average  shares outstanding – basic            |       | 13,638,995                           |       | 13,773,219                         |       | 13,638,995 |   | 13,773,219 |   |
|                                                         |       |                                 |       |                               |       |   |   |   |   |
| **Dilutive  potential common shares**                        |       |                                 |       |                               |       |   |   |   |   |
| Stock options  (1)                                           |       | 515,179                              |       | 811,065                            |       | — |   | 742,564 |   |
| Denominator for  dilutive earnings per share                 |       | 14,154,174                           |       | 14,584,284                         |       | 13,638,995 |   | 14,515,873 |   |
|                                                         |       |                                 |       |                               |       |   |   |   |   |
| Net income  (loss) per common share                          |       | $                                    | 0.01       |                               | $          | 0.04 |   | ($0.00 | ) | $ | 0.05 |   |
| Net income  (loss) per common share – assuming dilution |       | $                                    | 0.01       |                               | $          | 0.04 |   | ($0.00 | ) | $ | 0.05 |   |

 

7

----

 

----

(1)          For the three and sixmonths ended June 30, 2004, 1,193,000 and 1,758,571 options have not beenincluded in dilutive shares, as the effect would be anti-dilutive.  For the three and six months ended June 30,2005, 1,686,417 and 1,618,006 options, have not been included in dilutiveshares, as the effect would be anti-dilutive.

 

# **Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

This QuarterlyReport on Form 10-Q contains “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities and Exchange Act of 1934, as amended.  “Forward looking statements” are thosestatements that describe management’s beliefs and expectations about thefuture.  We have identifiedforward-looking statements by using words such as “anticipate,” “believe,” “could,”“estimate,” “may,” “expect,” and “intend.” Although we believe these expectations are reasonable, our operationsinvolve a number of risks and uncertainties, including those described in the “RiskFactors” section of our Annual Report on Form 10-K and otherdocuments filed with the Securities and Exchange Commission.  GlobalSCAPE’s actual results could differmaterially from those discussed in any forward-looking statements included inthis Quarterly Report.

 

**Overview**

 

GlobalSCAPEdevelops and distributes Internet related software including File Management,Content Management and Web Development Tools. We distribute our software primarily via download from our Internetwebsite.  Our internal direct sales forcerevenue began exceeding Internet revenue in the second quarter of 2005,achieving a goal set by management. During 2004, approximately 65% of ourrevenues were generated from customers within the United States, with theremaining 35% concentrated mostly in Western Europe, Canada and Australia. Inthe second quarter of 2005, 64% of our revenues were generated from customerswithin the United States. We sell our products on the Internet, throughresellers and through our internal sales force.

 

•                  **Content Management Products**–****Our Content Management Products helpnon-technical business users update and manage Web Site content withoutexcessive training. The product line includes PublishXML. Our PureCMS productwill be phased out beginning in the third quarter of 2005.

 

•                  **File Management Products** – Our FileManagement products are best known for the “CuteFTP” product line. Theyprimarily consist of products that help users move and copy files on theInternet. A substantial portion of our revenues are derived from licensing ourFile Management products. We offer both individual and enterprise levels ofthese products. Some of our products encrypt the transfers for security usingtechnology similar to a Web browser. Our File Management product line includesCuteFTP Home, Cute FTP Professional, SecureFTP Server, CuteZIP and EnhancedFile Transfer.

 

•                  **Web Development Products** – Our WebDevelopment Products help Web developers create Web sites. They provide a widerange of capabilities such as creating Web sites from a template, directediting of Web based computer code and creating Web surveys. Our WebDevelopment product line includes CuteSITE Builder, CuteHTML, CuteMAP and WebSurvey.

 

CuteFTP Homeand CuteFTP Professional accounted for approximately 71% and 51% of totalrevenues in the quarters ended June 30, 2004 and 2005, respectively.  Revenue from the sales of these products increasedapproximately 1% when comparing the second quarter of 2004 to the secondquarter of

 

8

----

 

2005.  The decline in the percentage of totalrevenues was due to an increase in sales of Enhanced File Transfer and SecureServer which accounted for approximately 21% and 18% of total revenues,respectively. We are continuing to improve on our Enhanced File Transfer andSecure Server products to meet the needs of our customers who are concernedwith secure transfer of files on the internet. The Company made the decision tofocus on the file transfer products, as they are the core of our revenues andwill be in the future.

 

Substantiallyall software products ultimately reach a point in their lifecycle in which salescan be expected to plateau or decline. While it cannot be determined with certainty, CuteFTP Home and CuteFTPProfessional may have reached such a point in their lifecycles.  Management believes that the market forstand-alone FTP clients for home consumers may be declining.  However, we have not seen the same decline inthe market for secure FTP clients and servers such as CuteFTP Professional,Secure Server and Enhanced File Transfer which we believe better target theneeds of businesses.

 

Our strategyis to continue enhancing our file transfer products across the board to meetthe demands of both individual and enterprise users, while improving ourcurrent product line. Our success in 2005 is, to a great extent, dependent onour ability to market and sell our Enhanced File Transfer (EFT) to enterpriseusers. We introduced Enhanced File Transfer in late 2004; in the second quarterof 2005, EFT represented 21% of our total revenue. We are continuing to addresssecurity issues for our customers for future releases and will be releasingadditional modules for our Enhanced File Transfer and Secure Server products.We plan on releasing additional versions of our Enhanced File Transfer productthis year.  In general, our successdepends on our ability to introduce new products and the market’s acceptance ofthese products.  We released new versionsof CuteFTP, CuteFTP Pro and Secure Server early in 2005 and will again in late2005. We anticipate continued growth in our secure transfer products.

 

##### **Liquidity and Capital Resources**

 

The Company continuesto improve its positive working capital position through a combination ofrevenue growth and expense reductions; this has resulted in net income over thelast five quarters, including the quarter ended June 30, 2005. The Companyincurred significant operating losses during the three years ended December 31,2003 and in the first quarter of 2004. In February 2004 GlobalSCAPE reduced its workforce by 20%, layingoff 9 of the 45 people then employed by the Company.  As of June 30, 2005 the Company hasemployed 37 people.

 

We relyheavily on cash flows from operations and these cash flows are directly linkedto CuteFTP Home and CuteFTP Professional, which accounted for 71% and 56% ofour revenues in the six months ended June 30, 2004 and 2005respectively.  Although these productsdeclined as a percent of total revenue, the revenue from them actuallyincreased. Newer products in the second quarter of 2005, namely, Enhanced FileTransfer and Secure Server have increased total revenue and reduced thepercentage of total revenue previously held by the two FTP products. Totalrevenues increased 41% when comparing the second quarter of 2005 to the sameperiod in 2004.

 

Net cashprovided by operating activities was $476,057 for the six months ended June 30,2005 as compared to $30,085 in the six months ended June 30, 2004. Cashprovided in operations for the six months ended June 30, 2005, was primarilythe result of net income, and to a lesser extent, depreciation and amortization,accounts receivable, accrued expenses, and deferred revenue offset by accountspayable. The increase in sales to businesses has resulted in an increase inaccounts receivable as well as deferred revenue.

 

Net cash usedin investing activities for the six months ended June 30, 2004 and 2005was $29,625 and $63,753, respectively. The net cash used in both periods was mainly for the purchase ofcomputer hardware and software.

 

Net cash usedin financing activities during the six months ended June 30, 2004 and 2005was $111,538 and $0, respectively.  Netcash used in financing activities for the period ended June 30, 2004

 

9

----

 

consisted of $15,294 inprincipal payments on capital lease obligations, a $100,000 repayment of a bankloan and $3,756 in receipts related to the exercise of stock options.

 

As of June 30,2005 we had $985,263 in cash, current assets of $1,604,425 and currentliabilities of $594,438, resulting in working capital of $1,009,987, a $917,644improvement over the working capital at June 30, 2004.  Our principal commitments consisted ofobligations outstanding under capital and operating leases as well as royaltyagreements with third parties and trade accounts payable.  We plan to continue to expend significantresources on product development in future periods and may also use our cash toacquire or license technology, products or businesses related to our currentbusiness.  We expect that operatingexpenses will continue to be a material use of our cash resources as well.  The facility that we currently occupy isexpected to be sufficient for our growth for the next twelve months.  Consequently, we do not anticipate significantexpenditures for leasehold improvements or furniture for 2005.

 

The followingtable sets forth the future minimum payments required under contractualcommitments at June 30, 2005:

 
| ** **                  | ** ** | **Payments Due by Fiscal Year** | ** ** |
|-----------------------------|------------|---------------------------------|------------|
| **Contractual Obligations** | ** ** | **2005 (1)**                    | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Operating Lease             |       | $                               | 95,329     |   | $ | 190,659 |   | $ | 190,659 |   | $ | 95,330 |   | — |   | $ | 571,977 |   |
| Equipment Leases            |       | 3,129                           |       | 6,257 |   | 3,105 |   | — |   | — |   | 12,491 |   |
| Total Cash  Obligations     |       | $                               | 98,458     |   | $ | 196,916 |   | $ | 193,764 |   | $ | 95,330 |   | — |   | $ | 584,468 |   |

 

----

(1)          Amounts for 2005 reflect the future minimum payments for the remaining six months of the fiscal year.

 

# **CriticalAccounting Policies**

 

# ***Use ofEstimates***

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operations arebased upon the Company’s financial statements, which have been prepared in accordancewith accounting principles generally accepted in the Unites States.  The preparation of these financial statementsrequires management to make estimates and assumptions that affect the reportedamount of assets and liabilities.  On anongoing basis, management evaluates its estimates and judgments, includingthose related to revenue recognition, allowance for doubtful accountsreceivable, long-lived and intangible assets, income taxes, contingencies andlitigation.  Management bases itsestimates on historical experience, observable trends, and various otherassumptions that are believed to be reasonable under the circumstances.  Management uses this information to makejudgments about the carrying values of assets and liabilities that are not readilyapparent from other sources.  Actualresults may differ from the estimates under different assumptions orconditions.

 

Managementbelieves the following critical accounting policies affect its more significantjudgments and estimates used in the preparation of its financial statements.

 

***RevenueRecognition***

 

Our revenue is generatedprimarily by licensing our software products and providing support for thoseproducts.  Revenues are comprisedof the gross selling price of the software, including shipping charges and theearned portion of support and maintenance agreements.  The Company recognizes revenue in accordancewith the American Institute of Certified Public Accountants Statement ofPosition (“SOP”) 97-2, *Software RevenueRecognition*, as modified by SOP 98-9, *Modification of SOP 97-2, Software Revenue Recognition, With Respect toCertain Transactions*.

 

10

----

 

Revenues fromthe sale of software products are recognized and completely earned uponshipment or electronic delivery of the product provided that persuasiveevidence of an arrangement exists, collection is probable, payment terms arefixed and determinable and no significant obligations remain.

 

We also selltechnical support and maintenance agreements (post contract customer support “PCS”),which are sometimes bundled with the software. When vendor specific objective evidence (“VSOE”) of fair valueexists for all elements in a multiple element arrangement, revenue is allocatedto each element based on the relative fair value of each of the elements. VSOEof fair value is established by the price charged when the same element is soldseparately.  In a multiple elementarrangement whereby VSOE of fair value of all undelivered elements exists butVSOE of fair value does not exist for one or more delivered elements, revenueis recognized using the residual method. Under the residual method, the fairvalue of the undelivered elements is deferred and the remaining portion of thearrangement fee is recognized as revenue, assuming collection is probable.  Revenue allocated to PCS is recognizedratably over the contractual term, typically one year.

 

The Companysells technical support and maintenance services for some of its softwareproducts.  Deferred revenue grew to abalance of approximately $178,117 at December 31, 2004 and $255,658 at June 30,2005.  The deferred revenue is dueprimarily to the sale of technical support and maintenance agreements.  If the level of sales of technical supportand maintenance agreements remains the same or declines, the balance ofdeferred revenues will stabilize or decline. However, if sales grow, this balance will increase, resulting in thedeferred recognition of a significant amount of revenue in future periods. Theincrease in the first six months was largely due to the sale of maintenance andsupport for our enterprise type products.

 

***Allowancefor Doubtful Accounts***

 

We providecredit, in the normal course of business, to a number of companies and performongoing evaluations of our credit risk. We require no collateral from our customers and we estimate theallowance for uncollectible accounts based on our historical experience andcurrent credit evaluations.  No singlecustomer accounted for more than 2% of net revenues in 2004 or the first sixmonths of 2005.

 

***Valuationof Long-Lived and Intangible Assets***

 

The Companyassesses the impairment of long-lived and intangible assets whenever events orchanges in circumstances indicate that the carrying value may not be recoverable.  Factors considered important which couldtrigger an impairment review included the following:  significant underperformance relative tohistorical or projected future cash flows; significant changes in the manner ofuse of the assets or the strategy for the overall business; and significantnegative industry trends.  Whenmanagement determines that the carrying value of long-lived and intangibleassets may not be recoverable, impairment is measured based on the excess ofthe assets’ carrying value over the estimated fair value.  No impairment was recognized in 2004 or thefirst six months of 2005.

 

***Stock-BasedCompensation***

 

The Companyhas adopted Statement of Financial Accounting Standards No. 123, *Accounting for Stock Based Compensation*,and elected to use the intrinsic value method in accounting for its stockoption plan in accordance with Accounting Principles Board opinion No. 25,*Accounting for Stock Issued to Employees*andrelated interpretations under which compensation expense is recorded to theextent that the current market price of the underlying stock exceeds theexercise price.

 

During thesecond quarter ended June 30, 2005, 469,000 options were granted tovarious employees at an average exercise price of $0.3172 per share. During thesecond quarter of 2005, there were no options exercised, cancelled orforfeited.

 

In December 2004,FASB issued Statement No. 123-R, *Share-BasedPayment,*which establishes accounting standards for transactions inwhich an entity receives employee services in exchange for (a)

 

11

----

 

equity instruments of theentity or (b) liabilities that are based on the fair value of the entity’sequity instruments or that may be settled by the issuance of equity instruments*. *Effectivein the third quarter of 2005, SFAS 123-R will require us to recognize thegrant-date fair value of stock options and equity based compensation issued toemployees in the statement of operations. The statement also requires that such transactions be accounted forusing the fair –value-based method, thereby eliminating use of the intrinsicvalue method of accounting in APB No. 25, *Accountingfor Stock Issued to Employees,*which was permitted under Statement123, as originally issued.  This changein accounting will be required in the first quarter of 2006 and will result inincreased compensation expense for stock options over their vesting period.

 

***Researchand Development***

 

Research anddevelopment expenses include all direct costs, primarily salaries for personneland expenditures with external development sources, related to the developmentof new products and significant enhancements to existing products and areexpensed as incurred until such time as technological feasibility is achieved.For the six months ended June 30, 2004 and 2005, we spent approximately $387,000and $384,000, respectively, on research and development.  No research and development expenses werecapitalized in either of these periods and all previously capitalized researchand development expenses were fully amortized at December 31, 2002.

 

# ***IncomeTaxes***

# ** **

GlobalSCAPEaccounts for income taxes using the liability method in accordance withStatement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*. The liabilitymethod provides that the deferred tax assets and liabilities are recorded basedon the difference between the book and tax basis of assets and liabilities andtheir carrying amount for financial reporting purposes, as measured by theenacted tax rates and laws that will be in effect when the differences areexpected to reverse.  Deferred tax assetsare carried on the balance sheet with the presumption that they will berealizable in future periods when pre-taxable income is generated.

 

Statement ofFinancial Accounting Standards (SFAS) No. 109 requires a valuationallowance to reduce the deferred tax assets reported if, based on the weight ofthe evidence, it is more likely than not that some portion or all of thedeferred tax assets will not be realized.  Based on these criteria,management has concluded that no deferred tax assets are to be recorded relatedto the net operating loss carryforwards for the six months ended June 30,2005, because we cannot be certain of the future period recoverability of taxassets generated from any available net operating losses.

 

# **Comparisonof the Three Months ended June 30, 2004 and 2005**

 
| ** **                                    | ** ** | **2004**  | ** ** | **2005**  | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|-----------------------------------------------|------------|-----------|------------|-----------|------------|-------------------|------------|--------------|------------|
| Software product  revenues                    |       | $         | 1,287,797  |      | $          | 1,819,376         |       | $            | 531,579    |   | 41 | % |
| Cost of revenues                              |       | 93,837    |       | 77,819    |       | (16,018           | )          | (17          | )%         |
| Selling, general  and administrative Expenses |       | 798,436   |       | 986,570   |       | 188,134           |       | 24           | %          |
| Research and  development expenses            |       | 141,102   |       | 205,043   |       | 63,941            |       | 45           | %          |
| Depreciation and  amortization                |       | 50,220    |       | 24,315    |       | (25,905           | )          | (52          | )%         |
| Total operating  expense                      |       | 1,083,595 |       | 1,293,747 |       | 210,152           |       | 19           | %          |
| Income (loss)  from operations                |       | 204,202   |       | 525,629   |       | 321,427           |       | 157          | %          |
| Other Income  (expense)                       |       | —    |       | (15       | )          | (15               | )          | (100         | )%         |
| Income tax  expense                           |       | —    |       |      |       |              |       |         |       |
| Net income  (loss)                            |       | $         | 204,202    |      | $          | 525,614           |       | $            | 321,412    |   | 157 | % |

 

12

----

 

***Revenue.***  For the three months ended June 30, 2004and 2005, total revenues increased $531,579 or 41% from $1,287,797 to $1,819,376.Revenues from CuteFTP Home and CuteFTP Professional increased 1% over thecomparable periods.  Revenues from theseproducts were up 3% in the second quarter of 2005 over the first quarter of 2005.  CuteFTP Home and CuteFTP Professionalaccounted for 51% of total revenues for the three months ended June 30,2005. Enhanced File Transfer and Secure Server accounted for 21% and 18%respectively for the three months ended June 30, 2005.

 

***Cost of Revenues.***  Cost of revenues consists primarily ofproduction, packaging and shipping costs for boxed copies of software productsas well as a portion of our bandwidth costs, certain licensing expenses androyalties.  Cost of revenues decreased $16,018or 17% between periods from $93,837 for the three months ended June 30,2004 to $77,819 for the three months ended June 30, 2005 due to decreasedroyalty expenses related to our technology licensing agreement for the CuteSITEBuilderproduct and no longer selling our products online through Commission Junction.  Royalties that the Company pays on softwareproducts licensed from third parties, which it resells, are expensed as a costof sale when the software product is sold or earlier if the recoverability ofany prepaid royalties is in doubt.  TheCompany has distribution agreements with Hannon Hill Corp., Trellix Corp.,Perseus Development Corp., Beehive Software, Inc., Visicom Media, Inc.,and Xnet Communications GmbH.  TheGlobalSCAPE software products associated with each of the companies are PureCMS/ Publish XML, CuteSITE Builder, Web Survey, Mac FTP, CuteHTML Pro, and Mac FTPPro, respectively.

 

***Selling, General and Administrative.***  Selling, general and administrative expensesconsist primarily of personnel and related expenses, marketing, customersupport, rents, credit card transaction fees, bad debt and professional fees.  For the three months ended June 30, 2004and 2005 selling, general and administrative expenses were $798,436 and $986,570,respectively, an increase of $188,134 or 24%. For the three months ended June 30,2005, selling, general and administrative expenses decreased $13,384 over thequarter ended March 31, 2005.  Mostof the increase was due to the higher sales commissions resulting from higherrevenues.

 

***Research and Development.***  Research and development expenses increased $63,941or 45% for the three months ended June 30, 2004 and 2005, from $141,102 to$205,043.  The increase was due primarilyto an additional use of outside development sources.

 

***Depreciation and Amortization.***  Depreciation and amortization expenseconsists of depreciation expense related to our fixed assets, amortization ofthe trademark associated with our purchase of CuteFTP and in prior periods,amortization of capitalized development costs. Depreciation and amortization expense decreased from $50,220 to $24,315,a decrease of 52% for the three month period ended June 30, 2004 and 2005.  This decrease was due to a reduction indepreciation expense as fixed assets come to the end of their depreciable lifeand as well as a slowdown in additions to fixed assets as compared to priorperiods.

 

***Other Income, Expense.***  For the three months ended June 30, 2004and 2005, interest expense increased from $0 to $206, respectively.  The majority of interest expense incurred wasrelated to financing insurance premiums. A gain on the sale of fixed assets of $191 was realized during the threemonths ended June 30, 2005. There were no gains realized in the quarterended June 30, 2004.

 

***Income Taxes.***  Although we recorded net income for the threemonths ended June 30, 2004 and 2005, we did not recognize a tax liability relatedto this net income. The amount of current tax expense generated for the threemonths ending June 30, 2005 was offset by a reduction in the valuationallowance posted in our prior period deferred tax assets. As discussed in ourAnnual Report on Form 10K, we cannot be certain of the futurerecoverability of tax assets generated from available net operating losses.

 

***Net Income (Loss).***  GlobalSCAPE recorded net income of $525,614in the second quarter of 2005 compared to net income of $204,202 in the secondquarter of 2004.  The positive results inthe second quarter of 2005 were largely the result of increased revenues fromEnhanced File Transfer and the revenues from our new releases of other existingproducts.

 

13

----

 

# **Comparisonof the Six Months ended June 30, 2004 and 2005**

 
| ** **                                    | ** ** | **2004**  | ** ** | **2005**  | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|-----------------------------------------------|------------|-----------|------------|-----------|------------|-------------------|------------|--------------|------------|
| Software product  revenues                    |       | $         | 2,459,934  |      | $          | 3,241,757         |       | $            | 781,823    |   | 32 | % |
| Cost of revenues                              |       | 192,515   |       | 159,377   |       | (33,138           | )          | (17          | )%         |
| Selling, general  and administrative Expenses |       | 1,775,351 |       | 1,959,374 |       | 184,023           |       | 10           | %          |
| Research and  development expenses            |       | 386,733   |       | 383,809   |       | (2,924            | )          | 1            | %          |
| Depreciation and  amortization                |       | 106,014   |       | 53,415    |       | (52,599           | )          | (50          | )%         |
| Total operating  expense                      |       | 2,460,613 |       | 2,555,975 |       | 95,362            |       | 4            | %          |
| Income (loss)  from operations                |       | (679      | )          | 685,728   |       | 686,407           |       |         |       |
| Other Income  (expense)                       |       | (720      | )          | (534      | )          | 186               |       | 26           | %          |
| Income tax  expense                           |       | —    |       | —    |       | —            |       | —       |       |
| Net income  (loss)                            |       | $         | (1,399     | )         | $          | 684,183           |       | $            | 685,582    |   |   |   |

 

***Revenue.***  For the six months ended June 30, 2004and 2005, total revenues increased $781,823 or 32% from $2,459,934 to $3,241,757respectively.  Revenues from CuteFTP Homeand CuteFTP Professional increased 5% between periods. Total revenues werehelped by increased sales of some of our newer products such as Enhanced FileTransfer and new releases of our other products.

 

***Cost of Revenues.***  Cost of revenues consists primarily ofproduction, packaging and shipping costs for boxed copies of software productsas well as a portion of our bandwidth costs, certain licensing expenses androyalties.  Cost of revenues decreased $33,138or 17% between periods from $192,515 for the six months ended June 30, 2004to $159,377 for the six months ended June 30, 2005 due to decreasedroyalty expenses related to our technology licensing agreement for the CuteSITEBuilder and ending our agreement to sell through an online service.  We expect cost of revenues to decrease bothas a percentage of sales and in gross terms in future periods due to royalty agreements.

 

***Selling, General and Administrative.***  Selling, general and administrative expensesconsist primarily of personnel and related expenses, marketing, customersupport, rents, credit card transaction fees, bad debt and professional fees.  For the six months ended June 30, 2004and 2005 selling, general and administrative expenses were $1,775,351 and $1,959,374,respectively, an increase of $184,023 or 10%. The increase was due to primarily to the increase in sales commissions,health insurance costs and software maintenance.

 

***Research and Development.***  Research and development expenses decreased $2,924or 1% between periods, from $386,4733 to $383,809.  The decrease was due primarily to slightlylower personnel costs for internal staff.

 

***Depreciation and Amortization.***  Depreciation and amortization expenseconsists of depreciation expense related to our fixed assets, amortization ofthe trademark associated with our purchase of CuteFTP and in prior periods,amortization of capitalized development costs. Depreciation and amortization expense decreased from $106,014 to $53,415a decrease of 50%.  This decrease was dueto a reduction in amortization expense because many fixed assets are nearingthe end of their depreciable lives as well as a slowdown in additions to fixedassets in current periods relative to prior periods.

 

***Other Income, Expense.***  For the six months ended June 30, 2004and 2005, interest expense increased from $720 to $725, respectively.  The majority of interest expense incurredduring the 2004  period was related tocapital leases and borrowings from a bank, in 2005 it was related to financinginsurance premiums.  During the sixmonths ended June 30, 2005, we recognized a gain on the disposal of fixedassets in the amount of $191, and no disposals of fixed assets in the sameperiod in 2004.

 

14

----

 

***Income Taxes.***  Although we recorded net income for the sixmonths ended June 30, 2004 and 2005, we did not recognize a tax liabilityrelated to this net income. The amount of current tax expense generated for thesix months ending June 30, 2005 was offset by a reduction in the valuationallowance posted in our prior period deferred tax assets. As discussed in ourAnnual Report on Form 10K, we cannot be certain of the futurerecoverability of tax assets generated from available net operating losses.

 

***Net Income (Loss).***  GlobalSCAPE incurred a net loss of $(1,399)and net income of  $684,183 for the sixmonths ended June 30, 2004 and 2005, respectively.  The net loss in the six months ended June 30,2004  was due a loss in the first quarterfollowed by almost an even net income for the second quarter. The net incomefor the six months ended June 30, 2005 was largely due to the release ofour Enhanced File Transfer product in late 2004, increased Secure Serverrevenue and increased sales in other products which had new versions releasedduring the period.

 

##### **Seasonality**

 

We believe oursales are subject to seasonal variations. We experience significantly less sales volume during national holidaysand weekends when compared to normal business days.  We expect that in future periods we will seeweakness in the fourth quarter when compared to the third quarter due to theholiday season

 

# **Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

To date, wehave not utilized derivative financial instruments or derivative commodityinstruments.  We do not expect to employthese or other strategies to hedge market risk in the foreseeable future.  We may invest our cash in money market funds,which are subject to minimal credit and market risk.  We believe that the interest rate risk andother relevant market risks associated with these financial instruments are immaterial.

 

In the threemonths ended June 30, 2004, approximately 35% of our revenues came fromcustomers outside the United States.  Allrevenues are received in U.S. dollars so we have no exchange rate risk withregard to the sale.  However, in July 2003,the European Union (EU) enacted Value Added Taxes (VAT) on electronicpurchases.  These taxes are charged toour non-business customers in the EU and, in our case, are remitted quarterlyin pound sterling.  We expect that theimpact of this currency translation will not be material to our business.

 

# **Item 4. Controls and Procedures**

 

a)              Evaluation ofdisclosure controls and procedures. Within the 90 days prior to the filing date of this report, ourPresident and Chief Financial Officer carried out an evaluation of GlobalSCAPE’sdisclosure controls and procedures (as defined SEC Rules 13a-14 and 15d-14under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”))and concluded that the controls and procedures are effective in recording,processing, summarizing and reporting the information required to be disclosedby GlobalSCAPE in the reports it files with the SEC under the Exchange Actwithin the time periods specified in the SEC’s rules and forms.

 

b)             Changes in internalcontrols.  There were no material changesin GlobalSCAPE’s internal controls subsequent to the evaluation describedabove.

 

## **Part II. Other Information.**

## ** **

# **Item 1.  LegalProceedings**

 

We are notcurrently involved in any material legal proceedings.

 

15

----

 

# **Item 2.  Changesin Securities and Use of Proceeds**

 

None in the secondquarter of 2005.

 

# **Item 3.  DefaultsUpon Senior Securities**

# ** **

Not applicable.

 

# **Item 4.  Submissionof Matters to a Vote of Security Holders**

 

The AnnualMeeting of Stockholders was held on June 8, 2005. A proposal to electthree (3) nominees for membership on the Company’s Board of Directors,each to serve until the next Annual Meeting of Stockholders, and until theirsuccessors are duly elected and qualified. The nominees received the following votes:

 
| **Name:**        | ** ** | **Votes for:** | ** ** | **Votes Withheld:** | ** ** |
|------------------|------------|----------------|------------|---------------------|------------|
| Thomas W. Brown  |       | 10,277,966     |       | 7,789               |       |
| David L. Mann    |       | 10,277,966     |       | 7,789               |       |
| Charles R. Poole |       | 10,277,966     |       | 7,789               |       |

 

In addition,stockholders ratified the appointment of Helin, Donovan, Trubee &Wilkinson, LLP, LLP as the Company’s independent certified public accountantsto audit the Company’s consolidated financial statements for the year ending December 31,2005. This proposal received the following votes:

 
| **For:**     |   | 10,276,425 |   |
|--------------|--------|------------|--------|
| **Against:** |   | 3,904      |   |
| **Abstain:** |   | 5,426      |   |

 

# **Item 5.  OtherInformation**

 

None

 

# **Item 6.  Exhibitsand Reports on Form 8-K**

 

**(a)**           Exhibits

 

31.1Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1 Certificatepursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

16

----

 

**(b)**           Reportson Form 8-K

 

A Form 8-K was filedon June 20, 2005, under Item 1.01Entry into a Material Definitive Agreement****relating to GlobalSCAPE, Inc.entering into an Employment Agreement with Charles R. Poole, President andChief Operating Officer and a director of the Company on June 15, 2005.

 

17

----

 

**Signatures**

** **

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|                |                  GLOBALSCAPE,  INC. |
|---------------------|--------------------------------------------------------------------------------------------------------------------------|
|                |                                                                                                                     |
|                |                                                                                                                     |
| August 2, 2005 |                                                                                                                     | By: |   | /s/ Charles R. Poole |   |
| Date                |                                                                                                                     |   |   | Charles R. Poole |
|                |                                                                                                                     |   | President and Chief Operating Officer |
|                |                                                                                                                     |
| August 2, 2005 |                                                                                                                     | By: |   | /s/ Thomas F. Farar |   |
| Date                |                                                                                                                     |   |   | Thomas F. Farar |
|                |                                                                                                                     |   | Chief Financial Officer |

 

18

----