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GLOW > SEC Filings for GLOW > Form 10-Q on 6-Nov-2013All Recent SEC Filings

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Form 10-Q for GLOWPOINT, INC.


6-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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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 "SEC") 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," "may" 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 SEC with our Annual Report on Form 10-K/A filed on April 4, 2013. Forward-looking statements in this Report include, among other things:
our ability to meet commercial commitments; our ability to service debt obligations and fund operations; and our beliefs about inflation. 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-based video collaboration services and network services. We provide our customers with a tailored mix of these services to fit each customer's needs. More than 1,000 different organizations in 96 countries use Glowpoint services to collaborate with colleagues, business partners and customers more effectively.

Our video collaboration services include: i) Glowpoint NowTM, a reservationless videoconferencing service that allows users to collaborate via video on-demand from virtually any device, including web browsers; ii) managed videoconferencing, a high-touch, concierge-based managed service whereby Glowpoint sets up and manages customer videoconferences; and iii) video meeting suites, which allow our customers to conduct meetings and events in over 4,000 video conference rooms across 1,300 cities without investing in video devices or infrastructure. Glowpoint fully manages the videoconferences held in these suites.

Our network services provide our customers with the flexibility to select specialized solutions or converge multi-service applications on a single network infrastructure to increase bandwidth efficiency and dynamic allocation. Our network services are offered through our cloud based platform in an effort to make it easier to manage and share real-time information, spread job responsibilities and external resources while enabling stronger continuity of service and better planning for predictable peaks and valleys of the enterprise.

We also offer professional services, including video communication services for broadcast/media content acquisition and remote analyst contribution for live-to-air or live-to-tape production that enable studios to broadcast or stream their media with solutions for mobile, video, and live events. Broadcasters rely on our platform and service delivery to deliver breaking news information.

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 nine months ended September 30, 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 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 SEC with our Annual Report on Form 10-K/A filed on April 4, 2013.

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Results of Operations
Nine and Three Months Ended September 30, 2013 (the "2013 Period" and the "2013 Quarter", respectively) compared to Nine and Three Months Ended September 30, 2012 (the "2012 Period" and the "2012 Quarter", respectively) The results of operations for the 2012 Period and 2012 Quarter do not include the results of Affinity since the acquisition closed on October 1, 2012 (see Note 3 to the condensed consolidated financial statements attached hereto). Revenue. Total revenue increased $5,446,000 to $25,553,000 in the 2013 Period from $20,107,000 in the 2012 Period. This increase is attributable to revenue contribution of $6,387,000 from Affinity in the 2013 Period partially offset by a decrease of $941,000 in revenue from the pre-existing business as discussed below.
Total revenue increased $1,752,000 to $8,313,000 in the 2013 Quarter from $6,561,000 in the 2012 Quarter. This increase is attributable to revenue contribution of $1,973,000 from Affinity in the 2013 Quarter partially offset by a decrease of $221,000 in revenue from the pre-existing business as discussed below.
Pro-forma revenue for the 2012 Period and 2012 Quarter, assuming the Affinity acquisition closed on January 1, 2012 (the "Pro-forma 2012 Period" and "Pro-forma 2012 Quarter", respectively), was $28,133,000 and $9,114,000, respectively (see unaudited Pro-forma results in Note 3 to our condensed consolidated financial statements attached hereto). Revenue for the Pro-forma 2012 Period of $28,133,000 includes revenue from Affinity of $8,026,000. Revenue for the Pro-forma 2012 Quarter of $9,114,000 includes revenue from Affinity of $2,553,000.
Total revenue decreased $2,580,000 to $25,553,000 in the 2013 Period from $28,133,000 in the Pro-forma 2012 Period. This decrease in total revenue is attributable to a decrease in revenue from Affinity of $1,639,000 and a decrease in revenue from the pre-existing business of $941,000 as discussed below. The following table summarizes the changes in the components of our revenue (in thousands):

                           Nine Months Ended September 30,                    Three Months Ended September 30,
                                                     Pro-forma 2012                                     Pro-forma 2012
                   2013 Period       2012 Period         Period       2013 Quarter     2012 Quarter         Quarter
Revenue
Managed services  $     14,954     $       9,705     $     16,791     $     4,820     $       3,204     $       5,400
Network services         9,145             9,168            9,715           3,056             2,998             3,170
Professional and
other services           1,454             1,234            1,627             437               359               544
Total revenue     $     25,553     $      20,107     $     28,133     $     8,313     $       6,561     $       9,114

Revenue for managed services, which represents video collaboration services, increased $5,249,000 to $14,954,000 in the 2013 Period, from $9,705,000 in the 2012 Period. This increase is attributable to revenue contribution of $5,793,000 from Affinity in the 2013 Period, partially offset by a decrease of $544,000 primarily related to a decline in usage-based video collaboration services. Revenue for managed services increased $1,616,000 to $4,820,000 in the 2013 Quarter, from $3,204,000 in the 2012 Quarter. This increase is attributable to revenue contribution of $1,782,000 from Affinity in the 2013 Quarter, partially offset by a $166,000 decrease primarily related to a decline in usage based video collaboration services. Revenue for managed services decreased $1,837,000 to $14,954,000 in the 2013 Period, from $16,791,000 in the Pro-forma 2012 Period. This decrease is attributable to: (i) a decrease of $1,293,000 in managed services revenue from Affinity, primarily relating to a decline in the use of video meeting suites, and (ii) a decrease of $544,000 primarily related to a decline in usage based video collaboration services.

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Revenue for managed services decreased $580,000 to $4,820,000 in the 2013 Quarter, from $5,400,000 in the Pro-forma 2012 Quarter. This decrease is attributable to: (i) a decrease of $414,000 in managed services revenue from Affinity, primarily relating to a decline in the use of video meeting suites, and (ii) a decrease of $166,000 primarily related to a decline in usage based video collaboration services.
Revenue for network services decreased $23,000 to $9,145,000 in the 2013 Period from $9,168,000 in the 2012 Period. This decrease is attributable to a decrease of $600,000 in revenue from the pre-existing business partially offset by revenue contribution of $577,000 from Affinity in the 2013 Period. Revenue for network services increased $58,000 to $3,056,000 in the 2013 Quarter, from $2,998,000 in the 2012 Quarter. The increase is attributable to revenue contribution of $190,000 from Affinity in the 2013 Quarter partially offset by a decrease of $132,000 in revenue from the pre-existing business. The decreases in network services revenue from the pre-existing business for both the 2013 Period and 2013 Quarter as compared to the same periods in 2012 are primarily attributable to customer disconnects. Revenue for Network Services for the Pro-forma 2012 Period and for the Pro-forma 2012 Quarter was $9,715,000 and $3,170,000, respectively. The decreases in revenue for network services from the Pro-forma 2012 Period and Pro-forma 2012 Quarter as compared to the 2013 Period and 2013 Quarter were primarily attributable to customer disconnects.

Revenue for professional and other services, which represent non-recurring services and equipment sales, increased $220,000 to $1,454,000 in the 2013 Period from $1,234,000 in the 2012 Period. This increase is attributable to an increase of $203,000 in revenue from the pre-existing business in addition to revenue contribution of $17,000 from Affinity in the 2013 Period. Revenue for professional and other services increased $78,000 to $437,000 in the 2013 Quarter, from $359,000 in the 2012 Quarter. This increase is primarily attributable to an increase of $77,000 in revenue from the pre-existing business. Revenue for professional and other services for the 2013 Period and 2013 Quarter were slightly lower as compared to the Pro-forma 2012 Period of $1,627,000 and the Pro-forma 2012 Quarter of $544,000, respectively.

Network and Infrastructure Expenses. Network and infrastructure expenses decreased $36,000 to $6,261,000 in the 2013 Period from $6,297,000 in the 2012 Period, and increased $77,000 to $2,153,000 in the 2013 Quarter from $2,076,000 in the 2012 Quarter. 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 $3,839,000 to $9,101,000 in the 2013 Period from $5,262,000 in the 2012 Period, and $1,157,000 to $2,958,000 in the 2013 Quarter from $1,801,000 in the 2012 Quarter. Global managed services expenses include all costs for delivering and servicing our managed services, such as customer service operations, internal costs of maintaining the network and infrastructure, and the development and implementation of operating support systems and associated hardware enhancements. These increases are primarily attributable to the acquisition of Affinity and relate to the increases in revenue for these periods.
Sales and Marketing Expenses. Sales and marketing expenses decreased $20,000 to $2,934,000 in the 2013 Period from $2,954,000 in the 2012 Period, and $222,000 to $868,000 in the 2013 Quarter from $1,090,000 in the 2012 Quarter. These decreases are primarily attributable to lower personnel costs.
General and Administrative Expenses. General and administrative expenses include direct corporate expenses and costs of personnel in the various corporate support categories, including executive, finance, legal, human resources and information technology. General and administrative expenses increased by $2,160,000 to $6,544,000 in the 2013 Period from $4,384,000 in the 2012 Period. This increase is primarily attributable to the following: (i) severance charges of $696,000 related primarily to the separation of our former Chief Executive Officer, Chief Financial Officer, General Counsel and certain other employees during the 2013 Period, (ii) an asset impairment charge of $680,000 during the 2013 Period for property and equipment no longer being utilized in the Company's business, (iii) an increase in stock-based compensation expense of $413,000,
(iv) an increase of $281,000 related to administrative expenses associated with Affinity, (v) an increase of $112,000 related to sales tax expenses, partially offset by a decrease in acquisition costs related to the Affinity acquisition of $202,000. General and administrative expenses increased by $14,000 to $1,746,000 in the 2013 Quarter from $1,732,000 in the 2012 Quarter. This increase is primarily attributable to the following: (i) severance charges of $289,000 recorded in the 2013 Quarter, (ii) an asset impairment charge of $141,000 during the 2013 Quarter for property and equipment no longer being

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utilized in the Company's business, and (iii) an increase of $121,000 related to administrative expenses associated with Affinity, partially offset by (i) a decrease in acquisition costs related to the Affinity acquisition of $441,000 and (ii) a decrease in stock-based compensation expense of $58,000. Depreciation and Amortization Expenses. Depreciation and amortization expenses increased $850,000 to $2,151,000 in the 2013 Period from $1,301,000 in the 2012 Period, and $257,000 to $693,000 in the 2013 Quarter from $436,000 in the 2012 Quarter. These increases are primarily attributable to amortization of intangible assets related to the acquisition of Affinity of $940,000 and $311,000 during the 2013 Period and 2013 Quarter, respectively.
Loss from Operations. The Company generated a loss from operations of $1,438,000 in the 2013 Period which represented an increase of $1,347,000 from the loss from operations of $91,000 in the 2012 Period. This increase in our loss from operations is primarily attributable to increases in operating expenses partially offset by an increase in revenue, as discussed above. Loss from operations decreased $469,000 to $105,000 in the 2013 Quarter from $574,000 in the 2012 Quarter. This decrease in our loss from operations is primarily attributable to an increase in revenue partially offset by an increase in operating expenses, as discussed above.
Interest and Other Expense, Net. Interest and other expense, net in the 2013 Period was $1,248,000, which was comprised of interest charges on our outstanding debt of $898,000, amortization of deferred financing costs of $242,000 and amortization of debt discount of $108,000. Interest and other expense in the 2012 Period was $76,000, which principally reflected $43,000 of interest charges from vendors and $33,000 of amortization of financing charges related to certain private placement transactions the Company completed during the 2012 Period. This increase in interest and other expense is attributable to the debt incurred in October 2012 in connection with the Affinity acquisition (see Note 6 to the condensed consolidated financial statements attached hereto). Interest and other expense, net in the 2013 Quarter was $446,000, which was comprised of interest charges on our outstanding debt of $286,000, amortization of deferred financing costs of $121,000 and amortization of debt discount of $39,000. Interest and other expense in the 2012 Quarter was $18,000, which principally reflected $14,000 of interest charges from vendors. This increase in interest and other expense is attributable to the debt incurred in October 2012 in connection with the Affinity acquisition (see Note 6 to the condensed consolidated financial statements attached hereto).
Income Taxes. There was no provision for income taxes recorded in the 2013 Period, 2013 Quarter and 2012 Quarter. We recorded a $5,000 provision for income taxes for certain minimum taxes in the 2012 Period.
Net Loss. Net loss for the 2013 Period was $2,686,000 or $0.09 per basic and diluted share, an increase of $2,514,000 from net loss of $172,000 in the 2012 Period. Net loss for the 2013 Quarter was $551,000 or $0.01 per basic and diluted share, a decrease of $41,000 from net loss of $592,000 in the 2012 Quarter. The increases in our net loss for the 2013 Period is primarily attributable to the increases in operating expenses and interest and other expense, partially offset by the increases in revenue, as discussed above. Preferred Stock Dividends. Preferred stock dividends increased to $25,000 in the 2013 Period from $0 in the 2012 Period. Preferred stock dividends for the 2013 Quarter represent a negative amount of $185,000, resulting from the reversal of previously accrued dividends in the 2013 Quarter (as discussed in Note 8 to the condensed consolidated financial statements attached hereto). Preferred stock dividends were $0 in the 2012 Quarter. Dividends commenced accruing on January 1, 2013 (as discussed in Note 8).
Net Loss Attributable to Common Stockholders. Net loss attributable to common stockholders for the 2013 Period was $2,711,000, an increase of $2,539,000 from the net loss attributable to common stockholders of $172,000 in the 2012 Period. This increase in our net loss attributable to common stockholders is primarily attributable to the increase in operating expenses and interest and other expense, partially offset by the increase in revenue, as discussed above. Net loss attributable to common stockholders for the 2013 Quarter was $366,000, a decrease of $226,000 from the net loss attributable to common stockholders of $592,000 in the 2012 Quarter. This decrease in our net loss attributable to common stockholders is primarily attributable to the increase in revenue partially offset by the increases in our operating expenses and interest and other expense.

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Liquidity and Capital Resources

As of September 30, 2013, we had $2,051,000 of cash and working capital of $51,000. Our cash balance as of September 30, 2013 includes restricted cash of $242,000 (as discussed in Note 4). For the nine months ended September 30, 2013, we generated a net loss of $2,686,000 and net cash provided by operating activities of $1,812,000. We generated cash from operations even though we incurred a net loss due to certain non-cash expenses and changes in working capital.

Net cash used in investing activities for the nine months ended September 30, 2013 was $751,000, primarily related to the purchase of property and equipment. Net cash used in financing activities for the nine months ended September 30, 2013 was $1,228,000, attributable to net payments of $780,000 on our Comerica Revolver, issuance costs related to our debt agreements entered into in 2012 and principal payments on capital lease obligations.

On October 17, 2013, the Company entered into the Main Street Loan Agreement (the "Main Street Loan Agreement") by and among the Company and its subsidiaries, and Main Street Capital Corporation, as lender and as administrative agent and collateral agent for itself and the other lenders from time to time party thereto. The Main Street Loan Agreement provides for an $11,000,000 senior secured term loan facility and a $2,000,000 senior secured revolving loan facility. At closing, the Company borrowed $9,000,000 under the term loan and approximately $193,000 on the revolving loan facility. The proceeds of the $9,000,000 term loan were used to repay the existing $6,500,000 Escalate Term Loan and $2,000,000 Comerica Term Loan (further described in Note
6), in addition to facility fees and expenses. All borrowings under the Main Street Loan Agreement mature on October 17, 2018, unless sooner terminated as provided in the Main Street Loan Agreement. The Main Street Loan Agreement provides that term loan borrowings bear interest at 12% and revolving loan borrowings bear interest at 8%. Interest payments on the outstanding borrowings under the term loan and revolving loan are due monthly. The Company is required to make quarterly principal payments on the term loan as follows: (i) starting on February 15, 2014 to April 15, 2015 in an amount equal to 33% of Excess Cash Flow generated by the Company (as defined in the Loan Agreement) during the trailing fiscal quarter and (ii) from August 15, 2015 to August 15, 2018 in an amount equal to 50% of Excess Cash Flow generated by the Company during the trailing fiscal quarter. Monthly interest payments on the $9,000,000 term loan over a twelve month period, assuming no principal payments are made during such period, would approximate an aggregate amount of $1,080,000. The Company may prepay borrowings under the Main Street Loan Agreement at any time without premium or penalty, subject to certain notice and minimum prepayment requirements.

As of September 30, 2013, the current portion of long-term debt on the Company's condensed consolidated balance sheet was $917,000 and was related to the scheduled principal payments on our $2,000,000 term loan with Comerica Bank (the "Comerica Term Loan"), as summarized in Note 6. With the repayment of the Comerica Term Loan on October 17, 2013, the Company improved its working capital position as the current portion of long-term debt of $917,000 as of September 30, 2013 is no longer outstanding.

Based on our current projection of revenue, expenses and cash flows, 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. In the event we need to raise additional capital to fund operations and provide growth capital, we have historically been able to raise capital in private placements as needed. 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 September 30, 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 a non-GAAP financial measure and 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 were 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. The Main Street Loan Agreement also contains financial covenants,

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including a fixed charge coverage ratio covenant and a debt to Adjusted EBITDA ratio covenant. 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 loss to Adjusted EBITDA is shown below:

                                       Nine Months Ended September 30,          Three Months Ended September 30,
                                           2013                2012                 2013                   2012
Net loss                            $        (2,686 )     $        (172 )   $           (551 )       $         (592 )
Provision for income taxes                        -                   5                    -                      -
Depreciation and amortization                 2,151               1,301                  693                    436
Interest and other expense, net               1,248                  76                  446                     18
EBITDA                                          713               1,210                  588                   (138 )
Stock-based compensation                        861                 448                  171                    229
Severance                                       696                   -                  289                      -
Acquisition costs                               278                 480                   40                    480
Asset impairment                                680                   -                  141                      -
Adjusted EBITDA                     $         3,228       $       2,138     $          1,229         $          571

Inflation

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

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