Oblong, Inc. - Quarter Report: 2009 March (Form 10-Q)
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
ý
|
Quarterly
report under Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended March 31,
2009.
|
|
or
|
o
|
Transition
report under Section 13 or 15(d) of the Securities Exchange Act of
1934
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Commission
file number: 0-25940
GLOWPOINT,
INC.
(Exact
Name of registrant as Specified in its Charter)
Delaware
(State
or other Jurisdiction of
Incorporation
or Organization)
|
77-0312442
(I.R.S.
Employer Number)
|
225
Long Avenue, Hillside, New Jersey 07205
(Address
of Principal Executive Offices)
312-235-3888
(Issuer’s
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes ý No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “accelerated filer”, “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
|
o
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Accelerated filer
|
o
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Non-accelerated
filer
|
o
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Smaller
reporting company
|
ý
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No ý
The
number of shares outstanding of the registrant’s common stock as of May 13, 2009
was 47,510,063.
GLOWPOINT, INC
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32 |
*
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The
Condensed Consolidated Balance Sheet at December 31, 2008 has been derived
from the audited consolidated financial statements filed as an exhibit to
our Report on Form 10-K on March 31,
2009.
|
GLOWPOINT,
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except par value and shares)
March
31,
2009
|
December
31, 2008
|
|||||||
ASSETS
|
(Unaudited)
|
|||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 2,013 | $ | 1,227 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $266 and $301,
respectively
|
3,491 | 3,090 | ||||||
Prepaid
expenses and other current assets
|
349 | 294 | ||||||
Total
current assets
|
5,853 | 4,611 | ||||||
Property
and equipment, net
|
2,601 | 2,533 | ||||||
Other
assets
|
33 | 33 | ||||||
Total
assets
|
$ | 8,487 | $ | 7,177 | ||||
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 3,226 | $ | 2,367 | ||||
Accrued
expenses
|
1,383 | 842 | ||||||
Accrued
sales taxes and regulatory fees
|
4,447 | 4,535 | ||||||
Customer
deposits
|
606 | 606 | ||||||
Deferred
revenue
|
373 | 325 | ||||||
Current
portion of capital lease
|
196 | 161 | ||||||
Total
current liabilities
|
10,231 | 8,836 | ||||||
Long
term liabilities:
|
||||||||
Derivative
financial instruments
|
4,028 | — | ||||||
Senior
Secured Notes, net of discount of $240
|
— | 1,482 | ||||||
Capital
lease, less current portion
|
— | 72 | ||||||
Total
long term liabilities
|
4,028 | 1,554 | ||||||
Total
liabilities
|
14,259 | 10,390 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders’
deficit:
|
||||||||
Preferred
stock, $.0001 par value 7,500 shares authorized and convertible; and 4,509
Series A-1 shares and 3,790 Series A shares issued and outstanding
recorded at fair value, respectively (liquidation value of $33,815 and
$28,423, respectively) (see Note 10 for information related to Insider
Purchasers – related parties)
|
16,210 | 11,574 | ||||||
Common
stock, $.0001 par value;150,000,000 shares authorized; 49,074,954 and
48,374,954 shares issued; 47,510,063 and 46,810,063 shares outstanding,
respectively
|
5 | 5 | ||||||
Additional
paid-in capital
|
143,739 | 172,000 | ||||||
Accumulated
deficit
|
(164,343 | ) | (185,409 | ) | ||||
(4,389 | ) | (1,830 | ) | |||||
Less:
Treasury stock, 1,564,891 shares at cost
|
(1,383 | ) | (1,383 | ) | ||||
Total
stockholders’ deficit
|
(5,772 | ) | (3,213 | ) | ||||
Total
liabilities and stockholders’ deficit
|
$ | 8,487 | $ | 7,177 | ||||
See
accompanying notes to condensed consolidated financial statements.
GLOWPOINT,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
(Unaudited)
Three
Months Ended March 31,
|
||||||||
2009
|
2008
|
|||||||
Revenue
|
$ | 6,442 | $ | 5,999 | ||||
Cost
of revenue
|
3,413 | 3,351 | ||||||
Gross
margin
|
3,029 | 2,648 | ||||||
Operating
expenses:
|
||||||||
Sales
and marketing
|
862 | 879 | ||||||
General
and administrative
|
3,126 | 2,132 | ||||||
Total
operating expense
|
3,988 | 3,011 | ||||||
Loss
from operations
|
(959 | ) | (363 | ) | ||||
Interest
and other expense (income):
|
||||||||
Interest
expense, including $0 and $31, respectively, for Insider
Purchasers
|
147 | 1,017 | ||||||
Loss
on extinguishment of debt
|
254 | — | ||||||
Interest
income
|
— | (11 | ) | |||||
Increase
in fair value of derivative financial instruments, including $31 and $43,
respectively for Insider Purchasers
|
1,125 | 1,456 | ||||||
Amortization
of deferred financing costs, including $12 for Insider
Purchasers
|
— | 113 | ||||||
Total
interest and other expense, net
|
1,526 | 2,575 | ||||||
Net
loss
|
(2,485 | ) | (2,938 | ) | ||||
Loss
on redemption of preferred stock
|
(1,999 | ) | — | |||||
Net
loss attributable to common stockholders
|
$ | (4,484 | ) | $ | (2,938 | ) | ||
Net
loss attributable to common stockholders per share:
|
||||||||
Basic
and diluted
|
$ | (0.10 | ) | $ | (0.07 | ) | ||
Weighted
average number of common shares:
|
||||||||
Basic
and diluted
|
45,700 | 45,182 | ||||||
See
accompanying notes to condensed consolidated financial statements.
GLOWPOINT,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
Three
Months Ended March 31, 2009
(In
thousands)
(Unaudited)
Additional
|
Series
A -1
(Note
A)
|
|||||||||||||||||||||||||||||||||||
Common
Stock
|
Paid
In
|
Accumulated
|
Preferred
Stock
|
Treasury
Stock
|
||||||||||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Shares
|
Amount
|
Shares
|
Amount
|
Total
|
||||||||||||||||||||||||||||
Balance
at January 1, 2009
|
48,375 | $ | 5 | $ | 172,000 | $ | (185,409 | ) | 3,790 | $ | 11,574 | 1,565 | $ | (1,383 | ) | $ | (3,213 | ) | ||||||||||||||||||
Cumulative
effect of reclassification of warrants (EITF 07-05)
|
— | — | (26,173 | ) | 23,551 | — | — | — | — | (2,622 | ) | |||||||||||||||||||||||||
Balance
at January 1, 2009, as adjusted
|
48,375 | 5 | 145,827 | (161,858 | ) | 3,790 | 11,574 | 1,565 | (1,383 | ) | (5,835 | ) | ||||||||||||||||||||||||
Net
loss
|
— | — | — | (2,485 | ) | — | — | — | — | (2,485 | ) | |||||||||||||||||||||||||
Stock-based
compensation - options
|
— | — | 77 | — | — | — | — | — | 77 | |||||||||||||||||||||||||||
Stock-based
compensation - restricted stock
|
700 | — | 97 | — | — | — | — | — | 97 | |||||||||||||||||||||||||||
Series
A-1 Preferred Stock issued in connection with the 2009 Private
Placement
|
— | — | — | — | 719 | 2,637 | — | — | 2,637 | |||||||||||||||||||||||||||
Loss
on redemption of Series A Preferred Stock
|
— | — | (1,999 | ) | — | — | 1,999 | — | — | — | ||||||||||||||||||||||||||
Costs
related to 2009 Private Placement
|
— | — | (263 | ) | — | — | — | — | — | (263 | ) | |||||||||||||||||||||||||
Balance
at March 31, 2009
|
49,075 | $ | 5 | $ | 143,739 | $ | (164,343 | ) | 4,509 | $ | 16,210 | 1,565 | $ | (1,383 | ) | $ | (5,772 | ) | ||||||||||||||||||
Note A –
In March 2009 the shares of Series A Preferred Stock outstanding at December 31,
2008 were exchanged for an equal number of shares of newly-created Series A-1
Convertible Preferred Stock (“Series A-1 Preferred Stock”).
See
accompanying notes to condensed consolidated financial
statements.
GLOWPOINT,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
Three
Months Ended March 31,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from Operating Activities:
|
||||||||
Net
loss
|
$ | (2,485 | ) | $ | (2,938 | ) | ||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||
Depreciation
and amortization
|
271 | 331 | ||||||
Other
expense recognized for the increase in the estimated fair value of the
derivative financial instruments
|
1,125 | 1,456 | ||||||
Amortization
of deferred financing costs
|
— | 113 | ||||||
Bad
debt expense
|
31 | 85 | ||||||
Accretion
of discount on Senior Secured Notes
|
23 | 623 | ||||||
Loss
on disposal of equipment
|
2 | — | ||||||
Loss
on extinguishment of debt
|
254 | — | ||||||
Stock-based
compensation
|
174 | 158 | ||||||
Increase
(decrease) in cash attributable to changes in assets and
liabilities:
|
||||||||
Accounts
receivable
|
(432 | ) | (472 | ) | ||||
Prepaid
expenses and other current assets
|
(55 | ) | 34 | |||||
Other
assets
|
— | (12 | ) | |||||
Accounts
payable
|
859 | 552 | ||||||
Customer
deposits
|
— | (45 | ) | |||||
Accrued
expenses, sales taxes and regulatory fees
|
521 | 463 | ||||||
Deferred
revenue
|
48 | 20 | ||||||
Net
cash provided by operating activities
|
336 | 368 | ||||||
Cash
flows from Investing Activities:
|
||||||||
Purchases
of property and equipment
|
(341 | ) | (539 | ) | ||||
Net
cash used in investing activities
|
(341 | ) | (539 | ) | ||||
Cash
flows from Financing Activities:
|
||||||||
Proceeds
from preferred stock offering
|
1,800 | — | ||||||
Capital
lease
|
(38 | ) | (29 | ) | ||||
Purchase
of Senior Secured Notes
|
(750 | ) | — | |||||
Costs
related to private placement
|
(221 | ) | — | |||||
Net
cash provided by (used in) financing activities
|
791 | (29 | ) | |||||
Increase
(decrease) in cash and cash equivalents
|
786 | (200 | ) | |||||
Cash
and cash equivalents at beginning of period
|
1,227 | 2,312 | ||||||
Cash
and cash equivalents at end of period
|
$ | 2,013 | $ | 2,112 | ||||
Supplement
disclosures of cash flow information:
|
||||||||
Cash
paid during the period for
|
||||||||
Interest
|
$ | 36 | $ | 25 | ||||
Non-cash
investing and financing activities:
|
||||||||
Exchange
of Senior Secured Notes for Series A-1 Preferred Stock
|
$ |
1,076
|
$ |
—
|
||||
Additional
Senior Secured Notes issued as payment for interest
|
55
|
|
315
|
|||||
Costs
related to private placement incurred by issuance of placement agent
warrants
|
133 |
—
|
||||||
Settlement
of accrued 2007 management bonus with restricted stock
|
— |
|
179
|
|||||
See
accompanying notes to condensed consolidated financial
statements
|
GLOWPOINT,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2009
(Unaudited)
Note
1 - Basis of Presentation
The
Business
Glowpoint,
Inc. ("Glowpoint" or "we" or "us" or the “Company”), a Delaware corporation, is
a leading provider of advanced video communications solutions. Our
suite of advanced and robust telepresence and video communications solutions
enable organizations to communicate with each other over disparate networks and
technology platforms – empowering business, governmental agencies and
educational institutions to sharply boost the impact and productivity of their
internal and external communications while at the same time reducing their
on-going operating costs. We support thousands of video
communications systems in over 35 countries with our 24/7 managed video
services, powering Fortune® 500 companies, major broadcasters, as well as global
carriers and video equipment manufacturers and their customers around the
world. The Company operates in one segment and therefore
segment information is not presented.
We view
our services as analogous to cellular service providers in the cellular
telephone industry. Regardless of the cellular phone purchased, users must
select a cellular service provider to make it work. Users make that service
decision based on the features, reliability and price offered by the service
provider. In our industry, regardless of the video conferencing or telepresence
equipment purchased, or the network connecting it, Glowpoint provides the
managed services to make it work. In doing so, we offer a vast array of video
communications solutions, including video application services, video operations
services (VNOC) for telepresence, managed network services, IP and ISDN
videoconferencing services, multi-point conferencing (bridging), technology
hosting and management, and professional services. We provide these services to
a wide variety of companies, from large enterprises and governmental entities to
small and medium-sized businesses. Glowpoint is primarily focused on high
quality two-way video communications. With the advent of HD (High Definition)
and telepresence solutions, we combined various components of our features and
services, and developed new ones, to create a comprehensive service offering for
enterprises and their end users that can support any of the telepresence
products on the market today. Glowpoint also wholesales these services and
provides private-labeled branding for manufacturers, carriers, and integrators
seeking to offer this service as a value-add to their offerings for their
customer bases.
Glowpoint’s
video communications solutions involve two major components, the Glowpoint
managed video applications services and the Glowpoint managed network services.
Glowpoint has focused its sales and marketing efforts on the managed video
application services, which are network agnostic and may be leveraged by
customers on any QoS (Quality of Service) network that supports two-way video
transport. Glowpoint’s services for telepresence are in increased demand
because they address the need for a single point of contact to provide
monitoring, scheduling, support, and management of telepresence rooms and the
associated equipment. Additionally, companies look to Glowpoint as a
resource to provide secure business-to-business (B2B) support when using the
video systems to communicate beyond their internal enterprise use. Our
Telepresence inter-Exchange Network (TEN) is a suite of services and
applications designed to overcome the challenges of using video outside of a
company's private network, such as interconnectivity and interoperability, and
we believe will be a critical component for enhanced B2B video communications.
Our managed video application services are sold as a monthly subscription
service and may also include Glowpoint managed network services as an
option.
Liquidity
and Going Concern
Our
condensed consolidated financial statements have been prepared assuming that we
will continue as a going concern. We have incurred recurring
operating losses and negative operating cash flows since our inception including
a net loss attributable to common stockholders of $4,484,000 for the three
months ended March 31, 2009. At March 31, 2009, we had cash and cash
equivalents of $2,013,000, a working capital deficit of $4,378,000 and an
accumulated deficit of $164,343,000. We have raised capital in
private placements, but continue to sustain losses and negative operating cash
flows. Additionally, current economic conditions may cause a decline
in business and consumer spending which could adversely affect our business and
financial performance. These factors raise substantial doubt as to our ability
to continue as a going concern. Assuming we are able to negotiate
favorable terms with the authorities regarding our sales and use taxes and we
are not adversely affected by the current economic conditions, we believe that
our available capital as of March 31, 2009 will enable us to continue as a going
concern through March 31, 2010. There are no assurances that we will
be able to raise additional capital as needed upon acceptable terms, nor that
the current economic conditions will not negatively impact us. If the
current economic conditions negatively impact us and/or we are unable to raise
additional capital as needed upon acceptable terms, it would have a material
adverse effect on the Company. The accompanying consolidated
financial statements do not include any adjustments that might result from this
uncertainty.
Summary
of Significant Accounting Policies
Fair
Value Measurements
The
Company measures fair value in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 157, Fair Value Measurements
(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a
framework and gives guidance regarding the methods used for measuring fair
value, and expands disclosures about fair value measurements. SFAS No. 157
clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that market
participants would use in pricing an asset or liability. As a basis for
considering such assumptions, there exists a three-tier fair value hierarchy,
which prioritizes the inputs used in measuring fair value as
follows:
|
•
|
Level
1 - unadjusted quoted prices in active markets for identical assets or
liabilities that the Company has the ability to access as of the
measurement date.
|
|
•
|
Level
2 - inputs other than quoted prices included within Level 1 that are
directly observable for the asset or liability or indirectly observable
through corroboration with observable market
data.
|
|
•
|
Level
3 - unobservable inputs for the asset or liability only used when there is
little, if any, market activity for the asset or liability at the
measurement date.
|
This
hierarchy requires the Company to use observable market data, when available,
and to minimize the use of unobservable inputs when determining fair
value.
Warrants
and Preferred Stock
The
Company adopted Emerging Issues Task Force Issue No. 07-5, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-5”)
effective January 1, 2009. The adoption of EITF 07-5’s requirements can affect
the accounting for warrants and many convertible instruments with
provisions that protect holders from a decline in the stock price (or
“down-round” provisions). For example, warrants with such provisions will no longer be recorded
in equity. Down-round provisions reduce the exercise price of a warrant or
convertible instrument if a company either issues equity shares for a price that is
lower than the exercise price of those instruments or issues new warrants or
convertible instruments that have a lower exercise price. We evaluated whether
our warrants or convertible preferred stock contain provisions that protect
holders from declines in our stock price or otherwise could result in modification
of the exercise price and/or shares to be issued under the respective warrant or
preferred stock agreements based on a variable that is not an input to the
fair value of a
“fixed-for-fixed” option. The Company determined that the all of the outstanding
warrants contained such provisions thereby concluding they were not indexed
to the Company’s
own stock. The Company determined that EITF 07-05 does not affect the accounting
treatment of the convertible preferred stock. A contingent beneficial
conversion amount is required to be calculated and recognized when and if the
adjusted conversion price of the convertible preferred stock, currently $0.75,
is adjusted to reflect a down round stock issuance that reduces the conversion
price below the $0.29 fair value of the common stock on the issuance date of the
convertible preferred stock.
In
accordance with EITF 07-5, the Company, beginning on January 1, 2009, recognizes
these warrants as liabilities at their respective fair values on each reporting
date. The cumulative effect of the change in accounting for these instruments of
$23,551,000 was recognized as an adjustment to the opening balance of
accumulated deficit at January 1, 2009. The cumulative effect adjustment was the
difference between the amounts recognized in the consolidated balance sheet
before initial adoption of EITF 07-5 and the amounts recognized in the
consolidated balance sheet upon the initial application of EITF 07-5. The
amounts recognized in the consolidated balance sheet as a result of the initial
application of EITF 07-5 on January 1, 2009 were determined based on the amounts
that would have been recognized if EITF 07-5 had been applied from the issuance
date of the instruments. The Company measured the fair value of these
instruments as of March 31, 2009, and recorded a $1,125,000 charge to the
statement of operations. The Company determined the fair values of these
securities using a Black-Scholes valuation model.
Recurring
Fair Value Estimates
The
Company’s recurring fair value measurements at March 31, 2009 were as follows
(in thousands):
Fair
Value as of March 31, 2009
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
Significant
other Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
Increases
(decreases) during the three months ended March 31,
2009
|
||||||||||||||||
Assets:
|
||||||||||||||||||||
Cash
equivalents
|
$ | 2,013 | $ | — | $ | 2,013 | $ | — | $ | — | ||||||||||
Liabilities:
|
||||||||||||||||||||
Derivative
financial instruments
|
$ | 4,028 | $ | — | $ | — | $ | 4,028 | $ | 1,125 | ||||||||||
Recurring
Level 3 Activity, Reconciliation and Basis for Valuation
The table
below provides a reconciliation of the beginning and ending balances for the
major classes of assets and liabilities measured at fair value using significant
unobservable inputs (Level 3). The table reflects gains and losses for the
quarter for all financial liabilities categorized as Level 3 as of March 31,
2009.
Fair
Value Measurements Using Significant Unobservable Inputs (Level 3) (in
thousands):
Increases
(decreases) during the
three
months ended
March
31, 2009
|
||||
Liabilities:
|
||||
Balance
as of January 1, 2009
|
$ | 2,622 | ||
Initial
measurement of warrants issued in the period
|
281 | |||
Increase
in fair value of warrants
|
1,125 | |||
Balance
as of March 31, 2009
|
$ | 4,028 |
The fair
value of each option group is estimated using the Black-Scholes option pricing
model with the following weighted average assumptions as of (number of warrants
and fair value in thousands):
Original
Value
|
December
31, 2008
|
March
16, 2009
|
March
31, 2009
|
|||||||||||||
Number
of warrants
|
40,917 | 40,917 | 3,345 | 44,262 | ||||||||||||
Exercise
price
|
$ | 0.97 | $ | 0.54 | $ | 0.40 | $ | 0.53 | ||||||||
Risk
free interest rate
|
3.3 | % | 0.7 | % | 1.0 | % | 0.8 | % | ||||||||
Expected
warrant lives in years
|
5.0
|
1.9
|
1.8
|
1.7
|
||||||||||||
Expected
volatility
|
102.7 | % | 132.3 | % | 139.0 | % | 143.5 | % | ||||||||
Expected
dividend yields
|
None
|
None
|
None
|
None
|
||||||||||||
Fair
value per share
|
$ | 0.64 | $ | 0.06 | $ | 0.08 | $ | 0.09 | ||||||||
Common
stock price note
|
$ | 0.83 | $ | 0.15 | (A) | $ | 0.17 | (A) | $ | 0.19 | (A) | |||||
Fair
value of warrants
|
$ | 26,173 | $ | 2,622 | $ | 281 | $ | 4,028 | ||||||||
Note A -
Due to the low average daily trading volume of our common stock, we have
discounted the common stock price in the Black-Scholes valuation model to
reflect the adverse impact on our share price which would result from a dramatic
increase in the number of shares of our common stock outstanding upon the
exercise of these warrants. If the discount on the common stock was
increased by 10% on March 31, 2009, the derivative liability would have been
reduced by $1,139,000 and a $14,000 gain would have been reflected on the
statement of operations. If the discount on the common stock was decreased
by 10% on March 31, 2009, the derivative liability would have been increased by
$1,208,000 and a $2,333,000 loss would have been reflected on the statement of
operations.
Non-recurring
Fair Value Estimates
The
Company’s non-recurring fair value measurements recorded during the three months
ended March 31, 2009 were as follows (in thousands):
Fair
Value at Measurement Date
|
Quoted
Prices in Active Markets for Identical Assets (Level
1)
|
Significant
other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs
(Level
3)
|
Gains
(losses)
|
||||||||||||||||
Liabilities:
|
||||||||||||||||||||
Warrants
issued in connection with:
|
||||||||||||||||||||
Sale
of Series A-1 Preferred Stock
|
$ | 189 | $ | — | $ | — | $ | 189 | $ | — | ||||||||||
Senior
Secured Note Exchange
|
50 | — | — | 50 | — | |||||||||||||||
Placement
agent warrant fee
|
42 | — | — | 42 | — | |||||||||||||||
$ | 281 | $ | — | $ | — | $ | 281 | $ | — |
Non-recurring
Level 3 Basis for Valuation
The fair
value of the warrants issued in conjunction with various transactions is
determined using the Black-Scholes method with assumptions for risk free
interest rate, term, common stock price, expected volatility and no
dividends.
Quarterly
Financial Information and Results of Operations
The
condensed consolidated financial statements as of March 31, 2009 and for the
three months ended March 31, 2009 and 2008 are unaudited and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial position as of March 31,
2009, and the results of operations for the three months ended March 31, 2009
and 2008 and cash flows for the three months ended March 31, 2009 and
2008. The results for the three months ended March 31, 2009 are not
necessarily indicative of the results to be expected for the entire
year. While management of the Company believes that the disclosures
presented are adequate to make the information not misleading, these condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the footnotes thereto for the fiscal year
ended December 31, 2008 as filed with the Securities and Exchange Commission as
an exhibit to our Form 10-K on March 31, 2009 (the “Audited 2008
Financials”).
See “Note
2 - Basis of Presentation, Liquidity and Summary of Significant Accounting
Policies” in the Audited 2008 Financials for a discussion of the estimates and
judgments inherent in the Company’s accounting for allowance for doubtful
accounts, concentration of credit risk, lives of property and equipment, income
taxes, stock-based compensation and accrued sales taxes and regulatory
fees. There have been no changes to our critical accounting policies
in the three months ended March 31, 2009. Critical accounting
policies and the significant estimates made in accordance with them are
regularly discussed with our Audit Committee.
Principles
of Consolidation
The
condensed consolidated financial statements include the accounts of Glowpoint
and our wholly owned subsidiary, GP Communications, LLC. All material
inter-company balances and transactions have been eliminated in
consolidation.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current period
presentation.
Use
of Estimates
Preparation
of the condensed consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the condensed consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual amounts
could differ from the estimates made. We continually evaluate estimates used in
the preparation of the condensed consolidated financial statements for
reasonableness. Appropriate adjustments, if any, to the estimates used are made
prospectively based upon such periodic evaluation. The significant areas of
estimation include determining the allowance for doubtful accounts, deferred tax
valuation allowance, accrued sales taxes, the estimated life of customer
relationships, the fair value of derivative financial instruments and the
estimated lives and recoverability of property and equipment.
Derivative
Financial Instruments
The
Company’s objectives in using debt-related derivative financial instruments are
to obtain the lowest cash cost source of funds within a targeted range of
variable-to fixed-rate debt obligations. Derivatives are recognized in the
consolidated balance sheets at fair value based on the criteria specified in
SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities”. The estimated fair
value of the derivative liabilities is calculated using the Black-Scholes method
where applicable and such estimates are revalued at each balance sheet date,
with changes in value recorded as other income or expense in the consolidated
statement of operations. As a result of the Company’s adoption of EITF
07-5, effective January 1, 2009 all warrants are now accounted for as
derivatives. See “Fair Value Measurements” above.
Revenue
Recognition
We
recognize subscription revenue when the related services have been performed.
Revenue billed in advance is deferred until the revenue has been earned. Other
service revenue, including amounts related to surcharges charged by our
carriers, related to the Glowpoint managed network service and the multi-point
video and audio bridging services are recognized 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 twenty-four month period estimated life of the customer
relationship. Revenue related to integration services is recognized
at the time the services are performed, and presented in accordance with EITF
99-19 “Reporting Revenue Gross
as a Principal Versus Net as an Agent”. Revenues
derived from other sources are recognized when services are provided or events
occur.
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 three months ended
March 31, 2009 and 2008, no impairment losses were indicated or
recorded.
Related
Party Transactions
The
Company receives consulting and tax services from an accounting firm in which
one of our directors is a partner and software development from a firm in which
one of our prior directors is the president. The Company provides
video services to a company in which one of our directors is an officer.
Management believes that such transactions are at arm’s-length and for terms
that would have been obtained from unaffiliated third parties. For the three
months ended March 31, 2009 and 2008, we incurred aggregate fees for these
services of $17,000 and $43,000, respectively. For the three months ended March
31, 2009 and 2008, we received aggregate fees for the video services of $83,000
and $77,000, respectively. The fees incurred for software development are only
included for the period that company’s president was a director of the
Company.
Software
Development Costs
The
Company incurred costs for the development of its “Customer Connect” software
that is to be sold, leased or licensed to third parties in the
future. All software development costs have been appropriately
accounted for in accordance with SFAS 86 “Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed”. Software
development costs are required to be capitalized when a product’s technological
feasibility has been established by completion of a detailed program design or
working model of the product, and ending when a product is available for release
to customers. The Company did not capitalize any software development
costs for the three months ended March 31, 2009 and 2008. Software
development costs were being amortized over 24 months beginning in September
2007, when the product became available for general release to customers and the
capitalization of software costs ceased. As of December 31, 2008, the
remaining $63,000 of unamortized capitalized software costs were written off
since the net realizable value of the capitalized software was not realizable.
For the three months ended March 31, 2009 and 2008, we amortized $0 and $24,000,
respectively, to cost of revenues.
Recent
Accounting Pronouncements
In May
2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“Statement No. 162”). The statement is intended to
improve financial reporting by identifying a consistent hierarchy for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with GAAP. Prior to the issuance of Statement No. 162,
GAAP hierarchy was defined in the American Institute of Certified Public
Accountants (“AICPA”) Statement on Auditing Standards (SAS) No. 69, The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting Principles.
Unlike SAS No. 69, Statement No. 162 is directed to the entity rather than the
auditor. Statement No. 162 is effective 60 days following the SEC’s approval of
the Public Company Accounting Oversight Board Auditing amendments to AU Section
411, The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles. Statement No. 162 is not expected to have any material
impact on the Company’s results of operations, financial condition or
liquidity.
In May
2008, the FASB issued FASB Staff Position (FSP) APB 14-1, “Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)” (FSP APB 14-1). FSP APB 14-1 clarifies that convertible debt
instruments that may be settled in cash upon either mandatory or optional
conversion (including partial cash settlement) are not addressed by paragraph 12
of APB Opinion No. 14, “Accounting for Convertible Debt and
Debt issued with Stock Purchase Warrants.” Additionally, FSP
APB 14-1 specifies that issuers of such instruments should separately account
for the liability and equity components in a manner that will reflect the
entity’s nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. We adopted FSP APB 14-1 beginning in the first quarter of
2009, and this standard must be applied on a retrospective basis. The adoption
of this Statement did not have a material impact on the Company’s consolidated
results of operations and financial condition.
In June
2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”).
Equity-linked instruments (or embedded features) that otherwise meet the
definition of a derivative as outlined in SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” are not accounted for as derivatives
if certain criteria are met, one of which is that the instrument (or embedded
feature) must be indexed to the entity’s stock. EITF 07-5 provides guidance on
determining if equity-linked instruments (or embedded features) such as warrants
to purchase our stock are considered indexed to our stock. EITF 07-5 is
effective for the financial statements issued for fiscal years and interim
periods within those fiscal years, beginning after December 15, 2008 and will be
applied to outstanding instruments as of the beginning of the fiscal year in
which it is adopted. Upon adoption, a cumulative effect adjustment will be
recorded, if necessary, based on amounts that would have been recognized if this
guidance had been applied from the issuance date of the affected instruments.
The adoption of this Statement had a material impact on the on the Company’s
consolidated results of operations and financial condition. See “Fair
Value Measurements” above.
Note
2 – Stock Options
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. Effective January 1, 2006, the Company adopted SFAS No. 123R, Share-Based Payment (“SFAS
No. 123R”) which requires that compensation cost relating to share-based payment
transactions be recognized as an expense in the financial statements and that
measurement of that cost be based on the estimated fair value of the equity or
liability instrument issued. SFAS No. 123R also requires that
forfeitures be estimated and recorded over the vesting period of the
instrument.
The
intrinsic value of options outstanding and exercisable at March 31, 2009 and
2008 was $3,000 and $83,000, respectively. There were no options
exercised during the three months ended March 31, 2009.
The
remaining unrecognized stock-based compensation expense at March 31, 2009 was
$348,000 and will be amortized over a weighted average period of 1.5
years.
The
weighted average fair value of each option granted is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions during the three months ended March 31, 2009 and
2008:
Three
Months Ended
March
31,
|
||||||||
2009
|
2008
|
|||||||
Risk
free interest rate
|
1.7 | % | 3.1 | % | ||||
Expected
option lives
|
5
Years
|
5
Years
|
||||||
Expected
volatility
|
112.0 | % | 94.5 | % | ||||
Estimated
forfeiture rate
|
10 | % | 10 | % | ||||
Expected
dividend yields
|
None
|
None
|
||||||
Weighted
average grant date fair value of options
|
$ | 0.27 | $ | 0.36 | ||||
The
Company calculates expected volatility for a stock-based grant based on historic
daily stock price observations of our common stock during the period immediately
preceding the grant that is equal in length to the expected term of the grant.
The expected term of the options and forfeiture rates are estimated based on the
Company’s exercise and employment termination experience. The risk free interest
rate is based on U.S. Treasury yields for securities in effect at the time of
grants with terms approximating the term of the grants. The assumptions used in
the Black-Scholes option valuation model are highly subjective, and can
materially affect the resulting valuations.
A summary
of options granted, exercised, expired and forfeited under our plans and options
outstanding as of and for the three months ended March 31, 2009 with respect to
all outstanding options is as follows (options in thousands):
Outstanding
|
Exercisable
|
|||||||||||||||
Number
of
Options
|
Weighted
Average
Exercise
Price
|
Number
of Options
|
Weighted
Average
Exercise
Price
|
|||||||||||||
Options
outstanding, January 1, 2009
|
4,973 | $ | 1.31 | 3,334 | $ | 1.72 | ||||||||||
Granted
|
558 | 0.39 | ||||||||||||||
Exercised
|
— | — | ||||||||||||||
Expired
|
— | — | ||||||||||||||
Forfeited
|
(125 | ) | 0.49 | |||||||||||||
Options
outstanding, March 31, 2009
|
5,406 | $ | 1.23 | 3,394 | $ | 1.69 |
Stock
option compensation expense is allocated as follows for the three months ended
March 31, 2009 and 2008 (in thousands):
Three
Months Ended
March
31,
|
||||||||
2009
|
2008
|
|||||||
Cost
of revenue
|
$ | 4 | $ | 5 | ||||
Sales
and marketing
|
13 | 19 | ||||||
General
and administrative
|
60 | 76 | ||||||
$ | 77 | $ | 100 |
There was
no income tax benefit recognized for stock-based compensation for the three
months ended March 31, 2009 and 2008. No compensation costs were
capitalized as part of the cost of an asset.
Note
3 - Restricted Stock
A summary
of restricted stock granted, vested, forfeited and unvested restricted stock
outstanding as of March 31, 2009, is presented below (restricted shares in
thousands):
Restricted
Shares
|
Weighted Average
Exercise
Price
|
|||||||
Unvested
restricted shares outstanding, January 1, 2009
|
1,220 | $ | 0.49 | |||||
Granted
|
1,150 | 0.34 | ||||||
Vested
|
(126 | ) | 0.50 | |||||
Forfeited
|
(450 | ) | 0.50 | |||||
Unvested
restricted shares outstanding, March 31, 2009
|
1,794 | $ | 0.38 | |||||
Restricted
stock compensation expense is allocated as follows for the three months ended
March 31, 2009 and 2008 (in thousands):
Three
Months Ended
March
31,
|
||||||||
2009
|
2008
|
|||||||
General
and administrative
|
$ | 95 | $ | 207 | ||||
Sales
and marketing
|
2 | 8 | ||||||
Accrued
Expenses (Note A)
|
— | 179 | ||||||
$ | 97 | $ | 394 |
Note A –
In 2007 the Company accrued $179,000, included in General and Administrative
expenses for management bonuses. In 2008, the Company issued shares, with a
value of $179,000, to pay for the management bonuses accrued in
2007.
There was
no income tax benefit recognized for stock-based compensation for the three
months ended March 31, 2009 and 2008, respectively. No compensation
costs were capitalized as part of the cost of an asset.
Note
4 - 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 shares
outstanding during the period. Diluted loss per share for the three months ended
March 31, 2009 and 2008 is the same as basic loss per share. For the three
months ended March 31, 2009 and 2008, the following potential shares of common
stock that could be issuable have been excluded from the calculation of diluted
loss per share because the effects, as a result of our net loss, would be
anti-dilutive (000’s omitted):
Three
Months Ended
March
31,
|
||||||||
2009
|
2008
|
|||||||
Series
A-1 Preferred Stock
|
45,087 | — | ||||||
Warrants
|
44,262 | 22,925 | ||||||
Options
|
5,406 | 4,286 | ||||||
Unvested
restricted stock
|
1,394 | 570 | ||||||
Senior
Secured Notes
|
— | 22,641 | ||||||
Series
C Convertible Preferred Stock
|
— | 4,748 | ||||||
Note
5 – 2009 Private Placement Transactions
In
November and December 2008, the Company entered into a series of transactions to
recapitalize its balance sheet, raise funds, eliminate the derivative
liabilities, extend the maturity date of our Senior Secured Convertible Notes
(“Senior Secured Notes”) and limit the related interest rate (the “2008 Private
Placements”). In March 2009 the Company entered into a series
of transactions to further recapitalize its balance sheet, raise funds and
prepay or exchange all remaining Senior Secured Notes for shares of preferred
stock (the “2009 Private Placement”). The following is a summary of
the components of the 2009 Private Placement transactions (in thousands except
shares):
Sale
of Series A-1 Preferred Stock
|
Preferred
Stock Exchange
|
Senior
Secured Note Exchange
|
Senior
Secured Note Purchase
|
Placement
Agent
Warrant
Fee
|
Total
|
||||||||||||||||||||
Consideration
received:
|
|||||||||||||||||||||||||
Gross
proceeds – cash
|
$ | 1,800 | $ | - | $ | - | $ | (750 | ) | $ | - | $ | 1,050 | ||||||||||||
Senior
Secured Notes
|
$ | - | $ | - | $ | (1,076 | ) | $ | (713 | ) | $ | - | $ | (1,789 | ) | ||||||||||
Series
A Preferred Stock – shares
|
- | (3,790 | ) | - | - | - | (3,750 | ) | |||||||||||||||||
Series
A Preferred Stock – carrying amount
|
$ | - | $ | (11,574 | ) | $ | - | $ | - | $ | - | $ | (11,574 | ) | |||||||||||
Consideration
provided to holders:
|
|||||||||||||||||||||||||
Series
A-3 Warrants issued:
|
|||||||||||||||||||||||||
Shares
|
2,250 | - | 594 | - | 500 | 3,344 | |||||||||||||||||||
Carrying
amount
|
$ | 189 | $ | - | $ | 50 | $ | - | $ | 42 | $ | 281 | |||||||||||||
Series
A-1 Preferred Stock issued:
|
|||||||||||||||||||||||||
Shares
|
450 | 3,790 | 269 | - | - | 4,509 | |||||||||||||||||||
Carrying
amount
|
$ | 1,611 | $ | 13,573 | $ | 1,026 | $ | - | $ | - | $ | 16,210 | |||||||||||||
Sales
of Series A-1 Preferred Stock
In the
2009 Private Placement, the Company received $1,800,000 of gross proceeds in an
initial closing (the “Initial Closing”) of 450 shares of its newly-created
Series A-1 Preferred Stock and Series A-3 warrants having an exercise price of
$0.40 per share (the “Series A-3 Warrants”) to acquire an aggregate of 2,250,000
shares of common stock pursuant to a Series A-1 Convertible Preferred Stock
Purchase Agreement (the “Purchase Agreement”). Pursuant to the Purchase
Agreement, the Company may sell additional shares of Series A-1 Preferred Stock
and Series A-3 Warrants in one or more subsequent closings that may occur during
the 90-day period following the Initial Closing, There can be
no assurance, however, that the Company will raise any additional funds
following the Initial Closing.
We
accounted for the issuance of the Series A-3 Warrants to acquire 2,250,000
shares of common stock at $0.40 with an expiration date of March 2014, at fair
value. The $189,000 estimated fair value of these warrants,
using the Black-Scholes method on the date of the sale will be charged to the
Series A-1 Preferred Stock and credited to Derivative Financial
Instruments.
In the
2009 Private Placement, the estimated fair value of the issued warrants was
determined using the Black-Scholes method with the following assumptions, a risk
free interest rate of 0.95%, a term of 1.8 years, a common stock
price of $0.17, which reflects a lack of marketability discount, expected
volatility of 139.0% and no dividends.
The
Series A-1 Preferred Stock was recorded in the balance sheet at $1,611,000 which
is the gross cash received less the $189,000 fair value of the Series A-3
warrants issued in the sale.
Preferred
Stock Exchange
In the
2009 Private Placement, the holders of the Company’s Series A Convertible
Preferred Stock (“Series A Preferred Stock”) (i) consented to the creation of
the Series A-1 Preferred Stock and (ii) were issued an aggregate of 3,790 shares
of Series A-1 Preferred Stock, having a Stated Value of $28,423,000, in exchange
for an aggregate of 3,790 shares of the Company’s Series A Preferred Stock,
which also had a Stated Value of $28,423,000 (“2009 Preferred Stock
Exchange”). The book value of the Series A Preferred Stock
exchanged was $11,574,000. The Series A-1 Preferred Stock received in the
transaction will be recorded in the balance sheet at $13,572,000 which is the
fair value of the Series A-1 Preferred Stock.
We
accounted for the 2009 Preferred Stock Exchange as a redemption and in
accordance with Emerging Issues Task Force Topic No. D-42 “The Effect on the Calculation of
Earnings per Share for the Redemption or Induced Conversion of Preferred Stock”
(“D- 42”). In connection with the 2009 Preferred Stock
Exchange, D-42 requires that the excess of the fair value of the Series A-1
Preferred Stock (the “Series A-1 Fair Value”) over the carrying amount of the
Series A Preferred Stock (the “Series A Carrying Amount”) should be added to net
loss to arrive at net loss attributable to common stockholders. The
Series A Carrying Amount of $11,574,000 is based on the recorded fair
value. The Series A-1 Carrying Amount of $13,572,000 is based on
applying the $3,582 fair value of each share of Series A-1 Preferred Stock sold
in the 2009 Private Placement to each share of Series A-1 Preferred Stock issued
in the 2009 Preferred Stock Exchange. The $1,999,000 excess of Series
A-1 Fair Value Series over the Series A Carrying Amount is recognized in our
condensed consolidated statement of operations as a “Loss on Redemption of
Preferred Stock” and added to our net loss to arrive at the net loss
attributable to common shareholders.
Senior
Secured Note Exchange
In the
2009 Private Placement, the Company issued 269 shares of Series A-1 Preferred
Stock and Series A-3 Warrants to acquire 594,000 shares of common stock in
exchange for $1,076,000 (including $12,000 of accrued interest) of the Company’s
Senior Secured Notes.
We
accounted for the issuance of Series A-3 Warrants to acquire 594,000 shares of
common stock at $0.40 with an expiration dates of March 2014, which were issued
to exchange the Senior Secured Notes into Series A-1 Preferred Stock at fair
value, using the Black-Scholes method. The $50,000 estimated
fair value of these warrants at the date of the exchange will be charged to the
Series A-1 Preferred Stock and credited to Derivative Financial
Instruments.
The
Series A-1 Preferred Stock issued in exchange for the Senior Secured Notes will
be recorded in the balance sheet at $1,026,000 which is the value of the Senior
Secured Notes exchanged less the $50,000 fair value of the Series A-3 Warrants
issued in the exchange.
Senior
Secured Note Purchase
In the
2009 Private Placement, the remaining $713,000 of Senior Secured Notes were
purchased for $750,000 and retired by the Company pursuant to that certain
Securities Purchase Agreement, dated March 16, 2009, which prepayment was funded
from the sale of securities in the 2009 Private Placement. As a result, there
are no Senior Secured Notes outstanding. The $37,000
excess of the amount paid to purchase the remaining Senior Secured Notes and
their book value along with $217,000 of unamortized discount that remained when
the Senior Secured Notes were exchanged or purchased in the 2009 Private
Placement resulted in a $254,000 loss on extinguishment of debt which was
recorded in other income and expense.
Placement
Agent Warrant Fee
Burnham
Hill Partners, acted as placement agent and financial advisor for the 2009
Private Placements and received fees of $126,000, which equaled seven (7%)
percent of the gross proceeds received by the Company, and was entitled to the
balance of a fee of $150,000, $75,000 of which has been paid in 2008 and the
remaining $75,000 was paid upon closing this capital raise.
Glowpoint
also issued advisory warrants to Burnham Hill Partners and/or its designees and
assignees to purchase 500,000 shares of common stock at an exercise price of
$0.40 per share.
We
accounted for the issuance of Series A-3 Warrants to Burnham Hill Partners to
acquire 500,000 shares of common stock at $0.40 with an expiration date of March
2014, at fair value, using the Black-Scholes method. The
$42,000 estimated fair value of these warrants will be charged to Paid in
Capital and credited to Derivative Financial Instruments.
The cash
and non-cash costs for Burnham Hill Partners, legal and professional fees for
the 2009 Private Placements, which were charged to Paid in Capital, are as
follows (in thousands):
Total
Costs
|
||||
Cash
financing costs:
|
||||
Burnham
Hill Partners placement agent fees
|
$ | 201 | ||
Legal
and other professional fees
|
21 | |||
221 | ||||
Non-cash
financing costs:
|
||||
Burnham
Hill Partners placement agent warrants
|
42 | |||
$ | 263 |
Note
6 - Senior Secured Notes
Senior
Secured Notes and Senior Secured Notes Discount
In March
and April 2006 and September 2007, we issued our Senior Secured Notes in private
placements to private investors. The September 2007 private placement also
included several officers and directors of the Company (“Insider
Purchasers”). In November 2008, the holders of $10,802,000 of the
Senior Secured Notes, including the Insider Purchasers, exchanged them for
shares of Series A Preferred Stock. Activity for the Senior Secured
Notes and Senior Secured Notes discount during the three months ended March 31,
2009 and as of December 31, 2008 and March 31, 2009 was as follows (in
thousands):
December
31, 2008
|
2009
Activity
|
2009
Private Placements Entries, Net
|
March
31, 2009
|
|||||||||||||
Principal
of Senior Secured Notes:
|
||||||||||||||||
2006
Private Placements
|
$ | 1,500 | $ | — | $ | (1,500 | ) | $ | — | |||||||
Senior
Secured Notes issued as payment for interest
|
222 | 55 | (277 | ) | — | |||||||||||
1,722 | 55 | (1,777 | ) | — | ||||||||||||
Discount:
|
||||||||||||||||
Series
A-3 warrants
|
(260 | ) | — | 260 | — | |||||||||||
(260 | ) | — | 260 | — | ||||||||||||
Accretion
of discount
|
20 | 23 | (43 | ) | — | |||||||||||
(240 | ) | 23 | 217 | — | ||||||||||||
Senior
Secured Notes, net of discount
|
$ | 1,482 | $ | 78 | $ | (1,560 | ) | $ | — | |||||||
During
the three months ended March 31, 2009 and 2008, the accretion of discount was
$23,000 and $623,000, respectively.
Financing
Costs
In the
2008 Private Placements the remaining unamortized financing costs were charged
to the extinguishment of debt. During the three months ended March
31, 2008 the amortization of financing costs, using the effective interest
method over the term of the financing, was $113,000.
Note
7 - Interest Expense
The
components of interest expense for the three months ended March 31, 2009 and
2008 are presented below (in thousands):
Three
Months ended
March
31,
|
||||||||
2009
|
2008
|
|||||||
Accretion
of discount on Senior Secured Notes
|
$ | 23 | $ | 592 | ||||
Accretion
of discount on Senior Secured Notes, Insider Purchasers
|
— | 31 | ||||||
Interest
on Senior Secured Notes
|
57 | 288 | ||||||
Interest
on Senior Secured Notes, Insider Purchasers
|
— | 31 | ||||||
Interest
expense for sales and use taxes and regulatory fees
|
31 | 50 | ||||||
Other
interest expense
|
36 | 25 | ||||||
$ | 147 | $ | 1,017 | |||||
Note
8 - Derivative Liabilities
In the
February 2004, March 2006, April 2006 and September 2007 private placements we
incurred liabilities for the estimated fair value of various derivative
financial instruments. The estimated fair value of the derivative
financial instruments was calculated using the Black-Scholes method and such
estimates were revalued at each balance sheet date, with changes in value
recorded as other income or expense. In the 2008 Private Placements
the derivative liabilities were eliminated with the related gain credited to
Additional Paid in Capital.
During
the three months ended March 31, 2009 and 2008, respectively, $1,125,000 and
$1,456,000 increases in the fair value of the derivative liabilities were
recorded in other income and expense.
Activity
for derivative liabilities during the three months ended March 31, 2009 and as
of December 31, 2008 and March 31, 2009 was as follows (in
thousands):
December
31, 2008
|
Cumulative
Effect of Change in Accounting Principle
|
Activity
during the period
|
Increase
in Fair Value
|
March
31, 2009
|
||||||||||||||||
(i) Derivative
financial instrument – warrants
|
$ | — | $ | 2,546 | $ | 281 | $ | 1,094 | $ | 3,921 | ||||||||||
(ii)
Derivative financial instrument – warrants – insider
purchasers
|
— | 76 | — | 31 | 107 | |||||||||||||||
$ | — | $ | 2,622 | $ | 281 | $ | 1,125 | $ | 4,028 | |||||||||||
The fair
value of each option group is estimated using the Black-Scholes option pricing
model with the following weighted average assumptions as of March 31, 2009
(number of warrants and fair value in thousands):
(i)
|
(ii)
|
|||||||||||
All
Others
|
Insider
Purchasers
|
Total
|
||||||||||
Number
of warrants
|
43,161 | 1,101 | 44,262 | |||||||||
Exercise
price
|
$ | 0.53 | $ | 0.40 | $ | 0.53 | ||||||
Risk
free interest rate
|
0.8 | % | 0.8 | % | 0.8 | % | ||||||
Expected
warrant lives in years
|
1.7 | 1.8 | 1.7 | |||||||||
Expected
volatility
|
143.5 | % | 140.3 | % | 143.5 | % | ||||||
Expected
dividend yields
|
None
|
None
|
None
|
|||||||||
Fair
value per share
|
$ | 0.09 | $ | 0.10 | $ | 0.09 | ||||||
Common
stock price note (A)
|
$ | 0.19 | $ | 0.19 | $ | 0.19 | ||||||
Fair
value of warrants
|
$ | 3,921 | $ | 107 | $ | 4,028 | ||||||
Note A -
Due to the low average daily trading volume of our common stock, we have
discounted the common stock price in the Black-Scholes valuation model to
reflect the adverse impact on our share price which would result from a dramatic
increase in the number of shares of our common stock outstanding upon the
exercise of these warrants. If the discount on the common stock was
increased by 10% on March 31, 2009, the derivative liability would have been
reduced by $1,139,000 and a $14,000 gain would have been reflected on the
statement of operations. If the discount on the common stock was decreased
by 10% on March 31, 2009, the derivative liability would have been increased by
$1,208,000 and a $2,333,000 loss would have been reflected on the statement of
operations.
Note
9 – Employment Agreements
In March
2009, the Company announced the voluntarily resignation of Michael Brandofino as
Glowpoint’s Chief Executive Officer and a member of the Board of
Directors. Joseph Laezza and David W. Robinson were appointed
Co-Chief Executive Officers. The Company also entered into a
Separation Agreement with Mr. Brandofino that provided, among other things,
salary continuation for a stated period and a grant of 400,000 shares of
restricted stock (replacing the May 2007 grant of restricted stock) that vest
upon the earlier of a change of control and the second anniversary of
grant. In connection with his voluntary resignation, Mr. Brandofino
will be paid severance of between approximately $225,000 and $300,000 over the
following nine months to one year and other benefits (e.g., grants of new
restricted stock, extension of period to exercise vested options, etc.) valued
at approximately $70,000. On March 20, 2009, (i) Messrs. Laezza and
Robinson were each granted 270,000 shares of restricted stock and Mr. Heinen was
granted 210,000 shares of restricted stock, all of which vest upon the earlier
of a change of control and the third anniversary of grant, and (ii) Messrs.
Laezza and Robinson were each granted options to acquire 180,000 shares of
common stock and Mr. Heinen was granted an option to acquire 140,000 shares of
common stock, all of which have an exercise price of $0.40 and vest upon the
earlier of a change of control and the third anniversary of
grant.
The
following is a summary of the activity for the period ending, and as of, March
31, 2009, for costs for Mr. Brandofino and two members of the Board of Directors
who resigned in March 2009 (in thousands):
Severance pay plus payroll taxes
|
$ | 300 | ||
Restricted
stock award and extension of exercise period for vested
options
|
57 | |||
Other
benefits and costs
|
36 | |||
393 | ||||
Less:
amounts paid or vested
|
(73 | ) | ||
Accrual
as of March 31, 2009
|
$ | 320 |
Note
10 – Preferred Stock
Our
Certificate of Incorporation authorizes the issuance of up to 5,000,000 shares
of preferred stock. Currently, we have 7,500 shares of Series A-1 Preferred
Stock authorized, of which 4,509 shares are issued and outstanding as of March
31, 2009, and 4,000 shares of Series D convertible preferred stock authorized,
none of which are issued. We still have 7,500 shares of Series A
Preferred Stock currently authorized, none of which are outstanding, but we
expect to file a Certificate of Elimination with the Delaware Secretary of State
eliminating this class of stock. We have no other classes of
preferred stock. Only the Series A-1 Preferred Stock is outstanding
as of March 31, 2009.
Each
share of Series A-1 Preferred Stock, par value $0.0001 per share, has a stated
value of $7,500 per share, a liquidation preference equal to the stated value,
and is convertible at the holder’s election into common stock at a conversion
price per share of $0.75. Therefore, each share of Series A-1 Preferred
Stock is convertible into 10,000 shares of common stock. The
Series A-1 Preferred Stock contains provisions providing weighted average
anti-dilution protection. The Series A-1 Preferred Stock is
senior to all other classes of equity and, after the first anniversary of
issuance (the “Dividend Grace Period”), is entitled to dividends at a rate of 5%
per annum, payable quarterly in cash, based on the Stated Value. After the
Dividend Grace Period, all dividends shall be payable (i) if on or before
September 30, 2010, at the Company’s option in cash or through the issuance of a
number of additional shares of Series A-1 Preferred Stock with an aggregate
liquidation preference equal to the dividend amount payable on the applicable
dividend payment date and (ii) if after September 30, 2010, at the option of the
holder in cash or through the issuance of a number of additional shares of
Series A-1 Preferred Stock with an aggregate liquidation preference equal
to the dividend amount payable on the applicable dividend payment
date. The “Issuance Date” is defined as the original issuance date of
the Series A-1 Preferred Stock, except for shares of Series A-1 Preferred Stock
issued upon the exchange of Series A Preferred Stock pursuant to the Series A
Preferred Consent and Exchange Agreement, in which case the “Issuance Date” is
the date of issuance of the Series A Preferred Stock (i.e., either November 2008
or December 2008). Except for when dividends are payable, the Series A-1
Preferred Stock is the same as the Series A Preferred Stock created in November
2008.
The
following is a summary of the activity for the Company’s preferred stock during
the three months ended March 31, 2009 and as of December 31, 2008 and March 31,
2009 (in thousands except preferred stock shares) as of December 31,
2008:
Series
A
as
of December 31, 2008
Note
A
|
Series
A & A-1 Exchange
Note
B
|
2009
Private Placement
|
Series
A-1 as of March 31, 2009
|
|||||||||||||
Shares
of Preferred Stock:
|
||||||||||||||||
Investors
|
3,675 | — | 719 | 4,394 | ||||||||||||
Insider
Purchasers
|
115 | — | — | 115 | ||||||||||||
3,790 | — | 719 | 4,509 | |||||||||||||
Book
Value:
|
||||||||||||||||
Investors
|
$ | 11,226 | $ | 1,934 | $ | 2,637 | $ | 15,797 | ||||||||
Insider
Purchasers
|
348 | 65 | — | 413 | ||||||||||||
$ | 11,574 | $ | 1,999 | $ | 2,637 | $ | 16,210 | |||||||||
Liquidation
Value:
|
||||||||||||||||
Investors
|
$ | 27,560 | $ | — | $ | 5,392 | $ | 32,952 | ||||||||
Insider
Purchasers
|
863 | — | — | 863 | ||||||||||||
$ | 28,423 | $ | — | $ | 5,392 | $ | 33,815 | |||||||||
Note A –
Share, book value and liquidation value amounts for Mr. Brandofino have been
reclassified into the Investors totals.
Note B –
In the 2009 Private Placement all shares of the Series A Preferred Stock were
exchanged for an equal amount of shares of Series A-1 Preferred
Stock. The resulting $1,999,000 loss on the redemption of the Series
A Preferred Stock will be charged to Additional Paid in Capital.
Note
11 - Commitments and Contingencies
We have
entered into a number of agreements with telecommunications companies to
purchase communications services. Some of the agreements require a
minimum amount of services purchased over the life of the agreement, or during a
specified period of time.
Glowpoint
believes that it will meet its commercial commitments. In certain
instances where Glowpoint did not meet the minimum commitments, no such
penalties for minimum commitments have been assessed and the Company has entered
into new agreements. It has been our experience that the prices and
terms of successor agreements are similar to those offered by other
carriers.
Glowpoint
does not believe that any loss contingency related to a potential shortfall
should be recorded in the condensed consolidated financial statements because it
is not probable, from the information available and from prior experience, that
Glowpoint has incurred a liability.
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
Certain statements in this Quarterly
Report on Form 10-Q, (the “Report”), are “forward-looking statements.” These
forward-looking statements include, but are not limited to, statements about the
plans, objectives, expectations and intentions of Glowpoint, Inc. (“Glowpoint” or “we” or
“us”)., a
Delaware corporation and other statements contained in this Report that are not
historical facts. Forward-looking statements in this Report or hereafter
included in other publicly available documents filed with the Securities and
Exchange Commission, or the Commission, reports to our stockholders and other
publicly available statements issued or released by us involve known and unknown
risks, uncertainties and other factors which could cause our actual results,
performance (financial or operating) or achievements to differ from the future
results, performance (financial or operating) or achievements expressed or
implied by such forward-looking statements. Such future results are based upon
management's best estimates based upon current conditions and the most recent
results of operations. When used in this Report, the words “expect,”
“anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and similar
expressions are generally intended to identify forward-looking statements,
because these forward-looking statements involve risks and uncertainties. There
are important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including our
plans, objectives, expectations and intentions and other factors that are
discussed under the
section entitled “Risk Factors,” in item 7 of our consolidated financial statements
and the footnotes thereto for the fiscal year ended December 31, 2008 as filed
with the Commission as an exhibit to Form 10-K on March 31, 2009.
The
following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and related notes included elsewhere
in this Report.
Overview
Glowpoint,
Inc. ("Glowpoint" or "we" or "us" or the “Company”), a Delaware corporation, is
a leading provider of advanced video communications solutions. Our
suite of advanced and robust telepresence and video communications solutions
enable organizations to communicate with each other over disparate networks and
technology platforms – empowering business, governmental agencies and
educational institutions to sharply boost the impact and productivity of their
internal and external communications while at the same time reducing their
on-going operating costs. We support thousands of video
communications systems in over 35 countries with our 24/7 managed video
services, powering Fortune® 500 companies, major broadcasters, as well as global
carriers and video equipment manufacturers and their customers around the
world. The Company operates in one segment and therefore
segment information is not presented.
We view
our services as analogous to cellular service providers in the cellular
telephone industry. Regardless of the cellular phone purchased, users must
select a cellular service provider to make it work. Users make that service
decision based on the features, reliability and price offered by the service
provider. In our industry, regardless of the video conferencing or telepresence
equipment purchased, or the network connecting it, Glowpoint provides the
managed services to make it work. In doing so, we offer a vast array of video
communications solutions, including video application services, video operations
services (VNOC) for telepresence, managed network services, IP and ISDN
videoconferencing services, multi-point conferencing (bridging), technology
hosting and management, and professional services. We provide these services to
a wide variety of companies, from large enterprises and governmental entities to
small and medium-sized businesses. Glowpoint is primarily focused on high
quality two-way video communications. With the advent of HD (High Definition)
and telepresence solutions, we combined various components of our features and
services, and developed new ones, to create a comprehensive service offering for
enterprises and their end users that can support any of the telepresence
products on the market today. Glowpoint also wholesales these services and
provides private-labeled branding for manufacturers, carriers, and integrators
seeking to offer this service as a value-add to their offerings for their
customer bases.
Glowpoint’s
video communications solutions are hardware and network agnostic, supporting all
recognized video standards across any high-quality network. As a result, we have
become the global video interconnection point, linking together “islands of
video” across third party private networks (e.g., provided by AT&T, SBC,
Qwest and others), protocols (e.g., H320, H323, IP, SIP, and VoIP), and devices
(e.g., telepresence, desktop, laptop, and mobile phone). Glowpoint’s services
provide users with a consistent experience - regardless of how they are
connecting or where they are connecting from.
Glowpoint’s
video communications solutions involve two major components, the Glowpoint
managed video applications services and the Glowpoint managed network services.
Glowpoint has focused its sales and marketing efforts on the managed video
application services, which are network agnostic and may be leveraged by
customers on any QoS (Quality of Service) network that supports two-way video
transport. Glowpoint’s services for telepresence are in increased demand
because they address the need for a single point of contact to provide
monitoring, scheduling, support, and management of telepresence rooms and the
associated equipment. Additionally, companies look to Glowpoint as a
resource to provide secure business-to-business (B2B) support when using the
video systems to communicate beyond their internal enterprise use. Our
Telepresence inter-Exchange Network (TEN) is a suite of services and
applications designed to overcome the challenges of using video outside of a
company's private network, such as interconnectivity and interoperability, and
we believe will be a critical component for enhanced B2B video communications.
Our managed video application services are sold as a monthly subscription
service and may also include Glowpoint managed network services as an
option.
Critical
Accounting Policies
There
have been no changes to our critical accounting policies in the three months
ended March 31, 2009. Critical accounting policies and the significant estimates
made in accordance with them are regularly discussed with our Audit Committee.
Those policies are discussed under “Critical Accounting Policies” in our
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included in Item 7 of our consolidated financial statements and the
footnotes thereto for the fiscal year ended December 31, 2008 as filed with the
Commission as an exhibit to Form 10-K on March 31, 2009.
Results
of Operations
The
following table sets forth for the three months ended March 31, 2009 and 2008;
information derived from our condensed consolidated financial statements as
expressed as a percentage of revenue:
(Unaudited)
Three
Months Ended
March
31,
|
||||||||
2009
|
2008
|
|||||||
Revenue
|
100.0 | % | 100.0 | % | ||||
Cost
of revenue
|
53.0 | 55.9 | ||||||
Gross
margin
|
47.0 | 44.1 | ||||||
Operating
expenses:
|
||||||||
Sales
and marketing
|
13.4 | 14.7 | ||||||
General
and administrative
|
48.5 | 35.5 | ||||||
Total
operating expenses
|
61.9 | 50.2 | ||||||
Loss
from operations
|
(14.9 | ) | (6.1 | ) | ||||
Interest
and other expense (income):
|
||||||||
Interest
expense, including 0.0% and 0.5%, respectively, for Insider
Purchasers
|
2.3 | 16.9 | ||||||
Loss
on extinguishment of debt
|
3.9 | — | ||||||
Interest
income
|
— | (0.2 | ) | |||||
Increase
in fair value of derivative financial instruments, including 0.5% and
0.7%, respectively for Insider Purchasers
|
17.5 | 24.3 | ||||||
Amortization
of deferred financing costs, including 0.0% and 0.2%, respectively, for
Insider Purchasers
|
— | 1.9 | ||||||
Total
interest and other expense, net
|
23.7 | 42.9 | ||||||
Net
loss
|
(38.6 | ) | (49.0 | ) | ||||
Loss
on redemption of preferred stock
|
(31.0 | ) | — | |||||
Net
loss attributable to common stockholders
|
(69.6 | )% | (49.0 | )% | ||||
Three
Months Ended March 31, 2009 (the “2009 quarter”) Compared to Three Months Ended
March 31, 2008 (the “2008 quarter”).
Revenue - Revenue increased
$443,000, or 7.4%, in the 2009 quarter to $6,442,000 from $5,999,000 in the 2008
quarter. We have separated our revenue into Core Revenue and Non-core
Revenue.
Three
Months Ended March 31,
|
||||||||||||||||
2009
|
2008
|
Increase
(Decrease)
|
%
Change
|
|||||||||||||
Revenue
|
||||||||||||||||
Core
revenue:
|
||||||||||||||||
Subscription
and related revenue (Note A)
|
$ | 4,828 | $ | 4,295 | $ | 533 | 12.4 | % | ||||||||
Non-subscription
revenue
|
||||||||||||||||
Bridging
(Note B)
|
1,170 | 1,006 | 164 | 16.3 | % | |||||||||||
Special
events and professional services
|
19 | 81 | (62 | ) | (76.5 | )% | ||||||||||
6,017 | 5,382 | 635 | 11.8 | % | ||||||||||||
Non-core
revenue:
|
||||||||||||||||
Integration
services for a broadcast customer (Note C)
|
63 | — | 63 | N/A | ||||||||||||
ISDN
resale revenue (Note D)
|
362 | 617 | (255 | ) | (41.3 | %) | ||||||||||
425 | 617 | (192 | ) | (31.1 | %) | |||||||||||
Total
revenue
|
$ | 6,442 | $ | 5,999 | $ | 443 | 7.4 | % | ||||||||
Note A -
The increased subscription and related revenue is caused by increases in
installed subscription circuits and VNOC support services.
Note B -
The increased bridging services revenue was a result of utilization of these
services by VNOC support customers and a concerted effort by the company to grow
revenue from bridging services.
Note C -
Glowpoint was asked to facilitate the procurement and integration of equipment
on required by a customer as part of the implementation of their subscription
agreements.
Note D -
We are continue to consider alternatives with respect to our ISDN resale
business, including whether to sell, transfer or discontinue this line of
business. Currently, we resell ISDN and other services to Tandberg, from whom we
acquired our ISDN resale business in April 2004. While we resell ISDN
services to many customers, in the three months ended March 31, 2009,
approximately 34.5% of our resold ISDN revenues, or approximately $125,000, were
from Tandberg, which was approximately 1.9% of our total gross
revenues. A year earlier, for the three months ended March 31, 2008,
approximately $257,000 of our resold ISDN revenues were from Tandberg, which was
approximately 4.3% of our total gross revenues during that
period. Tandberg continues the process of transitioning its business
from Glowpoint and intends to cease buying these services from Glowpoint, which
we expect to occur in the coming months. Because this revenue is our lowest
margin revenue, however, we have seen, and expect to continue to see, our
overall gross margin percentage to increase once we lose this gross
revenue.
Cost of revenue - Cost of
revenue for the 2009 quarter increased $62,000, or 1.9%, to $3,413,000 from
$3,351,000 in the 2008 quarter. The 1.9% increase was significantly
less than the 7.4% increase in revenues. The increase was primarily
related to $125,000 of increased salaries, benefits and contract employee costs
related to the expansion of our services to encompass 24/7
staffing. These increases were partially offset by a decrease of
$44,000 of depreciation and amortization.
The
components of cost of revenues and their percentage of revenues for the three
months ended March 31, 2009 and 2008 are summarized as follows (in
thousands):
2009
|
%
of 2008 Revenues
|
2008
|
%
of 2008 Revenues
|
|||||||||||||
Telecommunication
carrier charges
|
$ | 2,313 | 35.9 | % | $ | 2,394 | 39.9 | % | ||||||||
Sales
taxes and regulatory fees
|
438 | 6.8 | % | 435 | 7.3 | % | ||||||||||
Salaries
and benefits
|
327 | 5.1 | % | 202 | 3.4 | % | ||||||||||
Depreciation
|
203 | 3.2 | % | 247 | 4.1 | % | ||||||||||
General
overhead costs
|
87 | 1.3 | % | 73 | 1.2 | % | ||||||||||
Integration
costs
|
45 | 0.7 | % | — | — | |||||||||||
$ | 3,413 | 53.0 | % | $ | 3,351 | 55.9 | % | |||||||||
Gross margin - Gross margin
for the 2009 quarter increased by $381,000, or 14.4%, to $3,029,000 from
$2,648,000 in the 2008 quarter. The employee cost increases discussed
in Cost of Revenue were offset by the additional gross margin generated by the
elimination of network costs and our on-going activity involving the
renegotiation of rates, the migration of service to lower cost providers where
possible and the disconnection of lower margin resold ISDN revenue, which caused
our gross margin to increase to 47.0% in the 2009 quarter from 44.1% in the 2008
quarter. The rate of increase in our gross margin percentage is not
indicative of results expected to be achieved in subsequent
quarters.
Sales and marketing - Sales
and marketing expenses, which include sales salaries, commissions, overhead and
marketing costs, decreased by $17,000, or 1.9%, in the 2009 quarter to $862,000
from $879,000 in the 2008 quarter. Sales and marketing expense, as a
percentage of revenue, was 13.4% for the 2009 quarter and 14.7% for the 2008
quarter.
General and administrative -
General and administrative expenses increased by $994,000, or 46.6% in the 2009
quarter to $3,126,000 from $2,132,000 in the 2008 period. The primary
components of this increase were $608,000 in salaries, benefits and contract
employee costs incurred in connection staffing and growth costs driven by new
contracts, which have not realized the full benefit of revenues in the quarter.
Further were costs associated with expansion of our 24/7 VNOC Support Services
staffing and $392,000 of onetime costs accrued in connection with the
resignation of Mr. Brandofino and two members of the Board of
Directors. These increases were partially reduced by a decrease
of $37,000 for travel and entertainment. General and administrative
expenses as a percentage of revenue were 48.5% in the 2009 quarter and 35.5% in
the 2008 quarter.
Loss from operations - Loss
from operations increased by $596,000, or 164.2%, to $959,000 in the 2009
quarter from $363,000 in the 2008 quarter. This increased loss from
operations was primarily attributable to the increased general and
administrative expenses which included onetime charges relating to
separation costs explained further above.
Other expense (income) - Other
expense in the 2009 quarter of $1,526,000 principally reflects $1,125,000 for an
increase in the fair value of derivative financial instruments caused by the
adoption of EITF 07-5, $254,000 for the loss on the extinguishment of the
remaining Senior Secured Notes and interest expense of $147,000 which is
comprised of $57,000 of accrued interest expense related to the Senior Secured
Notes, $23,000 for the accretion of the discount related to the Senior Secured
Notes, $31,000 of interest related to sales and use taxes and regulatory fees
and $37,000 of other interest.
Other
expense in the 2008 quarter of $2,575,000 principally reflects interest expense
of $1,017,000 which is comprised of $623,000 for the accretion of the discount
related to the Senior Secured Notes, $319,000 of accrued interest expense
related to the Senior Secured Notes, $50,000 of interest related to sales and
use taxes and regulatory fees and $25,000 of other interest. The $1,456,000 net
increase in fair value of derivative financial instruments was comprised of an
increase in the fair value of derivative financial instruments related to
warrants issued in connection with the March and April 2006 and September 2007
private placements. Amortization of deferred financing costs incurred
in connection with the Senior Secured Notes was $113,000. Those
expenses are partially offset by $11,000 of interest income.
Income taxes - As a result of
our losses we recorded no provision for incomes taxes in the three months ended
March 31, 2009 and 2008. Any deferred tax asset that would be related
to our losses has been fully reserved under a valuation allowance, reflecting
the uncertainties as to realization evidenced by the Company’s historical
results and restrictions on the usage of the net operating loss
carryforwards.
Net loss - Net loss decreased
by $453,000, or 15.4%, to $2,485,000 in the 2009 quarter from $2,938,000 in the
2008 quarter. This increased net loss was primarily attributable to
the $1,125,000 increase in the fair value for derivative financial instruments
caused by the adoption of EITF 07-5.
Loss on redemption of preferred stock
– As a result of the Preferred Stock Exchange in March 2009 we recognized
a loss for the $1,999,000 excess of Series A-1 Preferred Stock Fair Value over
the Series A Preferred Stock Carrying Amount in the 2009 quarter.
Net loss attributable to common
stockholders - Net loss attributable to common stockholders increased by
$1,546,000, or 52.6% in the 2009 quarter to $4,484,000, or $0.10 per basic and
diluted share, from a net loss of $2,938,000, or $0.07 per basic and diluted
share, in the 2008 quarter. This increased net loss was primarily
attributable to accounting for a loss on the redemption of preferred
stock.
Liquidity
and Capital Resources
Our
condensed consolidated financial statements have been prepared assuming that we
will continue as a going concern. We have incurred recurring
operating losses and negative operating cash flows since our inception including
a net loss attributable to common stockholders of $4,484,000 for the three
months ended March 31, 2009. At March 31, 2009, we had cash and
cash equivalents of $2,013,000, a working capital deficit of $4,378,000 and an
accumulated deficit of $164,343,000. We raised capital in private
placements, but continue to sustain losses and negative operating cash
flows. Additionally, current economic conditions may cause a decline
in business and consumer spending which could adversely affect our business and
financial performance. These factors raise substantial doubt as to our ability
to continue as a going concern. Assuming we are able to negotiate
favorable terms with the authorities regarding our sales and use taxes and we
are not adversely affected by the current economic conditions, we believe that
our available capital as of March 31, 2009 will enable us to continue as a going
concern through March 31, 2010. There are no assurances that we will
be able to raise additional capital as needed upon acceptable terms, nor that
the current economic conditions will not negatively impact us. If the
current economic conditions negatively impact us and we are unable to raise
additional capital as needed upon acceptable terms, it would have a material
adverse effect on the Company. The accompanying consolidated
financial statements do not include any adjustments that might result from this
uncertainty.
Net cash
provided by operating activities was $336,000 for the 2009
period. The cash components provided by operations were $1,380,000
for an increase in accounts payable, accrued expenses, and sales taxes and
regulatory fees and $48,000 for an increase in deferred revenue. These sources
of cash were partially offset by $432,000 for an increase in accounts receivable
and $55,000 for an increase in prepaid expenses and other current
assets.
During
the period ended March 31, 2009, there were no material changes in our
contractual obligations.
Cash used
in investing activities in the 2009 period for the purchase of property,
equipment and leasehold improvements was $341,000. We anticipate capital
expenditures in 2009 to be at a similar level as 2008.
In
accordance with EITF 07-5, the Company, beginning on January 1, 2009, recognizes
warrants with down round protection as liabilities at their respective fair
values on each reporting date. The $4,028,000 derivative liability recorded in
the balance sheet as of March 31, 2009 reflects accounting for these warrants as
a liability rather than as a component of equity. These derivative
liabilities are a non-cash item and reflect the fair value of the related
warrants; they do not reflect an amount that is owed to the warrant holders or
any requirement for payment whatsoever. Increases in the Company’s
common stock price will cause the related derivative liabilities to increase and
will result in a charge to other expense. Decreases in the Company’s
common stock price will cause the related derivative liability to decrease and
will result in a credit to other income. While the warrants remain
unexercised, assuming no change in the common stock price, the derivative
liability will gradually diminish as the warrant expiration date approaches,
with a related credit to other income. If the warrants are exercised,
any remaining derivative liability on the date of exercise will be credited to
Additional Paid in Capital. Upon the expiration or exercise of the
Company’s warrants, the applicable derivative liability will cease to exist and
amounts charged to Additional Paid in Capital will be completely offset by
charges to Accumulated Deficit. Therefore, the net effect of the change in
accounting principle caused by the adoption of EITF 07-5 to Stockholder’s
deficit will be zero, though the financial statements will be subject to
material fluctuations as the Company’s common stock price increases or decreases
until all of the Company’s warrants expire or are exercised.
Commitments
and Contingencies
During
the three months ended March 31, 2009, there were no other items except as shown
below that significantly impacted our commitments and contingencies as discussed
in our consolidated financial statements and the footnotes thereto for the
fiscal year ended December 31, 2008 as filed with the Securities and Exchange
Commission as an exhibit to Form 10-K on March 31, 2009. The
following table summarizes our contractual cash obligations and commercial
commitments at March 31, 2009, and the effect such obligations are expected to
have on liquidity and cash flow in future periods (in thousands).
Contractual
Obligations:
|
Total
|
Less
Than
1
Year
|
1-3
Years
|
3-5
Years
|
More
than
5
Years
|
|||||||||||||||
Operating
lease obligations
|
$ | 495 | $ | 275 | $ | 217 | $ | 3 | $ | — | ||||||||||
Capital
lease obligations
|
224 | 224 | — | — | — | |||||||||||||||
Commercial
commitments
|
666 | 666 | — | — | — | |||||||||||||||
Total
|
$ | 1,385 | $ | 1,165 | $ | 217 | $ | 3 | $ | — | ||||||||||
Inflation
Management
does not believe inflation had a material adverse effect on the condensed
consolidated financial statements for the periods presented.
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
Derivative
Financial Instruments
We have
certain derivative financial instruments related to our warrants. The
derivative financial instruments are revalued each period, which may cause
material fluctuations in our results from operations. As a result of this
volatility, the Company may experience significant material swings in our net
loss or income attributable to common stockholders. The Company
is presenting proforma information which shows the effect on the derivative
liability if our common stock price of $0.38 on March 31, 2009 had been
increased or decreased by $0.25.
The
following table shows the effect of those common stock prices on the derivative
financial instruments shown in the condensed consolidated balance sheets and the
increase in fair value of derivative financial instruments and net loss
attributable to common stockholders shown in the condensed consolidated
statement of operations as of March 31, 2009 (in thousands except
stock price).
Proforma
Information
|
||||||||||||
As
Reported March 31, 2009
|
Common
Stock Price Reduction
|
Common
Stock Price Increase
|
||||||||||
Common
stock price
|
$ | 0.38 | $ | 0.13 | $ | 0.63 | ||||||
Condensed
Consolidated Balance Sheet:
|
||||||||||||
Derivative
financial instruments
|
$ | 4,028 | $ | 929 | $ | 8,138 | ||||||
Change
in fair value of derivative financial instruments
|
$ | - | $ | (3,099 | ) | $ | 4,110 | |||||
Condensed
Consolidated Statement of Operations:
|
||||||||||||
Increase
(decrease) in fair value of derivative financial
instruments
|
$ | 1,125 | $ | (1,974 | ) | $ | 5,235 | |||||
Net
loss attributable to common stockholder
|
$ | (4,484 | ) | $ | (1,385 | ) | $ | (8,594 | ) | |||
Current
Economic Conditions
Current
economic conditions may cause a decline in business and consumer spending which
could adversely affect our business and financial performance. Our
operating results are impacted by the health of the global economy, especially
the North American economy. Our business and financial performance,
including collection of our accounts receivable and recoverability of assets,
may be adversely affected by current and future economic conditions, such as a
reduction in the availability of credit, financial market volatility, recession,
etc.
Additionally,
we may experience difficulties in scaling our operations to react to economic
pressures in the United States.
Item
4. Controls and Procedures
Disclosure
Controls and Procedures
Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by Glowpoint in the
reports it files or submits under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), is recorded, processed, summarized, and
reported within the time periods specified by the Commission’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to provide reasonable assurance that information required to
be disclosed by Glowpoint in the reports it files or submits
under the Exchange Act is accumulated and communicated to management, including
the Co-Chief Executive Officers and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure.
Under the
supervision and with the participation of management, including the Co-Chief
Executive Officers and Chief Financial Officer, Glowpoint has evaluated the
effectiveness of its disclosure controls and procedures (as such term is defined
in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31,
2009, and, based upon this evaluation, the Co-Chief Executive Officer and Chief
Financial Officer have concluded that these controls and procedures are
effective in providing reasonable assurance of compliance.
Changes
in Internal Control over Financial Reporting
No change
in our internal control over financial reporting occurred during the three
months ended March 31, 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
PART
II - OTHER INFORMATION
Item
1. Legal
Proceedings
We are
not currently defending any suit or claim.
Item
1A. Risk Factors
The risk
factors set forth in Item 1A of our 2008 Form 10-K filed on March 31, 2009, are
incorporated herein by reference.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
There
have been no sales of securities in the past three years that have not been
previously reported in a Quarterly Report on Form 10-Q or in a Current Report on
Form 8-K.
Item
3. Defaults
upon Senior Securities
None.
Item
4. Submission
of Matters to a Vote of Security Holders
None.
Item
5. Other
Information
None.
Item
6. Exhibits
|
|
|
|
|
|
(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: May
13, 2009
|
By:
/s/ Joseph
Laezza
|
Joseph
Laezza, Co-Chief Executive Officer
(principal
executive officer)
|
|
Date: May
13, 2009
|
By:
/s/ Edwin F.
Heinen
|
Edwin
F. Heinen, Chief Financial Officer
(principal
financial and accounting
officer)
|