SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 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
May 10, 2005 was 46,034,176.
GLOWPOINT, INC
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Restated Condensed Consolidated Financial Statements
Restated Condensed Consolidated Balance Sheets at March 31, 2005 (unaudited) and December
31, 2004*.......................................................................................1
Unaudited Restated Consolidated Statements of Operations For the Three Months Ended March
31, 2005 and 2004...............................................................................2
Unaudited Restated Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2005 and 2004...................................................................3
Notes to Restated Condensed Consolidated Financial Statements.......................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................14
Item 3. Quantitative and Qualitative Disclosures about Market Risk...............................................23
Item 4. Controls and Procedures..................................................................................23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................................24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..............................................24
Item 3. Defaults Upon Senior Securities..........................................................................24
Item 4. Submission of Matters to a Vote of Security Holders......................................................24
Item 5. Other Information........................................................................................24
Item 6. Exhibits.................................................................................................24
Signatures.......................................................................................................25
* 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.
i
GLOWPOINT, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
(RESTATED-NOTE 3)
MARCH 31, 2005 DECEMBER 31, 2004*
-------------- ------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 13,683 $ 4,497
Escrowed cash ............................................................. -- 337
Accounts receivable, net of allowance for doubtful accounts of
$366 and $305, respectively ........................................... 2,035 1,872
Receivable from Gores Technology Group .................................... -- 2,371
Prepaid expenses and other current assets ................................. 455 554
--------- ---------
Total current assets .................................................. 16,173 9,631
Property and equipment - net .................................................. 4,828 5,103
Other assets ................................................................... 261 258
--------- ---------
Total assets .......................................................... $ 21,262 $ 14,992
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 2,958 $ 2,984
Accrued expenses .......................................................... 2,163 2,421
Derivative financial instrument ........................................... 586 367
Deferred revenue .......................................................... 475 265
Current portion of capital lease obligations .............................. -- 35
--------- ---------
Total current liabilities ............................................. 6,182 6,072
Derivative financial instrument, less current portion .......................... 755 932
--------- ---------
Total liabilities .............................................................. 6,937 7,004
Preferred stock, $.0001 par value; 5,000 shares authorized
120 and 204 Series B shares outstanding, respectively (stated value of
$2,888 and $4,888; liquidation value of $3,353 and $5,257)................. 2,888 4,888
Stockholders' equity:
Common stock, $.0001 par value; 100,000 shares authorized;
45,966 and 37,884 shares outstanding, respectively .................... 5 4
Deferred compensation ..................................................... (1,021) (1,176)
Additional paid-in capital ................................................ 160,099 148,510
Accumulated deficit ....................................................... (147,406) (143,998)
--------- ---------
11,677 3,340
Less: Treasury stock, 40 shares at cost ................................... (240) (240)
--------- ---------
Total stockholders' equity ............................................ 11,437 3,100
--------- ---------
Total liabilities and stockholders' equity ....................... $ 21,262 $ 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.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(RESTATED-NOTE 3)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2005 2004
----------- -----------
(UNAUDITED) (UNAUDITED)
Revenue .................................................................. $ 4,202 $ 3,186
Cost of revenue .......................................................... 3,686 3,539
--------- ---------
Gross margin (loss).................................................. 516 (353)
--------- ---------
Operating expenses
Research and development ............................................ 313 241
Sales and marketing ................................................. 923 556
General and administrative .......................................... 3,028 2,482
--------- ---------
Total operating expenses ................................................. 4,264 3,279
--------- ---------
Loss from operations ..................................................... (3,748) (3,632)
--------- ---------
Other (income) expense
Amortization of deferred financing costs ............................ -- 448
Interest income ..................................................... (3) (14)
Interest expense .................................................... 42 67
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 ........................................ (340) 3,894
--------- ---------
Net loss ................................................................. (3,408) (7,526)
Preferred stock dividends ................................................ (89) (74)
Preferred stock deemed dividends ......................................... (1,282) --
--------- ---------
Net loss attributable to common stockholders ............................. $ (4,779) $ (7,600)
========= =========
Net loss attributable to common stockholders per share:
Basic and diluted ................................................... $ (0.12) $ (0.23)
========= =========
Weighted average number of common shares:
Basic and diluted ................................................... 39,020 32,363
========= =========
See accompanying notes to condensed consolidated financial statements.
2
GLOWPOINT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(RESTATED-NOTE 3)
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
----------- ---------
Cash flows from Operating Activities:
Net loss .................................................................... $ (3,408) $ (7,526)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ........................................... 570 543
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 ................................. 43 13
Equity-based compensation ............................................... 189 181
Gain on settlement with Gores............................................ (379) --
Common stock issued for interest on convertible debentures............... -- 45
Other ................................................................... -- 83
Increase (decrease) in cash attributable to changes in assets
and liabilities:
Escrowed cash ....................................................... 337 (1)
Accounts receivable ................................................. (163) 683
Receivable from Gores Technology Group .............................. -- 59
Other current assets ................................................ 99 (48)
Other assets ........................................................ (3) (209)
Accounts payable .................................................... (26) (661)
Accrued expenses .................................................... (165) (158)
Deferred revenue .................................................... 210 26
--------- ---------
Net cash provided (used in) operating activities................ (2,696) (3,129)
--------- ---------
Cash flows from Investing Activities:
Proceeds from discontinued operations (Note 6)............................... 2,750 --
Purchases of furniture, equipment and leasehold improvements ................ (295) (309)
--------- ---------
Net cash used by investing activities ................................... 2,455 (309)
--------- ---------
Cash flows from Financing Activities:
Proceeds from issuance of common stock and warrants ......................... 9,389 11,399
Proceeds attributed to derivative financial instrument ...................... -- 1,164
Exercise of warrants and options, net ....................................... 73 122
Payments on capital lease obligations ....................................... (35) (39)
--------- ---------
Net cash provided by financing activities ............................... 9,427 12,646
--------- ---------
Increase in cash and cash equivalents .......................................... 9,186 9,208
Cash and cash equivalents at beginning of period ............................... 4,497 4,105
--------- ---------
Cash and cash equivalents at end of period ..................................... $ 13,683 $ 13,313
========= =========
Supplement disclosures of cash flow information:
Cash paid during the period for:
Interest .................................................................. $ 53 $ 8
========= =========
3
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
--------- --------
Non-cash investing and financing activities:
Deferred compensation and additional paid-in capital recorded for
the issuance of restricted common stock ................................... $ -- $ 380
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................................................... 96 74
Equity issued as consideration for accrued preferred stock dividends........ 183 --
See accompanying notes to condensed consolidated financial statements.
GLOWPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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
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 ended March 31, 2004 gives effect to
the acquisition as if it had occurred on January 1, 2004:
4
(In thousands except per share amount)
Revenue $4,066
Gross profit 80
Net loss (7,278)
Net loss attributable to common stockholders (7,352)
Net loss attributable to common stockholders per share $(0.23)
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 ended March 31, 2005 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 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 restated 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 $3.7 million
and $3.6 million for the three months ended March 31, 2005 and 2004,
respectively, and had negative operating cash flows of $2.7 million and $3.2
million, respectively, for the three months ended March 31, 2005 and 2004. At
March 31, 2005, we had cash and cash equivalents of $13.7 million, working
capital of $10.0 million and an accumulated deficit of $147.4 million. We raised
net proceeds of $9.4 million in March 2005, but continue to sustain losses and
negative operating cash flows. In March 2006, we commenced a restructuring of
our business (see Note 9), and we are working on raising capital to fund such
operations. However, there are no assurances that additional capital will be
obtained. We believe that our available working capital at March 31, 2005 along
with our operating activities will enable us to continue as a going concern
through March 31, 2006.
NOTE 3-- RESTATEMENT
We have identified errors in previously reported consolidated financial
statements and have restated our condensed consolidated balance sheet as of
March 31, 2005 and the condensed consolidated statements of operations and cash
flows for the three months ended March 31, 2005 and 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 as of March 31, 2005 and for the three
months ended March 31, 2005 (the 2005 period) and 2004 (the 2004 period) relate
to the following matters (the items described below will not aggregate the total
amount of the restatement):
5
Balance Sheet as of March 31, 2005
Account receivable, net of allowance for doubtful accounts. Accounts
receivable, net was reduced by $1,070,000 as of March 31, 2005, principally for
pre-billed revenue for April 2005 of $863,000 which was previously included in
accounts receivable and has been reversed against the corresponding deferred
revenue included in current liabilities. The allowance for doubtful accounts was
increased by $139,000.
Prepaid expenses and other current assets. Prepaid expenses and other
current assets was reduced by $507,000 as of March 31, 2005. A monthly
telecommunications invoice in the amount of $220,000, which was previously
erroneously reflected as a prepaid expense, has been charged to expense in the
2005 period. Deferred installation costs associated with deferred activation
revenues was previously overstated by $153,000, and $145,000 which was
previously recorded as a sales tax receivable was determined to be uncollectible
and written off in 2004.
Property and equipment-net. Property and equipment-net was reduced by
$6,996,000 at March 31, 2005, principally reflecting cost of revenue that was
improperly capitalized as property and equipment, net of the related adjustment
to accumulated depreciation. Property and equipment previously included
purchases of videoconferencing equipment that represented the cost of sales
associated with our VS business prior to 2004. Property and equipment also
previously included telecommunication charges that represented the cost of
service revenue, including approximately $585,000 that was improperly
reclassified during the 2004 period. Additionally, during the 2004 period, we
had improperly increased the estimated life of our network equipment.
Goodwill-net. The goodwill-net of $2,548,000 at March 31, 2005
associated with the purchase of a business in 2001 was deemed to have become
impaired prior to January 1, 2004, because we determined prior to 2004 that we
would not pursue the development of such asset.
Accrued expenses. Accrued expenses was increased by $817,000 at March
31, 2005, including $343,000 of telecommunication vendor bills and $569,000
related to sales tax.
Derivative financial instrument. We have restated our financial
statements to reflect the estimated fair value of a derivative financial
instrument for the liquidated damages provisions of the registration rights
agreement associated with our February 2004 financing. We estimated that the
fair value of the derivative financial instrument as of March 31, 2005 was
$1,341,000.
Deferred revenue. Deferred revenue was reduced by $908,000 at March 31,
2005, which principally reflects the reversal of $863,000 of pre-billed revenue
for April 2005 against the corresponding accounts receivable.
Additional paid-in capital. Additional paid-in capital, as previously
reported of $166,771,000 as of March 31, 2005 was reduced by $6,672,000. We
reduced additional paid-in capital by $1,489,000 to properly account for the
discount on convertible debentures associated with warrants and a beneficial
conversion premium. We have reduced additional paid-in capital (and the
corresponding loss on the exchange) recorded in connection with the exchange of
convertible debentures for Series B convertible preferred stock, restricted
stock and an adjustment to the exercise price of warrants in January 2004 by
$611,000. We have reduced additional paid-in capital at March 31, 2005 for the
reclassification of $2,888,000 of Series B convertible preferred stock to
mezzanine. Additionally, we determined that $1,164,000 of the proceeds of our
February 2004 financing were attributable to a derivative liability and we
reduced additional paid-in capital. We have reduced additional paid-in capital
for preferred stock dividends aggregating $458,000 (including $369,000 as of
December 31, 2004) which were previously recorded as increases to the
accumulated deficit.
6
Statement of Operations
Accumulated Deficit. Our accumulated deficit as of March 31, 2005 was
increased by $8,493,000. The most significant adjustment to our accumulated
deficit relates to the improper capitalization of cost of revenue as property
and equipment. The significant restatements to the net loss for the 2005 period
and the 2004 period are described below:
Revenue - Revenue was reduced by $65,000 and $39,000, respectively, for
the three months ended March 31, 2005 and 2004. We have deferred the recognition
of revenue associated with installation services from 2002 and 2003 over a 24
month period (the estimated average life of a subscription based customer).
Previously, we recognized installation revenue at the time such services were
completed. This change had the impact of increasing revenues by $32,000 for the
2005 period and reducing revenues by $26,000 for the 2004 period. There was also
an increase of $33,000 in network services revenues in the 2005 period. The
increases in the 2005 period were offset by a reduction in revenue of $39,000
associated with sales tax charged to customers that was erroneously classified
as revenue and a reduction of $66,000 related to billing errors that were
subsequently corrected, but erroneously reclassified from previously reported
revenue and charged to the allowance for doubtful accounts.
Cost of revenue - Cost of revenue was increased by $325,000 and
$799,000, respectively, for the three months ended March 31, 2005 and 2004. For
the 2004 period, approximately $610,000 was erroneously capitalized as property
and equipment rather than being charged to cost of revenue in the period. We
recomputed the amount of our network costs allocated to cost of revenue,
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, which resulted in increases to cost of revenue of
$348,000 and $114,000, respectively, for the 2005 and 2004 periods. Depreciation
expense of $112,000 and $81,000, respectively, for the 2005 and 2004 periods
previously allocated to sales and marketing and general and administrative
expenses has been reclassified to cost of revenues associated with bridging
services. 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 during the 2004 period by $138,000. Cost
of revenue for the 2004 period was decreased by $53,000 to apply credits from
telecommunications carriers to the appropriate periods. We also reduced cost of
revenue for the 2004 period by $113,000 for costs incurred in 2003 that were
previously recognized in the 2004 period.
Research and development - Research and development expenses were
decreased by $156,000 and $86,000, respectively, for the three months ended
March 31, 2005 and 2004. The decrease in the 2005 period is a result of a
reduction in the allocation of network costs of $90,000 and depreciation expense
of $58,000, previously allocated to the expense category. The decrease in the
2004 period reflects a reclassification of $117,000 to general and
administrative expenses.
Sales and marketing - Sales and marketing expenses, previously referred
to as selling, were decreased by $1,366,000 and $1,279,000, respectively, for
the three months ended March 31, 2005 and 2004, respectively. The decreases
reflect the reclassification of $1,380,000 and $871,000, respectively, to
general and administrative expenses for the 2005 period and 2004 period. The
2005 period reflects an increase of $60,000 in costs associated with use of the
network by sales and marketing personnel. The 2004 period reflects a reduction
of $242,000 to reflect a proper allocation of network costs to sales expense and
a reduction of $137,000 for sales commissions that should have been expensed
prior to the 2004 period.
7
NOTE 3-- RESTATEMENT (CONTINUED)
General and administrative - General and administrative expenses were
increased by $750,000 and $600,000, respectively, for the three months ended
March 31, 2005 and 2004. We have reclassified to general and administrative
expenses $1,383,000 and $988,000, respectively, for the 2005 and 2004 periods
that were previously classified as selling ($1,380,000 and $871,000) and
research and development ($3,000 and $117,000), which relate principally to
customer service, engineering and other operating expenses. Depreciation expense
was reduced by $477,000 and $503,000, respectively, for the 2005 and 2004
periods, reflecting the reduction of fixed assets and a reclassification of
depreciation expense related to bridging revenue. The re-allocation of network
costs between cost of revenue, research and development, sales and marketing and
general and administrative expenses resulted in a reduction of $317,000 and an
increase of $118,000, respectively, in general and administrative expenses for
the 2005 and 2004 periods. We also recognized additional expense of $69,000 and
$60,000, respectively, in the 2005 and 2004 periods relating to sales tax.
Other (income) expense - Other expense as previously reported of
$50,000 for the 2005 period was adjusted by $390,000, which resulted in other
income, as restated, of $340,000. Other expense for the 2004 period was
decreased by $761,000. As a result of correcting the accounting with respect to
our activities with Gores, we recognized a gain on the settlement of amounts due
to Gores of $379,000 in the 2005 period. As a result of correcting the
accounting for the issuance of the subordinated convertible debentures, we
reduced the amortization of the related discount by $500,000 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 ($5,499,000)
over the face amount of the subordinated convertible debentures ($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 during the 2005 period in connection with warrants and a reduced
conversion price, which were offered as an inducement to convert 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.
8
The following tables summarize the account balances that have been restated
(dollars in thousands):
Previously As Restated Previously As Restated
Reported Reported
-------------------------------------------------------------------
Balance sheets: March 31, 2005 December 31, 2004
(unaudited)
-------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 13,683 $ 13,683 $ 4,586 $ 4,497
Escrowed cash 0 0 337 337
Accounts receivable, net 3,105 2,035 2,763 1,872
Receivable from Gores 0 0 2,750 2,371
Prepaid expenses and other
current assets 962 455 939 554
-------------------------------------------------------------------
Total current assets 17,750 16,173 11,375 9,631
Property and equipment-net 11,824 4,828 12,591 5,103
Goodwill-net 2,548 0 2,548 0
Other assets 339 261 296 258
-------------------------------------------------------------------
Total assets $ 32,461 $ 21,262 $ 26,810 $ 14,992
===================================================================
LIABILITIES
Accounts payable $2,959 $ 2,958 $ 2,833 $ 2,984
Accrued expenses 1,346 2,163 1,486 2,421
Derivative 0 586 0 367
Deferred revenue 1,383 475 1,018 265
Capital lease obligations 0 0 35 35
----------------------------------------------------------------
Total current liabilities 5,688 6,182 5,372 6,072
Deferred income taxes 229 0 212 0
Derivative, less current portion 0 755 0 932
----------------------------------------------------------------
Total liabilities 5,917 6,937 5,584 7,004
Preferred stock 0 2,888 0 4,888
STOCKHOLDERS' EQUITY
Common stock 5 5 4 4
Additional paid-in capital 166,771 160,099 157,323 148,510
Accumulated deficit (138,913) (147,406) (134,530) (143,998)
Deferred compensation (1,079) (1,021) (1,331) (1,176)
Treasury stock (240) (240) (240) (240)
----------------------------------------------------------------
Total stockholders' equity 26,544 11,437 21,226 3,100
----------------------------------------------------------------
Total liabilities and
stockholders' equity $ 32,461 $ 21,262 $ 26,810 $ 14,992
================================================================
9
Previously As Restated Previously As Restated
Reported Reported
---------------------------------------------------------------
Statements of Operations: Three months ended Three months ended
March 31, 2005 March 31, 2004
(unaudited) (unaudited)
---------------------------------------------------------------
Revenue $ 4,267 $ 4,202 $ 3,225 $ 3,186
Cost of revenue 3,361 3,686 2,740 3,539
---------------------------------------------------------------
Gross margin (loss) 906 516 485 (353)
---------------------------------------------------------------
Research and development 469 313 327 241
Sales and marketing 2,289 923 1,835 556
General and administrative 2,278 3,028 1,882 2,482
---------------------------------------------------------------
Total operating expenses 5,036 4,264 4,044 3,279
---------------------------------------------------------------
Loss from operations (4,130) (3,748) (3,559) (3,632)
Other (income) expenses 50 (340) 4,655 3,894
Income tax provision 41 0 0 0
---------------------------------------------------------------
Income (loss) from continuing (4,221) (3,408) (8,214) (7,526)
operations
Discontinued (loss) operations (66) 0 0 0
---------------------------------------------------------------
Net (loss) (4,287) (3,408) (8,214) (7,526)
Preferred stock dividends (96) (89) (74) (74)
Preferred stock deemed dividends 0 1,282 0 0
Net (loss) attributable to
common
Stockholders $ (4,383) $ (4,779) $ (8,288) $ (7,600)
Net loss attributable to common
stockholders per share - basic
and diluted $ (0.11) $ (0.12) $ (0.25) $ (0.23)
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
Accounting 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 ended March 31,
2005 and 2004 if the fair value based method had been applied to all awards.
10
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
------------ -----------
(in thousands)
Net loss attributable to common stockholders, as reported ...................... $ (4,779) $ (7,600)
Add: stock-based compensation expense included in reported loss................. 189 181
Deduct: total stock-based employee compensation expense determined
under the fair value based method for all awards........................... (439) (390)
--------- ---------
Pro forma net loss attributable to common stockholders.......................... $ (5,029) $ (7,809)
========= =========
Net loss attributable to common stockholders per share:
Basic and diluted - as reported ................................................ $ 0.12 $ 0.23
Basic and diluted - pro forma .................................................. $ 0.13 $ 0.24
The weighted average grant date fair value of options granted during the three
months ended March 31, 2005 and 2004 was $1.57 and $1.65, respectively. The
weighted average grant date fair value of 190,000 shares of restricted common
stock granted during the three months ended March 31, 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:
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
------------ -----------
Risk free interest rate ........................................................ 4.27% 4.87%
Expected lives ................................................................. 10 years 10 years
Expected volatility ............................................................ 101.05% 101.76%
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 ended
March 31, 2005 and 2004 is the same as basic loss per share. A total of
14,780,000 and 11,052,000 potential shares of common stock for outstanding
options and warrants and 2,059,000 and 1,288,000 shares of common stock issuable
upon the conversion of our Series B convertible preferred stock have been
excluded from the calculation of diluted loss per share for the three months
ended March 31, 2005 and 2004, respectively, 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 an 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 segment, 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.
11
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. On January 12, 2005, we announced that the arbitrator had concluded
that the net assets of the VS business sold to Gores should be reduced by $4.3
million.
On March 7, 2005, we announced that we had entered into a settlement
agreement with Gores, resolving the outstanding disputes between the companies
relating to the sale of the assets 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 earnout 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 $100,000 of revenue that we recognized during the three
months ended March 31, 2004, 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 three months ended
March 31, 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 three months
ended March 31, 2004.
12
NOTE 8 -- STOCKHOLDER'S EQUITY
In January 2004, in exchange for the cancellation and termination of
debentures with an aggregate face value of $4,888,000 and forfeiture of any and
all rights of collection, claim or demand under the notes, 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 three months ended March 31, 2004. Additionally, we recognized a
$743,000 loss on the exchange. The investors have anti-dulution 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 $2.242 and $2.49, respectively. In connection with the
adjustment to the conversion price, we recognized deemed dividends of $115,000
in the 2005 period. The corresponding amount in the 2004 period was nominal, as
was the incremental fair value for the adjustments to the exercise price of the
warrants.
In February 2004, we raised net proceeds of $12.4 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 the Company 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
were attributed to the estimated fair value of the derivative liability. As of
March 31, 2005 and December 31, 2004, we estimated the fair value of the
derivative liability to be $1,341,000 and $1,298,000, respectively, and
recognized other expense of $43,000 and $13,000, respectively, for the three
months ended March 31, 2005 and 2004.
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. We also
issued warrants to the investors in the private placement to purchase 2,666,667
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 three months ended March 31, 2005 in connection with
the warrants and a reduced conversion price, which were offered as an inducement
to convert.
NOTE 9--SUBSEQUENT EVENTS
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 $197,000, $218,000 and $73,000 for the years ending December 31, 2005,
2006 and 2007, respectively, excluding operating costs.
13
In March 2006, we implemented a corporate restructuring plan designed to
reduce certain operating, sales 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.
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 ended March 31, 2005 (the
2005 period) and the three months ended March 31, 2004 (the 2004 period), and
the notes thereto. 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 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
$1.000 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.
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.
14
In the 2005 period, 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.
On March 7, 2005, we announced a settlement agreement with Gores,
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 totalling $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.
15
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 are included elsewhere in this Report on Form 10-Q/A.
We have described the specific impact of the restatement on the 2005 period 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.
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.
16
The Audit Committee investigation further found that our current
management has instituted improved internal accounting controls, including the
hiring of our current 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 years experience
in public company reporting, has earned his CPA and will become our acting 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".
Results of Operations
The following table sets forth for the three months ended March 31, 2005
and 2004, information derived from our restated consolidated financial
statements expressed as a percentage of our revenues:
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
------ ------
Net revenues................................................................. 100.0% 100.0%
Cost of revenues............................................................. 87.7 111.1
------ ------
Gross margin................................................................. 12.3 (11.1)
------ ------
Operating expenses:
Research and development................................................ 7.4 7.6
Sales and marketing..................................................... 22.0 17.5
General and administrative.............................................. 72.1 77.9
------ ------
Total operating expenses..................................................... 101.5 102.9
------ ------
Loss from operations......................................................... (89.2) (114.0)
------ ------
Other (income) expense:
Amortization of deferred financing costs................................ 0.0 14.1
Interest income......................................................... (0.1) (0.4)
Interest expense........................................................ 1.0 2.1
Amortization of discount on subordinated debentures..................... 0.0 83.2
Loss on exchange of debt................................................ 0.0 23.3
Gain on settlement with Gores........................................... (9.0) --
------ ------
Total other (income) expenses, net........................................... (8.1) 122.2
------ ------
Net loss..................................................................... (81.1) (236.2)
Preferred stock dividends.................................................... (2.1) (2.3)
Preferred stock deemed dividends............................................. (30.5) --
------ ------
Net loss attributable to common stockholders................................. (113.7) (238.5)
====== ======
17
THREE MONTHS ENDED MARCH 31, 2005 ("2005 PERIOD") COMPARED TO THREE MONTHS ENDED
MARCH 31, 2004 ("2004 PERIOD").
Revenue. Revenue increased $1.0 million, or 32%, in the 2005 period to
$4.2 million from $3.2 million for the 2004 period. Subscription and related
revenue (which includes contractual revenue related to the Network Services
customer base) increased $0.3 million, or 13%, in the 2005 period to $2.7
million from $2.4 million for the 2004 period. Contractual revenue related to
the Network Services customer base (formerly known as NuVision) was $0.1 million
in the 2005 period. We received no revenue from this customer base in the 2004
period because we acquired it from Tandberg USA in May 2004. Non-subscription
revenue consisting of bridging, events and other one-time fees increased $0.7
million, or 88% in the 2005 period to $1.5 million from $0.8 million for the
2004 period. The growth in non-subscription revenue was the result of $0.8
million in revenue from the Network Services customer base.
Restatement Impact: Revenue was reduced by $65,000 and $39,000,
respectively, for the three months ended March 31, 2005 and 2004. We have
deferred the recognition of revenue associated with installation services for
2002 and 2003 over a 24 month period (the estimated average life of a
subscription based customer ). Previously, we recognized installation revenues
at the time such services were completed. This change had the impact of
increasing revenues by $32,000 for the 2005 period and decreasing revenues by
$26,000 for the 2004 period. There was also an increase of $33,000 in network
services revenues in the 2005 period. The increases in the 2005 period were
offset by a reduction in revenue of $39,000 associated with sales tax charged to
customers that was erroneously classified as revenue and a reduction of $66,000
related to billing errors that were subsequently corrected, but erroneously
reclassified from previously reported revenue and charged to the allowance for
doubtful accounts.
Cost of Revenue. Cost of revenue increased $0.1 million, or 4%, in the 2005
period to $3.7 million from $3.5 million for the 2004 period. Infrastructure
costs (defined as backbone related costs of network) decreased $0.1 million, or
11%, in the 2005 period to $1.0 million from $1.1 million for the 2004 period.
Access costs (defined as costs of connecting subscriber locations to the
network) decreased $0.3 million, or 6%, in the 2005 period to $1.3 million from
$1.6 million for the 2004 period. The decline in access costs in the 2005 period
was the result of the renegotiation of rates and the migration of service to
lower cost providers where possible. Costs associated with the Network Services
customer base were $0.5 million for the 2005 period. Other costs of revenue
decreased $0.1 million, or 13%, in the 2005 period to $0.7 million from $0.8
million for the 2004 period. The rate of increase in our gross profit percentage
is not indicative of results expected to be achieved in subsequent periods.
18
Restatement Impact: Cost of revenue was increased by $325,000 and
$799,000, respectively, for the three months ended March 31, 2005 and 2004. For
the 2004 period, approximately $610,000 was erroneously capitalized as property
and equipment rather than being charged to cost of revenue in the period. We
recomputed the amount of our network costs allocated to cost of revenue,
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, which resulted in increases to cost of revenue of
$348,000 and $114,000, respectively, for the 2005 and 2004 periods. Depreciation
expense of $112,000 and $81,000, respectively, for the 2005 and 2004 periods
previously allocated to sales and marketing and general and administrative
expenses has been reclassified to cost of revenues associated with bridging
services. 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 during the 2004 period by $138,000. Cost
of revenue for the 2004 period was decreased by $53,000 to apply credits from
telecommunications carriers to the appropriate periods. We also reduced cost of
revenue for the 2004 period by $113,000 for costs incurred in 2003 that were
previously recognized in the 2004 period.
Research and Development. Research and development expense, which includes
the costs of the personnel in this group, the equipment they use and their use
of the network for development projects, increased by $0.1 million in the 2005
period to $0.3 million from $0.2 million for 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 7.4% and 7.6%, respectively, for the 2005 and 2004 periods.
Restatement Impact: Research and development expenses were decreased by
$156,000 and $86,000, respectively, for the three months ended March 31, 2005
and 2004. The decrease in the 2005 period is a result of a reduction in the
allocation of network costs of $90,000 and depreciation expense of $58,000,
previously allocated to this expense category. The decrease in the 2004 period
reflects a reclassification of $117,000 to general and administrative expenses.
Sales and Marketing. Sales and marketing expense, which includes salaries
of our direct sales force, sales engineers and marketing personnel, commissions,
overhead and marketing costs, increased $0.4 million in the 2005 period to $0.9
million, from $0.6 million in the 2004 period. The primary causes of the
increase in costs for the 2005 period were the $0.4 million increase in
salaries, benefits and travel costs resulting from the addition of a direct
sales force of 11 employees and an increase of $0.1 million in marketing expense
associated with a sales lead generation program. Sales and marketing expense as
a percentage of revenue was 22.0% and 17.5%, respectively, for the 2005 and 2004
periods.
Restatement Impact: Sales and marketing expenses, previously referred
to as selling, were decreased by $1,366,000 and $1,279,000, respectively, for
the three months ended March 31, 2005 and 2004, respectively. The decreases
reflect the reclassification of $1,380,000 and $871,000, respectively, to
general and administrative expenses for the 2005 and 2004 periods. The 2005
period reflects an increase of $60,000 in costs associated with use of the
network by sales and marketing personnel. The 2004 period reflects a reduction
of $242,000 to reflect a proper allocation of network costs to sales expense and
a reduction of $137,000 for sales commissions that should have been expensed
prior to the 2004 period.
General and Administrative. General and administrative expenses increased
$0.5 million in the 2005 period to $3.0 million from $2.5 million in the 2004
period. The primary components of the increase were $0.1 million in salaries and
benefits related to executive management, $0.1 million increase in equity-based
compensation recorded in connection with the issuance of restricted stock and
warrants as compensation and an increase of $0.1 million of additional
provision for bad debt. General and administrative expenses as a percentage of
net revenues was 71.5% for the 2005 period, a decrease from 77.9% for the 2004
period.
19
Restatement Impact: General and administrative expenses were increased by
$750,000 and $600,000, respectively, for the three months ended March 31, 2005
and 2004. We have reclassified to general and administrative expenses $1,383,000
and $988,000, respectively, for the 2005 and 2004 periods that were previously
classified as selling ($ and $871,000) and research and development ($ and
$117,000), which relate principally to customer service, engineering and other
operating expenses. Depreciation expense was reduced by $349,000 [$477,000?] and
$323,000 [$503,000?], respectively, for the 2005 and 2004 periods, reflecting
the reduction of fixed assets and a reclassification of depreciation expense
related to bridging revenue. The re-allocation of network costs between cost of
revenue, research and development, sales and marketing and general and
administrative expenses resulted in a reduction of $254,000 [$318,000?] and an
increase of $88,000, respectively, in general and administrative expenses for
the 2005 and 2004 periods. We also recognized additional expense of $69,000 and
$60,000, respectively, in the 2005 and 2004 periods relating to sales tax.
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 the warrants.
Restatement Impact. Other expense as previously reported of $50,000 for
the 2005 period was adjusted by $390,000, which resulted in other income, as
restated, of $340,000. Other expense for the 2004 period was decreased by
$761,000. As a result of correcting the accounting with respect to our
activities with Gores, we recognized a gain on the settlement of amounts due to
Gores of $379,000 in the 2005 period. As a result of correcting the accounting
for the issuance of the subordinated convertible debentures, we reduced the
amortization of the related discount by $500,000 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 ($5,499,000) over the face amount of the
subordinated convertible debentures ($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 during the 2005 period in connection with warrants and a reduced
conversion price, which were offered as an inducement to convert 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 $4.8
million, or $0.12 per basic and diluted share, in the 2005 period from $7.6
million, or $0.23 per basic and diluted share, for the 2004 period.
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. Management believes 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.
20
THREE MONTHS ENDED MARCH 31,
-----------------------------
2005 2004
--------- ---------
Net loss attributable to common stockholders ................................... $ (4,779) $ (7,600)
Depreciation and amortization ............................................. 570 543
Amortization of deferred financing costs .................................. -- 448
Amortization of discount on subordinated debentures ....................... -- 2,650
Loss on exchange of debt .................................................. -- 743
Equity-based compensation ................................................. 189 181
Gain from discontinued VS operations ...................................... (379) --
Preferred stock dividends ................................................. 1,371 74
Interest expense, net ..................................................... 42 53
--------- ---------
EBITDA from continuing operations .............................................. $ (2,986) $ (2,908)
========= =========
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2005, we had working capital of $10.0 million compared to
$3.6 million at December 31, 2004. We had $13.7 million in cash and cash
equivalents at March 31, 2005 compared to $4.5 million at December 31, 2004. The
$6.4 million increase in working capital resulted primarily from the net
proceeds from the March 2005 private placement of common stock of $9.4 million.
In January 2004, in exchange for the cancellation and termination of
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 $12.4 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 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 totalling $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".
In February 2004, we terminated a $7.5 million revolving credit
facility with JPMorgan Chase.
Net cash used in operating activities was $2.7 million and $3.1
million, respectively, during the 2005 and 2004 periods. For the 2005 period, we
had a net loss of $3.4 million, a gain on settlement with Gores of $0.4 million,
an increase in accounts receivable of $0.2 million and a decrease in accrued
expenses of $0.2 million, offset by depreciation and amortization of $0.5
million, $0.2 million of equity-based compensation, the collection of $0.3
million of escrowed cash and an increase in deferred revenue of $0.2 million.
For the 2004 period, we had a net loss of $7.5 million, an increase in other
assets of $0.2 million and a decrease in accounts payable and accrued expenses
of $0.8 million, partially offset by depreciation and amortization of $0.5
million, amortization of debenture discount and deferred financing costs of $3.1
million, loss on exchange of convertible debentures of $0.7 million and
equity-based compensation of $0.2 million.
21
During the quarter ended March 31, 2005, there were no material changes
in our contractual obligations.
Cash provided by investing activities for the 2005 period was $2.5
million and cash used in investing activities for the 2004 period was $0.3
million. In the 2005 period, we collected $2.8 million from Gores. The balance
of investing activities for both periods related to purchases of network and
computer equipment and leasehold improvements. The Glowpoint network is
currently built out to handle the anticipated level of subscriptions for 2005.
We do not anticipate current expansion for the network and therefore have no
significant commitments to make capital expenditures in 2005.
Cash provided by financing activities for the 2005 period and 2004
period were $9.4 million and $12.6 million, respectively. Financing activities
for the 2005 period and 2004 period 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 March 31, 2005, together
with our operating activities, will enable us to continue as a going concern
through March 31, 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 bad debts, 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.
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.
22
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
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 period 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.
Our current management team, under the supervision of our Chief
Executive Officer and Chief Financial Officer, has instituted improved internal
accounting controls, including the hiring of our current 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 years experience in public company reporting, has earned his CPA
and will become our acting 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.
23
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
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 2,666,667 shares
of common stock. The issued shares and shares underlying the warrants were
registered pursuant to our Registration Statement on Form S-3 (registration No.
333-114207), which was filed with the Securities and Exchange Commission on
April 5, 2004 and declared effective on April 16, 2004. The warrants were not
registered under the Securities Act in reliance on the exemption provided by
Rule 506 of Regulation D. The warrants are exercisable beginning on September
15, 2005 and expire on March 14, 2010, five years after the closing date. The
proceeds will be used for general corporate purposes.
Concurrently, we issued an additional 1,333,328 shares of common stock
and warrants to purchase 533,331 shares of common stock to an institutional
investor in exchange for the cancellation of 83.333 shares of our Series B
preferred stock. The shares and warrants issued pursuant to this exchange offer
were exempt from registration under Section 3(a)(9) of the Securities Act. We
received no proceeds from this transaction.
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.
24
(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: March 22, 2006 By: /s/ David C. Trachtenberg
-------------------------
David C. Trachtenberg, Chief
Executive Officer
(principal executive officer)
Date: March 22, 2006 By: /s/ Gerard E. Dorsey
--------------------
Gerard E. Dorsey, Chief
Financial Officer
(principal financial and
accounting officer)
25