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GLOW > SEC Filings for GLOW > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for GLOWPOINT, INC.


9-May-2013

Quarterly Report


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" or the "Company"), 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 (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 that 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," as well as our consolidated financial statements and the footnotes thereto, for the fiscal year ended December 31, 2012 as filed with the Commission with our Annual Report on Form 10-K/A filed on April 4, 2013.
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") is a provider of cloud and managed videoconferencing services. Our services, delivered via our cloud-based OpenVideo® platform, are securely accessible via any network (private or public) and are technology-agnostic. OpenVideo® is a cloud platform that offers telepresence, video and unified communications and collaboration users a way to meet and communicate across the varying hardware/software platforms and carrier networks in a secure and seamless fashion. 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 (as discussed in Note 3 to our condensed consolidated financial statements attached hereto). As a result of the acquisition, Glowpoint now offers a comprehensive suite of cloud and managed video services, consisting of the following: (i) monitoring and management, and collaboration services, resulting in an end-to-end cloud and managed solution for telepresence, conference room, desktop and mobile solutions, and video infrastructure; (ii) network services that provide our customers with the flexibility to either source the entire video network from a single provider, maintain existing networks and extend a logical connection to the OpenVideo® cloud or bring bandwidth to Open Video® datacenters; (iii) Affinity public video suites that provide remote access to video communication services for everyday business meetings and events; and (iv) professional and other services consisting of video communication solutions for broadcast/media content acquisition and event services.

Glowpoint's suite of cloud and managed video services focus on multi-tiered help desk support for mixed manufacturer video environments and complements Affinity's standing as a specialized service provider of tailored, business-class meetings for professional service organizations across the world. With the acquisition of Affinity, we new employ approximately 130 employees providing clients with a wide range of products and services across the entire video spectrum, from proprietary technology to design, implementation, 24x7 monitoring and mission critical support.

The Company was formed as a Delaware corporation in May 2000. The Company operates in one segment and therefore segment information is not presented.

Critical Accounting Policies

There have been no changes to our critical accounting policies in the three months ended March 31, 2013. 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

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of Financial Condition and Results of Operations" included in Item 7, as well as in our consolidated financial statements and the footnotes thereto for the fiscal year ended December 31, 2012, as filed with the Commission with our Annual Report on Form 10-K filed on April 1, 2013.

Results of Operations
Three Months Ended March 31, 2013 (the "2013 Period") compared to Three Months Ended March 31, 2012 (the "2012 Period") Revenue. Total revenue increased $1,758,000, or 26.1%, in the 2013 Period to $8,504,000 from $6,746,000 in the 2012 Period. This increase is attributable to the 2013 Period including the results of Affinity whereas the 2012 Period does not include Affinity's results since the acquisition closed on October 1, 2012. Pro-forma revenue for the 2012 Period, assuming the Affinity acquisition closed on January 1, 2012 (the "Pro-forma 2012 Period"), was $9,442,000 (see unaudited pro-forma results in Note 3 to our condensed consolidated financial statements attached hereto). The following is a discussion of the changes in the components of our revenue (in thousands):

                                                                                                   Pro-forma 2012
                        2013 Period       2012 Period      Increase (Decrease)       % Change          Period
Revenue
Managed services
combined              $       5,136     $       3,297     $            1,839            55.8  %   $         5,752
Network services              3,068             3,140                    (72 )          (2.3 )              3,332
Professional and
other services                  300               309                     (9 )          (2.9 )                358
Total revenue         $       8,504     $       6,746     $            1,758            26.1  %   $         9,442

• 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 55.8% to $5,136,000 in the 2013 Period, from $3,297,000 in the 2012 Period. Revenue for managed services combined accounted for 60.4% of our total revenue in the 2013 Period compared to 48.9% for the 2012 Period. The increase in revenue for managed services combined was primarily attributable to the acquisition of Affinity. Revenue for managed services combined for the Pro-forma 2012 Period was $5,752,000. The $616,000 decrease from the Pro-forma 2012 Period to the 2013 Period was primarily attributable to a $426,000 decrease in revenue generated by the Affinity public video suites.

• Revenue for network services, which represents network sales and related services generally tied to contracts of 12 months or more, decreased 2.3% to $3,068,000 in the 2013 Period from $3,140,000 in the 2012 Period. Revenue for network services accounted for 36.1% of total revenue in the 2013 Period compared to 46.5% for the 2012 Period. Revenue for Network Services for the Pro-forma 2012 Period was $3,332,000. The decrease from both the 2012 and Pro-forma 2012 Period to the 2013 Period was primarily attributable to customer disconnects.

• Revenue for professional and other services, which represent non-recurring services, was $300,000 in the 2013 Period, relatively flat as compared to $309,000 in the 2012 Period. Revenue for professional and other services accounted for 3.5% of revenue in the 2013 Period compared to 4.6% for the 2012 Period. Revenue for professional and other services for the Pro-forma 2012 Period was $358,000.

Network and Infrastructure Expenses. Network and infrastructure expenses were $2,002,000 in the 2013 Period as compared to $2,076,000 in the 2012 Period, a decrease of $74,000. 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 expense category also includes the cost for taxes which have been billed to customers.
Global Managed Services Expenses. Global managed services expenses increased 88.1% to $3,190,000 in the 2013 Period from $1,696,000 in the 2012 Period. Global managed services expenses include all costs for delivering and servicing our

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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 is primarily attributed to the acquisition of Affinity and corresponds to the increase in revenue.
Sales and Marketing Expenses. Sales and marketing expenses were $1,069,000 in the 2013 Period as compared to $986,000 in the 2012 Period, an increase of $83,000. This increase is primarily attributed to increased sales and marketing expenses associated with the Affinity acquisition.
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 by $1,737,000 to $3,087,000 in the 2013 Period from $1,350,000 in the 2012 Period. This increase is attributable to the following factors: (i) an increase in stock-based compensation expense of $559,000, (ii) an asset impairment charge of $435,000 during the 2013 Period for network equipment no longer being utilized in the Company's business, (iii) severance charges of $399,000 related primarily to the separation of our former Chief Executive Officer, Chief Financial Officer and certain other employees during the 2013 Period, and (iv) acquisition costs related to the Affinity acquisition of $239,000.
Depreciation and Amortization Expenses. Depreciation and amortization expenses increased $318,000 to $758,000 in the 2013 Period from $440,000 in the 2012 Period. This increase is primarily attributable to amortization of intangible assets of $314,000 during the 2013 Period related to the acquisition of Affinity.
Income (Loss) from Operations. Loss from operations for the 2013 Period was $1,602,000, a decrease of $1,800,000 from the income from operations of $198,000 in the 2012 Period. The primary drivers of the decrease in income were due to the increase in general and administrative expenses as discussed above. Interest and Other Expense, Net. Interest and other expense, net in the 2013 Period was $383,000, which was comprised of $292,000 of interest charges on our outstanding debt and $61,000 of the amortization of financing charges related to our Comerica Loans and other debt. Interest and other expense in the 2012 Period was $26,000, which principally reflected $11,000 of interest charges from vendors and $15,000 of the amortization of financing charges related to certain private placement transactions in the Company completed during the 2012 Period. The increase from the 2012 Period to the 2013 Period in interest and other expense was attributable to the debt incurred in October 2012 in connection with the Affinity acquisition (see Note 4 to the condensed consolidated financial statements attached hereto).
Net Income (Loss). Net loss for the 2013 Period was $1,985,000 or, $0.07 per basic and diluted share, a decrease of $2,157,000 from net income of $172,000 in the 2012 Period. The primary drivers of the increase were due to the increases in general and administrative expenses, as well as interest expense, as discussed above.
Preferred Stock Dividends. Preferred stock dividends increased by $105,000 in the 2013 Period to $105,000 from $0 in the 2012 Period as dividends commenced accruing on January 1, 2013 (as discussed in Note 6 to our consolidated financial statements attached hereto).
Net income (Loss) Attributable to Common Stockholders. Net loss attributable to common stockholders for the 2013 Period was $2,090,000, a decrease of $2,262,000 from the net income attributable to common stockholders of $172,000 in the 2012 Period. The primary drivers of the decrease were due to the increases in general and administrative expenses, as well as interest expense and preferred dividends, as discussed above.
Liquidity and Capital Resources

As of March 31, 2013, we had $2,166,000 of cash and positive working capital of $548,000. For the three months ended March 31, 2013, we generated a net loss of $1,985,000 and net cash provided by operating activities of $264,000. We generated cash from operations even though we incurred a net loss due to changes in working capital and certain non-cash expenses.

Net cash used in investing activities for the three months ended March 31, 2013 was $124,000, primarily related to the purchase of property and equipment. Net cash used in financing activities for the three months ended March 31, 2013 was

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$192,000, attributable to issuance costs related to our debt agreements entered into in 2012 and principal payments on capital lease obligations.

The Company entered into certain debt agreements in connection with the Affinity acquisition in October 2012 (see Note 4 to our condensed consolidated financial statements attached hereto). As of March 31, 2013, the current portion of long-term debt on the Company's condensed consolidated balance sheet was $1,197,000, which includes $780,000 of outstanding borrowings under our Comerica Revolver, maturing on April 1, 2014, and $417,000 of scheduled principal payments under our other debt agreements summarized in Note 4. As of March 31, 2013, interest payments under the Company's debt agreements over the next twelve months are expected to approximate $1,122,000. As of March 31, 2013, the Company had unused borrowing availability of $419,000 under the Comerica Revolver.

Pursuant to the terms of our Series A-2 Preferred Stock and Series B-1 Preferred Stock, the Company began accruing dividends as of January 1, 2013 of approximately $105,000 per quarter, however, the company is not obligated to begin paying such dividends in cash until the Company's cash balance exceeds approximately $4,174,000.

Based on our current projection of revenue and expenses, the Company believes that it has, and will have, sufficient resources and cash flow to service its debt obligations and fund its operations for at least the next twelve months following the filing of this Quarterly Report on Form 10-Q. 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.

Off-Balance Sheet Arrangements

As of March 31, 2013, we had no off-balance sheet arrangements. Adjusted EBITDA

Adjusted EBITDA is defined as net income (loss) before depreciation, amortization, net interest expense, taxes, severance, acquisition costs, stock-based compensation and asset impairment. 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. The Comerica Loans and Escalate Term Loan are subject to certain financial covenants, including, without limitation, covenants that require the Company to maintain a total funded debt to Adjusted EBITDA ratio, to maintain a senior funded debt to Adjusted EBITDA ratio and to maintain a fixed charge coverage ratio as defined in the agreement. 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 net income (loss) to Adjusted EBITDA is shown below:

                                 Three Months Ended March 31,
                                      2013                2012
Net income (loss)             $          (1,985 )       $   172
Depreciation and amortization               758             440
Interest and other expense                  383              26
EBITDA                                     (844 )           638
Stock-based compensation                    608              79
Severance                                   399               -
Acquisition costs                           239               -
Asset impairment                            435               -
Adjusted EBITDA               $             837         $   717

Inflation

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

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