#### ** **

#### **UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

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

 

### **FORM 10-Q**

 

| **ý**                                                                                                                         |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                                                                                                               |   |                                                                                          |
| **For the  quarterly period ended June 30, 2004**                                                                                  |
|                                                                                                                               |   |                                                                                          |
| **Or**                                                                                                                             |
|                                                                                                                               |   |                                                                                          |
| **o**                                                                                                                              |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                               |   |                                                                                          |
| **For the transition period from                   to** |
|                                                                                                                               |
| **Commission File  Number:     000-30617**                                                                |

 

**GlobalSCAPE,Inc.**

(Exact name of registrant asspecified in its charter)

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports required 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.  ý Yes   o No

 

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

 

## **Thenumber of shares outstanding of the registrant’s common stock at August 13,2004 was 13,773,219.**

 

 

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## **GlobalSCAPEInc.**

## ** **

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

## **Forthe Quarter ended June 30, 2004**

## ** **

## **Index**

 
| **Part I.**                    | **Financial Information**                                                                   |   |
|--------------------------------|---------------------------------------------------------------------------------------------|--------|
|                           |                                                                                        |   |
| Item 1.                        | Interim Financial Statements (Unaudited)                                                    |   |
|                           | Balance  Sheets as of December 31, 2003 and June 30, 2004                                   |   |
|                           | Statements of Operations for the three and  six months ended June 30, 2003 and 2004         |   |
|                           | Statements of Cash Flows for the six months  ended June 30, 2003 and 2004                   |   |
|                           | Notes to Financial Statements                                                               |   |
|                           |                                                                                        |   |
| Item  2.                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                           |                                                                                        |   |
| Item 3.                        | Quantitative  and Qualitative Disclosures About Market Risk                                 |   |
|                           |                                                                                        |   |
| Item  4.                       | Controls  and Procedures                                                                    |   |
|                           |                                                                                        |   |
| **Part II.**                   | **Other Information**                                                                       |   |
|                           |                                                                                        |   |
| Item 1.                        | Legal Proceedings                                                                           |   |
|                           |                                                                                        |   |
| Item 2.                        | Changes in Securities and Use of Proceeds                                                   |   |
|                           |                                                                                        |   |
| Item 3.                        | Defaults Upon Senior Securities                                                             |   |
|                           |                                                                                        |   |
| Item 4.                        | Submission of Matters to a Vote of Security  Holders                                        |   |
|                           |                                                                                        |   |
| Item 5.                        | Other Information                                                                           |   |
|                           |                                                                                        |   |
| Item 6.                        | Exhibits and Reports on Form 8-K                                                            |   |
|                           |                                                                                        |   |
| Signatures  and Certifications |                                                                                        |

 

 

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

 

ii

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**GlobalSCAPE, Inc.**

** **

**Balance Sheets**

** **
|                                                                                                                                       |   | **December  31,  2003** |    | **June 30,  2004** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|--------------------|--------|
|                                                                                                                                       |   |                    |    | **(unaudited)**    |   |
| Assets                                                                                                                                     |   |                    |    |               |   |
| Current assets:                                                                                                                            |   |                    |    |               |   |
| Cash                                                                                                                                       |   | $                       | 342,433 |               | $      | 231,355 |   |
| Accounts receivable (net of allowance for  doubtful accounts of $43,581 and $16,460 at December 31, 2003 and June 30,  2004, respectively) |   | 240,615                 |    | 219,821            |   |
| Prepaid expenses                                                                                                                           |   | 46,428                  |    | 42,540             |   |
| Total current assets                                                                                                                       |   | 629,476                 |    | 493,716            |   |
|                                                                                                                                       |   |                    |    |               |   |
| Property and equipment:                                                                                                                    |   |                    |    |               |   |
| Furniture and fixtures                                                                                                                     |   | 332,920                 |    | 332,920            |   |
| Software                                                                                                                                   |   | 235,436                 |    | 240,572            |   |
| Equipment                                                                                                                                  |   | 590,019                 |    | 601,122            |   |
| Leasehold improvements                                                                                                                     |   | 154,376                 |    | 167,762            |   |
|                                                                                                                                       |   | 1,312,751               |    | 1,342,376          |   |
| Accumulated depreciation and amortization                                                                                                  |   | 1,035,830               |    | 1,141,844          |   |
| Net property and equipment                                                                                                                 |   | 276,921                 |    | 200,532            |   |
|                                                                                                                                       |   |                    |    |               |   |
| Other assets:                                                                                                                              |   |                    |    |               |   |
| Other                                                                                                                                      |   | 11,881                  |    | 11,881             |   |
| Total other assets                                                                                                                         |   | 11,881                  |    | 11,881             |   |
| Total assets                                                                                                                               |   | $                       | 918,278 |               | $      | 706,129 |   |

 

1

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**GlobalSCAPE, Inc.**

** **

**Balance Sheets**

** **
|                                                                                                                                                                                   |   | **December  31,  2003** |    | **June 30,  2004** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|--------------------|--------|
|                                                                                                                                                                                   |   |                    |    | **(unaudited)**    |   |
| Liabilities and Stockholders’ Equity                                                                                                                                              |   |                    |    |               |   |
| Current liabilities:                                                                                                                                                                   |   |                    |    |               |   |
| Accounts payable                                                                                                                                                                       |   | $                       | 180,555 |               | $      | 32,239 |   |
| Accrued expenses                                                                                                                                                                       |   | 173,935                 |    | 197,334            |   |
| Deferred revenue                                                                                                                                                                       |   | 140,489                 |    | 171,801            |   |
| Notes Payable                                                                                                                                                                          |   | 100,000                 |    | —             |   |
| Current portion of capital lease obligation                                                                                                                                            |   | 15,294                  |    | —             |   |
| Total current liabilities                                                                                                                                                              |   | 610,273                 |    | 401,374            |   |
|                                                                                                                                                                                   |   |                    |    |               |   |
| Long-term liabilities:                                                                                                                                                                 |   |                    |    |               |   |
| Other long-term liabilities                                                                                                                                                            |   | 39,253                  |    | 33,646             |   |
| Total long-term liabilities                                                                                                                                                            |   | 39,253                  |    | 33,646             |   |
|                                                                                                                                                                                   |   |                    |    |               |   |
| Commitments and contingencies                                                                                                                                                          |   |                    |    |               |   |
|                                                                                                                                                                                   |   |                    |    |               |   |
| Stockholders’ equity:                                                                                                                                                             |   |                    |    |               |   |
| Preferred stock, par value $0.001 per  share, 10,000,000 authorized, no shares issued or outstanding                                                                                   |   | —                  |    | —             |   |
| Common stock, par value $0.001 per share,  40,000,000 shares authorized, 13,488,619 and 13,773,219 shares issued and  outstanding at December 31, 2003 and June 30, 2004, respectively |   | 13,489                  |    | 13,773             |   |
| Additional paid-in capital                                                                                                                                                             |   | 671,893                 |    | 675,365            |   |
| Retained earnings (deficit)                                                                                                                                                            |   | (416,630                | )       | (418,029           | )      |
| Total stockholders’ equity                                                                                                                                                        |   | 268,752                 |    | 271,109            |   |
| Total liabilities and stockholders’ equity                                                                                                                                        |   | $                       | 918,278 |               | $      | 706,129 |   |

 

See accompanying notes.

 

2

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**GlobalSCAPE, Inc.**

** **

**Statements of Operations**

** **

**(Unaudited)**

** **
|                                                                                  |   | **Three  months ended June 30,** |      | **Six months  ended June 30,** |   |
|---------------------------------------------------------------------------------------|--------|----------------------------------|-----------|--------------------------------|--------|
|                                                                                  |   | **2003**                         |      | **2004**                       |   | **2003** |   | **2004** |   |
| Operating revenues:                                                                   |   |                             |      |                           |   |   |   |   |   |
| Software product revenues                                                             |   | $                                | 1,309,708 |                           | $      | 1,287,797 |   | $ | 2,429,894 |   | $ | 2,459,934 |   |
|                                                                                  |   |                             |      |                           |   |   |   |   |   |
| Operating expenses:                                                                   |   |                             |      |                           |   |   |   |   |   |
| Cost of revenues (exclusive of depreciation  and amortization shown separately below) |   | 131,351                          |      | 93,837                         |   | 273,341 |   | 192,515 |   |
| Selling, general and administrative  expenses                                         |   | 762,697                          |      | 798,436                        |   | 2,014,417 |   | 1,775,351 |   |
| Research and development expenses                                                     |   | 203,874                          |      | 141,102                        |   | 421,092 |   | 386,733 |   |
| Depreciation and amortization                                                         |   | 109,297                          |      | 50,220                         |   | 226,337 |   | 106,014 |   |
| Total operating expense                                                               |   | 1,207,219                        |      | 1,083,595                      |   | 2,935,187 |   | 2,460,613 |   |
| Income (loss) from operations                                                         |   | 102,489                          |      | 204,202                        |   | (505,293 | ) | (679 | ) |
|                                                                                  |   |                             |      |                           |   |   |   |   |   |
| Other income (expense):                                                               |   |                             |      |                           |   |   |   |   |   |
| Interest expense                                                                      |   | (907                             | )         | —                         |   | (2,055 | ) | (720 | ) |
| Gain (loss) on sale of assets                                                         |   | —                           |      | —                         |   | (1,486 | ) | — |   |
| Total other income (expense)                                                          |   | (907                             | )         | —                         |   | (3,541 | ) | (720 | ) |
| Income (loss) before income taxes                                                     |   | 101,582                          |      | 204,202                        |   | (508,834 | ) | (1,399 | ) |
|                                                                                  |   |                             |      |                           |   |   |   |   |   |
| Income tax expense (benefit):                                                         |   |                             |      |                           |   |   |   |   |   |
| Current:                                                                              |   |                             |      |                           |   |   |   |   |   |
| Federal                                                                               |   | —                           |      | —                         |   | — |   | — |   |
| State                                                                                 |   | —                           |      | —                         |   | — |   | — |   |
| Deferred:                                                                             |   |                             |      |                           |   |   |   |   |   |
| Federal                                                                               |   | —                           |      | —                         |   | — |   | — |   |
| State                                                                                 |   | —                           |      | —                         |   | — |   | — |   |
| Total income tax provision (benefit)                                                  |   | —                           |      | —                         |   | — |   | — |   |
|                                                                                  |   |                             |      |                           |   |   |   |   |   |
| Net income (loss)                                                                     |   | $                                | 101,582   |                           | $      | 204,202 |   | $ | (508,834 | ) | $ | (1,399 | ) |
|                                                                                  |   |                             |      |                           |   |   |   |   |   |
| Net income (loss) per common share- basic                                             |   | $                                | 0.01      |                           | $      | 0.01 |   | $ | (0.04 | ) | $ | 0.00 |   |
| Net income (loss) per common share-  assuming dilution                                |   | $                                | 0.01      |                           | $      | 0.01 |   | $ | (0.04 | ) | $ | 0.00 |   |
| Weighted average shares outstanding:                                                  |   |                             |      |                           |   |   |   |   |   |
| Basic                                                                                 |   | 13,358,619                       |      | 13,638,995                     |   | 13,358,619 |   | 13,638,995 |   |
| Diluted                                                                               |   | 14,284,107                       |      | 14,154,174                     |   | 13,358,619 |   | 13,638,995 |   |

 

See accompanying notes.

 

3

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**GlobalSCAPE, Inc.**

** **

**Statements of Cash Flows**

** **

**(Unaudited)**

** **
|                                                                                      |   | **Six months  ended June 30,** |     |
|-------------------------------------------------------------------------------------------|--------|--------------------------------|----------|
|                                                                                      |   | **2003**                       |     | **2004** |   |
| Operating Activities:                                                                     |   |                           |     |   |   |
| Net income (loss)                                                                         |   | $                              | (508,834 | ) | $ | (1,399 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |   |                           |     |   |   |
| Bad debt expense                                                                          |   | 4,277                          |     | (11,324 | ) |
| Depreciation and amortization                                                             |   | 226,337                        |     | 106,014 |   |
| Loss on sale of assets                                                                    |   | 1,486                          |     | — |   |
| Changes in operating assets and  liabilities:                                             |   |                           |     |   |   |
| Accounts receivable                                                                       |   | (37,728                        | )        | 32,118 |   |
| Prepaid expenses                                                                          |   | 36,903                         |     | 3,888 |   |
| Accounts payable                                                                          |   | (20,947                        | )        | (148,316 | ) |
| Accrued expenses                                                                          |   | 36,041                         |     | 23,399 |   |
| Deferred revenues                                                                         |   | 59,758                         |     | 31,312 |   |
| Other long-term liabilities                                                               |   | (5,607                         | )        | (5,607 | ) |
| Net cash provided (used) by operating  activities                                         |   | (208,314                       | )        | 30,085 |   |
| Investing Activities:                                                                     |   |                           |     |   |   |
| Purchase of property and equipment                                                        |   | (23,837                        | )        | (29,625 | ) |
| Net cash used in investing activities                                                     |   | (23,837                        | )        | (29,625 | ) |
| Financing Activities:                                                                     |   |                           |     |   |   |
| Issuance of common stock                                                                  |   | —                         |     | 3,756 |   |
| Repayment of notes payable                                                                |   | —                         |     | (100,000 | ) |
| Principal payments on capital lease  obligations                                          |   | (30,168                        | )        | (15,294 | ) |
| Net cash used in financing activities                                                     |   | (30,168                        | )        | (111,538 | ) |
| Net increase (decrease) in cash                                                           |   | (262,319                       | )        | (111,078 | ) |
| Cash at beginning of period                                                               |   | 480,609                        |     | 342,433 |   |
| Cash at end of period                                                                     |   | $                              | 218,290  |   | $ | 231,355 |   |

 

See accompanying notes.

 

4

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**GlobalSCAPE, Inc.**

** **

**Notes to Financial Statements**

 

# **Natureof Business**

 

GlobalSCAPE,founded in April 1996, develops and distributes Internet related software.  The Company is best known for its popularfile transfer program, CuteFTP.  TheCompany derives its revenues primarily from sales of licenses to use itssoftware products.  Sales of CuteFTPHome and CuteFTP Professional accounted for approximately 77% and 70% of totalrevenues in 2003 and the first six months of 2004, respectively.  The Company is organized and operates as oneoperating segment, Internet-based software distribution, and markets itsproducts primarily over the Internet.

*** ***

***Corporate Structure***

 

All of theCompany’s operations are conducted by GlobalSCAPE Texas, LP, a Texas limitedpartnership.  The partners ofGlobalSCAPE Texas, LP are two Nevada limited liability companies, which areboth wholly-owned subsidiaries of GlobalSCAPE, Inc., a Delaware corporation.  GlobalSCAPE, Inc. is approximately 71% ownedby the Brown and Mann-GlobalSCAPE Joint Venture, with the remainder heldpublicly.  GlobalSCAPE, Inc. is aholding company and conducts no operations, however, the stock of GlobalSCAPE,Inc. is quoted on the OTC Bulletin Board. References to “GlobalSCAPE” or the “Company” refer collectively to allof these entities unless otherwise indicated.

# ** **

# **Basisof Presentation**

 

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

 

The BalanceSheet at December 31, 2003 has been derived from the audited financialstatements at that date but does not include all the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  For further informationrefer to the financial statements and footnotes included in GlobalSCAPE’sAnnual Report on Form 10-K for the year ended December 31, 2003.

# ** **

# **Principlesof Consolidation**

 

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

*** ***

***Liquidity***

 

The Companyreturned to a positive working capital position as of June 30, 2004 through acombination of revenue growth and expense reductions.  The Company incurred significant operating losses during the yearended December 31, 2003 and the quarter ended March 31, 2004 but returned toprofitability for the quarter ended June 30, 2004.  In February 2004 GlobalSCAPE reduced its workforce by 20%, layingoff 9 of the 45 people then employed by the Company.  This workforce reduction was a necessary step in improving theoverall financial health of the organization. The Company had anticipated stronger revenue performance in the firstquarter of 2004 after poorer than expected sales in the fourth quarter of 2003and had maintained staffing levels with this objective.  These higher revenue targets were not met inthe first quarter of 2004. GlobalSCAPE reduced selling, general andadministrative expenses by

 

5

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approximately $178,478 andresearch and development expenses by approximately $104,529 from the firstquarter of 2004, primarily by the reduction in salaries and related expensesand by use of less outside development sources.

 

The Company ishighly dependent on the sale of two software products, CuteFTP Home and CuteFTPProfessional, which may be subject to technological and competitiveobsolescence.  Sales of these twoproducts, which represented 71% of the Company’s revenues in the second quarterof 2004, declined approximately 6% from the same quarter in the previous year.Total revenues declined only 2% when comparing the second quarter of 2004 tothe same period in 2003 and sales of CuteFTP Home and CuteFTP Professionalincreased approximately 9% from the first to second quarters of 2004.

 

On March 30, 2004,the Company obtained a $200,000 line of credit with the Brown andMann-GlobalSCAPE Joint Venture.  Theline of credit is available after June 21, 2004 if the Company fails to extenda line of credit with a bank and matures on December 31, 2004. GlobalSCAPE hasapplied for a line of credit with a bank, as of this report the bank line ofcredit has not been granted. The interest rate is subject to change and isindexed to the prime rate published in the Wall Street Journal.  In connection with the line of credit,GlobalSCAPE entered into a Commercial Security Agreement with the Brown andMann-GlobalSCAPE Joint Venture whereby GlobalSCAPE granted a security interestin all its accounts and equipment.

 

The Company’sflexibility in reacting to changes in the operating environment and to changingeconomic conditions may be limited by the Company’s current liquidityposition.  However, management believesthat, if required, it will be able to effect some or all of the components ofthe plan set forth above, which are sufficient in the aggregate to enable theCompany to continue as a going concern through at least December 31, 2004.  Accordingly, the financial statements of theCompany do not include any adjustments to reflect the possible future effectsor the recoverability and classification of assets or the amounts andclassification of liabilities that may result if the Company cannot continue toimprove its working capital position.

*** ***

***Reclassifications***

 

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

# ** **

# **Sale/ Disposal of Assets**

 

During thefirst and second quarters of 2004, the Company did not sell or dispose of anyfixed assets.

 

# **Stock-BasedCompensation**

 

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

 

Pro formainformation regarding net income and earnings per share is required byStatement 148, which also requires that the information be determined as if theCompany had accounted for its stock

 

6

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options granted subsequent toDecember 31, 1994 under the fair value method of that Statement.  The fair value of these options wasestimated at the date of grant using a Black-Scholes option-pricing model.

 

For purposesof pro forma disclosures, the estimated fair value of the options is amortizedto expense over the options’ vesting period. The Company’s pro forma information for the three months ended June 30,2003 and 2004 follows:

 
|                                                                                                                                                                                              |   | **Three months  ended  June 30,** |    | **Six months  ended  June 30,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|---------------------------------|--------|
|                                                                                                                                                                                              |   | **2003**                          |    | **2004**                        |   | **2003** |   | **2004** |   |
| Net Income, as reported                                                                                                                                                                           |   | $                                 | 101,582 |                            | $      | 204,202 |   | $ | (508,834) |   | $ | (1,399) |   |
| Stock-based compensation expense that would  have been included in the determination of net income (loss) had the fair  value based method been applied to all awards, net of related tax effects |   | (8,184                            | )       | (3,289                          | )      | (30,480 | ) | (12,175 | ) |
| Pro forma net income (loss)                                                                                                                                                                       |   | $                                 | 93,398  |                            | $      | 200,913 |   | $ | (539,314 | ) | $ | (13,574 | ) |
|                                                                                                                                                                                              |   |                              |    |                            |   |   |   |   |   |
| Income (Loss) per share:                                                                                                                                                                          |   |                              |    |                            |   |   |   |   |   |
| Basic- as reported                                                                                                                                                                                |   | $                                 | 0.01    |                            | $      | 0.01 |   | $ | (0.04 | ) | $ | 0.00 |   |
| Basic- pro forma                                                                                                                                                                                  |   | $                                 | 0.01    |                            | $      | 0.01 |   | $ | (0.04 | ) | $ | 0.00 |   |
|                                                                                                                                                                                              |   |                              |    |                            |   |   |   |   |   |
| Diluted- as reported                                                                                                                                                                              |   | $                                 | 0.01    |                            | $      | 0.01 |   | $ | (0.04 | ) | $ | 0.00 |   |
| Diluted- pro forma                                                                                                                                                                                |   | $                                 | 0.01    |                            | $      | 0.01 |   | $ | (0.04 | ) | $ | 0.00 |   |

 

During thesecond quarter ended June 30, 2004, 261,000 options were granted to variousemployees at an average exercise price of $0.16 per share. During the secondquarter of 2004, 284,600 options were exercised at a price of  $0.0132 per share, by employees. Additionally,74,000 stock options were forfeited in the second quarter 2004.

# ** **

# **Earningsper Common Share**

 

Basic anddiluted net income per common share is presented in conformity with Statementof Financial Accounting Standards No. 128, “Earnings Per Share” (SFAS 128) 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 a reconciliation of the numeratorsand denominators of basic and diluted earnings per share for each of the periodspresented:

 

7

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|                                                    |   | **Three  months ended June 30,** |    | **Six months  ended June 30,** |   |
|---------------------------------------------------------|--------|----------------------------------|---------|--------------------------------|--------|
|                                                    |   | **2003**                         |    | **2004**                       |   | **2003** |   | **2004** |   |
| **Numerators**                                          |   |                             |    |                           |   |   |   |   |   |
| Numerators for basic and diluted earnings  per share:   |   |                             |    |                           |   |   |   |   |   |
| Net income (loss)                                       |   | $                                | 101,582 |                           | $      | 204,202 |   | $ | (508,834 | ) | $ | (1,399 | ) |
|                                                    |   |                             |    |                           |   |   |   |   |   |
| **Denominators**                                        |   |                             |    |                           |   |   |   |   |   |
| Denominators for basic and diluted earnings  per share: |   |                             |    |                           |   |   |   |   |   |
| Weighted average shares outstanding - basic             |   | 13,358,619                       |    | 13,638,995                     |   | 13,358,619 |   | 13,638,995 |   |
|                                                    |   |                             |    |                           |   |   |   |   |   |
| **Dilutive potential common shares**                    |   |                             |    |                           |   |   |   |   |   |
| Stock options (1)                                       |   | 925,488                          |    | 515,179                        |   | — |   | — |   |
| Denominator for dilutive earnings per share             |   | 14,284,107                       |    | 14,154,174                     |   | 13,358,619 |   | 13,638,995 |   |
|                                                    |   |                             |    |                           |   |   |   |   |   |
| Net income (loss) per common share                      |   | $                                | 0.01    |                           | $      | 0.01 |   | $ | (0.04 | ) | $ | (0.00 | ) |
| Net income (loss) per common share -  assuming dilution |   | $                                | 0.01    |                           | $      | 0.01 |   | $ | (0.04 | ) | $ | (0.00 | ) |

 

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(1)   For the three and six months ended June 30, 2003,935,500 and 1,935,671 options have not been included in dilutive shares, as theeffect would be anti-dilutive.  For thethree and six months ended June 30, 2004, 1,193,000 and 1,758,571 options,respectively, have not been included in dilutive shares, as the effect would beanti-dilutive.

# ** **

# **Item 2. **Management’sDiscussion and Analysis of Financial Condition and Results of Operations

 

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 describemanagement’s beliefs and expectations about the future.  We have identified forward-lookingstatements by using words such as “anticipate,” “believe,” “could,” “estimate,”“may,” “expect,” and “intend.”  Althoughwe believe these expectations are reasonable, our operations involve a numberof risks and uncertainties, including those described in the “Risk Factors”section of our Annual Report on Form 10-K and other documents filed with theSecurities and Exchange Commission. GlobalSCAPE’s actual results could differ materially from thosediscussed in any forward-looking statements included in this Quarterly Report.

 

**Overview**

 

GlobalSCAPEdevelops and distributes Internet related software including File Management,Content Management and Web Development Tools. We distribute our software primarily via download from our Internetwebsite.  During 2003 and the secondquarter of 2004, approximately 65% of our revenues were generated from customerswithin the United States, with the remaining 35% concentrated mostly in WesternEurope, Canada and Australia.

 

•      **Content Management Products –**Our ContentManagement Products help non-technical business users update and manage WebSite content without excessive training. The product line includes PublishXML,PureCMS and SnapEdit.

 

•      **File Management Products** – Our FileManagement products are best known for the “CuteFTP” product line. Theyprimarily consist of products that help users move and copy files on theInternet. A substantial portion of our revenues are derived from licensing ourFile Management products. Some of our products encrypt the transfers forsecurity using technology similar to a Web browser. Our File Management productline includes CuteFTP Home, Cute FTP Professional, SecureFTP Server andCuteZIP.

 

•      **Web Development Products** – Our WebDevelopment Products help Web developers create Web sites. They provide a widerange of capabilities such as creating Web sites from a template, direct editingof Web based computer code and creating Web surveys.

 

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Our WebDevelopment product line includes CuteSITE Builder, CuteHTML, CuteMAP and WebSurvey.

 

CuteFTP Homeand CuteFTP Professional accounted for approximately 74% and 71% of totalrevenues in the quarters ended June 30, 2003 and 2004, respectively.  Sales of these products declinedapproximately 6% when comparing the second quarter of 2003 to the second quarterof 2004.  This decline in combined saleswas due to a 37% decline in sales of CuteFTP Home. However, sales of CuteFTPProfessional increased approximately 45% over the same periods.  Total revenues decreased approximately 2%from the second quarter of 2003 to the second quarter of 2004, Secure Serversales increased approximately 153% over the same period and accounted for 16%of sales in the quarter ended June 30, 2004.

 

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

 

Our success in2004 is, to a great extent, dependent on our ability to market and sell ourcontent management products effectively as well as our ability to maintain therevenues generated by CuteFTP products. We also believe that we have an opportunity to increase sales of CuteFTPProfessional and Secure Server.  Ingeneral, our success depends on our ability to introduce new products and themarket’s acceptance of these products. We released new versions of CuteFTP Home, CuteFTP Professional andSecure Server early in 2004 and we believe we can slow the decline in sales ofCuteFTP Home and improve sales of CuteFTP Professional and Secure Server.

 

 

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

 

 The Company returned to a positive workingcapital position as of June 30, 2004 through a combination of revenue growthand expense reductions.  The Companyincurred significant operating losses during the last three years and in thefirst quarter of 2004.  In February 2004GlobalSCAPE reduced its workforce by 20%, laying off 9 of the 45 people thenemployed by the Company.  This workforcereduction was a necessary step in improving the overall financial health of theorganization.

 

We relyheavily on cash flows from operations and these cash flows are directly linkedto CuteFTP Home and CuteFTP Professional, which accounted for 79% and 71% ofour revenues in the six months ended June 30, 2003 and 2004 respectively.  Much of the decline in revenues from thesale of these two products was offset by sales of newer products in the secondquarter of 2004, namely, Secure Server, CuteHTML PRO, FTP for MAC, FTP for MACPRO and PureCMS.  Total revenuesincreased 1.2% when comparing the second quarter of 2004 to the same period in2003.

 

The Company’sliquidity could be further reduced in 2004 if sales of CuteFTP Home continue todecline and the Company is unable to successfully introduce new products orincrease sales of existing products.

 

If salescontinue to decline or the Company’s liquidity position otherwise requires,management has the intent and ability to substantially reduce personnel and personnel-relatedcosts, reduce or substantially eliminate capital expenditures and/or reduce orsubstantially eliminate research and development expenditures.

 

On March 30,2004, the Company obtained a $200,000 line of credit with the Brown andMann-GlobalSCAPE Joint Venture.  Theline of credit is available after June 21, 2004 if the Company fails to extenda line of credit with a bank and matures on December 31, 2004.  The interest rate is subject to

 

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change and is indexed to theprime rate published in the Wall Street Journal.  In connection with the line of credit, GlobalSCAPE entered into aCommercial Security Agreement with the Brown and Mann-GlobalSCAPE Joint Venturewhereby GlobalSCAPE granted a security interest in all its accounts andequipment.

 

Net cashprovided by operating activities was $30,084 for the six months ended June 30,2004 as compared to $208,314 used in the six months ended June 30, 2003.  Cash provided in operations for the six monthsended June 30, 2004, was the result of depreciation and amortization, accountsreceivable, accrued expenses, and deferred revenue offset by accounts payable.

 

Net cash usedin investing activities for the six months ended June 30, 2003 and 2004 was$23,837 and $29,625, respectively.  Thenet cash used in both periods was mainly for the purchase of computer hardwareand software.

 

Net cash usedin financing activities during the six months ended June 30, 2003 and 2004 was$30,168 and $111,537, respectively.  Netcash used in financing activities for the period ended June 30, 2003 consistedof $30,168 in principal payments on capital lease obligations. The financingactivity in the six months ended June 30, 2004 was related to $15,294 inprincipal payments on capital lease obligations, a $100,000 repayment of a bankloan and $3,757 in receipts related to the exercise of stock options.

 

As of June 30,2004 we had $231,355 in cash, current assets of $493,716 and currentliabilities of $401,373, resulting in working capital of $92,343, a $234,071improvement over the working capital deficit of $141,728 at March 31,2004.  Our principal commitmentsconsisted of obligations outstanding under capital and operating leases as wellas royalty agreements with third parties and trade accounts payable.  We plan to continue to expend significantresources on product development in future periods and may also use our cash toacquire or license technology, products or businesses related to our currentbusiness.  We expect that operatingexpenses will continue to be a material use of our cash resources as well.  The facility that we currently occupy isexpected to be sufficient for our growth for the next twelve months.  Consequently, we do not anticipatesignificant expenditures for leasehold improvements or furniture for 2004.

# ** **

 

# **CriticalAccounting Policies**

 

# ***Use ofEstimates***

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operations arebased upon the Company’s financial statements, which have been prepared inaccordance with accounting principles generally accepted in the UnitesStates.  The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the reported amount of assets and liabilities.  On an ongoing basis, management evaluates its estimates andjudgments, including those related to revenue recognition, allowance fordoubtful accounts receivable, long-lived and intangible assets, income taxes,contingencies and litigation. Management bases its estimates on historical experience, observabletrends, and various other assumptions that are believed to be reasonable underthe circumstances.  Management uses thisinformation to make judgments about the carrying values of assets andliabilities that are not readily apparent from other sources.  Actual results may differ from the estimatesunder different assumptions or conditions.

 

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

 

***RevenueRecognition***

* *

Our revenue isgenerated primarily by licensing our software products and providing supportfor those products.  Revenues arecomprised of the gross selling price of the software, including shippingcharges and the earned portion of support and maintenance agreements.  The Company recognizes revenue 

 

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in accordance with the AmericanInstitute of Certified Public Accountants Statement of Position (“SOP”) 97-2, *Software Revenue Recognition*, as modifiedby SOP 98-9, *Modification of SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions*.

 

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

 

We also selltechnical support and maintenance agreements (post contract customer support“PCS”), which are sometimes bundled with the software.  When vendor specific objectiveevidence (“VSOE”) of fair value exists for all elements in a multiple elementarrangement, revenue is allocated to each element based on the relative fairvalue of each of the elements. VSOE of fair value is established by the pricecharged when the same element is sold separately.  In a multiple element arrangement whereby VSOE of fair value ofall undelivered elements exists but VSOE of fair value does not exist for oneor more delivered elements, revenue is recognized using the residual method.Under the residual method, the fair value of the undelivered elements isdeferred and the remaining portion of the arrangement fee is recognized asrevenue, assuming collection is probable. Revenue allocated to PCS is recognized ratably over the contractualterm, typically one year.

 

The Companysells technical support and maintenance services for some of its softwareproducts.  Deferred revenue grew to abalance of approximately $140,489 at December 31, 2003 and $171,801at June 30,2004.  The deferred revenue is dueprimarily to the sale of technical support and maintenance agreements.  If the level of sales of technical support andmaintenance agreements remains the same or declines, the balance of deferredrevenues will stabilize or decline. However, if sales grow, this balance will increase, resulting in thedeferred recognition of a significant amount of revenue in future periods.

 

***Allowancefor Doubtful Accounts***

*** ***

We providecredit, in the normal course of business, to a number of companies and performongoing evaluations of our credit risk. We require no collateral from our customers and we estimate theallowance for uncollectible accounts based on our historical experience andcurrent credit evaluations.  No singlecustomer accounted for more than 2% of net revenues in 2003 or the first sixmonths of 2004.

 

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

* *

The Companyassesses the impairment of long-lived and intangible assets whenever events orchanges in circumstances indicate that the carrying value may not berecoverable.  Factors consideredimportant which could trigger an impairment review included the following:  significant underperformance relative tohistorical or projected future cash flows; significant changes in the manner ofuse of the assets or the strategy for the overall business; and significantnegative industry trends.  Whenmanagement determines that the carrying value of long-lived and intangibleassets may not be recoverable, impairment is measured based on the excess ofthe assets’ carrying value over the estimated fair value.  No impairment was recognized in 2003 or thefirst six months of 2004.

 

***Stock-BasedCompensation***

* *

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

 

During thesecond quarter ended June 30, 2004, 261,000 options were granted to variousemployees at an average exercise price of $0.16 per share. During the secondquarter of 2004, 284,600 options were exercised at a price of  $0.0132 per share, by employees.Additionally, 74,000 stock options were forfeited in the second quarter 2004.

 

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***Researchand Development***

*** ***

Research anddevelopment expenses include all direct costs, primarily salaries for personneland expenditures with external development sources, related to the developmentof new products and significant enhancements to existing products and areexpensed as incurred until such time as technological feasibility is achieved.For the six months ended June 30, 2003 and 2004, we spent approximately$421,092 and $386,733, respectively, on research and development.  No research and development expenses werecapitalized in either of these periods and all previously capitalized researchand development expenses were fully amortized at December 31, 2002.

 

 

# ***IncomeTaxes***

# ** **

GlobalSCAPEaccounts for income taxes using the liability method in accordance withStatement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*. The liability method providesthat the deferred tax assets and liabilities are recorded based on thedifference between the book and tax basis of assets and liabilities and theircarrying amount for financial reporting purposes, as measured by the enactedtax rates and laws that will be in effect when the differences are expected toreverse.  Deferred tax assets arecarried on the balance sheet with the presumption that they will be realizablein future periods when pre-taxable income is generated.

 

Statement ofFinancial Accounting Standards (SFAS) No. 109 requires a valuation allowance toreduce the deferred tax assets reported if, based on the weight of theevidence, it is more likely than not that some portion or all of the deferredtax assets will not be realized.  Based on these criteria, management hasconcluded that no income tax benefits are to be recorded related to the netloss for the six months ended June 30, 2004, because we cannot be certain ofthe future period recoverability of tax assets generated from any available netoperating losses.

 

# **Comparisonof the Three Months ended June 30, 2003 and 2004**

 

***Revenue.***  For the three months ended June 30, 2003 and2004, total revenues decreased $21,911 or 2% from $1,309,708 to $1,287,797  Revenues from CuteFTP Home and CuteFTPProfessional declined 6% over the comparable periods.  However, revenues from these products were up 9% in the secondquarter of 2004 over the first quarter of 2004.  CuteFTP Home and CuteFTP Professional accounted for 71% of totalrevenues for the three months ended June 30, 2004.

 

***Cost of Revenues.***  Cost of revenues consists primarily ofproduction, packaging and shipping costs for boxed copies of software productsas well as a portion of our bandwidth costs, certain licensing expenses androyalties.  Cost of revenues decreased$37,514 or 29% between periods from $131,351 for the three months ended June30, 2003 to $93,837 for the three months ended June 30, 2004 due to decreasedroyalty expenses related to our technology licensing agreement for the PureCMSproduct.  Royalties that the Companypays on software products licensed from third parties, which it resells, areexpensed as a cost of sale when the software product is sold or earlier if therecoverability of any prepaid royalties is in doubt.  The Company has distribution agreements with Hannon Hill Corp.,Trellix Corp., Perseus Development Corp., Beehive Software, Inc., VisicomMedia, Inc., and Xnet Communications GmbH. The GlobalSCAPE software products associated with each of the companiesare PureCMS / Publish XML, CuteSITE Builder, Web Survey, Mac FTP, CuteHTML Pro,and Mac FTP Pro, respectively. GlobalSCAPE’s agreement with Hannon Hill Corp. required a minimumroyalty of $16,667 per month, as prepayment of royalties, for 12 monthsbeginning in December 2002.  These paymentswere expensed as paid because the lower than expected sales of PureCMS raiseddoubt as to the realization of benefit from these prepayments.  The total amount expensed in 2003 relatingto these prepayments was $183,337.  As aresult, we expect the cost of revenues to decline both as a percentage of salesand in gross terms in 2004 when compared to 2003 as we recover benefit fromthese minimum royalties.

 

***Selling, General and Administrative.***  Selling, general and administrative expensesconsist primarily of personnel and related expenses, marketing, customersupport, rents, credit card transaction

 

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fees, bad debt and professionalfees.  For the three months ended June30, 2003 and 2004 selling, general and administrative expenses were $762,697and $798,436, respectively, an increase of $35,739 or 5%. For the three monthsended June 30, 2004, selling, general and administrative expenses decreased$178,478 over the quarter ended March 31, 2004.  Most of the decrease was due to the expense reductions insalaries, commissions, payroll taxes and health care costs due to the layoff of9 people in the first quarter of 2004.

 

***Research and Development.***  Research and development expenses decreased$62,772 or 31% for the three months ended June 30, 2003 and 2004, from $203,874to $141,102.  The decrease was dueprimarily to slightly lower personnel costs and reduction in use of outsidedevelopment sources.

 

***Depreciation and Amortization.***  Depreciation and amortization expenseconsists of depreciation expense related to our fixed assets, amortization ofthe trademark associated with our purchase of CuteFTP and in prior periods,amortization of capitalized development costs. Depreciation and amortization expense decreased from $109,297 to$50,220, a decrease of 54% for the three month period ended June 30, 2003 and2004.  This decrease was due to areduction in depreciation expense as fixed assets come to the end of their depreciablelife and because the purchase of CuteFTP was fully amortized as of September30, 2003.

 

***Other Income, Expense.***  For the three months ended June 30, 2003 and2004, interest expense decreased from $907 to $0, respectively.  The majority of interest expense incurredduring these periods was related to capital leases.  A note payable and capital lease obligation were both paid off inthe first quarter of 2004.

 

***Income Taxes.***  Although we recorded net income for thethree months ended June 30, 2003 and 2004, we did not recognize a tax liabilitydue to the net loss for the six months ended June 30, 2003 and 2004.  We cannot be certain of the future periodrecoverability of tax assets generated from available net operating losses.

 

***Net Income (Loss).***  GlobalSCAPE recorded net income of $101,582 inthe second quarter of 2003 compared to net income of $204,202 in the secondquarter of 2004.  The positive resultsin the second quarter of 2004 were largely the result of reductions tooperating costs discussed above.

 

# **Comparisonof the Six Months ended June 30, 2003 and 2004**

 

***Revenue.***  For the six months ended June 30, 2003 and2004, total revenues increased $30,040 or 1.2% from $2,429,894 to $2,459,934respectively.  Revenues from CuteFTPHome and CuteFTP Professional declined 9% between periods but increased 9% fromthe first to second quarter of 2004.  Total revenues were helped somewhat by increased sales of some of ournewer products such as CuteSITE Builder, Secure Server, PureCMS, FTP for MAC,FTP for MAC PRO, CuteHTML PRO, Web Survey and PublishXML.

 

***Cost of Revenues.***  Cost of revenues consists primarily ofproduction, packaging and shipping costs for boxed copies of software productsas well as a portion of our bandwidth costs, certain licensing expenses androyalties.  Cost of revenues decreased$80,826 or 30% between periods from $273,341 for the six months ended June 30,2003 to $192,515 for the six months ended June 30, 2004 due to decreasedroyalty expenses related to our technology licensing agreement for the PureCMSproduct and lower production packaging and shipping costs.  We expect cost of revenues to decrease bothas a percentage of sales and in gross terms in future periods due to royaltyagreements.

 

***Selling, General and Administrative.***  Selling, general and administrative expensesconsist primarily of personnel and related expenses, marketing, customersupport, rents, credit card transaction fees, bad debt and professionalfees.  For the six months ended June 30,2003 and 2004 selling, general and administrative expenses were $2,014,417 and$1,775,351, respectively, a decrease of $239,066 or 12%.  The decrease was due to approximately$460,000 in product launch expenses related to PureCMS in thethe period endingJune 30, 2003 offset by the increase in sales commissions, health insurancecosts, software maintenance and professional fees.

 

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***Research and Development.***  Research and development expenses decreased$34,359 or 8% between periods, from $421,092 to $386,733.  The decrease was due primarily to slightlylower personnel costs for internal staff, and reduction of outside developmentcosts.

 

***Depreciation and Amortization.***  Depreciation and amortization expenseconsists of depreciation expense related to our fixed assets, amortization ofthe trademark associated with our purchase of CuteFTP and in prior periods,amortization of capitalized development costs. Depreciation and amortization expense decreased from $226,337 to$106,014 a decrease of 53%.  Thisdecrease was due to a reduction in amortization expense because many fixedassets are nearing the end of their depreciable lives as well as a slowdown inadditions to fixed assets in current periods relative to prior periods.

 

***Other Income, Expense.***  For the six months ended June 30, 2003 and2004, interest expense decreased from $2,055 to $720, respectively.  The majority of interest expense incurredduring these periods was related to capital leases and borrowings from a bank.  During the six months ended June 30, 2003,we recognized a loss on the disposal of fixed assets in the amount of $1,486,and no disposals of fixed assets in the same period in 2004..

 

***Income Taxes.***  We recognized no benefit related to the netloss in the first six months ended June 30, 2003 and 2004 because we cannot becertain of the future period recoverability of tax assets generated fromavailable net operating losses.

 

***Net Income (Loss).***  GlobalSCAPE incurred net losses of$(508,834) and $(1,399) for the six months ended June 30, 2003 and 2004,respectively.  The net loss in the sixmonths ended June 30, 2003  was due tothe approximately $460,000 in product launch expenses related to PureCMS andthe near $186,000 decline in revenues over the same quarter in the prioryear.  The net loss for the six months endedJune 30, 2004 was an improvement over the same period in 2003 as a result ofexpense cuts made in the first quarter of 2004 and realized in the secondquarter of 2004.

 

 

##### **Seasonality**

 

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

 

# **Item 3**.  Quantitative and Qualitative DisclosuresAbout Market Risk

 

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

 

In the threemonths ended June 30, 2004, approximately 35% of our revenues came fromcustomers outside the United States. All revenues are received in U.S. dollars so we have no exchange raterisk with regard to the sale.  However,in July 2003, the European Union (EU) enacted Value Added Taxes (VAT) onelectronic purchases.  These taxes arecharged to our non-business customers in the EU and, in our case, are remittedquarterly in pound sterling.   We expectthat the impact of this currency translation will not be material to ourbusiness.

 

# **Item 4. **Controlsand Procedures

 

a)     Evaluationof disclosure controls and procedures. Within the 90 days prior to the filing date of this report, ourPresident and former Vice President of Finance and Administration carried out anevaluation of GlobalSCAPE’s disclosure controls and procedures (as defined SECRules 13a-14

 

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and 15d-14under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”))and concluded that the controls and procedures are effective in recording,processing, summarizing and reporting the information required to be disclosedby GlobalSCAPE in the reports it files with the SEC under the Exchange Actwithin the time periods specified in the SEC’s rules and forms.

 

b)    Changesin internal controls.  There were nomaterial changes in GlobalSCAPE’s internal controls subsequent to theevaluation described above.

 

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

## ** **

# **Item1.  Legal Proceedings**

 

We are notcurrently involved in any material legal proceedings.

 

# **Item2.  Changes in Securities and Use of Proceeds**

 

None in the secondquarter of 2004.

 

# **Item3.  Defaults Upon Senior Securities**

# ** **

Not applicable.

 

# **Item4.  Submission of Matters to a Vote of Security Holders**

 

The Annual Meetingof Stockholders was held on June 1, 2004.

 

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

 

| **Name:**        |   | **Votes for:** |   | **Votes  Withheld:** |   |
|------------------|--------|----------------|--------|----------------------|--------|
| Thomas W. Brown  |   | 12,623,000     |   | 9,087                |   |
| David L. Mann    |   | 12,623,000     |   | 9,087                |   |
| Charles R. Poole |   | 12,623,000     |   | 9,087                |   |

 

In addition,stockholders ratified the appointment of Ernst & Young, LLP as theCompany’s independent certified public accountants to audit the Company’sconsolidated financial statements for the year ending December 31, 2004.  This proposal received the following votes:

 

| For:     |   | 12,622,483 |   |
|----------|--------|------------|--------|
| Against: |   | 6,251      |   |
| Abstain: |   | 3,353      |   |

 

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# **Item5.  Other Information**

 

Thomas F.Farar replaced Daniel P. McRedmond as Chief Financial Officer June 28, 2004.

 

# **Item6.  Exhibits and Reports on Form 8-K**

 

**(a)**           Exhibits

 

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

 

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

 

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

 

**(b)**           Reports on Form 8-K

 

None in the second quarter of 2004.

 

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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. |
|-----------------|--------|--------------------|
|            |   |               |
|            |   |               |
| August 13, 2004 |   | By:                | /s/  Charles R. Poole |   |
| Date            |   |               | Charles  R. Poole |
|            |   |               | President  and Chief Operating Officer |
|            |   |               |   |
| August 13, 2004 |   | By:                | /s/ Thomas F. Farar |   |
| Date            |   |               | Thomas F. Farar |
|            |   |               | Chief Financial Officer |
|                 |        |                    |  |  |  |

 

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