**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**x****         ****QUARTERLY****REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the Quarterly Period endedSeptember 30, 2007**

 

**OR**

 

**o****          ****TRANSITION REPORT PURSUANT TO SECTION13 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 itscharter)

 

| **Delaware**                          | ** ** | **74-2785449**      |
|---------------------------------------|------------|---------------------|
| (State or other jurisdiction of       |       | (I.R.S. Employer    |
| incorporation or organization)        |       | Identification No.) |
|                                  |       |                |
| **6000 Northwest Parkway, Suite 100** | ** ** | ** **          |
| **San Antonio, Texas**                | ** ** | **78249**           |
| (Address of Principal                 |       | (Zip Code)          |
| Executive Office)                     |       |                |

 

**(210)308-8267**

(Registrant’s Telephone Number, Including AreaCode)

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

x Yes    o No

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act (check one):

 

Large Accelerated filer o    Accelerated filer o    Non-Accelerated filer x

 

Indicateby check mark if the registrant is a shell company (as defined in Rule 12b-2 ofthe Act).

 

o Yes    x No

 

As of November 13, 2007,there were 17,315,785 shares of common stock outstanding.

 

 

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**GlobalSCAPE Inc.**

** **

**Quarterly Report on Form 10-Q**

**For the Quarter ended September 30, 2007**

** **

**Index**

** **
| ** **   | ** **                                                                                  | **PAGE** |
|--------------|---------------------------------------------------------------------------------------------|----------|
|         |                                                                                        |     |
| **Part I.**  | **Financial Information**                                                                   | 1        |
|         |                                                                                        |     |
| Item 1.      | Financial Statements                                                                        | 1        |
|         | Consolidated  Balance Sheets                                                                | 1        |
|         | Consolidated  Statements of Operations                                                      | 3        |
|         | Consolidated  Statements of Cash Flows                                                      | 4        |
|         | Notes  to Consolidated Financial Statements                                                 | 5        |
|         |                                                                                        |     |
| Item  2.     | Management’s Discussion and  Analysis of Financial Condition and Results of Operations | 12       |
|         |                                                                                        |     |
| Item  3.     | Quantitative and Qualitative  Disclosures About Market Risk                                 | 21       |
|         |                                                                                        |     |
| Item  4.     | Controls and Procedures                                                                     | 21       |
|         |                                                                                        |     |
| **Part II.** | **Other Information**                                                                       | **22**   |
|         |                                                                                        |     |
| Item 1.      | Legal Proceedings                                                                           | 22       |
|         |                                                                                        |     |
| Item1A       | Risk Factors                                                                                | 22       |
|         |                                                                                        |     |
| Item  2.     | Unregistered Sales of Equity  Securities and Use of Proceeds                                | 22       |
|         |                                                                                        |     |
| Item 4.      | Submission of Matters to a Vote of  Security Holders                                        | 23       |
|         |                                                                                        |     |
| Item 6.      | Exhibits                                                                                    | 23       |
|         |                                                                                        |     |
| Signatures   |                                                                                        | 24       |

 

GlobalSCAPE®,CuteFTP Pro®, CuteZIP® and CuteMAP® are registered trademarks of GlobalSCAPETexas, LP. CuteFTP, CuteHTML, GlobalSCAPE Secure FTP Server, GlobalSCAPETransfer Engine, ContentXML, and Enhanced File Transfer Server are trademarksof GlobalSCAPE Texas, LP. Other trademarks and tradenames in thisquarterly report are the property of their respective owners.

 

----

** **

**Part I.Financial Information**

 

**Item 1. Financial Statements**

 

**GlobalSCAPE, Inc.**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                      | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                                                      | ** ** | **2006**              | ** ** | **2007**               | ** ** |
| ** **                                                                                                                                      | ** ** | ** **            | ** ** | **(unaudited)**        | ** ** |
| Assets                                                                                                                                          |       |                  |       |                   |       |
| Current assets:                                                                                                                                 |       |                  |       |                   |       |
| Cash and cash  equivalents                                                                                                                      |       | $                     | 4,632,666  |                   | $          | 4,573,998 |   |
| Accounts  receivable (net of allowance for doubtful accounts of $59,458 and $62,309 at  December 31, 2006 and September 30, 2007, respectively) |       | 1,592,846             |       | 1,735,483              |       |
| Federal income  tax receivable                                                                                                                  |       | 73,525                |       | —                 |       |
| Prepaid expenses                                                                                                                                |       | 115,754               |       | 120,825                |       |
| Total current  assets                                                                                                                           |       | 6,414,791             |       | 6,430,306              |       |
|                                                                                                                                            |       |                  |       |                   |       |
| Property and  equipment:                                                                                                                        |       |                  |       |                   |       |
| Furniture and  fixtures                                                                                                                         |       | 343,702               |       | 343,702                |       |
| Software                                                                                                                                        |       | 323,161               |       | 393,615                |       |
| Equipment                                                                                                                                       |       | 720,107               |       | 777,513                |       |
| Leasehold  improvements                                                                                                                         |       | 191,090               |       | 191,090                |       |
|                                                                                                                                            |       | 1,578,060             |       | 1,705,920              |       |
| Accumulated  depreciation and amortization                                                                                                      |       | 1,345,881             |       | 1,430,742              |       |
| Net property and  equipment                                                                                                                     |       | 232,179               |       | 275,178                |       |
|                                                                                                                                            |       |                  |       |                   |       |
| Other assets:                                                                                                                                   |       |                  |       |                   |       |
| Goodwill                                                                                                                                        |       | 9,653,059             |       | 9,753,059              |       |
| Deferred tax  asset                                                                                                                             |       | 8,724                 |       | 315,989                |       |
| Other                                                                                                                                           |       | 58,996                |       | 79,968                 |       |
| Total other  assets                                                                                                                             |       | 9,720,779             |       | 10,149,016             |       |
|                                                                                                                                            |       |                  |       |                   |       |
| Total assets                                                                                                                                    |       | $                     | 16,367,749 |                   | $          | 16,854,500 |   |

 

See accompanyingnotes.

 

1

----

 

**GlobalSCAPE, Inc.**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                                                                   | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **2006**              | ** ** | **2007**               | ** ** |
| ** **                                                                                                                                                                                   | ** ** | ** **            | ** ** | **(unaudited)**        | ** ** |
|                                                                                                                                                                                         |       |                  |       |                   |       |
| Current  liabilities:                                                                                                                                                                        |       |                  |       |                   |       |
| Accounts payable                                                                                                                                                                             |       | $                     | 371,093    |                   | $          | 407,022 |   |
| Accrued expenses                                                                                                                                                                             |       | 377,940               |       | 604,057                |       |
| Federal income  tax payable                                                                                                                                                                  |       | —                |       | 277,513                |       |
| Long-term  debt,current portion                                                                                                                                                              |       | 1,539,455             |       | —                 |       |
| Deferred revenue                                                                                                                                                                             |       | 1,377,037             |       | 2,035,016              |       |
| Total current  liabilities                                                                                                                                                                   |       | 3,665,525             |       | 3,323,608              |       |
|                                                                                                                                                                                         |       |                  |       |                   |       |
| Long-term  liabilities:                                                                                                                                                                      |       |                  |       |                   |       |
| Deferred  compensation                                                                                                                                                                       |       | 52,487                |       | 100,945                |       |
| Long-term debt,  non-current portion                                                                                                                                                         |       | 3,070,757             |       | —                 |       |
| Other long-term  liabilities                                                                                                                                                                 |       | 5,941                 |       | —                 |       |
| Total long-term  liabilities                                                                                                                                                                 |       | 3,129,185             |       | 100,945                |       |
|                                                                                                                                                                                         |       |                  |       |                   |       |
| Total Liabilities                                                                                                                                                                            |       | 6,794,710             |       | 3,424,553              |       |
|                                                                                                                                                                                         |       |                  |       |                   |       |
| 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, 16,490,146 and  17,088,853 shares issued and outstanding at December 31, 2006 and September 30,  2007, respectively |       | 16,490                |       | 17,088                 |       |
| Common stock  held in treasury at cost, 159,873 shares at September 30, 2007                                                                                                                 |       | —                |       | (527,528               | )          |
| Additional  paid-in capital                                                                                                                                                                  |       | 6,363,520             |       | 7,456,389              |       |
| Retained  earnings                                                                                                                                                                           |       | 3,193,029             |       | 6,483,998              |       |
| Total  stockholders’ equity                                                                                                                                                             |       | 9,573,039             |       | 13,429,947             |       |
| Total  liabilities and stockholders’ equity                                                                                                                                             |       | $                     | 16,367,749 |                   | $          | 16,854,500 |   |

 

See accompanyingnotes.

 

2

----

 

**GlobalSCAPE,Inc.**

**ConsolidatedStatements of Operations**

**(Unaudited)**

 
| ** **                                                                            | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                            | ** ** | **2006**                             | ** ** | **2007**                            | ** ** | **2006** | ** ** | **2007** | ** ** |
| Operating  revenues:                                                                  |       |                                 |       |                                |       |   |   |   |   |
| Software product  revenues                                                            |       | $                                    | 1,910,198  |                                | $          | 2,918,984 |   | $ | 6,335,822 |   | $ | 10,915,730 |   |
| Maintenance and  support (net of deferred revenues)                                   |       | 693,038                              |       | 981,316                             |       | 1,127,664 |   | 3,025,742 |   |
| Total revenues                                                                        |       | 2,603,236                            |       | 3,900,300                           |       | 7,463,486 |   | 13,941,472 |   |
|                                                                                  |       |                                 |       |                                |       |   |   |   |   |
| Operating  expenses:                                                                  |       |                                 |       |                                |       |   |   |   |   |
| Cost of revenues  (exclusive of depreciation and amortization shown separately below) |       | 145,646                              |       | 85,711                              |       | 372,565 |   | 204,881 |   |
| Selling, general  and administrative expenses                                         |       | 1,318,952                            |       | 2,529,956                           |       | 3,879,460 |   | 7,451,676 |   |
| Research and  development expenses                                                    |       | 302,363                              |       | 443,433                             |       | 799,168 |   | 1,432,394 |   |
| Depreciation and  amortization                                                        |       | 25,046                               |       | 38,965                              |       | 69,726 |   | 105,393 |   |
| Total operating  expense                                                              |       | 1,792,007                            |       | 3,098,065                           |       | 5,120,919 |   | 9,194,344 |   |
| Income from  operations                                                               |       | 811,229                              |       | 802,235                             |       | 2,342,567 |   | 4,747,128 |   |
|                                                                                  |       |                                 |       |                                |       |   |   |   |   |
| Other income  (expense):                                                              |       |                                 |       |                                |       |   |   |   |   |
| Interest expense                                                                      |       | —                               |       | (2,292                              | )          | — |   | (33,443 | ) |
| Interest income                                                                       |       | 21,412                               |       | 42,967                              |       | 58,342 |   | 55,679 |   |
| Gain on sale of  assets                                                               |       | —                               |       | 221                                 |       | 619 |   | 221 |   |
| Other income  (expense)                                                               |       | —                               |       | 644                                 |       | (295 | ) | 2,269 |   |
| Total other  income (expense)                                                         |       | 21,412                               |       | 41,540                              |       | 58,666 |   | 24,726 |   |
| Income before  income taxes                                                           |       | 832,641                              |       | 843,775                             |       | 2,401,233 |   | 4,771,854 |   |
| Provision for  income taxes                                                           |       | 294,556                              |       | 140,900                             |       | 814,161 |   | 1,480,887 |   |
|                                                                                  |       |                                 |       |                                |       |   |   |   |   |
| Net income                                                                            |       | $                                    | 538,085    |                                | $          | 702,875 |   | $ | 1,587,072 |   | $ | 3,290,967 |   |
|                                                                                  |       |                                 |       |                                |       |   |   |   |   |
| Net income per  common share- basic                                                   |       | $                                    | 0.04       |                                | $          | 0.04 |   | $ | 0.11 |   | $ | 0.19 |   |
| Net income per  common share- assuming dilution                                       |       | $                                    | 0.03       |                                | $          | 0.04 |   | $ | 0.10 |   | $ | 0.18 |   |
|                                                                                  |       |                                 |       |                                |       |   |   |   |   |
| Average shares  outstanding:                                                          |       |                                 |       |                                |       |   |   |   |   |
| Basic                                                                                 |       | 14,484,319                           |       | 17,105,835                          |       | 14,152,932 |   | 17,161,519 |   |
| Diluted                                                                               |       | 15,891,298                           |       | 18,333,292                          |       | 15,549,377 |   | 18,108,829 |   |

 

See accompanyingnotes.

 

3

----

 

**GlobalSCAPE,Inc.**

**Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                                | ** ** | **2007** | ** ** |
| Operating  Activities:                                                             |       |                                                    |       |   |   |
| Net Income                                                                         |       | $                                                       | 1,587,072  |   | $ | 3,290,967 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                    |       |   |   |
| Bad debt expense                                                                   |       | 2,560                                                   |       | 2,851 |   |
| Depreciation and  amortization                                                     |       | 69,726                                                  |       | 105,393 |   |
| Amortization of  deferred loan costs                                               |       | —                                                  |       | 36,345 |   |
| (Gain) loss on  disposition of assets                                              |       | (619                                                    | )          | (221 | ) |
| Stock-based  compensation                                                          |       | 204,935                                                 |       | 759,014 |   |
| Deferred taxes                                                                     |       | (11,949                                                 | )          | (307,265 | ) |
| Changes in  operating assets and liabilities:                                      |       |                                                    |       |   |   |
| Accounts  receivable                                                               |       | (574,761                                                | )          | (145,488 | ) |
| Prepaid expenses                                                                   |       | (94,963                                                 | )          | (5,071 | ) |
| Other Assets                                                                       |       | —                                                  |       | (157,320 | ) |
| Accounts payable                                                                   |       | 168,744                                                 |       | 35,929 |   |
| Accrued expenses                                                                   |       | 77,453                                                  |       | 226,117 |   |
| Federal income  tax payable                                                        |       | 215,821                                                 |       | 351,038 |   |
| Deferred  revenues                                                                 |       | 379,002                                                 |       | 657,979 |   |
| Deferred  compensation                                                             |       | 19,740                                                  |       | 48,458 |   |
| Other long-term  liabilities                                                       |       | (46,153                                                 | )          | (5,936 | ) |
| Net cash  provided by operating activities                                         |       | 1,996,608                                               |       | 4,892,790 |   |
| Investing  Activities:                                                             |       |                                                    |       |   |   |
| Proceeds from  sale of property and equipment                                      |       | 619                                                     |       | 221 |   |
| Purchase of  property and equipment                                                |       | (114,043                                                | )          | (148,392 | ) |
| Purchase of  Availl, Inc.                                                          |       | (7,776,932                                              | )          | — |   |
| Cash acquired in  purchase of Availl, Inc.                                         |       | 181,277                                                 |       | — |   |
| Net cash used in  investing activities                                             |       | (7,709,079                                              | )          | (148,171 | ) |
| Financing  Activities:                                                             |       |                                                    |       |   |   |
| Issuance of  common stock                                                          |       | 28,969                                                  |       | 334,453 |   |
| Purchase of  treasury stock                                                        |       | —                                                  |       | (527,528 | ) |
| Additional  paid-in capital                                                        |       | —                                                  |       | — |   |
| Proceeds from  term loan                                                           |       | 5,000,000                                               |       | — |   |
| Repayment of  long-term debt                                                       |       | —                                                  |       | (4,610,212 | ) |
| Net cash  provided by (used in) financing activities                               |       | 5,028,969                                               |       | (4,803,287 | ) |
| Net decrease in  cash                                                              |       | (683,502                                                | )          | (58,668 | ) |
| Cash at  beginning of period                                                       |       | 2,029,473                                               |       | 4,632,666 |   |
| Cash at end of  period                                                             |       | $                                                       | 1,345,971  |   | $ | 4,573,998 |   |
|                                                                               |       |                                                    |       |   |   |
| Supplemental  disclosures:                                                         |       |                                                    |       |   |   |
| Interest paid                                                                      |       | $                                                       | —     |   | $ | 33,443 |   |
| Income taxes  paid                                                                 |       | $                                                       | 666,920    |   | $ | 1,350,000 |   |
|                                                                                    |            |                                                         |            |  |  |  |  |  |

 

See accompanyingnotes.

 

4

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**GlobalSCAPE, Inc.**

** **

**Notes to Consolidated FinancialStatements**

** **

# **Natureof Business**

# ** **

GlobalSCAPE, Inc. (“GlobalSCAPE”), founded inApril 1996, develops and distributes secure file management software thatenables users to safely send data over the internet and Wide-Area Files Systems(“WAFS”) collaboration and Continuous Data Protection (“CDP”) software. Oursoftware is used worldwide across a wide range of industries. Through the endof 2006, we had sold approximately 1.6 million software licenses and supportagreements and our customer base includes individual consumers, small tomedium-sized businesses, as well as some of the largest corporations in theworld.

 

Our file transfer products provide privacyfor critical information such as medical records, financial data, customerfiles and other similar documents. In addition, these products provide forcompliance with government regulations relating to the protection ofinformation while allowing users to reduce IT costs, increase efficiency, trackand audit transactions and automate processes. Our WAFS and CDPproducts providedata replication, acceleration of file transfer, sharing/collaboration andcontinuous data backup and recovery to our customers. We believe that weare uniquelypositioned to provide secure transfer, sharing, and replication of files thatneed to be transmitted inside the user’s firewall to distributed offices, oroutside the user’s firewall to business and trading partners.

 

During thenine months ended September 30, 2007, approximately 82% of our revenues weregenerated from customers within the United States, with the remaining 18%concentrated mostly in Western Europe, Canada and Australia. Virtually all ofour 2007 revenues were derived from sales of software licenses and supportagreements. The combined sales of CuteFTP Home and CuteFTP Pro accounted for33% of our revenues for the first nine months of 2006 and 18% of our revenuesfor the same period of 2007. The combined sales of our SecureFTP Server andEnhanced File Transfer products represented 63% and 67% of our revenues for the nine monthsended September 30, 2006 and 2007, respectively. There were no sales of theWAFS and CDP products in the first nine months of 2006, but sales of theseproducts represented 16% of our revenues for the nine months ended September30, 2007.

 

***Corporate Structure***

*** ***

Prior to September 22, 2006, all of theCompany’s operations were conducted by GlobalSCAPE Texas, LP, a Texas limitedpartnership. The partners of GlobalSCAPE Texas, LP are two Nevada limitedliability companies, which are both wholly-owned subsidiaries of GlobalSCAPE,Inc., a Delaware corporation.

 

On September 22, 2006, GlobalSCAPE acquiredone hundred percent (100%) of the issued and outstanding capital stock ofAvaill, Inc., a privately held corporation (“Availl”), pursuant to an Agreementand Plan of Merger with Availl and its stockholders. The purchase price was$9.65 million of which $7.65 million was paid in cash and $2.0 million was paidin shares of GlobalSCAPE common stock.

 

Availl operates as a wholly-owned subsidiaryof GlobalSCAPE, Inc. based in Andover, Massachusetts. GlobalSCAPE, Inc. is aholding company and conducts no operations; however, references to “GlobalSCAPE”or the “Company” refer collectively to GlobalSCAPE Texas, LP, its partners andAvaill unless otherwise indicated.

 

On July 19, 2007 the common stock ofGlobalSCAPE, Inc. began trading on the American Stock Exchange (AMEX) under thesymbol GSB.

 

5

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# **Basisof Presentation**

# ** **

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with 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 consolidated financial statements. In the opinion ofmanagement, all adjustments (consisting of normally recurring accruals)considered necessary for a fair presentation have been made. The results ofoperations for any interim period are not necessarily indicative of the resultsto be expected for the full year.

 

Theconsolidated balance sheet at December 31, 2006 has been derived from theaudited consolidated financial statements at that date but does not include allthe information and footnotes required by generally accepted accountingprinciples for complete consolidated financial statements. For furtherinformation, refer to the consolidated financial statements and footnotesincluded in GlobalSCAPE’s Annual Report on Form 10-K for the year endedDecember 31, 2006.

 

# **Principlesof Consolidation**

# ** **

Theconsolidated financial statements include all subsidiaries. All inter-companytransactions and balances have been eliminated.

 

# **Liquidity**

# ** **

The use of capitalresources is driven principally by the need to enhance existing products and todevelop or acquire new products. The amount of such expenditures has a directimpact on the ability to offer enhanced and new products to customers. TheCompany’s principal source of funds is cash flow from operations which, inturn, is highly dependent on sales revenue. During the nine months endedSeptember 30, 2007, the Company generated $4.9 million of cash from operations,$1.4 million of which was used along with other funds to repay a $4.6 millionterm loan incurred in connection with the Availl acquisition. Wecontinue to generate cash in excess of our operational needs. As of September 30, 2007,the Company had cash and cash equivalents of $4.6 million and had net workingcapital of $3.1 million. Management believes this level of working capital,together with availability under the Company’s revolving credit facility withSilicon Valley Bank and the excess cash generated by the profitable operationof the business, is adequate to finance the Company’s current level ofoperations.

 

The Company enteredinto a loan agreement with Silicon Valley Bank on September 22, 2006 whichinvolved a $5,000,000 term loan agreement which we used to finance part of thecash portion of the purchase price for Availl. The term loan was fully repaidin the first quarter of 2007. The loan agreement also established a $750,000revolving line of credit for two years at an interest rate of prime plus 1.00%.At September 30, 2007, the entire amount of this line of credit was available.

 

On May 21, 2007,the Board of Directors approved a plan to repurchase up to $3.0 million ofGlobalSCAPE common stock. The repurchase plan is designed to increaseshareholders’ value and reduce the dilutive effect of GlobalSCAPE’s stockoption plans. As of September 30, 2007, the Company had repurchased a total of159,873 shares at an average cost of $3.35 per share for a total cost of$527,528. We base our level of stock repurchases on internal cash managementdecisions and this level may fluctuate from quarter to quarter. At September30, 2007, approximately $2.5 million remained available for repurchase underthe existing repurchase authorization.

 

***Reclassifications***

*** ***

***Certain prior period amounts havebeen reclassified to conform to the current year presentation. Thesereclassifications had no impact on operating income as previously reported.***

 

6

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***Sale / Disposal of Assets***

*** ***

***During***the first nine months of 2006, the Companydisposed of equipment with an original purchase price of $15,362 and accumulateddepreciation of $15,362. GlobalSCAPE recognized a gain of $619 related to thedisposal of these assets. During the first nine months of 2007, the Companydisposed of equipment with an original purchase price of $20,532 andaccumulated depreciation of $20,532. GlobalSCAPE recognized a gain of $221related to the disposal of these assets

*** ***

**Goodwill**

 

As of September 30, 2007, GlobalSCAPE hadgoodwill in the amount of $9.8 million associated with theacquisition of Availl. This acquisition was accounted for using the purchasemethod of accounting. See Acquisitions note for a description of the acquisition. Inaccordance with SFAS No. 142 *Goodwill and OtherIntangible Assets*, the Company will assess the impairment ofgoodwill annually in the fourth quarter, or more frequently if other indicatorsof potential impairment arise.

 

Noallocation has been made to intangible assets as of September 30, 2007. Managementwill determine the proper value of intangible assets acquired from Availl, Inc.and allocate a portion of the goodwill to intangible assets within the nextthree months.

 

**Acquisitions**

 

OnSeptember 22, 2006, the Company completed the acquisition of all of the issuedand outstanding shares of Availl, a privately held provider of WAFS and CDPsoftware, for $7.65 million in cash and $2.0 million in the form of 716,846shares of GlobalSCAPE common stock. The Company incurred direct acquisitioncosts of approximately $127,000. In connection with the acquisition, $850,000of the cash consideration was placed into an escrow account for purposes ofsettling indemnification claims for the eighteen-month period following theclosing. In accordance with EITF Issue No. 99-12, *Determination of the Measurement Date for the Market Price of AcquirerSecurities Issued in a Purchase Business Combination*, the Companyhas used $2.79 as the per share amount to value the common stock considerationpaid to Availl shareholders (representing the average of the closing prices ofGlobalSCAPE’s common stock for the thirty days before the date of the closingof the merger, September 22, 2006). Pursuant to the terms of the acquisition,the Company granted stock options to the former Availl stockholders who werealso employees under the GlobalSCAPE, Inc. 2000 Stock Option Plan. Exercisingthe options under this plan is contingent upon the individual’s continuedemployment with the Company and will be vested over three years in three annualinstallments.

 

TheAvaill acquisition was accounted for using the purchase method of accounting.The purchase price was paid on the September 22, 2006 closing date. Thevalue of assets and liabilities was estimated based on the purchase price andfuture intended use. In the quarter ended June 30, 2007, the Company adjustedthe net fair value of assets acquired lower by $100,000 resulting in anincrease in goodwill acquired of $100,000.

 

Goodwillrepresents the excess of the purchase price over the fair value of the netidentifiable assets acquired. This premium paid for the acquisitions is basedon management’s belief that the acquired technologies, businesses andengineering talent were of strategic importance in the Company’s growthstrategy. Operating results from the acquired business is included in thecondensed consolidated statements of operations from the date of acquisition.

 

7

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Asummary of the purchase price allocation is as follows:

 
| 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 assets acquired and liabilities assumed |   | (23,872   | )         |
| Goodwill  acquired                                         |   | $         | 9,753,059 |   |

 

The net fair value ofassets acquired and liabilities assumed of Availl at the acquisition date wereas follows:

 
| Cash                                                       |   | $        | 191,276 |   |
|------------------------------------------------------------|--------|----------|---------|--------|
| Accounts  receivable, net                                  |   | 453,798  |    |
| 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 |   | $        | 23,872  |   |

 

# **Stock-BasedCompensation**

# ** **

GlobalSCAPE has stock-based compensation plansavailable to grant incentive stock options, non-qualified stock options andrestricted stock to employees and non-employee members of the Board ofDirectors.

 

Under the GlobalSCAPE, Inc. 2000 Stock Option Plan(the “Employees Plan”), which was approved by the Board of Directors and becameeffective on May 17, 2001, a maximum of 3,660,000 shares of GlobalSCAPE commonstock may be awarded. Duringthe nine months ended September 30, 2007, 450,000 stock options were granted. Theexercise price, term and other conditions applicable to each stock optiongranted under the Employees Plan are determined by the Board of Directors. Theexercise price of stock options is set on the grant date and may not be lessthan the fair market value per share of our stock on that date. The EmployeesPlan options generally become exercisable over a three-year period and expireafter ten years.

 

Under the GlobalSCAPE, Inc. 2006 Non-Employee Directors Long-term Equity Incentive Plan (the “DirectorsPlan”), which was approved by the stockholders and became effective onSeptember 1, 2007, a maximum of 500,000 shares of GlobalSCAPE common stock maybe awarded. Duringthe nine months ended September 30, 2007, 80,000 stock options were granted. Theexercise price, term and other conditions applicable to each stock optiongranted under the Directors Plan are determined by the Compensation Committeeof the Board of Directors. The exercise price of stock options is set on thegrant date and may not be less than the fair market value per share of ourstock on that date. The most recently awarded Directors Plan options becomeexercisable over a one-year period and expire after ten years.

 

Effective January 1, 2006, we adopted the provisionsof Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment” (SFAS No. 123R) requiring that compensation cost relating toshare-based payment transactions be recognized in the financial statements. Thecost is measured at the grant date, based on the calculated fair value of theaward, and is recognized as an expense

 

8

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over the employee’s requisite service period (generallythe vesting period of the equity award). Prior to January 1, 2006, we accountedfor share-based compensation to employees in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”(APB No. 25), and related interpretations. We also followed the disclosurerequirements of Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation”, as amended by Statement of Financial AccountingStandards No. 148, “Accounting for Stock-Based Compensation-Transition andDisclosure”. We adopted SFAS No. 123R using the modified prospective methodand, accordingly, financial statement amounts for prior periods presented inthis Form 10-Q have not been restated to reflect the fair value method ofrecognizing compensation cost relating to non-qualified stock options.

 

There was $204,935 and$759,014 of compensation cost related to incentive stock options recognized inoperating results in the nine months ended September 30, 2006 and 2007,respectively.

 

The fair value of each option award is estimated onthe date of grant using the Black-Scholes option-pricing model. Expectedvolatility is based on historical volatility of GlobalSCAPE stock. We used thesimplified method to derive an expected term. The expected term represents anestimate of the time options are expected to remain outstanding. The risk-freerate 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 setsforth the assumptions used to determine compensation cost for our non-qualifiedstock options consistent with the requirements of SFAS No. 123R for the threemonths ended September 30, 2007:

 
| Expected  volatility            |   | 94.00 | %      |
|---------------------------------|--------|-------|--------|
| Expected annual  dividend yield |   | 0.00  | %      |
| Risk free rate  of return       |   | 4.67  | %      |
| Expected option  term (years)   |   | 6     |   |

 

The following table summarizes information about stockoption activity for the nine months ended September 30, 2007: 

 
| ** **                         | ** ** | ** **          | ** ** | ** **           | ** ** | **Weighted**          | ** ** | ** **          | ** ** |
|------------------------------------|------------|---------------------|------------|----------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                         | ** ** | ** **          | ** ** | ** **           | ** ** | **Average**           | ** ** | ** **          | ** ** |
| ** **                         | ** ** | ** **          | ** ** | **Weighted**         | ** ** | **Remaining**         | ** ** | **Average**         | ** ** |
| ** **                         | ** ** | **Number**          | ** ** | **Average**          | ** ** | **Contractual**       | ** ** | **Intrinsic**       | ** ** |
| ** **                         | ** ** | **of Options** | ** ** | **Share Price** | ** ** | **Term (years)** | ** ** | **Value ($M)** | ** ** |
| Outstanding at  December 31, 2006  |       | 2,480,640           |       | $                    | 1.16       |                  | 7.25       |                | $          | 4.30 |   |
|                               |       |                |       |                 |       |                  |       |                |       |
| Granted                            |       | 450,000             |       | $                    | 3.45       |                  |       |                |       |   |
| Exercised                          |       | (758,580            | )          | $                    | 0.44       |                  |       |                |       |   |
| Lapsed or  canceled                |       | (135,033            | )          | $                    | 3.07       |                  |       |                |       |   |
| Outstanding at  September 30, 2007 |       | 2,037,027           |       | $                    | 1.81       |                  | 7.71       |                | $          | 4.52 |   |
|                               |       |                |       |                 |       |                  |       |                |       |
| Exercisable at  September 30, 2007 |       | 1,033,933           |       | $                    | 1.10       |                  | 6.99       |                | $          | 3.03 |   |

 

The weighted average fair value of options grantedduring the three months ended September 30, 2007 was $3.30. The total intrinsicvalue of options (which is the amount by which the stock price exceeded theexercise price of the options on the date of exercise) exercised during thenine months ended September 30, 2007 was approximately $2.7 million. During thenine months ended September 30, 2007, the amount of cash received from theexercise of stock options was $334,453 with no associated tax benefit.

 

The following table summarizes information aboutnonvested stock option awards as of September 30, 2007 and changes for the ninemonths ended September 30, 2007.

 

9

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| ** **                        | ** ** | **Number  Of  Options** | ** ** | **Weighted Average  Grant Date  Fair Value** | ** ** |
|-----------------------------------|------------|-------------------------|------------|-------------------------------------------------------------|------------|
| Non-vested at  December 31, 2006  |       | 1,180,580               |       | $                                                           | 1.52       |   |
| Granted                           |       | 450,000                 |       | 2.41                                                        |       |
| Vested                            |       | (492,453                | )          | 1.40                                                        |       |
| Forfeited                         |       | (135,033                | )          | 3.07                                                        |       |
|                              |       |                    |       |                                                        |       |
| Non-vested at  September 30, 2007 |       | 1,003,094               |       | $                                                           | 2.14       |   |

 

At September 30, 2007, there was $1.8 million of totalunrecognized compensation cost related to non-vested stock option awards whichis expected to be recognized over a weighted-average period of three years.There were 492,453 options that became vested during the nine months endedSeptember 30, 2007.

 

**Common Stock and Warrants**

 

On November 13, 2006, GlobalSCAPE entered into asecurities purchase agreement with accredited investors, who paid it anaggregate of $3.4 million in gross proceeds in consideration for 1,352,000shares of GlobalSCAPE common stock at a price of $2.50 per share. The Companyalso granted warrants to purchase 1,352,000 shares of its common stock to theinvestors with an exercise price of $3.15 per share, subject to certainadjustments. The exercise price will not, in any event, be adjusted to a priceof less than $2.81 per share except in the event of stock dividends, stocksplits or similar events. The warrants have a 5-year term and are currentlyexercisable. As part of this transaction, GlobalSCAPE filed a registrationstatement to register the resale of these shares by the investors. Theregistration statement was declared effective by the SEC on April 16, 2007.

 

**Earnings per 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) forall periods presented. Basic earnings per share is based on the weighted effectof all common shares issued and outstanding, and is calculated by dividing netincome (loss) available to common stockholders by the weighted average sharesoutstanding during the period. Diluted earnings per share is calculated bydividing net income (loss) available to common stockholders by the weightedaverage number of common shares used in the basic earnings per sharecalculation plus the number of common shares that would be issued assumingconversion of all potentially dilutive common shares outstanding. Below is areconciliation of the numerators and denominators of basic and diluted earningsper share for each of the periods presented:

 
| ** **                                              | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                                 | ** ** | **2007**                                                | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Numerators**                                          |       |                                                     |       |                                                    |       |   |   |   |   |
| Numerators for  basic and diluted earnings per share:   |       |                                                     |       |                                                    |       |   |   |   |   |
| Net income                                              |       | $                                                        | 538,085    |                                                    | $          | 702,875 |   | $ | 1,587,072 |   | $ | 3,290,967 |   |
|                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| **Denominators**                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Denominators for  basic and diluted earnings per share: |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted average shares outstanding – basic        |       | 14,484,319                                               |       | 17,105,835                                              |       | 14,152,932 |   | 17,161,519 |   |
|                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| **Dilutive  potential common shares**                   |       |                                                     |       |                                                    |       |   |   |   |   |
| Stock options  (1)                                      |       | 1,406,979                                                |       | 887,625                                                 |       | 1,396,445 |   | 845,801 |   |
| Common stock  warrants (2)                              |       | —                                                   |       | 339,832                                                 |       | — |   | 101,508 |   |
| Denominator for dilutive earnings per share             |       | 15,891,298                                               |       | 18,333,292                                              |       | 15,549,377 |   | 18,108,829 |   |
| Net income per  common share                            |       | $                                                        | 0.04       |                                                    | $          | 0.04 |   | $ | 0.11 |   | $ | 0.19 |   |
| Net income per  common share – assuming dilution   |       | $                                                        | 0.03       |                                                    | $          | 0.04 |   | $ | 0.10 |   | $ | 0.18 |   |

 

10

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(1)   For the three and nine monthsended September 30, 2006, 715,000 options have not been included in dilutiveshares, as the effect would be anti-dilutive. For the three months endedSeptember 30, 2007, 150,000 options have not been included in dilutive shares,as the effect would be anti-dilutive. For the nine months ended September 30,2007, 155,000 options have not been included in dilutive shares, as the effectwould be anti-dilutive.

 

(2)   For the three and nine monthsended September 30, 2006, no warrants have been included in dilutive shares, asthe effect would be anti-dilutive.

 

11

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# ** **

# **Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

# ** **

This QuarterlyReport on Form 10-Q contains “forward-looking statements” within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities and Exchange Act of 1934, as amended. “Forward looking statements”are those statements that describe management’s beliefs and expectations aboutthe future. We have identified forward-looking statements by using words suchas “anticipate,” “believe,” “could,” “estimate,” “may,” “expect,” and “intend.”  Although we believe these expectations arereasonable, our operations involve a number of risks and uncertainties,including those described in the “Risk Factors” section of our Annual Report onForm 10-K and other documents filed with the Securities and Exchange Commission.GlobalSCAPE’s actual results could differ materially from those discussed inany forward-looking statements included in this Quarterly Report.

 

**Overview**

 

We develop anddistribute secure file management software for individuals and business usersto safely send data over the internet and Wide-Area File System (“WAFS”) collaborationand Continuous Data Protection (“CDP”) products. Our file management productsguarantee the privacy of critical information such as financial data, medicalrecords, customer files and other similar documents. In addition, theseproducts ensure compliance with government regulations relating to theprotection of information while allowing users to reduce IT costs, increaseefficiency, track and audit transactions and automate processes. Our WAFS andCDP 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 user’s firewallto distributed offices, or outside the user’s firewall to business and tradingpartners.

 

The followingis a brief description of our products:

 

•      FileManagement Products — Our File Management products are best known for the “CuteFTP”product line. They primarily consist of products that help users securely moveand copy files on the internet. A substantial portion of our revenues arederived from licensing our File Management products. Some of our productsencrypt the transfers for security using technology similar to a Web browser.The products consist of three product categories: client, server andcompression transfer. Our File Management product line includes CuteFTP Home,Cute FTP Professional, SecureFTP Server, and Enhanced File Transfer.

 

•      Wide-AreaFile System Products — Our WAFS products provide a file sharing andcollaboration solution over multiple sites. By keeping all data updated on eachlocation’s 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 versionwithout user conflicts. Changes made to data on any server are mirrored on allother servers.

 

•      ContinuousData Protection Products — Our CDP products consolidate remote backup for fileservers. As files change, the servers backup in real time to the customer’sbackup site which can be at the same or a remote location. The backup servercan keep any number of past versions of each file (and deleted files) whichgives the customer instant restore, as well as the ability to performpoint-in-time snapshots.

 

Our strategyis to continue enhancing our file transfer products to meet the demands of bothindividual and enterprise users, while improving the security features of ourcurrent product line, and to expand into growing markets through theacquisition of compatible companies and products. We acquired Availl, a leadingprovider of WAFS collaboration and CDP products, as part of this strategy. Thisacquisition expanded our technology base into data replication, acceleration offile transfer, sharing/collaboration and continuous data backup and recovery. Webelieve that these new products give us entry into two large and rapidlygrowing markets.

 

We believethat our continued growth will come not only through the further development ofour SecureFTP Server and Enhanced File Transfer products and the growing demandfor file security when

 

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transferringinformation across the internet, but also through the aggressive exploitationof the data replication and protection markets. Based upon estimates byGartner, Inc., and other consulting groups in our markets, we believe that theWAN optimization/WAFS market is currently $300 million annually and growing at20% - 30% per year, and the CDP market is of similar size, but in the earlystages of adoption and growing rapidly. In addition, we believe that the WAFSand CDP products are highly complementary to our traditional Secure FileTransfer products facilitating cross sales and new customer penetration.

 

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

##### ** **

Our capitalrequirements principally relate to our need to enhance our existing productsand to develop or acquire new products. The amount of our capital expenditureshas a direct impact on our ability to offer enhanced and new products to ourcustomers. We rely heavily on cash flows from operations to fund our capitalexpenditures and prior to 2006, these cash flows were significantly dependentupon sales of CuteFTP Home and CuteFTP Professional, which accounted for 50%and 30% of our revenues in the years ended December 31, 2005 and 2006,respectively, and 33% and 18% for the nine months end September 30, 2006 and2007, respectively. Much of the percentage decline of revenues from the sale ofthese two products was caused by continued significant increases in the salesof our other products in 2006, particularly, SecureFTP Server and Enhanced FileTransfer, which collectively accounted for 61% of our revenues in the yearended December 31, 2006, and 63 % and 67 % for the nine months ended September30, 2006 and 2007, respectively. Revenues in total increased 87% when comparingthe nine months ended September 30, 2006 and 2007.

 

Our principalsources of capital are cash on hand, cash flow from operations and availabilityunder our revolving line of credit. At September 30, 2007, we had cash on handof $4.6 million and we continue to generate cash in excess of our operationalneeds. To the extent that sales decline, our cash flow from operations willalso decline. If sales or liquidity decline, management may substantiallyreduce personnel and personnel-related costs, reduce or substantially eliminatecapital expenditures and/or reduce or substantially eliminate research anddevelopment expenditures. We may also sell equity securities or enter intoother credit arrangements in order to finance future acquisitions or licensingactivities.

 

At September30, 2007, we had $750,000 of availability under our revolving line of credit. Borrowingsunder our revolving credit facility bear interest at 1.00% above the Bank’sprime rate and mature on September 22, 2008. Interest payments are due on thefirst day of each calendar month.

 

The revolvingcredit facility is secured by substantially all of the assets of GlobalSCAPEand its subsidiaries including Availl. The loan agreement contains customarycovenants including covenants relating to maintaining legal existence and goodstanding, complying with applicable laws, delivery of financial statements,maintenance of inventory, payment of taxes, maintaining insurance, andprotection of intellectual property rights. GlobalSCAPE and its subsidiariesare also prohibited from selling any of their assets other than in the ordinarycourse of business, acquiring any other entities, changing the types ofbusiness they are engaged in, incurring indebtedness other than that permittedby the loan agreement, incurring any liens on their assets other than thosepermitted by the loan agreement, making certain investments or paying anydividends on, or acquiring, any shares of their capital stock. The loanagreement contains two financial covenants. GlobalSCAPE and its subsidiariesmust maintain:

 

•      aratio of (A) EBITDA less the sum of (i) cash taxes paid and (ii) non-financedcapital expenditures (excluding non-cash stock options and taxes alreadyaccrued), to (B) the sum of (i) principal plus (ii) interest paid to Bank, ofat least 1.5 to 1.00; and

 

•      aratio of total funded debt to EBITDA of not more than 2.00 to 1.00.

 

At September 30, 2007, wewere in compliance with these covenants.

 

The loanagreement also contains customary events of default including the failure tomake payments of principal and interest, the breach of any covenants, theoccurrence of a material adverse change, certain bankruptcy and insolvencyevents, the breach of other agreements creating indebtedness of

 

13

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$50,000 ormore and the entry of a judgment of $50,000 or more against GlobalSCAPE or anyof its subsidiaries.

 

Net cashprovided by operating activities was approximately $4.9 million for the ninemonths ended September 30, 2007 as compared to $2.0 million in the nine monthsended September 30, 2006. Cash provided by operations for the nine months endedSeptember 30, 2007 was primarily the result of increasing sales of the softwareproducts without a corresponding increase in operating expenses.

 

Net cash usedin investing activities for the nine months ended September 30, 2006 and 2007was $7.7 million and $148,171, respectively. Of all the cash used in 2006, $7.6million was for the acquisition of Availl and the balance used was primarilyfor the purchase of computer equipment and software. The cash used in 2007 wasprimarily $148,000 spent for computer equipment.

 

Net cashprovided by (used in) financing activities during the nine months endedSeptember 30, 2006 and 2007 were $5.0 million and ($4.8 million)******respectively. In 2006, the increasein cash provided from financing activities was attributable to the proceedsfrom the term loan in connection with the acquisition of Availl and theissuance of stock from exercised options. In 2007, the decrease in cash fromfinancing activities was the result of the repayment of the term loan with SiliconValley Bank of $4.6 million and the repurchase of treasury stock of $527,528, whichwas partially offset by the issuance of common stock from employee stockoptions of $334,453.

 

As ofSeptember 30, 2007, we had in excess of $4.5 million in cash and cashequivalents, total current assets of $6.4 million and total current liabilitiesof $3.3 million, resulting in working capital of $3.1 million. The primarycomponent of current liabilities at September 30, 2007 was $2.0 million ofdeferred revenues which will be recognized over the remaining term (generallyone to twelve months) of the maintenance and support contracts. At September30, 2007, our principal commitments consisted of obligations outstanding underoperating leases as well as accrued expenses, federal income tax and tradeaccounts payable. We plan to continue to expend significant resources onproduct development in future periods and may also use our cash to acquire orlicense technology, products or businesses related to our current business.

 

The facilitiesthat we currently occupy are expected to be sufficient for the remainder of2007. Consequently, we do not anticipate significant expenditures for leaseholdimprovements or furniture for our current facility in 2007. Our lease on thecurrent facility will expire in mid-2008. On September 21, 2007, the Companyobtained new office space through a new lease agreement for 21,495 square feet.The term of the new agreement is for 132 months, and the basic monthly rentalranges from $27,317 to $30,003 over the life of the lease. We believe that wewill occupy this space by July of 2008.

 

On May 21, 2007, the Board of Directorsapproved a plan to repurchase up to $3.0 million of GlobalSCAPE common stock.The repurchase plan is designed to increase shareholders’ value and reduce thedilutive effect of GlobalSCAPE’s stock option plans. As of September 30, 2007,the company had repurchased a total of 159,873 shares at an average cost of$3.35 per share for a total cost of $527,528. We base our level of stockrepurchases on internal cash management decisions and this level may fluctuatefrom quarter to quarter. At September 30, 2007, approximately $2.5 millionremained available for repurchase under the existing repurchase authorization.

 

14

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**ContractualObligations**

 

The followingtable sets forth the future minimum payments required under contractualcommitments at September 30, 2007**: **

** **
| ** **                       | ** ** | **Payments Due by Fiscal Year** | ** ** |
|----------------------------------|------------|-----------------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **2007 (1)**                                   | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Operating Lease                  |       | $                                                   | 70,858     |   | $ | 190,063 |   | $ | 81,667 |   | $ | 0 |   | $ | 0 |   | $ | 342,588 |   |
| Equipment Leases                 |       | $                                                   | 2,002      |   | $ | 7,392 |   | $ | 7,392 |   | $ | 7,392 |   | $ | 9,056 |   | $ | 33,234 |   |
| Total Cash  Obligations          |       | $                                                   | 72,860     |   | $ | 197,455 |   | $ | 89,059 |   | $ | 7,392 |   | $ | 9,056 |   | $ | 375,822 |   |

 

----

(1) Amounts for2007 reflect the future minimum payments for the remaining three months of thefiscal year.

 

##### **Critical Accounting Policies**

##### ** **

# **UncertainTax Issues**

# ** **

Effective at thebeginning of the first quarter of 2007, the Company adopted the provision ofFIN 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASBStatement No. 109.”  FIN 48 contains atwo-step approach to recognizing and measuring uncertain tax positionsaccounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.”  The first step is to evaluate the taxposition for recognition by determining if the weight of available evidenceindicates that it is more likely than not that the position will be sustainedon audit, including resolution of related appeals or litigation processes, ifany. The second step is to measure the tax benefit as the largest amount thatis more than 50% likely of being realized upon ultimate settlement.

 

As a result of theimplementation of FIN 48, the Company has not changed any of its tax accrualestimates. The Company files U.S. federal and U.S. state tax returns.

 

There were noother changes in our critical accounting policies from those set forth in ourAnnual Report on Form 10-K for the year ended December 31, 2006 during the ninemonths ended September 30, 2007.

 

# **Inflation**

# ** **

Increases ininflation generally result in higher interest rates and operating costs. Ourgreatest exposure is to the cost of salaries and general and administrativeexpenses. To date we believe that inflation has not had a significant impact onour operations.

 

# **Seasonality**

# ** **

Historically,our internet sales have been subject to seasonal variations. We experiencesignificantly less sales volume during national holidays and weekends when comparedto normal business days. In the fourth quarter of 2005, our sales revenuesdecreased approximately 5% over the prior quarter. However, this trend did notexist in 2006 as internet sales increased in the fourth quarter by 7% over thethird quarter of the same year. Over the past two calendar years the totaldollar value of internet sales has remained relatively flat while sales of ourfile transfer server products have increased by 130% growing to become 61% oftotal sales. As a result of this change in mix of products and the apparentlessoning of the internet sales seasonality in 2006, we do not expectseasonality to have a significant impact on sales in 2007. In the nine monthsended September 30, 2007, seasonality had no material effect on internet salesvolume.

 

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**Comparisonof the Three Months ended September 30, 2006 and 2007**

 
| ** **                                    | ** ** | **2006**  | ** ** | **2007**  | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|-----------------------------------------------|------------|-----------|------------|-----------|------------|-------------------|------------|--------------|------------|
| Software product  revenues                    |       | $         | 2,603,236  |      | $          | 3,900,300         |       | $            | 1,297,064  |   | 50 | % |
| Cost of revenues                              |       | 145,646   |       | 85,711    |       | (59,935           | )          | (41          | )%         |
| Selling, general  and administrative Expenses |       | 1,318,952 |       | 2,529,956 |       | 1,211,004         |       | 92           | %          |
| Research and  development expenses            |       | 302,363   |       | 443,433   |       | 141,070           |       | 47           | %          |
| Depreciation and  amortization                |       | 25,046    |       | 38,965    |       | 13,919            |       | 56           | %          |
| Total operating  expense                      |       | 1,792,007 |       | 3,098,065 |       | 1,306,058         |       | 73           | %          |
| Income (loss)  from operations                |       | 811,229   |       | 802,235   |       | (8,994            | )          | (1           | )%         |
| Other Income  (expense)                       |       | 21,412    |       | 41,540    |       | 20,128            |       | 94           | %          |
| Income tax  expense                           |       | 294,556   |       | 140,900   |       | (153,656          | )          | (52          | )%         |
| Net income  (loss)                            |       | $         | 538,085    |      | $          | 702,875           |       | $            | 164,790    |   | 31 | % |

 

***Revenue.***We derive revenues primarily from software sales. Revenues are comprised of thegross selling price of software, including shipping charges and the earnedportion of support and maintenance agreements. For the three months endedSeptember 30, 2007, total revenues increased by $1.3 million or approximately50% from the same quarter in 2006 due to an increase in revenues from sales ofour Wide-Area File Systems, SecureFTP Server and Enhanced File Transferproducts.

 

The followingtable reflects revenue by product including the related maintenance and supportfor each product:

 
| ** **                                                                                               | ** ** | **Revenue for the Quarter Ending September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **Product**                                                                                              | ** ** | **2006**                                         | ** ** | **2007** | ** ** |
|                                                                                                     |       |                                             |       |   |   |   |   |   |   |
| CuteFTP  Professional                                                                                    |       | $                                                | 531,647    |   | 20 | % | $ | 493,535 |   | 13 | % |
| CuteFTP Home                                                                                             |       | 237,862                                          |       | 9 | % | 247,799 |   | 6 | % |
| Enhanced File  Transfer                                                                                  |       | 1,010,912                                        |       | 39 | % | 1,587,228 |   | 41 | % |
| SecureFTP Server                                                                                         |       | 707,736                                          |       | 27 | % | 801,858 |   | 21 | % |
| Wide-Area File  Systems                                                                                  |       | —                                           |       | — |   | 601,434 |   | 15 | % |
| Continuous Data  Protection                                                                              |       | —                                           |       | — |   | 80,203 |   | 2 | % |
| All Others                                                                                               |       | 207,870                                          |       | 8 | % | 181,626 |   | 5 | % |
| Deferred Revenue  adjustment                                                                             |       | (92,791                                          | )          | (4 | )% | (93,383 | ) | (2 | )% |
| Total Operating  Revenues                                                                                |       | $                                                | 2,603,236  |   | 100 | % | $ | 3,900,300 |   | 100 | % |
| Gross  maintenance and support included above before recognition of the net  adjustment to defer revenue |       | $                                                | 785,829    |   | 30.2 | % | $ | 1,074,699 |   | 27.6 | % |

 

Our Wide-AreaFile Systems and Continuous Data Protection products accounted forapproximately 17.5% of total revenue for the third quarter of 2007. There wereno sales for these products in the same quarter of 2006 because we did notbegin selling these products until after completing the Availl acquisition inSeptember 2006. The WAFS/CDP revenues have not increased as originallyanticipated due to management’s decision to delay the aggressive marketing ofthose products to our existing customer base and to the market in general as wehad initially planned. The amount of time required to make improvements to ourWAFS and CDP products that we believe are necessary has been greater than wehad expected. We believe that good progress is currently being made on theproduct improvements and we anticipate a more aggressive sales effort for theseproducts in 2008.

 

Sales of ourSecureFTP Server and Enhanced File Transfer products grew by 39% in the threemonths ended September 30, 2007 to $2.4 million, from $1.7 million in the sameperiod in 2006. These

 

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productsrepresented approximately 62% of our total revenues in the three months endingSeptember 30, 2007 as compared to 66% in the same period in 2006. Revenues fromCuteFTP Home and CuteFTP Professional decreased by 4% as compared to thequarter ended September 30, 2006 and accounted for approximately 29% and 19% oftotal revenues for the three months ended September 30, 2006 and 2007,respectively.

 

We believethat our reliance on the CuteFTP products will continue to decline as weemphasize sales of our more complex enterprise products. In addition, becauseof the more complex nature of SecureFTP Server, Enhanced File Transfer, WAFSand CDP, purchasers require increased maintenance and support. As a result, ourmaintenance and support revenues increased by 42% from the second quarter of2006 to the same period in 2007, and from $693,038 in 2006 to $981,316 in 2007,net of deferred revenue. Maintenance and support pricing is reflective of thelicense cost of the products and the additional support it takes to maintainand support the products and customers. With higher maintenance and supportrevenues, we will recognize additional deferred revenue as we earn the revenueover the life of the maintenance and support agreement.

 

***Cost of Revenues.***Costof revenues consists primarily of royalties and production, packaging andshipping costs for boxed copies of software products. Cost of revenuesdecreased by approximately $60,000 or 41% between periods from $146,000 for thethree months ended September 30, 2006 to $86,000 for the three months endedSeptember 30, 2007. Royalties that we pay on software products licensed fromthird parties, which we resell, are expensed as a cost of sale when thesoftware product is sold or earlier if the recoverability of any prepaidroyalties is in doubt. Cost of revenues as a percent of total revenues was 6%for the three months ended September 30, 2006 as compared to 2% for the sameperiod in 2007.

 

***Selling, General andAdministrative.***  Selling, general andadministrative expenses consist primarily of personnel and related expenses,marketing, customer support, rents, bad debt and professional fees.  Forthe three months ended September 30, 2006 and 2007, selling, general andadministrative expenses were $1.3 million and $2.5 million, respectively, anincrease of $1.2 million.  Of this increase, 45% or $538,000 wasattributable to Availl.  In addition to the new Availl expenses, salariesand fringe benefit costs increased by 5% as we have hired new employees inorder to support current and projected growth.  Commissions and bonusesincreased by 85% as a result of the increase in revenues and income beforetaxes.  In the three months ended September 30, 2006 and 2007, we expensed$84,000 and $323,000 respectively, for stock based compensation related to thegranting of stock options to employees and directors as required by FAS123R. Inaddition, we incurred a one-time fee of $75,750 for joining the American StockExchange.

 

***Research andDevelopment.***  Research and developmentexpenses increased by $141,000 or 147% between periods, from $302,000 to$443,000.  The increase was due largely to Availl’s R&D cost in 2007which were not included in the same period of 2006, plus additionalexpenditures for external development resources and hiring of additionalpersonnel needed to support the Availl products.

 

***Depreciation andAmortization.***  Depreciation and amortizationexpense consists of depreciation expense related to our fixed assets andamortization of capitalized development costs. Depreciation and amortizationexpense increased from $25,000 to $39,000, an increase of approximately56%.  This increase was the result of acquiring $148,000 of equipment andsoftware acquired during the first nine months of 2007, and the correspondingdepreciation of these assets.

 

***Other Income,Expense.***  We earned $21,000 and $43,000 ininterest income during the third quarter of 2006 and 2007 respectively frominvesting our excess cash.  For the three months ended September 30, 2006and 2007, interest expense increased from $0 to $2,000, respectively.  Theinterest expense incurred during 2007 was paid on deferred income per anemployment agreement between GlobalSCAPE and one of its key executives.

 

***Income Taxes.*** The provision for federal income taxes for the quarter ended September 30, 2006and 2007 respectively was $295,000 and $141,000. The decrease in federal incometaxes versus last year is the result of $158,436 of nonrecurring Research &Development Credits and Extraterritorial Income

 

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Exclusionaccumulated from prior periods. ** **These net credits were discovered andcalculated in the third quarter of 2007, so they are also being recognized inthis quarter as a reduction to tax expense. There is also a fee of $40,924recorded in SG&A related to these credits.

 

BeginningJanuary 1, 2007, the state of Texas imposed a new margin tax equal to 1% of theCompany’s revenue less compensation expense (based on Texas sourceincome).  In the three months ended September 30, 2007, this tax plus theMassachusetts state tax for Availl equaled approximately $21,000**.**

 

***Net Income.*** GlobalSCAPE recorded net income of $538,000 and $703,000 for the three monthsended September 30, 2006 and 2007, respectively.  The $165,000 increase innet income is positively affected by approximately $46,000 by the net of someone-time items such as tax credits and the American Stock Exchange fees.Without the positive impact of these one-time items, net income would be 17% ofrevenue in the 2007 quarter compared to 21% of revenue in the 2006 quarter. Ingeneral, the reduction of Net Income as a percentage of revenue is due to theadditional expenses incurred by bringing the Availl products to market.

 

**Comparisonof the Nine Months ended September 30, 2006 and 2007**

 
| ** **                                    | ** ** | **2006**  | ** ** | **2007**  | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|-----------------------------------------------|------------|-----------|------------|-----------|------------|-------------------|------------|--------------|------------|
| Software product  revenues                    |       | $         | 7,463,486  |      | $          | 13,941,472        |       | $            | 6,477,986  |   | 87 | % |
| Cost of revenues                              |       | 372,565   |       | 204,881   |       | (167,684          | )          | (45          | )%         |
| Selling, general  and administrative expenses |       | 3,879,460 |       | 7,451,676 |       | 3,572,216         |       | 92           | %          |
| Research and  development expenses            |       | 799,168   |       | 1,432,394 |       | 633,226           |       | 79           | %          |
| Depreciation and  amortization                |       | 69,726    |       | 105,393   |       | 35,667            |       | 51           | %          |
| Total operating  expense                      |       | 5,120,919 |       | 9,194,344 |       | 4,073,425         |       | 80           | %          |
| Income (loss)  from operations                |       | 2,342,567 |       | 4,747,128 |       | 2,404,561         |       | 103          | %          |
| Other Income  (expense)                       |       | 58,666    |       | 24,726    |       | (33,940           | )          | (58          | )%         |
| Income tax  expense                           |       | 814,162   |       | 1,480,887 |       | 666,725           |       | 82           | %          |
| Net income  (loss)                            |       | $         | 1,587,072  |      | $          | 3,290,967         |       | $            | 1,703,896  |   | 107 | % |

 

***Revenue.***We derive revenues primarily from software sales. Revenues are comprised of thegross selling price of software, including shipping charges and the earnedportion of support and maintenance agreements. For the nine months endedSeptember 30, 2006 and 2007, total revenues increased by $6.5 million orapproximately 87% from $7.5 million to $13.9 million due to the increase inrevenues from sales of our Wide-Area File Systems, SecureFTP Server andEnhanced File Transfer products, a major portion of which was a $2.8 millionorder from the US Army. Unit volume increased with approximately 137,000 licensesand support agreements sold in the nine months ended September 30, 2006 versus208,000 sold in the same period in 2007. The 52% increase in unit volumesresulted from the large number of individual licenses and support agreementsassociated with the US Army order.

 

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The followingtable reflects revenue by product including the related maintenance and supportfor each product.

 
| ** **                                                                                               | ** ** | **Revenue for the Nine Months Ending September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| **Product**                                                                                              | ** ** | **2006**                                                                                | ** ** | **2007** | ** ** |
|                                                                                                     |       |                                                                                    |       |   |   |   |   |   |   |
| CuteFTP  Professional                                                                                    |       | $                                                                                       | 1,688,022  |   | 23 | % | $ | 1,723,003 |   | 12 | % |
| CuteFTP Home                                                                                             |       | 749,754                                                                                 |       | 10 | % | 845,680 |   | 6 | % |
| Enhanced File  Transfer                                                                                  |       | 2,849,088                                                                               |       | 38 | % | 4,332,954 |   | 31 | % |
| SecureFTP Server                                                                                         |       | 1,869,512                                                                               |       | 25 | % | 5,011,402 |   | 36 | % |
| Wide-Area File  Systems                                                                                  |       | —                                                                                  |       | — |   | 2,075,052 |   | 15 | % |
| Continuous Data  Protection                                                                              |       | —                                                                                  |       | — |   | 139,545 |   | 1 | % |
| All Others                                                                                               |       | 686,113                                                                                 |       | 9 | % | 471,815 |   | 3 | % |
| Deferred Revenue  adjustment                                                                             |       | (379,001                                                                                | )          | (5 | )% | (657,979 | ) | (5 | )% |
| Total Operating  Revenues                                                                                |       | $                                                                                       | 7,463,488  |   | 100 | % | $ | 13,941,472 |   | 100 | % |
|                                                                                                     |       |                                                                                    |       |   |   |   |   |   |   |
| Gross  maintenance and support included above before recognition of the net  adjustment to defer revenue |       | $                                                                                       | 1,506,665  |   | 20.2 | % | $ | 3,683,721 |   | 26.4 | % |

 

Sales of ourSecureFTP Server and Enhanced File Transfer products grew by 98% in the ninemonths ended September 30, 2007 to $9.3 million from $4.7 million in the sameperiod in 2006, and represented approximately 67% of our total revenues in thefirst nine months of 2007 as compared to 63% in the same period in 2006. Theincrease in revenues from these products was the result of increased emphasisof our internal sales group on the enterprise level software needs ofbusinesses and the US Army order which was heavily weighted in the SecureFTPServer product.

 

Our Wide-AreaFile Systems and Continuous Data Protection products, which we began sellingafter completing the Availl acquisition in September 2006, accounted forapproximately 16% of total revenue for the nine months ended September 30, 2007.The WAFS/CDP revenues have not increased as originally anticipated due tomanagement’s decision to delay the aggressive marketing of those products toour existing customer base and to the market in general as we had initiallyplanned. The amount of time required to make improvements to our WAFS and CDPproducts that we believe are necessary has been greater than we had expected. Webelieve that good progress is currently being made on the product improvementsand we anticipate a more aggressive sales effort for these products in 2008.

 

Revenues fromCuteFTP Home and CuteFTP Professional increased by 5% as compared to the ninemonths ended September 30, 2006 and accounted for approximately 33% and 18% oftotal revenues for the nine months ended September 30, 2006 and 2007,respectively. We believe that our reliance on the CuteFTP products willcontinue to decline as we emphasize sales of our more complex enterpriseproducts.

 

Because of themore complex nature of SecureFTP Server, Enhanced File Transfer, WAFS and CDP,purchasers require increased maintenance and support. As a result, ourmaintenance and support sales increased by 168% from the first nine months of2006 to the same period in 2007 from $1.1 million in 2006 to $3.0 million in2007, net of the deferred revenue adjustment. Maintenance and support pricing isreflective of the license cost of the products and the additional support ittakes to maintain and support the products and customers. With highermaintenance and support revenues, we will recognize additional deferred revenueas we earn the revenue over the life of the maintenance and support agreement.

 

***Cost of Revenues.***Costof revenues consists primarily of royalties and production, packaging andshipping costs for boxed copies of software products. Cost of revenuesdecreased $168,000 or 45% between periods from $372,000 for the nine

 

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months endedSeptember 30, 2006 to $205,000 for the nine months ended September 30, 2007. Royaltiesthat we pay on software products licensed from third parties, which we resell,are expensed as a cost of sale when the software product is sold or earlier ifthe recoverability of any prepaid royalties is in doubt. Cost of revenues as apercent of total revenues was 5% for the nine months ended September 30, 2006as compared to 1% for the same period in 2007.

 

***Selling, General and Administrative.*** Selling, general and administrative expenses consist primarily of personnel andrelated expenses, marketing, customer support, rents, bad debt and professionalfees.  For the nine months ended September 30, 2006 and 2007, selling,general and administrative expenses were $3.9 million and $7.5 million,respectively, an increase of $3.6 million.  Of this increase, 41% or $1.6million was attributable to Availl.  Of the non-Availl expenses, salariesand fringe benefit costs increased 13% as we have hired new employees in orderto support current and projected growth.  Commissions and bonusesincreased 75% as a result of the increase in revenues and income beforetaxes.  In the nine months ended September 30, 2006 and 2007, we expensed$205,000 and $759,000 respectively, for stock based compensation related to thegranting of stock options to employees and directors as required by FAS123R.

 

***Research andDevelopment.***  Research and developmentexpenses increased $633,000 or 79% between periods, from $799,000 to $1.4million.  The increase was due largely to Availl’s R&D cost in 2007which were not included in the same period of 2006, plus additionalexpenditures for external development resources and hiring of additionalpersonnel needed to support the Availl products.

 

***Depreciation andAmortization.***  Depreciation and amortizationexpense consists of depreciation expense related to our fixed assets andamortization of capitalized development costs. Depreciation and amortizationexpense increased from $70,000 to $105,000, an increase of approximately50%.  This increase was due primarily to the purchase of $148,000 ofequipment and software during the first nine months of 2007, and the correspondingdepreciation of those assets.

 

***Other Income,Expense.***  For the nine months ended September30, 2006 and 2007, interest expense increased from $0 to $33,000,respectively.  The interest expense incurred during 2007 was paid on theterm loan related to the acquisition of Availl. We earned $58,000 and $56,000in interest during the first nine months of 2006 and 2007, respectively, frominvesting our excess cash.

 

***Income Taxes.*** The provision for federal income taxes for the nine months ended September 30,2006 and 2007 respectively was $814,000 and $1.4 million. The increase infederal income taxes versus last year is the result of increased income uponwhich tax is due. ** **BeginningJanuary 1, 2007, the state of Texas imposed a new margin tax equal to 1% of theCompany’s revenue less compensation expense (based on Texas sourceincome).  In the nine months ended September 30, 2007, this tax plus theMassachusetts state tax for Availl equaled approximately $87,000**.**

 

***Net Income.*** GlobalSCAPE recorded net income of $1.6 million and $3.3 million for the ninemonths ended September 30, 2006 and 2007, respectively.  The $1.7 millionincrease in net income was attained even though the Company incurredsubstantial increases in SG&A and R&D expenses related to Availl, plushad an additional expense of $554,000 over the nine months in 2006 incompensation expense as required by FAS 123R for grants of employee anddirectors stock options.

 

# **Item3. Quantitative and Qualitative Disclosures About Market Risk**

# ** **

To date, we havenot utilized derivative financial instruments or derivative commodityinstruments. We do not expect to employ these or other strategies to hedgemarket risk in the foreseeable future. We may invest our cash in money marketfunds, which are subject to minimal credit and market risk. We believe that theinterest rate risk and other relevant market risks associated with thesefinancial instruments are immaterial.

 

In the ninemonths ended September 30, 2007, approximately 18% of our revenues came fromcustomers outside the United States. All revenues are received in U.S. dollarsso we have no exchange rate risk with regard to the sale. However, in July2003, the European Union (EU) enacted Value Added Taxes

 

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(VAT) onelectronic purchases. These taxes are charged to our non-business customers inthe EU and, in our case, are remitted quarterly in pound sterling. We expectthat the impact of this currency translation will not be material to ourbusiness.

 

# **Item4. Controls and Procedures**

# ** **

As of the end of theperiod covered by this report, our Chief Executive Officer and Chief FinancialOfficer carried out an evaluation of the effectiveness of GlobalSCAPE’s “disclosurecontrols and procedures” (as defined in the Securities Exchange Act of 1934Rules 13a-15(e)and 15d-15(e)) and concluded that the disclosure controls andprocedures were effective.

 

 There were no changes in our internal controlsover financial reporting during the period covered by this report that havematerially affected, or are reasonably likely to materially affect, ourfinancial reporting.

 

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## **PartII. Other Information**

## ** **

# **Item1.**   Legal Proceedings

# ** **

We are notcurrently involved in any material legal proceedings.

 

**Item 1A.**                Risk Factors.

** **

In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2006, which could materially affect ourbusiness, financial condition or future results. The risks described in ourAnnual Report on Form 10-K are not the only risks facing GlobalSCAPE. Additionalrisks and uncertainties not currently known to us or that we currently deem tobe immaterial also may materially adversely affect our business, financialcondition and/or operating results.

 

#### **Item 2.**   Unregistered Sales of Equity Securities and Use ofProceeds.

#### ** **

**IssuerPurchases of Equity Securities**

 
| **Period**      | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average Price  Paid Per  Share** | ** ** | **Total Number of  Shares  Purchased as  Part of a Publicly  Announced Plan  (1)** | ** ** | **Maximum Number  of Shares that may  yet be Purchased  Under the Plan (2)** | ** ** |
|-----------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|
| April, 2007     |       | —                                           |       | —                                       |       | —                                                                                                                |       | —                                                                                                                    |       |
| May, 2007       |       | 18,500                                           |       | $                                            | 3.13       |                                                                                                                  | 18,500     |                                                                                                                      | 730,048    |   |
| June, 2007      |       | 101,653                                          |       | $                                            | 3.24       |                                                                                                                  | 101,653    |                                                                                                                      | 648,322    |   |
| August, 2007    |       | 34,120                                           |       | $                                            | 3.69       |                                                                                                                  | 34,120     |                                                                                                                      | 617,081    |   |
| September, 2007 |       | 5,600                                            |       | $                                            | 3.93       |                                                                                                                  | 5,600      |                                                                                                                      | 611,620    |   |
| Total           |       | 159,873                                          |       | $                                            | 3.35       |                                                                                                                  | 159,873    |                                                                                                                      | 611,620    |   |

#### ** **

#### ****

(1)    On May 21, 2007, we announced a plan to purchase up to $3.0 million ofour common stock. This plan is scheduled to terminate on May 20, 2008.

 

(2)    At September 30, 2007, there were 611,620 shares yet to be purchasedbased on the price of $4.03 per share on that date.

 

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# **Item6.**   Exhibits

# ** **

**(a)**           Exhibits

 
| 10.1   | Form of Nonstatutory Stock  Option Agreement Granted Under 2006 Non-Employee Directors Long-Term Equity Incentive  Plan. |
|--------|--------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                     |
| 31.1   | Certificate pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                  |
|   |                                                                                                                     |
| 31.2   | Certificate pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                  |
|   |                                                                                                                     |
| 32.1   | Certificate pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                  |

 

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**Signatures**

** **

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

 

 
|               |      | GLOBALSCAPE,  INC.                     |
|--------------------|-----------|----------------------------------------|
|               |      |                                   |
| November 14 , 2007 | By:  |                                   | /s/  Charles R. Poole |   |
| Date               |      | Charles  R. Poole                      |
|               |      | President  and Chief Executive Officer |
|               |      |                                   |
| November 14,  2007 | By:  |                                   | /s/ Kelly E. Simmons |   |
| Date               |      | Kelly E. Simmons                       |
|               |      | Chief Financial Officer                |

 

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