**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-K**

 
| x | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|---|------------------------------------------------------------------------------------------------------|

 

**For the fiscal year ended December 31, 2007**

** **

**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 its charter)

 

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

 

**(210) 308-8267**

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

**Common Stock, par value $0.001 per share**

(Title of Class)

 

Securities registered pursuant to Section 12(g) of the Act:

**None**

 

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.

o Yes    x No

 

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.

o Yes    x No

 

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

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§ 229.405 of this chapter) is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, a non-accelerated filer or a smallerreporting company.  See definition of “accelerated filer”, “largeaccelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act (check one):

 

| Large Accelerated filer o                      |   | Accelerated filer o         |
|------------------------------------------------|--------|-----------------------------|
|                                           |   |                        |
| Non-Accelerated filer o                        |   | Smaller Reporting Company x |
| (Do not check if  a smaller reporting company) |   |                        |

 

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

o Yes    x No

 

The aggregatemarket value of the registrant’s outstanding common stock held bynon-affiliates was approximately $33,192,000 as of the last business day of theregistrant’s most recently completed second fiscal quarter, based upon theclosing sales price of $2.69 per share on such date on the American StockExchange.

 

As of March 14,2008 there were 17,024,711 shares of common stock outstanding.

 

**DocumentsIncorporated by Reference**

** **

Portions of the Registrant’s Proxy Statementfor the 2008 Annual Meeting of Stockholders to be held on June 4, 2008,are incorporated by reference in Part III hereof.

 

 

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**TABLEOF CONTENTS**

 
|              |                                                                                                        | **Page** |
|-------------------|-------------------------------------------------------------------------------------------------------------|----------|
| **PART I**   |
|              |                                                                                                        |     |
| Item 1.           | Business                                                                                                    | 1        |
|              |                                                                                                        |     |
| Item  1A.         | Risk  Factors                                                                                               | 10       |
|              |                                                                                                        |     |
| Item 1B.          | Unresolved Staff  Comments                                                                                  | 18       |
|              |                                                                                                        |     |
| Item  2.          | Properties                                                                                                  | 18       |
|              |                                                                                                        |     |
| Item  3.          | Legal  Proceedings                                                                                          | 18       |
|              |                                                                                                        |     |
| Item 4.           | Submission of  Matters to a Vote of Security Holders                                                        | 18       |
|              |                                                                                                        |     |
| Item 4A.          | Executive  Officers of the Company                                                                          | 18       |
|              |                                                                                                        |     |
| **PART II**  |
|              |                                                                                                        |     |
| Item 5.           | Market for  Registrant’s Common Equity and Related Stockholder Matters and Issuer  Purchases of Equity | 19       |
|              |                                                                                                        |     |
| Item 6.           | Selected Financial  Data                                                                                    | 21       |
|              |                                                                                                        |     |
| Item 7.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operation                  | 22       |
|              |                                                                                                        |     |
| Item 8.           | Financial  Statements and Supplementary Data                                                                | 33       |
|              |                                                                                                        |     |
| Item 9.           | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                       | 56       |
|              |                                                                                                        |     |
| Item 9A.          | Controls and  Procedures                                                                                    | 56       |
|              |                                                                                                        |     |
| Item 9B.          | Other Information                                                                                           | 57       |
|              |                                                                                                        |     |
| **PART III** |
|              |                                                                                                        |     |
| Item 10.          | Directors,  Executive Officers and Corporate Governance                                                     | 57       |
|              |                                                                                                        |     |
| Item 11.          | Executive  Compensation                                                                                     | 57       |
|              |                                                                                                        |     |
| Item 12.          | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters            | 57       |
|              |                                                                                                        |     |
| Item 13.          | Certain  Relationships and Related Transactions, and Director Independence                                  | 58       |
|              |                                                                                                        |     |
| Item 14.          | Principal  Accountant Fees and Services.                                                                    | 58       |
|              |                                                                                                        |     |
| **PART IV**  |
|              |                                                                                                        |     |
| Item 15.          | Exhibits,  Financial Statement Schedules                                                                    | 58       |

 

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**PreliminaryNotes**

 

GlobalSCAPE®, CuteFTP®, CuteFTP Pro®,CuteMx®, CuteSITE Builder®,PureCMS®, CuteZIP®,CuteHTML® andCuteMAP® areregistered trademarks of GlobalSCAPE, Inc. GlobalSCAPE Secure FTP ServerTM, GlobalSCAPETransfer EngineTM, and GlobalSCAPE Enhanced File TransferServerTM aretrademarks of GlobalSCAPE, Inc.  Other trademarks and tradenames inthis Annual Report are the property of their respective owners.

 

In this report, we use thefollowing terms:

 

“HTTP” or Hyper TextTransfer Protocol is a protocol commonly used to transfer hypertext documentsbetween a web server and a web browser.

 

“S/Key” is a security systemin which a one-time challenge-response password scheme is used to authenticateaccess to data.  The purpose of S/Key isto eliminate the need for the same password to be sent over a network each timea password is needed for access.

 

“SSH2” or Secure Shell is aprotocol that provides encrypted network communications between two computers.

 

“SSL” or Secure Socket Layeruses cryptography to encrypt data between the web server and the web browser.

 

**Forward-LookingStatements**

 

This Annual Reporton Form 10-K and the documents incorporated by reference herein contain “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities and Exchange Act of1934, as amended.  “Forward-lookingstatements” are those statements that are not of historical fact, but describemanagement’s beliefs and expectations. We have identified many of the forward-looking statements in this AnnualReport by using words such as “anticipate,” “believe,” “could,” “estimate,” “may,”“expect,” and “intend.”  Although webelieve these beliefs and expectations are reasonable, our operations involve anumber of risks and uncertainties, including those described in the “RiskFactors” section of this Annual Report and other documents filed with theSecurities and Exchange Commission. Therefore, GlobalSCAPE’s actual results could differ materially fromthose discussed in this Annual Report.

 

# PART I

#  

## **Item 1.    Business**

## ** **

### **CompanyOverview**

### ** **

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, or CDP, software which furtherenhance the ability to share and backup files within the infrastructure of acompany’s wide and local area networks, 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.

 

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Our initial product,CuteFTP, a file transfer protocol client program used mostly by individuals andsmall businesses, was first distributed in 1996 over the internet and hasachieved significant success and popularity. We built on this success by steadily adding complementary products suchas the enterprise versions of our file transfer programs, Secure FTP Server andEnhanced File Transfer Server, and establishing an internal sales organizationand reseller network. We believe we now have a reputation as a provider of easy-touse, affordable file transfer and collaboration software for individual, smallbusiness and enterprise users.  Since2000, we have focused on enhancing our portfolio of products to meet theincreasing demand for data security, overcoming the challenges of latency andbandwidth limitations for supporting branch offices and geographicallydistributed locations, allowing enterprises to backup data across their LAN andWAN as changes are made, and offering solutions that permit non-technicalpersonnel to contribute content to their organizations’ Web sites.  Our software is used worldwide across a widerange of industries.  Through the end of2007, we had distributed over 1.9 million software licenses to our customer basewhich includes individual consumers, small to medium-sized businesses, as wellas some of the largest corporations in the world.

 

**Recent Developments**

 

                In March 2008,we announced the retirement of our President and Chief Executive Officer,Charles R. Poole. During the fall of 2007, the Board of Directors beganhaving discussions with Mr. Poole, relating to his potential retirement orreduction in his day-to-day role at December 31, 2008, when his currentcontract expires, and the necessary steps for succession of the CEO position.At this time, the Board also began focusing on some longer-term projectsdesigned to continue the Company’s growth and profitability. We believe thatthe future success of our business will be dependent upon our ability toimprove our current products and to introduce new products, through researchand development, innovations by our employees, strategic partnerships, andacquisitions.  As a result of the longer term nature of theBoard’s areas of focus for 2008 and Mr. Poole’s wishes, it became apparentto the Board that that it would be in the best interest of the Company and itsshareholders that Mr. Poole not spearhead our more product-focusedinitiatives if he were not available to see them through implementation. As aresult, on March 7, we accepted Mr. Poole’s decision to retire early.Kelly E. Simmons, our CFO, was named interim President and we began toaccelerate the search for Mr. Poole’s replacement.

 

**Industry Background**

 

The internethas become an integral part of operations for companies of all sizes, not onlyfor e-commerce, but also as a means of managing information between central andremote locations and with employees, partners and suppliers.  Corporate information managers must protectbusiness assets, ensure that policies and processes meet regulations governingthe management of sensitive information, and ensure that the right people haveaccess to the right information at the right time.  Global operations, diverse business partnersand networks further emphasize the need for common standards to ensurecompatibility, scalability and cost-effective integration.

 

Organizationsthat use the internet for data transfer are also faced with a daunting array ofsecurity challenges stemming from various regulatory and business requirementsfor data privacy and confidentiality. Regulatory and privacy requirements include legislation such as theHealth Insurance Portability and Accountability Act (HIPAA), California SenateBill (SB) 1386, and the Gramm-Leach-Bliley Act (GLBA) in the US, and theEuropean Union’s Privacy Directive, some of which impose severe penalties forimproper disclosure of confidential information.  Additionally, industry best-practices andself-imposed business requirements include intellectual property and tradesecrets protection and controls regarding disclosure of proprietary informationto minimize corporate risk from the devastating consequences of securitybreaches.  As corporate Web operationsmature, we believe we will see an increasing demand for solutions to facilitatesecure file transfers on the internet and for products that 

 

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provide data replication, acceleration of file transfer,sharing/collaboration and continuous data backup and recovery.

 

### **Products**

### ** **

Our productsinclude Windows®-based, Macbased, browser-based and server software applications.

 

**FTP Client Programs**

 

File transferprotocol, or FTP, is the language used for file transfers from computer tocomputer across the internet.  FTP ismost commonly used to download a file from a server using the internet or toupload a file to a server.

 

***CuteFTP*.**  CuteFTP is a “client-side” program, meaningthat it permits a user to request a file from or send a file to an FTP serveror host computer.  The user base for thisprogram ranges from corporate IT professionals who use it to transfer databetween locations via the internet, to individual Web site operators who use itto upload their Web pages to their Web hosting provider.  CuteFTP simplifies use of file transferprotocol by hiding the technical processes behind a user-friendly, graphicalinterface, which allows users to “drag `n drop” files between computers.CuteFTP has won several awards, including the CNet Editors’ Choice award, andhas been favorably reviewed in leading online and print trade journals such asPC Magazine, WindowsNT, Yahoo Internet Life, CNet’s Download.com and Tucows, asbeing the most powerful, easy-to-use file transfer protocol programavailable.  We offer CuteFTP in German,French, Spanish, Japanese and Traditional and Simplified Chinese.  CuteFTP was first released in February 1995by its original author, and was first distributed as a commercial product byGlobalSCAPE in April 1996.  In October 2003,GlobalSCAPE released CuteFTP Mac, our easy-to use FTP client for the Macintoshoperating system.  CuteFTP Macincorporates many of the popular features of CuteFTP for Windows, whileadhering to Apple’s Aqua® interface and usability guidelines.

 

***CuteFTP Pro*.**  CuteFTP Pro is a secure FTP client programdesigned for advanced users and information technology professionals.  CuteFTP Pro incorporates standards forencrypting data during transport and at rest, accelerating transfer of largefiles, and automating common file transfer tasks. It includes various featuresattractive to advanced users such as multi-part and concurrent file transfersto maximize transfer speed, scheduled file transfers, automated site backupsand scripting ability for automating FTP tasks. CuteFTP Pro has been favorably reviewed by leading online publicationsincluding CNet’s Download.com, ZDNet and PC Review.  CuteFTP Pro was released in March 2001and CuteFTP MAC Pro was released in April 2004.

 

**File Transfer Servers**

 

FTP transfersrequire two software programs: a client program to start a transfer and aserver to accept the connection. Our file transfer server programs are designedto provide business with increased security and speedier file transport whencompared to e-mail.

 

***Secure FTP Server*.**  Secure FTP Server complements CuteFTP Pro andother professional FTP clients by enabling encrypted transfers using SSL, SSH2and advanced S/KEY password encryption. When used with CuteFTP Pro, Secure FTP Server offers a complete digitalcertificate management system, giving system administrators the ability tocreate, sign, import, export and add digital certificates, as well as kick offback-end processes.  The latterfunctionality can be used as a partial or total replacement for more complexenterprise-level electronic data interchange systems, or (EDI).  Additional features include full remotemanagement capability, the ability to operate multiple FTP sites with uniquedirectory structures from a single server and manage user accounts withadvanced restriction settings for maximum security and control.  Secure FTP Server has been favorably reviewedby leading online publications including Server Watch and File Forum.  GlobalSCAPE Secure FTP Server was firstreleased in January 2002.

 

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***Enhanced FileTransfer Server. ***EnhancedFile Transfer Server,  EFT, is anenterprise file server, building on the base features of Secure FTP Server byproviding digital certificate management, multiple secure protocols, remoteadministration, flexible authentication choices, extensive automation andadvanced security options. The latest version, EFT Server 5, helps customersachieve regulatory compliance with Payment Card Industry, or PCI, Data SecurityStandard, or DSS, by providing hardened security settings and compliancereporting options. EFT also offers modules that can be integrated into the basesoftware such as DMZ Gateway, which provides a multi-tiered security solutionfor traversing network walls; OpenPGP, a dual-key encrypted storage solution;Secure Ad-Hoc, which is an alternative solution to e-mail for sending largefile attachments; and auditing and reporting of server transactions.

 

**DataReplication Products**

 

Businesses with multiple locations have aneed to access data in a timely, efficient manner and to be able to move andshare data throughout their organizations. Our data replication products allow users to maintain and synchronizetheir live data files in multiple remote server locations and to restore datato any point in time.

 

***Wide Area File System (WAFS)****.*  Our Wide Area FileSystem product delivers a unified and accelerated file access system, instantfile-sharing and server-to-server mirroring across any distance, with fullcoherency and at LAN access speeds.  WAFSdelivers a true wide area file solution for any distance, and any number andany complexity of files.  Continuous,real-time multi-directional acceleration and mirroring technology ensures thatdata exists in multiple places simultaneously and in complete synchronization,no matter where a change in any file is made. The data mirrors between servers on the LAN, virtual private network, orVPN, or crossing firewalls in real time.  In addition, users can leverage file locking capabilitiesacross the LAN and WAN. Our WAFSensures bandwidth efficient WAN utilization; that users have access to the mostrecent data.  The off-line mode ensurescontinued data access in the event of WAN or server outage.  Our WAFS software is easy to deploy andmanage remotely.

 

***CDP****.*  Our continuousbackup software inexpensively delivers true real-time continuous dataprotection.  Our software-only solutionsupports the ability to backup any number of branch servers or remote laptopsto one or more centrally located systems.  CDP transparently and continuously captures data from local and remoteservers, eliminating the backup window and restoring data rapidly. Bandwidthrequirements are minimal since only file differences are transferred to thebackup system.

 

***Enterprise****.*  Enterprise isdesignated for companies that need both WAFS or multi-directional mirroring andreal-time backup.  It includes all thefeatures of the entire WAFS and CDP product line.

 

**Internet Products**

 

We offer a variety of software products thatcan be purchased and downloaded directly from our automated website.  These products range in price from $3.99 to$249.00 for a single license.  Theseproducts are easy to install and use, making them good products to attractusers to our website.

 

**Maintenance and Support**

** **

We offermaintenance and support contracts for all of our products which includescontent, upgrades and technical support. Standard technical support islimited to the reporting and correction of product defects and installation andconfiguration assistance. CuteFTP, EFT Server, and Secure Server support isavailable 8:00 AM to 6:00 PM US Central Time, Monday-Friday, excluding major USholidays. WAFS and CDP support is available 8:00 AM to 5:30 US Eastern Time,Monday-Friday, excluding major US holidays.

 

###  

4

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### **Strategy**

### ** **

Our goal is to build uponour successful market position in FTP, WAFS and CDP, to provide business userswith secure and efficient solutions for their growing file access, filetransfer, and data replication and protection needs.  For example, in 2007, we introduced upgradesto EFT 5.0,  CuteFTP 8.0, the Secure AdHoc Transfer module, and the HS-PCI module ensuring compliance with DSS.   We continue to enhance and develop highquality, affordable software that enables organizations and individuals toeasily create, move and manage Web and file-based data in a secure,collaborative environment.  We havesuccessfully established a brand in the market for internet software productivitytools with our file management products, CuteFTP and CuteFTP Pro.  We believe that our continued growth willcome not only through the further development of our SecureFTP Server andEnhanced File Transfer products and the growing demand for file security whentransferring information across the internet, but also through the aggressivesales and marketing of our WAFS and CDP products, which we believe representtwo high growth markets.  Based uponestimates by Gartner, Inc., and other consulting groups in our markets, webelieve that the WAN optimization/WAFS market is currently $300 millionannually and growing at 20% - 30% per year, and the CDP market is of similarsize but in the early stages of adoption and growing rapidly.  In addition, we believe that the WAFS and CDPproducts are highly complementary to our traditional Secure File Transferproducts facilitating cross sales and new customer penetration.

 

GlobalSCAPE believes thatour products represent a low cost solution for businesses for their access,secure file transfer, and data replication and protection requirements becausewe do not require the purchase of a whole suite of products. Our Secure FTPServer, Enhanced File Transfer, WAFS and CDP products offer modules to form thecomprehensive solutions needed by businesses to solve their particular needs.Maintenance and support agreements are purchased with most of our higher-endserver products by businesses. We will also continue to market our contentmanagement solutions that help non-technical professionals manage their organization’sWeb sites without reliance on information technology professionals.

 

Key elements of our strategyare:

 

***Continue to enhance and develop our products. ***Corporate and individual users are increasingly concerned with securityand data replication and protection.  Wehave added the EFT enterprise solution to our product line for businesses tomeet the needs of security issues when transferring files in and out of theirservers across the internet and we acquired Availl in 2006 in order to offercustomers a data replication and protection solution. We believe thatthe future success of our business will be dependent upon our ability toimprove our current products and to introduce new products, through researchand development, innovations by our employees, strategic partnerships, andacquisitions. We intend to acceleratethe development and improvement of our current products throughout 2008 to meetthe demand for file transfer security and data replication and protectionthrough Enhanced File Transfer Server, WAFS and CDP and to consumers andsmaller businesses through our other well known FTP products, CuteFTP Home andCuteFTP Professional and Secure FTP Server.

 

***Pursue strategic product and acquisition opportunities*****.**  Wewill continue to look for opportunities to develop, acquire or add synergisticproducts or technologies that enhance the success of these products.  In 2005, we added modules and furtherdeveloped our Secure FTP Server and EFT products.  In September 2006, we acquired Availlwhich allowed us to add our WAFS and CDP products. We continue to seekpotential acquisitions and strategic patnerships.

 

  ***Continue to develop a morerobust reseller channel*.** During 2007, we continued our emphasis on the development of third partyreseller channels by hiring sales people with reseller sales backgrounds anddeveloping relationships with new resellers. In particular, we attempt to reach“value-added” resellers such as system design consultants.  We believe sales will be significantlyenhanced if we are able to recruit numerous resellers who have existingrelationships with prospective customers.

 

5

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***Increase our maintenance and support business***. Maintenance and support contracts are an important part of our productoffering for our Enhanced File Transfer Server, WAFS and CDP.  Our maintenance and support revenuesincreased by 171% from 2005 to 2006, and 112% from 2006 to 2007.

 

***Develop internal sales staff****.*  During 2007, we continued the development ofour internal direct sales force to better sell more complex products, such asEnhanced File Transfer, Secure FTP Server, WAFS and CDP. We intend to continueto develop our sales staff through additional employees, further training andcertification.

 

***Continue to develop online marketing capabilities****. *We believe we havesignificant expertise in driving online sales via online marketing activities,including product placement on third party sites such as search engines andreferral sites, and electronic mail campaigns. This type of sales activity is particularly well suited to certain lowerpriced products because of the lower cost of sale.  We intend to continue to leverage our establishedWeb presence to drive online sales as well as supporting direct and resellersales efforts.

 

**Sales and Marketing**

 

Since 2003, wehave increased our emphasis on developing our internal sales staff and resellerchannels to capture those sales that require personal attention, such as salesof our more complex products Enhanced File Transfer Server, WAFS and CDP, salesto larger enterprises and sales of maintenance and support contracts. Werequire training, testing and professional development of our sales people toinsure that they are capable of meeting the needs of our customers.

 

We also sellour FTP Client Programs, Secure FTP Server and our internet products viadownload from our Web site, **www.globalscape.com**.  Prospective buyers may use our softwareproducts free during an evaluation period of up to thirty days.  The programs are automatically disabled if alicense is not purchased by the end of the trial period.  Our current products typically range in pricefrom $39.99 to $2,400 per license.  Priorto 2006, the majority of our software sales had been made online using a creditcard.  While we continue to sell productsover the internet, this has become a less important sales channel as we havegrown our internal sales organization and reseller network.  Our software is also available for downloadfrom a variety of independent internet software sites such as CNet’sDownload.com, as well as sites in Western Europe, Canada, Australia, andAsia.  We distribute a limited number ofcopies on CD in Fry’s and Micro Center stores in the United States and throughnumerous international resellers.  Weprovide free customer support via a searchable knowledge base on our Web siteand sell “live” support and maintenance packages.

 

### **Customers**

### ** **

We had onecustomer, the Army Contracting Agency ITEC4, whose purchase of $2.8 milliondollars accounted for 14.5% of our sales in 2007. The order was comprised ofSecure FTP Server with SSH Add On module, CuteFTP Pro, and the associatedmaintenance and support covering first year installations. While the purchaseof the product would not be recurrent in the same volume, first yearmaintenance and support will increase until all software installations havebeen completed and thereafter in the form of renewals.

 

### **Seasonality**

### ** **

Our products are marketed to individuals aswell as large organizations. As a result of this mix within ourcustomer base, we did not experience seasonality in our sales during 2007, nordo we expect seasonality to have a significant impact on sales in 2008.

##  

### **6**

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### ** **

### **Network andEquipment**

### ** **

We havecontracted with various network providers for internet access.  Our arrangements provide for redundancy inthe event of a failure, and also for rapid expansion of available bandwidth inthe event that there is a dramatic increase in demand.  To protect critical customer data,GlobalSCAPE’s secure server utilizes Secure Sockets Layer encryption.  We have dedicated servers on and off site andexpansion plans in place to allow rapid and cost effective scalability.

 

### **Research and Development**

### ** **

Our internalsoftware engineers are responsible for software design, managing thedevelopment process, testing and quality assurance.  We utilize offshore developers for a largeportion of the coding phase of software development.  All phases of development, including scopeapproval, functional and implementation design, object modeling andprogramming, are subject to internal quality assurance testing.  Our use of external developers allows us totap into a highly skilled labor pool, maintain a 24-hour development schedule,decrease time to market, and minimize programming costs.

 

For the years2005, 2006 and 2007, GlobalSCAPE spent approximately  $869,155, $1,230,400 and $1,919,253,  respectively, on research and development,all of which were expensed. We expect to increase our research and developmentspending in 2008 as we focus on improving our current products and introducingnew products.

 

### **Competition**

### ** **

The filemanagement, content management and Web development software market sectors areintensely competitive, subject to rapid change and are significantly affectedby new product introductions and other activities of market participants.  Our primary competitors vary by product andare listed below.

 

***CuteFTP*.**  CuteFTP exists in a highly competitiveenvironment with several hundred FTP software utilities available on theinternet.  We believe our primarycompetitors are WS_FTP from Ipswitch, Inc. and FTP Voyager by RhinoSoftware, Inc.  CuteFTP was thesecond Windows-based FTP client to market and is consistently the mostfrequently downloaded FTP client on popular download sites.  CuteFTP Mac, our FTP client for the Macintoshplatform, competes with Fetch, by Fetch Softworks, Interachry, by Stairways Software Pty Ltd., and Transmit FTP,by Panic Inc.

 

***CuteFTP Pro*.**  CuteFTP Professional competes in the higherend of the same market as CuteFTP, targeting the security-minded ITprofessional.  CuteFTP Professional ispositioned as one of the only secure FTP client programs that support a widerange of security standards related to the FTP protocol.  Competitors in the general FTP market offerproducts that support a smaller subset of these security standards and addressa narrower segment of the secure FTP market. Competitors include Van Dyke, Inc., Ipswitch, Inc., and RhinoSoftware, Inc.

 

***Secure FTP Server***.  Secure FTP Server competes against a limitednumber of secure Windows-based FTP servers. We believe our primary competitors are WS_FTP Server and Serve-U.  Secure FTP Server has the advantage ofleveraging the success of CuteFTP Pro through product integration, offeringproprietary extensions to the FTP protocol, and cross-marketing efforts to anexisting customer base.

 

***Enhanced FileTransfer Server. ***EnhancedFile Transfer Server competes in the managed file transfer server market.  We believe our primary competitors areTumbleweed, Sterling, Proginet, and SSH’s Tectia.  Enhanced File Transfer Server has theadvantage of being very cost effective in its market while leveraging andextending the security and file management features of our other FTP products.

 

***WAFS. ***WAFS competes in the Wide Area FileSystem/Storage market.  We believeour primary competitors are Riverbed, Packeteer and Cisco, who are deliveringproprietary based appliances.  We 

 

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believethat WAFS has the advantage of being a software only solution which leveragescorporate infrastructure and minimizes the total cost of ownership.

 

***CDP. ***Continuous Data Protection competes in thehighly competitive CDP market.  Webelieve our primary competitors are CA XOsoft, Doubletake andSymantec/Veritas.  We believe that CDPhas the advantage of transparently and continuously capturing data from localand remote servers, eliminating the backup window and restoring data rapidly.

 

***CuteHTML*.**  CuteHTML exists in a highly competitiveenvironment with approximately one hundred text-based HTML editors.  CuteHTML’s competition includes HomeSite fromAllaire, Inc.  CuteHTML’s advantageis that it doesn’t add extraneous code to Web pages, an attribute preferred bymany professional Web masters.

 

***CuteHTML Pro***.  CuteHTML Pro faces heavy competition fromvisual or “WYSIWYG” editors such as Front Page, by Microsoft, Dreamweaver, byMacromedia Inc, and competition from other direct editors*,*such as Homesite, also by MacromediaInc.  CuteHTML Pro’s advantage is itsappeal to professional Webmasters who typically shun visual editors in favor ofthe extra features and added control provided by direct editors such asCuteHTML Pro.

 

***CuteMAP*.**  CuteMAP competes against approximately 65image-mapping utilities, which exist in a niche market.  Primary competitors include CoffeeCup ImageMapper, Ulead Smart Saver and MapEdit. CuteMAP has the advantage of being able to leverage the success ofCuteHTML through product integration and cross-marketing efforts to an existingcustomer base.

 

***CuteZIP*.**  CuteZIP exists in the highly competitive filecompression utility market, competing against several hundred file compressionutilities.  Its main competitors includeWinZIP, the current market leader, and NetZIP. CuteZIP’s main advantage is that it is one of the only compressionutilities offering 128-bit encryption to secure compressed files.  In addition, users can create self-extractingencrypted archives that recipients may open even if they don’t have a ziputility installed.

 

We havelimited information regarding our products’ market shares in their respectivecategories.  Many of our competitors havesubstantially greater financial, technical, sales, marketing, personnel, andother resources, as well as greater name recognition and a larger customer basethan we do.  Significant competitioncharacterizes the markets for our products and we anticipate that we will faceincreasing pricing pressures from competitors in the future.  Moreover, given that there are low barriersto entry into the software market, and the market is rapidly evolving andsubject to rapid technological change, we believe that competition will persistand intensify in the future.  We haveexperienced price declines on some products over the last several years.  A reduction in the price of our productswould negatively affect gross margins as a percentage of net revenues, andwould require us to increase software unit sales, in order to maintain netrevenues at existing levels.  For morediscussion on the risks associated with our competition, you should read theinformation under “Risk Factors — Risks Related to Operations.”

 

### **GovernmentalRegulation**

### ** **

All of ourproducts are subject to U.S. export control laws and applicable foreigngovernment import, export and/or use requirements. Minimal U.S. exportrestrictions apply to all products, whether or not they perform encryptionfunctions.

 

The Export AdministrationRegulations of the U.S. Department of Commerce regulate the export of mostcommercial products with encryption features. Under regulations issued by theDepartment of Commerce in January 2000, encryption products of any keylength may be exported, after a one-time technical review, to non-governmentalend-users around the world, except for embargoed countries and specificprohibited end-users. Encryption products may be exported to governmentalend-users under special Encryption Licensing Arrangements or individual exportlicenses that may be issued at the discretion of the Department of Commerce. InOctober 2000, the Department of Commerce further revised 

 

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the Export Administration Regulations to relax some reportingrequirements and to remove the export licensing requirement for shipments togovernmental end-users in 23 countries, including most of the United States’major trading partners. In June 2002, the Department of Commerce amendedthe encryption regulations again to conform them to the control listsimplemented by other countries that are also members of the WassenaarArrangement. We believe that we have completed the necessary technical reviewsof the products and services we currently export, but new products that weacquire or develop may require technical review before we can export them. Forthe export of some of our products, we are subject to various post-shipmentreporting requirements.

 

The changes tothe export regulations allow our products to be exported more quickly and withmore strength and, therefore, be more competitive with products from foreignproducers. However, the export regulations may be modified at any time. Inlight of the ongoing discussions regarding anti-terrorism legislation in theU.S. Congress, there may be an increased risk that export regulations may bemodified in the future. Modifications to the export regulations could reduce oreliminate our ability to export some or all of our products from the U.S.without a license in the future, which could put us at a disadvantage incompeting for international sales compared to companies located outside of theU.S. that would not be subject to these restrictions.

 

### **IntellectualProperty**

### ** **

We regard someof the features of our internal operations, software, and documentation asproprietary and rely on copyright, patent, trademark and trade secret laws,confidentiality procedures, contractual arrangements, and other measures toprotect our proprietary information. Our intellectual property is an importantand valuable asset that enables us to gain recognition for our products,services, and technology and enhance our competitive position.

 

As part of ourconfidentiality procedures, we generally enter into non-disclosure agreementswith our employees, distributors, and corporate partners, and we enter intolicense agreements with respect to our software, documentation, and otherproprietary information. These license agreements are generallynon-transferable and have a perpetual term. We also educate our employees ontrade secret protection and employ measures to protect our facilities,equipment, and networks.

 

Ourtrademarks, copyrights and technology are central to our business.  We protect our intellectual property rightsthrough a combination of licenses, trademarks, service marks, copyrights, tradesecret laws and restrictions on disclosure.

 

We have U. S.federal trademark registrations for GlobalSCAPE, CuteFTP, CuteFTP Pro, CuteMx,PureCMS, CuteHTML, CuteZIP, CuteMAP, CuteSITE Builder and design,SnapEdit and pending U. S. federal trademark applications for Availl andEnhanced File Transfer Services.  We haveobtained twenty-nine United States copyright registrations for all but the mostrecent versions of our software applications, and have applied for registrationfor the most recent versions.

 

We seek toprotect our software, documentation and other written materials under tradesecret and copyright laws, which afford only limited protection.  Despite our efforts to protect ourproprietary rights, unauthorized parties may attempt to copy aspects of ourproducts or to obtain and use information that we regard as proprietary.  Policing unauthorized use of our products isdifficult, and while we are unable to determine the extent to which piracy ofour software products exists, software piracy can be expected to be apersistent problem.  In selling ourproducts, we rely primarily on click-wrap licenses that are not signed by licensees,and may be unenforceable under the laws of certain jurisdictions.  In addition, the laws of some foreigncountries do not protect our proprietary rights to as great an extent as do thelaws of the United States.  In addition,the number of patents applied for and granted for software inventions isincreasing.  Consequently, there is agrowing risk of third parties asserting patent claims against us. We havereceived, and may receive in the future, communications from third partiesasserting that our products infringe, or may infringe, the proprietary rightsof third parties, seeking indemnification against such infringement orindicating that we may be required to obtain a license or royalty from suchthird parties.

 

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For more discussion on the risks associated with our intellectualproperty, you should read the information under “Risk Factors,” especially “RisksRelated to Legal Uncertainty.”

 

### **Employees**

### ** **

As of March 1, 2008, we had 66 full-timeand part-time employees organized within eight functional areas.  The employee distribution according tofunction is as follows:

 

| **Department**                 | ** ** | **Number of  Employees** | ** ** |
|--------------------------------|------------|--------------------------|------------|
| Management and  Administration |       | 9                        |       |
| Research and Development       |       | 10                       |       |
| Quality Assurance              |       | 6                        |       |
| Marketing                      |       | 4                        |       |
| Information Services           |       | 5                        |       |
| Professional Services          |       | 3                        |       |
| Sales                          |       | 17                       |       |
| Customer Support               |       | 12                       |       |
| Total                          |       | 66                       |       |

 

None of ouremployees are covered by collective bargaining agreements and we believe ouremployee relations are good.

 

### **AvailableInformation**

### ** **

We fileannual, quarterly and current reports, proxy statements and other informationwith the Securities and Exchange Commission. You may read and copy any documentwe file with the SEC at the SEC’s public reference room at 100 F Street, NE, Room 1580,Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for informationon the public reference room. The SEC maintains an internet web site thatcontains annual, quarterly and current reports, proxy statements and otherinformation that issuers (including GlobalSCAPE) file electronically with the SEC.The SEC’s web site is www.sec.gov.

 

Our AnnualReport on Form 10-K, Quarterly Reports on Form 10-Q, Current Reportson Form 8-K and other reports and amendments filed with the Securities andExchange Commission are available free of charge on our web site atwww.globalscape.com in the Investor Relations section as soon as practicableafter such reports are filed. Information on our website is not incorporated by reference into this Form 10-Kand should not be considered part of this report or any other filing that wemake with the SEC.

 

###### **Item 1A.  Risk Factors**

###### ** **

We havedescribed below risks that we are aware of that could have a material adverseeffect on your stock ownership and our business.

 

**Risks Related to Operations**

 

***If we are unable to develop new and enhanced products and services thatachieve widespread market acceptance, or if we are unable to continuallyimprove the performance, features, and reliability of our existing products andservices, our business and operating results could be adversely affected.***

 

Our future success dependson our ability to respond to the rapidly changing needs of our customers bydeveloping or introducing new products, product upgrades, and services on atimely basis.  We have in the past incurred,and we believe that we will continue to incur, research and development expensesas we strive to remain competitive.  Newproduct development and introduction involves a significant commitment of timeand resources and is subject to a number of risks and challenges including:

 

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Managing the length of the development cycle for newproducts and product enhancements, which has frequently been longer than weoriginally expected.

 

Adapting to emerging and evolving industry standardsand to technological developments by our competitors and customers.

 

Extending the operation of our products and servicesto new platforms and operating systems.

 

Entering into new or unproven markets with which wehave limited experience.

 

Managing new product and service strategies, includingintegrating our various security and file replication technologies, managementsolutions, customer service, and support into unified enterprise security andfile replication solutions.

 

Incorporating acquired products and technologies.

 

Developing or expanding efficient sales channels.

 

Obtaining sufficient licenses to technology andtechnical access from operating system software vendors on reasonable terms toenable the development and deployment of interoperable products, includingsource code licenses for certain products with deep technical integration intooperating systems.

 

If we are not successful inmanaging these risks and challenges, or if our new products, product upgrades,and services are not technologically competitive or do not achieve marketacceptance, we could have expended substantial resources and capital withoutrealizing sufficient revenues in return, and our business and operating resultscould be adversely affected.

 

***Fluctuations in demand for our products and services are driven by manyfactors and a decrease in demand for our products could adversely affect ourfinancial results.***

 

We are subject tofluctuations in demand for our products and services due to a variety offactors, including competition, product obsolescence, technological change,budget constraints of our actual and potential customers, level of broadbandusage, awareness of security threats to IT systems, and other factors.  While such factors may, in some periods,increase product sales, fluctuations in demand can also negatively impact ourproduct sales.  If demand for ourproducts declines, our revenues and gross margin could be adversely affected.

 

***If we fail to manage our salesand distribution channels effectively or if our partners choose not to marketand sell our products to their customers, our operating results could beadversely affected***.

* *

We sell ourproducts to customers primarily through our direct sales force and throughresellers. Sales through these different channels involve distinct risks,including the following:

 

*Direct Sales.*  A significant portion of our revenues is derived from salesby our direct sales force to end-users. Special risks associated with thissales channel include:

 

Longer sales cycles associated with direct salesefforts.

 

Difficulty in hiring, retaining, and motivating ourdirect sales force.

 

Substantial amounts of training for salesrepresentatives to become productive, including regular updates to cover newand revised products.

 

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*Indirect Sales Channels.*  A significant portion of ourrevenues is derived from sales through indirect channels, includingdistributors that sell our products to end-users and other resellers. Thischannel involves a number of risks, including:

 

Our lack of control over the timing of delivery of ourproducts to end-users.

 

Our resellers and distributors are not subject tominimum sales requirements or any obligation to market our products to theircustomers.

 

Our reseller and distributor agreements are generallynonexclusive and may be terminated at any time without cause.

 

Our resellers and distributors frequently market anddistribute competing products and may, from time to time, place greateremphasis on the sale of these products due to pricing, promotions, and otherterms offered by our competitors

 

***Our products are complex and operate in a wide variety of computerconfigurations, which could result in errors or product failures.***

 

Because we offer very complexproducts, undetected errors, failures, or bugs may occur, especially whenproducts are first introduced or when new versions are released.  Our products are often installed and used inlarge-scale computing environments with different operating systems, systemmanagement software, and equipment and networking configurations, which maycause errors or failures in our products or may expose undetected errors,failures, or bugs in our products.  Ourcustomers’ computing environments are often characterized by a wide variety ofstandard and non-standard configurations that make pre-release testing forprogramming or compatibility errors very difficult and time-consuming.  In addition, despite testing by us andothers, errors, failures, or bugs may not be found in new products or releasesuntil after commencement of commercial shipments.  In the past, we have discovered softwareerrors, failures, and bugs in certain of our product offerings after theirintroduction and have experienced delayed or lost revenues during the periodrequired to correct these errors.

 

Errors, failures, or bugs inproducts released by us could result in negative publicity, product returns,loss of or delay in market acceptance of our products, loss of competitiveposition, or claims by customers or others. Many of our end-user customers use our products in applications that arecritical to their businesses and may have a greater sensitivity to defects inour products than to defects in other, less critical, software products.  In addition, if an actual or perceived breachof information integrity or availability occurs in one of our end-user customer’ssystems, regardless of whether the breach is attributable to our products, themarket perception of the effectiveness of our products could be harmed.  Alleviating any of these problems couldrequire significant expenditures of our capital and other resources and couldcause interruptions, delays, or cessation of our product licensing, which couldcause us to lose existing or potential customers and could adversely affect ouroperating results.

 

***We have grown, and may continue to grow, through acquisitions that giverise to risks and challenges that could adversely affect our future financialresults.***

 

We have in the past acquired, and we expect to acquirein the future, other businesses, business units and technologies.  Acquisitions involve a number of specialrisks and challenges, including:

 

·                  Complexity, time, and costs associatedwith the integration of acquired business operations, workforce, products, andtechnologies into our existing business, sales force, employee base, productlines, and technology.

 

·                  Diversion of management time andattention from our existing business and other business opportunities.

 

·                  Loss or termination of employees,including costs associated with the termination or replacement of thoseemployees.

 

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·                  Assumption of debt or other liabilitiesof the acquired business, including litigation related to alleged liabilitiesof the acquired business.

 

·                  The incurrence of additionalacquisition-related debt as well as increased expenses and working capitalrequirements.

 

·                  Dilution of stock ownership of existingstockholders, or earnings per share.

 

·                  Increased costs and efforts in connectionwith compliance with Section 404 of the Sarbanes-Oxley Act.

 

·                  Substantial accounting charges forrestructuring and related expenses, write-off of in-process research anddevelopment, impairment of goodwill, amortization of intangible assets, andstock-based compensation expense.

 

If integration of our acquired businesses is notsuccessful, we may not realize the potential benefits of an acquisition orundergo other adverse effects that we currently do not foresee.  To integrate acquired businesses, we mustimplement our technology systems in the acquired operations and integrate andmanage the personnel of the acquired operations.  We also must effectively integrate thedifferent cultures of acquired business organizations into our own in a waythat aligns various interests, and may need to enter new markets in which wehave no or limited experience and where competitions in such markets havestronger market positions.

 

Any of the foregoing, and other factors, could harmour ability to achieve anticipated levels of profitability from acquiredbusinesses or to realize other anticipated benefits of acquisitions.  In addition, because acquisitions of hightechnology companies are inherently risky, no assurance can be given that our previousor future acquisitions will be successful and will not adversely affect ourbusiness, operating results, or financial condition.

 

***We utilize “open source” software in some of our products.***

 

The open source softwarecommunity develops software technology for free use by anyone. We have reliedon open source technology for the encryption features in our CuteFTP Pro andSecure FTP Server products. Our reliance on open source code software mayimpose limitations on our ability to commercialize our solution and may subjectus to possible intellectual property litigation.

 

We incorporate a limitedamount of open source code software into our products, and we may use more opensource code software in the future. Open source code may impose limitations onour ability to commercialize our products because, among other reasons, opensource license terms may be ambiguous and may result in unanticipatedobligations regarding our solution, and open source software cannot beprotected under trade secret law. In addition, it may be difficult for us toaccurately determine the developers of the open source code and whether theacquired software infringes third-party intellectual property rights. As aresult, we could be subject to suits by parties claiming ownership of what webelieve to be open source software. Claims of infringement or misappropriationagainst us could be costly for us to defend and could require us to seek toobtain licenses from third parties in order to continue offering our solution,to re-engineer our solution or to discontinue the sale of our solution in theevent re-engineering could not be accomplished on a timely basis. If thisoccurs, our business and operating results could be harmed.

 

In addition, from time totime there have been claims challenging the ownership of open source softwareagainst companies that incorporate open source software into their products. Weuse a limited amount of open source software in our solution and may use moreopen source software in the future. As a result, we could be subject to suitsby parties claiming ownership of what we believe to be open source software.Any of this litigation could be costly for us to defend, hurt our results ofoperations and financial condition or require us to devote additional researchand development resources to change our solution.

 

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***If we lose key personnel we may not be able to execute our businessplan.***

 

Our future success dependson the continued services of key members of our management team. Theseindividuals are difficult to replace because of the intense competition forsimilarly skilled people. In addition, new members of the management team maynot be productive for  weeks or months asthey learn about our products and the administration within GlobalSCAPE.

 

***We may not be able to compete effectively with larger,better-positioned companies, resulting in lower margins and loss of marketshare.***

 

We operate in intenselycompetitive markets that experience rapid technological developments, changesin industry standards, changes in customer requirements, and frequent newproduct introductions and improvements. If we are unable to anticipate or react to these competitive challengesor if existing or new competitors gain market share in any of our markets, ourcompetitive position could weaken and we could experience a drop in revenuesthat could adversely affect our business and operating results.  To compete successfully, we must maintain asuccessful research and development effort to develop new products and servicesand enhance existing products and services, effectively adapt to changes in thetechnology or product rights held by our competitors, appropriately respond tocompetitive strategy, and effectively adapt to technological changes andchanges in the ways that our information is accessed, used, and stored withinour enterprise and consumer markets.  Ifwe are unsuccessful in responding to our competitors or to changing technologicaland customer demands, we could experience a negative effect on our competitiveposition and our financial results.

 

We compete with a variety ofcompanies who have significantly greater revenues and financial resources thanGlobalSCAPE as well as greater personnel and technical resources. For example,CuteFTP and CuteFTP Pro compete with products offered by Ipswitch, Inc.and Microsoft Corporation, EFT competes with products from Sterling Commerceand several other vendors, and WAFS competes with Riverbed Technology whichrecently completed an initial public offering. Large companies may be able to develop new technologies more quicklythan we can, to offer a broader array of products, and to respond more quicklyto new opportunities, industry standards or customer requirements. For example,Sterling Commerce receives approximately $50 million in maintenance contractrevenue annually, providing them with significant resources for productdevelopment and marketing.  Somecompetitors may also be able to adopt more aggressive pricing strategies. Forexample, Ipswitch gives an older version of its file transfer protocol programaway for free for non-commercial use, and Microsoft includes file transferprotocol functionality in its internet browser, which it distributes for free.Increased competition may result in lower operating margins and loss of marketshare. Additional competitors may enter the market and may have significantlygreater capabilities and resources than we do.

 

***It may be difficult for us to recruit software developers and other technicaland management personnel because we are a relatively small company.***

 

We competeintensely with other internet software development and distribution companiesinternationally to recruit and hire from a limited pool of qualified personnel.Some qualified candidates prefer to work for larger, better known companies..In order to attract and retain personnel in a competitive marketplace, webelieve that we must provide a competitive compensation package, including cashand equity-based compensation. The volatility in our stock price may from timeto time adversely affect our ability to recruit or retain employees. Inaddition, we may be unable to obtain required stockholder approvals of futureincreases in the number of shares available for issuance under our equitycompensation plans, and recent changes in accounting rules require us totreat the issuance of employee stock options and other forms of equity-basedcompensation as compensation expense. As a result, we may decide to issue fewerequity-based incentives and may be impaired in our efforts to attract andretain necessary personnel. If we are unable to hire and retain qualifiedemployees, or conversely, if we fail to manage employee performance or reducestaffing levels when required by market conditions, our business and operatingresults could be adversely affected.

 

Key personnelhave left our company in the past and there likely will be additionaldepartures of key personnel from time to time in the future. The loss of anykey employee could result in significant disruptions to our operations,including adversely affecting the timeliness of product releases, thesuccessful implementation and completion of company initiatives, theeffectiveness of our disclosure 

 

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controls and procedures and our internal control over financialreporting, and the results of our operations. In addition, hiring, training,and successfully integrating replacement sales and other personnel could betime consuming, may cause additional disruptions to our operations, and may beunsuccessful, which could negatively impact future revenues.

 

***Our ability to develop our software will be seriously impaired if weare not able to use our foreign subcontractors.***

 

We rely on foreignsubcontractors to help us develop our software. If these programmers decided tostop working for us, or if we were unable to continue using them because ofpolitical or economic instability, we would have difficulty finding comparablyskilled developers. In addition, we would likely have to pay considerably morefor the same work, especially if we used U.S. personnel. If we could notreplace the programmers, it would take us significantly longer to develop ourproducts.

 

***We may incur losses as we attempt to expand our business.***

 

We intend to expand ourbusiness and therefore expect to expend significant additional resources ondeveloping our sales force, developing a more robust reseller program, researchand development, marketing and product development. As a result, we may need toexpend significant resources to accomplish these goals. If we fail tosuccessfully develop and market new products or improve our direct and channelsales results, we may not be able to achieve the necessary revenue growth andmay not be profitable.

 

***Our operations are vulnerable to security breaches that could harm thequality of our products and services or disrupt our ability to deliver ourproducts and services.***

 

Third parties may breach oursystem security and damage our products and services or misappropriateconfidential customer information. This might cause us to lose customers, oreven cause customers to make claims on us for damages to them. In addition, wemay be required to expend significant resources to protect against securitybreaches and/or to address problems caused by such breaches.

 

***Increased customer demands on ourtechnical support services may adversely affect our relationships with ourcustomers and our financial results.***

* *

We offertechnical support services with many of our products. We may be unable torespond quickly enough to accommodate short-term increases in customer demandfor support services. We also may be unable to modify the format of our supportservices to compete with changes in support services provided by competitors orsuccessfully integrate support for our customers. Further customer demand forthese services, without corresponding revenues, could increase costs andadversely affect our operating results.

 

***Our products may expose customers to invasion of privacy, causingcustomer dissatisfaction.***

 

Our Secure FTP Server andEnhanced File Transfer are intended to provide outsiders access to a customer’scomputer, making the customer vulnerable to security breaches, which couldresult in the loss of their privacy or property. Customers suffering invasionsof privacy or other harm could result in customer dissatisfaction and possibleclaims against us for any resulting damages.

 

**RisksRelated to Stock Ownership**

 

***Our stock price is/may be volatile.***

 

The trading price of ourcommon stock has been and could continue to be subject to wide fluctuations inresponse to certain factors, including:

 

Quarter-to-quarter variations in results ofoperations;

 

Our announcements of new products;

 

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Our competitors’ announcements of new products;

 

Our product development or release schedule;

 

General conditions in the software industry; and

 

Investor perceptions and expectations regarding ourproducts, plans and strategic position and those of our competitors andcustomers.

 

In addition, the publicstock markets experience extreme price and trading volume volatility,particularly in high-technology sectors of the market. This volatility hassignificantly affected the market prices of securities of many technologycompanies for reasons often unrelated to the operating performance of thespecific companies. The broad market fluctuations may adversely affect themarket price of our common stock.

 

***Accounting charges may causefluctuations in our quarterly financial results.***

* *

Our financial results may beaffected by non-cash and other accounting charges, including:

 

Amortization of intangible assets, including acquiredproduct rights

 

Impairment of goodwill

 

Stock-based compensation expense

 

Restructuring charges

 

Impairment of long-lived assets

 

For example,in connection with our acquisition of Availl in 2006,  we have recorded approximately $5.2million  of acquired product rights andother intangible assets and $4.6 million of goodwill. We have recorded andwill continue to record future amortization charges with respect to a portionof these intangible assets. In addition, we will evaluate our long-livedassets, including property and equipment, goodwill, acquired product rights,and other intangible assets, whenever events or circumstances occur whichindicate that these assets might be impaired.

 

***We do not pay dividends on our common stock.***

 

We have not paid a dividendon our common stock and have no plan to do so in the near future.  In addition, the terms of our revolvingcredit facility prohibit the payment of dividends.

 

***Anti-takeover provisions in our charter and Delaware law could inhibitothers from acquiring us.***

 

Some of the provisions ofour certificate of incorporation and bylaws and in Delaware law could, togetheror separately:

 

discourage potential acquisition proposals;

 

delay or prevent a change in control; and

 

limit the price that investors may be willing to payin the future for shares of our common stock.

 

In particular, ourcertificate of incorporation and bylaws prohibit stockholders from voting bywritten consent or calling meetings of the stockholders.  We are also subject to Section 203 ofthe Delaware General Corporation Law, which generally prohibits a Delawarecorporation from engaging in any of a 

 

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broadrange of business combinations with any interested stockholder, as defined inthe statute, for a period of three years following the date on which thestockholder became an interested stockholder.

 

***Our directors and executive officers continue to have substantialcontrol over us***

 

Our directors andexecutive officers, together with their affiliates and related persons, beneficially own, in the aggregate, approximately 46% of our outstanding commonstock at December 31, 2007. As a result, these stockholders, actingtogether, would have the ability to control GlobalSCAPE and direct its policiesincluding the outcome of matters submitted to our stockholders for approval,such as the election of directors and any merger, consolidation or sale ofall or substantially all of our assets. In addition, our certificate ofincorporation and bylaws provide for our Board of Directors to be divided intothree classes of directors serving staggered three-year terms.  As aresult, approximately one-third of our Board of Directors will be elected eachyear.

 

***Stockholders’ ownership of our stock may be significantly diluted,affecting the value of the stock.***

 

There were options for 1,960,328 shares outstanding under our employee stockoption plans as March 1,2008, of which 971,493 werevested as of March 1, 2008.We have filed a registration statement under the Securities Act, covering stockissued upon the exercise of options by non-affiliates, and we may file aregistration statement covering options held by affiliates as well. If we donot file a registration statement covering affiliates, affiliates who exercisetheir options may choose to sell the stock under an exemption fromregistration, such as Rule 144 under the Securities Act. The exercise ofthese options and sale of the resulting stock could depress the value of ourstock.

 

**RisksRelate****d****to Legal Uncertainty**

 

***We are vulnerable to claims that our products infringe third-partyintellectual property rights particularly because our products are partiallydeveloped by independent parties.***

 

We may be exposed to futurelitigation based on claims that our products infringe the intellectual propertyrights of others. This risk is exacerbated by the fact that some of the code inour products is developed by independent parties or licensed from third partiesover whom we have less control than we exercise over internal developers. Inaddition, we expect that infringement claims against software developers willbecome more prevalent as the number of products and developers grows and thefunctionality of software programs in the market increasingly overlaps. Claimsof infringement could require us to re-engineer our products or seek to obtainlicenses from third parties in order to continue offering its products. Inaddition, an adverse legal decision affecting our intellectual property, or theuse of significant resources to defend against this type of claim could place asignificant strain on our financial resources and harm our reputation.

 

***We may not be able to protect our intellectual property rights.***

 

Our software code, and tradeand service marks are some of our most valuable assets. Given the global natureof the internet and our business, we are vulnerable to the misappropriation ofthis intellectual property, particularly in foreign markets, such as China andEastern Europe, where laws or law enforcement practices are less developed. Theglobal nature of the internet makes it difficult to control the ultimatedestination or security of our software making it more likely that unauthorizedthird parties will copy certain portions of our proprietary information orreverse engineer the proprietary information used in its programs. If ourproprietary rights were infringed by a third-party, and we did not haveadequate legal recourse, our ability to earn profits, which are highlydependent on those rights, would be severely diminished.

 

***Other companies may own, obtain or claim trademarks that could preventlimit or interfere with our use of our trademarks.***

 

Our various trademarks areimportant to our business. If we were to lose the use of any of our trademarks,our business would be harmed and we would have to devote substantial resourcestowards 

 

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developingan independent brand identity. Defending or enforcing our trademark rights at alocal and international level could result in the expenditure of significantfinancial and managerial resources.

 

###### **Item 1B.  Unresolved Staff Comments**

###### ** **

None.

 

## **Item 2.  Properties**

## ** **

Our corporate office is located in atechnical park in northwest San Antonio called University Park Tech CenterII.  Our lease for the 14,700 square footfacility expires in September 2008. Our annual rent is approximately $191,000. By June 2008, thecorporate office will relocate to a new 21,495 square foot facility alsolocated in northwest San Antonio. The annual rent on the eleven year lease forthis facility will average $584,000. Availl is located in an office park inAndover, Massachusetts called Brickstone Square.  Our lease for the 3920 square foot facilityexpires in October 2009.  Our annualrent is approximately $90,800.  Webelieve these facilities will be suitable for our current business needs andthat suitable additional space will be available on acceptable terms whenneeded.

 

## **Item 3.  Legal Proceedings**

## ** **

We are notcurrently involved in any material pending legal proceedings, but may becomesubject to legal proceedings in the ordinary course of our business.  Such claims may result in the expenditure ofsignificant financial and managerial resources.

 

## **Item 4.  Submission of Matters to a Vote of SecurityHolders**

## ** **

None.

 

###### **Item 4A.  Executive Officers of the Company**

###### ** **

***Kelly E. Simmons.***  Mr. Simmonsserves as GlobalSCAPE’s interim President and Chief Financial Officer andCorporate Secretary. He is a Texas CPA and has over 27 years experience infinancial management including accounting, SEC reporting, mergers andacquisitions, information systems, and investor relations.  From 1988 to2000, Mr. Simmons held various positions, including CFO, with twoaffiliated public companies, US Long Distance and Billing Concepts which grewfrom revenues of $2 million in 1988 to over $500 million in 1999 with over1,200 employees.  Before joining GlobalSCAPE, he was CFO of SinoSwearingen Aircraft Corporation, a manufacturer of light business jets from2005 to 2007.  Mr. Simmons holds a B.S. degree in Finance from LouisianaState University.

 

***Jeffrey Gehring****.***  **Mr. Gehring serves as GlobalSCAPE’s VicePresident of Sales and has been with GlobalSCAPE since November 2004 inthat capacity. Mr. Gehring is responsible for the company’s inbound sales,corporate sales and the reseller program. Mr. Gehring was employed byNextel Partners as Director of Sales in 2004, where he coordinated sales acrossthe country. From 2003 to 2004, Mr. Gehring was Sales Manager forGlobalSCAPE, performing the duties he presently holds. From 2002 to 2003, Mr. Gehringwas a principal in a start up business, ConnectOne Telecom, where he got thebusiness off the ground from the organizational stage to operations. Prior to2002, Mr. Gehring was Director of Sales and Marketing at UDP, a telecommunications billing, ordermanagement and customer service software company. Inaddition to his UDP experience, he has more than 20 years of operational andsales management experience in large and medium-sized businesses, includingUnisys, Bell South and Metrocall. His experience includes strategic planningand implementation for companies that require rapid growth, as well asestablishing processes and policies that foster world-class salesorganizations.

 

***TimothyJ. Barton***.  Mr. Bartonserves as GlobalSCAPE’s Vice President of Operations. He is responsible forproduct definition, development, and testing, and for the GlobalSCAPE ITinfrastructure 

 

18

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and web sitedevelopment.  Mr. Barton joinedGlobalSCAPE in March of 2006 as the Vice President of Product Developmentand Quality Assurance. Prior to joining GlobalSCAPE, he served as ChiefArchitect of Secure Logix Corporation, where he was responsible forrequirements definition and product design. Mr. Barton was employed bySecure Logix form 1998 to 2006 and held positions of Director of SoftwareEngineering and ETM Development Manager prior to becoming Chief Architect in2005. Prior to Secure Logix, Mr. Barton held positions of Research Analystand Senior Research Analyst at Southwest Research Institute where he developedsoftware for the US Military and NASA. Mr. Barton holds a B.S. in ComputerScience from Slippery Rock University.

 

***GregoryHoffer.***  Mr. Hofferserves as Vice President and Chief Technology Officer and has been employed byGlobalSCAPE since May 2000. Mr. Hoffer is responsible for overseeingall software development and Web development at GlobalSCAPE. Before joiningGlobalSCAPE, Mr. Hoffer held software development positions at theconsulting firm of Marotz, Inc. Prior to that, Mr. Hoffer managed theIT department and was head of the computer science department at Saint Mary’sHall, a private school in San Antonio, Texas. Mr. Hoffer received abachelor’s degree in computer science from Trinity University and is pursuinghis master’s degree in computer science.

 

***K.Earl Posey.  ***Mr. Posey serves as GlobalSCAPE’s Vice-Presidentof Investor Relations/Business Operations. In this capacity he is responsiblefor mergers and acquisitions, investor relations and human resources. Mr. Posey’sbackground includes time spent with Black and Decker and Nortel Networks invarious positions in human resources and manufacturing. In addition, he hasbeen a professor at the university level teaching courses in management andlabor relations. Immediately prior to joining GlobalSCAPE Mr. Posey wasmanaging principal and founder of Gossyppia Partners, a consultancy thatspecialized in the development of strategic plans for corporations. Mr. Poseydid his graduate and post-graduate work at Vanderbilt University.

 

***Douglas Conyers.  ***Mr. Conyersserves as Vice President of Professional Services and has been employed byGlobalSCAPE since March 2007. Mr. Conyers is responsible for totalcustomer satisfaction as they look to enhance and customize GlobalSCAPEsolutions based on their company’s requirements. Prior to joining GlobalSCAPE,he held positions as Chief Architect, Director of Systems Engineering andSenior Software Engineer for SecureLogix Corp. Previous to that, he heldsoftware engineering positions with both the Southwest Research Institute andParadigm Simulations. Conyers has a B.S. in Computer Science from TrinityUniversity.

 

# PART II

#  

## **Item 5.    Market for Registrant’s Common Equity,Related Stockholder Mattersand Issuer Purchases of Equity**

## ** **

                Our common stock is listed onthe American Stock Exchange under the symbol GSB and began trading on July 19,  2007. As of  December 31, 2007,there were approximately 2,371 holders of record of our common stock.  GlobalSCAPE stock began trading on February 15,2002.  The table below sets forth thequarterly high and low bid prices for our common stock for the last two fiscalyears.

##  

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### ** **

### **Common Stock Price**

 
| ** **                                | ** ** | **2006** | ** ** | **2007** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter (ending  March 31)     |       | $        | 3.20       |     | $          | 1.05 |   | $ | 3.35 |   | $ | 2.63 |   |
| Second Quarter (ending  June 30)     |       | $        | 3.75       |     | $          | 2.21 |   | $ | 4.00 |   | $ | 2.13 |   |
| Third Quarter (ending  September 30) |       | $        | 3.25       |     | $          | 2.50 |   | $ | 5.90 |   | $ | 2.85 |   |
| Fourth Quarter (ending  December 31) |       | $        | 3.50       |     | $          | 2.16 |   | $ | 7.71 |   | $ | 3.85 |   |
|                                      |       |     |       |     |       |   |   |   |   |
| Annual                                    |       | $        | 3.75       |     | $          | 1.05 |   | $ | 7.71 |   | $ | 2.13 |   |

 

Theclosing  price on March 14, 2008 was$2.15.  All prices listed above prior to July 19,2007 are over-the-counter market quotations which reflect inter-dealer prices,without retail mark-up, mark-down, or commission and may not necessarilyrepresent actual transactions.

 

We have neverpaid a cash dividend, and do not expect to do so in the foreseeablefuture.  The terms of our revolvingcredit facility prohibit the payment of dividends.

 

 

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**Item 6.  Selected Financial Data**

 

The selectedfinancial data presented below for the years ended December 31, 2003,2004, 2005, 2006 and 2007 are derived from our audited financial statements.

 

**Statement of Operations Data:**

 
| ** **                                                                            | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Revenues:                                                                             |       |       |       |       |       |       |       |       |       |       |       |
| Software product revenues                                                             |       | $          | 4,734,105  |       | $          | 4,713,191  |       | $          | 6,096,045  |       | $          | 9,395,445 |   | $ | 14,826,197 |   |
| Maintenance and support (net of deferred revenue)                                     |       | 113,014    |       | 217,469    |       | 582,570    |       | 1,578,236  |       | 3,534,144  |       |
| Total revenues                                                                        |       | 4,847,119  |       | 4,930,660  |       | 6,678,615  |       | 10,973,681 |       | 18,360,341 |       |
| Operating expenses:                                                                   |       |       |       |       |       |       |       |       |       |       |       |
| Cost of revenues (exclusive of depreciation and amortization shown  separately below) |       | 532,910    |       | 371,242    |       | 279,964    |       | 468,515    |       | 250,439    |       |
| Selling, general and administrative                                                   |       | 3,613,759  |       | 3,456,598  |       | 3,986,047  |       | 6,142,299  |       | 10,049,430 |       |
| Research and development                                                              |       | 945,395    |       | 727,423    |       | 869,155    |       | 1,230,400  |       | 1,919,253  |       |
| Depreciation and amortization                                                         |       | 390,154    |       | 171,834    |       | 98,071     |       | 99,213     |       | 279,573    |       |
| Total operating expenses                                                              |       | 5,482,218  |       | 4,727,097  |       | 5,233,237  |       | 7,940,427  |       | 12,498,695 |       |
| Income (loss) from  operations                                                        |       | (635,099   | )          | 203,563    |       | 1,445,378  |       | 3,033,254  |       | 5,861,646  |       |
| Interest expense, net                                                                 |       | (5,016     | )          | (1,651     | )          | (620       | )          | (128,362   | )          | (34,893    | )          |
| Interest income                                                                       |       | —     |       | —     |       | 10,685     |       | 60,639     |       | 95,808     |       |
| Gain (loss) on sale of  assets                                                        |       | (1,486     | )          | —     |       | 1,242      |       | 619        |       | 365        |       |
| Other income, net                                                                     |       | —     |       | —     |       | —     |       | —     |       | 2,269      |       |
| Income (loss) before  provision for income taxes                                      |       | (641,601   | )          | 201,912    |       | 1,456,685  |       | 2,966,150  |       | 5,925,195  |       |
| Total income tax provision  (benefit)                                                 |       | 1,400      |       | 1,489      |       | 9,981      |       | 1,003,618  |       | 2,002,686  |       |
| Net income (loss)                                                                     |       | $          | (643,001   | )          | $          | 200,423    |       | $          | 1,446,704  |       | $          | 1,962,532 |   | $ | 3,922,509 |   |
| Net income (loss) per common  share - basic                                           |       | $          | (0.05      | )          | $          | 0.01       |       | $          | 0.10       |       | $          | 0.13 |   | $ | 0.23 |   |
| Net income (loss) per common share - assuming dilution                                |       | $          | (0.05      | )          | $          | 0.01       |       | $          | 0.09       |       | $          | 0.12 |   | $ | 0.21 |   |
|                                                                                  |       |       |       |       |       |       |       |       |       |       |       |
| **Balance Sheet Data:**                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                  |       |       |       |       |       |       |       |       |       |       |       |
| ** **                                                                            | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|                                                                                  |       |       |       |       |       |       |       |       |       |       |       |
| Cash and cash equivalents                                                             |       | $          | 342,433    |       | $          | 572,959    |       | $          | 2,029,473  |       | $          | 4,632,666 |   | $ | 5,214,479 |   |
| Working capital                                                                       |       | $          | 19,203     |       | $          | 341,749    |       | $          | 1,741,354  |       | $          | 2,749,266 |   | $ | 4,256,164 |   |
| Total assets                                                                          |       | $          | 918,278    |       | $          | 971,857    |       | $          | 2,901,671  |       | $          | 16,367,749 |   | $ | 18,108,783 |   |
| Long term debt including capital lease obligations, less current  portion             |       | $          | —     |       | $          | —     |       | $          | —     |       | $          | 3,076,698 |   | $ | — |   |
| Cash dividends per common  share                                                      |       | $          | —     |       | $          | —     |       | $          | —     |       | $          | — |   | $ | — |   |

 

 

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## **Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operation**

## ** **

The followingManagement’s Discussion and Analysis of Financial Condition and Results ofOperations should be read in conjunction with our financial statements for theyears ended December 31, 2005, 2006 and 2007 and related notes includedelsewhere in this document.

 

**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 Management Products — Our FileManagement products are best known for the “CuteFTP” product line. Theyprimarily consist of products that help users securely move and copy files onthe internet. A substantial portion of our revenues are derived from licensingour File Management products. Some of our products encrypt the transfers forsecurity using technology similar to a Web browser. The products consist ofthree product categories; client, server and compression transfer. Our FileManagement product line includes CuteFTP Home, Cute FTP Professional, SecureFTPServer, and Enhanced File Transfer.

 

·                  Wide-Area File System (WAFS) Products— Our WAFS products provide a file sharing and collaboration solution overmultiple sites.  By keeping all dataupdated on each location’s file server, each site has instant access to thevery latest version.  Our WAFS productshelp ensure that no one can ever open an old file version without userconflicts. Changes made to data on any server are mirrored on all otherservers.

 

·                  Continuous Data Protection (CDP)Products — Our CDP products consolidate remote backup for file servers.  As files change, the servers backup in realtime to the customer’s backup site which can be at the same or a remotelocation.   The backup server can keepany number of past versions of each file (and deleted files) which gives thecustomer immediate restore, as well as the ability to perform point-in-timesnapshots.

 

We believe that thefuture success of our business will be dependent upon our ability to improveour current products and to introduce new products, through research and development,innovations by our employees, strategic partnerships, and acquisitions. Weintend to   continue enhancing our filetransfer products to meet the demands of both individual and enterprise users,while improving the security features of our current product line, and toexpand into growing markets through the acquisition of compatible companies andproducts and through strategic partnerships. For example, in 2007, weintroduced upgrades to EFT 5.0,  CuteFTP8.0, the Secure Ad Hoc Transfer module, and the HS-PCI module ensuringcompliance with DSS  In 2006, we acquiredAvaill, a leading provider of Wide-Area File System (WAFS) collaboration andcontinuous data protection (CDP) products as part of this strategy.  This acquisition expanded our technology baseinto data replication, acceleration of file transfer, sharing/collaboration and

 

 

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continuous data backup and recovery.  We believe that these products have give usentry into two large and rapidly growing markets. Based upon estimates byGartner, Inc., and other consulting groups in our markets, we believe thatthe WAN optimization/WAFS market is currently $300 million annually and growingat 20% - 30% per year, and the CDP market is of similar size but in the earlystages of adoption and growing rapidly. In addition, we believe that the WAFS and CDP products are highlycomplementary to our traditional Secure File Transfer products facilitatingcross sales and new customer penetration. As described below, our WAFS/CDPrevenues have not increased as much as originally anticipated due to management’sdecision to delay the aggressive marketing of those products to our existingcustomer base and to the market in general as we had initially planned.  The amount of time required to makeimprovements to our WAFS and CDP products that we believe are necessary hasbeen greater than we had expected.

 

##### **Liquidityand Capital Resources**

##### ** **

The Companycontinues to enjoy a strong working capital position resulting from solid netprofits from operations over the last fifteen consecutive quarters, includingthe quarter ended December 31, 2007. ** **At December 31, 2007, our networking capital position was $4.3 million, which consists of current assetsless current liabilities. We had cash available of $5.2 million and we continueto generate 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 relyheavily on cash flows from operations to fund our business a a result of theprofitable history of the company.

 

Our capitalrequirements principally relate to our need to enhance our existing productsand to develop new products, which primarily consist of research anddevelopment expenses and expenses for people and the elements that supporttheir work. By comparison, we do not spend large sums on capital equipment.Over the past three years, we spent $103,304 in 2005, $150,926 in 2006 and$175,779 in 2007 for equipment. Capital expenditures will be higher in 2008 asa result of the planned move to new office space.

 

Our totalrevenues increased 67% in 2007 when compared to 2006. The principal drivers ofour sales are the enterprise level server products for MFT, which are EFTServer and SecureFTP Server. These products accounted for 68% of our sales in2007, not including maintenance and support agreements. Prior to 2006, we werelargely dependent upon sales of CuteFTP Home and CuteFTP Professional, whichaccounted for 51%****of our revenue in the year ended December 31,2005, and represented larger percentages of sales in earlier years. The actualsales of these products have remained relatively flat over the three yearsended December 31, 2007 while becoming an increasingly smaller portion ofour total revenue. In 2007, sales of these products represented  approximately 19.3 % of our total revenues

 

Since ourprincipal sources of capital are cash on hand and cash flow from operations, tothe extent that sales decline, our cash flow from operations will alsodecline.  If sales decline or if our  liquidity is otherwise under duress,management could substantially reduce personnel and personnel-related costs,reduce or substantially eliminate capital expenditures and/or reduce orsubstantially 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 credit arrangements inorder to finance future acquisitions or licensing activities.

 

Net cashprovided by operating activities was $1,549,636, $2,604,274 and $5,213,644 in2005, 2006 and 2007, respectively.  Thisincrease in cash for each year was generated from the profitable operations ofour business. Some of the major non-cash items that were charged against netincome over this period are depreciation and amortization, stock-basedcompensation and deferred revenues. While these items are expensed according toGenerally Accepted Accounting Principles, the cash impact from these chargeshas occurred or will occur in other accounting periods and the differencereflects a positive impact on cash in the Consolidated Statements of CashFlows. There is also a recurring timing difference between the time we record salesand the time we actually receive payment for those sales. The increase inAccounts Receivables during this period serve to negatively impact the cashfrom operations in the 

 

 

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Consolidated Statements of Cash Flows, and the Deferred Revenues duringthis period serve to positively impact the cash from operations in thosestatements.

 

Our financingactivities over the past three years have primarily related to  funding the acquisition of Availl. In 2006,we used $7.6 million in cash to acquire Availl. The cash used to make thisacquisition came from a $5 million term loan from Silicon Valley Bank. Werepaid $400,000 of the loan in 2006 and $4.6 million in 2007 from the cashgenerated from our operations and a stock offering completed in November 2006.We have also sold stock through the exercise of employee stock options. Wereceived cash from stock option exercises of $8,940, $28,968, and $681,656 for2005, 2006, and 2007, respectively. We also used our own cash for therepurchase of treasury our common stock, in the amount of $527,528 in 2007.

 

At December 31,2007, our principal commitments consisted of obligations outstanding underoperating leases as well as royalty agreements with third parties, federalincome tax and trade accounts payable.  The commitments related to royalty agreements are contingent on salesvolumes.  We plan to continue to expendsignificant resources on product development in future periods and may also useour cash to acquire or license technology, products or businesses related toour current business.  We will move to anew facility in 2008. We will likely purchase significant fixed assets andlease hold improvements in connection with moving into this facility.

 

In order to financethe 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 customarycovenants including covenants relating to maintaining legal existence and goodstanding, complying with applicable laws, delivery of financial statements,maintenance of inventory, payment of taxes, maintaining insurance, andprotection of intellectual property rights. GlobalSCAPE 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:

 

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

 

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

 

The loan agreement also contains customary events of default includingthe failure to make payments of principal and interests, the breach ofprincipal and interests, the breach of any covenants, the occurrence of amaterial adverse change, certain bankruptcy and insolvency events, the breachof other agreements creating indebtedness of $50,000 or more and the entry of ajudgment of $50,000 or more against GlobalSCAPE or any of itssubsidiaries.  At March 21, 2008, wewere in compliance with these covenants.

 

The followingtable summarizes our contractual obligations at December 31, 2007,consisting of future minimum capital lease payments and future minimum paymentsunder operating leases:

 

 

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| ** **                  | ** ** | **Payments Due by Fiscal Year** | ** ** |
|-----------------------------|------------|---------------------------------|------------|
| **Contractual Obligations** | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Operating Lease             |       | $                               | 578,181    |   | $ | 606,465 |   | $ | 538,587 |   | $ | 4,939,948 |   | $ | 6,663,181 |   |
| Equipment Leases            |       | $                               | 7,392      |   | $ | 7,392 |   | $ | 7,392 |   | $ | 9,056 |   | $ | 31,232 |   |
| Deferred Compensation       |       | $                               | 119,711    |   | $ | — |   | $ | — |   | $ | — |   | $ | 119,711 |   |
| Total Cash Obligations      |       | $                               | 705,284    |   | $ | 613,857 |   | $ | 545,979 |   | $ | 4,949,004 |   | $ | 6,814,124 |   |

 

##### **CriticalAccounting Policies**

##### ** **

***Use ofEstimates***

* *

Management’sDiscussion and Analysis of Financial Condition and Results of Operations isbased upon the Company’s financial statements, which have been prepared inaccordance with accounting principles generally accepted in the UnitesStates.  The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the reported amount of assets and liabilities.  On an ongoing basis, management evaluates itsestimates and judgments, including those related to revenue recognition,allowance for doubtful accounts receivable, long-lived and intangible assets,  valuation of stock based compensation,  income taxes and contingencies.  Management bases its estimates on historicalexperience, observable trends, and various other assumptions that are believedto be reasonable under the circumstances. Management uses this information to make judgments about the carryingvalues of assets and liabilities that are not readily apparent form othersources.  Actual results may differ fromthe estimates under different assumptions or conditions.

 

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

 

***RevenueRecognition***

* *

Our revenue is generatedprimarily by licensing our software products and providing support for thoseproducts.  Revenues are comprisedof the gross selling price of the software, including shipping charges and theearned portion of support and maintenance agreements.  In periods where we had revenue fromadvertising, we recognized the net proceeds received from advertisers asrevenue.  The Company recognizes revenuein accordance with the American Institute of Certified Public AccountantsStatement of Position (“SOP”) 97-2, *SoftwareRevenue Recognition*, as modified by SOP 98-9, *Modification of SOP 97-2, Software RevenueRecognition, With Respect to Certain Transactions*.

 

Revenues fromthe sale of software products are recognized and completely earned uponshipment or electronic delivery of the product provided that persuasiveevidence of an arrangement exists, collection is probable, payment terms are fixedand determinable and no significant obligations remain.  The majority of our sales are deliveredelectronically via email.

 

We also selltechnical support and maintenance agreements (post contract customer support “PCS”),which are sometimes bundled with the software. When vendor specific objective evidence (“VSOE”) of fair valueexists for all elements in a multiple element arrangement, revenue is allocatedto each element based on the relative fair value of each of the elements.  VSOE of fair value is established by theprice charged when the same element is sold separately.  In a multiple element arrangement wherebyVSOE of fair value of all undelivered elements exists but VSOE of fair valuedoes not exist for one or more delivered elements, revenue is recognized usingthe residual method.  Under the residualmethod, the fair value of the undelivered elements is deferred and theremaining portion of the arrangement fee is recognized as revenue, assumingcollection is probable.  Revenueallocated to PCS is recognized ratably over the contractual term, typically oneyear.  We sometimes sell installation andtraining services with our PureCMS and EFT products.  Revenue for installation and training isrecognized when performed.

 

The Companybegan selling technical support and maintenance services for some of itssoftware products in 2001.  With higherpriced support and maintenance for our enterprise class software products 

 

 

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and our efforts to renew agreements upon their expiration, sales ofthese agreements grew in 2005, 2006 and 2007 to $811,000, $2,032,000 and$4,486,000 respectively.  Growth in thesales of maintenance and support agreements may result in the deferredrecognition of a significant amount of revenue in future periods.

 

***Allowance for Doubtful Accounts***

*** ***

We providecredit, in the normal course of business, to a number of companies and performongoing evaluations of our credit risk. We require no collateral from our customers and we estimate theallowance for uncollectible accounts based on our historical experience andcurrent credit evaluations.  No singlecustomer accounted for more than 2% of net revenues in 2006.  We had one customer that accounted forapproximately 2.7% of net revenues in 2005, and one customer that accounted for14.5% of net revenues in 2007.

 

***Valuation of Long-Lived and Intangible Assets***

* *

The Companyassesses the impairment of long-lived and intangible assets whenever events orchanges in circumstances indicate that the carrying value may not berecoverable.  Factors consideredimportant which could trigger an impairment review included the following:  significant underperformance relative tohistorical or projected future cash flows; significant changes in the manner ofuse of the assets or the strategy for the overall business; and significantnegative industry trends.  Whenmanagement determines that the carrying value of long-lived and intangibleassets may not be recoverable, impairment is measured based on the excess ofthe assets’ carrying value over the estimated fair value.  No impairment was recognized in 2005, 2006 or2007.

 

***Stock-BasedCompensation***

* *

Effective January 1,2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment” (SFAS No.123R) requiring thatcompensation cost relating to share-based payment transactions be recognized inthe financial statements. The cost is measured at the grant date, based on thecalculated fair value of the award, and is recognized as an expense over theemployee’s requisite service period (generally the vesting period of the equityaward). Prior to January 1, 2006, we accounted for share-basedcompensation to employees in accordance with Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25),and related interpretations. We also followed the disclosure requirements ofStatement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation”, as amended by Statement of Financial AccountingStandards No. 148, “Accounting for Stock-Based Compensation-Transition andDisclosure”. We adopted SFAS No. 123R using the modified prospectivemethod and, accordingly, financial statement amounts for prior periodspresented in this Form 10-K have not been restated to reflect the fairvalue method of recognizing compensation cost relating to stock options.

 

See note 9 tothe financial statements under the heading “Stock Options and Stock BasedCompensation.”

 

***Researchand Development***

*** ***

Research anddevelopment expenses include all direct costs, primarily salaries for personneland expenditures with external development sources, related to the developmentof new products and significant enhancements to existing products and areexpensed as incurred until such time as technological feasibility isachieved.  For the years 2005, 2006 and2007, we spent approximately $869,000, $1,230,000 and $1,919,000, respectively,on research and development.  No researchand development expenses were capitalized in 2005, 2006 or 2007.

 

***Income Taxes***

 

GlobalSCAPEaccounts for income taxes using the liability method in accordance withStatement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*.  The liability method provides 

 

 

26

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that the deferred tax assets and liabilities are recorded based on thedifference between the tax bases of assets and liabilities and their carryingamount for financial reporting purposes, as measured by the enacted tax ratesand laws that will be in effect when the differences are expected toreverse.  Deferred tax assets andliabilities are carried on the balance sheet with the presumption that they willbe realizable in future periods when pre-tax income is generated.  GlobalSCAPE had a deferred tax asset of$51,983, $8,724, and $440,632 at December 31, 2005, 2006 and 2007,respectively

 

Statement of FinancialAccounting Standards (SFAS) No. 109 requires a valuation allowance toreduce the deferred tax assets reported if, based on the weight of theevidence, it is more likely than not that some portion or all of the deferredtax assets will not be realized.  Afterconsideration of all of the evidence, both positive and negative, management determinedthat no allowance was considered necessary at December 31, 2005, 2006 or2007.

 

##### **Comparisonof Year Ended December 31, 2007 to Year Ended December 31, 2006**

 

| ** **                           | ** ** | **2007**   | ** ** | **2006**  | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|--------------------------------------|------------|------------|------------|-----------|------------|-------------------|------------|--------------|------------|
| Software product revenues            |       | $          | 18,360,341 |      | $          | 10,973,681        |       | $            | 7,386,660  |   | 67.31 | % |
|                                 |       |       |       |      |       |              |       |         |       |
| Cost of revenues                     |       | 250,439    |       | 468,515   |       | (218,076          | )          | (46.55       | )%         |
| Selling, general and  administrative |       | 10,049,430 |       | 6,142,299 |       | 3,907,131         |       | 63.61        | %          |
| Research and development  expenses   |       | 1,919,253  |       | 1,230,400 |       | 688,853           |       | 55.99        | %          |
| Depreciation and  amortization       |       | 279,573    |       | 99,213    |       | 180,360           |       | 181.79       | %          |
| Total operating expense              |       | 12,498,695 |       | 7,940,427 |       | 4,558,268         |       | 57.41        | %          |
| Income from operations               |       | 5,861,646  |       | 3,033,254 |       | 2,828,392         |       | 93.25        | %          |
| Other Income (expense)               |       | 63,549     |       | (67,104   | )          | 130,653           |       | (194.70      | )%         |
| Income tax expense                   |       | 2,002,686  |       | 1,003,618 |       | 999,068           |       | 99.55        | %          |
| Net Income                           |       | $          | 3,922,509  |      | $          | 1,962,532         |       | $            | 1,959,977  |   | 99.87 | % |

 

***Revenue.***  We derive our revenues primarily fromsoftware sales.  Revenue is comprised ofthe gross selling price of software, including shipping charges and the earnedportion of support and maintenance agreements. Revenues increased from $10,973,681 in 2006 to $18,360,341 in 2007. Theincrease of $7.4 million, or approximately 67%, in revenues was the result ofincreased sales of our WAF Systems, Secure FTP Server Systems and EFT products.In addition, in May 2007, we receiveda substantial order from the U.S. Army for Secure FTP Server, SSH Module andCuteFTP Professional software licenses, with maintenance, starting at aninitial purchase of $2.5 million in software licenses and $300,000 in initialmaintenance and support revenue. The fully deployed contract has maintenanceand support valued at $1 million annually This sale representedapproximately 14.5% of our revenues in 2007.

 

 

27

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The following table reflects revenue by product including the relatedmaintenance and support for each product:

 
| ** **                                                                                              | ** ** | **Revenue for the Year Ending December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **Product**                                                                                             | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
|                                                                                                    |       |                                              |       |   |   |   |   |   |   |
| CuteFTP Professional                                                                                    |       | $                                                 | 2,438,085  |   | 13.28 | % | $ | 2,405,970 |   | 21.92 | % |
| CuteFTP Home                                                                                            |       | 1,102,458                                         |       | 6.00 | % | 1,044,593 |   | 9.52 | % |
| Enhanced File Transfer                                                                                  |       | 6,691,982                                         |       | 36.45 | % | 4,170,938 |   | 38.01 | % |
| SecureFTP Server                                                                                        |       | 5,769,020                                         |       | 31.42 | % | 2,521,994 |   | 22.98 | % |
| Wide-Area File Systems                                                                                  |       | 2,711,605                                         |       | 14.77 | % | 600,373 |   | 5.47 | % |
| Continuous Data Protection                                                                              |       | 187,996                                           |       | 1.02 | % | 34,298 |   | 0.31 | % |
| All Others                                                                                              |       | 411,274                                           |       | 2.24 | % | 649,219 |   | 5.92 | % |
| Deferred Revenue  adjustment                                                                            |       | (952,079                                          | )          | (5.19 | )% | (453,703 | ) | (4.13 | )% |
| Total Operating Revenues                                                                                |       | $                                                 | 18,360,341 |   | 100.00 | % | $ | 10,973,682 |   | 100.00 | % |
|                                                                                                    |       |                                              |       |   |   |   |   |   |   |   |   |
| Gross maintenance and support included above before recognition of  the net adjustment to defer revenue |       | $                                                 | 3,534,144  |   | 19.25 | % | $ | 1,578,236 |   | 14.38 | % |

 

WAFS and CDPproducts accounted for approximately 15.8% of total revenue for 2007. Therewere only $683,934 in sales for these products in 2006 because we did not beginselling these products until after completing the Availl acquisition in September 2006.The WAFS/CDP revenues have not increased as originally anticipated due tomanagement’s decision to delay the aggressive marketing of those products toour existing customer base and to the market in general as soon as we hadinitially planned.  The amount of timerequired to make improvements to our WAFS and CDP products that we believe arenecessary has been greater than we had expected.  We believe that good progress is currentlybeing made on the product improvements and we anticipate a more aggressivesales effort for these products in 2008.

 

Sales of ourSecureFTP Server and Enhanced File Transfer products grew by 86% in 2007 to$12.5 million, from $6.7 million in 2006. This increase was the resultof the continuing  emphasis of ourinternal sales group to market and sell these products to meet the needs ofbusinesses to transfer files in a secure fashion using business or enterpriselevel software as well as the $2.5 million sale to the US Army described above.  In total, our Secure FTP Server and EnhancedFile Transfer products  representedapproximately 68% of our total revenues in 2007 as compared to 61% in2006.  Revenues from CuteFTP Home andCuteFTP Professional increased by 3% and accounted for approximately 31% and19% of total revenues 2006 and 2007, respectively. Those changes were the result of thecontinuing maturity of CuteFTP and CuteFTP Pro, and the availability of lowcost alternatives to occasional users.

 

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 124% from$1,578,236  in 2006 to $3,534,144  in 2007, net of deferred revenue.  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.

 

***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 approximately47% between periods from $468,515 in 2006 to $250,439 in 2007. Royaltyexpenses, the major component of cost of revenues, declined as did the sale ofsome of our internet products primarily as the result of the non-renewal of thethird party software distribution agreement with Hannon Hill, whose products,Cascade Serve and Publish XML, had previously generated a significant revenuecontribution and related royalty expense. Royalties that we pay on software products licensed from third parties,which we resell, are expensed as a cost of sales when the software product issold or 

 

 

28

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earlier if the recoverability of any prepaid royalties is indoubt.  Cost of sales as a percent oftotal revenues was 4.3% and 1.4% respectively for 2006 and 2007.

 

***Selling, General andAdministrative.*** Selling, general and administrative expenses consist primarily ofpersonnel and related expenses, marketing, customer support, professional fees,rent, bad debt and credit card transaction fees.  Selling, general and administrative expensesincreased by approximately 64% from $6,142,299 in 2006 to $10,049,432 in2007.  As a percentage of revenue,SG&A decreased to 55% of revenue in 2007 from 56% of revenue in 2006.  A major portion of this increase wasattributable to increased wages and commissions which included a 12 personemployee headcount increase.  Anotherlarge portion of the SG&A increase was caused by stock based compensationexpense for 2007 required by SFAS 123(R) totaling $937,546 in 2007compared to $497,895 in 2006.

 

***Research andDevelopment.*** Research and development expenses increased by approximately 56% from$1,230,400  in 2006 to $1,919,253 in2007. Virtually all of the increase was caused by increases in wages, fringebenefits and contract labor.  A majorportion of the increased wages and fringe benefit cost was the result of reclassificationof a Vice President level employee from marketing to R&D.   Included in the research and developmentexpenses, external development costs increased approximately 16% from 2006 to2007, $469,565 to $545,183 respectively.

 

***Depreciation andAmortization.*** Depreciation and amortization expense consists of depreciation expenserelated to our fixed assets. Depreciation and amortization expense increased by $180,360, orapproximately 182%, year over year. Depreciation expense has increased due to replacement of equipment atend of life cycle and as required for new employees.

 

***Other Income(Expense), Net.*** In 2006, we had interest expense of $128,362 related primarily to thefinancing of the Availl acquisition, interest income of $60,639 as a result ofinterest earned on excess cash balances and a gain of $619 on sale of fullydepreciated fixed assets. During 2007, we had interest expense of $34,893primarily related to the financing of the Availl acquisition, interest incomeof $95,808 as a result of interest earned on excess cash balances and a gain of$365 on sale of fully depreciated fixed assets.

 

***Income Taxes.***  The provision for state income taxes in 2006was $3,533 and the provision for federal income taxes was $1,000,085 in2006.  GlobalSCAPE’s effective income taxrate is 34.5% and differs from the federal rate primarily because of statetaxes.  The provision for state incometaxes in 2007 was $114,054 and the provision for federal income taxes was$1,888,632 in 2007.  GlobalSCAPE’seffective income tax rate is 33.8% and differs from the federal rate primarilybecause of prior period credits for EIE Exclusion, Research &Development and amended returns totaling $130,976.

 

***Net Income.***  In 2007, net income was primarily the resultof continued growth in our Enhanced File Transfer product and our Secure FTPServer product, resulting in an increase in revenue, while we continued tocontrol expenses. In addition, our 2007 income tax expense was reduced bytaking advantage of Research & Development Credits andExtra-territorial Income Exclusion Credits for 2004, 2005, and 2006.  In 2007, we paid an additional $999,068 inincome taxes and still increased net income by $1,959,977 over the prioryear.  The increase in net income was theresult of continued growth of sales of the Enhanced File Transfer and SecureFTP Server products.

 

 

29

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##### **Comparisonof Year Ended December 31, 2006 to Year Ended December 31, 2005**

 
| ** **                                    | ** ** | **2006**  | ** ** | **2005**  | ** ** | **$**     | ** Change** | ** ** | **% Change** | ** ** |
|-----------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------------|------------|--------------|------------|
| Software product revenues                     |       | $         | 10,973,681 |      | $          | 6,678,615 |             | $          | 4,295,066    |       | 64.31 | % |
|                                          |       |      |       |      |       |      |             |       |         |
| Cost of revenues                              |       | 468,515   |       | 279,964   |       | 188,551   |             | 67.35      | %            |
|                                          |       |      |       |      |       |      |             |       |         |
| Selling, general and  administrative expenses |       | 6,142,299 |       | 3,986,047 |       | 2,156,252 |             | 54.09      | %            |
| Research and development  expenses            |       | 1,230,400 |       | 869,155   |       | 361,245   |             | 41.56      | %            |
| Depreciation and  amortization                |       | 99,213    |       | 98,071    |       | 1,142     |             | 1.16       | %            |
| Total operating expense                       |       | 7,940,427 |       | 5,233,237 |       | 2,707,190 |             | 51.73      | %            |
| Income from operations                        |       | 3,033,254 |       | 1,445,378 |       | 1,587,876 |             | 109.86     | %            |
| Other Income (expense)                        |       | (67,104   | )          | 11,307    |       | (78,411   | )                | (693.47    | )%           |
| Income tax expense                            |       | 1,003,618 |       | 9,981     |       | 993,637   |             | 9,955.29   | %            |
| Net Income                                    |       | $         | 1,962,532  |      | $          | 1,446,704 |             | $          | 515,828      |       | 35.66 | % |

 

***Revenue.***  We derive our revenues primarily fromsoftware sales.  Revenue is comprised ofthe gross selling price of software, including shipping charges and the earnedportion of support and maintenance agreements. Revenues increased from $6,678,615 in 2005 to $10,973,681 in 2006. Theincrease of $4.3 million or approximately 64% in revenues was the result ofincreased sales of our Secure FTP Server Systems and EFT products.

 

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

 
| ** **                                                                                              | ** ** | **Revenue for the Year Ending December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **Product**                                                                                             | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
|                                                                                                    |       |                                              |       |   |   |   |   |   |   |
| CuteFTP Professional                                                                                    |       | $                                                 | 2,405,970  |   | 21.92 | % | $ | 2,285,416 |   | 34.22 | % |
| CuteFTP Home                                                                                            |       | 1,044,593                                         |       | 9.52 | % | 1,130,357 |   | 16.93 | % |
| Enhanced File Transfer                                                                                  |       | 4,170,938                                         |       | 38.01 | % | 1,407,792 |   | 21.08 | % |
| SecureFTP Server                                                                                        |       | 2,521,994                                         |       | 22.98 | % | 1,503,530 |   | 22.51 | % |
| Wide-Area File Systems                                                                                  |       | 600,373                                           |       | 5.47 | % | — |   | 0.00 | % |
| Continuous Data Protection                                                                              |       | 34,298                                            |       | 0.31 | % | — |   | 0.00 | % |
| All Others                                                                                              |       | 649,218                                           |       | 5.92 | % | 579,548 |   | 8.68 | % |
| Deferred Revenue  adjustment                                                                            |       | (453,703                                          | )          | (4.13 | )% | (228,028 | ) | (3.41 | )% |
| Total Operating Revenues                                                                                |       | $                                                 | 10,973,681 |   | 100.00 | % | $ | 6,678,615 |   | 100.00 | % |
| Gross maintenance and support included above before recognition of  the net adjustment to defer revenue |       | $                                                 | 1,578,236  |   | 14.38 | % | $ | 582,570 |   | 8.72 | % |

 

WAFS and CDPproducts accounted for approximately 5.8% of total revenue for 2006. There wereonly $634,671 in sales for these products in 2006 as we did not begin sellingthese products until after completing the Availl acquisition in September 2006.

 

Sales of ourSecureFTP Server and Enhanced File Transfer products grew by 130% in 2006 to$6.7 million, from $2.9 million in 2005. This increase was the result ofan increased emphasis of our internal sales group to market and sell theseproducts to meet the needs of businesses to transfer files in a secure fashionusing business or enterprise level software. These products  represented approximately 61% of our totalrevenues in 2006 as compared to 44% in 2005. Revenues from CuteFTP Home and CuteFTP Professional increased by 1% andaccounted for approximately 51% and 31% of total revenues 2005 and 2006,respectively. Those changes werethe result of the continuing maturity of CuteFTP and CuteFTP Pro, and theavailability of low cost alternatives to occasional users.

 

 

30

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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 and Enhanced File Transfer product purchasersrequire increased maintenance and support. As a result, our maintenance and support revenues increased by 171% from$582,570 in 2005 to $1,578,236 in 2006, net of deferred revenue.  Maintenance and support pricing is reflectiveof the license cost of the products and the additional support it takes to maintainand support the products and customers. With higher maintenance and supportrevenues, we will recognize additional deferred revenue as we earn the revenueover the life of the maintenance and support agreement.

 

***Cost of Revenues.***  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 increased by approximately67% between periods from $279,964 in 2005 to $468,515 in 2006 due to anincrease in royalty expenses related to our software distribution agreementswith third parties.  Royalties that wepay on software products licensed from third parties, which we resell, areexpensed as a cost of sales when the software product is sold or earlier if therecoverability of any prepaid royalties is in doubt.  Cost of sales as a percent of total revenueswas 4.2% and 4.3% respectively for 2005 and 2006.

 

***Selling, General andAdministrative.*** Selling, general and administrative expenses consist primarily ofpersonnel and related expenses, marketing, customer support, professional fees,rent, bad debt and credit card transaction fees.  Selling, general and administrative expensesincreased by approximately 54% from $3,986,047 in 2005 to $6,142,299 in2006.  A major portion of this increaseis attributable to increased wages and commissions which included the employeeheadcount increase of fifteen, most of which was associated with the Availl acquisition.  Another large portion of the SG&Aincrease was caused by compensation expense for 2006 required by the adoptionof SFAS 123(r) totaling $497,895 which had no effect on expenses in theprior years.

 

***Research andDevelopment.*** Research and development expenses increased by approximately 42% from$869,155 in 2005 to $1,230,400 in 2006. Virtually all of the increase wascaused by increases in wages, fringe benefits and contract labor.  A major portion of the increased wages andfringe cost was the result of reclassification of a Vice President levelemployee from marketing to R&D.  Included in the research and development expenses, external developmentcosts decreased approximately 1% from 2005 to 2006.

 

***Depreciation andAmortization.*** Depreciation and amortization expense consists of depreciation expenserelated to our fixed assets. Depreciation and amortization expense increased by $1,142, orapproximately 1%, year over year. Depreciation expense has declined due to a slowdown in additions tofixed assets in current periods relative to prior periods.

 

***Other Income(Expense), Net.*** In 2005, we had interest expense of $620 related primarily to thefinancing of insurance premiums.  During2005, we had interest income of $10,685 as a result of interest earned onexcess cash balances, and a gain of $1,242 on the sale of fully depreciatedfixed assets. During 2006, we had interest expense of $128,362 relatedprimarily to the financing of the Availl acquisition, interest income of$60,639 as a result of interest earned on excess cash balances and a gain of$619 on sale of fully depreciated fixed assets.

 

***Income Taxes.***  The provision for state income taxes in 2005was $1,065 and the provision for federal income taxes was $8,916 in 2005.  GlobalSCAPE’s effective income tax rate is0.7% and differs from the federal rate primarily because of a change in thevaluation allowance for deferred tax assets.  The Company utilized remaining net operating loss carryforwards in 2005to substantially reduce its Federal income tax expense. The provision for stateincome taxes in 2006 was $3,533 and the provision for federal income taxes was$1,000,085 in 2006.  GlobalSCAPE’seffective income tax rate is 34.5% and differs from the federal rate primarilybecause of state taxes.

 

***Net Income.***  In 2005, net income was primarily the resultof the introduction of our Enhanced File Transfer product and the featuresadded to our Secure FTP Server product, resulting in an increase in revenue,while we continued to control expenses. In addition, our 2005 income taxexpense was minimized 

 

 

31

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by the use of loss carry forwards from prior years.  Without loss carry forwards in 2006, we paidan additional $993,637 in income taxes and still increased net income by$515,828 over the prior year.  Theincrease in net income was the result of continued growth of sales of theEnhanced File Transfer and Secure FTP Server products.

 

 

32

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## ** **

## **Item 8.  Financial Statements and Supplementary Data**

 

 

**GlobalSCAPE, Inc.**

 

**Index toConsolidated Financial Statements**

 

**Years ending December 31, 2005, 2006 and 2007**

 

**Contents**

 
| Report of Independent  Registered Public              |   |   |   |
|-------------------------------------------------------|--------|--------|--------|
| Accounting Firm - PMB Helin  Donovan, LLP             |   | 34     |   |
|                                                  |   |   |   |
| Financial Statements                                  |   |   |   |
| Consolidated  Balance Sheets                          |   | 35     |   |
| Consolidated  Statements of Operations                |   | 36     |   |
| Consolidated  Statements of Stockholders’ Equity |   | 37     |   |
| Consolidated  Statements of Cash Flows                |   | 38     |   |
| Notes to Consolidated  Financial Statements           |   | 39     |   |

** **

 

33

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***Report of Independent RegisteredPublic Accounting Firm***

 

TheBoard of Directors and Shareholders of

GlobalSCAPE, Inc.

 

Wehave audited the accompanying consolidated balance sheets of GlobalSCAPE, Inc.(the Company) as of December 31, 2006 and 2007, and the relatedconsolidated statements of operations, shareholders’ equity, and cash flows forthe years ended December 31, 2005, 2006 and 2007. These consolidatedfinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement. TheCompany is not required to have, nor were we engaged to perform, an audit ofits internal control over financial reporting. Our audit included considerationof internal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion. An auditalso includes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements, assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall consolidated financial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofGlobalSCAPE, Inc. as of December 31, 2006 and 2007, and the resultsof its operations and its cash flows for the years ended December 31,2005, 2006 and 2007, in conformity with accounting principles generallyaccepted in the United States of America.

 

**PMBHelin Donovan, LLP**

 

 

March 21,2008

Austin,Texas

 

** **

**34**

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** **

** **

**GlobalSCAPE, Inc.**

** **

**Consolidated BalanceSheets**

** **

** **
| ** **                                                                                                                                                       | ** ** | **As of December 31,** | ** ** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------|
| ** **                                                                                                                                                       | ** ** | **2006**                    | ** ** | **2007**   | ** ** |
| **Assets**                                                                                                                                                       | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                  |       |                        |       |       |   |
| Cash and cash equivalents                                                                                                                                        |       | $                           | 4,632,666  |       | $ | 5,214,479 |   |
| Accounts receivable (net of allowance for doubtful accounts of  $59,458 and $113,201 in 2006 and 2007, respectively)                                             |       | 1,592,846                   |       | 2,232,927  |   |
| Federal income tax receivable                                                                                                                                    |       | 73,525                      |       | 122,984    |   |
| Prepaid expenses                                                                                                                                                 |       | 115,754                     |       | 87,654     |   |
| Total current assets                                                                                                                                             |       | 6,414,791                   |       | 7,658,044  |   |
|                                                                                                                                                             |       |                        |       |       |   |
| Fixed Assets, net                                                                                                                                                |       | 232,179                     |       | 262,745    |   |
| Intangible assets, net                                                                                                                                           |       | —                      |       | 5,071,640  |   |
| Goodwill                                                                                                                                                         |       | 9,653,059                   |       | 4,447,059  |   |
| Deferred tax asset                                                                                                                                               |       | 8,724                       |       | 440,632    |   |
| Other assets                                                                                                                                                     |       | 58,996                      |       | 79,967     |   |
|                                                                                                                                                             |       |                        |       |       |   |
| Total assets                                                                                                                                                     |       | $                           | 16,367,749 |       | $ | 18,108,783 |   |
|                                                                                                                                                             |       |                        |       |       |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                   | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                                                                             |       |                        |       |       |   |
| Accounts payable                                                                                                                                                 |       | $                           | 371,093    |       | $ | 329,817 |   |
| Accrued expenses                                                                                                                                                 |       | 377,940                     |       | 742,946    |   |
| Current portion of long term debt                                                                                                                                |       | 1,539,455                   |       | —     |   |
| Deferred revenue                                                                                                                                                 |       | 1,377,037                   |       | 2,329,117  |   |
| Total current liabilities                                                                                                                                        |       | 3,665,525                   |       | 3,401,880  |   |
|                                                                                                                                                             |       |                        |       |       |   |
| Long-term liabilities, net  of current portion                                                                                                                   |       | 3,129,185                   |       | 119,711    |   |
| Total Liabilities                                                                                                                                                |       | 6,794,710                   |       | 3,521,591  |   |
|                                                                                                                                                             |       |                        |       |       |   |
| 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,  16,490,146 and 17,432,352 shares outstanding at December 31, 2006 and  2007, respectively |       | 16,490                      |       | 17,432     |   |
| Treasury Stock, 159,873 shares at December 31, 2007                                                                                                         |       | —                      |       | (527,398   | ) |
| Additional paid-in capital                                                                                                                                       |       | 6,363,520                   |       | 7,981,620  |   |
| Retained earnings                                                                                                                                                |       | 3,193,029                   |       | 7,115,538  |   |
| Total stockholders’ equity                                                                                                                                  |       | 9,573,039                   |       | 14,587,192 |   |
| Total liabilities and  stockholders’ equity                                                                                                                 |       | $                           | 16,367,749 |       | $ | 18,108,783 |   |
|                                                                                                                                                                  |            |                             |            |            |  |  |  |  |  |

** **

 Seeaccompanying notes.

 

 

35

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**GlobalSCAPE, Inc.**

** **

**Consolidated Statementsof Operations**

** **
| ** **                                                                            | ** ** | **For the Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                                 | ** ** | **2006** | ** ** | **2007** | ** ** |
| Operating revenues:                                                                   |       |                                     |       |   |   |   |   |
| Software product revenues                                                             |       | $                                        | 6,096,045  |   | $ | 9,395,445 |   | $ | 14,826,197 |   |
| Maintenance and support (net of deferred revenues)                                    |       | 582,570                                  |       | 1,578,236 |   | 3,534,144 |   |
| Total revenues                                                                        |       | 6,678,615                                |       | 10,973,681 |   | 18,360,341 |   |
|                                                                                  |       |                                     |       |   |   |   |   |
| Operating expenses:                                                                   |       |                                     |       |   |   |   |   |
| Cost of revenues (exclusive of depreciation and amortization shown  separately below) |       | 279,964                                  |       | 468,515 |   | 250,439 |   |
| Selling, general and administrative expenses                                          |       | 3,986,047                                |       | 6,142,299 |   | 10,049,430 |   |
| Research and development expenses                                                     |       | 869,155                                  |       | 1,230,400 |   | 1,919,253 |   |
| Depreciation and amortization                                                         |       | 98,071                                   |       | 99,213 |   | 279,573 |   |
| Total operating expense                                                               |       | 5,233,237                                |       | 7,940,427 |   | 12,498,695 |   |
| Income from operations                                                                |       | 1,445,378                                |       | 3,033,254 |   | 5,861,646 |   |
|                                                                                  |       |                                     |       |   |   |   |   |
| Other income (expense):                                                               |       |                                     |       |   |   |   |   |
| Interest expense                                                                      |       | (620                                     | )          | (128,362 | ) | (34,893 | ) |
| Interest income                                                                       |       | 10,685                                   |       | 60,639 |   | 95,808 |   |
| Gain on sale of assets                                                                |       | 1,242                                    |       | 619 |   | 365 |   |
| Other income                                                                          |       | —                                   |       | — |   | 2,269 |   |
| Total other income  (expense)                                                         |       | 11,307                                   |       | (67,104 | ) | 63,549 |   |
| Income before income taxes                                                            |       | 1,456,685                                |       | 2,966,150 |   | 5,925,195 |   |
| Total income tax provision                                                            |       | 9,981                                    |       | 1,003,618 |   | 2,002,686 |   |
| Net income                                                                            |       | $                                        | 1,446,704  |   | $ | 1,962,532 |   | $ | 3,922,509 |   |
|                                                                                  |       |                                     |       |   |   |   |   |
| Net income per common  share — basic                                             |       | $                                        | 0.10       |   | $ | 0.13 |   | $ | 0.23 |   |
|                                                                                  |       |                                     |       |   |   |   |   |
| Net income per common  share — assuming dilution                                 |       | $                                        | 0.09       |   | $ | 0.12 |   | $ | 0.21 |   |
|                                                                                  |       |                                     |       |   |   |   |   |
| Weighted average shares  outstanding — basic                                     |       | 13,778,989                               |       | 14,744,635 |   | 17,199,618 |   |
|                                                                                  |       |                                     |       |   |   |   |   |
| Weighted average shares  outstanding — assuming dilution                         |       | 15,442,524                               |       | 16,160,839 |   | 18,289,157 |   |

 

See accompanying notes.

 

** **

**36**

----

** **

** **

**GlobalSCAPE, Inc.**

** **

**Consolidated Statementsof Stockholders’ Equity**

** **
| ** **                                               | ** ** | ** **       | ** ** | **Additional** | ** ** | ** **   | ** ** | **Retained** | ** ** | ** **    | ** ** |
|----------------------------------------------------------|------------|------------------|------------|----------------|------------|--------------|------------|--------------|------------|---------------|------------|
| ** **                                               | ** ** | **Common Stock** | ** ** | **paid in**    | ** ** | **Treasury** | ** ** | **Earnings** | ** ** | ** **    | ** ** |
| ** **                                               | ** ** | **Shares**       | ** ** | **Amount**     | ** ** | **Capital**  | ** ** | **Stock**    | ** ** | **(Deficit)** | ** ** | **Total** | ** ** |
| Balances at December 31, 2004                       |       | 13,773,219       |       | 13,773         |       | 675,365      |       |         |       | (216,207      | )          | 472,931 |   |
|                                                     |       |             |       |           |       |         |       |         |       |          |       |   |   |
| Net income                                               |       | —           |       | —         |       | —       |       |         |       | 1,446,704     |       | 1,446,704 |   |
|                                                     |       |             |       |           |       |         |       |         |       |          |       |   |   |
| Exercise of Options                                      |       | 24,900           |       | 25             |       | 8,915        |       |         |       | —        |       | 8,940 |   |
| Balance at December 31, 2005                        |       | 13,798,119       |       | 13,798         |       | 684,281      |       |         |       | 1,230,497     |       | 1,928,576 |   |
|                                                     |       |             |       |           |       |         |       |         |       |          |       |   |   |
| Net income                                               |       |             |       |           |       |         |       |         |       | 1,962,532     |       | 1,962,532 |   |
|                                                     |       |             |       |           |       |         |       |         |       |          |       |   |   |
| Stock Compensation (FAS123r)                             |       |             |       |           |       | 497,895      |       |         |       |          |       | 497,895 |   |
|                                                     |       |             |       |           |       |         |       |         |       |          |       |   |   |
| Common shares and warrants issued for cash               |       | 1,352,000        |       | 1,352          |       | 3,153,716    |       |         |       |          |       | 3,155,068 |   |
|                                                     |       |             |       |           |       |         |       |         |       |          |       |   |   |
| Common shares issued in acquisition of Availl, Inc. |       | 716,846          |       | 717            |       | 1,999,283    |       |         |       |          |       | 2,000,000 |   |
|                                                     |       |             |       |           |       |         |       |         |       |          |       |   |   |
| Exercise of Options                                      |       | 623,181          |       | 623            |       | 28,345       |       |         |       |          |       | 28,968 |   |
| Balance at December 31, 2006                        |       | 16,490,146       |       | 16,490         |       | 6,363,520    |       |         |       | 3,193,029     |       | 9,573,039 |   |
|                                                     |       |             |       |           |       |         |       |         |       |          |       |   |   |
| Net income                                               |       |             |       |           |       |         |       |         |       | 3,922,509     |       | 3,922,509 |   |
|                                                     |       |             |       |           |       |         |       |         |       |          |       |   |   |
| Stock Compensation (FAS123r)                             |       |             |       |           |       | 937,546      |       |         |       |          |       | 937,546 |   |
|                                                     |       |             |       |           |       |         |       |         |       |          |       |   |   |
| Shares issued for net share settlement of warrants       |       | 35,000           |       | 35             |       | (35          | )          | 0            |       |          |       | 0 |   |
|                                                     |       |             |       |           |       |         |       |         |       |          |       |   |   |
| Exercise of options                                      |       | 1,067,079        |       | 1,067          |       | 680,589      |       |         |       |          |       | 681,656 |   |
|                                                     |       |             |       |           |       |         |       |         |       |          |       |   |   |
| Treasury Stock                                           |       | (159,873         | )          | (160           | )          |         |       | (527,398     | )          |          |       | (527,558 | ) |
|                                                     |       |             |       |           |       |         |       |         |       |          |       |   |   |
| Balance at December 31, 2007                        |       | 17,432,352       |       | 17,432         |       | 7,981,620    |       | (527,398     | )          | 7,115,538     |       | 14,587,192 |   |

** **

See accompanying notes.

 

** **

**37**

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** **

** **

**GlobalSCAPE, Inc.**

** **

**Consolidated Statementsof Cash Flows**

** **
| ** **                                                                         | ** ** | **For the Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                 | ** ** | **2006** | ** ** | **2007** | ** ** |
| Operating Activities:                                                              |       |                                     |       |   |   |   |   |
| Net income                                                                         |       | $                                        | 1,446,704  |   | $ | 1,962,532 |   | $ | 3,922,509 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                     |       |   |   |   |   |
| Bad debt expense                                                                   |       | 8,231                                    |       | 48,214 |   | 128,816 |   |
| Depreciation and amortization                                                      |       | 98,071                                   |       | 99,213 |   | 279,573 |   |
| (Gain) on disposition of assets                                                    |       | (1,242                                   | )          | (619 | ) | (365 | ) |
| Stock-based compensation                                                           |       | —                                   |       | 497,895 |   | 937,546 |   |
| Deferred taxes                                                                     |       | (51,983                                  | )          | (27,780 | ) | (431,908 | ) |
| Changes in operating assets and liabilities:                                       |       |                                     |       |   |   |   |   |
| Accounts receivable                                                                |       | (450,413                                 | )          | (496,547 | ) | (768,897 | ) |
| Prepaid expenses                                                                   |       | 25,828                                   |       | (178,921 | ) | (21,359 | ) |
| Other assets                                                                       |       | 269                                      |       | 6,579 |   | (169,669 | ) |
| Accounts payable                                                                   |       | 30,546                                   |       | 246,606 |   | (41,276 | ) |
| Accrued expenses                                                                   |       | 60,258                                   |       | (46,968 | ) | 365,006 |   |
| Deferred revenues                                                                  |       | 382,461                                  |       | 453,703 |   | 952,080 |   |
| Other long-term liabilities                                                        |       | 906                                      |       | 40,367 |   | 61,588 |   |
| Net cash provided by  operating activities                                         |       | 1,549,636                                |       | 2,604,274 |   | 5,213,644 |   |
| Investing Activities:                                                              |       |                                     |       |   |   |   |   |
| Proceeds from sale of property and equipment                                       |       | 1,242                                    |       | 619 |   | 365 |   |
| Purchase of property and equipment                                                 |       | (103,304                                 | )          | (150,926 | ) | (175,779 | ) |
| Purchase of Availl, Inc.                                                      |       | —                                   |       | (7,776,932 | ) | — |   |
| Cash acquired in purchase of Availl, Inc                                           |       | —                                   |       | 181,276 |   | — |   |
| Net cash used in investing  activities                                             |       | (102,062                                 | )          | (7,745,963 | ) | (175,414 | ) |
| Financing Activities:                                                              |       |                                     |       |   |   |   |   |
| Loan proceeds                                                                      |       | —                                   |       | 5,000,000 |   | — |   |
| Deferred loan costs                                                                |       | —                                   |       | (38,484 | ) | — |   |
| Repayments on loan                                                                 |       | —                                   |       | (400,670 | ) | (4,610,545 | ) |
| Proceeds from exercise of stock options                                            |       | 8,940                                    |       | 28,968 |   | 681,656 |   |
| Purchase of treasury stock                                                         |       | —                                   |       | — |   | (527,528 | ) |
| Proceeds from the PIPE, net of issuance costs                                      |       | —                                   |       | 3,155,068 |   | — |   |
| Net cash provided by (used  in) financing activities                               |       | 8,940                                    |       | 7,744,882 |   | (4,456,417 | ) |
| Net increase in cash                                                               |       | 1,456,514                                |       | 2,603,193 |   | 581,823 |   |
| Cash at beginning of  period                                                       |       | 572,959                                  |       | 2,029,473 |   | 4,632,666 |   |
| Cash at end of period                                                              |       | $                                        | 2,029,473  |   | $ | 4,632,666 |   | $ | 5,214,479 |   |
| Supplemental disclosure of  cash flow information:                                 |       |                                     |       |   |   |   |   |
| Cash paid during the year  for:                                                    |       |                                     |       |   |   |   |   |
| Interest paid                                                                      |       | $                                        | 620        |   | $ | 89,323 |   | $ | 29,719 |   |
| Income taxes paid                                                                  |       | $                                        | 1,065      |   | $ | 1,162,289 |   | $ | 2,414,094 |   |

 

See accompanying notes.

### ** **

 

38

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### ** **

### **GlobalSCAPE, Inc.**

### **Notes toConsolidated Financial Statements**

### **December 31,2006 and 2007**

### ** **

**1.             Overview of the Business andSignificant Accounting Policies**

** **

***Natureof Business***

* *

GlobalSCAPE, Inc.(GlobalSCAPE or the Company), founded in April 1996, develops anddistributes secure file management software that enables users to safely senddata over the internet. Our software is used worldwide across a wide range ofindustries. Through the end of 2007, we had sold approximately 1.9 millionsoftware licenses and our customer base includes individual consumers, small tomedium-sized businesses, as well as some of the largest corporations in theworld.

 

Ourfile transfer products provide for the privacy of critical information such asmedical records, financial data, customer files and other similar documents. Inaddition, our products provide for compliance with government regulationsrelating to the protection of information while allowing users to reduce ITcosts, increase efficiency, track and audit transactions and automateprocesses.

 

ThroughAvaill Inc. (Availl), our wholly-owned subsidiary, we also provide Wide AreaFiles Systems (WAFS) and Continuous Data Protection (CDP) software.  This addition expands GlobalSCAPE’stechnology base into data replication, acceleration of file transfer,sharing/collaboration and continuous data backup and recovery.  We believe that our expanded product offeringuniquely positions us to provide comprehensive, secure transfer, sharing, andreplication of files that need to be transmitted inside the user’s firewall todistributed offices, or outside the user’s firewall to business and tradingpartners.

 

During the year ended December 31,2007, approximately 72% of our revenues were generated from customers withinthe United States, with the remaining 28% concentrated mostly in WesternEurope, Canada and Australia. Virtually all of our 2007 revenues were derivedfrom sales of software licenses and support agreements. The combined sales ofCuteFTP Home and CuteFTP Pro accounted for 31% and 19% of our revenues in 2006and 2007, respectively,. The combined sales of our Secure Server and EnhancedFile Transfer products grew from 61% of our revenues in 2006 to 68% in 2007.

 

***CorporateStructure***

*** ***

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, a privately held corporationbased in Andover, Mass, pursuant to an Agreement and Plan of Merger with Availland its stockholders.  The initialpurchase price was $9.65 million of which $7.65 million was paid in cash and$2.0 million was paid in shares of GlobalSCAPE common stock. Availl operated asa wholly-owned subsidiary of GlobalSCAPE, Inc. through the end of 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.

 

***Basis ofPresentation***

* *

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the Unites States requires management to make estimatesand assumptions that affect the 

 

 

39

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amounts reported in the financial statements and accompanyingnotes.  Actual results could differ fromthose estimates.

 

***Principlesof Consolidation***

* *

Theconsolidated financial statements include all subsidiaries.  All inter-company transactions and balanceshave been eliminated. Availl became a subsidiary on September 22, 2006;therefore the consolidated financial statements only include Availl’s financialresults and activities from the date of acquisition..

 

***Liquidity***

* *

The use of capital resources isdriven principally by the need to enhance existing products and to develop oracquire new products.  The amount of ourexpenditures has a direct impact on the ability to offer enhanced and newproducts to customers.  The Company’sprincipal source of funds is cash flow from operations which, in turn, ishighly dependent on our sales revenue. During the year ended December 31, 2007, the Company generated $5.2million of cash from operations, which was used along with other funds in therepayment of debt and purchase of treasury shares. At December 31,2007, the Company had cash available of $5.2 million and we continue togenerate cash in excess of our operational needs.

 

The Company entered into a new loanagreement with Silicon Valley Bank on September 22, 2006. The loanagreement established a $750,000 revolving line of credit for two years at aninterest rate of prime plus 1.00%.

 

As of December 31, 2007, theCompany had cash and cash equivalents of $5.2 million and had net workingcapital of $4.2 million. Management believes this level of working capital,together with availability under the Company’s revolving credit facility withSilicon Valley Bank and the excess cash generated by the profitable operationof the business, is adequate to finance the Company’s current level ofoperations.

 

***Reclassifications***

*** ***

***Certain prior periodamounts have been reclassified to conform to the current year presentation.These reclassifications had no impact on operating income as previouslyreported.***

*** ***

***RevenueRecognition***

* *

The Companyrecognizes revenue in accordance with the American Institute of CertifiedPublic Accountants Statement of Position (“SOP”) 97-2, *Software Revenue Recognition*, as modifiedby SOP 98-9, *Modification of SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions*.

 

Revenues fromthe sale of software products are recognized and completely earned upon shipmentor electronic delivery of the product provided that persuasive evidence of anarrangement exists, collection is probable, payment terms are fixed anddeterminable and no significant obligations remain.

 

The Companyalso sells technical support and maintenance agreements (post contract customersupport “PCS”), which are sometimes bundled with the software.  When vendor specific objectiveevidence (“VSOE”) of fair value exists for all elements in a multiple elementarrangement, revenue is allocated to each element based on the relative fairvalue of each of the elements.  VSOE offair value is established by the price charged when the same element is soldseparately.  In a multiple elementarrangement whereby VSOE of fair value of all undelivered elements exists butVSOE of fair value does not exist for one or more delivered elements, revenueis recognized using the residual method. Under the residual method, the fair value of the undelivered elements isdeferred and the remaining portion of the arrangement fee is recognized asrevenue, assuming collection is probable. Revenue allocated to PCS is recognized ratably over the contractualterm, typically one year.

 

 

40

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The Companybegan selling technical support and maintenance services for some of itssoftware products in 2001.  In 2005, 2006and 2007, sales of enterprise class products resulted in higher revenues frommaintenance and support agreements sold to customers and, as a result, deferredrevenue at December 31, 2006 and 2007 was $1,377,037 and $2,329,117respectively.

 

The outboundshipping charges charged to the customer are included in software productrevenues and amounted to approximately $17,673, $13,963 and $7,647 in 2005,2006 and 2007, respectively.  The costsassociated with these shipping charges are included in the software productscost of revenue.

 

***RoyaltyCosts***

* *

Royalties thatthe Company pays on software products licensed from third parties, which itresells, are expensed as a cost of sales when the software product is sold orearlier if the recoverability of any prepaid royalties is in doubt.  The Company has distribution agreements withHannon Hill Corp., Beehive Software, Inc., Visicom Media, Inc.,ComponentOne LLC, and PGP Deutschland AG (formerly Glueck and Kanja).  The GlobalSCAPE software products associatedwith each of the companies are Cascade Server (formerly PublishXML), Mac FTP,CuteHTML Pro and Enhanced File Transfer (EFT), respectively.  The Company incurred approximately $191,970,$392,494, and $188,419 in royalty expense in 2005, 2006 and 2007, respectively.

 

***Concentrations of Credit Risk and Significant Customers***

* *

Financialinstruments that potentially subject the Company to concentrations of creditrisk consist principally of cash and cash equivalents, and accountsreceivable.  Cash is deposited in demand accounts infederally insured domestic institutions to minimize risk.  The Company provides credit, in thenormal course of business, to a number of companies and performs ongoingevaluations of its credit risk.  TheCompany requires no collateral from its customers.  Management estimates the allowance foruncollectible accounts based on their historical experience and creditevaluation.  In 2005 we had one customerthat accounted for 2.7% of net revenues, no single customer accounted for morethan 2% of revenues in 2006, and one customer accounted for approximately 14.5%of revenues in 2007.

 

Cash and cash equivalents,accounts receivable, employee advances, accounts payable, accrued expenses andnotes payable, related party are reflected in the accompanying financialstatements at cost, which approximates fair value because of the short termmaturity of these instruments.

 

***Other Concentrations***

* *

*Sales in Foreign Markets. *In2005, 2006 and 2007, approximately 33%, 33% and 28%, respectively, of theCompany’s revenues were generated from sales to customers who providedaddresses in foreign countries.  However, all revenues are received inU.S. dollars so there is no exchange rate risk with respect to the sale of ourproducts.  These sales were concentrated mostly in Western Europe, Canada,and Australia.  In 2005, 2006 and 2007, the UK accounted for approximately9%, 8%, and 8%, respectively, of total revenues.

 

*Labor. *GlobalSCAPE utilizes offshore developers for alarge portion of the coding phase of software development.  If GlobalSCAPE were unable to continue usingthese developers because of political or economic instability, GlobalSCAPE mayhave difficulty finding comparably skilled developers or may have to payconsiderably more for the same work, which would have a material adverse impacton results of operations.

 

***Advertising Costs***

* *

The Companyexpenses advertising costs as incurred. Advertising expenses charged to operations for the years ended December 31,2005, 2006 and 2007 were approximately $159,000, $384,000,  and $816,000, respectively, and are includedin selling, general and administrative expenses.  Advertising costs 

 

 

41

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are principally for the purchase of keywords for internet searches, adirect mail campaign for EFT, trade show participation and advertising invarious publications.

 

***Income Taxes***

* *

The Companyaccounts for income taxes using the liability method in accordance withStatement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*.  The liability method provides that thedeferred tax assets and liabilities are recorded based on the differencebetween the tax bases of assets and liabilities and their carrying amount forfinancial reporting purposes, as measured by the enacted tax rates and lawsthat will be in effect when the differences are expected to reverse. Deferredtax assets and liabilities are carried on the balance sheet with thepresumption that they will be realizable in future periods when pre-tax incomeis generated. GlobalSCAPE had a deferred tax asset of $51,983,  $8,724 and $440,632 at December 31,2005, 2006 and 2007 respectively.

 

Statement of FinancialAccounting Standards (SFAS) No. 109 requires a valuation allowance toreduce the deferred tax assets reported if, based on the weight of theevidence, it is more likely than not that some portion or all of the deferredtax assets will not be realized.  Afterconsideration of all of the evidence, both positive and negative, managementdetermined that no valuation was considered necessary at December 31, 2006or 2007.

 

Massachusetts State IncomeTaxes incurred $3,533 and $21,337 for 2006 and 2007 respectively. The MarginTax, enacted by the State of Texas as of January 1, 2007, is based on 1%of revenue less the greater of cost of sales or W2 Wages. The Texas Margin Taxfor 2007 was $92,717.

 

***Research and Development***

* *

Research anddevelopment expenses include all direct costs, primarily salaries for personneland expenditures with external development sources, related to the developmentof new products and significant enhancements to existing products and areexpensed as incurred until such time as technological feasibility is achieved.  For the years 2005, 2006 and 2007, theCompany expended approximately $869,000, $$1,230,000 and $1,919,000,respectively, on research and development. Typically technological feasibility is achieved very late in thedevelopment cycle and as such no research and development expenses werecapitalized in 2005, 2006 or 2007.

 

***Stock-Based Compensation***

* *

Effective January 1, 2006, GlobalSCAPE adopted theprovisions of Statement of Financial Accounting Standards No. 123 (revised2004), “Share-Based Payment” (SFAS No.123R) requiring that compensation costrelating to share-based payment transactions be recognized in the financialstatements. The cost is measured at the grant date, based on the calculatedfair value of the award, and is recognized as an expense over the employee’srequisite service period (generally the vesting period of the equity award).Prior to January 1, 2006, the Company accounted for share-basedcompensation to employees in accordance with Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25),and related interpretations. We also followed the disclosure requirements ofStatement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation”, as amended by Statement of Financial AccountingStandards No. 148, “Accounting for Stock-Based Compensation-Transition andDisclosure”. The Company adopted SFAS No. 123R using the modifiedprospective method and, accordingly, financial statement amounts for priorperiods presented in this Form 10-K have not been restated to reflect thefair value method of recognizing compensation cost relating to stock options.

 

There was compensation cost related to stock optionsrecognized in operating results of $497,895 in 2006 and $937,546 in 2007.

 

The fair value of each option award is estimated on thedate of grant using the Black-Scholes option-pricing model. Expected volatilityis based on historical volatility of GlobalSCAPE stock. The Company 

 

 

42

----

 

 

used the simplified method to derive an expected term. Theexpected term represents an estimate of the time options are expected to remainoutstanding. The risk-free rate for periods within the contractual life of theoption is based on the U.S. treasury yield curve in effect at the time ofgrant. The following table sets forth the assumptions used to determinecompensation cost for our stock options consistent with the requirements ofSFAS No. 123R.

 

| ** **                     | ** ** | **Year Ended  December 31, 2007** | ** ** |
|--------------------------------|------------|----------------------------------------|------------|
| Expected volatility            |       | 96%                                    |       |
| Expected annual dividend yield |       | 0%                                     |       |
| Risk free rate of return       |       | 3.45%                                  |       |
| Expected option term (years)   |       | 5.5 - 6.0                              |       |

 

Under APB No. 25 there was no compensation costrecognized for our stock options awarded in the year ended December 31,2005 as these stock options had an exercise price equal to the market value ofthe underlying stock at the grant date. The following table sets forth proforma information as if compensation cost had been determined consistent withthe requirements of SFAS No. 123.

 
| Net income, as reported for year ended December 31, 2005                                                                                                                                     |   | $       | 1,446,704 |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|-----------|--------|
| Stock based compensation included in the determination of net income  (loss) as reported, net of related tax effects                                                                              |   | —  |      |
| Stock-based compensation expense that would have been included in the  determination of net income (loss) had the fair value based method been  applied to all awards, net of related tax effects |   | (25,921 | )         |
| Pro forma net income                                                                                                                                                                              |   | $       | 1,420,783 |   |
|                                                                                                                                                                                              |   |    |      |
| Earnings (loss) per share:                                                                                                                                                                        |   |    |      |
| Basic — as reported                                                                                                                                                                          |   | $       | 0.10      |   |
| Basic — pro forma                                                                                                                                                                            |   | $       | 0.10      |   |
|                                                                                                                                                                                              |   |    |      |
| Diluted — as reported                                                                                                                                                                        |   | $       | 0.09      |   |
| Diluted — pro forma                                                                                                                                                                          |   | $       | 0.09      |   |

 

*Refer to Note 9 - Stock* Options and Stock BasedCompensation for additional disclosures regarding our stock compensationprograms.

* *

***Cash and cash equivalents***

* *

Cash includesall cash and highly liquid investments with original maturities of three monthsor less.

 

***Property and Equipment***

* *

Property andequipment is comprised of furniture and fixtures, software, computer equipmentand leasehold improvements which are recorded at cost and depreciated using thestraight-line method over their estimated useful lives.  Expenditures for maintenance and repairs arecharged to operations as incurred. Property and equipment acquired under capital leases are depreciatedover their useful lives or the respective lease term, if shorter.  Depreciation periods used for property andequipment range from three to five years.

 

Leaseholdimprovements are depreciated over the shorter of the lease term or theestimated useful life of the asset.

 

 

43

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*** ***

***Sale /Disposal of Assets***

* *

During 2007,the Company disposed of equipment and software with an original price of$20,531 and accumulated depreciation of $20,531. GlobalSCAPE recognized a gainof $365 related to the disposal of these assets. During 2006, the Companydisposed of equipment and software with an original purchase price of $15,362and accumulated depreciation of $15,362. GlobalSCAPE recognized a gain of $619 related to the disposal of theseassets.  During 2005 the Company disposedof equipment and software with an original purchase price of $29,949  and accumulated depreciation of $29,949.  GlobalSCAPE recognized a gain of $1,242related to the disposal of these assets.

 

***Goodwill***

 

Asof December 31, 2006 and 2007, GlobalSCAPE had goodwill in the amount of$9,653,059 and $4,447,059, respectively, associated with the acquisition ofAvaill.  This acquisition was accountedfor using the purchase method of accounting. See Acquisitions note for adescription of the acquisition. In accordance with SFAS No. 142 *Goodwill and Other Intangible Assets*, the Company willassess the impairment of goodwill annually in the fourth quarter, or morefrequently if other indicators of potential impairment arise. There was nogoodwill as of December 31, 2005.

 

Noallocation had been made to intangible assets as of the December 31,2006.  The Company obtained a valuationreport of it’s acquisition of Availl, Inc. which determined that theacquisition included purchased software, which is an identifiable intangibleasset. The purchased software had a market value of approximately $5,000,000and this amount has been allocated to purchased software from Goodwilleffective October 1, 2007. The purchased software is being amortized usingthe straight-line method over its estimated useful life of 10 years.

 

***IntangibleAssets***

 

**The cost of purchased intangibles and the legal andprofessional fees incurred related to patent filings and trademarks arecapitalized.  Capitalized amounts areamortized to expense using the straight-line method over the expected usefullife of the assets of three to fifteen years.**

 

***Capitalized Software Development Costs***

* *

Capitalizationof software development costs begins upon the establishment of technologicalfeasibility and ceases when the product is available for general release.  The establishment of technologicalfeasibility and the ongoing assessment of recoverability of capitalizedsoftware development costs require considerable judgment by management concerningcertain external factors including, but not limited to, technologicalfeasibility, anticipated future gross revenue, estimated economic life andchanges in software and hardware technologies. These software development costs were amortized using the straight-linemethod over a three-year period and are only those costs incurred in thedevelopment of products that are sold to external customers and not used forinternal purposes.  No research anddevelopment expenses were capitalized in 2005, 2006 or 2007.  These software development costs are notrelated to those costs incurred for the acquisition of software products ortitles.  For the years 2005, 2006 and2007, the Company spent approximately $869,000, $1,230,000 and $1,919,000,respectively, on research and development.

 

***Other Long-Term Assets***

* *

Other assetsinclude deposits for facilities, which are anticipated to be refunded to theCompany upon termination of the lease and deferred loan costs.

 

44

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***Deferred Compensation***

* *

*The deferred compensation liability is related to anemployment agreement with the Company’s President.  The deferred compensation is subject tocertain terms and conditions related to his planned retirement in December 2008.*

* *

***Other Long-Term Liabilities***

* *

Otherlong-term liabilities relate to deferred payments of rent expense.  The total amount of base leasepayments is being charged to expense on the straight-line method over the termof the lease.

 

***EarningsPer Common Share***

* *

Basic anddiluted net income per common share is presented in conformity with Statementof Financial Accounting Standards No. 128, *Earnings Per Share* (SFAS 128) for all periodspresented.  Basic earnings per share isbased on the weighted effect of all common shares issued and outstanding, andis calculated by dividing net income (loss) available to common stockholders bythe weighted average shares outstanding during the period.  Diluted earnings per share is calculated bydividing net income (loss) available to common stockholders by the weighted averagenumber of common shares used in the basic earnings per share calculation plusthe number of common shares that would be issued assuming conversion of allpotentially dilutive common shares outstanding. Awards of non vested options are considered potentially dilutive commonshares for the purpose of computing earnings per common share.  In applying the treasury stock method to nonvested options the assumed proceeds include the amount the employee must pay toexercise the option plus the amount of unrecognized cost attributable to futureperiods less any expected tax benefits. Below is a reconciliation of thenumerators and denominators of basic and diluted earnings per share for each ofthe following years:

 

| ** **                                             | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **2005 (1)**                     | ** ** | **2006 (2)** | ** ** | **2007 (3)** | ** ** |
| **Numerators**                                         | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Numerator for basic and  diluted earnings per share:   |       |                             |       |   |   |   |   |
| Net income                                             |       | $                                | 1,446,704  |   | $ | 1,962,532 |   | $ | 3,922,509 |   |
| **Denominators**                                       |       |                             |       |   |   |   |   |
| Denominators for basic  earnings per share:            |       |                             |       |   |   |   |   |
| Weighed average shares outstanding – Basic        |       | 13,778,989                       |       | 14,744,635 |   | 17,199,618 |   |
| **Dilutive potential common  shares:**                 |       |                             |       |   |   |   |   |
| Stock options                                          |       | 1,663,535                        |       | 1,416,204 |   | 834,493 |   |
| Warrants                                               |       | —                           |       | — |   | 255,046 |   |
| Denominator for dilutive  earnings per share           |       | 15,442,524                       |       | 16,160,839 |   | 18,289,157 |   |
| Net income per common  share                           |       | $                                | 0.10       |   | $ | 0.13 |   | $ | 0.23 |   |
| Net income per commons  share – assuming dilution |       | $                                | 0.09       |   | $ | 0.12 |   | $ | 0.21 |   |

* *

----

*(1)*       For theyear ended December 31, 2005, all options have been included in dilutiveshares.

* *

*(2)*          For the year ended December 31, 2006, 100,000 options and1,352,000 warrants have not been included in dilutive shares as the effectwould be anti-dilutive.

* *

*(3)*          For the year ended December 31, 2007, all options and warrantshave been included in dilutive shares and 241,000 options have not beenincluded in dilutive shares as the effect would be anti-dilutive.

* *

*45*

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* *

***Recentaccounting pronouncements***

 

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”).  FIN48 contains a two-step approach to recognizing and measuring uncertain taxpositions accounted 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.  Forstate tax returns the Company is generally no longer subject to taxexaminations for years prior to 2003.

 

In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement No. 157,“Fair Value Measurements” (“FAS 157”), which addresses how companies shouldmeasure fair value when they are required to use a fair value measure forrecognition or disclosure purposes under generally accepted accountingprinciples (“GAAP”). As a result of FAS 157, there is now a common definitionof fair value to be used throughout GAAP, which is expected to make themeasurement of fair value more consistent and comparable. The Company mustadopt FAS 157 in fiscal 2008, and management currently does not expect theimpact to be material to its consolidated financial statements.

 

In February 2006,the FASB issued SFAS No. 155, “Accounting for Certain Hybrid FinancialInstruments—an amendment of FASB Statements No. 133 and 140,” to permitfair value remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation in accordance withthe provisions of SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities.” The Company adopted SFAS No. 155 in fiscal year 2007.SFAS 155 did not have a material impact on the Company’s consolidated financialstatements.

 

****In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities”, which permits entities to choose to measure manyfinancial instruments and certain other items at fair value. The objective isto improve financial reporting by providing entities with the opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions.  The statement amends SFAS No. 115, “Accounting forCertain Investments in Debt and Equity”.****

 

In December 2006,the FASB issued the FASB Staff Position (FSP) No. EITF 00-19-2, (“FSP EITF00-19-2”), Accounting for Registration Payment Arrangements. This FSP addressesan issuer’s accounting for registration payment arrangements. This FSPspecifies that the contingent obligation to make future payments or otherwisetransfer consideration under a registration payment arrangement, whether issuedas a separate agreement or included as a provision of a financial instrument orother agreement, should be separately recognized and measured in accordancewith FASB Statement No. 5, Accounting for Contingencies. The guidance inthis FSP amends FASB Statements No. 133, Accounting for DerivativeInstruments and Hedging Activities, and No. 150, Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity, andFASB Interpretation No. 45, Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers, to include scope exceptions for registration payment arrangements. ThisFSP further clarifies that a financial instrument subject to a registrationpayment arrangement should be accounted for in accordance with other applicablegenerally accepted accounting principles (GAAP) without regard to the contingentobligation to transfer consideration pursuant to the registration paymentarrangement. This FSP shall be effective immediately for registration paymentarrangements and the financial instruments subject to those arrangements thatare entered into or modified subsequent to the date of issuance of this FSP, orfor financial statements issued for fiscal years beginning after December 15,2006, and interim periods within those fiscal years.

 

46

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The Company adopted FSPEITF 00-19-2 beginning in 2007. The adoption of this FSP did not have amaterial effect upon the Company’s financial statements.

 

In December 2007,the FASB issued SFAS No. 141 (Revised 2007), Business Combinations -Revised 2007. SFAS 141 R provides guidance on improving the relevance,representational faithfulness, and comparability of information that areporting entity provides in its financial reports about a business combinationand its effects. SFAS 141R applies to business combinations where theacquisition date is on or after the beginning of the first annual reportingperiod beginning on or after December 15, 2008. The Company is in theprocess of analyzing the effects SFAS 141R will have on the Company’s financialstatements.

 

In December 2007,the FASB also issued SFAS No. 160, Noncontrolling Interests inConsolidated Financial Statements, which establishes accounting and reportingstandards to improve the relevance, comparability, and transparency offinancial information in its consolidated financial statements that include anoutstanding noncontrolling interest in one or more subsidiaries. SFAS 160 iseffective for fiscal years, and the interim periods within those fiscal years,beginning on or after December 15, 2008. Management of the Company doesnot expect the adoption of this pronouncement to have a material impact on itsfinancial statements.

 

In February 2007, the FASB issued Statement No. 159,“*The Fair Value Option for Financial Assetsand Financial Liabilities*“ (“Statement No. 159”). Statement No. 159permits entities to choose to measure many financial assets and financialliabilities at fair value. Unrealized gains and losses on items for which thefair value option has been elected are reported in earnings. Statement No. 159is effective for fiscal years beginning after November 15, 2007. TheCompany is currently assessing the impact of Statement No. 159 on itsfinancial position, results of operations and cash flows.

 

**2.             Acquisitions**

** **

On September 22,2006, the Company completed the acquisition of all of the issued andoutstanding shares of Availl, a privately held provider of Wide Area FilesSystems (WAFS) and Continuous Data Protection (CDP) software, for $7.65 millionin cash and $2.0 million in the form of 716,846 shares of GlobalSCAPE commonstock. The Company incurred direct acquisition costs of approximately $127,000.In connection with the acquisition, $850,000 of the cash consideration in thisacquisition was placed into an escrow account for purposes of settlingindemnification claims for the eighteen-month period following the closing. Inaccordance with EITF Issue No. 99-12, *Determination of theMeasurement Date for the Market Price of Acquirer Securities Issued in aPurchase Business Combination*, the Company has used $2.79 as the pershare amount to value the common stock consideration paid to Availlshareholders (representing the average of the closing prices of GlobalSCAPE’scommon stock for the thirty days before the merger agreement date of September 22,2006). Pursuant to the terms of the acquisition, the Company granted stockoptions to the former Availl stockholders who were also employees under theGlobalSCAPE, Inc. 2000 Stock Option Plan. Exercising the options underthis plan is contingent upon the individual’s continued employment with theCompany and will be vested over three years in three annual installments.

 

                TheAvaill acquisition was accounted for using the purchase method of accounting.The purchase price was paid on the September 22, 2006 closing date.  The purchase price includes a provision forthe former Availl stockholders to earn up to an additional $100,000 in cashdepending upon the achievement of certain revenue targets for Availl for thethird and fourth quarters of 2006. Since the revenue targets were not attained,no additional payments were required.

 

47

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

 

                Asummary of the purchase price allocation is as follows:

 

| ** **                                                                                   | ** ** | **Availl** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------|------------|
| Purchase price –                                                                        |       |       |       |
| Cash paid                                                                                    |       | $          | 7,650,000  |   |
| Stock issued                                                                                 |       | 2,000,000  |       |
| Legal and other acquisition costs                                                            |       | 126,931    |       |
| Acquisition costs                                                                            |       | 9,776,931  |       |
| Net fair value of tangible  assets acquired and liabilities assumed                          |       | (123,872   | )          |
|                                                                                         |       |       |       |
| Excess of cost over net  fair value of tangible assets acquired                              |       | 9,653,059  |       |
| Purchase price adjustment  in 2007                                                           |       | 148,696    |       |
| Adjusted access of cost over fair value of tangible assets acquired  and liabilities assumed |       | 9,801,755  |       |
|                                                                                         |       |       |       |
| Software acquired                                                                            |       | 5,000,000  |       |
| Customer list acquired                                                                       |       | 180,000    |       |
| Patent acquired                                                                              |       | 26,000     |       |
|                                                                                         |       |       |       |
| Goodwill at  December 31, 2007                                                          |       | $          | 4,595,755  |   |

 

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

 

| Cash                                                       |   | $        | 191,276 |   |
|------------------------------------------------------------|--------|----------|---------|--------|
| Accounts receivable, net                                   |   | 553,798  |    |
| Fixed Assets                                               |   | 26,411   |    |
| Other Assets                                               |   | 13,555   |    |
|                                                       |   |     |    |
| Accounts payable and  accrued expenses                     |   | (226,719 | )       |
| Deferred tax liability                                     |   | (71,693  | )       |
| Deferred revenue                                           |   | (362,756 | )       |
|                                                       |   |     |    |
| Net fair value of assets  acquired and liabilities assumed |   | $        | 123,872 |   |

 

48

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Intangibleassets represent amounts acquired in the acquisition of Availl, Inc. asconsist of the following as of December 31, 2007:

| ** **                      | ** ** | **Gross Carrying** | ** ** | **Accumulated**  | ** ** | ** **       | ** ** |
|---------------------------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| ** **                      | ** ** | **Amount**         | ** ** | **Amortization** | ** ** | **Life (Years)** | ** ** |
| Amortized intangible assets:    | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Software acquired               |       | $                  | 5,000,000  |             | $          | 125,000          |       | 10 |   |
| Customer list acquired          |       | 180,000            |       | 9,000            |       | 5                |       |
| Patent acquired                 |       | 26,000             |       | 360              |       | 18               |       |
| Total                           |       | $                  | 5,206,000  |             | $          | 134,360          |       |   |   |
|                            |       |               |       |             |       |             |       |
| Estimated Amortization  Expense |       |               |       |             |       |             |       |
| For Year-ended 12/31/2008       |       |               |       | $                | 537,444    |             |       |   |
| 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                           |       |               |       | $                | 5,071,640  |             |       |   |

 

Thefollowing unaudited pro forma financial information presents the results ofoperations for the years ended December 31, 2005 and 2006 as if theacquisition had occurred at the beginning of each period presented. The proforma financial information has been adjusted for the effect of interest paidon the term loan. The pro forma financial information for the combined entitieshas been prepared for comparative purposes only and is not indicative of whatactual results would have been if the acquisitions had taken place at thebeginning of each period presented, or of future results.

 

49

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| ** **                                 | ** ** | **Year Ended  December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|
| **(in  thousands, except per share data)** | ** ** | **2005**                          | ** ** | **2006** | ** ** |
| Pro forma net revenues                     |       | $                                 | 7,981      |   | $ | 12,088 |   |
| Pro forma net income                       |       | 895                               |       | 1,664 |   |
|                                       |       |                              |       |   |   |
| Pro forma net income per share:            |       |                              |       |   |   |
| Basic                                      |       | $                                 | 0.06       |   | $ | 0.11 |   |
| Diluted                                    |       | $                                 | 0.06       |   | $ | 0.10 |   |

** **

**3.             Accounts Receivable**

** **

Accountsreceivable, which are primarily from sales of software licenses, are presentednet of an allowance for doubtful accounts. The activity of the Company’s allowance for doubtful accounts for theyears ended December 31, 2005, 2006 and 2007 is presented in the followingtable:

 

| ** **     | ** ** | **Balance at** | ** ** | **Charged to** | ** ** | ** **         | ** ** | **Balance** | ** ** |
|----------------|------------|----------------|------------|----------------|------------|--------------------|------------|-------------|------------|
| **Year Ended** | ** ** | **Beginning**  | ** ** | **Income or**  | ** ** | ** **         | ** ** | **End of**  | ** ** |
| **31-Dec**     | ** ** | **of Period**  | ** ** | **Expense**    | ** ** | **Deductions (1)** | ** ** | **Period**  | ** ** |
|           |       |           |       |           |       |               |       |        |       |
| 2005           |       | $              | 10,195     |           | $          | 8,231              |       | $           | (6,153     | ) | $ | 12,273 |   |
| 2006           |       | $              | 12,273     |           | $          | 48,214             |       | $           | (1,029     | ) | $ | 59,458 |   |
| 2007           |       | $              | 59,458     |           | $          | 128,816            |       | $           | (75,073    | ) | $ | 113,201 |   |

 

----

(1)  Represents amounts written off as uncollectible accountsreceivable.

 

**4.             Debt**

** **

On September 22, 2006,the company obtained a $5,000,000 term loan from Silicon Valley Bank.  The term loan was used to finance part of thecash portion of the purchase price of the Availl acquisition. The initialinterest rate is 9.5% and is subject to change as the bank’s prime ratechanges. Interest and principal were payable in 36 equal monthly installmentson the first day of each calendar month beginning October 1, 2006.  The Company made a $3.2 millionrepayment under the term loan in January 2007 plus a $0.5 millionrepayment in February 2007. There was no loan balance at December 31,2007.

 

  The Loan Agreementcontains customary covenants including covenants relating to maintaining legalexistence and good standing, complying with applicable laws, delivery offinancial statements, maintenance of inventory, payment of taxes, maintaininginsurance, and protection of intellectual property rights.  GlobalSCAPE and its subsidiaries are alsoprohibited from selling any of their assets other than in the ordinary courseof business, acquiring any other entities, changing the types of business theyare engaged in, incurring indebtedness other than that permitted by the LoanAgreement, incurring any liens on their assets other than those permitted bythe Loan Agreement, making certain investments or paying any dividends on, oracquiring, any shares of their capital stock. The Loan Agreement contains two financial covenants.  GlobalSCAPE and its subsidiaries mustmaintain:

 

·                  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 oftotal funded debt to EBITDA of not more than 2.00 to 1.00.

 

50

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The loan agreement also contains customary events of defaultincluding the failure to make payments of principal and interests, the breachof any covenants, the occurrence of a material adverse change, certainbankruptcy and insolvency events, the breach of other agreements creatingindebtedness of $50,000 or more and the entry of a judgment of $50,000 or moreagainst GlobalSCAPE or any of its subsidiaries. The Company failed the first ofthe two covenants at December 31, 2006 and obtained a waiver from theBank. The Company is in compliance with all of its debt covenants at December 31,2007.

 

The loanagreement provides for a $750,000 revolving credit facility. The entire amountof the revolving credit facility remains available.  Borrowings under the revolving creditfacility bear interest at 1.00% above the bank’s prime rate and mature on September 22,2008.  Interest payments are due on thefirst day of each calendar month. The revolving credit facility is secured bysubstantially all of the assets of GlobalSCAPE and its subsidiaries.

 

**5.             Commitments and Contingencies**

** **

**Operating Leases**

** **

Minimum futurelease payments on non-cancelable operating leases for office facilities are asfollows for the years ending December 31:

 

| 2008       |   | $         | 578,181   |   |
|------------|--------|-----------|-----------|--------|
| 2009       |   | 606,465   |      |
| 2010       |   | 538,587   |      |
| 2011       |   | 551,015   |      |
| 2012       |   | 565,670   |      |
| Thereafter |   | 3,823,263 |      |
| Total      |   | $         | 6,663,181 |   |

 

Operatinglease expense amounted to approximately $179,000 in 2005, $188,000 in 2006 and$235,000 in 2007.

 

**Contingencies**

 

TheCompany from time to time may be involved in litigation relating to claimsarising out of its ordinary course of business. There are no pending claims against the Company that would have amaterial adverse effect on the financial statements of the Company.

 

**6.             Income Taxes**

** **

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. Significant components of the Company’s deferred tax assets andliabilities are related to the following:

 

51

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| ** **                                   | ** ** | **2006** | ** ** | **2006** | ** ** | **2007** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Deferred tax liabilities:                    |       |     |       |     |       |     |       |
| Cash method to accrual adjustment            |       | $        | —     |     | $          | (91,884  | )          | $ | (45,942 | ) |
| Depreciation                                 |       | —   |       | —   |       | (3,427   | )          |
| Total deferred tax  liabilities              |       | $        | —     |     | $          | (91,884  | )          | $ | (49,369 | ) |
|                                         |       |     |       |     |       |     |       |
| Deferred tax assets:                         |       |     |       |     |       |     |       |
| Accrued expenses                             |       | 14,828   |       | 20,326   |       | 34,587   |       |
| Allowance for doubtful accounts              |       | 4,173    |       | 20,216   |       | 38,488   |       |
| Deferred compensation                        |       | 4,121    |       | 17,846   |       | 416,926  |       |
| Depreciation and amortization                |       | 28,861   |       | 7,491    |       | —   |       |
| Net operating loss carryforwards             |       | —   |       | 34,729   |       | —   |       |
| Total deferred tax assets                    |       | 51,983   |       | 100,608  |       | 490,001  |       |
| Valuation allowance for  deferred tax assets |       | —   |       | —   |       | —   |       |
| Net deferred tax  liabilities                |       | $        | 51,983     |     | $          | 8,724    |       | $ | 440,632 |   |

 

Areconciliation of income tax expense and the amount computed by applying thestatutory federal income tax rate (34%) to income before income taxes is asfollows:

 

| ** **                                                                                                 | ** ** | **2005** | ** ** | **2006** | ** ** | **2007**  | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Taxes computed at federal  statutory rate                                                                  |       | $        | 494,911    |     | $          | 1,007,289 |       | $ | 2,014,564 |   |
|                                                                                                       |       |     |       |     |       |      |       |
| Increases in taxes  resulting from:                                                                        |       |     |       |     |       |      |       |
| State taxes, net of federal benefit                                                                        |       | 703      |       | 2,333    |       | 75,276    |       |
| Other non-deductible expenses                                                                              |       | 5,653    |       | 2,142    |       | 19,715    |       |
| Change in valuation allowance                                                                              |       | (484,853 | )          | —   |       | —    |       |
| Research & Development Credit                                                                     |       |     |       | (10,000  | )          | 17,167    |       |
| Amortization of intangible Assets                                                                          |       | —   |       | —   |       | 45,683    |       |
| Prior period adjustment for EIE Exclusion, Research &  Development Credit and Amended Tax Returns |       | —   |       | —   |       | (130,976  | )          |
| Other                                                                                                      |       | (6,433   | )          | 1,854    |       | (38,743   | )          |
| Total                                                                                                      |       | $        | 9,981      |     | $          | 1,003,618 |       | $ | 2,002,686 |   |

 

**7.             Employee Benefit Plan**

** **

The Companyhas a 401(k) plan that covers substantially all employees with at leastsix months of service.  Under the plan,employees may elect to contribute a percentage of their annual salary subjectto the Internal Revenue Code maximum limitations.  The plan provides for employer matching anddiscretionary contributions, the amounts of which are to be determined annuallyby the Board of Directors.  The Companymade contributions to the plan of $15,864, $16,296 and $27,523 for the yearsended December 31, 2005, 2006 and 2007, respectively.

 

**8.             Stock Options and Stock BasedCompensation**

** **

GlobalSCAPE has stock-based compensation plans available togrant incentive stock options to employees. Under the GlobalSCAPE, Inc.2000 Stock Option Plan (the Plan), which was approved by the Board of Directorsand became effective on May 17, 2001, a maximum of 3,660,000 shares ofGlobalSCAPE common stock may be awarded. Through December 31, 2007 optionshave been granted for

 

52

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approximately 2,780,000 shares, net of granted andcancelled. There are approximately 880,000 shares available for grant under the2000 Plan.

 

The exercise price, term and other conditions applicable toeach stock option granted under the Plan are generally determined by the Boardof Directors. The exercise price of stock options is set on the grant date andmay not be less than the fair market value per share of our stock on that date.The options generally become exercisable over a three-year period and expireafter ten years.

 

There was $497,895 of compensation cost related to stockoptions recognized in operating results in the year ended December 31,2006, and $937,546 recognized in 2007.

 

The following table summarizes information about stockoption activity through the year ended December 31, 2007.

 

| ** **                             | ** ** | ** **    | ** ** | **Weighted**         | ** ** | **Weighted Average**      | ** ** | **Aggregate**  | ** ** |
|----------------------------------------|------------|---------------|------------|----------------------|------------|---------------------------|------------|----------------|------------|
| ** **                             | ** ** | **Number of** | ** ** | **Average Exercise** | ** ** | **Remaining Contractual** | ** ** | **Intrinsic**  | ** ** |
| ** **                             | ** ** | **Options**   | ** ** | **Price**            | ** ** | **Term (years)**          | ** ** | **Value ($M)** | ** ** |
|                                   |       |          |       |                 |       |                      |       |           |       |
| Outstanding at  December 31, 2004 |       | 1,970,071     |       | $                    | 0.24       |                      | 6.50       |           | —     |   |
| 2005                                   |       |          |       |                 |       |                      |       |           |       |
| Granted                                |       | 469,000       |       | 0.32                 |       |                      |       |           |       |
| Expired                                |       | 20,000        |       | 0.16                 |       |                      |       |           |       |
| Exercised                              |       | 24,900        |       | 0.36                 |       |                      |       |           |       |
| Outstanding at  December 31, 2005 |       | 2,394,171     |       | $                    | 0.25       |                      | 6.50       |           | $          | 2.06 |   |
| 2006                                   |       |          |       |                 |       |                      |       |           |       |
| Granted                                |       | 935,000       |       | 2.81                 |       |                      |       |           |       |
| Exercised                              |       | 623,181       |       | 0.05                 |       |                      |       |           |       |
| Lapsed or canceled                     |       | 225,350       |       | 1.47                 |       |                      |       |           |       |
| Outstanding at  December 31, 2006 |       | 2,480,640     |       | $                    | 1.16       |                      | 7.25       |           | $          | 4.34 |   |
| 2007                                   |       |          |       |                 |       |                      |       |           |       |
| Granted                                |       | 456,000       |       | 3.45                 |       |                      |       |           |       |
| Exercised                              |       | 1,067,079     |       | 0.64                 |       |                      |       |           |       |
| Lapsed or canceled                     |       | 135,033       |       | 3.07                 |       |                      |       |           |       |
|                                   |       |          |       |                 |       |                      |       |           |       |
| Outstanding at  December 31, 2007 |       | 1,734,528     |       | $                    | 1.94       |                      | 7.64       |           | $          | 6.17 |   |
|                                   |       |          |       |                 |       |                      |       |           |       |
| Exercisable at  December 31, 2007 |       | 722,985       |       | $                    | 0.95       |                      | 6.74       |           | $          | 3.29 |   |

 

The weighted average fair value of options granted duringthe year ended December 31, 2007 was $2.64. The total intrinsic value ofoptions (which is the amount by which the stock price exceeded the exerciseprice of the options on the date of exercise) exercised during the year ended December 31,2007 was $3,694,476. During the year ended December 31, 2007, the amountof cash received from the exercise of stock options was $681,656. The followingtable summarizes information about nonvested stock option awards as of December 31,2007 and changes for the year.

 

53

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| ** **                            | ** ** | **Number**  | ** ** | **Weighted Average** | ** ** |
|---------------------------------------|------------|-------------|------------|----------------------|------------|
| ** **                            | ** ** | **Of**      | ** ** | **Grant Date**       | ** ** |
| ** **                            | ** ** | **Options** | ** ** | **Fair Value**       | ** ** |
| Non-vested at  December 31, 2006 |       | 1,180,580   |       | $                    | 1.52       |   |
| Granted                               |       | 456,000     |       | $                    | 2.64       |   |
| Vested                                |       | (490,004    | )          | $                    | 1.52       |   |
| Forfeited                             |       | (135,033    | )          | $                    | 2.60       |   |
| Non-vested at  December 31, 2007 |       | 1,011,543   |       | $                    | 2.22       |   |

 

At December 31, 2007, there was $1,504,345 of totalunrecognized compensation cost related to non-vested stock option awards whichis expected to be recognized over a weighted-average period of 3 years. Therewere 490,004 options that became vested during the year ended December 31,2007.

 

The following table shows information about outstandingstock options at December 31, 2007.

 

| ** **          | ** ** | ** **      | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------|------------|-----------------|------------|-------------------------|------------|-------------------------|------------|
| ** **          | ** ** | ** **      | ** ** | **Weighted**            | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **      | ** ** | **Average**             | ** ** | **Weighted**            | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **          | ** ** | ** **      | ** ** | **Remaining**           | ** ** | **Average**             | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of**        | ** ** | **Options**     | ** ** | **Contractual**         | ** ** | **Exercise**            | ** ** | **Number of** | ** ** | **Exercise** | ** ** |
| **Exercise Prices** | ** ** | **Outstanding** | ** ** | **Life**                | ** ** | **Price**               | ** ** | **Options** | ** ** | **Price** | ** ** |
| $ .01 - $1.00  |       | 675,461         |       | 6.4                     |       | $                       | 0.29       |   | 518,484 |   | $ | 0.28 |   |
| $ 1.01 - $2.00 |       | 100,000         |       | 7.6                     |       | $                       | 1.10       |   | 33,000 |   | $ | 1.10 |   |
| $ 2.01 - $3.00 |       | 210,000         |       | 8.0                     |       | $                       | 2.72       |   | 69,300 |   | $ | 2.72 |   |
| $ 3.01 - $4.25 |       | 749,067         |       | 8.7                     |       | $                       | 3.32       |   | 102,201 |   | $ | 3.11 |   |
|                |       | 1,734,528       |       | 7.6                     |       | $                       | 1.94       |   | 722,985 |   | $ | 0.95 |   |

 

**9.             CommonStock and Warrants**

 

**On November 13,2006, the Company entered into a securities purchase agreement with accreditedinvestors, who paid us an aggregate of $3.4 million in gross proceeds inconsideration for 1,352,000 shares of our common stock at a price of $2.50 pershare.  The Company also granted warrantsto purchase 1,352,000 shares of our common stock to the investors with anexercise price of $3.15 per share. **

** **

**The warrantshave a 5-year term and will be exercisable beginning May 15, 2007.**  As part of the securities purchase agreement the Company was required tofile a registration statement to register the common stock and warrants. Thisregistration was declared effective on April 15, 2007.

** **

**During 2007,the Company issued 35,000 common shares in exchange for warrants for 85,000shares on a net share settlement for which the company received no proceeds.**

** **

There is an adjustmentprovision in which the warrant’s exercise price can be reduced to a minimum of$2.81 (which could reduce cash proceeds by $459,680 to $3,799,120) in the eventthat from November 13, 2006 (the closing date) to six months later (or May 13,2007) the Company issues or is deemed to issue additional shares of CommonStock for a consideration per share less than the Exercise Price in effectimmediately prior to the issuance of such shares, the Exercise Price shall bereduced by the Company to the price equal to the consideration per sharereceived or receivable.

 

54

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** **

**10.          Quarterly Financial Information(unaudited)**

 
| ** **                                          | ** ** | **Fiscal Year 2006**  | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **1st Quarter**       | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** |
|                                                |       |                  |       |   |   |   |   |   |   |
| Total revenues                                      |       | $                     | 2,414,923  |   | $ | 2,445,327 |   | $ | 2,603,236 |   | $ | 3,510,195 |   |
| Total operating expenses                            |       | $                     | 1,605,516  |   | $ | 1,723,395 |   | $ | 1,792,007 |   | $ | 2,819,509 |   |
| Other Income (expense)                              |       | $                     | 14,352     |   | $ | 22,902 |   | $ | 21,412 |   | $ | (125,770 | ) |
| Net income (loss) before provision for income taxes |       | $                     | 823,759    |   | $ | 744,834 |   | $ | 832,641 |   | $ | 564,916 |   |
| Net income (loss)                                   |       | $                     | 548,932    |   | $ | 500,056 |   | $ | 538,085 |   | $ | 375,459 |   |
|                                                |       |                  |       |   |   |   |   |   |   |
| Net income (loss) per  share:                       |       |                  |       |   |   |   |   |   |   |
| Basic                                               |       | $                     | 0.04       |   | $ | 0.03 |   | $ | 0.04 |   | $ | 0.02 |   |
| Diluted                                             |       | $                     | 0.03       |   | $ | 0.03 |   | $ | 0.03 |   | $ | 0.02 |   |
| Weighted average shares  outstanding:               |       |                  |       |   |   |   |   |   |   |
| Basic                                               |       | 14,284,348            |       | 14,379,061 |   | 14,484,319 |   | 15,821,575 |   |
| Diluted                                             |       | 15,971,013            |       | 15,081,666 |   | 15,891,298 |   | 17,251,219 |   |
|                                                |       |                  |       |   |   |   |   |   |   |
| ** **                                          | ** ** | **Fiscal  Year 2007** | ** ** |
| ** **                                          | ** ** | **1st  Quarter**      | ** ** | **2nd  Quarter** | ** ** | **3rd  Quarter** | ** ** | **4th  Quarter** | ** ** |
|                                                |       |                  |       |   |   |   |   |   |   |
| Total revenues                                      |       | $                     | 3,623,147  |   | $ | 6,418,025 |   | $ | 3,900,300 |   | $ | 4,418,869 |   |
| Total operating expenses                            |       | $                     | 2,826,217  |   | $ | 3,233,719 |   | $ | 3,098,065 |   | $ | 3,304,351 |   |
| Other Income (expense)                              |       | $                     | (62,902    | ) | $ | 9,743 |   | $ | 41,540 |   | $ | 38,823 |   |
| Net income before provision for income taxes        |       | $                     | 734,028    |   | $ | 3,194,049 |   | $ | 843,775 |   | $ | 1,153,341 |   |
| Net income (loss)                                   |       | $                     | 473,214    |   | $ | 2,114,876 |   | $ | 702,875 |   | $ | 631,542 |   |
|                                                |       |                  |       |   |   |   |   |   |   |
| Net income (loss) per  share:                       |       |                  |       |   |   |   |   |   |   |
| Basic                                               |       | $                     | 0.03       |   | $ | 0.12 |   | $ | 0.04 |   | $ | 0.04 |   |
| Diluted                                             |       | $                     | 0.03       |   | $ | 0.12 |   | $ | 0.04 |   | $ | 0.03 |   |
| Weighted average shares  outstanding:               |       |                  |       |   |   |   |   |   |   |
| Basic                                               |       | 17,183,552            |       | 17,204,922 |   | 17,161,519 |   | 17,293,946 |   |
| Diluted                                             |       | 17,972,115            |       | 18,036,354 |   | 18,108,829 |   | 18,872,912 |   |

 

## **11.          Subsequent Events**

## ** **

                In March 2008,we announced the retirement of our President and Chief Executive Officer,Charles R. Poole. During the fall of 2007, the Board of Directors beganhaving discussions with Mr. Poole, relating to his potential retirement orreduction in his day-to-day role at December 31, 2008, when his currentcontract expires, and the necessary steps for succession of the CEO position.At this time,  the Board also beganfocusing on some longer-term projects designed to continue the Company’s growthand profitability. We believe that the future success of our business will bedependent upon our ability to improve our current products and to introduce newproducts, through research and development, innovations by our employees,strategic partnerships, and acquisitions.  As a result of the longer termnature of the Board’s areas of focus for 2008 and Mr. Poole’s wishes, itbecame apparent to the Board that that it would be in the best interest of theCompany and its shareholders that Mr. Poole not spearhead our 

 

 

55

----

 

moreproduct-focused initiatives if he were not available to see them throughimplementation. As a result, on March 7, we accepted Mr. Poole’sdecision to retire early. Kelly E. Simmons, our CFO, was named interimPresident and we began to accelerate the search for Mr. Poole’sreplacement..

 

On May 22, 2007, the Company announced that its Board of Directorsauthorized the repurchase of up to $3 million of the company’s outstandingcommon shares. The repurchase plan is designed to increase shareholders’ valueand reduce the dilutive effect of GlobalSCAPE’s stock option plans. The stockrepurchase authorization has an expiration date of May 22, 2008 with therepurchase activity tied to such factors as cash generation from operations,current stock price, and other factors. GlobalSCAPE may repurchase shares fromtime to time on the open market or in private transactions, including structuredtransactions. This program may be modified or discontinued at any time. From January 1,2008 through March 19, 2008, the Company spent $978,382 under this programto acquire 263,708 shares of the company’s outstanding common stock. Since theinception of the program, the Company has spent $1,505,884 under this programto acquire 423,581 shares of the company’s outstanding common stock.

 

## **Item 9.    Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

## ** **

###### **None.**

###### ** **

###### **Item 9A (T).          Controls and Procedures**

###### ** **

**ConclusionRegarding the Effectiveness of Disclosure Controls and Procedures**

** **

GlobalSCAPE  maintains disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)) that aredesigned to ensure that information required to be disclosed in its reportsfiled or submitted under the Exchange Act is processed, recorded, summarizedand reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to GlobalSCAPE‘s management, including its Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow for timely decisions regarding requireddisclosure.  In designing and evaluating the disclosure controls andprocedures, management recognizes that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives.

 

As required bySEC Rule 13a-15(b), GlobalSCAPE carried out an evaluation, under thesupervision and with the participation of management, including its ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of GlobalSCAPE’s disclosure controls and procedures as ofthe end of the period covered by this Annual Report.  Based on thisevaluation, management concluded that GlobalSCAPE’s disclosure controls andprocedures were effective as of December 31, 2007 to ensure that theinformation required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in SEC rules and forms.

 

**Management’sReport on Internal Control Over Financial Reporting**

** **

Our managementis responsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and15d-15(f). Under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, we conductedan evaluation of the effectiveness of our internal control over financialreporting as of December 31, 2007 based on the framework in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Based on that evaluation, ourmanagement concluded that our internal control over financial reporting waseffective as of December 31, 2007.

 

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Therefore, even those systems determined to beeffective can provide only reasonable assurance with respect to financialstatement preparation and presentation.

 

 

56

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This annualreport does not include an attestation report of our registered publicaccounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestationby our registered public accounting firm pursuant to temporary rules ofthe Securities and Exchange Commission that permit us to provide onlymanagement’s report in this annual report.

 

There were nochanges in our internal control over financial reporting during the last fiscalyear and/or up to and including the date of this filing that we believematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

None.

 

###### **Item 9B.   Other Information**

###### ** **

None.

 

# PART III

#  

## **Item 10.**                 Directors,Executive Officers and Corporate Governance

## ** **

Theinformation called for by Item 10 of Form 10-K as to Directors isincorporated herein by reference to such information included in our ProxyStatement for the 2008 Annual Meeting of Stockholders to be held on June 1,2008 under the caption “Election of Directors.” Also see Item 4A of Part I of this Form 10-K.  The information called for by Item 10 of Form 10-Kas to compliance with Section 16(a) of the Exchange Act is incorporatedherein by reference to such information included in our Proxy Statement for the2008 Annual Meeting of Stockholders to be held on June 4, 2008 under thecaption “Executive Officers.”

 

GlobalSCAPEhas adopted a Code of Ethics that applies to all its employees, including itsPresident (its chief executive officer) and its Vice President of Finance andOperations (its chief financial officer).  GlobalSCAPE will provide a copyof its Code of Ethics to any person without charge upon written request to:

 

Kelly E. Simmons

President and Chief Financial Officer

GlobalSCAPE, Inc.

6000 Northwest Parkway, Suite 100

San Antonio, Texas  78249

 

## **Item 11.**                 ExecutiveCompensation

## ** **

Theinformation called for by Item 11 of Form 10-K is incorporated herein byreference to such information included in our Proxy Statement for the 2008Annual Meeting of Stockholders to be held on June 1, 2008, under thecaption “Executive Compensation” except for those parts under the captions “Compensation Committee Report on Executive Compensation”.

 

## **Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

## ** **

Theinformation called for by Item 12 of Form 10-K is incorporated herein byreference to such information included in our Proxy Statement for the 2008Annual Meeting of Stockholders to be held on June 1, 2008, under thecaption “Security Ownership of Certain Beneficial Owners and Management.”

 

 

57

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## **Item 13.**                 CertainRelationships and Related Transactions, and Director Independence

## ** **

Theinformation called for by Item 13 of Form 10-K is incorporated herein byreference to such information included in our Proxy Statement for the 2008Annual Meeting of Stockholders to be held on June 1, 2008, under thecaption “Certain Relationships and Related Transactions” and “Election ofDirectors — Board Independents”.

 

## **Item 14.**                 PrincipalAccountant Fees and Services.

## ** **

Theinformation called for by Item 14 of Form 10-K is incorporated herein byreference to such information included in our Proxy Statement for the 2008Annual Meeting of Stockholders to be held on June 1, 2008 under thecaption “Principal Accountant Fees and Services.”

 

# PART IV

#  

## **Item 15.**                 Exhibits,Financial Statement Schedules

## ** **

| (a)(1)                |   | Financial Statements and Schedules                                                                                                                                                                      |
|-----------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |   |                                                                                                                                                                                                    |
|                  |   | The following financial statements of  GlobalSCAPE, Inc. are included in Item 8:                                                                                                                   |
|                  |   |                                                                                                                                                                                                    |
|                  |   | ·                                                                                                                                                                                                  | Consolidated balance sheets — December 31, 2006 and 2007 |
|                  |   |                                                                                                                                                                                                    |   |
|                  |   | ·                                                                                                                                                                                                  | Consolidated statements of operations — Years ended December 31, 2005, 2006 and 2007 |
|                  |   |                                                                                                                                                                                                    |   |
|                  |   | ·                                                                                                                                                                                                  | Consolidated statements of stockholders’ equity — Years ended December 31, 2005, 2006 and 2007 |
|                  |   |                                                                                                                                                                                                    |   |
|                  |   | ·                                                                                                                                                                                                  | Consolidated statements of cash flows — Years ended December 31, 2005, 2006 and 2007 |
|                  |   |                                                                                                                                                                                                    |   |
|                  |   | ·                                                                                                                                                                                                  | Notes to consolidated financial statements — December 31, 2007 |
|                  |   |                                                                                                                                                                                                    |   |
|    (2) |   | Schedules not listed above have been omitted because they are not applicable or required, or the information required to be set forth therein is included in the Financial Statements or Notes thereto. |
|                  |   |                                                                                                                                                                                                    |
|    (3) |   | Exhibits                                                                                                                                                                                                |

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                        |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                   |
| 3.1         |       | Amended Restated Certificate of Incorporation (Filed as  Exhibit 3.1 to Form 8-Kfiled November 17, 2006).                                                                                          |
|        |       |                                                                                                                                                                                                              |
| 3.2         |       | Amended and Restated Bylaws of the Company effective as of  November 13, 2006 (Filed as Exhibit 3.2 to Form 8-K filed  November 17, 2006).                                                    |
|        |       |                                                                                                                                                                                                              |
| 4.1         |       | Specimen of Stock Certificate (Filed as Exhibit 4.1 to Annual  Report on Form 10-K filed April 2, 2001).                                                                                           |
|        |       |                                                                                                                                                                                                              |
| 4.2         |       | Registration Rights Agreement dated November 16, 2006 by and  between GlobalSCAPE, Inc. and the Purchasers signatory thereto (filed as  Exhibit 4.1 to Form 8-K filed November 17, 2006) |
|        |       |                                                                                                                                                                                                              |
| *10.1       |       | 1998 Stock Option Plan as amended May 13, 1999 (Filed as  Exhibit 4.2 to Form 10 filed May 12, 2000).                                                                                         |
|        |       |                                                                                                                                                                                                              |
| *10.2       |       | 2000 Stock Option Plan dated May 8, 2000 (Filed as  Exhibit 4.3 to Form 10 filed May 12, 2000).                                                                                               |

 

 

58

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| *10.3  |       | Form of 1998 Stock Option Plan Rights Termination Letter  Agreement of Directors to Agree Not to Claim Any Right of Adjustment dated  February 4, 2000 (Filed as Exhibit 4.6 to Form 10 filed  May 12, 2000).                       |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                         |
| *10.4  |       | Form of 1998 Stock Option Plan Rights Termination Letter  Agreement for Employees and Consultants to Cancel Options dated  February 8, 2000 (Filed as Exhibit 4.7 to Form 10, filed  May 12, 2000).                                 |
|   |       |                                                                                                                                                                                                                                                         |
| *10.5  |       | Form of 1998 Stock Option Plan Rights Termination Letter of  Officer to Agree Not to Claim Any Right of Adjustment dated February 8,  2000 (Filed as Exhibit 4.8 to Form 10 filed May 12, 2000).                                    |
|   |       |                                                                                                                                                                                                                                                         |
| *10.6  |       | Form of 1998 Stock Option Plan Rights Termination Letter  Agreement of Officer to Agree Not to Exercise Options dated February 8,  2000 (Filed as Exhibit 4.9 to Form 10 filed May 12, 2000).                                       |
|   |       |                                                                                                                                                                                                                                                         |
| *10.7  |       | Form of 1998 Stock Option Plan Reinstatement and Adjustment  Letter for Employees dated December 19, 2000 (Filed as  Exhibit 10.17 to Annual Report on Form 10-K filed April 2,  2001).                                             |
|   |       |                                                                                                                                                                                                                                                         |
| *10.8  |       | Form of Release and Indemnity Agreement between  GlobalSCAPE, Inc. and Employees dated December 19, 2000 (Filed as  Exhibit 10.18 to Annual Report on Form 10-K filed April 2,  2001).                                         |
|   |       |                                                                                                                                                                                                                                                         |
| 10.9   |       | Commercial Lease Agreement between ACLP University Park S.A. II, L.P.  and the Company dated April 13, 1999 (Filed as Exhibit 10.1 to  Form 10 filed May 12, 2000).                                                                      |
|   |       |                                                                                                                                                                                                                                                         |
| *10.10 |       | Release and Indemnity Agreement between GlobalSCAPE, Inc. and  Sandra Poole-Christal dated April 2, 2001 (Filed as Exhibit 10.17  to Annual Report on Form 10-K filed April 1, 2002).                                               |
|   |       |                                                                                                                                                                                                                                                         |
| *10.11 |       | Form of Incentive Stock Option Agreement under  GlobalSCAPE, Inc. 2000 Stock Option Plan (Filed as Exhibit 10.21 to  Annual Report on Form 10-K filed April 1, 2002).                                                               |
|   |       |                                                                                                                                                                                                                                                         |
| *10.12 |       | Employment Agreement between GlobalSCAPE, Inc. and Charles R.  Poole dated effective July 1, 2005 (Filed as exhibit 10.1 on  Form 8-K filed June 20, 2005).                                                                              |
|   |       |                                                                                                                                                                                                                                                         |
| *10.13 |       | Incentive Stock Option Agreement between GlobalSCAPE, Inc. and  Charles R. Poole dated June 15, 2005 (Filed as Exhibit 10.2 on  Form 8-K filed June 20, 2005).                                                                      |
|   |       |                                                                                                                                                                                                                                                         |
| 10.14  |       | Securities Purchase  Agreement dated November 13, 2006 by and among GlobalSCAPE, Inc.,  the Stockholders named in Schedule I thereto and the Purchasers named therein  (Filed as Exhibit 10.1 to Form 8-K filed November 17, 2006). |
|   |       |                                                                                                                                                                                                                                                         |
| 10.15  |       | Form of Common  Stock Purchase Warrant (Filed as Exhibit 10.2 to Form 8-K filed  November 17, 2006).                                                                                                                                     |
|   |       |                                                                                                                                                                                                                                                         |
| 10.16  |       | Loan and Security  Agreement dated September 22, 2006 by and between GlobalSCAPE, Inc.  and Silicon Valley Bank (filed as Exhibit 10.1 to Form 8-K filed  September 27, 2006).                                                      |
|   |       |                                                                                                                                                                                                                                                         |
| *10.17 |       | Form of  Non-Qualified Stock Option Agreement under the GlobalSCAPE, Inc. 2000  Stock Option Plan (Filed as Exhibit 10.2 to Form 10-Q filed  November 13, 2006)                                                                     |
|   |       |                                                                                                                                                                                                                                                         |
| *10.18 |       | GlobalSCAPE, Inc. 2006  Non-Employee Directors Long-Term Equity Incentive Plan (Previously filed as  Exhibit 10.1 to Current Report on Form 8-K filed June 5,  2007).                                                                    |
|   |       |                                                                                                                                                                                                                                                         |
| *10.19 |       | Form of Non-Statutory  Stock Option Agreement under GlobalSCAPE, Inc. 2006 Non-Employee  Directors Long-Term Equity Incentive Plan (Previously filed as Exhibit 10.1  to Form 10-Q filed November 14, 2007).                                       |
|   |       |                                                                                                                                                                                                                                                         |
| *10.20 |       | Form of Employment  Agreement for Executive Officers at Vice President-level and above  (Previously filed as Exhibit 10.1 to Current Report on Form 8-K  filed January 7, 2008).                                                         |
|   |       |                                                                                                                                                                                                                                                         |
| 14.1   | ** ** | Code of Ethics  (filed herewith)                                                                                                                                                                                                                             |
|   | ** ** | ** **                                                                                                                                                                                                                                                   |
| 23.1   |       | Consent of PMB Helin Donovan, LLP (filed herewith).                                                                                                                                                                                                          |
|   |       |                                                                                                                                                                                                                                                         |
| 31.1   |       | Rule 13a-14(a)/15d — 14(a) Certification of Kelly E.  Simmons, President and Chief Financial Officer (filed herewith).                                                                                                                        |
|   |       |                                                                                                                                                                                                                                                         |
| 32.1   |       | Certificate pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed  herewith).                                                                                                          |

 

----

* Management Compensatory Plan or Agreement

 

 

59

----

 

**Signatures**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, in San Antonio, Texas on March 26,2008.

 
| ** ** | **GlobalSCAPE, Inc.** |
|------------|----------------------------|
|       |                       |
|       | By:                        | /s/ Kelly E. Simmons |
|       |                       | Kelly E. Simmons |
|       |                       | President and Chief Financial Officer |

 

Pursuant to the requirements of the Securities Exchange Act of 1934, thisreport has been signed below by the following persons on behalf of theregistrant in the capacities indicated on March  26, 2008.

 
| ** ** | **Signature**          | ** ** | ** ** | **Title**                                        |
|------------|------------------------|------------|------------|--------------------------------------------------|
|       |                   |       |       |                                             |
|       | /s/ Thomas W. Brown    |       |       | Chairman of the Board and Director               |
|       | Thomas  W. Brown       |       |       |                                             |
|       |                   |       |       |                                             |
|       | /s/  Charles R. Poole  |       |       | Director                                         |
|       | Charles  R. Poole      |       |       |                                             |
|       |                   |       |       |                                             |
|       | /s/  David L. Mann     |       |       | Director                                         |
|       | David  L. Mann         |       |       |                                             |
|       |                   |       |       |                                             |
|       | /s/  Phillip M. Renfro |       |       | Director                                         |
|       | Phillip  M. Renfro     |       |       |                                             |
|       |                   |       |       |                                             |
|       | /s/  Frank M. Morgan   |       |       | Director                                         |
|       | Frank  M. Morgan       |       |       |                                             |
|       |                   |       |       |                                             |
|       | /s/  Kelly E. Simmons  |       |       | President , Chief  Financial Officer and         |
|       | Kelly E. Simmons       |       |       | Secretary  (Principal Executive Officer          |
|       |                   |       |       | and Principal  Accounting and Financial Officer) |

 

 

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