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**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q/A**

 

**Amendment No. 1**

 
| **x**                                                   | ** ** | **QUARTERLY****REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|
| ** **                                              |
| **For the Quarterly Period ended March 31,  2008** |
| ** **                                              |
| **OR**                                                  |
| ** **                                              |
| **o**                                                   | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |

 

**For the transition period from          to         .**

 

**Commission File No. ****001-33601**

 

**GlobalSCAPE, Inc.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                             | ** ** | **74-2785449**      |
|------------------------------------------|------------|---------------------|
| (State or other  jurisdiction of         |       | (I.R.S. Employer    |
| incorporation or  organization)          |       | Identification No.) |
|                                     |       |                |
| **4500  Lockhill-Selma, Suite 150** | ** ** | ** **          |
| **San  Antonio, Texas**                  | ** ** | **78249**           |
| (Address of Principal                    |       | (Zip Code)          |
| Executive Office)                        |       |                |

 

**(210)308-8267**

(Registrant’s Telephone Number, Including AreaCode)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

x Yes    o No

 

Indicate by check mark if theregistrant is a shell company (as defined in Rule 12b-2 of the Act).

 

o Yes    x No

 

As of  March 31, 2008, there were 17,184,584shares of common stock outstanding.

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act(check one):

 
| Large  accelerated filer o | Accelerated  filer o | Non-accelerated  filer o                      | Smaller  reporting company x |
|----------------------------|----------------------|-----------------------------------------------|------------------------------|
|                       |                 | (Do  not mark if a smaller reporting company) |

 

 

 

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EXPLANATORY NOTE

 

This amendment is being filed to effectuatethe restatement previously announced in the Current Report on Form 8-Kfiled on August 18, 2008 as amended by the Current Report on Form 8-K/Afiled on August 26, 2008.  As a result of the restatement federalincome tax receivable has increased by $809,774, deferred tax assets havedecreased by $480,511, and equity increased by $478,960 related to the correctcalculation of the tax effect on the exercise of employee stock options and thesubsequent sale of shares of stock. Goodwill and deferred tax liabilityincreased by $1,796,320 related to the correct calculation of deferred taxes onidentified intangible assets related to the Availl acquisition.  These changes are reflected in Part IItem 1 Financial Statements and Item 2 Management’s Discussion and Analysis ofFinancial Condition and Results of Operations. In addition, Part I, Item 4T Controls and Procedures has also beenamended.  No other portions of theQuarterly Report on Form 10-Q for the quarter ended March 31, 2008originally filed on May 15, 2008 (the “Original Filing”) have beenamended.

 

For convenience, we have repeated the entiretext of the Original Filing, as amended by this amendment.  This amendment speaks as of the filing dateof the Original Filing and reflects the changes discussed above.  No other information included in the OriginalFiling has been modified or updated in any way.

 

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**GlobalSCAPE Inc.**

** **

**Quarterly Report on Form 10-Q**

**For the Quarter ended March 31, 2008**

** **

**Index**

 
| ** **   | ** **                                                                                  | **Page** |
|--------------|---------------------------------------------------------------------------------------------|----------|
|         |                                                                                        |     |
| **Part  I.** | **Financial  Information**                                                                  | **1**    |
|         |                                                                                        |     |
| Item 1.      | Financial  Statements                                                                       | 1        |
|         | Consolidated Balance Sheets                                                                 | 1        |
|         | Consolidated Statements of Operations                                                       | 2        |
|         | Consolidated Statements of Cash Flows                                                       | 3        |
|         | Notes to Consolidated Financial Statements                                                  | 4        |
|         |                                                                                        |     |
| Item 2.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 14       |
|         |                                                                                        |     |
| Item 3.      | Quantitative  and Qualitative Disclosures About Market Risk                                 | 21       |
|         |                                                                                        |     |
| Item 4T.     | Controls and  Procedures                                                                    | 21       |
|         |                                                                                        |     |
| **Part II.** | **Other Information**                                                                       | **23**   |
|         |                                                                                        |     |
| Item 1.      | Legal Proceedings                                                                           | 23       |
|         |                                                                                        |     |
| Item1A       | Risk Factors.                                                                               | 23       |
|         |                                                                                        |     |
| Item 2.      | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 23       |
|         |                                                                                        |     |
| Item  6.     | Exhibits                                                                                    | 23       |
|         |                                                                                        |     |
| Signatures   |                                                                                        | 24       |

 

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

 

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** **

**Part I. Financial Information**

** **

**Item1.Financial Statements**

** **

**GlobalSCAPE, Inc.**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                                                       | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                       | ** ** | **2007**              | ** ** | **2008**           | ** ** |
| ** **                                                                                                                                                                       | ** ** | **(Restated)**        | ** ** | **(Unaudited)**    | ** ** |
| **Assets**                                                                                                                                                                       |       |                  |       |               |       |
| Current assets:                                                                                                                                                                  |       |                  |       |               |       |
| Cash and cash  equivalents                                                                                                                                                       |       | $                     | 5,214,479  |               | $          | 5,622,832 |   |
| Accounts  receivable (net of allowance for doubtful accounts of $113,201 and $168,368  on December 31, 2007 and March 31, 2008, respectively)                          |       | 2,232,927             |       | 1,573,197          |       |
| Federal income  tax receivable                                                                                                                                                   |       | 940,327               |       | 650,552            |       |
| Prepaid expenses                                                                                                                                                                 |       | 87,654                |       | 72,438             |       |
| Total current  assets                                                                                                                                                            |       | 8,475,387             |       | 7,919,019          |       |
|                                                                                                                                                                             |       |                  |       |               |       |
| Fixed assets,  net                                                                                                                                                               |       | 262,745               |       | 361,616            |       |
| Intangible  assets, net                                                                                                                                                          |       | 5,071,640             |       | 4,937,278          |       |
| Goodwill                                                                                                                                                                         |       | 6,392,075             |       | 6,392,075          |       |
| Deferred tax  asset                                                                                                                                                              |       | 80,044                |       | 87,682             |       |
| Other assets                                                                                                                                                                     |       | 79,967                |       | 79,967             |       |
|                                                                                                                                                                             |       |                  |       |               |       |
| Total assets                                                                                                                                                                     |       | $                     | 20,361,858 |               | $          | 19,777,637 |   |
|                                                                                                                                                                             |       |                  |       |               |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                   |       |                  |       |               |       |
| Current  liabilities:                                                                                                                                                            |       |                  |       |               |       |
| Accounts payable                                                                                                                                                                 |       | $                     | 329,817    |               | $          | 382,416 |   |
| Accrued expenses                                                                                                                                                                 |       | 742,946               |       | 673,936            |       |
| Deferred revenue                                                                                                                                                                 |       | 2,329,117             |       | 2,377,593          |       |
| Deferred  compensation                                                                                                                                                           |       | —                |       | 141,596            |       |
| Total current  liabilities                                                                                                                                                       |       | 3,401,880             |       | 3,575,541          |       |
|                                                                                                                                                                             |       |                  |       |               |       |
| Long-term  liabilities, net of current portion                                                                                                                                   |       | 119,711               |       | —             |       |
|                                                                                                                                                                             |       |                  |       |               |       |
| Deferred tax  liability                                                                                                                                                          |       | 1,750,637             |       | 1,645,189          |       |
|                                                                                                                                                                             |       |                  |       |               |       |
| Stockholders’  equity:                                                                                                                                                      |       |                  |       |               |       |
| Preferred stock,  par value $0.001 per share, 10,000,000 authorized, no shares issued or  outstanding                                                                            |       | —                |       | —             |       |
| Common stock,  par value $0.001 per share, 40,000,000 authorized, 17,432,352 and 17,184,584  shares outstanding at December 31, 2007 and March 31, 2008,  respectively |       | 17,432                |       | 17,184             |       |
| Treasury Stock,  159,873 and 423,581 shares at December 31, 2007 and March 31, 2008,  respectively                                                                     |       | (527,398              | )          | (1,505,516         | )          |
| Additional  paid-in capital                                                                                                                                                      |       | 8,764,300             |       | 9,058,010          |       |
| Retained  earnings                                                                                                                                                               |       | 6,835,296             |       | 6,987,229          |       |
| Total  stockholders’ equity                                                                                                                                                 |       | 15,089,630            |       | 14,556,907         |       |
| Total  liabilities and stockholders’ equity                                                                                                                                 |       | $                     | 20,361,858 |               | $          | 19,777,637 |   |

 

See accompanyingnotes.

 

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**GlobalSCAPE, Inc.**

**CondensedConsolidated Statement of Operations**

(Unaudited)

 
| ** **                                          | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                             | ** ** | **2008** | ** ** |
|                                                |       |                                                 |       |   |   |
| Operating  Revenues:                                |       |                                                 |       |   |   |
| Software product  revenues                          |       | $                                                    | 2,946,822  |   | $ | 2,889,058 |   |
| Maintenance and  support (net of deferred revenues) |       | 676,325                                              |       | 1,166,761 |   |
| Total Revenues                                      |       | 3,623,147                                            |       | 4,055,819 |   |
|                                                |       |                                                 |       |   |   |
| Operating  Expenses:                                |       |                                                 |       |   |   |
| Cost of revenues                                    |       | 58,942                                               |       | 30,025 |   |
| Selling, general  and administrative expenses       |       | 2,298,146                                            |       | 2,981,809 |   |
| Research and development  expenses                  |       | 437,544                                              |       | 543,270 |   |
| Depreciation and  amortization                      |       | 31,585                                               |       | 174,019 |   |
| Total operating  expenses                           |       | 2,826,217                                            |       | 3,729,123 |   |
| Income from  operations                             |       | 796,930                                              |       | 326,696 |   |
| Other income  (expense)                             |       | (62,902                                              | )          | 30,310 |   |
| Income before  income taxes                         |       | 734,028                                              |       | 357,007 |   |
| Provision for  income taxes                         |       | 260,814                                              |       | 205,074 |   |
| Net Income                                          |       | $                                                    | 473,214    |   | $ | 151,933 |   |
|                                                |       |                                                 |       |   |   |
| Net income per  common share - basic                |       | $                                                    | 0.03       |   | $ | 0.01 |   |
| Net income per  common share - assuming dilution    |       | $                                                    | 0.03       |   | $ | 0.01 |   |
| Average shares  outstanding:                        |       |                                                 |       |   |   |
| Basic                                               |       | 17,138,780                                           |       | 17,322,827 |   |
| Diluted                                             |       | 17,950,681                                           |       | 18,099,028 |   |

 

See accompanyingnotes.

 

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**GlobalSCAPE, Inc.**

**CondensedConsolidated Statements of Cash Flows**

(Unaudited)

 
| ** **                                                                         | ** ** | **For the three months ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                                               | ** ** | **2008** | ** ** |
| Operating  Activities:                                                             |       |                                                                   |       |   |   |
| Net income                                                                         |       | $                                                                      | 473,214    |   | $ | 151,933 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                                   |       |   |   |
| Bad debt expense                                                                   |       | (11,995                                                                | )          | 56,387 |   |
| Depreciation and  amortization                                                     |       | 31,585                                                                 |       | 174,021 |   |
| Amortization of  deferred loan costs                                               |       | 36,345                                                                 |       | — |   |
| (Gain) loss on  disposition of assets                                              |       | —                                                                 |       | (234 | ) |
| Stock-based  compensation                                                          |       | 223,347                                                                |       | 287,126 |   |
| Deferred taxes                                                                     |       | (102,474                                                               | )          | (113,086 | ) |
| Changes in  operating assets and liabilities:                                      |       |                                                                   |       |   |   |
| Accounts  receivable                                                               |       | (3,571                                                                 | )          | 603,343 |   |
| Prepaid expenses                                                                   |       | (627                                                                   | )          | 304,990 |   |
| Accounts payable                                                                   |       | (103,289                                                               | )          | 52,599 |   |
| Accrued expenses                                                                   |       | 21,842                                                                 |       | (69,010 | ) |
| Federal income  tax payable                                                        |       | 338,591                                                                |       | — |   |
| Deferred  revenues                                                                 |       | 165,191                                                                |       | 48,476 |   |
| Deferred  compensation                                                             |       | 13,670                                                                 |       | 21,885 |   |
| Other long-term  liabilities                                                       |       | (3,130                                                                 | )          | — |   |
| Net cash  provided by operating activities                                         |       | 1,078,699                                                              |       | 1,518,431 |   |
| Investing  Activities:                                                             |       |                                                                   |       |   |   |
| Proceeds from  sale of property and equipment                                      |       | —                                                                 |       | 234 |   |
| Purchase of  property and equipment                                                |       | (72,428                                                                | )          | (138,530 | ) |
| Net cash used in  investing activities                                             |       | (72,428                                                                | )          | (138,296 | ) |
| Financing  Activities:                                                             |       |                                                                   |       |   |   |
| Loan payments                                                                      |       | (4,610,212                                                             | )          | — |   |
| Proceeds from  exercise of stock options                                           |       | 326,758                                                                |       | 6,600 |   |
| Purchase of  treasury stock                                                        |       |                                                                   |       | (978,382 | ) |
| Net cash used in  financing activities                                             |       | (4,283,454                                                             | )          | (971,782 | ) |
| Net increase  (decrease) in cash                                                   |       | (3,277,183                                                             | )          | 408,353 |   |
| Cash at  beginning of period                                                       |       | 4,632,666                                                              |       | 5,214,479 |   |
| Cash at end of  period                                                             |       | $                                                                      | 1,355,483  |   | $ | 5,622,832 |   |
|                                                                               |       |                                                                   |       |   |   |
| Supplemental  disclosure of cash flow information:                                 |       |                                                                   |       |   |   |
| Cash paid during  the year for:                                                    |       |                                                                   |       |   |   |
| Interest                                                                           |       | $                                                                      | 29,929     |   | $ | 1,683 |   |
| Income taxes  paid                                                                 |       | $                                                                      | 14,132     |   | $ | 10,000 |   |

 

See accompanyingnotes.

 

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**GlobalSCAPE, Inc.**

**Notes to Consolidated Financial Statements**

** **

# **1.**                                      Nature ofBusiness

# ** **

GlobalSCAPE, Inc.(“GlobalSCAPE” or the “Company”), founded in April 1996, develops anddistributes secure managed file transfer, or MFT, software forindividuals and business users to safely send files over the internet. We havealso developed Wide-Area File System, or WAFS, collaboration and ContinuousData Protection, or CDP, software which further enhance the ability to shareand backup files within the infrastructure of a company’s wide and local areanetworks, or WAN and LAN at WAN and LAN speeds. Our MFT products ensure the privacy of critical information such asfinancial data, medical records, customer files and other similardocuments.  In addition, these productsensure compliance with government regulations relating to the protection ofinformation while allowing users to reduce IT costs, increase efficiency, trackand audit transactions and automate processes. Our WAFS and CDP products provide data replication, acceleration of filetransfer, sharing/collaboration and continuous data backup and recovery to ourcustomers.  We believe that we areuniquely positioned to provide secure transfer, sharing, and replication offiles that need to be transmitted inside the user’s firewall to distributedoffices, or outside the user’s firewall to business and trading partners.

 

During thethree months ended March 31, 2008, approximately 65% of our revenues weregenerated from customers within the United States, with the remaining 35%concentrated mostly in Western Europe, Canada and Australia. During the threemonths ended March 31 virtually all of our revenues were derived fromsales of software licenses and support agreements. The combined sales ofCuteFTP Home and CuteFTP Pro accounted for 24% of our revenues for the firstthree months of 2007 and 20% of our revenues for the same period of 2008.  The combined sales of our SecureFTP Serverand Enhanced File Transfer products represented 55% and 69% ofour revenues for the three months ended March 31, 2007 and 2008,respectively.  The combined sales of WAFSand CDP products for the three months ended March 31, 2007 and 2008represented 22% and 15% of the total, respectively.

 

***2.***                                      Corporate Structure

*** ***

Priorto September 22, 2006, all of the Company’s operations were conducted byGlobalSCAPE Texas, LP, a Texas limited partnership.  The partners of GlobalSCAPE Texas, LP weretwo Nevada limited liability companies, which were both wholly-ownedsubsidiaries of GlobalSCAPE, Inc., a Delaware corporation.

 

OnSeptember 22, 2006, GlobalSCAPE acquired one hundred percent (100%) of theissued and outstanding capital stock of Availl Inc. a privately heldcorporation based in Andover, Mass, pursuant to an Agreement and Plan of Mergerwith Availl and its stockholders.  Availloperated as a wholly-owned subsidiary of GlobalSCAPE, Inc. through the endof 2007.

 

Availl, Inc.and all other partnerships and limited liability corporations mentioned abovewere either dissolved or effectively merged into GlobalSCAPE, Inc. on December 31,2007.  The stock of GlobalSCAPE, Inc.is quoted on the American Stock Exchange. References to “GlobalSCAPE” or the “Company”refer collectively to all of these entities unless otherwise indicated.

 

# **3.**                                      Basis ofPresentation

# ** **

The accompanying unauditedconsolidated financial statements have been prepared in accordance with Rule 10-01of Regulation S-X, “Interim Financial Statements.”  Accordingly, they do not include allinformation and footnotes required under generally accepted accountingprinciples for complete consolidated financial statements.  In the opinion of management, all 

 

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adjustments (consisting ofnormally recurring accruals) considered necessary for a fair presentation havebeen made.  The results of operations forany interim period are not necessarily indicative of the results to be expectedfor the full year.

 

The consolidated balance sheetat December 31, 2007 has been derived from the audited consolidatedfinancial statements at that date but does not include all the information andfootnotes required by generally accepted accounting principles for completeconsolidated financial statements.  Forfurther information, refer to the consolidated financial statements andfootnotes included in GlobalSCAPE’s Annual Report on Form 10-K for theyear ended December 31, 2007.

 

As discussed in Note 12 below, on August 15,2008, GlobalSCAPE and its Board of Directors, after consultation withGlobalSCAPE’s independent registered public accounting firm, concluded thatGlobalSCAPE would restate its financial statements and financial informationfor the year ended December 31, 2007 and the quarter ended March 31,2008.

 

# **4.**                                      Principles ofConsolidation

# ** **

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

 

**5.****                                     ****Adoption of New AccountingStandards**

 

Effective at thebeginning of the first quarter of 2007, the Company adopted the provision of FIN48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASBStatement No. 109” (“FIN 48”).  FIN48 contains a two-step approach to recognizing and measuring uncertain taxpositions accounted for in accordance with SFAS No. 109, “Accounting forIncome Taxes.”  The first step is toevaluate the tax position for recognition by determining if the weight ofavailable evidence indicates that it is more likely than not that the positionwill be sustained on audit, including resolution of related appeals orlitigation processes, if any.  The secondstep is to measure the tax benefit as the largest amount that is more than 50%likely of being realized upon ultimate settlement.

 

# **As a result of the implementationof FIN 48, the Company has not changed any of its tax accrual estimates.  The Company files U.S. federal and U.S. statetax returns.  For state tax returns theCompany is generally no longer subject to tax examinations for years prior to2003.**

# ** **

In September 2006, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “FairValue Measurements.”  The Statement defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosure related to the use of fair value measures in financialstatements.  The provisions of SFAS No. 157 were to be effectivefor fiscal years beginning after November 15, 2007.  On February 6,2008, the FASB agreed to defer the effective date of SFAS No. 157 for oneyear for certain nonfinancial assets and nonfinancial liabilities, except thosethat are recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). Effective January 1, 2008, theCompany adopted SFAS No. 157 except as it applies to those nonfinancialassets and nonfinancial liabilities.  The adoption of SFAS No. 157did not have any material impact on the Company’s results of operations orfinancial position.

 

Effective January 1, 2008, the Company adopted SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities – including anamendment of FASB Statement No. 115.”  SFAS No. 159 allowsan entity the irrevocable option to elect fair value for the initial andsubsequent measurement of certain financial assets and liabilities under aninstrument-by-instrument election.  Subsequent measurements for thefinancial assets and liabilities an entity elects to fair value will berecognized in the results of operations.  SFAS No. 159 alsoestablishes additional disclosure requirements.  The Company did notelect the fair value option under SFAS No. 159

 

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for any of its financialassets or liabilities upon adoption.  The adoption of SFAS No. 159did not have a material impact on the Company’s results of operations orfinancial position.

 

***6.***                                      Reclassifications

*** ***

***Certain prior period amounts have been reclassified to conform to thecurrent period presentation. These reclassifications had no impact on operatingincome as previously reported.***

*** ***

***7.***                                      Sale / Disposal of Assets

*** ***

***The Company had no asset disposals in the first three monthsending March 31, 2007. During the three months ending March 31, 2008the Company disposed of equipment with an original purchase price of $72,081and accumulated depreciation of $72,081. GlobalSCAPE recognized a gain of $234related to the disposal of these assets.***

*** ***

**8.****                                     ****Goodwill and Intangible Assets**

 

As of March 31, 2008, GlobalSCAPE had goodwill in the amount of$6.4 millionassociated with the acquisition of Availl. This acquisition was accounted for using the purchase method ofaccounting. See Acquisitions note for a description of the acquisition. Inaccordance with SFAS No. 142 *Goodwill and OtherIntangible Assets*, the Company will assess the impairment ofgoodwill annually in the fourth quarter, or more frequently if other indicatorsof potential impairment arise.

 

The Companyobtained a valuation report of it’s acquisition of Availl, which determinedthat the acquisition included purchased software, which is an identifiableintangible asset. The purchased software had a market value of approximately$5,000,000 and this amount has been allocated to purchased software fromGoodwill effective October 1, 2007. The purchased software is beingamortized using the straight-line method over its estimated useful life of 10years. In 2007 the Company amortized $134,360 for the period between October 1,2007 and December 31, 2007. For the three months ended March 31, 2008the Company amortized $134,362.

 

Intangibleassets represent amounts acquired in the acquisition of Availl, and consistedof the following as of March 31, 2008:

 
| ** **                                 | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Life (Years)** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|-----------------------|------------|
| **Amortized intangible assets:** |       |                            |       |                          |       |                  |       |
| Software  acquired                         |       | $                               | 5,000,000  |                          | $          | 250,002               |       | 10 |   |
| Customer list  acquired                    |       | 180,000                         |       | 18,000                        |       | 5                     |       |
| Patent acquired                            |       | 26,000                          |       | 720                           |       | 18                    |       |
| Total                                      |       | $                               | 5,206,000  |                          | $          | 268,722               |       |   |   |
|                                       |       |                            |       |                          |       |                  |       |
| Estimated  Amortization Expense            |       |                            |       |                          |       |                  |       |
| For the nine  months ended 12/31/2008      |       |                            |       | $                             | 403,082    |                  |       |   |
| For Year-ended  12/31/2009                 |       |                            |       | 537,444                       |       |                  |       |
| For Year-ended  12/31/2010                 |       |                            |       | 537,444                       |       |                  |       |
| For Year-ended  12/31/2011                 |       |                            |       | 537,444                       |       |                  |       |
| For Year-ended  12/31/2012                 |       |                            |       | 528,444                       |       |                  |       |
| Thereafter                                 |       |                            |       | 2,393,420                     |       |                  |       |
| Total                                      |       |                            |       | $                             | 4,937,278  |                  |       |   |

 

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Recent AccountingPronouncements

 

In December 2007,the FASB issued SFAS No. 141 (Revised 2007), Business Combinations-Revised2007. SFAS 141R provides guidance on improving the relevance, representationalfaithfulness, and comparability of information that a reporting entity providesin its financial reports about a business combination and its effects. SFAS141R applies to business combinations where the acquisition date is on or afterthe beginning of the first annual reporting period beginning on or after December 15,2008. GlobalSCAPE is in the process of analyzing the effects SFAS 141R willhave on the Company’s financial statements.

 

In April 2008, theFASB issued FSP 142-3, *Determination of theUseful Life of Intangible Assets*, which amends the factors that mustbe considered in developing renewal or extension assumptions used to determinethe useful life over which to amortize the cost of a recognized intangibleasset under SFAS No. 142. The FSP amends paragraph 11(d) of SFAS No. 142to require an entity to consider its own assumptions about renewal or extensionof the term of the arrangement, consistent with its expected use of the asset.

 

The FSP also requires thefollowing incremental disclosures for renewable intangible assets:

 

·                              Theweighted-average period prior to the next renewal or extension (whetherexplicit and implicit) for each major intangible asset class

 

·                              Theentity’s accounting policy for the treatment of costs incurred to renew orextend the term of a recognized intangible asset

 

·                              Forintangible asset renewed or extended during the period:

 

·          For entities thatcapitalize renewal or extension costs, the costs incurred to review or extendthe asset, for each major intangible asset class

 

·          The weighted-averageperiod prior to the next renewal or extension (whether explicit and implicit)for each major intangible asset class

 

The FSP is effective forfinancial statements for fiscal years beginning after December 15, 2008.The guidance for determining the useful life of a recognized intangible assetmust be applied prospectively to intangible assets acquired after the effectivedate. Early adoption is prohibited. Accordingly, the FSP would not serve as abasis to change the useful life of an intangible asset that was acquired priorto the effective date (January 1, 2009 for a calendar year company).However, the incremental disclosure requirements described above would apply toall intangible assets, including those recognized in periods prior to theeffective date of the FSP. The Company is currently evaluating the impact thatthe adoption of this FSP will have on its consolidated financial statements.

 

# **9.**                                      Stock-BasedCompensation

# ** **

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

 

Under the GlobalSCAPE, Inc. 2000 Stock OptionPlan (the “Employees Plan”), which was approved by the Board of Directors andbecame effective on May 17, 2001, a maximum of 3,660,000 shares ofGlobalSCAPE common stock may be awarded. During the three months ended March 31, 2008, 262,500stock options were granted and at March 31, 2008, a total of 1,813,254stock options had been granted of which 694,068 were vested.  The exercise price, term

 

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and otherconditions applicable to each stock option granted under the Employees Plan aredetermined by the Board of Directors. The exercise price of stock options isset on the grant date and may not be less than the fair market value per shareof our stock on that date. The Employees Plan options generally become exercisableover a three-year period and expire after ten years.

 

Under the GlobalSCAPE, Inc. 2006 Non-Employee Directors Long-term EquityIncentive Plan (the “Directors Plan”), which was approved by thestockholders and became effective on June 1, 2007, a maximum of 500,000shares of GlobalSCAPE common stock may be awarded. During the three monthsended March 31, 2008, there were no stock options granted and at March 31,2008, a total of 160,000 stock options were outstanding of which 80,000 werevested.  The exercise price, termand other conditions applicable to each stock option granted under theDirectors Plan are determined by the Compensation Committee of the Board ofDirectors. The exercise price of stock options is set on the grant date and maynot be less than the fair market value per share of our stock on that date. Themost recently awarded Directors Plan options become exercisable over a one-yearperiod and expire after ten years. The Directors Plan provides that each year,at the first regular meeting of the Board of Directors following the Company’sannual stockholders meeting, each non-employee director shall be granted awardsof 20,000 shares of common stock for participation in the Board and Committeemeetings during the prior year.  The maximumannual award for any one person is 20,000 shares of common stock.

 

The Company accounts for stock options according toStatement of Financial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment” (SFAS No. 123R) which requires that compensation cost relating toshare-based payment transactions be recognized in the financial statements. Thecost is measured at the grant date, based on the calculated fair value of theaward, and is recognized as an expense over the employee’s requisite serviceperiod (generally the vesting period of the equity award).

 

There was $223,347 and $287,126 of compensation costrelated to incentive stock options recognized in operating results in the threemonths ended March 31, 2007 and 2008, respectively.

 

The fair value of each option award is estimated onthe date of grant using the Black-Scholes option-pricing model. Expectedvolatility is based on historical volatility of GlobalSCAPE stock. We used thesimplified method to derive an expected term. The expected term represents anestimate of the time options are expected to remain outstanding. The risk-freerate for periods within the contractual life of the option is based on the U.S.treasury yield curve in effect at the time of grant. The following table sets forththe assumptions used to determine compensation cost for our non-qualified stockoptions consistent with the requirements of SFAS No. 123R for the threemonths ended March 31, 2007 and 2008:

 
| ** **                      | ** ** | **Three months  ended  March 31, 2007** | ** ** | **Three months  ended  March 31, 2008** | ** ** |
|---------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Expected  volatility            |       | 98.00                                                  | %          | 99.00                                                  | %          |
| Expected annual  dividend yield |       | 0.00                                                   | %          | 0.00                                                   | %          |
| Risk free rate  of return       |       | 4.67                                                   | %          | 2.96                                                   | %          |
| Expected option  term (years)   |       | 6.010                                                  |       | 6.005                                                  |       |

 

The following table summarizes information about stockoption activity for the three months ended March 31, 2008:

 

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| ** **                             | ** ** | **Number of  Options** | ** ** | **Weighted  Average Share  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term (years)** | ** ** | **Average  Intrinsic Value  ($M)** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------|------------|
| Outstanding at  December 31, 2007 |       | 1,734,528                   |       | $                                       | 1.94       |                                                             | 7.64       |                                    | $          | 6.17 |   |
| Granted                                |       | 262,500                     |       | 3.91                                    |       |                                                             |       |                                    |       |
| Exercised                              |       | 15,940                      |       | 0.41                                    |       |                                                             |       |                                    |       |
| Lapsed or  canceled                    |       | 7,834                       |       | 0.36                                    |       |                                                             |       |                                    |       |
| Outstanding at  March 31, 2008    |       | 1,973,254                   |       | $                                       | 2.22       |                                                             | 7.69       |                                    | $          | 1.36 |   |
|                                   |       |                        |       |                                    |       |                                                             |       |                                    |       |
| Exercisable at  March 31, 2008    |       | 772,831                     |       | $                                       | 1.04       |                                                             | 6.63       |                                    | $          | 1.35 |   |

 

The weighted average fair value of options grantedduring the three months ended March 31, 2008 was $3.91. The totalintrinsic value of options (which is the amount by which the stock priceexceeded the exercise price of the options on the date of exercise) exercisedduring the three months ended March 31, 2008 was approximately$75,000.  During the three months ended March 31,2008, the amount of cash received from the exercise of stock options was $6,600with no associated tax benefit.

 

The following table summarizes information aboutnon-vested stock option awards for the three-month period ended March 31,2008:

 
| ** **                            | ** ** | **Number of  Options** | ** ** | **Weighted  Average Grant**

**Date Fair Value** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|-----------------------------------------------------------------|------------|
| Non-vested at  December 31, 2007 |       | 1,011,543                   |       | $                                                               | 2.22       |   |
| Granted                               |       | 262,500                     |       | $                                                               | 3.21       |   |
| Vested                                |       | (69,266                     | )          | $                                                               | 2.04       |   |
| Forfeited                             |       | (4,354                      | )          | $                                                               | 0.30       |   |
| Non-vested at  March 31, 2008    |       | 1,200,423                   |       | $                                                               | 2.45       |   |

 

At March 31, 2008, there was $2.0 million oftotal unrecognized compensation cost related to non-vested stock option awardswhich is expected to be recognized over a weighted-average period of 3.00years. There were 69,266 options that became vested during the three monthsended March 31, 2008.

 

**10.****                              ****Common Stock and Warrants**

 

On November 13, 2006, GlobalSCAPE entered into asecurities purchase agreement with accredited investors, who paid it anaggregate of $3.4 million in gross proceeds in consideration for 1,352,000shares of GlobalSCAPE common stock at a price of $2.50 per share.  The Company also granted warrants to purchase1,352,000 shares of its common stock to the investors with an exercise price of$3.15 per share, subject to certain adjustments. The exercise price will not,in any event, be adjusted to a price of less than $2.81 per share except in theevent of stock dividends, stock splits or similar events.  The warrants have a 5-year term and arecurrently exercisable.  As part of thistransaction, GlobalSCAPE filed a registration statement to register the resaleof these shares by the investors.  Theregistration statement was declared effective by the SEC on April 16, 2007and a post-effective amendment to the registration statement was declaredeffective on April 20, 2008.

 

**11.****                              ****Earningsper Common Share**

 

Basic and diluted net incomeper common share is presented in conformity with Statement of FinancialAccounting Standards No. 128, “Earnings Per Share” (SFAS 128) for all

 

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periods presented. Basicearnings per share is based on the weighted effect of all common shares issuedand outstanding, and is calculated by dividing net income (loss) available tocommon stockholders by the weighted average shares outstanding during theperiod. Diluted earnings per share is calculated by dividing net income (loss)available to common stockholders by the weighted average number of commonshares used in the basic earnings per share calculation plus the number ofcommon shares that would be issued assuming conversion of all potentiallydilutive common shares outstanding. Below is a reconciliation of the numerators and denominators of basicand diluted earnings per share for each of the periods presented:

 
| ** **                                              | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                              | ** ** | **2007**                                             | ** ** | **2008** | ** ** |
| **Numerators**                                          |       |                                                 |       |   |   |
| Numerators for  basic and diluted earnings per share:   |       |                                                 |       |   |   |
| Net income                                              |       | $                                                    | 473,214    |   | $ | 151,933 |   |
|                                                    |       |                                                 |       |   |   |
| **Denominators**                                        |       |                                                 |       |   |   |
| Denominators for  basic and diluted earnings per share: |       |                                                 |       |   |   |
| Weighted average  shares outstanding basic              |       | 17,138,780                                           |       | 17,322,827 |   |
|                                                    |       |                                                 |       |   |   |
| **Dilutive  potential common shares**                   |       |                                                 |       |   |   |
| Stock options  (1)                                      |       | 811,901                                              |       | 725,786 |   |
| Common stock  warrants (2)                              |       | —                                               |       | 50,415 |   |
| Denominator for  dilutive earnings per share            |       | 17,950,681                                           |       | 18,099,028 |   |
| Net income per  common share                            |       | $                                                    | 0.03       |   | $ | 0.01 |   |
| Net income per  common share – assuming dilution   |       | $                                                    | 0.03       |   | $ | 0.01 |   |

 

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(1)          Inthe three months ended March 31, 2008, there were 503,500 options notincluded as dilutive shares, as the effect would be anti-dilutive.

(2)          Forthe three months ended March 31, 2007, no warrants have been included indilutive shares, as the effect would be anti-dilutive.  For the three months ended March 31,2008, all outstanding warrants were included in the determination of dilutiveshares.

 

**Fair Value Measurements**

 

As described in “Adoptionof New Accounting Standards,” the Company adopted SFAS No. 157 effective January 1,2008.  SFAS 157 established a framework for measuring fair value inGAAP and clarified the definition of fair value within that framework. SFAS 157does not require assets and liabilities that were previously recorded at costto be recorded at fair value or for assets and liabilities that are alreadyrequired to be disclosed at fair value, SFAS 157 introduced, or reiterated, anumber of key concepts which form the foundation of the fair value measurementapproach to be used for financial reporting purposes. The fair value of theCompany’s financial instruments reflects the amounts that the Company estimatesto receive in connection with the sale of an asset or paid in connection withthe transfer of a liability in an orderly transaction between

 

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marketparticipants at the measurement date (exit price). SFAS 157 also established afair value hierarchy that prioritizes the use of inputs used in valuationtechniques into the following three levels:

 

Level 1—quotedprices in active markets for identical assets and liabilities.

 

Level 2—observableinputs other than quoted prices in active markets for identical assets and liabilities.

 

Level3—unobservable inputs.

 

The adoption ofFAS 157 did not have an effect on the Company’s financial condition or resultsof operations, but SFAS 157 introduced new disclosures about how we valuecertain assets and liabilities. Much of the disclosure is focused on the inputsused to measure fair value, particularly in instances where the measurementuses significant unobservable (Level 3) inputs. As of March 31, 2008, theCompany did not have financial assets or liabilities that would requiremeasurement on a recurring basis based on the guidance in SFAS 157. At March 31,2008 all financial assets consisted of cash and cash equivalents at financialinstitutions in the United States.

 

**12.****                               Restatement of Financial Statements**

 

The Company has restatedits 2007 financial statements from the amounts previously reported by thefiling of an amended Annual Report on Form 10-K. The restatements includeadjustments (a) to record a deferred tax liability, (b) to decreasepreviously recorded deferred tax assets (c) adjust income taxes and (d) adjustadditional paid in capital. Following is a summary of the restatementadjustments:

 
| ** **                                       | ** ** | **As**       | ** ** | ** **      | ** ** | **As**       | ** ** |
|--------------------------------------------------|------------|--------------|------------|-----------------|------------|--------------|------------|
| ** **                                       | ** ** | **Reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| 2007 Summary  Balance Sheet                      |       |         |       |            |       |         |       |
| Current Assets                                   |       | $            | 7,658,044  |            | 817,343    |         | $          | 8,475,387 |   |
| Property and  equipment (net)                    |       | 262,745      |       | —          |       | 262,745      |       |
| Intangible  assets, net                          |       | 5,071,640    |       | —          |       | 5,071,640    |       |
| Goodwill                                         |       | 4,595,755    |       | 1,796,320       |       | 6,392,075    |       |
| Deferred tax  asset                              |       | 440,632      |       | (360,588        | )          | 80,044       |       |
| Other assets                                     |       | 79,967       |       | —          |       | 79,967       |       |
| Total Assets                                     |       | $            | 18,108,783 |            | $          | 2,253,075    |       | $ | 20,361,858 |   |
|                                             |       |         |       |            |       |         |       |
| Current  Liabilities:                            |       |         |       |            |       |         |       |
| Accounts payable                                 |       | $            | 329,817    |            | —     |         | $          | 329,817 |   |
| Accrued expenses                                 |       | 742,946      |       | —          |       | 742,946      |       |
| Deferred revenue                                 |       | 2,329,117    |       | —          |       | 2,329,117    |       |
| Total current liabilities                        |       | 3,401,880    |       | —          |       | 3,401,880    |       |
| Long-term  liabilities                           |       | 119,711      |       | —          |       | 119,711      |       |
| Deferred tax  liability                          |       | —       |       | 1,750,637       |       | 1,750,637    |       |
| Stockholders’  equity:                      |       |         |       |            |       |         |       |
| Preferred stock                                  |       | —       |       | —          |       | —       |       |
| Common stock                                     |       | 17,432       |       | —          |       | 17,432       |       |
| Treasury stock                                   |       | (527,398     | )          | —          |       | (527,398     | )          |
| Additional paid  in capital                      |       | 7,981,620    |       | 782,680         |       | 8,764,300    |       |
| Retained  earnings                               |       | 7,115,538    |       | (280,242        | )          | 6,835,296    |       |
| Total  liabilities and stockholders’ equity |       | $            | 18,108,783 |            | $          | 2,253,075    |       | $ | 20,361,858 |   |

 

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| ** **                                                                            | ** ** | **As**       | ** ** | ** **      | ** ** | **As**       | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------|------------|-----------------|------------|--------------|------------|
| ** **                                                                            | ** ** | **Reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| 2007 Summary  Consolidated Statement of Operations                                    |       |         |       |            |       |         |       |
| Software Product  Revenues                                                            |       | $            | 14,826,197 |            | $          | —       |       | $ | 14,826,197 |   |
| Maintenance and  support (net of deferred revenues)                                   |       | 3,534,144    |       | —          |       | 3,534,144    |       |
| Total Revenues                                                                        |       | 18,360,341   |       |            |       | 18,360,341   |       |
| Operating  expenses                                                                   |       |         |       |            |       |         |       |
| Cost of revenues  (exclusive of depreciation and amortization shown separately below) |       | 250,439      |       | —          |       | 250,439      |       |
| Selling, general  and administrative expenses                                         |       | 10,049,430   |       | —          |       | 10,049,430   |       |
| Research and  development expenses                                                    |       | 1,919,253    |       | —          |       | 1,919,253    |       |
| Depreciation and  amortization                                                        |       | 279,573      |       | —          |       | 279,573      |       |
| Total operating  expenses                                                             |       | 12,498,695   |       |            |       | 12,498,695   |       |
| Income from  operations                                                               |       | 5,861,646    |       |            |       | 5,861,646    |       |
| Other income  (expense)                                                               |       | 63,549       |       | —          |       | 63,549       |       |
| Income before  income taxes                                                           |       | 5,925,195    |       |            |       | 5,925,195    |       |
| Income tax  provision                                                                 |       | 2,002,686    |       | 280,242         |       | 2,282,928    |       |
| Net Income                                                                            |       | $            | 3,922,509  |            | $          | (280,242     | )          | $ | 3,642,267 |   |
|                                                                                  |       |         |       |            |       |         |       |
| Basic per common  share                                                               |       | $            | 0.23       |            |       |         | $          | 0.21 |   |
| Diluted per  common share                                                             |       | $            | 0.21       |            |       |         | $          | 0.20 |   |

 

The Company has alsorestated its financial statements for the quarter ended March 31, 2008from the amounts previously reported by the filing of this form 10-Q/A Number1.  As a result of the restatement,federal income tax receivable has increased by $809,774, deferred tax assetshave decreased by $480,511, and equity increased by $478,960 related to thecorrect calculation of the tax effect on the exercise of employee stock optionsand the subsequent sale of shares of stock. Goodwill and deferred tax liabilityincreased by $1,796,320 related to the correct calculation of deferred taxes onidentified intangible assets related to the Availl acquisition.

 

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| ** **                                               | ** ** | **As  Reported** | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|-----------------|------------|------------------|------------|
| Quarter ended  March 31, 2008 Summary Balance Sheet |       |             |       |            |       |             |       |
| Current Assets                                           |       | $                | 7,268,467  |            | 809,774    |             | $          | 8,078,241 |   |
| Property and  equipment (net)                            |       | 361,616          |       |            |       | 361,616          |       |
| Goodwill                                                 |       | 4,595,755        |       | 1,796,320       |       | 6,392,075        |       |
| Deferred tax  asset                                      |       | 568,193          |       | (480,511        | )          | 87,682           |       |
| Other assets                                             |       | 5,017,245        |       |            |       | 5,017,245        |       |
| Total Assets                                             |       | $                | 17,811,276 |            | $          | 2,125,583        |       | $ | 19,936,859 |   |
|                                                     |       |             |       |            |       |             |       |
| Current  Liabilities:                                    |       |             |       |            |       |             |       |
| Accounts payable                                         |       | $                | 382,416    |            |       |             | $          | 382,416 |   |
| Accrued expenses                                         |       | 672,502          |       | 1,434           |       | 673,936          |       |
| Federal income  tax payable                              |       | 159,222          |       |            |       | 159,222          |       |
| Deferred revenue                                         |       | 2,377,593        |       |            |       | 2,377,593        |       |
| Deferred  compensation                                   |       | 141,596          |       |            |       | 141,596          |       |
| Total current  liabilities                               |       | 3,733,329        |       |            |       | 3,734,763        |       |
| Deferred tax  liability                                  |       |             |       | 1,645,189       |       | 1,645,189        |       |
| Stockholders’  equity:                              |       |             |       |            |       |             |       |
| Preferred stock                                          |       |             |       |            |       |             |       |
| Common stock                                             |       | 17,184           |       |            |       | 17,184           |       |
| Treasury stock                                           |       | (1,505,516       | )          |            |       | (1,505,516       | )          |
| Additional paid  in capital                              |       | 8,275,330        |       | 782,680         |       | 9,058,010        |       |
| Retained  earnings                                       |       | 7,290,949        |       | (303,720        | )          | 6,987,229        |       |
| Total liabilities  and stockholders’ equity         |       | $                | 17,811,276 |            | $          | 2,125,583        |       | $ | 19,936,859 |   |

 
| ** **                                                                            | ** ** | **As****Reported** | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------|------------|------------------|------------|
| Quarter ended  March 31, 2008 Summary Consolidated Statement of Operations       |       |               |       |            |       |             |       |
| Software Product  Revenues                                                            |       | $                  | 2,889,058  |            |       |             | $          | 2,889,058 |   |
| Maintenance and  support (net of deferred revenues)                                   |       | 1,166,761          |       |            |       | 1,166,761        |       |
| Total Revenues                                                                        |       | 4,055,819          |       |            |       | 4,055,819        |       |
| Operating  expenses:                                                                  |       |               |       |            |       |             |       |
| Cost of revenues  (exclusive of depreciation and amortization shown separately below) |       | 30,025             |       |            |       | 30,025           |       |
| Selling, general  and administrative expenses                                         |       | 2,981,809          |       |            |       | 2,981,809        |       |
| Research and  development expenses                                                    |       | 543,270            |       |            |       | 543,270          |       |
| Depreciation and  amortization                                                        |       | 174,019            |       |            |       | 174,019          |       |
| Total operating  expenses                                                             |       | 3,729,123          |       |            |       | 3,729,123        |       |
| Income from  operations                                                               |       | 326,696            |       |            |       | 326,696          |       |
| Other income  (expense)                                                               |       | 30,310             |       |            |       | 30,310           |       |
| Income before  income taxes                                                           |       | 357,007            |       |            |       | 357,007          |       |
| Income tax  provision                                                                 |       | 181,596            |       | 23,478          |       | 205,074          |       |
| Net Income                                                                            |       | $                  | 175,411    |            | $          | (23,478          | )          | $ | 151,933 |   |
|                                                                                  |       |               |       |            |       |             |       |
| Basic per common  share                                                               |       | $                  | 0.01       |            |       |             | $          | 0.01 |   |
| Diluted per  common share                                                             |       | $                  | 0.01       |            |       |             | $          | 0.01 |   |
|                                                                                       |            |                    |            |                 |            |                  |            |  |  |  |

 

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# **Item2.   Management’s Discussion and Analysis ofFinancial 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/A and other documentsfiled 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**

 

We develop anddistribute secure managed file transfer, or MFT, software for individuals andbusiness users to safely send files over the internet. We have also developedWide-Area File System, or WAFS, collaboration and Continuous Data Protection orCDP, software which further enhance the ability to share and backup fileswithin the infrastructure of a company’s wide and local area networks, or WANand LAN at WAN and LAN speeds.  Our MFTproducts ensure the privacy of critical information such as financial data,medical records, customer files and other similar documents.  In addition, these products ensure compliancewith government regulations relating to the protection of information whileallowing users to reduce IT costs, increase efficiency, track and audittransactions and automate processes.  OurWAFS and CDP products provide data replication, acceleration of file transfer,sharing/collaboration and continuous data backup and recovery to ourcustomers.  We believe that we areuniquely positioned to provide secure transfer, sharing, and replication offiles that need to be transmitted inside the user’s firewall to distributedoffices, or outside the user’s firewall to business and trading partners.

 

The followingis a brief description of our products:

 

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

 

·                  Wide-Area FileSystem (WAFS) Products – Our WAFS products provide a file sharing andcollaboration solution over multiple sites. By keeping all data updated on each location’s file server, each sitehas instant access to the very latest version. Our WAFS products help ensure that no one can ever open an old file versionwithout user conflicts. Changes made to data on any server are mirrored on allother servers.

 

·                  Continuous DataProtection (CDP) Products – Our CDP products consolidate remote backup for fileservers.  As files change, the serversbackup in real time to the customer’s backup site which can be at the same or aremote location.   The backup server cankeep any number of past versions of each file (and deleted files) which givesthe customer immediate restore, as well as the ability to perform point-in-timesnapshots.

 

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Webelieve that the future success of our business will be dependent upon ourability to improve our current products and to introduce new products, throughresearch and development, innovations by our employees, strategic partnerships,and acquisitions. We intend to   continueenhancing our file transfer products to meet the demands of both individual andenterprise users, while improving the security features of our current productline, and to expand into growing markets through the acquisition of compatiblecompanies and products and through strategic partnerships. For example, in2007, we introduced upgrades to EFT 5.0, CuteFTP 8.0, the Secure Ad HocTransfer module, and the HS-PCI module ensuring compliance with DSS  In 2006, we acquired Availl, a leadingprovider of Wide-Area File System (WAFS) collaboration and continuous dataprotection (CDP) products as part of this strategy.  This acquisition expanded our technology baseinto data replication, acceleration of file transfer, sharing/collaboration andcontinuous data backup and recovery.  Webelieve that these products have give us entry into two large and rapidlygrowing markets. Based upon estimates by Gartner, Inc., and otherconsulting groups in our markets, we believe that the WAN optimization/WAFSmarket is currently $300 million annually and growing at 20% - 30% per year,and the CDP market is of similar size but in the early stages of adoption andgrowing rapidly.  In addition, we believethat the WAFS and CDP products are highly complementary to our traditionalSecure File Transfer products facilitating cross sales and new customerpenetration. As described below, our WAFS/CDP revenues have not increased asmuch as originally anticipated due to management’s decision to delay theaggressive marketing of those products to our existing customer base and to themarket in general as we had initially planned. The amount of time required to make improvements to our WAFS and CDPproducts that we believe are necessary has been greater than we had expected.

 

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

##### ** **

The Companycontinues to enjoy a strong working capital position resulting from solid netprofits from operations over the last sixteen consecutive quarters, includingthe quarter ended March 31, 2008. ** **At March 31, 2008, our networking capital position was $4.3 million, which consists of current assets lesscurrent liabilities. We had cash available of $5.6 million and we continue togenerate cash in excess of our operational needs.  In addition, the Company has a $750,000 lineof credit with Silicon Valley Bank which is unused at this time. We rely heavilyon cash flows from operations to fund our business as a result of theprofitable history of the company.

 

Net cash usedin investing activities for the three months ended March 31, 2007 and 2008was $72,428 and $138,296, respectively. In both periods, the cash used in investing activity was primarily forthe purchase of computer equipment and software. Our capital requirementsprincipally relate to our need to enhance our existing products and to developnew products, which primarily consist of research and development expenses andexpenses for people and the elements that support their work. By comparison, wedo not spend large sums on capital equipment. Capital expenditures will behigher in 2008 as a result of the planned move to new office space.

 

Our totalrevenues increased 12% in the three months ending March 31, 2008 whencompared to the same period in 2007. The principal drivers of our sales are theenterprise level server products for MFT, which are EFT Server and SecureFTPServer. These products accounted for 71% of our sales in the three monthsending March 31, 2008. Prior to 2006, we were largely dependent upon salesof CuteFTP Home and CuteFTP Professional, which accounted for 51%****of our revenue in the year-ended December 31, 2005,and represented larger percentages of sales in earlier years. The actual salesof these products have remained relatively flat over the three years ended December 31,2007 while becoming an increasingly smaller portion of our total revenue. Inthe first quarter of 2007 and 2008, sales of these products representedapproximately 24.2% and 21.9 % of our total revenues, respectively

 

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 Since our principal sources of capital arecash on hand and cash flow from operations, to the extent that sales decline,our cash flow from operations will also decline.  If sales decline or if our liquidity isotherwise under duress, management may substantially reduce personnel andpersonnel-related costs, reduce or substantially eliminate capital expendituresand/or reduce or substantially eliminate research and development expenditures.We also have $750,000 of availability under our revolving line of credit and,if necessary, we may also sell equity securities or enter into other creditarrangements in order to finance future acquisitions or licensing activities.

 

Net cashprovided by operating activities for the three months ended March 31 2007and 2008 was $1,078,699 and $1,518,341, respectively.  This increase in cash was generated from theprofitable operation of our business. Some of the major non-cash items thatwere charged against net income over this period are depreciation and amortization,stock-based compensation and deferred revenues. While these items are expensedaccording to Generally Accepted Accounting Principles, the cash impact fromthese charges has occurred or will occur in other accounting periods and thedifference reflects a positive impact on cash in the Consolidated Statements ofCash Flows. The decrease in Accounts Receivables during this period and theDeferred Revenues during this period served to positively impact the cash fromoperations in those statements.

 

Our financingactivities in the prior two years have primarily related to funding theacquisition of Availl. In 2006, we used $7.6 million in cash to acquire Availl.The cash used to make this acquisition came from a $5 million term loan fromSilicon Valley Bank. The combination of cash generated from our operations andthe stock offering completed in November 2006 allowed repayment of$400,000 of the loan in 2006 and $4.6 million in the three months ended March 31,2007. We have also sold stock through the exercise of employee stock options.We received cash from stock option exercises of $326,758 and $6,600 for theperiods ended March 31, 2007 and 2008, respectively. In the three monthperiod ended March 31, 2008 cash was used in the repurchase of $978,382 oftreasury stock.

 

Net cash usedin financing activities during the three months ended March 31, 2007 and2008 were $4,283,454 and $971,782******respectively.In 2007, the decrease in cash from financing activities was primarily theresult of the payoff of the term loan with Silicon Valley Bank. In 2008, thedecrease resulted through the use of cash in the purchase of shares of ourcommon stock under our share purchase program.

 

In order tofinance the cash portion of the purchase price in the merger with Availl, GlobalSCAPEentered into a Loan and Security Agreement dated September 22, 2006 withSilicon Valley Bank.  The Loan Agreementwith Silicon Valley Bank provides for a $5.0 million term loan and a $750,000revolving credit facility. We repaid the balance of the term loan on March 1,2007.   The entire amount of therevolving credit facility remains available. The borrowings under the revolvingcredit facility bear interest at 1.00% above the Bank’s prime rate and matureson September 22, 2008.  Interestpayments are due on the first day of each calendar month. There have been noborrowings under the revolving credit facility.

 

The revolvingcredit facility is secured by substantially all of the assets of GlobalSCAPE, Inc.  The Loan Agreement contains customary covenantsincluding covenants relating to maintaining legal existence and good standing,complying with applicable laws, delivery of financial statements, maintenanceof inventory, payment of taxes, maintaining insurance, and protection ofintellectual property rights. GlobalSCAPE is also prohibited from selling any of its assets other thanin the ordinary course of business, acquiring any other entities, changing thetypes of business they are engaged in, incurring indebtedness other than thatpermitted by the Loan Agreement, incurring any liens on their assets other thanthose permitted by the Loan Agreement, making certain investments or paying anydividends on, or acquiring, any shares of its capital stock.  The Loan Agreement contains two financialcovenants.  GlobalSCAPE and itssubsidiaries must maintain:

 

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·                  a ratio of (A) EBITDAless the sum of (i) cash taxes paid and (ii) non-financed capitalexpenditures (excluding non-cash stock options and taxes already accrued), to (B) thesum of (i) principal plus (ii) interest paid to Bank, of at least 1.5to 1.00; and

 

·                  a ratio of totalfunded debt to EBITDA of not more than 2.00 to 1.00.

 

The loanagreement also contains customary events of default including the failure tomake payments of principal and interests, the breach of principal andinterests, the breach of any covenants, the occurrence of a material adverse change,certain bankruptcy and insolvency events, the breach of other agreementscreating indebtedness of $50,000 or more and the entry of a judgment of $50,000or more against GlobalSCAPE or any of its subsidiaries.  At March 31, 2008, we were in compliancewith these covenants.

 

As of March 31,2008, we had $5.6 million in cash and cash equivalents, total current assets of$7.9 million and current liabilities of $3.6 million, resulting in workingcapital of $4.3 million. The primary component of current liabilities at March 31,2008 was $2.4 million of deferred revenues which will be recognized over theremaining term (generally one to twelve months) of the maintenance and supportcontracts.  At March 31, 2008, ourprincipal commitments consisted of obligations outstanding under operatingleases as well as royalty agreements with third parties, and trade accountspayable.   The commitments related toroyalty agreements are contingent on sales volumes.  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 have recently moved to new corporate offices in San Antonio, andwe anticipate spending approximately $500,000 toward equipment, furniture,fixtures, and leasehold improvements in the second quarter of 2008 due to thismove.

 

**ContractualObligations**

 

The followingtable sets forth the future minimum payments required under contractualcommitments at March 31, 2008**:**

 
| ** **                       | ** ** | **Payments Due by Fiscal Year** | ** ** |
|----------------------------------|------------|-----------------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **2008 (1)**                                   | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Operating Lease                  |       | $                                                   | 479,679    |   | $ | 606,465 |   | $ | 537,692 |   | $ | 4,968,160 |   | $ | 6,591,996 |   |
| Equipment Leases                 |       | $                                                   | 6,252      |   | $ | 7,392 |   | $ | 7,392 |   | $ | 9,056 |   | $ | 30,092 |   |
| Deferred  Compensation           |       | $                                                   | 141,596    |   | $ | — |   | $ | — |   | $ | — |   | $ | 141,596 |   |
| Term Note                        |       | $                                                   | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Total Cash  Obligations          |       | $                                                   | 627,527    |   | $ | 613,857 |   | $ | 545,084 |   | $ | 4,977,216 |   | $ | 6,763,684 |   |

 

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(1)  Amounts for 2008 reflect the future minimumpayments for the remaining nine months of the fiscal year.

 

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

 

Except as setforth below, there were no other changes in our critical accounting policiesfrom those set forth in our Annual Report on Form 10-K, as amended, for theyear ended December 31, 2007 during the three months ended March 31,2008.

 

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# **UncertainTax Positions**

# ** **

Effective at thebeginning of the first quarter of 2007, the Company adopted the provision ofFIN 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASBStatement No. 109.”  FIN 48 containsa two-step approach to recognizing and measuring uncertain tax positionsaccounted for in accordance with SFAS No. 109, “Accounting for IncomeTaxes.”  The first step is to evaluatethe tax position for recognition by determining if the weight of availableevidence indicates that it is more likely than not that the position will besustained on audit, including resolution of related appeals or litigationprocesses, if any.  The second step is tomeasure the tax benefit as the largest amount that is more than 50% likely ofbeing realized upon ultimate settlement.

 

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

# ** **

**Comparisonof the Three Months ended March 31, 2007 and 2008**

 
| ** **                                    | ** ** | **2007**  | ** ** | **2008**  | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|-----------------------------------------------|------------|-----------|------------|-----------|------------|-------------------|------------|-------------------|------------|
|                                          |       |      |       |      |       |              |       |              |       |
| Software product  revenues                    |       | $         | 3,623,147  |      | $          | 4,055,819         |       | $                 | 432,672    |   | 11.9 | % |
|                                          |       |      |       |      |       |              |       |              |       |
| Cost of revenues                              |       | 58,942    |       | 30,025    |       | (28,917           | )          | (49.1             | )%         |
| Selling, general  and administrative expenses |       | 2,298,146 |       | 2,981,809 |       | 683,663           |       | 29.8              | %          |
|                                          |       |      |       |      |       |              |       |              |       |
| Research and  development expenses            |       | 437,544   |       | 543,270   |       | 105,726           |       | 24.2              | %          |
|                                          |       |      |       |      |       |              |       |              |       |
| Depreciation and  amortization                |       | 31,585    |       | 174,019   |       | 142,434           |       | 451.0             | %          |
| Total operating  expense                      |       | 2,826,217 |       | 3,729,123 |       | 902,906           |       | 32.0              | %          |
|                                          |       |      |       |      |       |              |       |              |       |
| Income (loss)  from operations                |       | 796,930   |       | 326,696   |       | (470,234          | )          | (59.0             | )%         |
|                                          |       |      |       |      |       |              |       |              |       |
| Other Income  (expense)                       |       | (62,902   | )          | 30,310    |       | 93,212            |       | (148.2            | )%         |
|                                          |       |      |       |      |       |              |       |              |       |
| Income tax  expense                           |       | 260,814   |       | 205,074   |       | (55,740           | )          | (21.4             | )%         |
| Net income  (loss)                            |       | $         | 473,214    |      | $          | 151,933           |       | $                 | (321,281   | ) | (67.9 | )% |
|                                          |       |      |       |      |       |              |       |              |       |
| Cost of Sales %  of Sales                     |       | 1.6       | %          | 0.7       | %          |              |       |              |       |

# ** **

***Revenue.***We derive revenues primarily from software sales.  Revenues are comprised of the gross sellingprice of software, including shipping charges and the earned portion of supportand maintenance agreements. For the three months ended March 31, 2008,total revenues increased by $432,672 or approximately 11.9% from the samequarter in 2007 due to an increase in revenues from sales of our SecureFTPServer and EFT products.

 

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

 

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| ** **                                          | ** ** | **Revenue for the Quarter ending March 31,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **Product**                                         | ** ** | **2007**                                                                   | ** ** | **2008** | ** ** |
|                                                |       |                                                                       |       |   |   |   |   |   |   |
| Enhanced File  Transfer                             |       | $                                                                          | 1,244,114  |   | 34.3 | % | $ | 1,736,024 |   | 42.8 | % |
| SecureFTP Server                                    |       | 741,889                                                                    |       | 20.5 | % | 862,191 |   | 21.3 | % |
| CuteFTP  Professional                               |       | 562,877                                                                    |       | 15.5 | % | 546,031 |   | 13.5 | % |
| CuteFTP Home                                        |       | 315,372                                                                    |       | 8.7 | % | 249,104 |   | 6.1 | % |
| WAFS                                                |       | 714,930                                                                    |       | 19.7 | % | 611,431 |   | 15.1 | % |
| CDP                                                 |       | 81,444                                                                     |       | 2.2 | % | 14,066 |   | 0.3 | % |
| All Others                                          |       | 127,711                                                                    |       | 3.5 | % | 85,448 |   | 2.1 | % |
| Deferred Revenue  adjustment                        |       | (165,190                                                                   | )          | (4.6 | )% | (48,476 | ) | (1.2 | )% |
| Total Operating  Revenues                           |       | $                                                                          | 3,623,147  |   | 100.0 | % | $ | 4,055,819 | % | 100.0 | % |
|                                                |       |                                                                       |       |   |   |   |   |   |   |
| Maintenance and  support (net of deferred revenues) |       | $                                                                          | 676,325    |   | 17.9 | % | $ | 1,166,761 |   | 28.4 | % |

 

Sales of ourWAFS and CDP Systems were $796,000 and $625,000 for the three months ended March 31,2007 and 2008 respectively, a decrease of $170,877 or 21.5% for the quarter.These products accounted for approximately 15.4% of total revenue for the firstquarter of 2008 compared to 22.0% for the same period in 2007.

 

Sales of ourSecureFTP Server and Enhanced File Transfer products were $1,986,000 and$2,598,000 for the three months ended March 31, 2007 and 2008 respectivelyan increase of $612,000 or 30.8% for the quarter. These products representedapproximately 64% of our total revenues in the three months ending March 31,2008 as compared to 55% in the same period in 2007.  Revenues from CuteFTP Home and CuteFTPProfessional decreased by 2% as compared to the quarter ended March 31,2007 and accounted for approximately 24% and 19% of total revenues for thethree months ended March 31, 2007 and 2008, respectively.

 

We believethat our reliance on the CuteFTP products will continue to decline as weemphasize sales of our more complex enterprise products.  In addition, because of the more complexnature of SecureFTP Server, Enhanced File Transfer, WAFS and CDP, purchasersrequire increased maintenance and support. As a result, our maintenance and support revenues increased by 72% fromthe first quarter of 2007 compared to the same period in 2008. Maintenance andsupport revenues were $676,325 and $1,166,761, net of deferred revenue, for thethree months ended March 31, 2007 and 2008, respectively.  Maintenance and support pricing is reflectiveof the license cost of the products and the additional support it takes tomaintain and support the products and customers. With higher maintenance andsupport revenues, we will recognize additional deferred revenue as we earn therevenue over the life of the maintenance and support agreement.

 

We havepreviously announced through press releases and investor conference calls thatwe believe our revenues will remain in a range of $4.0 million to $4.5 millionfor the next two quarters. Beginning in the fourth quarter of 2008, weanticipate generating revenues from new products that we may build ourselvesand/or resell from other software companies, and that our revenues willincrease from prior periods due to these new products

 

***Cost of Revenues.***  Cost of revenues consists primarily ofroyalties, a portion of our bandwidth costs as well as production, packagingand shipping costs for boxed copies of software products.  Cost of revenues decreased by approximately$29,000 or 49% between periods from $59,000 for the three months ended March 31,2007 to $30,000 for the three months ended March 31, 2008.  Royalties that we pay on software productslicensed from third parties, which we resell, are expensed as a cost of salewhen the software product is sold or earlier if the recoverability of anyprepaid royalties is in doubt.  Cost ofrevenues as a percent of total revenues was 2% for the three months ended March 31,2007 as compared to 1% for the same period in 2008.

 

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***Selling, General andAdministrative.***  Selling, general andadministrative expenses consist primarily of personnel and related expenses,marketing, customer support, rents, bad debt and professional fees.  Forthe three months ended March 31, 2007 and 2008, selling, general andadministrative expenses were $2.3 million and $3.0 million, respectively, anincrease of approximately $700,000.  Of this increase, 83%, or $571,000,was attributable to expenses incurred in connection with increased salaries,payroll taxes, and other associated benefits. Coverage for health insurance,for example, increased by 43% in 2008 over the same period in 2007. We havehired new employees in order to support current and projected growth. Paymentof commissions on current month sales rather than on collected sales caused$144,000 of the increase. In the three months ended March 31, 2007 and2008, we expensed $223,347 and $287,126 respectively, for stock basedcompensation related to the granting of stock options to employees anddirectors as required by FAS123R. The expense for the Allowance for DoubtfulAccounts increased from ($11,995) to $56,387 for the period ended March 31,2007 and 2008, respectively.

 

The companyhas recently relocated its offices into a larger, more expensive space. Thisadditional occupancy expense will be reflected in SG&A in the future.

 

***Research andDevelopment.***  Research and developmentexpenses increased by $105,000 or 24% between periods, from $438,000 to$543,000.  The increase was due to additional personnel needed to supportour products. We anticipate that this expense will be higher in the future dueto a more aggressive schedule of introducing new products for sale in 2008. Weare hiring several additional programmers to accomplish this work.

 

***Depreciation andAmortization.***  Depreciation and amortizationexpense consists of depreciation expense related to our fixed assets andamortization of capitalized development costs. Depreciation and amortizationexpense increased from $32,000 to $174,000, an increase of approximately24%.  This increase was the result of acquiring $139,000 of equipment andsoftware during the first three months of 2008, and the amortization of theintangible assets associated with the acquisition of Availl.

 

***Other Income,Expense.***  We earned $2,000 and $32,000 ininterest income during the first quarter of 2007 and 2008 respectively frominvesting our excess cash.  For the three months ended March 31, 2007and 2008, interest expense decreased from $30,000 to $2,000, respectively, as aresult of the payment during the first quarter of 2007 of the balanceoutstanding under our term loan with Silicon Valley Bank.  The interestexpense incurred during the first quarter of 2008 was paid on deferred incomeper an employment agreement between GlobalSCAPE and one of its key executives.

 

***Income Taxes.*** Increased revenue of $432,000, increased operating expense of $903,000, andincreased other income of $93,000 yielded approximately $377,000 less taxableincome. The provision for federal income taxes for the quarter ended March 31,2007 and 2008 was $236,000 and $178,000, respectively, a decrease of $58,000.

 

Beginning January 1,2007, the state of Texas imposed a new margin tax equal to 1% of the Company’srevenue less compensation expense (based on Texas source income).  In thethree months ended March 31, 2007 and 2008 the combined Margin Tax andMassachusetts State Income Tax was $24,480 and $26,950, respectively.

 

***Net Income.*** GlobalSCAPE recorded net income of $473,000 and $152,000 for the three monthsended March 31, 2007 and 2008, respectively.  The $321,000 decreasein net income was the result of increased expenses associated with building theinfra-structure required to sustain future growth.

 

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# **Item3.  Quantitative and QualitativeDisclosures 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 threemonths ended March 31, 2008, approximately 35% of our revenues came fromcustomers outside the United States.  Allrevenues are received in U.S. dollars so we have no exchange rate risk withregard to the sale.  However, in July 2003,the European Union (EU) enacted Value Added Taxes (VAT) on electronicpurchases.  These taxes are charged toour non-business customers in the EU and, in our case, are remitted quarterlyin pound sterling.   We expect that theimpact of this currency translation will not be material to our business.

 

# **Item4T.  Controls and Procedures**

 

 During a test by our independent auditors, PMBHelin Donovan, L.L.P., the independent auditors noted some inconsistencies inthe method that was used to account for stock option compensation expense whichhad been prepared by a third party firm hired to help us prepare our federalincome tax return.  The Company decided that in order to thoroughlyinvestigate the matter it should hire a new independent tax preparation firm toassist in the investigation of the proper treatment of stock basedcompensation.  In addition, as part ofthe engagement the new firm was tasked with reviewing the entire tax provisioncalculation appearing in the Company’s financial statements.  The new tax firm discovered that stock basedcompensation expense had previously not been treated properly for tax purposesand also that appropriate deferred tax balances had not been established forthe intangible assets acquired with Availl. Based upon these discoveries, we evaluated the design and operation ofour disclosure controls and procedures as of March 31, 2008 to determinewhether they were effective in ensuring that we disclose the requiredinformation in a timely manner and in accordance with the Securities ExchangeAct of 1934, as amended, or the Exchange Act, and the rules and forms ofthe Securities and Exchange Commission.  Management, including ourprincipal executive officer, supervised and participated in theevaluation.  Our principal executive officer and principal financialofficer concluded based on their review that:

 
|   | · | We had previously not  treated the recorded stock compensation expense as a permanent difference  when reconciling book income with taxable income which would have increased  our income tax expense. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                   |
|   | · | We had previously not  taken the appropriate deductions allowed when an employee exercised his or  her stock options and then subsequently sold the shares of stock.                                   |
|   |   |                                                                                                                                                                                                   |
|   | · | The appropriate  deferred tax liabilities were not calculated and booked at the time of the  Availl acquisition in 2006.                                                                               |

 

Ourreview was concluded in August 2008, after the filing of our 10-K for the2007 fiscal year and after the filing of our 10-Q for the quarter ended March 31,2008 but before the filing of our 10-Q for the quarter ended June 30,2008.  As a result of our evaluation, we concluded that our first quarterfinancial statements for 2008 would require approximately a $2.1 millionincrease in total assets in our balance sheet and an increase in the income taxprovision of approximately $23,000 on our income statement.  Followingdiscussions regarding the matter with our independent auditors and our auditcommittee the amounts of the adjustment were deemed to be material based onquantitative factors by our independent auditors, but were not deemed to bematerial based on qualitative factors.  However, in order to provide theutmost transparency with respect to our financial statements we decided torestate voluntarily our financial results for the quarter ended March 31,2008.

 

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Subsequentto the end of the second quarter of 2008, we also corrected our controls andprocedures.  The correction to ourcontrols and procedures was accomplished by hiring a new third party firm toassist in the preparation of our federal income tax returns as well as a morethorough review of the tax schedules by internal accounting staff.  Additional procedures have also been added tokeep track of when employees exercise their stock options and when and if theysubsequently sell the stock within a year of exercise.

 

Basedupon the corrective action taken, our restatement of our 2007 financial resultsthrough the filing of a report on Form 10-K/A, and the fact thatcorrections were made to subsequent financial results prior to their publicdisclosure, our principal executive officer and principal financial officerwere able to conclude that our financial statements for our quarter ended March 31,2008, as included in our report on Form 10-Q, as amended, and thesubsequent fiscal periods covered by our quarterly reports on Form 10-Qfairly present in all material respects the financial condition, results ofoperations and cash flows of GlobalSCAPE.

 

As ofthe end of the period covered by this report, our principal executive officerand principal financial officer carried out an evaluation of the effectivenessof GlobalSCAPE’s “disclosure controls and procedures” (as defined in theSecurities Exchange Act of 1934 Rules 13a-15(e)and 15d-15(e)) andconcluded that the disclosure controls and procedures, as corrected inconnection with the review discussed above, were effective and designed toensure that material information relating to GlobalSCAPE which is required tobe included in our periodic Securities and Exchange Commission filings would bemade known to them by others within those entities.  There were no changesin our internal controls over financial reporting during the period covered bythis report that could materially affect, or are reasonably likely tomaterially affect, our financial reporting.

 

There were no changes inour internal control over financial reporting during the last fiscal yearand/or up to and including the date of this filing that we believe materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting, except for improvements in the internal controls tostrengthen the process of calculating and reporting deferred taxes and stockcompensation expense.

 

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## **Part II.  Other Information**

## ** **

# **Item1.  Legal Proceedings**

# ** **

We are notcurrently involved in any material legal proceedings.

 

**Item1A.  Risk Factors.**

** **

                  Inaddition to the other information set forth in this report, you shouldcarefully consider the factors discussed in Part I, “Item 1A. Risk Factors”in our Annual Report on Form 10-K, as amended, for the year ended December 31,2007, which could materially affect our business, financial condition or futureresults.  The risks described in ourAnnual Report on Form 10-K, as amended, are not the only risks facingGlobalSCAPE.  Additional risks anduncertainties not currently known to us or that we currently deem to beimmaterial also may materially adversely affect our business, financialcondition and/or operating results.

#### ** **

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds.**

 
| **Period**     | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average Price  Paid Per  Share** | ** ** | **Total Nmber of  Shares Purchased  as Part of a  Publicly  Announced Plan  (1)** | ** ** | **Maximum  Number of  Shares that may  yet be Purchased  Under the Plan** | ** ** |
|----------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|
| February, 2008 |       | 254,096                                          |       | $3.6830                                      |       | 254,096                                                                                                              |       | 437,914                                                                                                      | (2)        |
| March, 2008    |       | 9,612                                            |       | $3.5998                                      |       | 9,612                                                                                                                |       | 684,934                                                                                                      | (3)        |
|           |       |                                             |       |                                         |       |                                                                                                                 |       |                                                                                                         |       |
| Total          |       |                                             |       |                                         |       |                                                                                                                 |       |                                                                                                         |       |

 

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| (1) |   | On May 21, 2007, we announced a plan to  purchase up to $3.0 million of our common stock. This plan is scheduled to  terminate on May 20, 2008. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | At February 29, 2008, there were 437,914 shares  yet to be purchased based on the price of $3.52 per share on that date.                             |
| (3) |   | At March 31, 2008, there were 684,934 shares  yet to be purchased based on the price of $2.20 per share on that date.                                |

 

# **Item6.**           Exhibits

# ** **

**(a)**                                  Exhibits

 

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

 

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

 

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**Signatures**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                                                                   |   |   | GLOBALSCAPE,  INC.             |
|------------------------------------------------------------------------|--------|--------|--------------------------------|
|                                                                   |   |   |                           |
|                                                                   |   |   |                           |
|       August 28,  2008              |   | By:    |   /s/  David L. Mann |
|            Date |   |   |   David  L. Mann     |
|                                                                   |   |   |   President          |

 

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