GSB Globalscape Inc

GlobalSCAPE, Inc. (NYSE MKT: GSB), a worldwide leader in the secure movement and integration of data, today announced that the Audit Committee of the Board of Directors, comprised entirely of independent directors, has been conducting an investigation into certain transactions in the fourth quarter of 2016 involving improper arrangements with customers that circumvented the Company’s internal controls and their potential effect on previously reported revenue. The Audit Committee is being advised by outside counsel and assisted by forensic accounting advisors.

Based on the results of the investigation to date, the improper arrangements with customers that circumvented the Company’s internal controls have the effect of overstating the reported amounts of accounts receivable as of December 31, 2016, and license revenue for the three months and year ended December 31, 2016, by approximately $403,000 and $396,000, respectively. GlobalSCAPE’s revenue for fiscal 2016 as previously reported and before the effects of this matter was $33.3 million. The effects of the improper arrangements with customers that circumvented the Company’s internal controls on the Company’s consolidated financial statements for the year ended and as of December 31, 2016 and the three months ended and as of March 31, 2017 are presented in the tables immediately following this press release.

As a result of these developments, the Company has taken and is taking steps to remediate the issues that were raised in the investigation.

The Company also announced that it intends to effect a restatement of its previously issued financial statements through filing an amended Annual Report on Form 10-K for the year ended December 31, 2016 and an amended Quarterly Report on Form 10-Q for the quarter ended March 31, 2017. The Company is working diligently and as expeditiously as possible to prepare and file these amended reports.

As further disclosed in a contemporaneous 8-K filed with the Securities and Exchange Commission, the Company announced the retention of Weaver and Tidwell as its independent registered public accounting firm to audit the Company’s financial statements.

GlobalSCAPE will provide updates concerning these matters as developments warrant.

Safe Harbor Statement

This news release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, GlobalSCAPE’s expectations as to the timing and outcome of its investigation and statements regarding preparation and filing of restated financial statements and amended periodic reports, possible additional transactions, assessment of control deficiencies and consideration of measures to address the accounting issues described above.

The statements are based on management’s current expectations, estimates and projections, are not guarantees of future outcomes or performance, and are subject to certain risks, uncertainties and other factors, some of which are beyond the Company’s control and are difficult to predict including, but not limited to, the discovery of additional information relevant to the internal review; the conclusions of the Audit Committee (and the timing of the conclusions) concerning matters relating to the internal review; the timing of the review by, and the conclusions of, the Audit Committee, the Board and the Company’s independent public accounting firm regarding the internal review and GlobalSCAPE’s financial statements; the determination of additional adjustments for the periods to be restated; and the risk that the completion and filing of the amended reports will take longer than expected.

The forward-looking statements contained in this news release are also subject to other risks and uncertainties, including those described in the Company’s Annual Report on Form 10-K for the period ended December 31, 2016, the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, and from time to time other filings with the SEC, which are available on the SEC’s Website (http://www.sec.gov).

Stockholders of the Company are cautioned not to place undue reliance on the Company’s forward-looking statements, which speak only as of the date such statements are made. The Company does not undertake any obligation to publicly update any forward-looking statements to reflect events, circumstances or new information after the date of this disclosure, or to reflect the occurrence of unanticipated events.

  GlobalSCAPE, Inc. Consolidated Balance Sheet December 31, 2016 (in thousands except per share amounts)  

This schedule illustrates the current and preliminary estimate by GlobalSCAPE, Inc. of adjustments relating to errors discovered to date with respect to arrangements with customers that have been the subject of the investigation being conducted by the Audit Committee as described in the attached press release.

             

PreviouslyReported

    Adjustment    

Restated(Unaudited)

Assets Current assets: Cash and cash equivalents $ 8,895 - $ 8,895 Short term investments 2,754 - 2,754 Accounts receivable, net 6,964 (403 ) 6,561 Federal income tax receivable 169 111 280 Prepaid and other expenses   521         -         521  

Total current assets

19,303 (292 ) 19,011   Long term investments 12,779 - 12,779 Property and equipment, net 456 - 456 Capitalized software development costs, net 3,743 - 3,743 Goodwill 12,712 - 12,712 Deferred tax asset, net 942 - 942 Other assets   245         -         245   Total assets $ 50,180       $ (292 )     $ 49,888     Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 876 $ (42 ) $ 834 Accrued expenses 1,836 (33 ) 1,803 Deferred revenue 13,655 - 13,655 Income taxes payable   -         -         -   Total current liabilities 16,367 (75 ) 16,292   Deferred revenue, non-current portion 3,790 - 3,790 Other long term liabilities 147 - 147   Stockholders' Equity: Preferred stock, par value $0.001 per share, 10,000,000 shares authorized, no shares issued or outstanding - - - Common stock, par value $0.001 per share, 40,000,000 shares authorized, 21,920,912 shares issued 22 - 22 Additional paid-in capital 21,650 - 21,650 Treasury stock, 403,581 shares, at cost (1,452 ) - (1,452 ) Retained earnings   9,656         (217 )       9,439   Total stockholders’ equity $ 29,876       $ (217 )     $ 29,659   Total liabilities and stockholders’ equity $ 50,180       $ (292 )     $ 49,888       GlobalSCAPE, Inc. Consolidated Statement of Operations and Comprehensive Income For the Year Ended December 31, 2016 (in thousands, except per share amounts)  

This schedule illustrates the current and preliminary estimate by GlobalSCAPE, Inc. of adjustments relating to errors discovered to date with respect to arrangements with customers that have been the subject of the investigation being conducted by the Audit Committee as described in the attached press release.

             

PreviouslyReported

Adjustment

Restated(Unaudited)

  Operating revenues: Software licenses $ 11,984 $ (396 ) $ 11,588 Maintenance and support 18,668 - 18,668 Professional services   2,684       -         2,684 Total revenues   33,336       (396 )       32,940 Costs of revenues

Software licenses

3,110 (42 ) 3,068 Maintenance and support 1,541 - 1,541 Professional services   1,671       -         1,671 Total costs of revenues   6,322       (42 )       6,280 Gross profit   27,014       (354 )       26,660 Operating expenses Sales and marketing 11,682 (26 ) 11,656 General and administrative 6,975 - 6,975 Research and development   2,539       -         2,539 Total operating expenses   21,196       (26 )       21,170 Income from operations 5,818 (328 ) 5,490 Other income   159       -         159 Income before income taxes 5,977 (328 ) 5,649 Income tax expense   2,026       (111 )       1,915 Net income $ 3,951     $ (217 )     $ 3,734 Comprehensive income $ 3,951     $ (217 )     $ 3,734   Net income per common share: Basic $ 0.19     $ (0.01 )     $ 0.18 Diluted $ 0.18     $ (0.01 )     $ 0.17   Weighted average shares outstanding: Basic 21,126 21,126 21,126 Diluted 21,677 21,677 21,677   Cash dividends declared per share $ 0.06     $ -       $ 0.06     GlobalSCAPE, Inc. Consolidated Statement of Cash Flows For the Year Ended December 31, 2016 (in thousands)  

This schedule illustrates the current and preliminary estimate by GlobalSCAPE, Inc. of adjustments relating to errors discovered to date with respect to arrangements with customers that have been the subject of the investigation being conducted by the Audit Committee as described in the attached press release.

             

PreviouslyReported

    Adjustment    

As Restated(Unaudited)

Operating Activities: Net income $ 3,951 (217 ) $ 3,734 Adjustments to reconcile net income to net cash provided by operating activities: Bad debt expense 72 - 72 Depreciation and amortization 2,045 - 2,045 Stock-based compensation 973 - 973 Deferred taxes (2 ) - (2 ) Excess tax deficiency from exercise of share based compensation   24         -         24   Subtotal before changes in operating assets and liabilities 7,063 (217 ) 6,846 Changes in operating assets and liabilities: Accounts receivable (1,161 ) 403 (758 ) Prepaid expenses (10 ) - (10 ) Federal income taxes 352 (111 ) 241 Accrued interest receivable (163 ) - (163 ) Other assets (185 ) - (185 ) Accounts payable 37 (42 ) (5 ) Accrued expenses (58 ) (33 ) (91 ) Deferred revenues 1,178 - 1,178 Other long-term liabilities   13         -         13   Net cash provided by (used in) operating activities   7,066         -         7,066   Investing Activities: Software development costs (1,538 ) - (1,538 ) Purchase of property and equipment (226 ) - (226 ) Purchase of certificates of deposit   (12,116 )       -         (12,116 ) Net cash provided by (used in) investing activities   (13,880 )       -         (13,880 ) Financing Activities: Proceeds from exercise of stock options 1,119 - 1,119 Tax deficiency (benefit) from stock-based compensation (24 ) - (24 ) Dividends paid   (1,271 )       -         (1,271 ) Net cash provided by (used in) financing activities   (176 )       -         (176 ) Net increase (decrease) in cash (6,990 ) - (6,990 ) Cash at beginning of period   15,885         -         15,885   Cash at end of period $ 8,895       $ -       $ 8,895     Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ -       $ -       $ -   Income taxes $ 1,638       $ -       $ 1,638       GlobalSCAPE, Inc. Consolidated Statements of Stockholders' Equity (in thousands, except number of shares)  

This schedule illustrates the current and preliminary estimate by GlobalSCAPE, Inc. of adjustments relating to errors discovered to date with respect to arrangements with customers that have been the subject of the investigation being conducted by the Audit Committee as described in the attached press release.

                          Additional Common Stock Paid-in Treasury Retained Shares     Amount Capital Stock Earnings Total     Balance at December 31, 2014 20,909,267 $ 21 $ 18,370 $ (1,452 ) $ 3,389 20,328   Shares issued upon exercise of stock options 314,200 - 508 - - 508   Tax (deficiency) from stock-based compensation - - 58 - - 58   Stock-based compensation expense Stock options - - 400 - - 400 Restricted stock 80,000 - 247 - - 247   Common stock cash dividends - - - - (941 ) (941 )   Net income -       -   -     -     4,528     4,528     Balance at December 31, 2015 21,303,467 $ 21 $ 19,583 $ (1,452 ) $ 6,976 $ 25,128   Shares issued upon exercise of stock options 537,445 1 1,118 - - 1,119   Tax benefit (deficiency) from stock-based compensation - - (24 ) - - (24 )   Stock-based compensation expense Stock options - - 700 - - 700 Restricted stock 80,000 - 273 - - 273   Common stock cash dividends - - - - (1,271 ) (1,271 )   Net income as restated (See Note) (unaudited) -       -   -     -     3,734     3,734     Balance at December 31, 2016 (retained earnings unaudited) 21,920,912     $ 22 $ 21,650   $ (1,452 ) $ 9,439   $ 29,659      

Note:

Net income for the year ended December 31, 2016, as previously reported $ 3,951 Adjustment   (217 ) Net income for the year ended December 31, 2016, as restated (unaudited) $ 3,734       GlobalSCAPE, Inc. Condensed Consolidated Balance Sheet March 31, 2017 (in thousands except share amounts) (Unaudited)  

This schedule illustrates the current and preliminary estimate by GlobalSCAPE, Inc. of adjustments relating to errors discovered to date with respect to arrangements with customers that have been the subject of the investigation being conducted by the Audit Committee as described in the attached press release.

             

PreviouslyReported

    Adjustment     Restated Assets Current assets: Cash and cash equivalents $ 10,400 - $ 10,400 Short term certificates of deposit 2,759 - 2,759 Accounts receivable, net 5,499 (396 ) 5,103 Federal income tax receivable - - - Prepaid and other expenses   492         -         492   Total current assets 19,150 (396 ) 18,754   Long term certificates of deposit 12,837 - 12,837 Capitalized software development costs, net 3,731 - 3,731 Goodwill 12,712 - 12,712 Deferred tax asset, net 1,190 - 1,190 Property and equipment, net 577 - 577 Other assets   64         -         64   Total assets $ 50,261       $ (396 )     $ 49,865     Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 657 (42 ) $ 615 Accrued expenses 1,928 (26 ) 1,902 Income tax payable 474 (111 ) 363 Deferred revenue   12,704         -         12,704   Total current liabilities 15,763 (179 ) 15,584   Deferred revenue, non-current portion 3,618 - 3,618 Other long term liabilities 163 - 163   Commitments and contingencies   Stockholders’ equity: Preferred stock, par value $0.001 per share, 10,000,000 shares authorized, no shares issued or outstanding - - - Common stock, par value $0.001 per share, 40,000,000 shares authorized, 21,970,412 shares issued 22 - 22 Additional paid-in capital 22,064 - 22,064 Treasury stock, 403,581 shares, at cost (1,452 ) (1,452 ) Retained earnings   10,083         (217 )       9,866   Total stockholders’ equity   30,717         (217 )       30,500   Total liabilities and stockholders’ equity $ 50,261       $ (396 )     $ 49,865       GlobalSCAPE, Inc. Condensed Consolidated Statement of Operations and Comprehensive Income For the Three Months Ended March 31, 2017 (In thousands, except per share amounts) (Unaudited)  

This schedule illustrates the current and preliminary estimate by GlobalSCAPE, Inc. of adjustments relating to errors discovered to date with respect to arrangements with customers that have been the subject of the investigation being conducted by the Audit Committee as described in the attached press release.

             

PreviouslyReported

    Adjustment     Restated   Operating Revenues: Software licenses $ 2,464 $ - $ 2,464 Maintenance and support 5,121 - 5,121 Professional services   733       -       733 Total Revenues   8,318       -       8,318 Cost of revenues Software licenses 736 - 736 Maintenance and support 412 - 412 Professional services   377       -       377 Total cost of revenues   1,525       -       1,525 Gross profit 6,793 6,793 Operating expenses Sales and marketing 3,330 - 3,330 General and administrative 1,721 - 1,721 Research and development   739       -       739 Total operating expenses   5,790       -       5,790 Income from operations 1,003 - 1,003 Other income   70       -       70 Income before income taxes 1,073 - 1,073 Income tax expense   322       -       322 Net income $ 751     $ -     $ 751 Comprehensive income $ 751     $ -     $ 751   Net income per common share: Basic $ 0.03     $ -     $ 0.03 Diluted $ 0.03     $ -     $ 0.03   Weighted average shares outstanding: Basic 21,544 21,544 Diluted 22,023 22,023   Cash dividends declared per share $ 0.015 $ 0.015     GlobalSCAPE, Inc. Condensed Consolidated Statement of Cash Flows For the Three Months Ended March 31, 2017 (in thousands) (Unaudited)  

This schedule illustrates the current and preliminary estimate by GlobalSCAPE, Inc. of adjustments relating to errors discovered to date with respect to arrangements with customers that have been the subject of the investigation being conducted by the Audit Committee as described in the attached press release.

             

PreviouslyReported

    Adjustment     Restated Operating Activities: Net income $ 751 $ - $ 751 Items not involving cash at the time they are recorded in the statement of operations: Provision for sales returns and doubtful accounts receivable 11 - 11 Depreciation and amortization 541 - 541 Share-based compensation 324 - 324 Deferred taxes (248 ) - (248 ) Excess tax benefit from share-based compensation   -         -         -   Subtotal before changes in operating assets and liabilities 1,379 - 1,379 Changes in operating assets and liabilities: Accounts receivable 1,454 (7 ) 1,447 Prepaid expenses 29 - 29 Deferred revenue (1,123 ) - (1,123 ) Accounts payable (219 ) - (219 ) Accrued expenses 92 7 99 Other assets 181 - 181 Accrued interest receivable (63 ) - (63 ) Other long-term liabilities 16 - 16 Income tax receivable and payable   643         -         643   Net cash provided by operating activities   2,389         -         2,389   Investing Activities: Software development costs capitalized (462 ) - (462 ) Purchase of property and equipment   (188 )       -         (188 ) Net cash (used in) investing activities   (650 )       -         (650 ) Financing Activities: Proceeds from exercise of stock options 90 - 90 Excess tax benefit from share-based compensation - - - Dividends paid   (324 )       -         (324 ) Net cash (used in) financing activities   (234 )       -         (234 ) Net increase in cash 1,505 - 1,505 Cash at beginning of period   8,895         -         8,895   Cash at end of period $ 10,400       $ -       $ 10,400     Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ -       $ -       $ -   Income taxes $ 15       $ -       $ 15    

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GlobalscapePress ContactPerry Street CommunicationsJonathan Morgan, 214-965-9955 or 212-333-5525jmorgan@perryst.comorInvestor Relations ContactMatt Glover or Najim Mostamand, 210-801-8489IR@globalscape.com