Taoweave, Inc. annual report, FY2018

Filing identity and reporting period

The supplied filing is Glowpoint, Inc.’s audited Form 10-K for the fiscal year ended December 31, 2018, filed March 8, 2019. It does not identify Taoweave, Inc.; investors should confirm the issuer and filing match their intended company. Although the request metadata says “2018 Q4,” the filing reports full-year results and does not provide a clear standalone fourth-quarter income statement.

Business context and financial results

Glowpoint provides managed video collaboration, network and related services to enterprise and smaller-business customers. Results below are for the year ended December 31; amounts are in millions except per-share data.

Revenue fell 15% year over year. Video collaboration revenue declined 15% to $7.589 million; network services declined 22% to $4.351 million; professional and other services rose to $617,000 from $279,000. Cost of revenue decreased, but rose to 61% of revenue from 58%, reducing gross margin. The filing does not provide a clear EBITDA figure in the summarized financial statements.

Material changes and liquidity

• Management attributed lower revenue primarily to customer attrition, reduced customer usage or pricing, competition and pricing pressure. Revenue had declined in each of the prior five fiscal years, from $33.5 million in 2013 to $12.6 million in 2018.
• Operating loss widened, in part because impairment charges increased to $5.093 million, including $4.955 million of goodwill impairment and $138,000 of capitalized software impairment. Goodwill remaining at year-end was $2.795 million.
• General and administrative expense rose $946,000 to $4.611 million, including $714,000 of merger and other M&A professional fees. Research and development fell to $921,000 and sales and marketing to $319,000.
• Net income in 2017 included a $9.045 million gain on debt extinguishment; 2018 included a $165,000 gain. Thus, the reported year-to-year net income swing was affected substantially by unusual financing-related gains.
• Glowpoint raised $1.527 million net from a Series C preferred-stock offering and paid off its Super G and Western Alliance debt during 2018. At year-end it reported $2.007 million cash, $2.793 million working capital and no debt. Operating cash use was $1.155 million.

Outlook, transactions, risks and other items

Management expected revenue declines to continue for the foreseeable future and anticipated negative operating cash flow in 2019. It said stand-alone resources were expected to fund operations for at least 12 months after filing, but warned that additional capital might be needed and could be difficult to raise on acceptable terms. The company had paused material investment in new service offerings while focusing on the proposed SharedLabs transaction.

Under the December 2018 merger agreement, Glowpoint proposed to acquire SharedLabs in a stock transaction. Existing Glowpoint stockholders were expected to own approximately 34% of the combined company and SharedLabs holders approximately 66%, subject to adjustments. Closing remained conditional on, among other things, shareholder and exchange approvals, an effective Form S-4, SharedLabs financing and other closing requirements; the filing gives no assurance the deal would close. If it did not, the companies could incur substantial costs and specified termination fees or expense reimbursements could apply.

Glowpoint had received an NYSE American low-share-price deficiency notice and faced a May 2019 deadline to regain compliance. A one-for-ten reverse split had been approved by the board and majority stockholders by written consent but was not yet effective; the company cautioned it might not be implemented or restore compliance. Other key risks include significant customer concentration (two customers generated 25% and 21% of 2018 revenue), ongoing losses, reliance on financing, competition, service/network interruption and cybersecurity risks. The merger could materially dilute existing holders and may require further capital. The company also disclosed $34.788 million of federal net operating loss carryforwards, subject to limitations; a merger-related ownership change was expected to further limit their use.

The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end; the auditor did not express an opinion on internal-control effectiveness. Adoption of lease accounting in January 2019 was expected to add approximately $100,000 each to assets and liabilities.

Important facts for investors to verify

• Confirm this Glowpoint filing is the intended issuer, not Taoweave, and distinguish full-year results from any Q4-only performance.
• Check subsequent filings for the SharedLabs merger’s status, financing, final ownership and dilution terms, and whether it closed.
• Verify whether the reverse split occurred and whether NYSE American continued-listing compliance was regained.
• Assess cash consumption, 2019 operating results, additional financing needs and any restrictions arising from preferred stock or the merger agreement.
• Review customer retention and concentration, gross-margin trends, and any further goodwill or software impairment charges.