NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
Note 1 - Business Description and Significant Accounting Policies
Business Description
Glowpoint, Inc. (“
Glowpoint,
” “
we,
” “
us,
” or the “
Company
”) is a managed service provider of video collaboration and network applications. Our services are designed to provide a comprehensive suite of automated and concierge applications to simplify the user experience and expedite the adoption of video as the primary means of collaboration. Our customers include Fortune 1000 companies, along with small and medium sized enterprises in a variety of industries. We market our services globally through a multi-channel sales approach that includes direct sales and channel partners. The Company was formed as a Delaware corporation in May 2000. The Company operates in
one
segment and therefore segment information is not presented.
On October 24, 2018, we entered into a non-binding letter of intent with SharedLabs, Inc., a privately held global software and technology services company located in Jacksonville, Florida (“SharedLabs”), with respect to the proposed acquisition by us of
100%
of the issued and outstanding equity securities of SharedLabs in exchange for an aggregate of
112,802,326
shares of our Common Stock, par value
$0.0001
per share (“Common Stock”). If the proposed business combination
is completed on the terms set forth in the non-binding letter of intent
, our stockholders existing prior to the transaction would collectively own an approximately
34%
interest in the combined company. For more information regarding this non-binding letter of intent, see
Note 14
and “Part II. Item 1A. Risk Factors--Risks Related to Non-Binding Letter of Intent.”
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Glowpoint and our
100%
-owned subsidiary, GP Communications, LLC, whose business function is to provide interstate telecommunications services for regulatory purposes. All material inter-company balances and transactions have been eliminated in consolidation.
Basis of Presentation
The Company's fiscal year ends on December 31 of each calendar year. The accompanying interim condensed consolidated financial statements are unaudited and have been prepared on substantially the same basis as our annual consolidated financial statements for the fiscal year ended December 31,
2017
. In the opinion of the Company's management, these interim condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of our financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with generally accepted accounting principles 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 revenue and expenses during the reporting periods. Actual results could differ from these estimates.
The December 31,
2017
year-end condensed consolidated balance sheet data in this document were derived from audited consolidated financial statements and does not include all of the disclosures required by U.S. generally accepted accounting principles. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements as of and for the year ended December 31,
2017
and notes thereto included in the Company's fiscal
2017
Annual Report on Form 10-K, filed with the Securities and Exchange Commission on
March 7, 2018
(the “
2017
10-K”).
The results of operations and cash flows for the interim periods included in these condensed consolidated financial statements are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.
Significant Accounting Policies
The significant accounting policies used in preparation of these condensed consolidated financial statements are disclosed in our
2017
10-K.
Adopted Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (ASU) 2014-09 (Topic 606) "
Revenue from Contracts with Customers
." Topic 606 supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605 “
Revenue Recognition
” (Topic 605), and requires entities to recognize revenue when control of promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. The Company recognizes revenue using the five-step model as prescribed by Topic 606:
|
|
•
|
Identification of the contract, or contracts, with a customer;
|
|
|
•
|
Identification of the performance obligations in the contract;
|
|
|
•
|
Determination of the transaction price;
|
|
|
•
|
Allocation of the transaction price to the performance obligations in the contract; and
|
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•
|
Recognition of revenue when or as the Company satisfies a performance obligation.
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Our managed videoconferencing services are offered to our customers on either a usage basis or on a monthly subscription. Our network services are offered to our customers on a monthly subscription basis. Revenue for these services is generally recognized on a monthly basis as services are performed. Revenue related to professional services is recognized at the time the services are performed. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Accounting Standards Codification Topic 605. We did not record an adjustment to opening accumulated deficit as of January 1, 2018 as the cumulative impact of adopting Topic 606 was not material. The costs associated with obtaining a customer contract were previously expensed in the period they were incurred. Under Topic 606, these payments are deferred on our consolidated balance sheet and amortized over the expected life of the customer contract. The impact to sales and marketing expense for the
three and nine
months ended
September 30, 2018
was not material as a result of applying Topic 606. Deferred revenue as of
September 30, 2018
totaled
$49,000
as certain performance obligations were not satisfied as of this date. During the
three and nine
months ended
September 30, 2018
, the Company recorded
$22,000
and
$341,000
of revenue that was included in deferred revenue as of
June 30, 2018
and
December 31, 2017
, respectively. The Company disaggregates its revenue by geographic region. See
Note 13
for more information.
Recently Issued Accounting Pronouncements
In February 2016 the FASB issued ASU 2016-02,
“Leases (Topic 842),”
as amended. The guidance introduces a lessee model that results in most leases impacting the balance sheet. The ASU addresses other concerns related to the current leases model. Under Topic 842, lessees will be required to recognize for all leases with terms longer than 12 months, at the commencement date of the lease, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and a right-to-use asset, which is an asset that represents the lessee’s right to use or control the use of a specified asset for the lease term. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. The update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Our operating leases, as disclosed in
Note 11
, will be recognized as right-of-use assets and operating lease liabilities on our balance sheet upon adoption, which will increase our total assets and liabilities.
In June 2016 the FASB issued ASU 2016-13,
“Financial Instruments - Credit Losses (Topic 326).”
The amendments introduce an impairment model that is based on expected credit losses, rather than incurred losses, to estimate credit losses on certain types of financial instruments (e.g., loans and held-to-maturity securities), including certain off-balance sheet financial instruments (e.g., loan commitments). The expected credit losses should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments, over the contractual term. Financial instruments with similar risk characteristics may be grouped together when estimating expected credit losses. In addition, the amendments provide for a simplified accounting model for purchased financial assets with a more-than-insignificant amount of credit deterioration since their origination.
In June 2018 the FASB issued ASU 2018-07, “
Compensation - Stock Compensation (Topic 718).
” The guidance simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The new guidance expands the scope to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in an entity’s own operations and supersedes the guidance in ASC 505-50. The update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and should apply to all new awards granted after the date of adoption. We are currently evaluating the effect of adopting this guidance on our consolidated financial statements and related disclosures.
Note 2 - Liquidity and Going Concern
As of
September 30, 2018
, we had
$2,578,000
of cash, working capital of
$3,355,000
and
no
debt. For the
nine
months ended
September 30, 2018
, we incurred a net loss of
$4,444,000
, used
$609,000
of net cash in operating activities, and experienced continued declines in revenue. During the
nine
months ended
September 30, 2018
and the year ended
December 31, 2017
, a significant portion of our cash flow from operations had been dedicated to the payment of interest on our then-existing indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures and investments in sales and marketing. For the
nine
months ended
September 30, 2018
and
2017
, our cash flow was reduced by
$318,000
and
$777,000
, respectively, for cash interest payments on our then-existing indebtedness.
During the
nine
months ended
September 30, 2018
, the Company completed a series of transactions (each of which is described further in Notes
6
and
8
below, as applicable) that improved our financial position and reduced the outstanding principal on our debt obligations from
$1.8 million
as of
December 31, 2017
to
$0
as of
September 30, 2018
. The following is a summary of these transactions:
•
On January 25, 2018, the Company closed a registered direct offering of
1,750
shares of our
0%
Series C Convertible Preferred Stock (the “Series C Preferred Stock”) for net proceeds of
$1,527,000
(the “Series C Offering”).
•
On January 26, 2018, the Company terminated the Business Loan and Security Agreement, dated July 31, 2017, by and between the Company and Super G Capital LLC (“Super G”), along with the accompanying Warrant to Purchase Shares of Common Stock, dated July 31, 2017, and paid off all remaining debt obligations with Super G (“the Super G Payoff”).
•
During the
nine
months ended
September 30, 2018
, the Company made total principal payments of
$800,000
on the Western Alliance Bank Loan Agreement, resulting in
no
outstanding debt as of
September 30, 2018
.
Our capital requirements continue to depend on numerous factors, including the timing and amount of revenue, the expense to deliver our services, expense for sales and marketing, expense for research and development, capital improvements, the amount of shares repurchased under the Company’s stock repurchase program, the cost involved in protecting our intellectual property rights, and expenses required to successfully pursue and execute the proposed business combination with SharedLabs, Inc., on the terms announced or otherwise, or any other merger and acquisition and/or business development initiatives. The Company believes that, based on our current projection of revenue, expenses, capital expenditures and cash flows, it has sufficient resources to fund its operations for at least the next twelve months following the filing of this Report. However, there is no assurance the Company will be able to accomplish this during this period or in the future following such period. The Company anticipates reduced cash flow from operations and increased levels of capital expenditures in 2018 as compared to 2017, and we believe additional capital may be required to fund investments in product development and sales and marketing as a means to reverse our negative revenue trends. While we expect to continue to adjust our cost of revenue and other operating expenses to partially offset the impact of revenue declines associated with our legacy services, we believe additional capital may be necessary to fund our obligations. In the event we need access to capital to fund operations or provide growth capital, we would likely need to raise capital in one or more equity offerings. There can be no assurance that we will be successful in raising necessary capital or that any such offering will be on terms acceptable to the Company. If we are unable to raise additional capital that may be needed on terms acceptable to us, it could have a material adverse effect on the Company. The lead investor of the Series C Preferred Stock (the “Lead Investor”) has certain rights to approve future financings. In addition, as previously disclosed, on July 5, 2018, we received a letter (the “Deficiency Letter”) from the NYSE American stating that we were not in compliance with the continued listing standards as set forth in Section 1003(f)(v) of the NYSE American Company Guide (the “Company Guide”). Specifically, the Deficiency Letter informed us that the NYSE American has determined that shares of our common stock have been selling for a low price per share for a substantial period of time and, pursuant to Section 1003(f)(v) of the Company Guide, the continued listing of our common stock on the NYSE American is predicated on us effecting a reverse stock split of our common stock or otherwise demonstrating sustained price improvement within a reasonable period of time, which the NYSE American determined to be no later than January 5, 2019. We intend to regain compliance with the listing standards set forth in the Company Guide on the timeline established by the NYSE American by undertaking a measure or measures that are for the best interests of the Company and its shareholders. There is, however, no assurance that the Lead Investor will provide the required approvals, that any such measures will be successful or that the NYSE American will deem us to be in compliance, any of which may affect our ability to raise capital, refinance indebtedness or borrow additional funds on terms we deem advisable, or at all. Failure to obtain financing, or obtaining financing on unfavorable terms, could result in a decrease in our stock price, would have a material adverse effect on future operating prospects, and could require us to significantly reduce operations.
Note 3 - Capitalized Software Costs
The Company capitalizes certain costs incurred in connection with developing or obtaining internal-use software. All software development costs have been appropriately accounted for as required by ASC Topic 350-40 “
Intangible – Goodwill and Other – Internal-Use Software.
”
Capitalized software costs are included in “Property and equipment, net” on our condensed consolidated balance sheets and are amortized over
three
to
four
years. Software costs that do not meet capitalization criteria are expensed as incurred. For the
three and nine
months ended
September 30, 2018
, we capitalized
$89,000
and
$265,000
, respectively, of internal-use software costs and we amortized
$82,000
and
$299,000
, respectively, of these costs. For the
three and nine
months ended
September 30, 2017
, we capitalized
$32,000
and
$90,000
, respectively, of internal-use software costs and we amortized
$160,000
and
$480,000
, respectively, of these costs. During the
three and nine
months ended
September 30, 2018
and
2017
, we recorded
no
impairment losses related to capitalized software.
Note 4 - Goodwill & Intangibles
Goodwill is not amortized but is subject to periodic testing for impairment in accordance with ASC Topic 350 “
Intangibles - Goodwill and Other - Testing Indefinite-Lived Intangible Assets for Impairment.
” We test goodwill for impairment on an annual basis on September 30 of each year or more frequently if events occur or circumstances change indicating that the fair value of the goodwill may be below its carrying amount. In addition, as of each
March 31, 2018
and
June 30, 2018
the Company considered the declines in our revenue and stock price to be triggering events for interim goodwill impairment tests. The Company operates as a single reporting unit and used its market capitalization to determine the fair value of the reporting unit as of each test date. In order to determine the market capitalization, the Company used the trailing 20 day volume weighted average price (“VWAP”) of its stock as of
September 30, 2018
. As of each
March 31, 2018
,
June 30, 2018
and
September 30, 2018
, the carrying amount of our reporting unit exceeded its fair value; therefore, the Company recorded goodwill impairment charges of
$975,000
and
$3,150,000
, respectively, in the
three and nine
months ended
September 30, 2018
. These charges are recognized as “Impairment charges” on our Condensed Consolidated Statements of Operations. The remaining goodwill balance as of
September 30, 2018
was
$4,600,000
. The continued future decline of our revenue, cash flows and/or stock price may give rise to a triggering event that may require the Company to record additional impairment charges on goodwill in the future.
The Company assesses the impairment of purchased intangible assets subject to amortization when events and circumstances indicate that the carrying value of the assets might not be recoverable. Fair value of our intangible assets is determined using the relief from royalty methodology. This approach involves two steps: (a) estimating reasonable royalty rates for each intangible asset and (b) applying these royalty rates to a net revenue stream and discounting the resulting cash flows to determine fair value. This fair value is then compared with the carrying value of each intangible asset. If the carrying value of the intangible asset is greater than its implied fair value, an impairment in the amount of the excess is recognized and charged to operations. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments, related primarily to the future profitability and/or future value of the assets. Changes in the Company’s strategic plan and/or other-than-temporary changes in market conditions could significantly impact these judgments and could require adjustments to recorded asset balances. Long-lived assets are evaluated for impairment at least annually, as well as whenever an event or change in circumstances has occurred that could have a significant adverse effect on the fair value of long-lived assets. The Company performed an evaluation of intangible assets as of September 30, 2018 and determined that the undiscounted cash flows of the long-lived assets exceeded the carrying value, therefore
no
impairment charges were required for the
three and nine
months ended
September 30, 2018
.
Note 5 - Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following (in thousands):
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September 30, 2018
|
|
December 31, 2017
|
Accrued compensation costs
|
$
|
258
|
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|
$
|
129
|
|
Other accrued expenses
|
145
|
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|
257
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|
Accrued dividends
|
68
|
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59
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Deferred revenue
|
49
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393
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Super G Warrant liability
|
—
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165
|
|
Accrued expenses and other liabilities
|
$
|
520
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|
$
|
1,003
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Note
6
- Debt
Debt consisted of the following (in thousands):
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September 30, 2018
|
|
December 31, 2017
|
Western Alliance Bank A/R Revolver
|
$
|
—
|
|
|
$
|
800
|
|
Super G Loan
|
—
|
|
|
1,032
|
|
Unamortized debt discounts
|
—
|
|
|
(269
|
)
|
Net carrying value
|
—
|
|
|
1,563
|
|
Less: current maturities, net of debt discount
|
—
|
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|
(1,194
|
)
|
Long-term obligations, net of debt discount
|
$
|
—
|
|
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$
|
369
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Western Alliance Bank Business Financing Agreement
On July 31, 2017, the Company and its subsidiary entered into a Business Financing Agreement with Western Alliance Bank, as lender (the “Western Alliance Bank Loan Agreement”). The Western Alliance Bank Loan Agreement provided the Company with up to a total of
$1,500,000
of revolving loans (the “A/R Revolver”). The Western Alliance Bank Loan Agreement provided that all borrowings would bear interest at the prime rate plus
2.25%
. Interest payments on the outstanding borrowings were due monthly. On July 31, 2017, the Company received a loan in an amount equal to
$1,100,000
under the Western Alliance Bank Loan Agreement. During the
nine
months ended
September 30, 2018
, the Company repaid all outstanding amounts. On May 8, 2018, the Company terminated the Western Alliance Bank Loan Agreement.
Super G Loan Agreement and Warrant
On July 31, 2017, the Company and its subsidiary entered into a Business Loan and Security Agreement with Super G Capital, LLC (“Super G”), as lender (the “Super G Loan Agreement”) and received a term loan from Super G in an amount equal to
$1,100,000
(the “Super G Loan”). Borrowings under the Super G Loan Agreement were to be repaid in installments (including interest) of
$33,000
per month in the first 3 months following closing and approximately
$68,600
per month in months four through twenty-four following closing, for total payments of
$1,540,000
. The effective interest rate of the Super G Loan was approximately
33%
.
On July 31, 2017, the Company also issued a warrant that entitled Super G to purchase
550,000
shares of the Company’s Common Stock, at an exercise price of
$0.30
per share (the “Super G Warrant”). The Super G Warrant had a
three
year term and if the profit on such warrants was not equal to at least
$165,000
over the term of the warrants, at the end of the
three
year term, the Company was required to pay an exit fee equal to the difference between
$165,000
and the amount of profit recognized. During the
nine
months ended
September 30, 2018
,
no
warrants were exercised. The
$165,000
fair value of this warrant was recorded as a derivative liability and as a discount to the carrying amount of the debt on issuance.
On January 26, 2018, the Company and Super G entered into a payoff letter that terminated the Super G Loan Agreement and the Super G Warrant in exchange for total cash payments from the Company of
$1,269,000
(the “Super G Payoff”). The total obligations to Super G at the time of the Super G Payoff was
$1,434,000
, including principal, accrued and remaining interest due over the term of the Super G Loan, and the Super G Warrant Liability. Therefore, the Company recorded a gain on extinguishment of the debt of
$165,000
, which is recorded in “Interest and Other Expense, Net” on our Condensed Consolidated Statements of Operations. In connection with the Super G Payoff, the related warrant liability and corresponding debt discount were eliminated during the
nine
months ended
September 30, 2018
. As of
September 30, 2018
, there are
no
outstanding obligations related to the Super G Loan.
The total debt discount on the Western Alliance Bank A/R Revolver and Super G Loan was
$339,000
, comprised of
$174,000
of debt issuance costs and
$165,000
related to the Super G Warrant. This debt discount was being amortized to interest expense using the effective interest method over the term of the debt. During the
three and nine
months ended
September 30, 2018
, the Company amortized
$0
and
$269,000
of the debt discount, respectively, which is recorded in “Interest and Other Expense, Net” on our Condensed Consolidated Statements of Operations. As of
September 30, 2018
, there is
no
remaining unamortized debt discount.
Note 7 - Stock Repurchase Program
On July 21, 2018, the Company’s Board of Directors authorized a stock repurchase program (the “
Stock Repurchase Program
”) granting the Company authority to repurchase up to
$750,000
of the Company’s Common Stock. Under the Company’s Stock Repurchase Program, repurchases of Common Stock may be funded using the Company’s existing cash balance and/or future cash flows through repurchases made in the open market, in privately negotiated transactions, or pursuant to other means determined by the Company, in each case as permitted by securities laws and other legal requirements. The number of shares purchased under the Stock Repurchase Program and the timing of any purchases may be based on many factors, including the level of the Company’s available cash, general business conditions, and the pricing of the Common Stock. The Stock Repurchase Program does not obligate the Company to acquire a specific number of shares and may be suspended, modified, or terminated at any time. During the
nine
months ended
September 30, 2018
, the Company repurchased
421,302
shares of Common Stock at an aggregate cost of
$77,000
, including commissions and fees. All shares of Common Stock repurchased under the Stock Repurchase Program are recorded as treasury stock. The Stock Repurchase Program does not have an expiration date. As of
September 30, 2018
, the Company had
$673,000
remaining under the Stock Repurchase Program.
Note
8
- Preferred Stock
Our Certificate of Incorporation authorizes us to issue up to
5,000,000
shares of preferred stock. As of
September 30, 2018
, there were: (i)
100
shares of Perpetual Series B-1 Preferred Stock authorized and
no
shares issued or outstanding; (ii)
7,500
shares of Series A-2 Convertible Preferred Stock authorized and
32
shares issued and outstanding (the “Series A-2 Preferred Stock”); (iii)
2,800
shares of
0%
Series B Convertible Preferred Stock (the “Series B Preferred Stock”) authorized and
375
shares issued and outstanding; (iv)
1,750
shares of Series C Preferred Stock authorized and
775
shares issued and outstanding; (v)
4,000
shares of Series D Convertible Preferred Stock authorized and
no
shares issued or outstanding; and (vi)
100
shares of Perpetual Series B Preferred Stock authorized and
no
shares issued or outstanding.
Series A-2 Preferred Stock
Each share of Series A-2 Preferred Stock has a stated value of
$7,500
per share (the “A-2 Stated Value”), a liquidation preference equal to the A-2 Stated Value, and is convertible at the holder’s election into common stock at a conversion price per share of
$2.16
as of
September 30, 2018
. Therefore, each share of Series A-2 Preferred Stock is convertible into
3,472
shares of common stock as of
September 30, 2018
. The conversion price is subject to adjustment upon the occurrence of certain events set forth in our Certificate of Incorporation. During the
nine
months ended
September 30, 2018
, the Series C Offering resulted in an adjustment to the Series A-2 Preferred Stock conversion price from
$2.40
to
$2.16
per share, resulting in a beneficial conversion amount of
$24,000
which has been recorded in additional paid-in capital.
The Series A-2 Preferred Stock is subordinate to the Series B-1 Preferred Stock but senior to all other classes of equity, has weighted average anti-dilution protection and, since January 1, 2013, has been entitled to cumulative dividends at a rate of
5%
per annum, payable quarterly, based on the A-2 Stated Value and payable at the option of the holder in cash or through the issuance of a number of additional shares of Series A-2 Preferred Stock with an aggregate liquidation preference equal to the dividend amount payable on the applicable dividend payment date. As of
September 30, 2018
, the Company has recorded
$68,000
in accrued dividends in “Accrued expenses and other liabilities” on the accompanying Condensed Consolidated Balance Sheet related to the remaining Series A-2 Preferred Stock outstanding. The Company, at its option, may redeem all or a portion of the Series A-2 Preferred Stock in cash at a price per share of
$8,250
per share (equal to
$7,500
per share multiplied by
110%
) plus all accrued and unpaid dividends.
Series B Preferred Stock
In October 2017, the Company closed a registered direct offering of
2,800
shares of its Series B Preferred Stock for total gross proceeds to the Company of
$2,800,000
. The shares of Series B Preferred Stock were sold at a price equal to their stated value of
$1,000
per share and are convertible into shares of the Company’s common stock at a conversion price of
$0.28
per share. During the
nine
months ended
September 30, 2018
,
75
shares of Series B Preferred Stock were converted to
268,000
shares of the Company’s common stock. As of
September 30, 2018
,
375
shares of Series B Preferred Stock remain issued and outstanding. See
Note 14
to these condensed consolidated financial statements for information regarding conversions of Series B Preferred Stock occurring subsequent to
September 30, 2018
. The Series B Preferred Stock is
pari passu
with the Company’s issued and outstanding shares of Series C Preferred Stock.
Subject to certain exceptions, the Company has agreed to provide the holders of Series B Preferred Stock a right of participation for up to
100%
of any future offering of its common stock or other securities or equity linked debt obligations until October 2019. In addition, the Company agreed to expand the size of the Company’s board of directors to
six
members and to appoint a new independent director agreeable to the lead investor in the offering (the “Lead Investor”). In addition, the Company has agreed that it will not enter into certain “fundamental transactions,” including transactions constituting a change of control of the Company, certain reorganization transactions or a sale of all or substantially all of the Company’s assets, except as pursuant to written agreements in form and substance satisfactory to the holders of a majority of the outstanding shares of Series B Preferred Stock including the Lead Investor and on terms with respect to the Series B Preferred Stock as set forth in the Certificate of Designation of Rights, Powers, Preferences, Privileges and Restrictions of the Series B Preferred Stock.
Series C Offering
On January 25, 2018, the Company closed a registered direct offering of
1,750
shares of its Series C Preferred Stock for total gross proceeds to the Company of
$1,750,000
. The shares of Series C Preferred Stock were sold at a price equal to their stated value of
$1,000
per share and are convertible into shares of the Company’s common stock at a conversion price of
$0.30
per share. The net proceeds to us from the sale of our securities in this offering were
$1,527,000
after deducting offering expenses paid by us. During the
nine
months ended
September 30, 2018
,
975
shares of Series C Preferred Stock were converted to
3,250,000
shares of the Company’s common stock. As of
September 30, 2018
,
775
shares of Series C Preferred Stock remain issued and outstanding. See
Note 14
to these condensed consolidated financial statements for information regarding conversions of Series C Preferred Stock occurring subsequent to
September 30, 2018
. The Series C Preferred Stock is
pari passu
with the Company’s issued and outstanding shares of Series B Preferred Stock.
Subject to certain exceptions, the Company has agreed to provide the purchasers, during the period that the purchasers continue to hold Series C Preferred Stock, a right of participation for up to
100%
of any future offering of its common stock or other securities or equity linked debt obligations until January 2020. Subject to limited exceptions, for as long as at least
$500,000
of stated value of Series C Preferred Stock remain outstanding and unconverted (subject to adjustment for stock splits, stock dividends, recapitalizations, reorganizations, reclassifications, combinations and subdivisions or similar events occurring after the date of the Purchase Agreement with respect to the Series C Preferred Stock), the Company shall not issue any common stock or convertible securities (or modify any of the foregoing that may be outstanding) to any person at a price per share less than
$0.30
, or incur any debt, without the express written consent of the Lead Investor.
In addition, the Company has agreed that it will not enter into certain “fundamental transactions,” including transactions constituting a change of control of the Company, certain reorganization transactions or a sale of all or substantially all of the Company’s assets, except as pursuant to written agreements in form and substance satisfactory to the holders of a majority of the outstanding shares of Series C Preferred Stock including the Lead Investor and on terms with respect to the Series C Preferred Stock as set forth in the Certificate of Designation of Rights, Powers, Preferences, Privileges and Restrictions of the Series C Preferred Stock.
In accordance with ASC Topic 815, we evaluated whether our convertible preferred stock contains 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 preferred stock agreements based on a variable that is not an input to the fair
value of a “fixed-for-fixed” option and require a derivative liability. The Company determined
no
derivative liability is required under ASC Topic 815 with respect to our convertible preferred stock. A contingent beneficial conversion amount is required to be calculated and recognized when and if the adjusted
$2.16
conversion price of the Series A-2 Preferred Stock is adjusted to reflect a down round stock issuance that reduces the conversion price below the
$1.16
fair value of the common stock on the issuance date of the Series A-2 Preferred Stock.
Note
9
- Stock Based Compensation
Glowpoint 2014 Equity Incentive Plan
On May 28, 2014, the Glowpoint, Inc. 2014 Equity Incentive Plan (the “2014 Plan”) was approved by the Company’s stockholders at the Company’s 2014 Annual Meeting of Stockholders. The purpose of the 2014 Plan is to promote the success of the Company and to increase stockholder value by providing an additional means to attract, motivate, retain, and reward selected employees and other eligible persons through the grant of equity awards. Awards may be granted under the 2014 Plan to officers, employees, directors and consultants of the Company or its subsidiary. The 2014 Plan permits the grant of stock options, stock appreciation rights, restricted shares, restricted stock units, cash awards and other awards, including stock bonuses, performance stock, performance units, dividend equivalents, or similar rights to purchase or acquire shares, whether at a fixed or variable price or ratio related to the Company’s common stock, upon the passage of time, the occurrence of
one
or more events, or the satisfaction of performance criteria or other conditions, or any combination thereof, or any similar securities with a value derived from the value of or related to the Company’s common stock, or returns thereon. A total of
4,400,000
shares of the Company’s common stock were initially available for issuance under the 2014 Plan. At the 2018 Annual Meeting of Stockholders held on May 31, 2018, the Company’s stockholders approved an amendment to the 2014 Plan to, among other things, increase the number of shares of common stock available for issuance under the 2014 Plan by
3,000,000
shares (the "Amendment"). As of
September 30, 2018
,
3,429,000
shares were available for issuance under the 2014 Plan.
Glowpoint 2007 Stock Incentive Plan
In May 2014, the Board terminated the Glowpoint 2007 Stock Incentive Plan (the “2007 Plan”). Notwithstanding the termination of the 2007 Plan, outstanding awards under the 2007 Plan will remain in effect in accordance with their terms. As of
September 30, 2018
, options to purchase a total of
1,183,000
shares of common stock and
113,000
shares of restricted stock were outstanding under the 2007 Plan.
No
shares are available for issuance under the 2007 Plan.
Stock Options
For the
nine
months ended
September 30, 2018
,
no
stock options were granted; therefore, no fair value assumptions are presented herein. A summary of stock options expired and forfeited under our stock incentive plans and stock options outstanding as of, and changes made during, the
nine
months ended
September 30, 2018
, is presented below (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
|
Number of Shares Underlying Options
|
|
Weighted
Average
Exercise
Price
|
|
Number of Shares Underlying Options
|
|
Weighted
Average
Exercise
Price
|
Options outstanding, December 31, 2017
|
1,202
|
|
|
$
|
1.99
|
|
|
1,202
|
|
|
$
|
1.99
|
|
Expired
|
(9
|
)
|
|
2.28
|
|
|
|
|
|
Forfeited
|
(10
|
)
|
|
1.66
|
|
|
|
|
|
Options outstanding, September 30, 2018
|
1,183
|
|
|
$
|
1.99
|
|
|
1,183
|
|
|
$
|
1.99
|
|
Stock-based compensation expense related to stock options was
$0
for the
three and nine
months ended
September 30, 2018
. Stock-based compensation expense related to stock options was
$0
and
$18,000
, respectively, for the
three and nine
months ended
September 30, 2017
, and was recorded to general and administrative expenses. There is
no
remaining unrecognized stock-based compensation expense for stock options as of
September 30, 2018
.
Restricted Stock Awards
A summary of unvested restricted stock awards outstanding as of, and changes made during, the
nine
months ended
September 30, 2018
, is presented below (shares in thousands):
|
|
|
|
|
|
|
|
|
Restricted Shares
|
|
Weighted Average
Grant Price
|
Unvested restricted stock outstanding, December 31, 2017
|
341
|
|
|
$
|
1.06
|
|
Vested
|
(228
|
)
|
|
0.84
|
|
Unvested restricted stock outstanding, September 30, 2018
|
113
|
|
|
$
|
1.49
|
|
The number of restricted stock awards vested during the
nine
months ended
September 30, 2018
includes
78,000
shares withheld and repurchased by the Company from employees to satisfy
$20,000
of tax obligations relating to the vesting of such shares. Such shares are included in “
Purchase of treasury stock
” during the
nine
months ended
September 30, 2018
.
Stock-based compensation expense related to restricted stock awards is allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cost of revenue
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
5
|
|
Research and development
|
—
|
|
|
1
|
|
|
—
|
|
|
4
|
|
General and administrative
|
2
|
|
|
12
|
|
|
14
|
|
|
36
|
|
|
$
|
2
|
|
|
$
|
15
|
|
|
$
|
14
|
|
|
$
|
45
|
|
Certain restricted stock awards have performance-based vesting provisions and are subject to forfeiture, in whole or in part, if these performance conditions are not achieved. Management assesses, on an ongoing basis, the probability of whether the performance criteria will be achieved and, once it is deemed probable, compensation expense is recognized over the relevant performance period. For those awards not subject to performance criteria, the cost of the restricted stock awards is expensed, which is determined to be the fair market value of the shares at the date of grant, on a straight-line basis over the vesting period.
The remaining unrecognized stock-based compensation expense for restricted stock awards as of
September 30, 2018
was
$141,000
. Of this amount,
$4,000
relates to time-based awards with a remaining weighted average period of
0.73 years
. The remaining
$137,000
of unrecognized stock-based compensation expense relates to performance-based awards for which expense will be recognized upon it becoming probable that the Company will achieve defined financial targets.
Restricted Stock Units
A summary of unvested restricted stock units (“RSUs”) outstanding as of, and changes made during, the
nine
months ended
September 30, 2018
, is presented below (shares in thousands):
|
|
|
|
|
|
|
|
|
RSUs
|
|
Weighted Average
Grant Price
|
Unvested restricted stock units outstanding, December 31, 2017
|
1,752
|
|
|
$
|
0.57
|
|
Granted
|
1,410
|
|
|
0.22
|
|
Vested
|
(553
|
)
|
|
0.75
|
|
Forfeited
|
(472
|
)
|
|
0.28
|
|
Unvested restricted stock units outstanding, September 30, 2018
|
2,137
|
|
|
$
|
0.35
|
|
The number of restricted stock units vested during the
nine
months ended
September 30, 2018
includes
174,000
shares withheld and repurchased by the Company from employees to satisfy
$46,000
of tax obligations relating to the vesting of such shares. Such shares are included in “
Purchase of treasury stock
” during the
nine
months ended
September 30, 2018
.
As of
September 30, 2018
,
988,000
vested RSUs issued to non-employee directors remain outstanding as shares of common stock have not yet been delivered due to the deferred payment provisions set forth in these RSUs.
As of
September 30, 2018
,
1,519,000
unvested RSUs have performance-based vesting provisions and are subject to forfeiture, in whole or in part, if these performance conditions are not achieved. Management assesses, on an ongoing basis, the probability of whether the performance criteria will be achieved and, once it is deemed probable, stock-based compensation expense is recognized over the relevant performance period. As of
September 30, 2018
,
617,000
unvested RSUs have timed-based vesting provisions, and the cost of the RSUs is expensed, which is determined to be the fair market value of the shares at the date of grant, on a straight-line basis over the vesting period.
Stock-based compensation expense related to RSUs is allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cost of revenue
|
$
|
13
|
|
|
$
|
10
|
|
|
$
|
30
|
|
|
$
|
29
|
|
Research and development
|
18
|
|
|
14
|
|
|
47
|
|
|
43
|
|
Sales and marketing
|
1
|
|
|
2
|
|
|
5
|
|
|
6
|
|
General and administrative
|
76
|
|
|
55
|
|
|
174
|
|
|
236
|
|
|
$
|
108
|
|
|
$
|
81
|
|
|
$
|
256
|
|
|
$
|
314
|
|
The remaining unrecognized stock-based compensation expense for RSUs as of
September 30, 2018
was
$498,000
. Of this amount
$99,000
relates to time-based RSUs with a remaining weighted average period of
0.08
years. The remaining
$399,000
of unrecognized stock-based compensation expense relates to performance-based RSUs for which expense will be recognized upon it becoming probable that the Company achieves defined financial targets for fiscal year
2018
and 2019.
Note 10 - Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. The weighted-average number of shares of common stock outstanding does
no
t include any potentially dilutive securities or unvested restricted stock. Unvested restricted stock, although classified as issued and outstanding at
September 30, 2018
and
2017
, is considered contingently returnable until the restrictions lapse and will not be included in the basic net income (loss) per share calculation until the shares are vested. Unvested restricted stock does not contain non-forfeitable rights to dividends and dividend equivalents. Unvested RSUs are not included in calculations of basic net income (loss) per share, as they are not considered issued and outstanding at time of grant.
Diluted net income (loss) per share is computed by giving effect to all potential shares of common stock, including stock options, preferred stock, RSUs, and unvested restricted stock, to the extent they are dilutive. For the
three and nine
months ended
September 30, 2018
, all such common stock equivalents have been excluded from diluted net loss per share as the effect to net loss per share would be anti-dilutive (due to the net loss).
The following table sets forth the computation of the Company’s basic and diluted net income (loss) per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(1,470
|
)
|
|
$
|
7,104
|
|
|
$
|
(4,444
|
)
|
|
$
|
5,846
|
|
Less: preferred stock dividends
|
3
|
|
|
3
|
|
|
9
|
|
|
9
|
|
Net income (loss) attributable to common stockholders
|
$
|
(1,473
|
)
|
|
$
|
7,101
|
|
|
$
|
(4,453
|
)
|
|
$
|
5,837
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average number of shares of common stock for basic net income (loss) per share
|
48,851
|
|
|
36,897
|
|
|
47,489
|
|
|
37,078
|
|
Add effect of dilutive securities:
|
|
|
|
|
|
|
|
Unvested restricted stock units
|
—
|
|
|
672
|
|
|
—
|
|
|
672
|
|
Unvested restricted stock
|
—
|
|
|
249
|
|
|
—
|
|
|
249
|
|
Shares of common stock issuable upon conversion
of preferred stock
|
—
|
|
|
79
|
|
|
—
|
|
|
79
|
|
Weighted-average shares outstanding - diluted
|
48,851
|
|
|
37,897
|
|
|
47,489
|
|
|
38,078
|
|
Basic net income (loss) per share
|
$
|
(0.03
|
)
|
|
$
|
0.19
|
|
|
$
|
(0.09
|
)
|
|
$
|
0.16
|
|
Diluted net income (loss) per share
|
$
|
(0.03
|
)
|
|
$
|
0.19
|
|
|
$
|
(0.09
|
)
|
|
$
|
0.15
|
|
The weighted-average number of shares for all periods presented includes
988,000
shares of vested RSUs, respectively, as discussed in Note
9
.
The following table represents the potential shares that were excluded from the computation of weighted-average number of shares of common stock in computing the diluted net income (loss) per share for the periods presented because including them would have had an anti-dilutive effect (in thousands):
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
Unvested restricted stock units
|
2,137
|
|
|
1,715
|
|
Unvested restricted stock awards
|
113
|
|
|
105
|
|
Outstanding stock options
|
1,183
|
|
|
1,206
|
|
Shares of common stock issuable upon conversion of Series A-2 Preferred
|
110
|
|
|
—
|
|
Shares of common stock issuable upon conversion of Series B Preferred
|
1,339
|
|
|
—
|
|
Shares of common stock issuable upon conversion of Series C Preferred
|
2,583
|
|
|
—
|
|
Warrants
|
—
|
|
|
550
|
|
Total
|
7,465
|
|
|
3,576
|
|
Note 11
- Commitments and Contingencies
Operating Leases
We lease
two
facilities in Denver, CO and Oxnard, CA that are under operating leases through December 2018 and March 2020, respectively. Both of these leases require us to pay increases in real estate taxes, operating costs and repairs over certain base year amounts. Rent expense for the
three and nine
months ended
September 30, 2018
were
$75,000
and
$223,000
, respectively. Rent expense for the
three and nine
months ended
September 30, 2017
were
$74,000
and
$221,000
, respectively.
Future minimum rental commitments under all non-cancelable operating leases as of
September 30, 2018
, are as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
|
Remaining 2018
|
$
|
77
|
|
2019
|
88
|
|
2020
|
23
|
|
|
$
|
188
|
|
Note 12 – Major Customers
Major customers are defined as direct customers or channel partners that account for more than
10%
of the Company’s revenue. For the
three
months ended
September 30, 2018
,
two
major customers represented
20%
and
27%
, respectively, of our revenue. For the
nine
months ended
September 30, 2018
, the same major customers represented
21%
and
25%
, respectively, of our revenue and represented
14%
and
54%
, respectively, of our accounts receivable balance at
September 30, 2018
. For the
three
months ended
September 30, 2017
,
two
major customers represented
16%
and
23%
, respectively, of our revenue. For the
nine
months ended
September 30, 2017
, the same major customers represented
16%
and
22%
, respectively, of our revenue.
Note 13
- Geographical Data
For the
three and nine
months ended
September 30, 2018
and
2017
, there was
no
material revenue attributable to any individual foreign country. Revenue by geographic area, based on customer location, is allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Domestic
|
$
|
1,982
|
|
|
$
|
2,408
|
|
|
$
|
6,477
|
|
|
$
|
8,059
|
|
Foreign
|
949
|
|
|
1,073
|
|
|
3,221
|
|
|
3,358
|
|
Total Revenue
|
$
|
2,931
|
|
|
$
|
3,481
|
|
|
$
|
9,698
|
|
|
$
|
11,417
|
|
Long-lived assets were
100%
located in domestic markets as of
September 30, 2018
and December 31,
2017
.
Note 14
- Subsequent Events
Conversions of Series B Preferred Stock
In October 2018,
300
shares of Series B Preferred Stock were converted to
1,071,429
shares of the Company’s common stock, leaving
75
shares of Series B Preferred Stock issued and outstanding as of the filing of this Report.
Conversions of Series C Preferred Stock
In October 2018,
250
shares of Series C Preferred Stock were converted to
833,333
shares of the Company’s common stock, leaving
525
shares of Series C Preferred Stock issued and outstanding as of the filing of this Report.
Non-Binding Letter of Intent with SharedLabs, Inc.
On October 24, 2018, we entered into a non-binding letter of intent with SharedLabs, Inc., a privately held global software and technology services company located in Jacksonville, Florida, with respect to the proposed acquisition by us of
100%
of the issued and outstanding equity securities of SharedLabs in exchange for an aggregate of
112,802,326
shares of our Common Stock. If the proposed business combination is completed on the terms set forth in the non-binding letter of intent, our stockholders existing prior to the transaction would collectively own an approximately
34%
interest in the combined company. A copy of the letter of intent was filed as Exhibit 99.1 to our Current Report on Form 8-K filed with the SEC on November 5, 2018. Subsequent to its filing, Glowpoint and SharedLabs agreed to extend the termination date of the letter of intent from November 8, 2018 to November 22, 2018.
We expect to negotiate and finalize definitive agreements relating to the business combination during the fourth calendar quarter of 2018. The closing of a business combination would be subject to, among other closing conditions, the receipt of all required approvals of our stockholders and the stockholders of SharedLabs and any required third-party consents and regulatory clearances,
including from the NYSE American (on which exchange our shares of Common Stock are listed),
the completion by SharedLabs of an equity financing on terms set forth in the letter of intent, the execution of one or more term sheets by SharedLabs with lending institutions for one or more credit facilities aggregating not less than
$16 million
in borrowing capacity, the satisfaction and termination prior to closing of all contracts or other agreements to which SharedLabs is a party that provide a counterparty with redeemable or contingent common stock or a guaranteed return, and other customary closing conditions, including satisfactory completion of due diligence by both parties and the execution by both parties of definitive legal documentation. Many of these conditions to closing are outside of our control. If SharedLabs fails to meet its obligations under either the debt or equity financing closing conditions, we may elect to proceed to close the business combination with a reduction in the shares of our Common Stock
to be issued to SharedLabs’ stockholders in the transaction, on terms set forth in the letter of intent. Further, the shares of our Common Stock to be issued in the transaction are subject to increase or decrease pursuant to certain “make-whole” provisions to be included in any definitive agreement regarding the transaction based upon each of the parties’ financial position at closing relative to certain agreed upon metrics included in the letter of intent.
Except as specifically set forth in the letter of intent, the letter of intent is not binding or enforceable and neither party thereto has any obligation to consummate a transaction of any kind until such time as the parties have entered into mutually agreeable definitive agreements, and then only subject to the terms and conditions thereof. There can be no assurance that any definitive agreement will be entered into or that the business combination will be completed on the terms set forth in the letter of intent or at all. In the event that the business combination is consummated, there can be no assurance that it will ultimately prove to be beneficial to our stockholders. For more information about possible risks of this transaction, see “Part II. Item 1A. Risk Factors--Risks Related to Non-Binding Letter of Intent.”