UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission File Number 333-16031
INCENTRA SOLUTIONS, INC.
------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 86-0793960
------ ----------
(State or other jurisdiction (I.R.S. Employer
of (incorporation or organization) Identification No.)
1140 PEARL STREET
BOULDER, COLORADO 80302
-----------------------
(Address of principal executive offices)
(303) 449-8279
--------------
(Issuer's telephone number)
Check whether the issuer (1) 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. Yes [X] No []
As of May 12, 2005, 126,245,072 shares of the issuer's common stock, $.001 par
value per share, and 2,466,971 shares of the issuer's Series A preferred stock,
$.001 par value per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
PART I. FINANCIAL INFORMATION
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2005
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 2,205,908
Accounts receivable, net of allowance for doubtful
accounts of $517,000 12,280,080
Other current assets 932,376
-------------
Total current assets 15,418,364
-------------
Property and equipment, net 2,423,675
Capitalized software development costs, net 1,452,853
Intangible assets, net 16,256,339
Goodwill 14,564,785
Other assets 985,228
-------------
35,682,880
-------------
TOTAL ASSETS $ 51,101,244
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of note payable, capital leases and
other long-term obligations $ 3,069,610
Accounts payable 9,122,551
Accrued expenses 3,881,962
Current portion of deferred revenue 1,666,711
-------------
Total current liabilities 17,740,834
-------------
Note payable, capital leases and other long-term
obligations, net of current portion 7,268,248
Derivative warrant liability 1,884,039
Deferred revenue, net of current portion 120,205
-------------
9,272,492
-------------
TOTAL LIABILITIES 27,013,326
-------------
Commitments and contingencies
Series A convertible redeemable preferred stock,
$.001 par value, $31,500,000 liquidation preference,
2,500,000 shares authorized, 2,466,971 shares issued
and outstanding 22,655,158
-------------
Shareholders' equity:
Preferred stock, nonvoting, $.001 par value, 2,500,000
shares authorized, none issued or outstanding --
Common stock, $.001 par value, 200,000,000 shares
authorized, 127,530,513 shares issued, 126,096,874
shares outstanding, 1,433,639 shares in treasury 126,097
Additional paid-in capital 122,132,054
Accumulated other comprehensive loss (58,049)
Accumulated deficit (120,767,342)
-------------
TOTAL SHAREHOLDERS' EQUITY 1,432,760
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 51,101,244
=============
See accompanying notes to unaudited condensed consolidated financial statements.
2
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2005 2004
------------- -------------
Revenues:
Products $ 3,231,513 $ 371,500
Services 2,775,652 1,992,296
------------- -------------
TOTAL REVENUE 6,007,165 2,363,796
------------- -------------
Cost of revenue:
Products 1,276,375 --
Services 1,787,610 1,212,337
------------- -------------
Total cost of revenue 3,063,985 1,212,337
------------- -------------
GROSS MARGIN 2,943,180 1,151,459
------------- -------------
Selling, general and administrative 4,027,373 2,055,202
Amortization 785,281 237,476
Depreciation 71,143 44,917
Impairment of goodwill -- 61,428
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4,883,797 2,399,023
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LOSS FROM OPERATIONS (1,940,617) (1,247,564)
------------- -------------
Other income (expense):
Interest income 22,431 17,429
Interest expense (561,310) (693,514)
Other income 366,741 40,744
Foreign currency transaction gain (loss) 82,189 (312)
------------- -------------
(89,949) (635,653)
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LOSS BEFORE INCOME TAX (2,030,566) (1,883,217)
------------- -------------
Income tax expense (318,000) --
------------- -------------
NET LOSS (2,348,566) (1,883,217)
------------- -------------
Deemed dividends on redeemable preferred stock -- (147,945)
Accretion of redeemable preferred stock to
redemption amount (654,391) (7,833)
------------- -------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (3,002,957) $ (2,038,995)
============= =============
COMPREHENSIVE LOSS
Net loss $(2,348,566) $(1,883,217)
Foreign currency translation adjustment (77,233) --
------------- -------------
$(2,425,799) $(1,883,217)
============= =============
Weighted average number of common shares
outstanding - basic and diluted 110,901,525 19,498,274
============= =============
Basic and diluted net loss per share
applicable to common shareholders $ (0.03) $ (0.10)
============= =============
See accompanying notes to unaudited condensed consolidated financial statements.
3
INCENTRA SOLUTIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2005 2004
------------- -------------
Cash flows from operating activities:
Net loss $ (2,348,566) $ (1,883,217)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 394,700 403,711
Amortization of intangible assets and software development costs 890,454 324,582
Amortization of non-cash loan discount 10,188 3,822
Stock-based compensation 155,515 44,309
Non-cash interest expense 526,447 --
Non-cash interest expense on Series C mandatorily redeemable preferred stock liability -- 656,668
Non-cash tax expense 318,000 --
Share of losses of Front Porch Digital, Inc. and related impairment of goodwill -- 61,428
Gain on disposal of assets -- (22,634)
Bad debt expense -- 51,263
Gain on revaluation of derivative warrant liability (341,495) --
Changes in operating assets and liabilities, net of business acquisitions:
Accounts and other receivables (965,496) (467,233)
Other current assets (90,777) 39,801
Other assets (17,462) (103,285)
Accounts payable 296,984 154,229
Accrued liabilities (80,677) 162,746
Deferred revenue 424,404 (361,605)
Other liabilities (66,212) (3,466)
------------- -------------
Net cash used in operating activities (893,993) (938,881)
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (155,995) (849,872)
Capitalized software development costs (399,311) (87,487)
Proceeds from sale of property and equipment 750 38,358
Cash acquired in STAR acquisition (Note 2) 1,597,498 --
Cash acquired in PWI acquisition (Note 2) 74,297 --
Net change in restricted cash (175) (158)
Maturies of short-term investments -- 3,793,099
------------- -------------
Net cash provided by investing activities 1,117,064 2,893,940
------------- -------------
Cash flows from financing activities:
Proceeds from lease line of credit 164,177 373,602
Payments on capital leases, notes payable and other long term liabilities (1,213,386) (158,388)
Proceeds from exercise of stock options and purchase of restricted stock -- 79
------------- -------------
Net cash (used in) provided by financing activities (1,049,209) 215,293
------------- -------------
Effect of exchange rate changes on cash and cash equivalents (36,412) --
------------- -------------
Net (decrease) increase in cash and cash equivalents (862,550) 2,170,352
Cash and cash equivalents at beginning of period 3,068,458 2,201,192
------------- -------------
Cash and cash equivalents at end of period $ 2,205,908 $ 4,371,544
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 99,676 $ 16,913
Supplemental disclosures of non-cash investing and financing activities:
Net assets acquired in STAR acquistion, excluding cash (Note 2) 6,097,510 --
Net assets acquired in PWI acquistion, excluding cash (Note 2) 4,310,840 --
Purchases of property and equipment included in accounts payable 80,279 283,306
See accompanying notes to unaudited condensed consolidated financial statements.
4
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Incentra Solutions, Inc. (which is referred to herein together with its
subsidiaries as the "Company", "we", "us" or "our"), formerly Front Porch
Digital, Inc. ("FPDI" or "Front Porch"), was organized and incorporated
in the state of Nevada. On October 25, 2004, the name of the Company was
changed from Front Porch Digital, Inc. to Incentra Solutions, Inc., and
the common stock of the Company now trades on the Over-the-Counter
Bulletin Board under the trading symbol "ICEN". On March 30, 2005, we
acquired PWI Technologies, Inc., a privately-held Washington corporation
("PWI"). On February 18, 2005, we acquired STAR Solutions of Delaware,
Inc., a privately-held Delaware corporation ("STAR"). On August 18, 2004,
we acquired ManagedStorage International, Inc., a Delaware corporation
incorporated in March 2000 ("MSI"). The MSI acquisition was accounted for
as a reverse merger, and therefore, MSI was deemed to be the acquirer for
accounting purposes. Accordingly, the consolidated financial statements
presented herein include the financial statements of MSI for all periods
prior to August 18, 2004 and the condensed consolidated financial
statements of the companies from the dates of the acquisitions forward.
Through Front Porch, we provide a software and management solution that
enables searching, browsing, editing, storage and on-demand delivery of
media-rich content in nearly any digital format. Our complete digital
archive solution includes our proprietary software bundled with
professional services, hardware/software procurement and resale, remote
monitoring/management services, complete support for our proprietary
software solutions and first call support for third-party hardware and
software maintenance. Our software converts audio, video, images, text
and data into digital formats for ease of use and archiving.
Through MSI, we deliver comprehensive storage services, including
professional services, third-party hardware/software procurement and
resale, financing solutions, remote monitoring/management services and
first call support for third-party hardware and software maintenance. MSI
focuses on providing data protection solutions and services that ensure
that its customers' data is backed-up and recoverable and meets internal
data retention compliance policies. MSI's remote monitoring and
management services are delivered from its Storage Network Operations
Center ("NOC") in Broomfield, Colorado, which monitors and manages a wide
spectrum of diverse storage infrastructures on a 24x7 basis throughout
the United States, the United Kingdom, the Netherlands, Bermuda and
Japan. MSI delivers this service worldwide using its proprietary
GridWorks Operations Support System, which enables automated remote
monitoring and management of complete storage infrastructures and
5
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
back-up applications. MSI provides outsourcing solutions for customer
data protection needs under long-term contracts. Customers pay on a
monthly basis for storage services based on the number of assets managed
and/or the volume of storage assets utilized. We believe customers
benefit from improved operating effectiveness with reduced operating
costs and reductions in capital expenditures.
Through STAR and PWI, we deliver complete IT solutions, including
professional services, third-party hardware/software procurement and
resale, financing solutions and the sale and delivery of first call
support for third-party hardware and software maintenance (including help
desk operations). Solutions are sold primarily to enterprise customers in
the financial services, government, hospitality, retail, security,
healthcare and manufacturing sectors. With offices and sales personnel
located primarily throughout the western United States, these recently
acquired entities are a cornerstone to our North American expansion
plans.
Our customers are located in North America, Europe, Asia and the Pacific
Rim.
The accompanying unaudited condensed consolidated financial statements
have been prepared by us in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to such
regulations. The unaudited condensed consolidated financial statements
reflect all adjustments and disclosures that are, in the opinion of
management, necessary for a fair presentation. All such adjustments are
of a normal recurring nature. For further information, refer to the
financial statements and footnotes included in our Annual Report on Form
10-KSB for the year ended December 31, 2004.
Certain amounts in the 2004 financial statements have been reclassified
to conform to the 2005 presentation. We do not believe the effects of
such reclassifications are material. Operating results for the three
months ended March 31, 2005 are not necessarily indicative of the
operating results to be expected for the year ending December 31, 2005.
MANAGEMENT'S PLANS
Our 2005 operating plan and the execution thereof is focused on
increasing revenue, controlling costs, and conserving cash; however,
there can be no assurance that we will be able to meet the operational
and financial requirements of our operating plan. Our 2005 plan also
includes growth through our recent business acquisitions (Note 2). We
cannot predict with certainty the expected revenue, gross profit margin,
net loss, and/or usage of cash and cash equivalents as a result of these
acquisitions. However, we believe that our cash and cash equivalents and
working capital will provide sufficient capital resources to fund our
operations, debt service requirements, and working capital needs at least
through March 31, 2006.
6
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
STOCK-BASED COMPENSATION
We apply the intrinsic value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and related interpretations, including Financial
Accounting Standards Board ("FASB") Interpretation No. 44 (FIN 44),
ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AN
INTERPRETATION OF APB OPINION NO. 25, to account for our fixed-plan stock
options. Under this method, compensation expense is generally recorded on
the date of grant only if the current market price of the underlying
stock exceeds the exercise price. Statement of Financial Accounting
Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION and
SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123, established
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As permitted by
existing accounting standards, we have elected to continue to apply the
intrinsic value-based method of accounting described above, and have
adopted only the disclosure requirements of Statement 123, as amended.
The following table illustrates the effect on net loss if the fair
value-based method had been applied to all outstanding and unvested
awards in the three months ended March 31, 2005 and 2004. All amounts
except per share amounts in (000's):
THREE MONTHS ENDED
MARCH 31,
2005 2004
--------- ---------
Net loss before deemed dividends and accretion
on preferred stock, as reported $ (2,349) $ (1,883)
Add stock-based employee compensation expense
included in reported net loss 156 44
Deduct total stock-based employee compensation
expense determined under fair value-based
method for all awards (510) (47)
--------- ---------
Pro forma net loss before deemed dividends and
accretion on preferred stock $ (2,703) $ (1,886)
========= =========
Net loss per weighted average common share
outstanding - basic and diluted - pro forma $ (0.03) $ (0.10)
========= =========
Net loss per weighted average common share
outstanding - basic and diluted - as reported $ (0.03) $ (0.10)
========= =========
We did not grant any options during the three months ended March 31,
2005.
In determining the fair value of stock options granted by MSI for the
three months ended March 31, 2004, we utilized the Black-Scholes
valuation model to determine pro forma compensation expense under the
fair value method with the following weighted average assumptions:
dividend yield of 0%, risk free interest rate of 4.05%, expected
volatility of 0.001%, and expected lives of ten years. The weighted
average fair value of options granted during 2004 was $0.32.
For purposes of pro forma disclosures, the estimated fair value of the
options was amortized to expense over the vesting period of the related
option. Previously recognized compensation expense for forfeited options
was included as a reduction of compensation expense in the period of
forfeiture.
7
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The accounts of our international subsidiary, Front Porch Digital
International, SAS, are translated using the exchange rate in effect at
the balance sheet date, and the results of operations are translated at
the average exchange rates during the period. For the three months ended
March 31, 2005, we reported a cumulative translation loss of $58,049, as
a component of accumulated other comprehensive loss. We are also subject
to foreign exchange transaction exposure when our subsidiary transacts
business in a currency other than its own functional currency. The
effects of exchange rate fluctuations in remeasuring foreign currency
transactions for the three months ended March 31, 2005 and 2004 were a
gain of $82,189 and a loss of $312, respectively.
During 2004, we began managing our foreign currency cash flow exposure
through the use of $/Euro forward contracts, which are considered
derivative instruments and which are recorded as either an asset or
liability, measured at fair value. Changes in fair value of the contracts
are recognized currently by us in the statements of operations. We
recorded an unrealized gain of approximately $74,600 as of March 31,
2005, which represented the change in the fair value of one foreign
currency forward contract related to the difference between changes in
the spot and forward rates excluded from the assessment of hedge
effectiveness.
ACCOUNTING FOR OBLIGATIONS AND INSTRUMENTS POTENTIALLY SETTLED IN THE
COMPANY'S COMMON STOCK
We account for obligations and instruments potentially settled in our
stock in accordance with Emerging Issues Task Force ("EITF") 00-19,
ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND
POTENTIALLY SETTLED IN A COMPANY'S OWN STOCK ("EITF 00-19"). This issue
addresses the initial balance sheet classification and measurement of
contracts that are indexed to, and potentially settled in, our stock.
Under EITF 00-19, contracts are initially classified as equity or as
either assets or liabilities, depending on the situation. All contracts
are initially measured at fair value and subsequently accounted for based
on the then current classification. Contracts initially classified as
equity do not recognize subsequent changes in fair value as long as the
contracts continue to be classified as equity. For contracts classified
as assets or liabilities, we report changes in fair value in earnings and
disclose these changes in the financial statements as long as the
contracts remain classified as assets or liabilities. If contracts
classified as assets or liabilities are ultimately settled in shares, any
previously reported gains or losses on those contracts continue to be
included in earnings. At March 31, 2005, we reassessed the value of these
contracts and recorded a gain of $341,495. The classification of these
contracts is reassessed at each balance sheet date.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived, tangible and intangible assets that do not have indefinite
lives, such as fixed assets and intellectual property, are reviewed for
impairment whenever events or changes in circumstances indicate that the
8
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
carrying amount of such assets may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the asset and its eventual disposition.
Measurement of an impairment loss for such long-lived assets is based on
the fair value of the asset.
Goodwill and other intangible assets with indefinite lives are not
amortized and are subject to write downs charged to results of operations
only when their carrying amounts are determined to be more than their
estimated fair values based upon impairment tests that are required to be
made annually or more frequently under certain circumstances. Fair values
are determined based on models that incorporate estimates of future
probability and cash flows.
For the three months ended March 31, 2005 we believe that no impairment
existed. For the three months ended March 31, 2004, MSI recorded
impairment losses of $61,428.
REVENUE RECOGNITION
Revenue is recognized when all of the following criteria are met:
persuasive evidence of an agreement exists, delivery has occurred or
services have been rendered, the sales price is fixed or determinable,
and collectibility is reasonably assured.
We license software under license agreements and provide professional
services, including training, installation, consulting and maintenance.
License fee revenues are recognized when a license agreement has been
signed, the software product has been shipped, the fees are fixed and
determinable, collection is reasonably assured, and no significant vendor
obligations remain.
We allocate revenue to each component of a contract based on objective
evidence of its fair value, as established by management. Because
licensing of software is generally not dependent on the professional
services portion of the contract, software revenue is generally
recognized upon delivery, unless a contract exists with the customer
requiring customer acceptance.
Fees for maintenance agreements are recognized ratably over the terms of
the agreements. Maintenance is generally billed in advance, resulting in
deferred revenue.
We also provide software related professional services. Services are
generally provided on a time and materials basis and revenue is
recognized as the services are provided.
Revenues from storage services are recognized at the time the services
are provided and are billed on a monthly basis. Fees received for
up-front implementation services are deferred and recognized over the
term of the arrangement. Deferred revenue is recorded for billings sent
to or paid by customers for which we have not yet performed the related
services.
Revenues from product sales are recognized when shipped. Consulting
revenues are recognized when the services are performed.
9
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SOFTWARE DEVELOPMENT COSTS
We account for costs related to software developed for internal use and
marketed for external use in accordance with SFAS No. 86, ACCOUNTING FOR
THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED.
MSI's Gridworks software product is used internally for providing
services to our customers and is also marketed separately as a
stand-alone product. FPDI's DIVArchive software product is marketed
solely as a stand-alone product. As required by SFAS No. 86, we
capitalize costs in developing software products upon determination that
technological feasibility has been established for the product, if that
product is to be sold, leased or otherwise marketed. Costs incurred prior
to the establishment of technological feasibility are charged to research
and development expense. When the product or enhancement is available for
general release to customers, capitalization is ceased, and previously
capitalized costs are amortized based on current and future revenue for
the product, but with an annual amortization amount at least equal to the
straight-line amortization over an estimated useful life of three years.
For the three months ended March 31, 2005 and 2004, capitalized software
development costs, which related primarily to enhancements to our
Gridworks and DIVArchive software solutions, totaled $399,311 and
$87,486, respectively. These costs are amortized on a straight-line basis
over the estimated life, typically three years. For the three months
ended March 31, 2005 and 2004, $117,734 and $87,106, respectively, of
software development costs were charged to expense. As of March 31, 2005,
the unamortized portion of software development costs was $1,452,853.
INCOME TAXES
Income tax expense recognized for the period ended March 31, 2005,
represented income tax expense on Front Porch Digital International, SAS
("FPD International"), our wholly-owned French subsidiary. We are
currently in the process of creating an agreement with FPD International
for the allocation of costs related to its sale of our proprietary
software solutions. Any such agreement is required to be approved by the
French taxing authorities. We expect that we will be able to implement
this agreement, and therefore allocate the appropriate costs to our FPD
International, which we anticipate would serve to significantly reduce
any income tax exposure for the remainder of the year. However, there can
be no assurance that the French taxing authorities will approve this
agreement with FPD International and that we will be able to reduce this
income tax expense.
(2) ACQUISITIONS
(A) ACQUISITION OF STAR SOLUTIONS OF DELAWARE, INC.
On February 18, 2005 (the "STAR Closing Date"), we acquired all of the
outstanding capital stock of STAR. The acquisition was effected pursuant
to an Agreement and Plan of Merger (the "STAR Merger Agreement"). The
results of operations of STAR were first included in our consolidated
financial statements beginning on February 18, 2005.
Pursuant to the STAR Merger Agreement, the purchase price consisted of
(i) a cash payment of $1,422,000, (ii) the issuance of 12,617,555
unregistered shares of our common stock valued at $3,136,364 (based upon
the market price three days before and after the acquisition date) and
(iii) the issuance of an unsecured convertible promissory note for $2.5
million (the "STAR Note"). In addition, we paid $78,000 to the sole
remaining stockholder of STAR in exchange for all shares of capital stock
of STAR held by such stockholder. We paid approximately $0.4 million in
investment banking fees associated with the transaction.
Interest on the STAR Note accrues at an annual rate of 0.5%, which has
been discounted to reflect a fair value rate of interest. Principal is
payable as follows: (i) $125,861 on May 1, 2005, (ii) eight consecutive
quarterly payments of $251,722, commencing on August 1, 2005, and (iii) a
single payment of $377,583 on August 1, 2007 (each of the foregoing
dates, a "STAR Payment Due Date"). All or a portion of the outstanding
principal and interest due under the STAR Note may be converted by the
holder into shares of common stock at any time from the end of each
calendar quarter immediately preceding a STAR Payment Due Date until and
10
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
including one day prior to such STAR Payment Due Date. The STAR Note is
initially convertible at a conversion price equal to the greater of (i)
$0.40 or (ii) seventy percent (70%) of the average closing price of our
common stock, as reported on the Over-The-Counter Bulletin Board, for the
ten (10) consecutive trading days ending on and including the last day of
the calendar quarter immediately preceding the applicable STAR Payment
Due Date. As of the March 31, 2005, the STAR Note was convertible into a
maximum of 6,250,000 shares of common stock. Our obligations under the
STAR Note are not secured by any of our assets.
The STAR Note provides that all unpaid principal and accrued interest
shall, at the option of the holder and without notice, become immediately
due and payable upon the occurrence of an event of default (as defined in
the STAR Note). Such events of default include the occurrence of any of
the following events: (i) failure to pay within ten (10) days after the
applicable due date any amounts payable under the STAR Note, (ii) an
assignment for the benefit of creditors, or (iii) failure to perform any
material covenant under the STAR Merger Agreement, the registration
rights agreement or the consulting agreement described below or any other
material agreement between us and the seller. Principal amounts not paid
when due (subject to applicable cure periods) bear interest at the rate
of twelve percent (12%) per annum.
Concurrent with the consummation of the acquisition, we entered into a
registration rights agreement with the seller, pursuant to which, at any
time after March 1, 2006, the seller shall have the right to cause us to
register under the Securities Act of 1933, as amended, the shares of
common stock issued to him in the acquisition and the shares of common
stock issuable upon conversion of the STAR Note. The agreement also
provides that, after March 1, 2006, the seller shall have 'piggy-back'
registration rights.
The following represents the preliminary purchase price allocation at the
date of the STAR acquisition:
Cash and cash equivalents $ 1,598,000
Other current assets 687,000
Property and equipment 20,000
Other assets 7,000
Goodwill 8,174,000
Other intangible assets (3-5 year lives) 530,000
Current liabilities (1,421,000)
Other liabilities (1,900,000)
-----------
Total purchase price $ 7,695,000
===========
The purchase price is not considered final as of the date of this report,
as we along with our independent valuation advisors are still reviewing
all of the underlying assumptions and calculations used in the
allocation. However, we believe the final purchase price allocation will
not be materially different than that presented herein.
11
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In addition, on February 18, 2005, STAR obtained a revolving line of
credit from a bank that provides for borrowings until March 1, 2007, of
up to $5,000,000 (Note 7(c)).
(B) ACQUISITION OF PWI TECHNOLOGIES, INC.
On March 30, 2005 (the "PWI Closing Date"), we acquired all of the
outstanding capital stock of PWI. The acquisition was effected pursuant
to a Stock Purchase Agreement, dated as of the PWI Closing Date (the "PWI
Stock Purchase Agreement").
The purchase price of PWI consisted of $2.3 million in cash and 8,419,340
shares of our common stock valued at $1,683,868 (based upon the market
price three days before and after the acquisition date). In addition, the
former PWI shareholders have the opportunity to earn an additional
$200,000 in cash and $1.0 million in our common stock based upon
achieving certain earn out requirements. Should PWI exceed the earn-out
requirements, its former shareholders can earn additional common stock
having a value equal to PWI's EBITDA contribution over the earn out
requirement. We paid approximately $0.3 million in investment banking
fees in connection with the transaction.
Concurrently with the consummation of the acquisition, we granted
registration rights with respect to the shares of common stock issued in
the acquisition. Pursuant to the registration rights agreement executed
on the PWI Closing Date, at any time after March 31, 2006, the holders of
such rights shall have the right to cause us to register under the
Securities Act of 1933, as amended, the shares of our common stock issued
on the PWI Closing Date and the shares of common stock issuable pursuant
to the earn-out described above. The agreement also provides that, after
March 31, 2006, the holders shall have 'piggy-back' registration rights
with respect to such shares.
In connection with the consummation of the acquisition, the Chief
Executive Officer of PWI prior to the acquisition was appointed President
of PWI. PWI entered into an "at-will" employment agreement dated as of
the PWI Closing Date that provides that the President will receive an
initial annual base salary of $211,500. The employment agreement also
provides that the President may terminate the agreement upon thirty (30)
days prior written notice and that PWI may terminate employment, with or
without cause, at any time upon written notice. In addition, the
President's right to receive his pro rata share of the earn-out described
above is subject to his continued employment with PWI for a period of at
least one year from the date of the agreement, except in cases of his
death or disability.
In connection with the acquisition, we paid $250,000 for advisory
services.
The following represents the preliminary purchase price allocation at the
date of the PWI acquisition:
12
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Cash and cash equivalents $ 74,000
Other current assets 7,010,000
Property and equipment 174,000
Other assets 28,000
Goodwill 6,391,000
Other intangible assets (3-5 year lives) 280,000
Current liabilities (7,157,000)
Other liabilities (2,415,000)
-----------
Total purchase price $ 4,385,000
===========
The purchase price is not considered final as of the date of this report,
as we along with our independent valuation advisors are still reviewing
all of the underlying assumptions and calculations used in the
allocation. However, we believe the final purchase price allocation will
not be materially different than that presented herein.
Financing for the cash component of the purchase was provided by a bank
through an existing line of credit ("LOC") that was established as part
of the acquisition of STAR. In connection with the financing, the LOC was
amended to make PWI a co-borrower under the agreements and to modify
certain financial covenants to accommodate the addition of PWI to the
LOC.
(C) ACQUISITION OF MANAGEDSTORAGE INTERNATIONAL, INC.
On August 18, 2004 (the "MSI Acquisition Date"), we acquired all of the
outstanding capital stock of MSI, a Delaware corporation. The transaction
was structured as a reorganization of MSI with and into Front Porch
Merger Corp., a Delaware corporation and newly-formed, wholly-owned
subsidiary of the Company. The acquisition of MSI by us has been
accounted for as a reverse merger because on a post-merger basis, the
former MSI shareholders held, immediately following the acquisition on
the MSI Acquisition Date, a majority of our outstanding common stock on a
voting and diluted basis. As a result, MSI is deemed to be the acquirer
for accounting purposes. Accordingly, the condensed consolidated
financial statements presented herein include the financial statements of
MSI for all periods prior to the MSI Acquisition Date and the financial
statements of the consolidated companies from the MSI Acquisition Date
forward. Historical share and per share amounts for periods prior to the
MSI Acquisition Date have been retroactively restated to reflect the
exchange ratio established in the transaction, in a manner similar to a
reverse stock split with the difference in par values being recorded as
an offset to additional paid in capital. The restated consolidated
accumulated deficit of the accounting acquirer (MSI) has been carried
forward after the MSI Acquisition. The MSI Acquisition has also been
accounted for as a step acquisition as it occurred in multiple steps over
the period from July 31, 2002, when MSI sold its French subsidiary to us.
After the acquisition, the former MSI shareholders beneficially owned
approximately 64% of the common stock, giving effect to the conversion of
the Series A Preferred Stock.
13
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(D) PROFORMA RESULTS
The following unaudited pro forma financial information presents our
combined results of operations as if the acquisitions described in (A)
(B) and (C) above had occurred as of the beginning of each of the periods
reported below. The unaudited pro forma financial information is not
intended to represent or be indicative of the consolidated results of
operations that would have been reported by us had the acquisitions been
completed as of the beginning of the periods presented, and should
not be taken as representative of our future consolidated results of
operations or financial condition. Pro forma results were as follows
for the periods ended March 31, 2005 and 2004:
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004
------------ ------------
Revenue $ 16,452,125 $ 14,276,667
Cost of revenue 11,971,102 10,127,554
------------ ------------
Gross margin 4,481,023 4,149,113
Operating expenses 6,377,743 5,821,234
------------ ------------
Loss from operations (1,896,720) (1,672,121)
Other income (expense), net (184,604) (845,761)
Income tax (319,607) --
------------ ------------
Net loss (2,400,931) (2,517,882)
Dividends on redeemable preferred stock -- (147,945)
Accretion of redeemable preferred stock
to redemption amount (654,391) (7,833)
------------ ------------
Net loss applicable to common shareholders $ (3,055,322) $ (2,673,660)
============ ============
(3) PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 2005, consisted of:
Computer equipment $ 5,008,661
Software 2,672,012
Office furniture and equipment 88,740
Leasehold improvements 1,586,779
-----------
9,356,192
Less accumulated depreciation (6,932,517)
-----------
$ 2,423,675
===========
For the three months ended March 31, 2005 and 2004, total depreciation
expense was $394,700 and $403,711, respectively, of which $323,555 and
$358,793, respectively, was included in cost of revenue.
Included in the balance above is property and equipment under a capital
lease with a cost of $1,532,143 and accumulated depreciation and
amortization of $714,385.
14
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(4) CONCENTRATION OF CREDIT RISK
We sell our products and services throughout North America, Europe, Asia
and the Pacific Rim. We perform periodic credit evaluations of our
customers' financial condition and generally do not require collateral.
Credit losses have been within our expectations. For the three months
ended March 31, 2005, aggregate revenues from customers located in Europe
or Asia and North America both amounted to $3.0 million, or 50% of total
revenue. For the three months ended March 31, 2004, our revenues from
customers located in Europe or Asia amounted to $0.4 million, or 17% of
total revenue, while revenues from customers located in North America
totaled $2.0 million, or 83% of total revenue. On a pro forma basis,
giving effect to the acquisitions as if they had occurred on January 1,
2005, for the three months ended March 31, 2005 aggregate revenues from
customers located in Europe or Asia amounted to $3.0 million, or
approximately 18% of total revenue, while revenues from customers located
in North America totaled $13.4 million.
No one customer exceeded 10% of total revenues for the three months ended
March 31, 2005. Two different customers represented 22% and 13% of
accounts receivable as of March 31, 2005. On a pro forma basis, giving
effect to the acquisitions as if they had occurred on January 1, 2005,
two customers exceeded 10% of total pro forma revenue for the three
months ended March 31, 2004, representing 24% and 10%.
For the three months ended March 31, 2004, revenues from two customers
each exceeding 10% of total revenues each aggregated 15%.
(5) PER SHARE DATA
We report our earnings (loss) per share in accordance with SFAS No. 128,
ACCOUNTING FOR EARNINGS PER SHARE (SFAS 128). Basic loss per share is
calculated using the net loss allocable to common shareholders divided by
the weighted average common shares outstanding during the period. In
accordance with accounting requirements for reverse mergers, the
historical loss per share of MSI prior to the MSI Acquisition has been
retroactively restated to reflect our capital structure. Due to our net
loss, shares from the assumed conversion of outstanding warrants,
options, convertible preferred stock and convertible debt have been
omitted from the computations of diluted loss per share for the three
months ended March 31, 2005 and 2004 because the effect would be
antidilutive. Shares issuable from common stock equivalents that could
potentially dilute earnings per share in the future that were not
included in the computation of loss per share because their effect was
anti-dilutive totaled approximately 101.3 million and 2.5 million at
March 31, 2005 and 2004, respectively.
(6) SERIES A CONVERTIBLE PREFERRED STOCK
In connection with the MSI Acquisition, we designated 2.5 million
authorized shares of preferred stock as Series A Preferred shares and
issued 2,466,971 of such shares. Warrants are outstanding for the
purchase of the remaining 33,029 Series A Preferred shares at a purchase
price of $10.35 per share.
15
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Series A Preferred shares are convertible at any time upon written
notice to us into shares of common stock on a twenty-for-one basis. So
long as at least 500,000 originally issued shares of Series A Preferred
are outstanding, the holders of Series A Preferred shares have the right
to appoint three directors to our Board of Directors. As a result, our
Board of Directors has been expanded to seven members to accommodate
these three directors. On or after August 16, 2008, the holders of at
least 80% of the Series A Preferred shares may elect to have us redeem
the Series A Preferred for a price equal to the greater of (i) the
original issue price of $12.60 per share ($31.5 million in the aggregate)
plus accrued dividends, to the extent dividends are declared by us, or
(ii) the fair market value of the number of shares of common stock into
which such shares of Series A Preferred are convertible. Other material
terms of the Series A Preferred shares include a preference upon
liquidation or dissolution of the Company, weighted-average anti-dilution
protection and pre-emptive rights with respect to subsequent issuances of
securities by us (subject to certain exceptions).
(7) DEBT
(A) SENIOR SECURED CONVERTIBLE NOTE
On the MSI Acquisition Date, liabilities assumed in the MSI Acquisition
included the fair value of a convertible note. This convertible note
originated on May 13, 2004, when we consummated a private placement
pursuant to which we issued a secured convertible term note due May 13,
2007 in the principal amount of $5,000,000 (the "Laurus Note"), and we
issued a common stock purchase warrant entitling the holder to purchase
4,435,000 shares of common stock (the "Laurus Warrant") at $0.48 per
share. The Laurus Note and the Laurus Warrant were sold to Laurus Master
Fund, Ltd. ("Laurus"), for a purchase price of $5,000,000. The principal
and unpaid interest on the Laurus Note is convertible into shares of our
common stock at a price of $0.30 per share, subject to antidilution
adjustments.
In connection with the issuance of the Laurus Note, we recorded the fair
value of the Laurus Warrant as a debt discount in the amount of
approximately $1.8 million based upon the Black-Scholes option-pricing
model, resulting in an imputed interest rate of 37%. This discount is
being amortized to earnings as additional interest expense over the term
of the Laurus Note. Accordingly, we have recorded $139,545 of additional
non-cash interest expense relating to the amortization of the discount
during the quarter ended March 31, 2005.
In accordance with EITF 00-19, we initially accounted for the fair value
of the Laurus Warrant as equity. As discussed below, in the fourth
quarter of 2004, due to an October 2004 change in the Laurus Note
conversion terms, our authorized and unissued shares available to settle
the Laurus Warrant (after considering all other commitments that may
require the issuance of stock during the maximum period the Laurus
Warrant could remain outstanding) were determined to be insufficient. As
a result, we reassessed and reclassified the value of the Laurus Warrant
to a liability at the reassessment date. At March 31, 2005, we reassessed
the value of the Laurus Warrant liability and recorded a gain of
$341,495. The fair value of the Laurus Warrant is evaluated at the end of
each reporting period with any resulting change in the fair value being
16
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
reflected in the consolidated statements of operations.
The Laurus Note provides for monthly payments of interest at the rate per
annum equal to the prime rate plus 1%, which is subject to reduction if
the market price of our common stock exceeds certain designated
thresholds. However, the rate cannot be less than 5% per annum. The
Laurus Note also provides for monthly amortization of principal, which
commenced on September 1, 2004, of $45,455 (increased to approximately
$159,000 per month beginning in March 2005) with the balance payable on
the maturity date. Laurus has the option to receive shares of our common
stock in lieu of debt service payments at the market price of our common
stock at the date of conversion. The Laurus Note is collateralized by a
security interest in all of our assets. The Laurus Warrant entitles the
holder to purchase, at any time through May 13, 2011, up to 4,435,000
shares of our common stock at a price of $0.48 per share, subject to
antidilution adjustments.
Pursuant to a Securities Purchase Agreement (the "Securities Purchase
Agreement") between us and Laurus, for so long as 25% of the principal
amount of the Laurus Note is outstanding, we may not directly or
indirectly declare or pay any dividends without the prior written consent
of Laurus. The Securities Purchase Agreement also requires the written
consent of Laurus in connection with any liquidation, material
reorganization or issuance of certain additional indebtedness of the
Company.
On October 26, 2004, we entered into an Amendment and Waiver, (the
"Amendment and Waiver"), with Laurus that amended the Securities Purchase
Agreement and certain other documents (the "Loan Documents") and waived
certain events of default under certain of the Loan Documents. Pursuant
to the Amendment and Waiver, the parties agreed to reduce the "Fixed
Conversion Price" set forth in the Laurus Note from $0.50 to $0.30 per
share and to amend the Master Security Agreement to provide for a
"Lockbox Deposit Account" to be maintained by us and our subsidiaries
under the Master Security Agreement. Lockbox remittances do not
automatically reduce the debt outstanding unless an event of default has
occurred. Laurus further agreed to (i) release to us approximately $3
million, which represented all funds then remaining in a restricted
account (less outstanding accrued interest and fees); (ii) postpone until
the maturity date of the Laurus Note the monthly principal payable by us
under the Laurus Note from November 1, 2004 through February 1, 2005;
(iii) waive certain events of default, and all fees and default interest
rates applicable to such events of default; (iv) extend the time for our
subsidiaries to be joined as a party to the Master Security Agreement;
(v) waive all fees and default interest arising from our failure to pay
the liquidated damages set forth in the Registration Rights Agreement and
further waive any liquidated damages due and payable to Laurus by us.
In consideration of the waivers, we issued a seven-year warrant to Laurus
to purchase 500,000 shares of our common stock with an exercise price of
$0.50 per share. We further agreed to register under the Securities Act
the resale of the shares of common stock issuable upon exercise of the
new warrant and the additional shares of our common stock issuable to
Laurus upon conversion of the Laurus Note due to the adjustment of the
Fixed Conversion Price. We valued the additional Warrant at $89,000,
17
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
which represents the total liquidated damages waived by Laurus as a
result of the Amendment and Waiver. We recorded this amount as a
liability and additional interest expense during the quarter ended
December 31, 2004. On February 17, 2005, we entered into an Amendment and
Waiver (the "Second Amendment and Waiver") with Laurus. The Second
Amendment and Waiver waived certain events of default under the
Registration Rights Agreement (as amended on October 25, 2004) and the
Laurus Note. Pursuant to the Second Amendment and Waiver, Laurus agreed
to waive all fees and default interest arising from our failure to pay
the liquidated damages set forth in the Registration Rights Agreement and
to waive any liquidated damages due and payable to Laurus in connection
with our failure to maintain the effectiveness of the Registration
Statement.
On February 18, 2005, we entered into a Waiver and Subordination
Agreement with Laurus (the "Laurus Subordination"). The Laurus
Subordination waived our obligation under the Securities Purchase
Agreement to cause STAR to become a party to the Master Security
Agreement. Pursuant to the Laurus Subordination, Laurus also agreed to
subordinate to a lender its security interest in the accounts receivable
and other rights to payments, general intangibles, equipment and
inventory of STAR.
In consideration of the waivers and subordination by Laurus described
above, we agreed to issue to Laurus an immediately exercisable seven-year
warrant to purchase 3,625,000 shares of common stock at an exercise price
of $0.26 per share, at any time on or prior to February 17, 2012 (the
"Additional Warrant") and further agreed to register under the Securities
Act the resale of the shares of common stock issuable upon exercise of
the Additional Warrant. A registration statement was filed on April 14,
2005 and was declared effective by the Securities and Exchange Commission
on April 25, 2005. At March 31, 2005, we accrued $300,000 for the value
of the Additional Warrant based on the terms of the Securities Purchase
Agreement relating to the amount of liquidated damages payable for not
meeting the deadlines required under the Registration Rights Agreement.
(B) CAPITAL LEASES
On November 20, 2003, we entered into a capital lease line of credit
agreement (the "Lease Line") for $1,500,000 with a third-party lender.
The term of the agreement is for term leases ranging from 12 to 18
months. The interest rate on the Lease Line ranges from 10.514% to
10.731%. As of March 31, 2005, we have drawn $1,470,507 on the Lease Line
and $29,493 of the Lease Line had expired unused. The Lease Line is to be
repaid in monthly principal and interest installments, with the final
payment due in October 2005. The unpaid balance at March 31, 2005 was
$279,695.
On March 2, 2005, we entered into an amendment to the Lease Line. Under
this amendment, we may draw an additional $500,000 (the "New Credit
Facility") for equipment purchases through June 30, 2005. The amendment
also grants us a call option to purchase equipment from the lessor. If
any part of the New Credit Facility amount is unfunded on June 30, 2005,
we are required to pay the lessor 5% of such unfunded amount upon demand
by the lessor. The term of the agreement is for 15 months with an
interest rate of 14.96%. During March 2005, we have drawn $164,177 on the
18
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
New Credit Facility. The New Credit Facility is to be repaid in monthly
principal and interest installments. The unpaid balance at March 31, 2005
was $153,259.
(C) REVOLVING LINE OF CREDIT
On February 18, 2005, STAR obtained a revolving line of credit from a
bank, which provides for borrowings, from time to time until March 1,
2007, of up to $5,000,000. In connection with the line of credit, on
February 18, 2005, STAR entered into a credit agreement (the "Credit
Agreement") with the bank and executed in favor of the bank a revolving
line of credit note (the "LOC Note"), a continuing security agreement
(rights to payment and inventory) ("Security Agreement #1") and a
security agreement (equipment) ("Security Agreement #2, and collectively
with Security Agreement #1, the "Security Agreements"). The Credit
Agreement, the LOC Note and the Security Agreements are collectively
referred to as the "Loan Documents." On March 30, 2005, the line of
credit was amended to make PWI a co-borrower thereunder.
Pursuant to the Credit Agreement, the maximum principal amount of all
borrowings under the line of credit cannot exceed 80% of STAR's and PWI's
eligible accounts receivable. The Credit Agreement further provides that
all borrowed amounts shall, at the option of the bank and without notice,
become immediately due and payable upon the occurrence of an event of
default (as defined in the Credit Agreement). Principal amounts not paid
when due bear interest at 4% above the per annum rate of interest of the
LOC Note.
The LOC Note provides that interest on all outstanding principal amounts
shall accrue at a rate per annum equal to the prime rate plus 1.5%.
Interest on the LOC Note is payable monthly on the first day of each
month during the term of the LOC Note, commencing April 1, 2005. Pursuant
to the Security Agreements, borrowings under the line of credit are
secured by a first priority lien on all of STAR's and PWI's assets. If an
event of default occurs under the Security Agreements or the LOC Note,
the bank has the right to accelerate payments under the LOC Note and, in
addition to any other remedies available to it, to foreclose upon the
assets securing the LOC Note. In addition, the LOC Note contains certain
financial covenants for which compliance is measured quarterly. During
the three months ended March 31, 2005, we drew $3,519,452 on the line of
credit. We were not in compliance with one of our covenants for the
quarter ended March 31, 2005 and obtained a waiver for this covenant from
the bank through June 30, 2005.
(8) SUBSEQUENT EVENTS
(A) REVERSE STOCK SPLIT
On April 12, 2005, our Board of Directors (the "Board") and the holders
of the required number of shares of our capital stock approved an
amendment to our Articles of Incorporation to effect a reverse stock
split, pursuant to which every ten (10) shares (the "Old Shares") of our
outstanding common stock are to be exchanged for one new share (the "New
Shares") of common stock.
19
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The number of Old Shares for which each New Share is to be exchanged is
referred to as the "Exchange Number". The reverse stock split will be
effected simultaneously for all shares of common stock and the Exchange
Number will be the same for all shares of common stock. Upon the
effectiveness of the reverse stock split, each option or warrant right
for common stock will entitle the holder to acquire a number of shares
equal to the number of shares that the holder was entitled to acquire
prior to the reverse stock split divided by the Exchange Number at the
exercise price in effect immediately prior to the reverse stock split,
multiplied by the Exchange Number.
The Board will have the authority to determine the effective date of the
reverse stock split, without further stockholder approval.
The Board also reserved the right, notwithstanding stockholder approval
and without further action by the stockholders, not to proceed with the
reverse stock split, if, at any time prior to filing the amendment to the
Articles of Incorporation with the Secretary of State of the State of
Nevada, the Board, in its sole discretion, determines that the reverse
stock split is no longer in the best interests of the Company and its
stockholders. The Board may consider a variety of factors in determining
whether or not to implement the reverse stock split, including, but not
limited to,
o overall trends in the stock market;
o recent changes and anticipated trends in the per share market price of
the common stock, business and transactional developments;
o our actual and projected financial performance; and
o our anticipated merger with another entity.
The reverse stock split will not change the proportionate equity
interests of our stockholders, nor will the respective voting rights and
other rights of stockholders be altered, except for possible immaterial
changes due to our issuance of additional shares in lieu of fractional
shares. The Common Stock issued pursuant to the reverse stock split will
remain fully paid and non-assessable. We will continue to be subject to
the periodic reporting requirements of the Securities Exchange Act of
1934, as amended.
(B) AMENDMENT TO EQUITY INCENTIVE PLAN
On April 1, 2005, our stockholders approved by written consent an
amendment to our 2000 Equity Incentive Plan (the "Plan") to increase the
maximum number of shares of our common stock available for issuance
thereunder from 6,000,000 shares to 22,625,000 shares. Such amendment was
approved by the Board on August 16, 2004. As a result of the reverse
stock split described above, the authorized shares in the Plan will be
adjusted accordingly.
20
INCENTRA SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(C) AMENDMENT TO SENIOR SECURED CONVERTIBLE NOTE
On May 4, 2005, we entered into an amendment with Laurus to the Laurus
Note pursuant to which the conversion price for the first $200,000 of
principal converted on or after April 28, 2005 was reduced to eighty
seven percent (87%) of the five (5) lowest closing prices of the common
stock during the twenty-two (22) trading days immediately prior to the
date of such conversion; provided, however, that such conversion price
shall not be less than $0.14. Any beneficial conversion features
resulting from the change in conversion terms will be recognized in
earnings at the time of the conversion.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
When used in this discussion, the word "believes", "anticipates",
"expects" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks
and uncertainties that could cause actual results to differ materially
from those projected.
Our business and results of operations are affected by a wide variety of
factors that could materially and adversely affect the Company and its
actual results, including, but not limited to: (1) the availability of
additional funds to enable us to successfully pursue its business plan;
(2) the uncertainties related to the effectiveness of our technologies
and the development of the our products and services; (3) our ability to
maintain, attract and integrate management personnel; (4) our ability to
complete the development and continued enhancement of its products in a
timely manner; (5) our ability to effectively market and sell its
products and services to current and new customers; (6) our ability to
negotiate and maintain suitable strategic partnerships and corporate
relationships; (7) the intensity of competition; and (8) general economic
conditions. As a result of these and other factors, we may experience
material fluctuations in future operating results on a quarterly or
annual basis, which could materially and adversely affect its business,
financial condition, operating results and stock price.
Any forward-looking statements herein speak only as of the date hereof.
We undertake no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
OVERVIEW
We are a supplier of complete solutions for enterprise's data protection
needs. We supply a broad range of storage products and storage management
services to broadcasters, enterprises and information technology service
providers worldwide. We market our products and services to broadcasters
under the trade name Front Porch Digital ("Front Porch") and to service
providers and enterprise clients under the trade names ManagedStorage
International ("MSI"), STAR Solutions ("STAR") and PWI Technologies
("PWI"). Front Porch provides unique software and professional services
21
solutions for digital archive management to broadcasters and media
companies. MSI provides outsourced storage solutions, including
engineering, hardware and software procurement and remote storage
operations services. STAR and PWI are leading systems integrators that
provide Information Technology ("IT") products, professional services and
outsourcing solutions to enterprise customers located primarily in the
western United States.
Through Front Porch, we provide a software and management solution that
enables searching, browsing, editing, storage and on-demand delivery of
media-rich content in nearly any digital format. The software converts
audio, video, images, text and data into digital formats for ease of use
and archiving. With more than 95 installations worldwide, our DIVArchive
software has become a leading digital archive management application
among European and Asian broadcast and media companies, and is gaining an
increasing share of the North American market. Front Porch's DIVArchive
and BitScream applications provide the essential integration layer within
the digital content creation and broadcast environments. As a result of
its software-based solution that was built on intelligent, distributed
architecture, Front Porch's archive management and transcoding solutions
are flexible, scalable, easily upgradable, failure resilient and
well-integratable with leading automation and asset management
applications.
Through MSI, we deliver comprehensive storage services including
professional services, hardware/software procurement and resale,
financing solutions and remote monitoring/management services. We focus
on providing data protection solutions and services that ensure that our
customers' data is backed-up and recoverable and meets internal data
retention compliance policies. MSI's remote monitoring and management
services are delivered from its Storage Network Operations Center, which
monitors and manages a multitude of diverse storage infrastructures on a
24x7 basis throughout the United States, United Kingdom, Bermuda and
Tokyo. MSI delivers this worldwide service utilizing its proprietary
GridWorks Operations Support System, which enables automated remote
monitoring and management of complete storage infrastructures and back-up
applications. MSI provides outsourcing solutions for customer data
protection needs under long-term contracts. Customers pay on a monthly
basis for storage services based on the number of assets managed and/or
the volume of storage assets utilized. These customers benefit from
reduced operating costs and reductions in capital expenditures.
Through STAR and PWI, we deliver complete IT solutions, including
professional services, third-party hardware/software procurement and
resale, financing solutions and the sale and delivery of first call
support for third-party hardware and software maintenance (including help
desk operations). Solutions are sold primarily to enterprise customers in
the financial services, government, hospitality, retail, security,
healthcare and manufacturing sectors. With offices and sales personnel
located primarily throughout the western United States, these recently
acquired entities are a cornerstone to its North American expansion
plans.
The following discussion and analysis of financial condition and results
of operations is based upon our pro forma and historical consolidated
financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America.
The preparation of these consolidated financial statements requires
management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. These estimates are
based on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which
22
form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
BUSINESS OUTLOOK
The following summarized discussion of financial results for the three
months ended March 31, 2005 and 2004 is of our results on a pro forma
basis, giving effect to the acquisitions as if they had occurred at the
beginning of all periods presented. We believe the pro forma results of
operations provide additional and more relevant information about the
operating performance of our business and gives a better indication of
our results of operations, and the size and scalability of our business
on a forward looking basis.
For the three months ended March 31, 2005, pro forma revenues totaled
$16.4 million as compared to $14.3 million for the comparable prior
period. The rate of year-over-year growth in revenues for the three
months ended 2005 was approximately 15%. The significant growth in
revenue was a result of increased sales and deliveries of our proprietary
DIVArchive solution, third-party hardware and software and our
professional services. In addition, we have a recurring revenue base
created by our proprietary Gridworks Operations System Support solution
that provides added stability and predictability in revenue, as well as a
significant growth opportunity through the expansion of services to
existing customers, the continued increase in the amount of data under
protection, as well as new enterprise and service provider customer
opportunities.
We continue to invest in hardware and the development of our software and
digital archiving in the data storage and infrastructure areas. During
the quarter ended March 31, 2005, we invested $0.2 million in software
development and $0.2 million for data storage infrastructure development.
During the three months ended March 31, 2005, our pro forma loss from
operations increased by approximately $0.2 million, to $1.9 million as
compared to a pro forma loss of $1.7 million for the comparable prior
year period. We incurred a significant increase in audit, accounting,
investment banking, investor relations and legal charges in the first
quarter of 2005 related to our recent acquisition activities and the
costs of registering under the Securities Act the resale of shares of
common stock owned by certain stockholders, including Laurus. These
costs, which amounted to approximately $0.4 million in the first quarter
of 2005, were not incurred in the comparable prior year.
During the three months ended March 31, 2005, we realized a EBITDA(1)
loss of approximately $0.1 million, on a pro forma basis. If
- --------
(1) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization and cumulative effect of changes in accounting principles. Although
EBITDA is not a measure of performance or liquidity calculated in accordance
with generally accepted accounting principles (GAAP), we believe the use of the
non-GAAP financial measure EBITDA enhances an overall understanding of our past
financial performance and is a widely-used measure of operating performance in
practice. In addition, we believe the use of EBITDA provides useful information
to the investor because EBITDA excludes significant non-cash interest and
amortization charges related to past financings by us that, when excluded, we
believe produces more meaningful operating information. EBITDA also excludes
depreciation and amortization expenses. However, investors should not consider
this measure in isolation or as a substitute for net income, operating income,
cash flows from operating activities or any other measure for determining our
operating performance or liquidity that are calculated in accordance with GAAP,
and this measure may not necessarily be comparable to similarly titled measures
employed by other companies. A reconciliation of EBITDA to the most comparable
GAAP financial measure on a pro forma basis, net loss before deemed dividends
and accretion on preferred stock is set forth below.
- --------------------------------------------------------------------------------
* EBITDA Reconciliation
THREE MONTHS ENDED MARCH 31, 2005
All amounts in (000's)
Pro forma net loss before deemed dividends and
accretion on preferred stock $ (2,401)
Depreciation and amortization 1,347
Taxes 320
Interest (cash portion) 171
Interest (non-cash portion) 462
----------
EBITDA (101)
----------
Former owner costs 314
Non-cash stock based compensation 156
Referral fees 43
----------
EBITDA, as adjusted $ 412
==========
23
EBITDA is adjusted to remove the impacts of the former owner's costs;
non-cash stock compensation expense and referral fee amortization, the
adjusted EBITDA would be a positive $0.4 million for the three months
ended March 31, 2005. Also included in EBITDA for three months ended
March 31, 2005, is a gain of approximately $341,000 due to the
revaluation of the derivative warrant liability
We intend to further leverage our unique intellectual property by
continuing to leverage our position as a leading provider of archive
software solutions. In addition, we intend to expand its product and
service offerings to position itself as a provider of a wide range of
services and products to the broadcast and media markets. We believe that
we can increase revenues from existing and new customers by offering
complete archive solutions, including storage hardware and software,
servers and peripheral devices, as well as first call support services.
To facilitate this strategy, we intend to increase our volume of products
available for resale to customers both directly and through existing
channel partners. We also plan to increase our expenditures for sales and
marketing initiatives to meet what appears to be an increasing volume of
digital archive implementations in the North American market and
throughout the rest of the world.
We also believe we can increase our sales of managed services by
introducing these services to the customers of our newly-acquired
businesses. Professional services will also be enhanced as we leverage
our engineering resources across our entire customer base. We plan to
increase our sales resources focused on the enterprise market and will
resell a variety of storage products directly to businesses.
As we continue to grow, we will need to sustain and possibly increase the
investment of capital into its software technologies, Gridworks and
DIVArchive, to ensure they maintain their competitive advantage and to
further enhance their inter-operability and feature sets.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2004
REVENUE. Total revenue for the three months ended March 31, 2005
increased $3.6 million, or 154%, to $6.0 million compared to total
revenue of $2.4 million for the three months ended March 31, 2004.
Revenue from the sale of our products increased to $3.2 million compared
to revenue of $0.4 million for the comparable prior year period. This
increase was attributable to the additional revenues of $3.2 resulting
from the acquisitions of Front Porch and STAR offset by a decrease of
24
$0.4 million due to a sale of MSI's Gridworks in 2004. Revenue from
delivery of our services increased $0.8 million, or 39%, to $2.8 million
compared to $2.0 million for the comparable prior year period. Service
revenue increased $1.0 million due to the acquisitions of Front Porch and
STAR offset by a decline in the MSI service revenues of $0.2 million due
to a customer who filed bankruptcy in December 2003 and did not renew the
service upon contract expiration.
For the quarter ended March 31, 2005, a significant portion of
our revenues were derived from the European and Asian geographic markets.
During that period, aggregate revenues from customers located in Europe
or Asia amounted to $3.0 million, or 50% of total revenue, while revenues
from customers located in North America totaled $3.0 million, or 50% of
total revenue. For the quarter ended March 31, 2004, revenues from
customers located in Europe and Asia amounted to $0.4 million, or 17% of
total revenue, while revenues from customers located in North America
totaled $2.0 million, or 83% of total revenue.
GROSS MARGIN. Total gross margin for the three months ended March
31, 2005 increased $1.8 million to $2.9 million, or 49% of total revenue,
as compared to gross margin of $1.2 million, or 49% of total revenue, for
the comparable prior year period. Product gross margin for the three
months ended March 31, 2005 totaled $2.0 million, or 61% of product
revenue. Service gross margin for the three months ended March 31, 2005
totaled $0.9 million, or 36% of service revenue. Gross margin was flat
year over year as the high margins experienced by Front Porch on sales of
its DIVArchive solutions were offset by lower margins on hardware sales
at STAR.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general
and administrative ("SG&A") expenses for the three months ended March 31,
2005 increased by approximately $2.0 million to $4.0 million from $2.0
million for the comparable prior year period. Actual SG&A expenses for
the three months ended March 31, 2005 included $2.5 million in salaries
and related benefits for employees not directly related to the production
of revenue, $0.5 million in general office expenses, $0.5 million in
professional fees, $0.2 million for travel-related costs, and $0.2
million in facilities costs. SG&A expenses of $2.1 million for the prior
period ending March 31, 2004 included $1.2 million in salaries and
related benefits for employees not directly related to the production of
revenue, $0.4 million in general office expenses, $0.2 million in travel
related costs, $0.1 million in professional fees, $0.1 million of
facilities costs and $0.1 million of bad debt expense. The increase in
SG&A expenses during the three months ended March 31, 2005 was due to the
inclusion of $2.3 million of SG&A expenses for Front Porch for the full
quarter and Star from February 18, 2005 through the end of the quarter.
This increase was offset by $0.4 million of reduced SG&A expenses at MSI
including a decrease of $0.2 million in payroll and related costs as a
result of reductions in staffing levels, $0.1 million in travel-related
costs associated with the staffing level reduction and $0.1 million in
bad debt expense.
DEPRECIATION AND AMORTIZATION. Amortization expense consists of
amortization of intellectual property, capitalized research and
development costs and other intangible assets. Depreciation expense
consists of depreciation of furniture, equipment, software and
improvements. Depreciation and amortization expense was approximately
$1.3 million and $0.7 million for the three months ended March 31, 2005
and 2004, respectively, of which $0.4 million is included in cost of
revenue for both periods ending March 31, 2005 and 2004. The increase is
primarily due to the increase in amortization associated with the
intangible assets created in the acquisitions of Front Porch, STAR and
PWI.
25
OPERATING LOSS. During the three months ended March 31, 2005, we
incurred a loss from operations of $1.9 million as compared to a loss
from operations of $1.2 million for the three months ended March 31,
2004. This increase was the result of an increase in gross margin by
approximately $1.8 million for the three months ended March 31, 2005
offset by an increase in selling, general and administrative expenses of
approximately $2.5 million.
INTEREST EXPENSE. Interest expense was $0.6 million for the three
months ended March 31, 2005 compared to $0.7 million for the three months
ended March 31, 2004. The decrease in interest expense was attributable
to a decrease of $0.7 million of non-cash interest expense on MSI's
previously outstanding Series C preferred stock, offset in part, by an
increase in non-cash interest of $0.2 million related to warrants,
non-cash interest of $0.2 million for amortization of debt discounts and
deferred financing costs and $0.1 million of cash interest on senior
secured convertible notes and capital leases. Interest expense in 2004
included non-cash interest expense of $0.7 million on MSI's previously
outstanding Series C preferred stock and an immaterial amount of cash
interest on capital leases.
OTHER INCOME AND EXPENSE. Other income was $0.4 million for the
three months ended March 31, 2005 compared to approximately $41,000 for
the three months ended March 31, 2004. Other income of $0.4 million for
2005 included $0.3 million of income resulting from reassessing the value
of contracts recorded under EITF 00-19 for outstanding warrants and $0.1
million of investment income from leased equipment to customers and gains
from sales of fixed assets. Other income of approximately $41,000 for the
three months ended March 31, 2004 included investment income from leased
equipment to customers and gains from sales of fixed assets.
FOREIGN CURRENCY TRANSACTION GAIN. As discussed above, we conduct
business in various countries outside the United States in which the
functional currency of the country is not the U. S. dollar. We are
subject to foreign exchange transaction exposure because we provide for
intercompany funding between the U.S. and international operations, when
we and/or our French subsidiary transact business in a currency other
than our own functional currency. The effects of exchange rate
fluctuations in remeasuring foreign currency transactions for the three
months ended March 31, 2005 resulted in a gain of approximately $22,000.
In addition, we entered into a forward contract, which expired on April
1, 2005. We recorded an unrealized gain of approximately $60,000 on the
contract for the three months ended March 31, 2005, which represented the
change in the fair value for the foreign currency forward contract
related to the difference between changes in the spot and forward rates
excluded from the assessment of hedge effectiveness.
INCOME TAX EXPENSE. We incurred income tax expense for the three
months ended March 31, 2005 of $0.3 million. This income tax expense
represents non-cash deferred income tax expense related to our French
subsidiary, Front Porch Digital International, S.A.S. These income taxes
were incurred during the three months ended March 31, 2005 and represent
the utilization of the subsidiary's deferred tax assets (net operating
losses) during that period, which was recorded as a deferred tax asset in
purchase accounting.
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS. During the three
months ended March 31, 2005, we incurred a net loss applicable to common
shareholders of $3.1 million as compared to a net loss applicable to
common shareholders of $2.0 million for the three months ended March 31,
2004. The increase in net loss for the three months ended March 31, 2005
was primarily due to an increase in accretion on the outstanding Series A
preferred stock of $0.7 million and tax expense of $0.3 million.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2005, we had $2.2 million of cash and cash equivalents. We
used net cash of $0.9 million in operating activities during the three
months ended March 31, 2005, primarily as a result of the net loss
26
incurred during the period. We provided net cash of $1.1 million in
investing activities during the three months ended March 31, 2005, of
which $1.7 million represented the cash acquired from the STAR and PWI
acquisition transactions, which was offset by $0.6 million used primarily
to purchase or develop computer software and equipment. Financing
activities used net cash of $1.0 million during the three months ended
March 31, 2005 primarily from the repayment of capital leases, long-term
obligations and notes payable of $1.2 million, which was partially offset
by proceeds of $0.2 million from a lease line of credit.
We expect our anticipated cash flow from operations combined with our
current cash and cash equivalents will meet our working capital and
capital expenditure requirements for at least the next twelve months. In
addition, in connection with the business acquisitions in the first
quarter of 2005, we secured a $5 million Senior Secured Revolving
Commercial Loan from a bank to finance the cost of the acquisitions and
to provide additional working capital and additional capacity for
future acquisitions. Considering these acquisitions and the related
funding combined with our current cash position, we believe we have
sufficient capital available for the execution of our business
strategy and our continued growth and expansion. However, there can be
no assurance that we will not need to access the capital markets for
additional financing to fund our organic growth and subsequent
acquisitions and that sufficient capital will be available upon
acceptable terms.
Our actual financial results may differ materially from the stated plan
of operations. Factors which may cause a change from our plans of
operation vary, but include, without limitation, decisions of our
management and board of directors not to pursue the stated plan of
operations based on its reassessment of the plan and general economic
conditions. Additionally, there can be no assurance that our business
will generate cash flows at or above current levels. Accordingly, we may
choose to defer capital expenditure plans and extend vendor payments for
additional cash flow flexibility.
ITEM 3. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES. Our management, with the
participation of our chief executive officer and chief financial officer,
has evaluated the effectiveness of our disclosure controls and procedures
(as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of
the end of the period covered by this report. Based on such evaluation,
our chief executive officer and chief financial officer have concluded
that, as of the end of such period, our disclosure controls and
procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by us
in the reports that it files or submits under the Exchange Act.
INTERNAL CONTROL OVER FINANCIAL REPORTING. There have not been any
changes in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the first quarter of 2005 that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.
27
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS:
In February 2005, we issued 12,617,555 shares of common stock to the
stockholders of STAR in connection with our acquisition of all of the
outstanding shares of STAR. The transaction, including the type and amount
of consideration paid by us, is described in Note 2 and previously
reported on a Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 23, 2005. The shares issued by us in the
transaction were issued in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended, on the
basis that such issuance did not involve a public offering, no underwriter
fees or commissions were paid in connection with such issuance and such
persons represented to us that they were 'accredited investors' as defined
in Regulation D under the Securities Act of 1933, as amended.
In February 2005, in consideration of the waivers and subordination by
Laurus discussed in Note 7, we issued Laurus an immediately exercisable
seven-year warrant to purchase 3,625,000 shares of common stock at an
exercise price of $0.26 per share, at any time on or prior to February 17,
2012. The warrant was issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as
amended, on the basis that such issuance did not involve a public
offering, no underwriter fees or commissions were paid in connection with
such issuance and such persons represented to us that they were
'accredited investors' as defined in Regulation D under the Securities Act
of 1933, as amended.
In March 2005, we issued 8,419,340 shares of common stock in connection
with its acquisition of all of the outstanding shares of PWI. The
transaction, including the type and amount of consideration paid by us, is
described in Note 2 and previously reported on a Current Report on Form
8-K filed with the Securities and Exchange Commission on April 4, 2005.
The shares issued by us in the transaction were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act
of 1933, as amended, on the basis that such issuance did not involve a
public offering, no underwriter fees or commissions were paid in
connection with such issuance and such persons represented to us that they
were 'accredited investors' as defined in Regulation D under the
Securities Act of 1933, as amended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 1, 2005 and April 12, 2005, respectively, the holders of a
majority of the issued and outstanding shares of our capital stock
approved (i) the amendment to our 2000 Equity Incentive Plan to increase
the maximum number of shares of common stock available for issuance
thereunder from 6,000,000 to 22,625,000 shares and (ii) the amendment to
our Articles of Incorporation to effect a stock combination, or reverse
stock split, pursuant to which every ten (10) shares of our outstanding
common stock would be exchanged for one new share of common stock. Such
actions were previously approved by our board of directors.
Stockholders beneficially owning an aggregate of approximately 107 million
shares of our common stock, representing approximately 61% of the voting
power of our company, delivered their written consent to the foregoing
actions. A preliminary Information Statement on Schedule 14C describing
such actions was filed with the Securities and Exchange Commission on May
5, 2005. The actions will not become effective until at least twenty (20)
days after we mail to our stockholders of record a definitive Information
Statement on Schedule 14C.
ITEM 6. EXHIBITS.
The exhibits required by this item are listed on the Exhibit Index
attached hereto.
28
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 16, 2005 INCENTRA SOLUTIONS INC.
By: /s/ Thomas P. Sweeney III
-------------------------
Thomas P. Sweeney III
Chief Executive Officer
(principal executive officer)
By: /s/ Paul McKnight
-------------------------
Paul McKnight
Chief Financial Officer
(principal financial and
accounting officer)
EXHIBIT INDEX
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.