SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 2005.
or
[_] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
COMMISSION FILE NUMBER: 0-25940
GLOWPOINT, INC.
(Exact Name of registrant as Specified in its Charter)
DELAWARE 77-0312442
(State or other Jurisdiction of (I.R.S. Employer Number)
Incorporation or Organization)
225 LONG AVENUE, HILLSIDE, NEW JERSEY 07205
(Address of Principal Executive Offices)
973-282-2000
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the 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 [_] No [X]
Check whether the registrant is an accelerated filer as defined in Rule
12b-2 of the Exchange Act of 1934.
Yes [_] No [X]
The number of shares outstanding of the registrant's Common Stock as of
August 12, 2005 was 45,966,340.
GLOWPOINT, INC
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Restated Condensed Consolidated Financial Statements*
Condensed Consolidated Balance Sheet at June 30, 2005 (unaudited) and Restated Condensed
Consolidated Balance Sheet at December 31, 2004*................................................1
Unaudited Condensed Consolidated Statements of Operations For the Six Months and Three
Months ended June 30, 2005 and 2004 (Restated) ...............................................2
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June
30, 2005 and 2004 (Restated)....................................................................3
Notes to Condensed Consolidated Financial Statements................................................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................12
Item 3. Quantitative and Qualitative Disclosures about Market Risk...............................................20
Item 4. Controls and Procedures..................................................................................20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................................21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..............................................21
Item 3. Defaults Upon Senior Securities..........................................................................21
Item 4. Submission of Matters to a Vote of Security Holders......................................................21
Item 5. Other Information........................................................................................21
Item 6. Exhibits.................................................................................................21
Signatures.......................................................................................................22
* The Condensed Consolidated Balance Sheet at December 31, 2004 has been
derived from the audited restated consolidated financial statements
filed as an exhibit to our Report on Form 8-K on March 17, 2006.
GLOWPOINT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
JUNE 30, 2005 DECEMBER 31, 2004*
------------- -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 9,041 $ 4,497
Escrowed cash ............................................................. -- 337
Accounts receivable, net of allowance for doubtful accounts of
$341 and $305; respectively ........................................... 2,171 1,872
Receivable from Gores Technology Group .................................... -- 2,371
Prepaid expenses and other current assets ................................. 848 554
--------- ---------
Total current assets .................................................. 12,060 9,631
Property and equipment, net ................................................... 4,967 5,103
Other assets ................................................................... 256 258
--------- ---------
Total assets .......................................................... $ 17,283 $ 14,992
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 2,590 $ 2,984
Accrued expenses .......................................................... 2,528 2,421
Current portion of derivative financial instrument ........................ 806 367
Deferred revenue .......................................................... 508 265
Capital lease obligations ................................................. -- 35
--------- ---------
Total current liabilities ............................................. 6,432 6,072
Derivative financial instrument, less current portion .......................... 573 932
--------- ---------
Total liabilities ............................................... 7,005 7,004
Preferred stock, $.0001 par value; 5,000 shares authorized; 120 and 204 Series B
shares issued and outstanding, (stated value of $2,888 and $4,888;
liquidation value of $3,220 and $5,257), respectively ..................... 2,888 4,888
--------- ---------
Stockholders' Equity:
Common stock, $.0001 par value; 100,000 shares authorized; 46,006 and
37,855 shares issued; 45,966 and 37,815 shares
outstanding, respectively ............................................. 5 4
Deferred compensation ..................................................... (865) (1,176)
Additional paid-in capital ................................................ 160,075 148,510
Accumulated deficit ....................................................... (151,585) (143,998)
--------- ---------
7,630 3,340
Less: Treasury stock, 40 shares at cost ................................... (240) (240)
--------- ---------
Total stockholders' equity ............................................ 7,390 3,100
--------- ---------
Total liabilities and stockholders' equity ............................ $ 17,283 $ 14,992
========= =========
* Derived from the audited restated consolidated financial statements filed
as an exhibit to our Report on Form 8-K on March 17, 2006.
See accompanying notes to condensed consolidated financial statements.
1
GLOWPOINT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
------------------------- ---------------------------
2005 2004 2005 2004
---------- ---------- ---------- -----------
(RESTATED) (RESTATED)
---------- -----------
Revenues ............................................... $ 8,599 $ 7,365 $ 4,397 $ 4,179
Cost of revenues ....................................... 7,692 7,611 4,006 4,072
-------- -------- -------- --------
Gross margin (loss) ............................... 907 (246) 391 107
-------- -------- -------- --------
Operating expenses:
Research and development .......................... 576 481 263 240
Sales and marketing ............................... 2,148 1,259 1,225 703
General and administrative ........................ 6,101 5,242 3,073 2,760
-------- -------- -------- --------
Total operating expenses ............................... 8,825 6,982 4,561 3,703
-------- -------- -------- --------
Loss from operations ................................... (7,918) (7,228) (4,170) (3,596)
-------- -------- -------- --------
Other (income) expenses:
Amortization of deferred financing costs .......... -- 448 -- --
Interest (income) expense, net .................... (33) 21 (29) (19)
Increase in fair value of derivative financial
instrument .................................... 81 43 38 30
Amortization of discount on subordinated
debentures .................................... -- 2,650 -- --
Loss on exchange of debt .......................... -- 743 -- --
Gain on settlement with Gores ..................... (379) -- -- --
-------- -------- -------- --------
Total other (income) expense, net ...................... (331) 3,905 9 11
-------- -------- -------- --------
Net loss ............................................... (7,587) (11,133) (4,179) (3,607)
Preferred stock dividends .............................. (147) (171) (58) (97)
Preferred stock deemed dividends ....................... (1,282) -- -- --
-------- -------- -------- --------
Net loss attributable to common
stockholders ...................................... $ (9,016) $(11,304) $ (4,237) $ (3,704)
======== ======== ======== ========
Net loss attributable to common stockholders per share:
Basic and diluted ................................. $ (0.21) $ (0.32) $ (0.09) $ (0.10)
======== ======== ======== ========
Weighted average number of common shares:
Basic and diluted ................................. 42,532 34,860 45,966 37,332
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
2
GLOWPOINT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
----------------------------
2005 2004
-------- ---------
(RESTATED)
----------
Cash flows from Operating Activities:
Net loss ................................................................ $ (7,587) $(11,133)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ....................................... 1,147 1,102
Amortization of deferred financing costs ............................ -- 448
Amortization of discount on subordinated debentures ................. -- 2,650
Loss on exchange of debt ............................................ -- 743
Other expense recognized for the increase in the
estimated fair value of the debenture liability ................. 81 43
Common stock issued for interest on convertible debentures .......... -- 45
Gain on settlement with Gores ....................................... (379) --
Equity-based compensation ........................................... 378 378
Other ............................................................... -- 38
Increase (decrease) in cash attributable to changes in assets and
liabilities, net of effects of acquisitions:
Escrowed cash ................................................... 337 (1)
Accounts receivable ............................................. (299) 75
Receivable from Gores Technology Group .......................... -- (392)
Prepaid expenses and other current assets ....................... (294) (119)
Other assets .................................................... 2 (215)
Accounts payable ................................................ (394) (806)
Accrued expenses ................................................ 142 923
Deferred revenue ................................................ 243 19
-------- --------
Net cash used in operating activities ...................... (6,623) (6,202)
-------- --------
Cash flows from Investing Activities:
Proceeds from discontinued operations (Note 6) .......................... 2,750 --
Purchases of property, equipment and leasehold improvements ............. (1,011) (568)
-------- --------
Net cash used in investing activities ............................... 1,739 (568)
-------- --------
Cash flows from Financing Activities:
Proceeds from issuance of common stock and warrants ..................... 9,389 11,399
Offering costs .......................................................... -- (27)
Proceeds attributed to derivative financial instrument .................. -- 1,164
Exercise of warrants and options, net ................................... 74 559
Payments on capital lease obligations ................................... (35) (64)
-------- --------
Net cash provided by financing activities ........................... 9,428 13,031
-------- --------
Increase in cash and cash equivalents ...................................... 4,544 6,261
Cash and cash equivalents at beginning of period ........................... 4,497 4,105
-------- --------
Cash and cash equivalents at end of period ................................. $ 9,041 $ 10,366
======== ========
Supplement disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................................... $ 1 $ 15
======== ========
See accompanying notes to consolidated financial statements.
3
SIX MONTHS ENDED JUNE 30,
-------------------------
2005 2004
------ -------
(RESTATED)
--------
Non-cash investing and financing activities:
Deferred compensation and additional paid-in capital recorded for the
issuance of restricted common stock ............................... $ -- $ 511
Issuance of Series B convertible preferred stock in exchange for
convertible debentures ............................................ -- 4,888
Conversion of Series B convertible preferred stock to common
stock ............................................................. 2,000 --
Preferred stock deemed dividends .................................... 1,282 --
Preferred stock dividends ........................................... 147 171
Equity issued as consideration for accrued preferred stock
dividends ......................................................... 183 --
See accompanying notes to condensed consolidated financial statements.
4
GLOWPOINT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 1 -- THE BUSINESS
Glowpoint, Inc. ("Glowpoint" or "we" or "us"), a Delaware corporation,
provides comprehensive video communications services. Prior to 2004, Glowpoint,
then known as Wire One Technologies, Inc., sold substantially all of the assets
of its video solutions (VS) business to an affiliate of Gores Technology Group
(Gores) and accordingly, the accompanying condensed consolidated financial
statements do not include such operations (See Note 6). Our services include
IP-based and ISDN-based videoconferencing services, which are provided
principally on a subscription basis, and managed bridging conferencing services
for multi-point video and audio communications among three or more participants.
We also provide IP-based broadcasting and event services.
On April 20, 2004, we entered into an agreement with Tandberg, Inc., a
wholly owned subsidiary of Tandberg ASA (OSLO: TAA.OL), a global provider of
visual communications solutions. As part of the agreement, we acquired for $1.00
certain assets and the customer base of Tandberg owned Network Systems LLC.
Network Systems customers, primarily ISDN-based video users, obtained immediate
access to our video bridging and webcasting services. As part of the agreement,
Tandberg's corporate use of IP video communications and other telecommunications
services, formerly purchased through Network Systems, is being provided
exclusively by us under a multi-year agreement. In addition, we assumed current
contractual commitments with AT&T, MCI and Sprint from Network Systems, which
were subsequently consolidated into new agreements with these carriers. For
accounting purposes, such commitments did not result in any additional asset or
liability recognition. Tandberg named the GlowPoint Certified Program as a
recognized external testing partner for its hardware and software products. The
transaction was accounted for following purchase accounting under Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations". The
fair value of tangible assets acquired and liabilities assumed were nominal.
Accordingly, we did not record any value of intangible assets acquired. Results
of operations of the acquired business are included in the accompanying
financial statements from April 20, 2004, the date of acquisition. The following
pro forma information for the three months and six months ended June 30, 2004
gives effect to the acquisition as if it had occurred on January 1, 2004:
5
(In thousands, except per share amounts)
------------------------------------------
Six Months Ended Three Months Ended
June 30, 2004 June 30, 2004
---------------- ------------------
Revenues $ 8,355 $ 4,290
Gross margin 267 188
Net loss (10,828) (3,549)
Net loss attributable to common stockholders (10,999) (3,646)
Net loss attributable to common stockholders per share $ (0.32) $ (0.10)
NOTE 2 -- BASIS OF PRESENTATION
Our accompanying unaudited financial statements have been prepared 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. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals and the restatement adjustments-see Note 3) considered
necessary for a fair presentation have been included. Operating results for the
three months and six months ended June 30, 2005 and 2004 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2005. For further information, refer to the restated consolidated financial
statements and footnotes thereto for the fiscal year ended December 31, 2004 as
filed with the Securities and Exchange Commission as an exhibit to Form 8-K on
March 17, 2006.
The condensed consolidated financial statements include the accounts of
Glowpoint and our wholly owned subsidiaries, AllComm Products Corporation
("APC") and VTC Resources, Inc. ("VTC"). All material inter-company balances and
transactions have been eliminated in consolidation.
Our consolidated financial statements have been prepared assuming we
will continue as a going concern. We incurred a loss from operations of $4.2
million and $7.9 million for the three months and six months ended June 30,
2005, respectively and $3.6 million and $7.2 million for the three months and
six months ended June 30, 2004, respectively. We had negative cash flows from
operations of $6.6 million and $6.2 million for the six months ended June 30,
2005 and 2004, respectively. At June 30, 2005, we had cash and cash equivalents
of $9.0 million, working capital of $5.4 million and an accumulated deficit of
$151.6 million. We raised net proceeds of $9.4 million in March 2005, but
continue to sustain losses and negative cash flows from operations. In March
2006, we commenced a restructuring of our business (see Note 10). In April 2006,
we issued senior secured convertible notes and warrants and raised net proceeds
of $5.6 million. We believe that our available working capital at June 30, 2005,
together with our operating activities will enable us to continue as a going
concern through June 30, 2006.
NOTE 3-- RESTATEMENT
We have identified errors in previously reported consolidated financial
statements and have restated our condensed consolidated balance sheet as of
December 31, 2004 and the condensed consolidated statements of operations for
the three months and six months ended June 30, 2004 and cash flows for the six
months ended June 30, 2004. The condensed consolidated balance sheet as of
December 31, 2004 has been derived from the audited restated financial
statements filed as an exhibit to our Report on Form 8-K on March 17, 2006. The
restatements in the statement of operations for the three months ended June 30,
2004 (the "2004 quarter") and six months ended June 30, 2004 (the "2004 period")
relate to the following matters (the items described below will not aggregate
the total amount of the restatement):
Revenues - Revenues were increased $14,000 for the 2004 period and by
$53,000 for the 2004 quarter. We have deferred the recognition of revenue
associated with installation services from 2002 and 2003 and amortized it over a
24 month period (the estimated average life of a subscription based customer).
Previously, we recognized such installation revenue at the time such services
were completed. This change had the impact of increasing revenues by $70,000 for
the 2004 period and $96,000 for the 2004 quarter. The increases for the 2004
period and 2004 quarter were offset by a reduction of $21,000 related to sales
taxes.
6
Cost of revenues - Cost of revenues was increased by $1,576,000 for the
2004 period and $777,000 for the 2004 quarter. For the 2004 period, $1,114,000
and for the 2004 quarter, $522,000 was erroneously capitalized as property and
equipment rather than being charged to cost of revenues in the period. We
recomputed the amount of our network costs allocated to cost of revenues,
research and development, sales and marketing and general and administrative
expenses to properly reflect costs associated with the various departments that
used the internal network. This resulted in increases to cost of revenues of
$188,000 for the 2004 period and $74,000 for the 2004 quarter. Depreciation
expense of $158,000 for the 2004 period and $78,000 for the 2004 quarter
previously allocated to sales and marketing and general and administrative
expenses has been reclassified to cost of revenues. Additionally, we recomputed
the amount of certain circuit costs that were allocated to Gores and previously
charged to the sale of the VS business and have decreased the amount allocated
by $255,000 for the 2004 period and $117,000 for the 2004 quarter. Cost of
revenues was increased by $72,000 for the 2004 period and 2004 quarter to
properly reflect installation costs. Cost of revenues was decreased by $62,000
for the 2004 period and $56,000 for the 2004 quarter to apply credits from
telecommunications carriers to the appropriate periods. Cost of revenues was
reduced $113,000 in the 2004 period for costs incurred in 2003 that were
previously recognized in the 2004 period.
Research and development - Research and development expenses were
decreased by $183,000 for the 2004 period and by $97,000 for the 2004 quarter.
The decreases reflect the reclassification of $246,000 for the 2004 period and
of $129,000 for the 2004 quarter of costs to general and administrative
expenses. This reclassification was partially offset by the proper allocation of
depreciation expense and allocated network services which increased expenses by
$64,000 for the 2004 period and $32,000 for the 2004 quarter.
Sales and marketing - Sales and marketing expenses, previously referred
to as selling, were decreased by $2,488,000 for the 2004 period and $1,209,000
for the 2004 quarter. The decreases reflect the reclassification of $1,727,000
for the 2004 period and $856,000 for the 2004 quarter of costs to general and
administrative expenses. Sales commissions and bonuses were reduced by $206,000
for the 2004 period and $68,000 for the 2004 quarter for costs that should have
been expensed prior to the 2004 period. To reflect a proper allocation of
network costs to sales and marketing expense we have recorded a reduction of
$446,000 for the 2004 period and $203,000 for the 2004 quarter. Sales and
marketing costs have been reduced by $124,000 for the 2004 period and $90,000
for the 2004 quarter relating to improper commission accruals.
General and administrative - General and administrative expenses were
increased by $1,530,000 for the 2004 period and $930,000 for the 2004 quarter.
We have reclassified to general and administrative expenses $1,973,000 for the
2004 period and $985,000 for the 2004 quarter of costs that were previously
classified as selling and research and development, which relate principally to
customer service, engineering and other operating expenses. Depreciation expense
was reduced by $942,000 for the 2004 period and $439,000 for the 2004 quarter
reflecting the reduction of fixed assets and a reclassification of depreciation
expense. The re-allocation of network costs between cost of revenues, research
and development, sales and marketing and general and administrative expenses
resulted in an increase of $236,000 for the 2004 period and $118,000 for the
2004 quarter, in general and administrative expenses. We also recognized
additional expense of $131,000 for the 2004 period and $69,000 for the 2004
quarter relating to sales taxes.
Other (income) expense - Other expense for the 2004 period of
$4,479,000 was reduced by $575,000, which resulted in other expense of
$3,904,000. Other income as previously reported of $176,000 for the 2004 quarter
was adjusted by $187,000, which resulted in other expense of $11,000. A gain of
$169,000 previously recognized in the 2004 period and 2004 quarter has been
reversed to properly account for marketable securities which were received in
2003 and sold in September 2004. As a result of correcting the accounting for
the issuance of the subordinated convertible debentures, we reduced the
amortization of the related discount by $515,000 and recognized additional
amortization of deferred financing costs of $363,000 for the 2004 period. We had
previously overstated the discount by $1,489,000, which was partially offset by
overstating amortization by $989,000 as of January 1, 2004, due to the
overstatement of the discount and by following the straight line method of
amortizing the discount rather than the effective yield method. As a result of
correcting the accounting for the exchange of the subordinated convertible
debentures for Series B convertible preferred stock, warrants and a modification
to warrants, we reduced the loss on the exchange of debt by $611,000 for the
2004 period. We had previously recognized a loss on the exchange of $1,354,000,
which included the excess of the fair value of the common stock underlying the
Series B convertible preferred stock of $5,499,000 over the face amount of the
subordinated convertible debentures of $4,888,000 in the loss on exchange.
However, the subordinated convertible debentures were convertible into the same
number of shares of common stock as the Series B convertible preferred stock
and, accordingly, had the same fair value. The loss on the exchange has been
reduced to $743,000, representing the fair value of the shares of common stock
and the incremental fair value from the warrant modification, which were
included in the exchange.
7
The following table summarizes the account balances that have been
restated (dollars in thousands):
Previously Previously
Reported As Restated Reported As Restated
---------- ----------- ---------- -----------
Statements of Operations: Six months ended Three months ended
June 30, 2004 June 30, 2004
-------------------------- ----------------------
(unaudited) (unaudited)
Revenues .......................................... $ 7,351 $ 7,365 $ 4,126 $ 4,179
Cost of revenues .................................. 6,035 7,611 3,295 4,072
-------- -------- -------- --------
Gross margin (loss) ......................... 1,316 (246) 831 107
-------- -------- -------- --------
Operating expenses:
Research and development .................... 664 481 337 240
Sales and marketing ......................... 3,747 1,259 1,912 703
General and administrative .................. 3,712 5,242 1,830 2,760
-------- -------- -------- --------
Total operating expenses .......................... 8,123 6,982 4,079 3,703
-------- -------- -------- --------
Loss from operations .............................. (6,807) (7,228) (3,248) (3,596)
Other (income) expense ............................ 4,479 3,905 (176) 11
-------- -------- -------- --------
Loss from continuing operations ................... (11,286) (11,133) (3,072) (3,607)
Discontinued operations ........................... (61) -- (61) --
-------- -------- -------- --------
Net loss........................................... (11,347) (11,133) (3,133) (3,607)
Preferred stock dividends ......................... (172) (171) (98) (97)
-------- -------- -------- --------
Net loss attributable to common
stockholders ................................. $(11,519) $(11,304) $ (3,231) $ (3,704)
======== ======== ======== ========
Net loss attributable to common
stockholders per share:
Basic and diluted ............................. $ (0.33) $ (0.32) $ (0.09) $ (0.10)
======== ======== ======== ========
NOTE 4 -- STOCK-BASED COMPENSATION
We periodically grant stock options to employees and directors in
accordance with the provisions of our stock option plans, with the exercise
price of the stock options being set at the closing market price of the common
stock on the date of grant. We account for our employee stock-based compensation
plans under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees", and, accordingly, account for employee stock-based
compensation utilizing the intrinsic value method. Statement of Financial
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation",
establishes a fair value based method of accounting for stock-based compensation
plans. We have adopted the disclosure only alternative under SFAS No. 123, and
SFAS No. 148 "Accounting for Stock Based Compensation - Transition and
Disclosure" which requires disclosure of the pro forma effects on our net loss
attributable to common stockholders and the related per share amounts as if SFAS
No. 123 had been adopted as well as certain other information.
The fair value of stock options or warrants issued in return for
services rendered by non-employees is accounted for using the fair value based
method. The following table illustrates the effect on net loss attributable to
common stockholders and net loss per share for the three months and six months
ended June 30, 2005 and 2004 if the fair value based method had been applied to
all awards.
8
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
2005 2004 2005 2004
---------- ---------- ----------- -----------
Net loss attributable to common
stockholders, as reported herein .................. $ (9,016) $(11,304) $ (4,237) $ (3,704)
Add: stock-based compensation expense
included in reported loss ......................... 311 378 122 197
Deduct: total stock-based employee
compensation expense determined
under the fair value based method
for all awards .................................... (1,071) (780) (630) (390)
---------- ---------- ----------- -----------
Pro forma net loss attributable to
common stockholders ............................... $ (9,776) $(11,706) $ (4,745) $ (3,897)
========== ========== =========== ===========
Net loss attributable to common stockholders per share:
Basic and diluted - as reported herein ................. $ (0.21) $ (0.32) $ (0.09) $ (0.10)
Basic and diluted - pro forma .......................... $ (0.23) $ (0.34) $ (0.10) $ (0.10)
The weighted average grant date fair value of options granted during
the three months and six months ended June 30, 2005 was $1.13 and $1.39,
respectively. The weighted average grant date fair value of options granted
during the three months and six months ended June 30, 2004 was $1.49 and $1.62,
respectively. The weighted average grant date fair value of 190,000 shares of
restricted common stock granted during the six months ended June 30, 2004 was
$2.01. The fair value of our stock-based option awards to employees was
estimated assuming no expected dividends and the following weighted average
assumptions:
Six Months Ended June 30, Three Months Ended June 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------- ------- ------- -------
Risk free interest rate................ 3.86 2.98 3.83 3.94
Expected lives......................... 5 Years 5 Years 5 Years 5 Years
Expected volatility.................... 109.52% 113.13% 108.57% 112.83%
NOTE 5 -- LOSS PER SHARE
Basic loss per share is calculated by dividing net loss attributable to
common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted loss per share for the three months and
six months ended June 30, 2005 and 2004 is the same as basic loss per share.
Potential shares of common stock associated with 14,258,000 and 11,206,000
outstanding options and warrants and 1,301,000 and 2,080,000 shares issuable
upon the conversion of our Series B convertible preferred stock as of June 30,
2005 and 2004, respectively, have been excluded from the diluted calculations
because the effects would be antidilutive.
NOTE 6 -- SALE OF VS BUSINESS
In September 2003, we completed the sale of all of the assets of our VS
business to Gores pursuant to the terms of the asset purchase agreement dated as
of June 10, 2003. The total consideration payable to us under the agreement was
up to $24 million, consisting of $21 million in cash, of which $19 million was
payable as of closing ($335,000 was placed in an escrow account) and $2 million
was held back by Gores to cover potential purchase price adjustments, an
unsecured $1 million promissory note maturing on December 31, 2004 and bearing
interest at 5% per annum and up to $2 million in earn-out payments based on
performance of the assets over the two years following the closing. As partial
consideration for the purchase of assets, Gores also assumed certain liabilities
related to the VS business, including (1) all liabilities to be paid or
performed after the closing date that arose from or out of the performance or
non-performance by Gores after the closing date of any contracts included in the
assets or entered into after June 10, 2003 and (2) our accounts payable,
customer deposits, deferred revenue and accrued liabilities related to the VS
business.
9
Pursuant to the agreement, Gores agreed that, for a period of three
years commencing on the closing date, it would not, directly or indirectly,
acquire or own any equity interest in certain of our competitors identified in
the agreement. The agreement further provided that Gores could acquire an
identified competitor upon payment to us of a one-time fee of $5 million. In
November 2004, Gores acquired V-SPAN, Inc., which was one of the identified
competitors.
Following the closing of the sale to Gores, we were unable to reach
agreement with Gores on the amount, if any, of the adjustment to be made to the
purchase price, which was based on the net assets, as defined, of the VS
business sold to Gores as of June 30, 2003. Consequently, we entered into
arbitration with Gores in July 2004, with PriceWaterhouseCoopers as the
arbitrator. In January 2005, the arbitrator concluded that the net assets of the
VS business sold to Gores should be reduced by $4.3 million.
In March 2005, we entered into a settlement agreement with Gores,
resolving the outstanding disputes between the companies relating to the sale of
the VS business, various payables between the companies and Gores' acquisition
of V-SPAN. Pursuant to the agreement, Gores paid us $2.75 million and released
the $335,000, including interest thereon that was escrowed at the closing of the
asset sale. We dismissed our lawsuit against Gores relating to the V-SPAN
acquisition. We will not receive any payments under the earn-out provision in
the agreement.
We originally accounted for the arbitrator's ruling and settlement
agreement with Gores as settlements of a contingency which became known prior to
the issuance of the December 31, 2004 financial statements. Therefore, although
the sale to Gores closed during 2003, we deferred recognition of the related
gain until December 31, 2004. The arbitrator's adjustment of $4,340,000 related
to the correction of specific financial reporting errors that should have
adjusted prior period financial statements rather than being charged to the gain
on the sale of the VS business.
The ultimate settlement of amounts due to/from Gores that arose
subsequent to the transaction closing date and unrelated to the sale
transaction, including $116,000 and $216,000 of revenues that we recognized
during the three months and six months ended June 30, 2004, respectively, were
previously deferred in the determination of the loss on the sale. The restated
condensed consolidated financial statements exclude these amounts from the sale
transaction, and a gain from the settlement of these items of $379,000 has been
recognized during the six months ended June 30, 2005, when the settlement was
reached with Gores.
In addition, we have become aware of several other accounting errors
whereby items unrelated to the sale of the VS business to Gores were
inappropriately charged to the loss on the sale. We have determined that the
matters addressed in the arbitrator ruling and the other corrections represent
accounting errors. Accordingly, the accompanying restated financial statements
reflect these items as corrections of errors prior to 2004 and the gain or loss
on the transaction has been accounted for upon the closing in 2003. Pursuant to
the settlement agreement with Gores in 2005, each party was released from
amounts due to the other beyond the payment by Gores of $2,750,000 and the
release of the escrowed cash to us. Accordingly, we recognized the gain on
settlement.
NOTE 7 -- BANK LOAN PAYABLE
In February 2004, we terminated a working capital credit facility with
JPMorgan Chase. As a result of the termination of this facility, we wrote off
$85,000 of unamortized deferred financing costs to expense in the six months
ended June 30, 2004.
NOTE 8 -- STOCKHOLDER'S EQUITY
In January 2004, in exchange for the cancellation and termination of
convertible debentures with an aggregate face value of $4,888,000 and forfeiture
of any and all rights of collection, claim or demand under the debentures, we
agreed to give the holders of the debentures: (i) an aggregate of 203.667 shares
of series B convertible preferred stock; (ii) an aggregate of 250,000 shares of
restricted common stock; and (iii) a reduction of the exercise price of the
warrants issued pursuant to the original purchase agreement from $3.25 to $2.75.
As a result of this exchange, the unamortized discount on subordinated
debentures and deferred financing costs were written off to expense, resulting
in amortization of discount of $2,650,000 and amortization of deferred financing
costs of $363,000 for the six months ended June 30, 2004. Additionally, we
recognized a $743,000 loss on the exchange. The investors have anti-dilution
rights. As a result of the February 2004 and March 2005 financings, the
conversion price of the Series B convertible preferred stock and the exercise
price of the warrants have been adjusted to $2.22 and $2.47, respectively and we
recognized deemed dividends of $115,000 in the six months ended June 30, 2005.
The corresponding amount in the 2004 period was nominal.
10
In February 2004, we raised net proceeds of $12.5 million in a private
placement of 6,100,000 shares of our common stock at $2.25 per share. We also
issued warrants to the investors in the private placement to purchase 1,830,000
shares of our common stock at an exercise price of $2.75 per share. The warrants
expire five and a half years after the closing date. The warrants are subject to
certain anti-dilution protection and as a result of the March 2005 financing,
the exercise price was reduced to $2.56 (the incremental fair value was
nominal). We also issued to our placement agent five and a half year warrants to
purchase 427,000 shares of common stock at an exercise price of $2.71 per share
with an estimated fair value of $895,000.
The registration rights agreement for the February 2004 financing
provides for liquidated damages of 3% of the aggregate purchase price for the
first month and 1.5% for each subsequent month if we failed to register the
common stock and the shares of common stock underlying the warrants or maintain
the effectiveness of such registration . We account for the registration rights
agreement as a separate freestanding instrument and account for the liquidated
damages provision as a derivative liability subject to SFAS No. 133. The
estimated fair value of the derivative liability is based on estimates of the
probability and costs expected to be incurred and such estimates are revalued at
each balance sheet date with changes in value recorded as other income or
expense. Approximately $1,164,000 of the proceeds of the financing was
attributed to the estimated fair value of the derivative liability. We estimated
the fair value of the derivative liability to be $1,379,000 as of June 30, 2005
and $1,298,000 as of December 31, 2004. We recognized other expense of $30,000
and $43,000 respectively, for the three months and six months ended June 30,
2004 and $38,000 and $81,000 for the three months and six months ended June 30,
2005.
In March 2005, we raised net proceeds of $9.4 million in a private
placement of 6,766,667 shares of our common stock at $1.50 per share. Investors
in the private placement were also issued warrants to purchase 2,706,667 shares
of common stock at an exercise price of $2.40 per share. The warrants expire
five years after the closing date. The warrants are subject to certain
anti-dilution protection.
In March 2005, 83.333 shares of our outstanding Series B convertible
preferred stock and accrued dividends of $183,000 were exchanged for 1,333,328
shares of our common stock and warrants to purchase 533,331 shares of our common
stock with an aggregate fair value of $1,350,000. We recognized deemed dividends
of $1,167,000 during the 2005 period in connection with the warrants and a
reduced conversion price, which were offered as an inducement to convert.
NOTE 9--OTHER MATTERS
In April 2005, we amended our operating lease for our Hillside, New
Jersey office to extend the term of the lease through April 2007. At such time,
we also increased the square feet under lease. Payments under the amended lease
aggregate $145,000, $218,000 and $73,000 for the years ending December 31, 2005,
2006 and 2007, respectively, excluding operating costs.
NOTE 10--SUBSEQUENT EVENTS
In March 2006, we implemented a corporate restructuring plan designed
to reduce certain operating, sales and marketing and general and administrative
costs. As part of the strategic initiative, we implemented management changes,
including the promotion of Michael Brandofino to Chief Operating Officer with
principal responsibility for the implementation and management of the
restructuring plan. We also announced that Gerard Dorsey, executive vice
president and chief financial officer since December 2004, will be leaving
Glowpoint in April 2006 to pursue other opportunities. In April 2006, Mr.
Brandofino was appointed President and Chief Executive Officer and a member of
the Board of Directors. Ed Heinen has been named to the Chief Financial Officer
position. David Trachtenberg, Glowpoint's previous President and CEO will act as
a consultant through April 2006.
In April 2006, we issued senior secured convertible notes and warrants
in a private placement to private investors. In the transaction, we issued $6.18
million aggregate principal amount of our 10% Senior Secured Convertible Notes,
Series A Warrants to purchase 6,180,000 shares of common stock at an exercise
price of $0.65 per share and Series B Warrants to purchase 6,180,000 shares of
common stock at an exercise price of $0.01 per share. The warrants are subject
to certain anti-dilution protection. The Series B Warrants only become
exercisable if we fail to achieve positive operating income, determined in
accordance with generally accepted accounting principles, excluding
restructuring and non-cash charges, in the fourth quarter of 2006. In addition,
the Series B Warrants will be cancelled if we consummate a strategic transaction
or repay the Notes prior to the date we make our financial statements for the
fourth quarter of 2006 available to the public. We also agreed to change the
exercise price of all previously issued warrants held by the investors in this
offering to $0.65, and to extend the term of any such warrants that would expire
earlier than three years after the offering date. The $5.6 million net proceeds
of the offering will be used to support our corporate restructuring program and
for working capital.
11
The Notes bear interest at 10% per annum, mature on September 30, 2007
and are convertible into common stock at a conversion rate of $0.50 per share.
The Series A and Series B warrants are exercisable for a period of 5 years.
We are currently evaluating the accounting treatment of this
transaction, including consideration of applicable accounting standards for
derivative instruments. We are also evaluating the effect on the conversion
price of our Series B convertible preferred stock and the exercise price of
outstanding warrants that are subject to anti-dilution adjustments occasioned by
this transaction. Reductions to the conversion price and exercise prices may
result in deemed dividend treatment.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with our
condensed consolidated financial statements for the three months and six months
ended June 30, 2005 and 2004 and the notes thereto included elsewhere herein.
The discussion of results, causes and trends should not be construed to imply
any conclusion that such results or trends will necessarily continue in the
future.
The statements contained herein, other than historical information, are
or may be deemed to be forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended, and involve factors, risks and
uncertainties that may cause our actual results in future periods to differ
materially from such statements. These factors, risks and uncertainties, include
market acceptance and availability of new video communications services; the
non-exclusive and terminable at-will nature of sales agent agreements; rapid
technological change affecting demand for our services; competition from other
video communication service providers; and the availability of sufficient
financial resources to enable us to expand our operations.
OVERVIEW
Glowpoint, Inc. ("Glowpoint" or "we" or "us"), a Delaware corporation,
provides comprehensive video communications services over its carrier-grade IP
based subscriber network enabling users to connect across the United States, as
well as to business centers around the world. Prior to 2004, Glowpoint, then
known as Wire One Technologies, Inc., sold substantially all of the assets of
its video solutions (VS) business to an affiliate of Gores Technology Group
(Gores). See Note 4 to the condensed consolidated financial statements for
further information.
On April 20, 2004, we entered into an agreement with Tandberg, Inc., a
wholly owned subsidiary of Tandberg ASA (OSLO:TAA.OL), a global provider of
visual communications solutions. As part of the agreement, we acquired for $1.00
certain assets and the customer base of Tandberg-owned Network Systems LLC
(successor to the NuVision Companies). Network Systems customers, primarily
ISDN-based video users, obtained immediate access to our video bridging and
webcasting services. As part of the agreement, Tandberg's corporate use of IP
video communications and other telecommunications services, formerly purchased
through Network Systems, is being provided exclusively by us under a multi-year
agreement. In addition, we assumed contractual commitments with AT&T, MCI and
Sprint from Network Systems, which were subsequently consolidated into new
agreements with these carriers. Tandberg named the Glowpoint Certified Program
as a recognized external testing partner for its hardware and software products.
In the six months ended June 30, 2005, we entered into a strategic
alliance with Sony Electronics, Inc. to create and launch a complete, Sony
customized, user friendly video communication solution focused on broadening the
use of IP-based video in and out of traditional office environments. The Sony
service, powered by Glowpoint, is designed to bring together Sony's
state-of-the-art line of video conferencing systems with our patent-pending
advanced IP-based video applications and network services. The two companies are
also developing joint initiatives to support the growing use of IP-based video
for more diverse and innovative applications, including the broadcasting
production segment where Sony is a recognized leader in providing customers with
advanced audio and video equipment and systems. Through a "private label"
arrangement, the two companies plan on delivering a customized Sony experience
that will allow subscribers to see and talk to anyone, anywhere around the world
regardless of network technology and device. Additionally, as part of the
alliance and to support development of the new service, Sony will install the
Glowpoint powered solution into a number of its office locations in the U. S.
12
On March 7, 2005, we announced a settlement agreement with Gores
Technology Group, resolving the outstanding disputes relating to the sale of the
assets of our VS business to Gores in September 2003. The agreement also covered
Gores' acquisition of V-SPAN Inc. in November 2004. Pursuant to the terms of the
settlement agreement, Gores paid us $2.75 million and released to us the
$335,000 that was escrowed at the closing of the asset sale. Also as part of the
settlement, we dismissed our lawsuit against Gores relating to the V-SPAN
acquisition.
On March 14, 2005, we entered into a common stock purchase agreement
with several unrelated institutional investors in connection with the offering
of (i) an aggregate of 6,766,667 shares of our common stock and (ii) warrants to
purchase up to an aggregate of 2,706,667 shares of our common stock. We received
proceeds from this offering of approximately $10.15 million, less our expenses
relating to the offering, which were approximately $760,500, a portion of which
represents investment advisory fees totaling $710,500 to Burnham Hill Partners,
our financial advisor. The warrants are exercisable for a five-year period term
and have an exercise price of $2.40 per share. The warrants may be exercised by
cash payment of the exercise price or by "cashless exercise."
RESTATEMENT AND RELATED MATTERS
On June 2, 2005, we dismissed our independent accounting firm, BDO
Seidman LLP, for geographic reasons, and retained the independent accounting
firm of Eisner LLP. In the course of its initial assessment of our December 31,
2004 balance sheet, Eisner raised certain issues relating to property and
equipment. Our internal accounting team looked into the matter and subsequently
concluded, on a preliminary basis, that the costs associated with certain
purchases of videoconferencing equipment for resale and certain other operating
costs that represented cost of revenue had erroneously been capitalized as
property and equipment.
These preliminary conclusions were discussed at a meeting of our board
of directors on July 21, 2005. At that meeting, our Audit Committee determined
to undertake an independent investigation of the matter. Following that meeting,
our internal accounting team conducted a further review of the audited financial
statements for 2002 through 2004 and held several discussions with our former
CFO. Based on these discussions, on August 2, 2005, we concluded that our
financial statements for fiscal years 2002 through 2004 (and the related
quarters) and the quarter ended March 31, 2005 needed to be restated and should
no longer be relied upon.
We requested that BDO Seidman audit our restated consolidated financial
statements for fiscal years 2002 through 2004 and review our condensed
consolidated financial statements for the applicable inclusive interim periods
and the quarter ended March 31, 2005, which BDO Seidman declined. We have
restated our consolidated financial statements as of December 31, 2004 and for
the year then ended and our unaudited condensed consolidated financial
statements for the interim periods within 2004, which have been filed as an
exhibit to our Report on Form 8-K filed with the Securities and Exchange
Commission on March 17, 2006. We have also restated our condensed consolidated
financial statements as of March 31, 2005 and for the three months ended March
31, 2005 and 2004, which have been filed on Form 10-Q/A with the Commission on
March 22, 2006. We have described the specific impact of the restatement on the
interim three months and six months ended June 30, 2004 in the more detailed
discussion below.
Our internal accounting team is working diligently to complete our
fiscal 2005 results. Restating financial statements for fiscal years 2002 and
2003 will require significant additional time and resources, primarily because
of the following reasons:
o During 2003, we completed the sale of our VS business to Gores. As part of the
sale, we transferred four data communication servers which contained various
documents and audit support workpapers associated with the books and records of
the VS business for all periods prior to the sale. We did not retain backups of
the information on those servers and we just recently received data downloads
from such servers. Gores was only able to locate three of the four servers
transferred.
o We may not be able to quantify inventory in periods prior to 2004. Effective
with the sale to Gores, we no longer owned any inventory and BDO Seidman was the
only auditor who observed the physical inventory counts that affect those
periods. To date, we have not been able to verify such inventory amounts, which
will be necessary in order to complete a restatement of our consolidated
financial statements for the years ended December 31, 2002 and 2003. We will
take all available actions to gain access to the BDO Seidman workpapers.
At this time, we cannot determine whether the resolution of the above
items will enable us to restate fiscal years 2002 and 2003 in a reasonable
amount of time or at all.
13
AUDIT COMMITTEE INVESTIGATION. The Audit Committee commenced its
independent investigation following the July 21, 2005 board meeting. The Audit
Committee hired independent counsel, the law firm of Kronish Lieb Weiner &
Hellman LLP, to conduct the investigation. Kronish Lieb retained a forensic
audit firm, Alix Partners LLP, to assist in the investigation. The investigation
was concluded in late September 2005 and found that expenses associated with
services provided to and equipment purchased by customers during 2001 through
2003 were improperly capitalized as additions to our fixed assets, and that such
practices affected our 2001 through 2004 financial statements. The Audit
Committee investigation also found that, during the same period, some of the
amounts associated with practices described in the preceding sentence were
written off in subsequent accounting journal entries that were themselves
improper, and that similarly improper additions to our fixed assets continued
even after such write-offs had occurred. Our prior CFO, who participated in
these practices and under whose supervision they occurred, left Glowpoint in
April 2005 after the planned relocation of the finance department from New
Hampshire to our headquarters in New Jersey. In addition to issues affecting
fixed assets, the investigation found that during the relevant period, we lacked
adequate internal accounting controls. Finally, the investigation identified
certain areas that warrant further review, including past revenue recognition
practices when we were a reseller of videoconferencing equipment, costs
allocated to the accounting associated with the Gores transaction and internal
reallocation of communication costs.
As noted above, the Audit Committee investigation found that during the
relevant periods being restated, we lacked adequate internal controls. A
material weakness in internal controls is a significant deficiency, or a
combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will be not be prevented or detected. We believe that a material
weakness in our internal controls arose as the result of aggregating several
significant deficiencies, including: inadequate review and approval of journal
entries in the financial statement preparation process and a lack of supporting
documentation and assumptions used therein, an insufficient number of technical
accounting and public company reporting personnel in the finance department, the
absence of a formal monthly closing process and subsequent formal reporting of
monthly financial statements and account variance analysis. Additionally, our
finance office was located in New Hampshire and our headquarters was located in
New Jersey.
The Audit Committee investigation further found that our current
management has instituted improved internal accounting controls, including the
hiring of our subsequent CFO based in New Jersey and the subsequent relocation
and restaffing of the finance organization to our headquarters in April 2005.
Our restaffing included a corporate Controller who has over twenty-five years
experience in public and private company reporting, has earned his CPA and
became our CFO in April 2006. We also instituted a formal monthly closing
process, including account analysis, oversight of all closing processes, formal
monthly review of the financial statements and the implementation of monthly
written reports to the Board of Directors. We are continuing to evaluate and
improve our internal control procedures, where applicable.
SEC INQUIRY. On August 2, 2005, we contacted the Securities and
Exchange Commission to notify it of our determination to restate our financial
statements. On August 3, 2005, the SEC notified us that it was conducting an
informal inquiry into our reported accounting issues. The SEC has met with our
outside counsel as well as counsel to the Audit Committee. The SEC also sent us
a document production request on October 27, 2005, and we responded to the
request on November 14, 2005. The SEC has also recently contacted our former CFO
and BDO Seidman LLP, our former independent accounting firm.
DELISTING. On August 16, 2005, we received a letter from the Nasdaq
National Market indicating that our common stock would be delisted from Nasdaq
because of our failure to timely file our Form 10-Q for the quarter ended June
30, 2005. We requested and were granted a hearing to seek a conditional listing
exception. The hearing occurred on September 15, 2005. On October 3, 2005, the
Nasdaq Listing Qualifications Panel notified us that our common stock would be
delisted from the Nasdaq National Market effective with the open of business on
October 5, 2005. Our common stock now trades over the counter in the pink sheets
under the symbol "GLOW.PK".
SIX MONTHS ENDED JUNE 30, 2005 ( THE "2005 PERIOD") COMPARED TO SIX
MONTHS ENDED JUNE 30, 2004 ( THE "2004 PERIOD") AND THE THREE MONTHS ENDED JUNE
30, 2005 ( THE "2005 QUARTER") COMPARED TO THREE MONTHS ENDED JUNE 30, 2004
(THE " 2004 QUARTER").
RESULTS OF OPERATIONS. The following table sets forth for the three
months and six months ended June 30, 2005 and 2004, information derived from
condensed consolidated financial statements as expressed as a percentage of
revenues:
14
(Unaudited)
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
2005 2004 2005 2004
------ ------ ------ ------
(Restated) (Restated)
------ ------ ------ ------
Revenues................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues......................... 89.5 103.3 91.1 97.4
------ ------ ------ ------
Gross margin (loss).............. 10.5 (3.3) 8.9 2.6
------ ------ ------ ------
Operating expenses:
Research and development............ 6.7 6.5 6.0 5.7
Sales and marketing................. 25.0 17.1 27.9 16.9
General and administrative.......... 70.9 71.2 69.9 66.0
------ ------ ------ ------
Total operating expenses................. 102.6 94.8 103.8 88.6
------ ------ ------ ------
Loss from operations.................... (92.1) (98.1) (94.9) (86.0)
------ ------ ------ ------
Other (income) expense:
Amortization of deferred financing
costs........................... 0.0 6.1 0.0 --
Interest (income) expense, net...... (0.4) 0.3 (0.7) (0.4)
Increase in derivative financial
instrument...................... 0.9 0.6 0.9 0.7
Amortization of discount on
subordinated debentures......... 0.0 36.0 0.0 --
Loss on exchange of debt............ 0.0 10.1 0.0 --
Gain on settlement with Gores....... (4.4) -- -- --
------ ------ ------ ------
Total other (income) expenses, net....... (3.9) 53.1 0.2 0.3
------ ------ ------ ------
Net loss................................. (88.2) (151.2) (95.1) (86.3)
Preferred stock dividends................ (1.7) (2.3) (1.3) (2.3)
Preferred stock deemed dividends......... (14.9) -- -- --
------ ------ ------ ------
Net loss attributable to common
stockholders........................ (104.8)% (153.5)% (96.4)% (88.6)%
====== ====== ====== ======
Revenues - Revenues increased $1.2 million, or 17%, in the 2005 period
to $8.6 million from $7.4 million in the 2004 period. Subscription and related
revenue (which includes contractual revenue related to the Network Services
customer base) increased $0.33 million, or 7%, in the 2005 period to $5.4
million from $5.0 million in the 2004 period. Contractual revenue related to the
Network Services customer base (formerly known as NuVision) was $0.17 million in
the 2005 period and $0.09 in the 2004 period. We received revenue from this
customer base beginning in the 2004 quarter because we acquired it from Tandberg
USA in April 2004. Non-subscription revenue consisting of bridging, events and
other one-time fees increased $0.9 million, or 39% in the 2005 period to $3.2
million from $2.3 million in the 2004 period. The growth in non-subscription
revenue was the result an increase of $0.85 million in revenue from the Network
Services customer base in the 2005 period. Revenues for the 2005 quarter
increased $0.2 million, or 5% to $4.4 million from $4.2 million in the 2004
quarter. Subscription and related revenue (which includes contractual revenue
related to the Network Services customer base) increased $.1 million, or 5% in
the 2005 quarter to $2.7 million from $2.6 million in the 2004 quarter.
Non-subscription revenue consisting of bridging events and other one-time fees
increased $0.1 million, or 6% in the 2005 quarter to $1.7 million from $1.6
million in the 2004 quarter.
Restatement Impact - Revenues - Revenues were increased $14,000 for the
2004 period and by $53,000 for the 2004 quarter. We have deferred the
recognition of revenue associated with installation services from 2002 and 2003
and amortized it over a 24 month period (the estimated average life of a
subscription based customer). Previously, we recognized such installation
revenue at the time such services were completed. This change had the impact of
increasing revenues by $70,000 for the 2004 period and $96,000 for the 2004
quarter. The increases for the 2004 period and 2004 quarter were offset by a
reduction of $21,000 related to sales taxes.
15
Cost of revenues - Cost of revenues for the 2005 period increased $0.1
million, or 1%, to $7.7 million from $7.6 million in the 2004 period. The
decline in costs as a percentage of revenue in the 2005 period is the result of
the renegotiation of rates and the migration of service to lower cost providers
where possible. This caused the gross margin to increase to 10.5% in the 2005
period from a negative 3.3% in the 2004 period. Cost of revenues decreased $0.1
million or 2% in the 2005 quarter to $4.0 million from $4.1 million in the 2004
quarter. This caused the gross margin to increase to 8.9% in the 2005 quarter
from 2.6% in the 2004 quarter. The rate of increase in our gross margin
percentage is not indicative of results expected to be achieved in subsequent
periods.
Restatement Impact - Cost of revenues - Cost of revenues was increased
by $1,576,000 for the 2004 period and $777,000 for the 2004 quarter. For the
2004 period, $1,114,000 and for the 2004 quarter, $522,000 was erroneously
capitalized as property and equipment rather than being charged to cost of
revenues in the period. We recomputed the amount of our network costs allocated
to cost of revenues, research and development, sales and marketing and general
and administrative expenses to properly reflect costs associated with the
various departments that used the internal network. This resulted in increases
to cost of revenues of $188,000 for the 2004 period and $74,000 for the 2004
quarter. Depreciation expense of $158,000 for the 2004 period and $78,000 for
the 2004 quarter previously allocated to sales and marketing and general and
administrative expenses has been reclassified to cost of revenues. Additionally,
we recomputed the amount of certain circuit costs that were allocated to Gores
and previously charged to the sale of the VS business and have decreased the
amount allocated by $255,000 for the 2004 period and $117,000 for the 2004
quarter. Cost of revenues was increased by $72,000 for the 2004 period and 2004
quarter to properly reflect installation costs. Cost of revenues was decreased
by $62,000 for the 2004 period and $56,000 for the 2004 quarter to apply credits
from telecommunications carriers to the appropriate periods Cost of revenues was
reduced $113,000 in the 2004 period for costs incurred in 2003 that were
previously recognized in the 2004 period.
Research and development - Research and development costs, which
include the costs of the personnel in this group, the equipment they use and
their use of the network for development projects, increased by $0.14 million in
the 2005 period to $0.6 million from $0.5 million in the 2004 period. The
increase was a result of increased usage of outside contractors to meet the
demand for application development in conjunction with new product development
for us and certain of our partners. Research and development expense as a
percentage of revenue was 6.7% for the 2005 period, 6.5% for the 2004 period,
6.0% for the 2005 quarter and 5.7% for the 2004 quarter.
Restatement Impact - Research and development - Research and
development expenses were decreased by $183,000 for the 2004 period and by
$97,000 for the 2004 quarter. The decreases reflect the reclassification of
$246,000 for the 2004 period and of $129,000 for the 2004 quarter of costs to
general and administrative expenses. This reclassification was partially offset
by the proper allocation of depreciation expense and allocated network services
which increased expenses by $64,000 for the 2004 period and $32,000 for the 2004
quarter.
Sales and marketing - Sales and marketing expenses, which include sales
salaries, commissions, overhead and marketing costs, increased $0.9 million in
the 2005 period to $2.1 million, from $1.3 million in the 2004 period. The
primary causes of the increase in costs for the 2005 period were a $0.5 million
increase in salaries, benefits and travel costs resulting from the addition of a
direct sales force of 11 employees and an increase of $0.3 million in marketing
expense associated with a sales lead generation program and other initiatives
Sales and marketing expenses increased $0.5 million to $1.2 million for the 2005
quarter from $0.7 million for the 2004 quarter. Sales and marketing expense, as
a percentage of revenue, was 25.0% for the 2005 period, 17.1% for the 2004
period, 27.9% for the 2005 quarter and 16.9% for the 2004 quarter.
Restatement Impact - Sales and marketing - Sales and marketing
expenses, previously referred to as selling, were decreased by $2,488,000 for
the 2004 period and $1,209,000 for the 2004 quarter. The decreases reflect the
reclassification of $1,727,000 for the 2004 period and $856,000 for the 2004
quarter of costs to general and administrative expenses. Sales commissions and
bonuses were reduced by $206,000 for the 2004 period and $68,000 for the 2004
quarter for costs that should have been expensed prior to the 2004 period. To
reflect a proper allocation of network costs to sales and marketing expense we
have recorded a reduction of $446,000 for the 2004 period and $203,000 for the
2004 quarter. Sales and marketing costs have been reduced by $124,000 for the
2004 period and $90,000 for the 2004 quarter relating to improper commission
accruals.
General and administrative - General and administrative expenses
increased $0.9 million in the 2005 period to $6.1 million from $5.2 million in
the 2004 period. The primary components of the increase were $0.5 million in
salaries and benefits related to executive management and increased staffing
levels and $0.2 million for increased equipment rentals. General and
administrative expenses increased $0.3 million to $3.1 million for the 2005
quarter from $2.8 million for the 2004 quarter. Salaries and benefits related to
executive management and increased staffing levels increased $0.2 million in the
2005 quarter. General and administrative expenses as a percentage of revenue
were 70.9% in the 2005 period, 71.2% in the 2004 period, 69.9% in the 2005
quarter and 66.0% in the 2004 quarter.
16
Restatement Impact - General and administrative - General and
administrative expenses were increased by $1,530,000 for the 2004 period and
$930,000 for the 2004 quarter. We have reclassified to general and
administrative expenses $1,973,000 for the 2004 period and $985,000 for the 2004
quarter of costs that were previously classified as selling and research and
development, which relate principally to customer service, engineering and other
operating expenses. Depreciation expense was reduced by $942,000 for the 2004
period and $439,000 for the 2004 quarter reflecting the reduction of fixed
assets and a reclassification of depreciation expense. The re-allocation of
network costs between cost of revenues, research and development, sales and
marketing and general and administrative expenses resulted in an increase of
$236,000 for the 2004 period and $118,000 for the 2004 quarter, in general and
administrative expenses. We also recognized additional expense of $131,000 for
the 2004 period and $69,000 for the 2004 quarter relating to sales taxes.
Other (income) expense - Other income of $0.3 million for the 2005
period principally reflects a gain on the settlement of an amount owed to Gores.
Other expense of $3.9 million for the 2004 period principally reflects
amortization of discount on convertible debentures and related deferred
financing costs and a loss on exchange of the debentures for Series B
convertible preferred stock, common stock and a modification to warrants. Other
expense for the 2005 quarter and 2004 quarter reflects net interest expense.
Restatement Impact - Other (income) expense - Other expense for the
2004 period of $4,479,000 was reduced by $575,000, which resulted in other
expense of $3,904,000. Other income as previously reported of $176,000 for the
2004 quarter was adjusted by $187,000, which resulted in other expense of
$11,000. A gain of $169,000 previously recognized in the 2004 period and 2004
quarter has been reversed to properly account for marketable securities which
were received in 2003 and sold in September 2004. As a result of correcting the
accounting for the issuance of the subordinated convertible debentures, we
reduced the amortization of the related discount by $515,000 and recognized
additional amortization of deferred financing costs of $363,000 for the 2004
period. We had previously overstated the discount by $1,489,000, which was
partially offset by overstating amortization by $989,000 as of January 1, 2004,
due to the overstatement of the discount and by following the straight line
method of amortizing the discount rather than the effective yield method. As a
result of correcting the accounting for the exchange of the subordinated
convertible debentures for Series B convertible preferred stock, warrants and a
modification to warrants, we reduced the loss on the exchange of debt by
$611,000 for the 2004 period. We had previously recognized a loss on the
exchange of $1,354,000, which included the excess of the fair value of the
common stock underlying the Series B convertible preferred stock of $5,499,000
over the face amount of the subordinated convertible debentures of $4,888,000 in
the loss on exchange. However, the subordinated convertible debentures were
convertible into the same number of shares of common stock as the Series B
convertible preferred stock and, accordingly, had the same fair value. The loss
on the exchange has been reduced to $743,000, representing the fair value of the
shares of common stock and the incremental fair value from the warrant
modification, which were included in the exchange.
Preferred stock deemed dividends - We recognized deemed dividends of
$1,167,000 for the 2005 period in connection with warrants and a reduced
conversion price, which were offered as an inducement to convert our Series B
convertible preferred stock. In addition, we recognized deemed dividends of
$115,000 in the 2005 period in connection with an anti-dilution adjustment to
the conversion price of our Series B convertible preferred stock resulting from
our March 2005 financing. There were no deemed dividends previously reported.
Net loss.- Net loss attributable to common stockholders decreased to
$9.0 million, or $0.21 per basic and diluted share, in the 2005 period from
$11.3 million, or $0.32 per basic and diluted share, in the 2004 period. Net
loss attributable to common stockholders increased to $4.2 million, or $0.09 per
basic and diluted share in the 2005 quarter from $3.7 million in the 2004
quarter, or $0.10 per basic and diluted share, in the 2004 quarter.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
is not a standard financial measurement under accounting principles generally
accepted in the United States of America (GAAP). EBITDA should not be considered
as an alternative to net loss or cash flow from operating activities as a
measure of liquidity or as an indicator of operating performance or any measure
of performance derived in accordance with GAAP. EBITDA is provided below to more
clearly present the financial results that management uses to internally
evaluate its business. We believe that this non-GAAP financial measure allows
investors and management to evaluate and compare our operating results from
continuing operations from period to period in a meaningful and consistent
manner. The following table provides a reconciliation of the net loss
attributable to common stockholders to EBITDA from continuing operations.
17
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ----------------------------
2005 2004 2005 2004
--------- ---------- ---------- ----------
(Restated) (Restated)
Net loss attributable to common
stockholders............................. $ (9,016) $ (11,304) $ (4,237) $ (3,704)
Depreciation and amortization............ 1,147 1,102 577 559
Amortization of deferred financing
costs................................ -- 448 -- --
Amortization of discount on
subordinated debentures.............. -- 2,650 -- --
Loss on exchange of debt................. -- 743 -- --
Gain from discontinued operations........ (379) -- -- --
Equity-based compensation................ 375 378 186 197
Preferred stock dividends and
deemed dividends..................... 1,429 171 58 97
Interest (income) expense net............ (33) 21 (29) (19)
---------- ---------- ---------- ----------
EBITDA from continuing operations............ $ (6,477) $ (5,791) $ (3,445) $ (2,870)
========== ========== ========== ==========
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2005, we had working capital of $5.6 million compared to
$3.6 million at December 31, 2004, an increase of approximately $2.0 million or
58%. We had $9.0 million in cash and cash equivalents at June 30, 2005 compared
to $4.5 million at December 31, 2004. The $2.0 million increase in working
capital resulted primarily from the net proceeds from the March 2005 private
placement of common stock of $9.4 million offset by the $6.1 million usage of
cash in operations in the 2005 period and the purchase of $1.0 million of
property, equipment and leasehold improvements.
In January 2004, in exchange for the cancellation and termination of
convertible debentures with an aggregate face value of $4,888,000 and forfeiture
of any and all rights of collection, claim or demand under the debentures, we
agreed to give the holders of the debentures: (i) an aggregate of 203.667 shares
of series B convertible preferred stock; (ii) an aggregate of 250,000 shares of
restricted common stock; and (iii) a reduction of the exercise price of the
warrants issued pursuant to the original purchase agreement from $3.25 to $2.75.
In February 2004, we raised net proceeds of $12.5 million in a private
placement of 6,100,000 shares of our common stock at $2.25 per share. We also
issued warrants to purchase 1,830,000 shares of our common stock at an exercise
price of $2.75 per share. The warrants expire on August 17, 2009. The warrants
are subject to certain anti-dilution protection. In addition, we issued to our
placement agent five and a half year warrants to purchase 427,000 shares of
common stock at an exercise price of $2.71 per share.
In February 2004, we terminated a $7.5 million revolving credit facility
with JPMorgan Chase.
In March 2005, we entered into a common stock purchase agreement with
several unrelated institutional investors in connection with the offering of (i)
an aggregate of 6,766,667 shares of our common stock and (ii) warrants to
purchase up to an aggregate of 2,706,667 shares of our common stock. We received
proceeds from this offering of approximately $10.15 million, less our expenses
relating to the offering, which were approximately $760,500, a portion of which
represents investment advisory fees totaling $710,500 to Burnham Hill Partners,
our financial advisor. The warrants are exercisable for a five-year period term
and have an exercise price of $2.40 per share. The warrants are subject to
certain anti-dilution protection. The warrants may be exercised by cash payment
of the exercise price or by "cashless exercise."
18
In April 2006, we issued senior secured convertible notes and warrants
in a private placement to private investors. In the transaction, we issued $6.18
million aggregate principal amount of our 10% Senior Secured Convertible Notes,
Series A Warrants to purchase 6,180,000 shares of common stock at an exercise
price of $0.65 per share and Series B Warrants to purchase 6,180,000 shares of
common stock at an exercise price of $0.01 per share. The warrants are subject
to certain anti-dilution protection. The Series B Warrants only become
exercisable if we fail to achieve positive operating income, determined in
accordance with GAAP, excluding restructuring and non-cash charges, in the
fourth quarter of 2006. In addition, the Series B Warrants will be cancelled if
we consummate a strategic transaction or repay the Notes prior to the date we
make our financial statements for the fourth quarter of 2006 available to the
public. We also agreed to change the exercise price of all previously issued
warrants held by the investors in this offering to $0.65, and to extend the term
of any such warrants that would expire earlier to three years after the offering
date. The $5.6 million net proceeds of the offering will be used to support our
corporate restructuring program and for working capital.
The Notes bear interest at 10% per annum, mature on September 30, 2007
and are convertible into common stock at a conversion rate of $0.50 per share.
The Series A and Series B warrants are exercisable for a period of 5 years.
Net cash used in operating activities was $6.6 million for the 2005
period and $6.2 million for the 2004 period. For the 2005 period, the primary
components of the net cash usage were the net loss of $7.6 million which was
increased by a non-cash gain on the settlement with Gores of $0.4 million, a
$0.3 million increase in accounts receivable and a $0.3 million increase in
prepaid expenses and other current assets and reduced by depreciation and
amortization of $1.1 million, $0.4 million of equity-based compensation and the
receipt of $0.3 million in previously escrowed cash in conjunction with the
Gores settlement agreement. For the 2004 period, the primary components of the
net cash usage were the net loss of $11.1 million and an increase in the amount
due from Gores of $0.4 million, reduced by depreciation and amortization of $1.1
million, amortization of deferred financing costs of $0.4 million, amortization
of discount on subordinated debentures of $2.7 million and loss on exchange of
debt of $0.7 million and equity-based compensation of $0.4 million.
During the quarter ended June 30, 2005, there were no material changes
in our contractual obligations.
Cash provided by investing activities for the 2005 period amounted to
$1.7 million which consisted of $2.75 collected in the settlement with Gores
partially offset by $1.0 million for the purchase of property, equipment and
leasehold improvements. For the 2004 period, cash used by investing activities
was $0.6 million for the purchase of property, equipment and leasehold
improvements. The Glowpoint network is currently built out to handle the
anticipated level of subscriptions through 2006. We do not anticipate current
expansion for the network and therefore currently have no significant
commitments to make capital expenditures in 2006.
Cash provided by financing activities for the 2005 and 2004 periods was
$9.4 million and $13.1 million, respectively. Financing activities for the 2005
and 2004 periods included receipt of the $9.4 million and $11.4 million of net
proceeds from the private placements of common stock and warrants. The 2004
period includes $1.2 million of proceeds attributable to a derivative financial
instrument.
We believe that our available capital as of June 30, 2005, together with
our operating activities, will enable us to continue as a going concern through
June 30, 2006.
CRITICAL ACCOUNTING POLICIES
We prepare our financial statements in accordance with accounting
principles generally accepted in the United States of America. Preparing
financial statements in accordance with generally accepted accounting principles
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclose contingent assets and liabilities as of
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The following paragraphs include a
discussion of some critical areas where estimates are required. The significant
areas of estimation includes determining the allowance for doubtful accounts,
accrued sales tax, the estimated lives of property and equipment and the fair
value of the derivative financial instrument.
REVENUE RECOGNITION
We recognize service revenue related to the Glowpoint network subscriber service
and the multi-point video and audio bridging services as service is provided. As
the non-refundable, upfront activation fees charged to the subscribers do not
meet the criteria as a separate unit of accounting, they are deferred and
recognized over the life of the customer contracts. Revenues derived from other
sources are recognized when services are provided or events occur.
19
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We record an allowance for doubtful accounts based on specifically
identified amounts that we believe to be uncollectible. We also record
additional allowances based on certain percentages of our aged receivables,
which are determined based on historical experience and our assessment of the
general financial conditions affecting our customer base. If our actual
collections experience changes, revisions to our allowance may be required.
After all attempts to collect a receivable have failed, we write off the
receivable against the allowance.
LONG-LIVED ASSETS
We evaluate impairment losses on long-lived assets used in operations,
primarily fixed assets, when events and circumstances indicate that the carrying
value of the assets might not be recoverable in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment
or Disposal of Long-lived Assets". For purposes of evaluating the recoverability
of long-lived assets, the undiscounted cash flows estimated to be generated by
those assets are compared to the carrying amounts of those assets. If and when
the carrying values of the assets exceed their fair values, the related assets
will be written down to fair value. In the 2005 period, no impairment losses
were recorded.
GOODWILL AND OTHER INTANGIBLE ASSETS
We follow SFAS No. 142, "Goodwill and Other Intangible Assets" in
accounting for goodwill and other intangible assets. SFAS No. 142 requires,
among other things, that companies no longer amortize goodwill, but instead test
goodwill for impairment at least annually. In addition, SFAS 142 requires that
we identify reporting units for the purposes of assessing potential future
impairments of goodwill, reassess the useful lives of other existing recognized
intangible assets, and cease amortization of intangible assets with indefinite
useful lives. An intangible asset with an indefinite useful life should be
tested for impairment in accordance with the guidance in SFAS No. 142.
INFLATION
Management does not believe inflation had a material adverse effect on
the financial statements for the periods presented.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to interest rate risk related to our cash equivalents
portfolio. The primary objective of our investment policy is to preserve
principal while maximizing yields. Our cash equivalents portfolio is short-term
in nature; therefore changes in interest rates will not materially impact our
consolidated financial condition. However, such interest rate changes can cause
fluctuations in our results of operations and cash flows.
There are no other material qualitative or quantitative market risks particular
to us.
ITEM 4. CONTROLS AND PROCEDURES
During the periods covered by this report, we lacked adequate internal
controls. A material weakness in internal controls is a significant deficiency,
or a combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will be not be prevented or detected. We believe that a material
weakness in our internal controls arose as the result of aggregating several
significant deficiencies, including: inadequate review and approval of journal
entries in the financial statement preparation process and a lack of supporting
documentation and assumptions used therein, an insufficient number of technical
accounting and public company reporting personnel in the finance department, the
absence of a formal monthly closing process and subsequent formal reporting of
monthly financial statements and account variance analysis. Additionally, our
finance office was located in New Hampshire and our headquarters was located in
New Jersey.
20
Our current management team has instituted improved internal accounting
controls, including the institution of a formal monthly closing process,
including account analysis, oversight of all closing processes, formal monthly
review of the financial statements and the implementation of monthly written
reports to the Board of Directors. We are continuing to evaluate and improve our
internal control procedures, where applicable.
PART II - OTHER INFORMATION
ITEM 5. LEGAL PROCEEDINGS
We are defending several suits in the ordinary course of business that
are not material to our business, financial condition or results of operations.
ITEM 6. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 7. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 8. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 9. OTHER INFORMATION
None.
ITEM 10. EXHIBITS
None.
21
(I) SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
GLOWPOINT, INC.
Registrant
Date: April 20, 2006 By: /s/ Michael Brandofino
----------------------
Michael Brandofino, Chief Executive Officer
(principal executive officer)
Date: April 20, 2006 By: /s/ Edwin F. Heinen
-------------------
Edwin F. Heinen, Chief Financial Officer
(principal financial and accounting officer)
22