UNITED STATES

SECURITIES AND 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 the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes    x No

 

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

o Yes    x No

 

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

x Yes    o No

 

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

 

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

 

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

 

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

o Yes    x No

 

The aggregate market value of the registrant’s outstanding common stock held by non-affiliates was approximately $33,192,000 as of the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sales price of $2.69 per share on such date on the American Stock Exchange.

 

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

 

Documents Incorporated by Reference

 

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

 

 

TABLE OF 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

 

 

Preliminary Notes

 

GlobalSCAPE ® , CuteFTP ® , CuteFTP Pro ® , CuteMx ® , CuteSITE Builder ® , PureCMS ® , CuteZIP ® , CuteHTML ®  and CuteMAP ®  are registered trademarks of GlobalSCAPE, Inc.  GlobalSCAPE Secure FTP Server TM , GlobalSCAPE Transfer Engine TM , and GlobalSCAPE Enhanced File Transfer Server TM  are trademarks of GlobalSCAPE, Inc.  Other trademarks and tradenames in this Annual Report are the property of their respective owners.

 

In this report, we use the following terms:

 

“HTTP” or Hyper Text Transfer Protocol is a protocol commonly used to transfer hypertext documents between a web server and a web browser.

 

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

 

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

 

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

 

Forward-Looking Statements

 

This Annual Report on Form 10-K and the documents incorporated by reference herein contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended.  “Forward-looking statements” are those statements that are not of historical fact, but describe management’s beliefs and expectations.  We have identified many of the forward-looking statements in this Annual Report by using words such as “anticipate,” “believe,” “could,” “estimate,” “may,” “expect,” and “intend.”  Although we believe these beliefs and expectations are reasonable, our operations involve a number of risks and uncertainties, including those described in the “Risk Factors” section of this Annual Report and other documents filed with the Securities and Exchange Commission.  Therefore, GlobalSCAPE’s actual results could differ materially from those discussed in this Annual Report.

 

PART I

 

Item 1.    Business

 

Company Overview

 

We develop and distribute secure managed file transfer, or MFT, software for individuals and business users to safely send files over the internet. We have also developed Wide-Area File System, or  WAFS, collaboration and Continuous Data Protection, or CDP, software which further enhance the ability to share and backup files within the infrastructure of a company’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 as financial data, medical records, customer files and other similar documents.  In addition, these products ensure compliance with government regulations relating to the protection of information while allowing users to reduce IT costs, increase efficiency, track and audit transactions and automate processes.  Our WAFS and CDP products provide data replication, acceleration of file transfer, sharing/collaboration and continuous data backup and recovery to our customers.  We believe that we are uniquely positioned to provide secure transfer, sharing, and replication of files that need to be transmitted inside the user’s firewall to distributed offices, 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 and small businesses, was first distributed in 1996 over the internet and has achieved significant success and popularity.  We built on this success by steadily adding complementary products such as the enterprise versions of our file transfer programs, Secure FTP Server and Enhanced File Transfer Server, and establishing an internal sales organization and reseller network. We believe we now have a reputation as a provider of easy-to use, affordable file transfer and collaboration software for individual, small business and enterprise users.  Since 2000, we have focused on enhancing our portfolio of products to meet the increasing demand for data security, overcoming the challenges of latency and bandwidth limitations for supporting branch offices and geographically distributed locations, allowing enterprises to backup data across their LAN and WAN as changes are made, and offering solutions that permit non-technical personnel to contribute content to their organizations’ Web sites.  Our software is used worldwide across a wide range of industries.  Through the end of 2007, we had distributed over 1.9 million software licenses to our customer base which includes individual consumers, small to medium-sized businesses, as well as 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 began having discussions with Mr. Poole, relating to his potential retirement or reduction in his day-to-day role at December 31, 2008, when his current contract expires, and the necessary steps for succession of the CEO position. At this time, the Board also began focusing on some longer-term projects designed to continue the Company’s growth and profitability. We believe that the future success of our business will be dependent upon our ability to improve our current products and to introduce new products, through research and development, innovations by our employees, strategic partnerships, and acquisitions.   As a result of the longer term nature of the Board’s areas of focus for 2008 and Mr. Poole’s wishes, it became apparent to the Board that that it would be in the best interest of the Company and its shareholders that Mr. Poole not spearhead our more product-focused initiatives if he were not available to see them through implementation. As a result, on March 7, we accepted Mr. Poole’s decision to retire early. Kelly E. Simmons, our CFO, was named interim President and we began to accelerate the search for Mr. Poole’s replacement.

 

Industry Background

 

The internet has become an integral part of operations for companies of all sizes, not only for e-commerce, but also as a means of managing information between central and remote locations and with employees, partners and suppliers.  Corporate information managers must protect business assets, ensure that policies and processes meet regulations governing the management of sensitive information, and ensure that the right people have access to the right information at the right time.  Global operations, diverse business partners and networks further emphasize the need for common standards to ensure compatibility, scalability and cost-effective integration.

 

Organizations that use the internet for data transfer are also faced with a daunting array of security challenges stemming from various regulatory and business requirements for data privacy and confidentiality.  Regulatory and privacy requirements include legislation such as the Health Insurance Portability and Accountability Act (HIPAA), California Senate Bill (SB) 1386, and the Gramm-Leach-Bliley Act (GLBA) in the US, and the European Union’s Privacy Directive, some of which impose severe penalties for improper disclosure of confidential information.  Additionally, industry best-practices and self-imposed business requirements include intellectual property and trade secrets protection and controls regarding disclosure of proprietary information to minimize corporate risk from the devastating consequences of security breaches.  As corporate Web operations mature, we believe we will see an increasing demand for solutions to facilitate secure 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 products include Windows ® -based, Mac based, browser-based and server software applications.

 

FTP Client Programs

 

File transfer protocol, or FTP, is the language used for file transfers from computer to computer across the internet.  FTP is most commonly used to download a file from a server using the internet or to upload a file to a server.

 

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

 

CuteFTP Pro .   CuteFTP Pro is a secure FTP client program designed for advanced users and information technology professionals.  CuteFTP Pro incorporates standards for encrypting data during transport and at rest, accelerating transfer of large files, and automating common file transfer tasks. It includes various features attractive to advanced users such as multi-part and concurrent file transfers to maximize transfer speed, scheduled file transfers, automated site backups and scripting ability for automating FTP tasks.  CuteFTP Pro has been favorably reviewed by leading online publications including CNet’s Download.com, ZDNet and PC Review.  CuteFTP Pro was released in March 2001 and CuteFTP MAC Pro was released in April 2004.

 

File Transfer Servers

 

FTP transfers require two software programs: a client program to start a transfer and a server to accept the connection. Our file transfer server programs are designed to provide business with increased security and speedier file transport when compared to e-mail.

 

Secure FTP Server .   Secure FTP Server complements CuteFTP Pro and other professional FTP clients by enabling encrypted transfers using SSL, SSH2 and advanced S/KEY password encryption.  When used with CuteFTP Pro, Secure FTP Server offers a complete digital certificate management system, giving system administrators the ability to create, sign, import, export and add digital certificates, as well as kick off back-end processes.  The latter functionality can be used as a partial or total replacement for more complex enterprise-level electronic data interchange systems, or (EDI).  Additional features include full remote management capability, the ability to operate multiple FTP sites with unique directory structures from a single server and manage user accounts with advanced restriction settings for maximum security and control.  Secure FTP Server has been favorably reviewed by leading online publications including Server Watch and File Forum.  GlobalSCAPE Secure FTP Server was first released in January 2002.

 

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Enhanced File Transfer Server.  Enhanced File Transfer Server,  EFT, is an enterprise file server, building on the base features of Secure FTP Server by providing digital certificate management, multiple secure protocols, remote administration, flexible authentication choices, extensive automation and advanced security options. The latest version, EFT Server 5, helps customers achieve regulatory compliance with Payment Card Industry, or PCI, Data Security Standard, or DSS, by providing hardened security settings and compliance reporting options. EFT also offers modules that can be integrated into the base software such as DMZ Gateway, which provides a multi-tiered security solution for traversing network walls; OpenPGP, a dual-key encrypted storage solution; Secure Ad-Hoc, which is an alternative solution to e-mail for sending large file attachments; and auditing and reporting of server transactions.

 

Data Replication Products

 

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

 

Wide Area File System (WAFS) .   Our Wide Area File System product delivers a unified and accelerated file access system, instant file-sharing and server-to-server mirroring across any distance, with full coherency and at LAN access speeds.  WAFS delivers a true wide area file solution for any distance, and any number and any complexity of files.  Continuous, real-time multi-directional acceleration and mirroring technology ensures that data 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, or VPN, or crossing firewalls in real time.  In addition, users can leverage file locking capabilities across the LAN and WAN. Our WAFS ensures bandwidth efficient WAN utilization; that users have access to the most recent data.  The off-line mode ensures continued data access in the event of WAN or server outage.  Our WAFS software is easy to deploy and manage remotely.

 

CDP .   Our continuous backup software inexpensively delivers true real-time continuous data protection.  Our software-only solution supports the ability to backup any number of branch servers or remote laptops to one or more centrally located systems.   CDP transparently and continuously captures data from local and remote servers, eliminating the backup window and restoring data rapidly. Bandwidth requirements are minimal since only file differences are transferred to the backup system.

 

Enterprise .   Enterprise is designated for companies that need both WAFS or multi-directional mirroring and real-time backup.  It includes all the features of the entire WAFS and CDP product line.

 

Internet Products

 

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

 

Maintenance and Support

 

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

 

 

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Strategy

 

Our goal is to build upon our successful market position in FTP, WAFS and CDP, to provide business users with secure and efficient solutions for their growing file access, file transfer, and data replication and protection needs.  For example, in 2007, we introduced upgrades to EFT 5.0,  CuteFTP 8.0, the Secure Ad Hoc Transfer module, and the HS-PCI module ensuring compliance with DSS.   We continue to enhance and develop high quality, affordable software that enables organizations and individuals to easily create, move and manage Web and file-based data in a secure, collaborative environment.  We have successfully established a brand in the market for internet software productivity tools with our file management products, CuteFTP and CuteFTP Pro.  We believe that our continued growth will come not only through the further development of our SecureFTP Server and Enhanced File Transfer products and the growing demand for file security when transferring information across the internet, but also through the aggressive sales and marketing of our WAFS and CDP products, which we believe represent two high growth markets.  Based upon estimates by Gartner, Inc., and other consulting groups in our markets, we believe that the WAN optimization/WAFS market is currently $300 million annually and growing at 20% - 30% per year, and the CDP market is of similar size but in the early stages of adoption and growing rapidly.  In addition, we believe that the WAFS and CDP products are highly complementary to our traditional Secure File Transfer products facilitating cross sales and new customer penetration.

 

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

 

Key elements of our strategy are:

 

Continue to enhance and develop our products.  Corporate and individual users are increasingly concerned with security and data replication and protection.  We have added the EFT enterprise solution to our product line for businesses to meet the needs of security issues when transferring files in and out of their servers across the internet and we acquired Availl in 2006 in order to offer customers a data replication and protection solution. We believe that the future success of our business will be dependent upon our ability to improve our current products and to introduce new products, through research and development, innovations by our employees, strategic partnerships, and acquisitions. We intend to accelerate the development and improvement of our current products throughout 2008 to meet the demand for file transfer security and data replication and protection through Enhanced File Transfer Server, WAFS and CDP and to consumers and smaller businesses through our other well known FTP products, CuteFTP Home and CuteFTP Professional and Secure FTP Server.

 

Pursue strategic product and acquisition opportunities .   We will continue to look for opportunities to develop, acquire or add synergistic products or technologies that enhance the success of these products.  In 2005, we added modules and further developed our Secure FTP Server and EFT products.  In September 2006, we acquired Availl which allowed us to add our WAFS and CDP products. We continue to seek potential acquisitions and strategic patnerships.

 

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

 

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

 

Develop internal sales staff .   During 2007, we continued the development of our internal direct sales force to better sell more complex products, such as Enhanced File Transfer, Secure FTP Server, WAFS and CDP. We intend to continue to develop our sales staff through additional employees, further training and certification.

 

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

 

Sales and Marketing

 

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

 

We also sell our FTP Client Programs, Secure FTP Server and our internet products via download from our Web site, www.globalscape.com .  Prospective buyers may use our software products free during an evaluation period of up to thirty days.  The programs are automatically disabled if a license is not purchased by the end of the trial period.  Our current products typically range in price from $39.99 to $2,400 per license.  Prior to 2006, the majority of our software sales had been made online using a credit card.  While we continue to sell products over the internet, this has become a less important sales channel as we have grown our internal sales organization and reseller network.  Our software is also available for download from a variety of independent internet software sites such as CNet’s Download.com, as well as sites in Western Europe, Canada, Australia, and Asia.  We distribute a limited number of copies on CD in Fry’s and Micro Center stores in the United States and through numerous international resellers.  We provide free customer support via a searchable knowledge base on our Web site and sell “live” support and maintenance packages.

 

Customers

 

We had one customer, the Army Contracting Agency ITEC4, whose purchase of $2.8 million dollars accounted for 14.5% of our sales in 2007. The order was comprised of Secure FTP Server with SSH Add On module, CuteFTP Pro, and the associated maintenance and support covering first year installations. While the purchase of the product would not be recurrent in the same volume, first year maintenance and support will increase until all software installations have been completed and thereafter in the form of renewals.

 

Seasonality

 

Our products are marketed to individuals as well as large organizations. As a result of this mix within our customer base, we did not experience seasonality in our sales during 2007, nor do we expect seasonality to have a significant impact on sales in 2008.

 

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Network and Equipment

 

We have contracted with various network providers for internet access.  Our arrangements provide for redundancy in the event of a failure, and also for rapid expansion of available bandwidth in the 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 and expansion plans in place to allow rapid and cost effective scalability.

 

Research and Development

 

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

 

For the years 2005, 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 development spending in 2008 as we focus on improving our current products and introducing new products.

 

Competition

 

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

 

CuteFTP .   CuteFTP exists in a highly competitive environment with several hundred FTP software utilities available on the internet.  We believe our primary competitors are WS_FTP from Ipswitch, Inc. and FTP Voyager by Rhino Software, Inc.  CuteFTP was the second Windows-based FTP client to market and is consistently the most frequently downloaded FTP client on popular download sites.  CuteFTP Mac, our FTP client for the Macintosh platform, 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 higher end of the same market as CuteFTP, targeting the security-minded IT professional.  CuteFTP Professional is positioned as one of the only secure FTP client programs that support a wide range of security standards related to the FTP protocol.  Competitors in the general FTP market offer products that support a smaller subset of these security standards and address a narrower segment of the secure FTP market.  Competitors include Van Dyke, Inc., Ipswitch, Inc., and Rhino Software, Inc.

 

Secure FTP Server .  Secure FTP Server competes against a limited number of secure Windows-based FTP servers.  We believe our primary competitors are WS_FTP Server and Serve-U.  Secure FTP Server has the advantage of leveraging the success of CuteFTP Pro through product integration, offering proprietary extensions to the FTP protocol, and cross-marketing efforts to an existing customer base.

 

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

 

WAFS.  WAFS competes in the Wide Area File System/Storage market.  We believe our primary competitors are Riverbed, Packeteer and Cisco, who are delivering proprietary based appliances.  We

 

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believe that WAFS has the advantage of being a software only solution which leverages corporate infrastructure and minimizes the total cost of ownership.

 

CDP.  Continuous Data Protection competes in the highly competitive CDP market.  We believe our primary competitors are CA XOsoft, Doubletake and Symantec/Veritas.  We believe that CDP has the advantage of transparently and continuously capturing data from local and remote servers, eliminating the backup window and restoring data rapidly.

 

CuteHTML .   CuteHTML exists in a highly competitive environment with approximately one hundred text-based HTML editors.  CuteHTML’s competition includes HomeSite from Allaire, Inc.  CuteHTML’s advantage is that it doesn’t add extraneous code to Web pages, an attribute preferred by many professional Web masters.

 

CuteHTML Pro .  CuteHTML Pro faces heavy competition from visual or “WYSIWYG” editors such as Front Page, by Microsoft, Dreamweaver, by Macromedia Inc, and competition from other direct editors , such as Homesite, also by Macromedia Inc.  CuteHTML Pro’s advantage is its appeal to professional Webmasters who typically shun visual editors in favor of the extra features and added control provided by direct editors such as CuteHTML Pro.

 

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

 

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

 

We have limited information regarding our products’ market shares in their respective categories.  Many of our competitors have substantially greater financial, technical, sales, marketing, personnel, and other resources, as well as greater name recognition and a larger customer base than we do.  Significant competition characterizes the markets for our products and we anticipate that we will face increasing pricing pressures from competitors in the future.  Moreover, given that there are low barriers to entry into the software market, and the market is rapidly evolving and subject to rapid technological change, we believe that competition will persist and intensify in the future.  We have experienced price declines on some products over the last several years.  A reduction in the price of our products would negatively affect gross margins as a percentage of net revenues, and would require us to increase software unit sales, in order to maintain net revenues at existing levels.  For more discussion on the risks associated with our competition, you should read the information under “Risk Factors — Risks Related to Operations.”

 

Governmental Regulation

 

All of our products are subject to U.S. export control laws and applicable foreign government import, export and/or use requirements. Minimal U.S. export restrictions apply to all products, whether or not they perform encryption functions.

 

The Export Administration Regulations of the U.S. Department of Commerce regulate the export of most commercial products with encryption features. Under regulations issued by the Department of Commerce in January 2000, encryption products of any key length may be exported, after a one-time technical review, to non-governmental end-users around the world, except for embargoed countries and specific prohibited end-users. Encryption products may be exported to governmental end-users under special Encryption Licensing Arrangements or individual export licenses that may be issued at the discretion of the Department of Commerce. In October 2000, the Department of Commerce further revised

 

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the Export Administration Regulations to relax some reporting requirements and to remove the export licensing requirement for shipments to governmental end-users in 23 countries, including most of the United States’ major trading partners. In June 2002, the Department of Commerce amended the encryption regulations again to conform them to the control lists implemented by other countries that are also members of the Wassenaar Arrangement. We believe that we have completed the necessary technical reviews of the products and services we currently export, but new products that we acquire or develop may require technical review before we can export them. For the export of some of our products, we are subject to various post-shipment reporting requirements.

 

The changes to the export regulations allow our products to be exported more quickly and with more strength and, therefore, be more competitive with products from foreign producers. However, the export regulations may be modified at any time. In light of the ongoing discussions regarding anti-terrorism legislation in the U.S. Congress, there may be an increased risk that export regulations may be modified in the future. Modifications to the export regulations could reduce or eliminate 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 in competing for international sales compared to companies located outside of the U.S. that would not be subject to these restrictions.

 

Intellectual Property

 

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

 

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

 

Our trademarks, copyrights and technology are central to our business.  We protect our intellectual property rights through a combination of licenses, trademarks, service marks, copyrights, trade secret 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 and Enhanced File Transfer Services.  We have obtained twenty-nine United States copyright registrations for all but the most recent versions of our software applications, and have applied for registration for the most recent versions.

 

We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection.  Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary.  Policing unauthorized use of our products is difficult, and while we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem.  In selling our products, 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 foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States.  In addition, the number of patents applied for and granted for software inventions is increasing.  Consequently, there is a growing risk of third parties asserting patent claims against us. We have received, and may receive in the future, communications from third parties asserting that our products infringe, or may infringe, the proprietary rights of third parties, seeking indemnification against such infringement or indicating that we may be required to obtain a license or royalty from such third parties.

 

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

 

Employees

 

As of March 1, 2008, we had 66 full-time and part-time employees organized within eight functional areas.  The employee distribution according to function 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 our employees are covered by collective bargaining agreements and we believe our employee relations are good.

 

Available Information

 

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any document we 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 information on the public reference room. The SEC maintains an internet web site that contains annual, quarterly and current reports, proxy statements and other information that issuers (including GlobalSCAPE) file electronically with the SEC. The SEC’s web site is www.sec.gov.

 

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and amendments filed with the Securities and Exchange Commission are available free of charge on our web site at www.globalscape.com in the Investor Relations section as soon as practicable after such reports are filed.  Information on our website is not incorporated by reference into this Form 10-K and should not be considered part of this report or any other filing that we make with the SEC.

 

Item 1A.  Risk Factors

 

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

 

Risks Related to Operations

 

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

 

Our future success depends on our ability to respond to the rapidly changing needs of our customers by developing or introducing new products, product upgrades, and services on a timely basis.  We have in the past incurred, and we believe that we will continue to incur, research and development expenses as we strive to remain competitive.  New product development and introduction involves a significant commitment of time and resources and is subject to a number of risks and challenges including:

 

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Managing the length of the development cycle for new products and product enhancements, which has frequently been longer than we originally expected.

 

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

 

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

 

Entering into new or unproven markets with which we have limited experience.

 

Managing new product and service strategies, including integrating our various security and file replication technologies, management solutions, customer service, and support into unified enterprise security and file replication solutions.

 

Incorporating acquired products and technologies.

 

Developing or expanding efficient sales channels.

 

Obtaining sufficient licenses to technology and technical access from operating system software vendors on reasonable terms to enable the development and deployment of interoperable products, including source code licenses for certain products with deep technical integration into operating systems.

 

If we are not successful in managing these risks and challenges, or if our new products, product upgrades, and services are not technologically competitive or do not achieve market acceptance, we could have expended substantial resources and capital without realizing sufficient revenues in return, and our business and operating results could be adversely affected.

 

Fluctuations in demand for our products and services are driven by many factors and a decrease in demand for our products could adversely affect our financial results.

 

We are subject to fluctuations in demand for our products and services due to a variety of factors, including competition, product obsolescence, technological change, budget constraints of our actual and potential customers, level of broadband usage, 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 our product sales.  If demand for our products declines, our revenues and gross margin could be adversely affected.

 

If we fail to manage our sales and distribution channels effectively or if our partners choose not to market and sell our products to their customers, our operating results could be adversely affected .

 

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

 

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

 

Longer sales cycles associated with direct sales efforts.

 

Difficulty in hiring, retaining, and motivating our direct sales force.

 

Substantial amounts of training for sales representatives to become productive, including regular updates to cover new and revised products.

 

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

 

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

 

Our resellers and distributors are not subject to minimum sales requirements or any obligation to market our products to their customers.

 

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

 

Our resellers and distributors frequently market and distribute competing products and may, from time to time, place greater emphasis on the sale of these products due to pricing, promotions, and other terms offered by our competitors

 

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

 

Because we offer very complex products, undetected errors, failures, or bugs may occur, especially when products are first introduced or when new versions are released.  Our products are often installed and used in large-scale computing environments with different operating systems, system management software, and equipment and networking configurations, which may cause errors or failures in our products or may expose undetected errors, failures, or bugs in our products.  Our customers’ computing environments are often characterized by a wide variety of standard and non-standard configurations that make pre-release testing for programming or compatibility errors very difficult and time-consuming.  In addition, despite testing by us and others, errors, failures, or bugs may not be found in new products or releases until after commencement of commercial shipments.  In the past, we have discovered software errors, failures, and bugs in certain of our product offerings after their introduction and have experienced delayed or lost revenues during the period required to correct these errors.

 

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

 

We have grown, and may continue to grow, through acquisitions that give rise to risks and challenges that could adversely affect our future financial results.

 

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

 

·                   Complexity, time, and costs associated with the integration of acquired business operations, workforce, products, and technologies into our existing business, sales force, employee base, product lines, and technology.

 

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

 

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

 

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

 

·                   The incurrence of additional acquisition-related debt as well as increased expenses and working capital requirements.

 

·                   Dilution of stock ownership of existing stockholders, or earnings per share.

 

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

 

·                   Substantial accounting charges for restructuring and related expenses, write-off of in-process research and development, impairment of goodwill, amortization of intangible assets, and stock-based compensation expense.

 

If integration of our acquired businesses is not successful, we may not realize the potential benefits of an acquisition or undergo other adverse effects that we currently do not foresee.  To integrate acquired businesses, we must implement our technology systems in the acquired operations and integrate and manage the personnel of the acquired operations.  We also must effectively integrate the different cultures of acquired business organizations into our own in a way that aligns various interests, and may need to enter new markets in which we have no or limited experience and where competitions in such markets have stronger market positions.

 

Any of the foregoing, and other factors, could harm our ability to achieve anticipated levels of profitability from acquired businesses or to realize other anticipated benefits of acquisitions.  In addition, because acquisitions of high technology companies are inherently risky, no assurance can be given that our previous or future acquisitions will be successful and will not adversely affect our business, operating results, or financial condition.

 

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

 

The open source software community develops software technology for free use by anyone. We have relied on open source technology for the encryption features in our CuteFTP Pro and Secure FTP Server products. Our reliance on open source code software may impose limitations on our ability to commercialize our solution and may subject us to possible intellectual property litigation.

 

We incorporate a limited amount of open source code software into our products, and we may use more open source code software in the future. Open source code may impose limitations on our ability to commercialize our products because, among other reasons, open source license terms may be ambiguous and may result in unanticipated obligations regarding our solution, and open source software cannot be protected under trade secret law. In addition, it may be difficult for us to accurately determine the developers of the open source code and whether the acquired software infringes third-party intellectual property rights. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. Claims of infringement or misappropriation against us could be costly for us to defend and could require us to seek to obtain 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 the event re-engineering could not be accomplished on a timely basis. If this occurs, our business and operating results could be harmed.

 

In addition, from time to time there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. We use a limited amount of open source software in our solution and may use more open source software in the future. As a result, we could be subject to suits by 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 of operations and financial condition or require us to devote additional research and development resources to change our solution.

 

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If we lose key personnel we may not be able to execute our business plan.

 

Our future success depends on the continued services of key members of our management team. These individuals are difficult to replace because of the intense competition for similarly skilled people. In addition, new members of the management team may not be productive for  weeks or months as they 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 market share.

 

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

 

We compete with a variety of companies who have significantly greater revenues and financial resources than GlobalSCAPE 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 Commerce and several other vendors, and WAFS competes with Riverbed Technology which recently completed an initial public offering.  Large companies may be able to develop new technologies more quickly than we can, to offer a broader array of products, and to respond more quickly to new opportunities, industry standards or customer requirements. For example, Sterling Commerce receives approximately $50 million in maintenance contract revenue annually, providing them with significant resources for product development and marketing.  Some competitors may also be able to adopt more aggressive pricing strategies. For example, Ipswitch gives an older version of its file transfer protocol program away for free for non-commercial use, and Microsoft includes file transfer protocol functionality in its internet browser, which it distributes for free. Increased competition may result in lower operating margins and loss of market share. Additional competitors may enter the market and may have significantly greater capabilities and resources than we do.

 

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

 

We compete intensely with other internet software development and distribution companies internationally 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, we believe that we must provide a competitive compensation package, including cash and equity-based compensation. The volatility in our stock price may from time to time adversely affect our ability to recruit or retain employees. In addition, we may be unable to obtain required stockholder approvals of future increases in the number of shares available for issuance under our equity compensation plans, and recent changes in accounting rules require us to treat the issuance of employee stock options and other forms of equity-based compensation as compensation expense. As a result, we may decide to issue fewer equity-based incentives and may be impaired in our efforts to attract and retain necessary personnel. If we are unable to hire and retain qualified employees, or conversely, if we fail to manage employee performance or reduce staffing levels when required by market conditions, our business and operating results could be adversely affected.

 

Key personnel have left our company in the past and there likely will be additional departures of key personnel from time to time in the future. The loss of any key employee could result in significant disruptions to our operations, including adversely affecting the timeliness of product releases, the successful implementation and completion of company initiatives, the effectiveness of our disclosure

 

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

 

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

 

We rely on foreign subcontractors to help us develop our software. If these programmers decided to stop working for us, or if we were unable to continue using them because of political or economic instability, we would have difficulty finding comparably skilled developers. In addition, we would likely have to pay considerably more for the same work, especially if we used U.S. personnel. If we could not replace the programmers, it would take us significantly longer to develop our products.

 

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

 

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

 

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

 

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

 

Increased customer demands on our technical support services may adversely affect our relationships with our customers and our financial results.

 

We offer technical support services with many of our products. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for support services. We also may be unable to modify the format of our support services to compete with changes in support services provided by competitors or successfully integrate support for our customers. Further customer demand for these services, without corresponding revenues, could increase costs and adversely affect our operating results.

 

Our products may expose customers to invasion of privacy, causing customer dissatisfaction.

 

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

 

Risks Related to Stock Ownership

 

Our stock price is/may be volatile.

 

The trading price of our common stock has been and could continue to be subject to wide fluctuations in response to certain factors, including:

 

Quarter-to-quarter variations in results of operations;

 

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 our products, plans and strategic position and those of our competitors and customers.

 

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

 

Accounting charges may cause fluctuations in our quarterly financial results.

 

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

 

Amortization of intangible assets, including acquired product 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 $5.2 million  of acquired product rights and other intangible assets and $4.6 million of goodwill. We have recorded and will continue to record future amortization charges with respect to a portion of these intangible assets. In addition, we will evaluate our long-lived assets, including property and equipment, goodwill, acquired product rights, and other intangible assets, whenever events or circumstances occur which indicate that these assets might be impaired.

 

We do not pay dividends on our common stock.

 

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

 

Anti-takeover provisions in our charter and Delaware law could inhibit others from acquiring us.

 

Some of the provisions of our certificate of incorporation and bylaws and in Delaware law could, together or separately:

 

discourage potential acquisition proposals;

 

delay or prevent a change in control; and

 

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

 

In particular, our certificate of incorporation and bylaws prohibit stockholders from voting by written consent or calling meetings of the stockholders.  We are also subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a

 

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

 

Our directors and executive officers continue to have substantial control over us

 

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

 

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 stock option plans as March 1, 2008, of which 971,493 were vested as of March 1, 2008. We have filed a registration statement under the Securities Act, covering stock issued upon the exercise of options by non-affiliates, and we may file a registration statement covering options held by affiliates as well. If we do not file a registration statement covering affiliates, affiliates who exercise their options may choose to sell the stock under an exemption from registration, such as Rule 144 under the Securities Act. The exercise of these options and sale of the resulting stock could depress the value of our stock.

 

Risks Relate d to Legal Uncertainty

 

We are vulnerable to claims that our products infringe third-party intellectual property rights particularly because our products are partially developed by independent parties.

 

We may be exposed to future litigation based on claims that our products infringe the intellectual property rights of others. This risk is exacerbated by the fact that some of the code in our products is developed by independent parties or licensed from third parties over whom we have less control than we exercise over internal developers. In addition, we expect that infringement claims against software developers will become more prevalent as the number of products and developers grows and the functionality of software programs in the market increasingly overlaps. Claims of infringement could require us to re-engineer our products or seek to obtain licenses from third parties in order to continue offering its products. In addition, an adverse legal decision affecting our intellectual property, or the use of significant resources to defend against this type of claim could place a significant strain on our financial resources and harm our reputation.

 

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

 

Our software code, and trade and service marks are some of our most valuable assets. Given the global nature of the internet and our business, we are vulnerable to the misappropriation of this intellectual property, particularly in foreign markets, such as China and Eastern Europe, where laws or law enforcement practices are less developed. The global nature of the internet makes it difficult to control the ultimate destination or security of our software making it more likely that unauthorized third parties will copy certain portions of our proprietary information or reverse engineer the proprietary information used in its programs. If our proprietary rights were infringed by a third-party, and we did not have adequate legal recourse, our ability to earn profits, which are highly dependent on those rights, would be severely diminished.

 

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

 

Our various trademarks are important 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 resources towards

 

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developing an independent brand identity. Defending or enforcing our trademark rights at a local and international level could result in the expenditure of significant financial and managerial resources.

 

Item 1B.  Unresolved Staff Comments

 

None.

 

Item 2.  Properties

 

Our corporate office is located in a technical park in northwest San Antonio called University Park Tech Center II.  Our lease for the 14,700 square foot facility expires in September 2008.  Our annual rent is approximately $191,000. By June 2008, the corporate office will relocate to a new 21,495 square foot facility also located in northwest San Antonio. The annual rent on the eleven year lease for this facility will average $584,000. Availl is located in an office park in Andover, Massachusetts called Brickstone Square.  Our lease for the 3920 square foot facility expires in October 2009.  Our annual rent is approximately $90,800.  We believe these facilities will be suitable for our current business needs and that suitable additional space will be available on acceptable terms when needed.

 

Item 3.  Legal Proceedings

 

We are not currently involved in any material pending legal proceedings, but may become subject to legal proceedings in the ordinary course of our business.  Such claims may result in the expenditure of significant financial and managerial resources.

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

None.

 

Item 4A.  Executive Officers of the Company

 

Kelly E. Simmons.   Mr. Simmons serves as GlobalSCAPE’s interim President and Chief Financial Officer and Corporate Secretary. He is a Texas CPA and has over 27 years experience in financial management including accounting, SEC reporting, mergers and acquisitions, information systems, and investor relations.  From 1988 to 2000, Mr. Simmons held various positions, including CFO, with two affiliated public companies, US Long Distance and Billing Concepts which grew from revenues of $2 million in 1988 to over $500 million in 1999 with over 1,200 employees.  Before joining GlobalSCAPE, he was CFO of Sino Swearingen Aircraft Corporation, a manufacturer of light business jets from 2005 to 2007.  Mr. Simmons holds a B.S. degree in Finance from Louisiana State University.

 

Jeffrey Gehring .    Mr. Gehring serves as GlobalSCAPE’s Vice President of Sales and has been with GlobalSCAPE since November 2004 in that capacity. Mr. Gehring is responsible for the company’s inbound sales, corporate sales and the reseller program. Mr. Gehring was employed by Nextel Partners as Director of Sales in 2004, where he coordinated sales across the country. From 2003 to 2004, Mr. Gehring was Sales Manager for GlobalSCAPE, performing the duties he presently holds. From 2002 to 2003, Mr. Gehring was a principal in a start up business, ConnectOne Telecom, where he got the business off the ground from the organizational stage to operations. Prior to 2002, Mr. Gehring was Director of Sales and Marketing at UDP, a telecommunications billing, order management and customer service software company. In addition to his UDP experience, he has more than 20 years of operational and sales management experience in large and medium-sized businesses, including Unisys, Bell South and Metrocall. His experience includes strategic planning and implementation for companies that require rapid growth, as well as establishing processes and policies that foster world-class sales organizations.

 

Timothy J. Barton .  Mr. Barton serves as GlobalSCAPE’s Vice President of Operations. He is responsible for product definition, development, and testing, and for the GlobalSCAPE IT infrastructure

 

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and web site development.  Mr. Barton joined GlobalSCAPE in March of 2006 as the Vice President of Product Development and Quality Assurance. Prior to joining GlobalSCAPE, he served as Chief Architect of Secure Logix Corporation, where he was responsible for requirements definition and product design. Mr. Barton was employed by Secure Logix form 1998 to 2006 and held positions of Director of Software Engineering and ETM Development Manager prior to becoming Chief Architect in 2005. Prior to Secure Logix, Mr. Barton held positions of Research Analyst and Senior Research Analyst at Southwest Research Institute where he developed software for the US Military and NASA. Mr. Barton holds a B.S. in Computer Science from Slippery Rock University.

 

Gregory Hoffer.   Mr. Hoffer serves as Vice President and Chief Technology Officer and has been employed by GlobalSCAPE since May 2000. Mr. Hoffer is responsible for overseeing all software development and Web development at GlobalSCAPE. Before joining GlobalSCAPE, Mr. Hoffer held software development positions at the consulting firm of Marotz, Inc. Prior to that, Mr. Hoffer managed the IT department and was head of the computer science department at Saint Mary’s Hall, a private school in San Antonio, Texas. Mr. Hoffer received a bachelor’s degree in computer science from Trinity University and is pursuing his master’s degree in computer science.

 

K. Earl Posey.   Mr. Posey serves as GlobalSCAPE’s Vice-President of Investor Relations/Business Operations. In this capacity he is responsible for mergers and acquisitions, investor relations and human resources. Mr. Posey’s background includes time spent with Black and Decker and Nortel Networks in various positions in human resources and manufacturing. In addition, he has been a professor at the university level teaching courses in management and labor relations. Immediately prior to joining GlobalSCAPE Mr. Posey was managing principal and founder of Gossyppia Partners, a consultancy that specialized in the development of strategic plans for corporations. Mr. Posey did his graduate and post-graduate work at Vanderbilt University.

 

Douglas Conyers.   Mr. Conyers serves as Vice President of Professional Services and has been employed by GlobalSCAPE since March 2007. Mr. Conyers is responsible for total customer satisfaction as they look to enhance and customize GlobalSCAPE solutions based on their company’s requirements. Prior to joining GlobalSCAPE, he held positions as Chief Architect, Director of Systems Engineering and Senior Software Engineer for SecureLogix Corp. Previous to that, he held software engineering positions with both the Southwest Research Institute and Paradigm Simulations. Conyers has a B.S. in Computer Science from Trinity University.

 

PART II

 

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity

 

                Our common stock is listed on the 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 the quarterly high and low bid prices for our common stock for the last two fiscal years.

 

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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

 

The closing  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 necessarily represent actual transactions.

 

We have never paid a cash dividend, and do not expect to do so in the foreseeable future.  The terms of our revolving credit facility prohibit the payment of dividends.

 

 

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