#### ** **

#### **UNITED STATESSECURITIES AND EXCHANGE COMMISSION**Washington, D.C. 20549

#### ** **

### **FORM 10-Q**

 

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

 

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

 

**Or**

****

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

 

**For the transition periodfrom             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****San Antonio, TX**   | ** ** | **78249**                              |
| (Address of principal  executive offices)                        |       | (Zip Code)                             |
| ** **                                                       | ** ** | ** **                             |
| **(210)  308-8267**                                              |
| (Registrant’s telephone number, including area code)        |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.   ý  Yes  o  No

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).     oYes  ýNo

 

## **The number of shares outstanding of the registrant’s commonstock at November 4, 2005 was 13,788,219.**

 

 

----

 

## **GlobalSCAPE Inc.**

## ** **

## **Quarterly Report on Form 10-Q**

## **For the Quarter ended September 30, 2005**

## ** **

## **Index**

## ** **

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

 

GlobalSCAPE®, CuteFTP®, CuteSITE Builder®, PureCMS®,CuteZIP®, CuteHTML® and CuteMAP® are registered trademarks of GlobalSCAPETexas, LP.  GlobalSCAPE Secure FTP Server, GlobalSCAPE Transfer Engine,ContentXML and SnapEdit are trademarks of GlobalSCAPE Texas, LP.  Othertrademarks and tradenames in this quarterly report are the property of theirrespective owners.

 

ii

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**GlobalSCAPE, Inc.**

** **

**Balance Sheets**

** **
| ** **                                                                                                                                                | ** ** | **December 31,  2004** | ** ** | **September 30,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                | ** ** | ** **                  | ** ** | **(unaudited)**              | ** ** |
| Assets                                                                                                                                                    |       |                        |       |                         |       |
| Current assets:                                                                                                                                           |       |                        |       |                         |       |
| Cash and cash equivalents                                                                                                                                 |       | $                           | 572,959    |                         | $          | 1,384,207 |   |
| Accounts receivable (net of allowance for doubtful  accounts of $15,442 and $15,905 at December 31, 2004 and September 30,  2005, respectively) |       | 148,534                     |       | 581,221                      |       |
| Prepaid expenses                                                                                                                                          |       | 91,144                      |       | 94,609                       |       |
| Total current assets                                                                                                                                      |       | 812,637                     |       | 2,060,037                    |       |
|                                                                                                                                                      |       |                        |       |                         |       |
| Property and equipment:                                                                                                                                   |       |                        |       |                         |       |
| Furniture and fixtures                                                                                                                                    |       | 332,920                     |       | 332,920                      |       |
| Software                                                                                                                                                  |       | 245,601                     |       | 278,740                      |       |
| Equipment                                                                                                                                                 |       | 608,718                     |       | 602,827                      |       |
| Leasehold improvements                                                                                                                                    |       | 167,762                     |       | 167,762                      |       |
|                                                                                                                                                      |       | 1,355,001                   |       | 1,382,249                    |       |
| Accumulated depreciation and amortization                                                                                                                 |       | 1,207,663                   |       | 1,223,005                    |       |
| Net property and equipment                                                                                                                                |       | 147,338                     |       | 159,244                      |       |
|                                                                                                                                                      |       |                        |       |                         |       |
| Other assets:                                                                                                                                             |       |                        |       |                         |       |
| Other                                                                                                                                                     |       | 11,882                      |       | 11,882                       |       |
| Total other assets                                                                                                                                        |       | 11,882                      |       | 11,882                       |       |
| Total assets                                                                                                                                              |       | $                           | 971,857    |                         | $          | 2,231,163 |   |

 

1

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| ** **                                                                                                                                                                                            | ** ** | **December 31,  2004** | ** ** | **September 30,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                                                            | ** ** | ** **                  | ** ** | **(unaudited)**              | ** ** |
| Liabilities and Stockholders’ Equity                                                                                                                                                             |       |                        |       |                         |       |
| Current liabilities:                                                                                                                                                                                  |       |                        |       |                         |       |
| Accounts payable                                                                                                                                                                                      |       | $                           | 122,117    |                         | $          | 93,697 |   |
| Accrued expenses                                                                                                                                                                                      |       | 170,654                     |       | 208,730                      |       |
| Deferred revenue                                                                                                                                                                                      |       | 178,117                     |       | 344,957                      |       |
| Total current liabilities                                                                                                                                                                             |       | 470,888                     |       | 647,384                      |       |
|                                                                                                                                                                                                  |       |                        |       |                         |       |
| Long-term liabilities:                                                                                                                                                                                |       |                        |       |                         |       |
| Deferred compensation                                                                                                                                                                                 |       | —                      |       | 6,349                        |       |
| Other long-term liabilities                                                                                                                                                                           |       | 28,038                      |       | 19,628                       |       |
| Total long-term liabilities                                                                                                                                                                           |       | 28,038                      |       | 25,977                       |       |
|                                                                                                                                                                                                  |       |                        |       |                         |       |
| 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, 13,773,219 and 13,788,219 shares issued and outstanding at  December 31, 2004 and September 30, 2005, respectively |       | 13,773                      |       | 13,788                       |       |
| Additional paid-in capital                                                                                                                                                                            |       | 675,365                     |       | 682,310                      |       |
| Retained earnings (deficit)                                                                                                                                                                           |       | (216,207                    | )          | 861,704                      |       |
| Total stockholders’ equity                                                                                                                                                                       |       | 472,931                     |       | 1,557,802                    |       |
| Total liabilities and stockholders’ equity                                                                                                                                                       |       | $                           | 971,857    |                         | $          | 2,231,163 |   |

 

See accompanying notes.

 

2

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**GlobalSCAPE, Inc.**

** **

**Statements of Operations**

** **

**(Unaudited)**

 
| ** **                                                                            | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                                  | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2005** | ** ** |
| Operating revenues:                                                                   |       |                                      |       |                                     |       |   |   |   |   |
| Software product revenues                                                             |       | $                                         | 1,222,118  |                                     | $          | 1,559,126 |   | $ | 3,599,400 |   | $ | 4,480,679 |   |
| Maintenance, support and other revenues (net of  deferred revenue)                    |       | 48,105                                    |       | 164,559                                  |       | 130,758 |   | 484,763 |   |
| Total operating revenues                                                              |       | 1,270,223                                 |       | 1,723,685                                |       | 3,730,158 |   | 4,965,442 |   |
|                                                                                  |       |                                      |       |                                     |       |   |   |   |   |
| Cost of revenues (exclusive of depreciation and  amortization shown separately below) |       | 111,556                                   |       | 66,709                                   |       | 304,071 |   | 226,086 |   |
| Selling, general and administrative expenses                                          |       | 823,813                                   |       | 1,014,011                                |       | 2,599,165 |   | 2,973,385 |   |
| Research and development expenses                                                     |       | 165,743                                   |       | 230,947                                  |       | 552,477 |   | 614,756 |   |
| Depreciation and amortization                                                         |       | 33,769                                    |       | 22,714                                   |       | 139,782 |   | 76,129 |   |
| Total operating expense                                                               |       | 1,134,881                                 |       | 1,334,381                                |       | 3,595,495 |   | 3,890,356 |   |
| Income from operations                                                                |       | 135,342                                   |       | 389,304                                  |       | 134,663 |   | 1,075,086 |   |
|                                                                                  |       |                                      |       |                                     |       |   |   |   |   |
| Other income (expense):                                                               |       |                                      |       |                                     |       |   |   |   |   |
| Interest expense                                                                      |       | (371                                      | )          | 105                                      |       | (1,091 | ) | (620 | ) |
| Interest income                                                                       |       | —                                    |       | 3,552                                    |       | — |   | 3,552 |   |
| Gain on disposal of assets                                                            |       | —                                    |       | 767                                      |       | — |   | 958 |   |
| Total other income (expense)                                                          |       | (371                                      | )          | 4,424                                    |       | (1,091 | ) | 3,890 |   |
| Income (loss) before income taxes                                                     |       | 134,971                                   |       | 393,728                                  |       | 133,572 |   | 1,078,976 |   |
|                                                                                  |       |                                      |       |                                     |       |   |   |   |   |
| Income tax expense (benefit):                                                         |       |                                      |       |                                     |       |   |   |   |   |
| Current:                                                                              |       |                                      |       |                                     |       |   |   |   |   |
| Federal                                                                               |       | —                                    |       | —                                   |       | — |   | — |   |
| State                                                                                 |       | —                                    |       | —                                   |       | — |   | 1,065 |   |
| Deferred:                                                                             |       |                                      |       |                                     |       |   |   |   |   |
| Federal                                                                               |       | —                                    |       | —                                   |       | — |   | — |   |
| State                                                                                 |       | —                                    |       | —                                   |       | — |   | — |   |
| Total income tax provision (benefit)                                                  |       | —                                    |       | —                                   |       | — |   | 1,065 |   |
| Net income                                                                            |       | $                                         | 134,971    |                                     | $          | 393,728 |   | $ | 133,572 |   | $ | 1,077,911 |   |
|                                                                                  |       |                                      |       |                                     |       |   |   |   |   |
| Net income per common share- basic                                                    |       | $                                         | 0.010      |                                     | $          | 0.029 |   | $ | 0.010 |   | $ | 0.078 |   |
| Net income per common share- assuming dilution                                        |       | $                                         | 0.009      |                                     | $          | 0.025 |   | $ | 0.009 |   | $ | 0.072 |   |
|                                                                                  |       |                                      |       |                                     |       |   |   |   |   |
| Average shares outstanding:                                                           |       |                                      |       |                                     |       |   |   |   |   |
|                                                                                  |       |                                      |       |                                     |       |   |   |   |   |
| Basic                                                                                 |       | 13,773,219                                |       | 13,776,969                               |       | 13,633,611 |   | 13,774,483 |   |
| Diluted                                                                               |       | 14,303,786                                |       | 15,582,248                               |       | 14,164,178 |   | 14,937,374 |   |

 

Seeaccompanying notes.

 

3

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## **GlobalSCAPE, Inc.**

**Statements of Cash Flows**

** **

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                                 | ** ** | **2005** | ** ** |
| Operating Activities:                                                              |       |                                     |       |   |   |
| Net income                                                                         |       | $                                        | 133,572    |   | $ | 1,077,911 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                     |       |   |   |
| Bad debt expense                                                                   |       | (11,504                                  | )          | 7,775 |   |
| Depreciation and amortization                                                      |       | 139,782                                  |       | 76,129 |   |
| Loss on disposal of assets                                                         |       | —                                   |       | — |   |
| Changes in operating assets and liabilities:                                       |       |                                     |       |   |   |
| Accounts receivable                                                                |       | 75,956                                   |       | (440,462 | ) |
| Prepaid expenses                                                                   |       | (45,259                                  | )          | (3,465 | ) |
| Accounts payable                                                                   |       | (81,895                                  | )          | (28,420 | ) |
| Accrued expenses                                                                   |       | 27,397                                   |       | 38,076 |   |
| Deferred revenues                                                                  |       | 28,949                                   |       | 166,840 |   |
| Other long-term liabilities                                                        |       | (8,411                                   | )          | (2,061 | ) |
| Net cash provided by operating activities                                          |       | 258,587                                  |       | 892,323 |   |
| Investing Activities:                                                              |       |                                     |       |   |   |
| Purchase of property and equipment                                                 |       | (32,991                                  | )          | (88,035 | ) |
| Net cash used in investing activities                                              |       | (32,991                                  | )          | (88,035 | ) |
| Financing Activities:                                                              |       |                                     |       |   |   |
| Issuance of common stock                                                           |       | 3,756                                    |       | 6,960 |   |
| Bank borrowing (repayment)                                                         |       | (100,000                                 | )          | — |   |
| Principal payments on capital lease obligations                                    |       | (15,294                                  | )          | — |   |
| Net cash provided by (used in) financing activities                                |       | (111,538                                 | )          | 6,960 |   |
| Net increase in cash                                                               |       | 114,058                                  |       | 811,248 |   |
| Cash at beginning of period                                                        |       | 342,433                                  |       | 572,959 |   |
| Cash at end of period                                                              |       | $                                        | 456,491    |   | $ | 1,384,207 |   |
|                                                                               |       |                                     |       |   |   |
| Supplemental disclosures:                                                          |       |                                     |       |   |   |
| Interest paid                                                                      |       | $                                        | 1,091      |   | $ | 620 |   |
| Income taxes paid                                                                  |       | $                                        | —     |   | $ | 1,065 |   |

 

See accompanying notes.

 

4

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**GlobalSCAPE, Inc.**

** **

**Notes to Financial Statements**

** **

# **Nature of Business**

# ** **

GlobalSCAPE, Inc.(collectively referred to as “GlobalSCAPE” or “the Company”), founded in April 1996,develops and distributes Internet related software. The Company is best knownfor its popular file transfer program, CuteFTP. The Company derives its revenues primarily from sales of licenses to useits software products.  Sales of CuteFTPand CuteFTP Pro accounted for approximately 70% and 53% of total revenues in2004 and the first nine months of 2005 respectively.  The Company is organized and operates as onesegment and markets its products primarily through the Internet, an internalsales force and through resellers.

 

***CorporateStructure***

*** ***

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

 

# **Basis of Presentation**

# ** **

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

 

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

 

# **Principles of Consolidation**

# ** **

***The consolidated financialstatements include all subsidiaries.  Allinter-company transactions and balances have been eliminated.***

*** ***

***Liquidity***

*** ***

The Company hasimproved its positive working capital position through a combination of revenuegrowth, expense control and improved net income over the last 6 quarters,including the quarter ended Seotember 30, 2005. The Company incurredsignificant operating losses during the year ended December 31, 2003 andthe quarter ended March 31, 2004. In February 2004 GlobalSCAPEreduced its workforce by 20%, laying off 9 of the 45 people then employed bythe Company.  This workforce reductionwas a necessary step in improving the overall financial health of the Company. TheCompany is meeting its higher revenue targets, further improving the Company’sliquidity position.

 

The Company ishighly dependent on the sale of two software products, CuteFTP Home and CuteFTPPro, which may be subject to technological and competitive obsolescence.  Sales of these two products which represented70% of the Company’s revenues in the third quarter of 2004, represented 53% ofthe Company’s revenues in the third quarter of 2005. Although the percentage oftotal revenue for these two products has decreased, revenue for these twoproducts has increased approximately 1% when

 

5

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comparing the first nine months of 2004 to the same period in 2005.Total revenues increased by approximately 36% when comparing the third quarterof 2005 to the same period in 2004. Revenues from the sale of Enhanced FileTransfer introduced in late 2004, represented approximately 17% of revenue inthe third quarter of 2005. Management is concentrating its efforts to increasemarket penetration of its Enhanced File Transfer products.

 

As of September 30,2005 the Company had cash and cash equivalents of $1,384,207 and had networking capital of $1,412,653. Management believes this level of workingcapital is adequate to finance the Company’s current level of operations.

 

The Companyrenewed a $250,000 revolving line of credit agreement in December 2004,which is due on demand, but if no demand is made, then on March 31, 2006.  The interest rate is subject to change and isindexed to the bank’s prime rate.  Theinitial rate is 7.25%.  In connectionwith the line of credit, GlobalSCAPE entered into a Commercial SecurityAgreement with the bank whereby GlobalSCAPE granted a security interest in allits accounts receivable and equipment. The Company has not borrowed under this agreement in 2005. The creditfacility is available to the Company at any time during its term.

 

***Reclassifications***

*** ***

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

 

# **Sale / Disposal of Assets**

# ** **

During thefirst three quarters of 2005, the Company sold or disposed of $29,293 in fixedassets, mainly older computer related equipment.

 

# **Stock-Based Compensation**

# ** **

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

 

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

 

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

 
| ** **                                                                                                                                                                                        | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **2004**                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net Income, as reported                                                                                                                                                                           |       | $                                          | 134,971    |                                      | $          | 393,728 |   | $ | 133,572 |   | $ | 1,077,911 |   |
| Stock-based compensation expense that would have  been included in the determination of net income (loss) had the fair value  based method been applied to all awards, net of related tax effects |       | (3,554                                     | )          | (7,158                                    | )          | (15,729 | ) | (15,643 | ) |
| Pro forma net income                                                                                                                                                                              |       | $                                          | 131,417    |                                      | $          | 386,570 |   | $ | 117,843 |   | $ | 1,062,268 |   |
|                                                                                                                                                                                              |       |                                       |       |                                      |       |   |   |   |   |
| Income per share:                                                                                                                                                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Basic- as reported                                                                                                                                                                                |       | $                                          | 0.010      |                                      | $          | 0.029 |   | $ | 0.010 |   | $ | 0.078 |   |
| Basic- pro forma                                                                                                                                                                                  |       | $                                          | 0.009      |                                      | $          | 0.025 |   | $ | 0.008 |   | $ | 0.071 |   |
|                                                                                                                                                                                              |       |                                       |       |                                      |       |   |   |   |   |
| Diluted- as reported                                                                                                                                                                              |       | $                                          | 0.009      |                                      | $          | 0.025 |   | $ | 0.009 |   | $ | 0.072 |   |
| Diluted- pro forma                                                                                                                                                                                |       | $                                          | 0.009      |                                      | $          | 0.025 |   | $ | 0.008 |   | $ | 0.071 |   |

 

6

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During thethird quarter ended September 30, 2005, there were no options granted toemployees. There were 15,000 stock options exercised by an employee at anaverage exercise price of $0.464 per share. Additionally, there were no stock options forfeited in the third quarter2005.

 

# **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)for all periods presented. Basic earnings per share is based on the weightedeffect of all common shares issued and outstanding, and is calculated bydividing net income (loss) available to common stockholders by the weightedaverage shares outstanding during the period. Diluted earnings per share iscalculated by dividing net income (loss) available to common stockholders bythe weighted average number of common shares used in the basic earnings pershare calculation plus the number of common shares that would be issuedassuming conversion of all potentially dilutive common shares outstanding.  Below is a reconciliation of the numeratorsand denominators of basic and diluted earnings per share for each of theperiods presented:

 
| ** **                                              | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                              | ** ** | **2004**                                  | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2005** | ** ** |
| **Numerators**                                          |       |                                      |       |                                     |       |   |   |   |   |
| Numerators for  basic and diluted earnings per share:   |       |                                      |       |                                     |       |   |   |   |   |
| Net income                                              |       | $                                         | 134,971    |                                     | $          | 393,728 |   | $ | 133,572 |   | $ | 1,077,911 |   |
|                                                    |       |                                      |       |                                     |       |   |   |   |   |
| **Denominators**                                        |       |                                      |       |                                     |       |   |   |   |   |
| Denominators for  basic and diluted earnings per share: |       |                                      |       |                                     |       |   |   |   |   |
| Weighted average shares outstanding – basic        |       | 13,773,219                                |       | 13,776,969                               |       | 13,633,611 |   | 13,774,483 |   |
|                                                    |       |                                      |       |                                     |       |   |   |   |   |
| **Dilutive  potential common shares**                   |       |                                      |       |                                     |       |   |   |   |   |
| Stock options  (1)                                      |       | 530,567                                   |       | 1,805,279                                |       | 530,567 |   | 1,162,891 |   |
| Denominator for  dilutive earnings per share            |       | 14,303,786                                |       | 15,582,248                               |       | 14,164,178 |   | 14,937,374 |   |
|                                                    |       |                                      |       |                                     |       |   |   |   |   |
| Net income per  common share                            |       | $                                         | 0.010      |                                     | $          | 0.029 |   | $ | 0.010 |   | $ | 0.078 |   |
| Net income per  common share – assuming dilution   |       | $                                         | 0.009      |                                     | $          | 0.025 |   | $ | 0.009 |   | $ | 0.072 |   |

 

----

(1)          Forthe three and nine months ended September 30, 2005, all outstanding optionshave been included as dilutive shares. For the three and nine months ended September 30,2004, 1,288,004 options have not been included in dilutive shares, as theeffect would be anti-dilutive.

 

7

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# **Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

# ** **

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

 

**Overview**

 

GlobalSCAPEdevelops and distributes Internet related software including File Management, ContentManagement and Web Development Tools.  Wedistribute our software primarily via download from our Internet website.  Our internal direct sales force began exceeding Internet revenue in thesecond quarter of 2005, achieving a goal set by management. During 2004,approximately 65% of our revenues were generated from customers within theUnited States, with the remaining 35% concentrated mostly in Western Europe,Canada and Australia. In the third quarter of 2005, approximately 72% of our revenues were generated fromcustomers within the United States. We sell our products on the Internet,through resellers and our internal sales force.

 

•                  **Content Management Products**–****Our Content Management Products helpnon-technical business users update and manage Web Site content withoutexcessive training. The product line includes PublishXML, Our PureCMS  product was phased out the the third quarterof 2005.

 

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

 

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

 

CuteFTP Homeand CuteFTP Professional accounted for approximately 70% and 53% of totalrevenues in the quarters ended September 30, 2004 and 2005,respectively.  Revenue from the sales ofthese two products increased approximately 1% when comparing the third quarterof 2004 to the third quarter of 2005.  Thedecline in the percentage of total revenue was due to an increase in sales ofEnhanced File Transfer and Secure Server which accounted for approximately 17%and 22% of total revenues, respectively. We are continuing to improve ourEnhanced File Transfer and Secure Server products to meet the needs of ourcustomers who are concerned with secure transfer of files on the Internet. TheCompany made the decision to focus on the file transfer products, as they arethe core of our current revenues and are expected to remain so for theforseeable future.

 

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 decline inthe market for secure FTP clients and servers such as CuteFTP Professional andSecure Server and Enhanced File Transfer which we believe better target theneeds of businesses.

 

8

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Our strategyis to continue enhancing our file transfer products across the board to meetthe demands of both individual and enterprise users, while improving ourcurrent product line. Our success in 2005 is, to a great extent, dependent onour ability to market and sell our Enhanced File Transfer (EFT) to enterpriseusers. We introduced Enhanced File Transfer in late 2004; in the second quarterof 2005, EFT represented 21% of our total revenue, in the third quarter 17% of totalrevenue. We are continuing to address security issues for our customers forfuture releases and will be releasing additional modules for our Enhanced FileTransfer and Secure Server products. We plan on releasing additional versionsof our Enhanced File Transfer product this year.  In general, our success depends on ourability to introduce new products and the market’s acceptance of theseproducts.  We released new versions ofCuteFTP, CuteFTP Pro and Secure Server early in 2005 and will again in late2005. We anticipate continued growth in our secure transfer products.

 

##### **Liquidity and CapitalResources**

##### ** **

The Companycontinues to improve its positive working capital position through acombination of revenue growth and expense reductions; this has resulted in netincome over the last six quarters, including the quarter ended September 30,2005. The Company incurred significant operating losses during the three yearsended December 31, 2003 and in the first quarter of 2004.  In February 2004 GlobalSCAPE reduced itsworkforce by 20%, laying off 9 of the 45 people then employed by theCompany.  As of September 30, 2005the Company has employed 39 people.

 

We relyheavily on cash flows from operations and these cash flows are directly linkedto CuteFTP Home and CuteFTP Professional, which accounted for 70% and 53% ofour revenues in the nine months ended September 30, 2004 and 2005respectively.  Newer products in thesecond and third quarters of 2005, namely, Enhanced File Transfer and SecureServer have increased total revenue and reduced the percentage of total revenuepreviously held by the two FTP products. Total revenues increased 36% whencomparing the third quarter of 2005 to the same period in 2004.

 

 Net cash provided by operating activities was$892,323 for the nine months ended September 30, 2005 as compared to $258,587in the nine months ended September 30, 2004.  Cash provided in operations for the ninemonths ended September 30, 2005, was primarily the result of net incomeand, to a lesser extent depreciation and amortization, changes in; accountsreceivable, accrued expenses, and deferred revenue offset by accounts payable.

 

Net cash usedin investing activities for the nine months ended September 30, 2004 and2005 was $32,991 and $88,035, respectively. The net cash used in both periods was mainly for the purchase ofcomputer hardware and software.

 

Net cashprovided by (used in) financing activities for the nine months ended September 30,2004 and 2005 was $(111,538) and $6,960, respectively. The financing activityin the nine months ended September 30, 2004 was related to $15,294 inprincipal payments on capital lease obligations, a $100,000 repayment of a bankloan and $3,756 in receipts related to the exercise of stock options. Thefinancing activity in the nine months ended September 30, 2005 was relatedto $6,960 in receipts related to the exercise of stock options.

 

As of September 30,2005 we had $1,384,207 in cash and cash equivalents, total current assets of $2,060,037and current liabilities of $647,384, resulting in working capital of $1,412,653,a $1,157,742 improvement over the working capital of $254,911 at September 30,2004.  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 theremainder of 2005.

 

9

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The following table sets forth the future minimum payments requiredunder contractual commitments at September 30, 2005:

 
| ** **                  | ** ** | **Payments Due by Fiscal Year** | ** ** |
|-----------------------------|------------|---------------------------------|------------|
| **Contractual Obligations** | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Operating Lease             |       | $                               | 47,665     |   | $ | 190,659 |   | $ | 190,659 |   | $ | 95,330 |   | — |   | $ | 524,313 |   |
| Equipment Leases            |       | 1,565                           |       | 6,257 |   | 3,105 |   | — |   | — |   | 10,927 |   |
| Total Cash  Obligations     |       | $                               | 49,230     |   | $ | 196,916 |   | $ | 193,764 |   | $ | 95,330 |   | — |   | $ | 535,240 |   |

 

----

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

 

##### **Critical AccountingPolicies**

##### ** **

# ***Useof Estimates***

# ** **

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

 

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

 

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

 

The Companybegan selling technical support and maintenance services for some of itssoftware products. Deferred revenue grew to a balance of approximately $178,117at December 31, 2004 and $344,957 at September 30, 2005.  The deferred revenue is due primarily to thesale of technical support and maintenance agreements.  If the level of sales of technical supportand maintenance agreements remains the

 

10

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same or declines, the balance of deferred revenues will stabilize ordecline.  However, if sales grow, thisbalance will increase, resulting in the deferred recognition of a significantamount of revenue in future periods. The increase in the first nine months waslargely due to the sale of maintenance and support for our enterprise typeproducts.

 

***Allowance for 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 revenues in 2004. One customer in the firstnine months of 2005 accounted for approximately 3.6% of revenues. This customerrepresented approximately 32% of our trade accounts receivable at September 30,2005.

 

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

* *

The Companyassesses the impairment of long-lived and intangible assets whenever events orchanges in circumstances indicate that the carrying value may not 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 2004 or thefirst nine months of 2005.

 

***Stock-BasedCompensation***

* *

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

 

During thethird quarter of 2005, there were no options granted to employees.  During the nine months ended September 30,2005, 15,000 options were exercised at an average price of $0.464 per share, byan employee.  There were no options forfeitedin the third quarter of 2005.

 

 In December 2004, FASB issued Statement No. 123-R,*Share-Based Payment,*whichestablishes accounting standards for transactions in which an entity receivesemployee services in exchange for (a) equity instruments of the entity or (b) liabilitiesthat are based on the fair value of the entity’s equity instruments or that maybe settled by the issuance of equity instruments*. *Effective in thethird quarter of 2005, SFAS 123-R will require us to recognize the grant-datefair value of stock options and equity based compensation issued to employeesin the statement of operations.  Thestatement also requires that such transactions be accounted for using the fair–value-based method, thereby eliminating use of the intrinsic value method ofaccounting in APB No. 25, *Accountingfor Stock Issued to Employees,*which was permitted under Statement123, as originally issued.  This changein accounting will be required in the first quarter of 2006 and will result inincreased compensation expense for stock options over their vesting period.

 

***Research and 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 nine months ended September 30, 2004 and 2005, we spentapproximately $552,000 and $615,000, respectively, on research anddevelopment.  No research and developmentexpenses were capitalized in either of these periods and all previouslycapitalized research and development expenses were fully amortized at December 31,2002.

 

11

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***Income Taxes***

*** ***

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

 

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

 

**Comparison of the Three Months ended September 30, 2004 and 2005**

 
| ** **                                   | ** ** | **2004**  | ** ** | **2005**  | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|----------------------------------------------|------------|-----------|------------|-----------|------------|-------------------|------------|--------------|------------|
| Software product revenues                    |       | $         | 1,270,223  |      | $          | 1,723,685         |       | $            | 453,462    |   | 36 | % |
| Cost of revenues                             |       | 111,556   |       | 66,709    |       | (44,847           | )          | (40          | )%         |
| Selling, general and administrative Expenses |       | 823,813   |       | 1,014,011 |       | 190,198           |       | 23           | %          |
| Research and development expenses            |       | 165,743   |       | 230,947   |       | 65,204            |       | 39           | %          |
| Depreciation and amortization                |       | 33,769    |       | 22,714    |       | (11,055           | )          | (33          | )%         |
| Total operating expense                      |       | 1,134,881 |       | 1,334,381 |       | 199,500           |       | 18           | %          |
| Income (loss) from operations                |       | 135,342   |       | 389,304   |       | 253,962           |       | 188          | %          |
| Other Income (expense)                       |       | (371      | )          | 4,424     |       | 4,795             |       | 1292         | %          |
| Income tax expense                           |       | —    |       |      |       |              |       |         |       |
| Net income (loss)                            |       | $         | 134,971    |      | $          | 393,728           |       | $            | 258,757    |   | 192 | % |

 

***Revenue.***  For the three months ended September 30,2004 and 2005, total revenues increased $453,462 or 36% from $1,270,223 to $1,723,685largely due to the increased revenue from our Secure Server product and theEnhanced File Transfer product which was released in late 2004. Revenues fromCute FTP Home declined approximately 12% and CuteFTP Pro declined approximately1%. Combined revenues from CuteFTP and CuteFTP Pro declined approximately 5%over the comparable period and accounted for approximately 53% of totalrevenues for the three months ended September 30, 2005.

 

***Cost of Revenues.***  Cost of revenues consists primarily of production,packaging and shipping costs for boxed copies of software products as well as aportion of our bandwidth costs, certain licensing expenses and royalties.  Cost of revenues decreased $44,847 or 40%between periods from $111,556 for the three months ended September 30, 2004to $66,709 for the three months ended September 30, 2005 due to decreasedroyalty expenses that the Company pays on software products licensed from thirdparties, which it resells, and are expensed as a cost of sale when the softwareproduct is sold or earlier if the recoverability of any prepaid royalties is indoubt.  The Company has distributionagreements with Hannon Hill Corp., Trellix Corp., Perseus Development Corp.,Beehive Software, Inc., Visicom Media, Inc., and Xnet CommunicationsGmbH.  The GlobalSCAPE software productsassociated with each of the companies are PureCMS / Publish XML, CuteSITEBuilder, Web Survey, Mac FTP, CuteHTML Pro, and Mac FTP Pro, respectively.  , The decline in cost of revenues is due todecreased royalty expenses related to the products we are currently selling.

 

***Selling, General andAdministrative.*** Selling, general and administrative expenses consist primarily ofpersonnel and related expenses, marketing, customer support, rents, bad debtand professional fees.  For the threemonths ended September 30, 2004 and 2005, selling, general andadministrative

 

12

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expenses were $823,813 and $1,014,011 respectively, an increase of $190,198or 23%. This increase is largely due to higher sales commissions on increasedrevenues.

 

***Research andDevelopment.*** Research and development expenses increased $65,204 or 39% betweenperiods, from $165,743 to $230,947. The increase was due mainly to increasedexpenditures for external development resources for our Secure Server andEnhanced File Transfer products. The Company plans to continue furtherdevelopment on these products.

 

***Depreciation andAmortization.*** Depreciation and amortization expense consists of depreciation expenserelated to our fixed assets, amortization of the trademark associated with ourpurchase of CuteFTP and in prior periods, amortization of capitalizeddevelopment costs.  Depreciation andamortization expense decreased from $33,769 to $22,714, a decrease of 33%.  This decrease was due to a reduction indepreciation expense as fixed assets come to the end of their depreciable livesas well as a slowdown in additions to fixed assets in current periods relativeto prior periods.

 

***Other Income, Expense.***  For the three months ended September 30,2004 and 2005, interest expense decreased from $371 to ($105),respectively.  The majority of interestexpense incurred during these periods was related to financing of insurancepremiums. A gain on the sale of fixed assets of $767 was realized during thethree months ended September 30, 2005. Interest income of $3,552 wasrecorded on funds in a Working Capital Management Account for the 2005 thirdquarter.

 

***Income Taxes.***  Although we recorded net income for the threemonths ended September 30, 2004 and 2005, we did not recognize a taxliability related to this net income. The amount of current tax expensegenerated from quarterly taxable income was offset by a reduction in thevaluation allowance posted in prior periods against deferred tax assets.   Asdiscussed in our Annual Report on Form 10K, we cannot be certain ofthe future period recoverability of tax assets generated from available netoperating losses.

 

***Net Income.***  GlobalSCAPE recorded net income of $134,971and $393,728 for the three months ended September 30, 2004 and 2005,respectively. The positive results in the third quarter 2005 were largely theresult of increased sales revenue.

 

# **Comparison of the Nine Months ended September 30,2004 and 2005**

 
| ** **                                   | ** ** | **2004**  | ** ** | **2005**  | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|----------------------------------------------|------------|-----------|------------|-----------|------------|-------------------|------------|--------------|------------|
| Software product revenues                    |       | $         | 3,730,158  |      | $          | 4,965,442         |       | $            | 1,595,284  |   | 47 | % |
| Cost of revenues                             |       | 304,071   |       | 226,086   |       | (77,985           | )          | (26          | )%         |
| Selling, general and administrative Expenses |       | 2,599,165 |       | 2,973,385 |       | 374,220           |       | 14           | %          |
| Research and development expenses            |       | 552,477   |       | 614,756   |       | 62,279            |       | 11           | %          |
| Depreciation and amortization                |       | 139,782   |       | 76,129    |       | (63,653           | )          | (46          | )%         |
| Total operating expense                      |       | 3,595,495 |       | 3,890,356 |       | 294,861           |       | 8            | %          |
| Income from operations                       |       | 134,663   |       | 1,075,086 |       | 940,423           |       | 698          | %          |
| Other Income (expense)                       |       | (1,091    | )          | 3,890     |       | 4,981             |       | 456          | %          |
| Income tax expense                           |       | —    |       | (1,065    | )          | (1,065            | )          | 100          | %          |
| Net income                                   |       | $         | 133,572    |      | $          | 1,077,911         |       | $            | 944,339    |   | 707 | % |

 

***Revenue.***  For the nine months ended September 30,2004 and 2005, total revenues increased $1,595,284 or 47% from $3,370,158 to $4,965,442.Revenues from CuteFTP Home and CuteFTP Professional  increased 1% between periods overall. Totalrevenues increased mainly due to the increases in sales of our Secure Serverand Enhanced File Transfer products which accounted for approximately 22% and 17%of combined total revenue, respectively for the nine months ended September 30,2005. Secure Server represented 14% of revenue in the nine months ended 2004.Enhanced File Transfer was released in December 2004. Our concentration ofrevenue will continue to come from the FTP, Secure Server and Enhanced FileTransfer. Our other products show an overall decline of approximately 14% andrepresented a total of approximately 17% and 11% of total revenue for the ninemonth periods ended September 2004 and 2005, respectively.

 

13

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***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 $77,985or 26% between periods from $304,071 to $226,086 for the nine months ending September 30, 2004 and 2005, respectively, due to decreased royalty expenses related to theproducts we are currently selling.

 

***Selling, General andAdministrative.*** Selling, general and administrative expenses consist primarily ofpersonnel and related expenses, marketing, customer support, rents, credit cardtransaction fees, bad debt and professional fees.  For the nine months ended September 30,2004 and 2005, selling, general and administrative expenses increased $374,220or 14%.  The increase is largely due tothe increase in expenditures for salaries and sales commissions on higherrevenues, and expense related to public relations and lead generation.

 

***Research andDevelopment.*** Research and development expenses increased $62,579 or 11% betweenperiods, from $552,477 to $614,756.  The increasewas due to additional development cost mainly for our Enhanced File Transferproduct and modules.

 

***Depreciation andAmortization.*** Depreciation and amortization expense consists of depreciation expenserelated to our fixed assets, amortization of the trademark associated with ourpurchase of CuteFTP and in prior periods, amortization of capitalizeddevelopment costs.  Depreciation andamortization expense decreased from $139,782 to $76,129, a decrease of 46%.  This decrease was mainly due to the purchaseof CuteFTP being fully amortized as of September 30, 2003 and due to areduction in depreciation expense as fixed assets come to the end of theirdepreciable lives.

 

***Other Income,Expense.*** For the nine months ended September 30, 2004 and 2005, interestexpense decreased from $1,091 to $620, respectively.  The majority of interest expense incurredduring these periods was related to financing of  insurance premiums.  During the nine months ended September 30,2005, we recognized a gain on the disposal of fixed assets in the amount of $958.The Company received interest income on its working capital management accountof $3,552 in the nine months ended September 30, 2005.

 

***Income Taxes.***  Although we recorded net income for the ninemonths ended September 30, 2004 and 2005, we did not recognize a taxliability to this net income. The amount of current tax expense generated forthe nine months ending September 30, 2005 was offset by a reduction in ourvaluation allowance posted in our prior period deferred tax assets. As discussedin our Annual Report on Form 10K, we cannot be certain of the futurerecoverability of tax assets generated from available net operating losses.

 

***Net Income.***  GlobalSCAPE incurred a net income of $133,572and net income of $1,077,911 for the nine months ended September 30, 2004and 2005, respectively.  The net income inthe nine months ended September 30, 2004 was largely due to the layoff of9 people in February 2004, lower depreciation and amortization expense andthe result of expense cuts in the first quarter of 2004 and realized in thesecond and third quarters of 2004. The net income for the nine months ended September 30,2005 is an improvement of approximately $944,339 over the same period in 2004and due mainly to the success of our Enhanced File Transfer product released inlate 2004 along with increased sales of our Secure Server product.

 

##### **Inflation**

##### ** **

Increases ininflation generally result in higher interest rates and operating costs.  Our greatest exposure is to the cost ofsalaries and general and administrative expenses. To date we believe thatinflation has not had a significant impact on our operations.

 

##### **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.

 

14

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

 

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

 

In the ninemonths ended September 30, 2005, approximately 33% of our revenues camefrom customers outside the United States.** **All revenues are received in U.S.dollars so we have no exchange rate risk with regard to the sale.  However, as of July 1, 2003, theEuropean Union (EU) enacted Value Added Taxes (VAT) on electronicpurchases.  These taxes are charged toour non-business customers in the EU and, in our case, are remitted quarterlyin pound sterling.   We expect that theimpact of this currency translation will not be material to our business.

 

# **Item4.  Controls and Procedures**

# ** **

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

 

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

 

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

## ** **

# **Item 1.**           Legal Proceedings

# ** **

We are notcurrently involved in any material legal proceedings.

 

# **Item2.**           Changesin Securities and Use of Proceeds

# ** **

None in the thirdquarter of 2005.

 

# **Item3.**           DefaultsUpon Senior Securities

# ** **

Not applicable.

 

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

# ** **

None in thethird quarter of 2005.

 

# **Item 5.**           Other Information

# ** **

None

 

# **Item6.**           Exhibitsand Reports on Form 8-K

# ** **

**(a)**                                  Exhibits

 

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

 

15

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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)**                                Reportson Form 8-K

 

None in thirdquarter of 2005.

 

16

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**Signatures**

** **

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|                  |   |   | GLOBALSCAPE,  INC.                                       |
|-----------------------|--------|--------|----------------------------------------------------------|
|                  |   |   |                                                     |
|                  |   |   |                                                     |
| November 4, 2005 |   | By:    |    /s/ Charles R. Poole                   |   |
| Date                  |   |   |    Charles R. Poole                       |
|                  |   |   |    President and Chief Operating  Officer |
|                  |   |   |                                                     |
| November 4, 2005 |   | By:    |    /s/  Thomas F. Farar                   |   |
| Date                  |   |   |    Thomas  F. Farar                       |
|                  |   |   |    Chief  Financial Officer               |

 

17

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