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GLOW > SEC Filings for GLOW > Form 10-K on 1-Apr-2013All Recent SEC Filings

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Form 10-K for GLOWPOINT, INC.


1-Apr-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated balance sheets as of December 31, 2012 and 2011 and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 2012 and 2011 and the related notes attached hereto. All statements contained herein that are not historical facts, including, but not limited to, statements regarding anticipated future capital requirements, our future development plans, our ability to obtain debt, equity or other financing, and our ability to generate cash from operations, are based on current expectations. The discussion of results, causes and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future.

Overview

Glowpoint, Inc. ("Glowpoint" or "we" or "us" or the "Company") is a provider of cloud and managed visual communication services. Our services, delivered via our cloud-based OpenVideo® platform (as discussed in further detail below), are securely accessible via any network (private or public) and are technology-agnostic. The Company delivers services to more than 600 different enterprises in over 68 countries supporting thousands of video endpoints, immersive telepresence rooms, and infrastructure for business-quality, real-time, two-way visual communications. On October 1, 2012, the Company completed the acquisition of privately held Affinity VideoNet, Inc. ("Affinity"), a provider of public videoconferencing rooms and managed videoconferencing services to professional service organizations globally

During 2012, we continued our strategy to transition Glowpoint to a cloud-based services company, focusing our sales and marketing efforts on growing the market awareness and adoption of our next-generation virtual meeting solutions based on ourOpenVideo® architecture. Our continuing operations reflect only our meeting solutions. As a result and except as provided herein, the following discussion and analysis reflects our results from continuing operations.

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Key highlights of our financial and strategic accomplishments for 2012 include:

• Generated 4.5% growth in our net revenues over 2011,

• Expanded our services and customer base by over 1,000 customers through the acquisition of Affinity,

• Launched OpenVideo Room as our next generation platform for reservationless video conferencing.

Our primary corporate objectives in 2013 are focused on continuing to:

• Expand our global distribution through a more focused sales approach, add new agents, resellers and strategic alliances with service providers worldwide, in order to further our market reach and accelerate customer awareness and adoption of our services;

• Develop and release additional upgrades and enhancements to OpenVideo® to increase functionality, improve competitive positioning and grow market opportunities; and

• Transition our network-only customers to a more converged set of services that provide a richer, more productive user experience.

We believe these strategic initiatives will increase the addressable market opportunity for Glowpoint and our solutions.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Our significant accounting policies are described in Note 2 to our consolidated financial statements attached hereto. We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition. Revenue billed in advance for monitoring and management services is deferred until the revenue has been earned, which is when the related services have been performed. Other service revenue, including amounts passed through based on surcharges from our telecom carriers, related to the network services and collaboration services are recognized as service is provided. As the non-refundable, upfront installation and activation fees charged to the subscribers do not meet the criteria as a separate unit of accounting, they are deferred and recognized over the 12 to 24 month period estimated life of the customer relationship. Revenue related to professional services is recognized at the time the services are performed, and presented as required by ASC Topic 605 "Revenue Recognition." Revenues derived from other sources are recognized when services are provided or events occur.

Allowance for Doubtful Accounts. We perform ongoing credit evaluations of our customers. We record an allowance for doubtful accounts based on specifically identified amounts that are believed to be uncollectible. We also record additional allowances based on our aged receivables, which are determined based on historical experience and an assessment of the general financial conditions affecting our customer base. If our actual collections experience changes, revisions to our allowance may be required. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. We do not obtain collateral from our customers to secure accounts receivable.

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 as required by ASC topic 360 "Property, Plant and Equipment." 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, then the related assets will be written down to fair value. No impairment losses were recorded during 2012 and 2011 except for the amounts discussed below under capitalized software costs.

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" on our consolidated balance sheets and are amortized over three to four years. Software costs that do not meet capitalization criteria are expensed as incurred. During 2011 we recorded an impairment loss of $23,000 for certain costs previously capitalized. No related impairment losses were recorded during 2012.

Goodwill. 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". The test for impairment will be conducted annually or more frequently if events occur or circumstances change indicating that the fair value of the goodwill

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may be below its carrying amount. The Company determined that no events occurred or circumstances changed during the three months ended December 31, 2012 that would indicate that the fair value of goodwill may be below its carrying amount. However, if market conditions deteriorate, or if the Company is unable to execute on its strategies, it may be necessary to record impairment charges in the future.

Intangible Assets. Intangible assets include acquired customer relationships, affiliate network and trademarks. Intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from five years to twelve years in accordance with ASC Topic 350 "Intangibles - Goodwill and Other - Testing Indefinite-Lived Intangible Assets for Impairment". Long-lived assets, including intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

Results of Operations
Year Ended December 31, 2012 ("2012 Year") versus Year Ended December 31, 2011
("2011 Year")
Revenue. Total revenue increased $1,264,000, or 4.5%, in the 2012 Year to $29,070,000 from $27,806,000 in the 2011 Year. The following are the changes in the components of our revenue:
• Revenue for Managed Services Combined, which represents subscription (monitoring and management) services generally tied to contracts of 12 months or more and usage based collaboration services, increased 16.5% to $14,932,000 in the 2012 Year, from $12,816,000 in the 2011 Year. Revenue for Managed Services Combined accounted for 51.4% of our total revenue in the 2012 Year compared to 46.1% for the 2011 Year. The increase in revenue for Managed Services Combined was primarily attributable to the acquisition of Affinity.

• Revenue for network services, which represents network sales and related services generally tied to contracts of 12 months or more, decreased 7.6% to $12,366,000 in the 2012 Year from $13,387,000 in the 2011 Year. Revenue for network services accounted for 42.5% of total revenue in the 2012 Year compared to 48.1% for the 2011 Year. The decrease in revenue for network services was primarily attributable to customers disconnecting or transitioning to managed service in their portfolio of Glowpoint services.

• Revenue for professional and other services, which represent non-recurring services, increased 10.5% to $1,772,000 in the 2012 Year from $1,603,000 in the 2011 Year. Revenue for professional and other services accounted for 6.1% of revenue in the 2012 Year compared to 5.8% for the 2011 Year. The increase in revenue for professional and other services was primarily attributable to the acquisition of Affinity.

                                                 Year Ended December 31,
                                                      (in thousands)
                                  2012        2011       Increase (Decrease)     % Change
Revenue
Managed Services Combined       $ 14,932    $ 12,816    $            2,116         16.5  %
Network services                  12,366      13,387                (1,021 )       (7.6 )
Professional and other services    1,772       1,603                   169         10.5
Total revenue                   $ 29,070    $ 27,806    $            1,264          4.5  %

Network and Infrastructure Expenses. Network and infrastructure expenses increased 1.3% to $9,513,000 in the 2012 Year from $9,388,000 in the 2011 Year. Network and infrastructure expenses include all external costs, exclusive of depreciation and amortization, related to the Glowpoint network and hosting facilities for our cloud-based infrastructure. This operating

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expense category also includes the cost for taxes which have been billed to customers. The increase was primarily attributed to the acquisition of Affinity. Global Managed Services Expenses. Global managed services expenses increased 1.7% to $7,477,000 in the 2012 Year from $7,350,000 in the 2011 Year. Global managed services expenses include all costs for delivering and servicing our managed services, such as delivering customer service operations, internal costs of maintaining the network and infrastructure, and the development and implementation of operating support systems and associated hardware enhancements. The increase was primarily attributed to the acquisition of Affinity.
Sales and Marketing Expenses. Sales and marketing expenses increased 19.2% to $4,180,000 in the 2012 Year from $3,506,000 in the 2011 Year. The increase was primarily attributed to investments in expanding the sales force.
General and Administrative Expenses. General and administrative expenses, which include direct corporate expenses related to costs of personnel in the various corporate support categories, including executive, finance, human resources and information technology, increased 13.3% to $6,411,000 in the 2012 Year from $5,656,000 in the 2011 Year. The increase was primarily due to expenses related with the acquisition of Affinity.
Depreciation and Amortization Expenses. Depreciation and amortization expenses increased 45.2% to $2,085,000 in the 2012 Year from $1,436,000 in the 2011 Year, due to purchases of property and equipment exceeding the retirement of these assets.
Income (Loss) from Operations. Income from operations decreased by $1,066,000 in the 2012 Year to a $596,000 loss from $470,000 income in the 2011 Year. The primary drivers of the decrease were due to acquisition related expenses of $857,000 and a decline in revenue associated with network services. Interest and Other Expense. Interest and other expense in the 2012 Year was $574,000, which principally reflected $421,000 of interest charges on outstanding debt (see new debt acquired as discussed in Note 6 to our consolidated financial statement attached hereto) and $153,000 of the amortization of financing charges related to our Revolving Loan Facility and other debt. Interest and other expense in the 2011 Year was $129,000, which principally reflected $67,000 of interest charges from vendors and $62,000 of the amortization of financing charges related to certain private placement transactions in the Company completed during the 2011 Year.
Income (Loss) from Continuing Operations. Income from continuing operations decreased by $1,511,000 to a $1,170,000 loss in the 2012 Year from $341,000 in the 2011 Year. This decrease was due to acquisition related expenses of $857,000 and a reduction in revenue as noted above.
Income from Discontinued Operations. Income from discontinued operations decreased by $28,000 to $0 in the 2012 Year from $28,000 in the 2011 Year. This decrease was a result of the transfer of our ISDN resale business completed in the third quarter of 2011.
Income Taxes. As a result of our current taxable income, a $2,221,000 benefit from income taxes was recorded for the tax benefit related to the amortization of the intangible assets acquired through Affinity in the 2012 Year. There was no provision recorded in the 2011 Year. 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 our historical results and restrictions on the usage of the net operating loss carry forwards. Net Income (Loss). Net Income increased by $682,000 to $1,051,000 or, or $0.04 per basic and diluted share, in the 2012 Year. The primary drivers of the increase were due to the tax benefit as noted above. Liquidity and Capital Resources

For the year ended December 31, 2012, we had net income of $1,051,000 and a positive cash flow from operations of $821,000. As of December 31, 2012, we had $2,218,000 of cash, positive working capital of $711,000 and an accumulated deficit of $163,648,000. In June 2012, the Company entered into the Second Loan Modification Agreement (as amended, the "Revolving Loan Facility") with Silicon Valley Bank ("SVB") pursuant to which the Company may borrow up to $5,000,000

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for working capital purposes (as discussed in Note 6 to our consolidated financial statements attached hereto). In October 2012, the Revolving Loan facility with SVB was terminated in connection with repayment of outstanding amounts due and replaced with a revolving line of credit with Comerica Bank (the "Comerica Revolver") pursuant to which the Company can borrow, for working capital needs an amount up to the lesser of (i) 80% of eligible accounts receivable and (ii) $3.0 million. The Comerica Revolver bears interest at a rate equal to the Prime Rate (as defined in the Comerica Loan Agreement) plus 2.00% and matures on April 1, 2014. As of December 31, 2012, we had unused borrowing availability of approximately $2,220,000.

Also in October 2012, Loan and Security Agreements ("Loan Agreement") were entered into with Comerica Bank and Escalate Capital Partners SBIC I, L.P. ("Escalate") in order to finance a portion of the Affinity acquisition (as discussed in Note 3 to our consolidated financial statements attached hereto). The Loan Agreement with Comerica Bank provided the Company with a $2.0 million term loan (the "Comerica Term Loan") and bears interest at a rate equal to the Prime Rate (as defined in the Comerica Loan Agreement) plus 3.00%. The Comerica Term Loan matures on November 1, 2015. The Loan Agreement with Escalate provided the Company with a $6.5 million term loan (the "Escalate Term Loan") for a term of 60 months and bears interest at a fixed rate of 12.0% per annum, with interest-only payable monthly for the first 24 months, commencing after such interest-only period, monthly payments of the outstanding principal amount, plus accrued interest, for the remainder of the term. On March 28, 2013, the Company and Comerica Bank mutually agreed to amend the Loan and Security Agreement, dated as of October 1, 2012 (the "Amendment"), which Amendment required the consent of Escalate Capital Partners SBIC I, L.P. ("Escalate"). In consideration of Escalate's consent to the Amendment and entrance into an Affirmation, the Company issued 100,000 shares of its common stock to Escalate.
The Amendment established revised financial covenants for future minimum levels of liquidity and EBITDA to be more consistent with the Company's continuing operations. The financial covenants affected by the Amendment were (i) the total funded debt to adjusted EBITDA ratio, (ii) the senior funded debt to adjusted EBITDA ratio and (iii) the fixed charge coverage ratio. The Amendment also added two new financial covenants, a minimum cash requirement and an extraordinary expenses limitation. Further, the Amendment reduced funds available to the Company under the Comerica Revolver so that advances under the Comerica Revolver cannot exceed the lesser of the Revolving Line or the Borrowing Base, less in each case any amount outstanding under the Comerica Revolver up to $1,500,000.

Pursuant to the terms of our Series A-2 Preferred Stock and Series B-1 Preferred Stock, the Company is not obligated to pay dividends on a current basis, however, must accrue them. The Company has commenced accruing dividends as of January 1, 2013 and is expected to be $420,000 for 2013.

Based primarily on our efforts to manage costs and our Loan Agreements, as amended, and Comerica Revolver, along with our cash flow projection, the Company believes that it has, and will have, sufficient cash flow to fund its operations through at least March 31, 2014. We have historically been able to raise capital in private placements as needed to fund operations and provide growth capital. There can be no assurances, however, that we will be able to raise additional capital as may be needed or upon acceptable terms, or that current economic conditions will not negatively impact us. If the current economic conditions negatively impact us and 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.

Cash Flows

At December 31, 2012, we had positive working capital of $711,000, compared to positive working capital of $477,000 at December 31, 2011, an increase of $234,000. We had $2,218,000 in cash at December 31, 2012, compared to $1,818,000 at December 31, 2011, an increase of $400,000.

Net cash provided by operating activities was $821,000 for the 2012 Year. The primary components of the funds were payments of $393,000 to reduce accrued expenses and sales taxes and regulatory fees, $316,000 decrease in prepaid expense and other current assets, and a $410,000 decrease in accounts receivable.

Cash used in investing activities in the 2012 Year was $8,291,000, which includes $7,562,000 for the acquisition of Affinity's assets and liabilities plus $740,000 for the purchase of property, equipment and leasehold improvements.

Cash provided by financing activities in the 2012 Year was comprised of $7,870,000, which includes $205,000 of costs related to our capital leases offset by $30,000 proceeds from a revolving loan facility and $8,033,000 net proceeds from long-term debt.

Adjusted EBITDA

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Adjusted EBITDA is defined as income (loss) from continuing operations before depreciation, amortization, interest expense, interest income, taxes, severance, acquisition costs and stock-based compensation. Adjusted EBITDA is not intended to replace operating income (loss), net income (loss), cash flow or other measures of financial performance reported in accordance with generally accepted accounting principles. Rather, Adjusted EBITDA is an important measure used by management to assess the operating performance of the Company. Adjusted EBITDA as defined here may not be comparable to similarly titled measures reported by other companies due to differences in accounting policies. A reconciliation of Adjusted EBITDA to net income (loss) from continuing operations is shown below:

                                                    Year Ended December 31,
                                            2012        2011      Increase (Decrease)
Income (loss) from continuing operations $ (1,170 )   $   341    $            (1,511 )
Depreciation and amortization               2,085       1,436                    649
Amortization of financing costs               153          62                     91
Interest expense                              421          67                    354
EBITDA                                      1,489       1,906                   (417 )
Stock-based compensation                      678         232                    446
Severance                                      48         349                   (301 )
Acquisition costs                             857           -                    857
Adjusted EBITDA                          $  3,072     $ 2,487    $               585

Inflation

Management does not believe inflation had a significant effect on the condensed consolidated financial statements for the periods presented.

Off-Balance Sheet Arrangements

As of December 31, 2012, we had no off-balance sheet arrangements. Recent Accounting Pronouncements

In July 2012, the FASB issued ASU 2012-02, "Intangibles- Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment". This standard is effective for annual interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. This standard provides for an optional qualitative assessment for the testing of indefinite-lived intangible asset impairment to determine whether it is more likely than not that such asset is impaired. If it is concluded that this is the case, it is necessary to perform the currently prescribed quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying value. Otherwise, the quantitative impairment test is not required. The company's adoption of this standard is not expected to have a material impact on the consolidated financial statements.

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