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GLOW > SEC Filings for GLOW > Form 10-K on 6-Mar-2014All Recent SEC Filings

Show all filings for GLOWPOINT, INC.

Form 10-K for GLOWPOINT, INC.


6-Mar-2014

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, 2013 and 2012 and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 2013 and 2012 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.

Business

Glowpoint, Inc. ("Glowpoint" or "we" or "us" or the "Company") is a provider of video collaboration services and network solutions. Our services enable our customers to use videoconferencing as an efficient and effective method of communication for their business meetings. Our customers include Fortune 1000 companies, along with small and medium enterprises in a variety of industries. We market our services globally through a multi-channel sales approach that includes direct sales and channel partners. On October 1, 2012, the Company completed the acquisition of privately held Affinity VideoNet, Inc. ("Affinity"), a service provider of public video meeting suites and managed videoconferencing. We plan to seek acquisition opportunities in the future that complement and expand our current business.

Results of Operations
Year Ended December 31, 2013 ("2013") versus Year Ended December 31, 2012
("2012")

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Revenue. Total revenue increased $4,384,000, or 15%, in 2013 to $33,454,000 from $29,070,000 in 2012. This growth was achieved from the acquisition of Affinity as our 2013 results include a full year of results related to Affinity whereas our 2012 results include only the fourth quarter of 2012 since the acquisition occurred on October 1, 2012.
Pro forma revenue for 2012, assuming the Affinity acquisition occurred on January 1, 2012, was $37,096,000. As compared to revenue for 2013 of $33,454,000, this represents a decrease of $3,642,000, or 10%. This decrease is primarily attributable to: (i) a decrease of $2,406,000 in video collaboration services, (ii) a decrease of $865,000 in network services due to customer loss and declining prices of such services and (iii) a decrease of $371,000 in professional and other services. The $2,406,000 decrease in video collaboration services is mainly attributable to a $1,761,000 decline in revenue associated with videoconference suites from 2012 to 2013 due to lower demand for this offering. We currently expect revenue for the year ending December 31, 2014 to be approximately level with 2013 as we expect to stabilize revenue across each of our service offerings.

                                        Year Ended December 31,
                                             (in thousands)
                                  2013        2012       Pro forma 2012
Revenue
Video collaboration services    $ 19,612    $ 14,932    $        22,018
Network services                  12,048      12,366             12,913
Professional and other services    1,794       1,772              2,165
Total revenue                   $ 33,454    $ 29,070    $        37,096

The following are the changes in the components of our reported revenue from 2012 to 2013:

Revenue for video collaboration services increased 31% to $19,612,000 in 2013, from $14,932,000 in 2012. Revenue for video collaboration services accounted for 59% of our total revenue in 2013 compared to 51% for 2012. The increase in revenue is attributable to the acquisition of Affinity.

Revenue for network services decreased 3% to $12,048,000 in 2013 from $12,366,000 in 2012. Revenue for network services accounted for 36% of total revenue in 2013 compared to 43% for 2012. The decrease in revenue for network services is primarily attributable to loss of customers.

Revenue for professional and other services increased 1% to $1,794,000 in 2013 from $1,772,000 in 2012. Revenue for professional and other services accounted for 5% of revenue in 2013 compared to 6% for 2012.

Cost of revenue (exclusive of depreciation and amortization). Cost of revenue, exclusive of depreciation and amortization, includes all internal and external costs related to the delivery of revenue. Cost of revenue also includes the cost for taxes which have been billed to customers. Cost of revenue increased to $19,504,000 in 2013 from $16,044,000 in 2012. Cost of revenue, as a percentage of total revenue, was 58% and 55% for 2013 and 2012, respectively. The $3,460,000 increase in cost of revenue from 2012 to 2013 is primarily attributable to: (i) the corresponding increase in revenue and (ii) an increase in our cost of revenue as a percentage of total revenue. The increase in our cost of revenue as a percentage of revenue in 2013 is primarily the result of higher personnel costs and changes in our mix of services from the Affinity acquisition.

Research and development. Research and development expenses include internal and external costs related to the development of new service offerings and features and enhancements to our existing services. Research and development decreased 30% to $662,000 in 2013 from $946,000 in 2012, primarily attributable to a decrease in personnel costs.

Sales and Marketing. Sales and marketing expenses decreased 9% to $3,812,000 in 2013 from $4,180,000 in 2012. The decrease is primarily attributable to a decrease in personnel costs due to lower headcount in sales and marketing.

General and Administrative. General and administrative expenses include direct corporate expenses related to costs of personnel in the various corporate support categories, including executive, legal, finance, human resources and information technology. General and administrative expenses increased 26% to $8,058,000 in 2013 from $6,411,000 in 2012. This increase is primarily attributable to the following: (i) severance charges of $860,000 related primarily to the separation of our former Chief Executive Officer, Chief Financial Officer, General Counsel and certain other employees during 2013, (ii) an asset impairment

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charge of $680,000 during 2013 for property and equipment no longer being utilized in the Company's business, and (iii) an increase in stock-based compensation expense of $525,000, partially offset by a decrease in costs related to the Affinity acquisition of $598,000.

Depreciation and Amortization. Depreciation and amortization expenses increased 37% to $2,860,000 in 2013 from $2,085,000 in 2012. This increase is primarily attributable to an increase of $944,000 in the amortization of intangible assets related to the acquisition of Affinity.

Loss from Operations. Loss from operations increased to $1,442,000 in 2013 from $596,000 in 2012. The increase in our loss from operations is primarily attributable to an increase in our operating expenses as discussed above, partially offset by an increase in revenue.

Interest and Other Expense, Net. Interest and other expense, net in 2013 was $2,799,000, comprised of: (i) $993,000 of interest expense on our outstanding debt, net of interest income, (ii) $976,000 of amortization of deferred financing costs related to our debt obligations, (iii) $727,000 of amortization of debt discount, and (iv) other income of $103,000 related to the reduction of the SRS Note (see Note 7 to our consolidated financial statements). Interest and other expense, net in 2012 was $574,000, comprised of: (i) $421,000 of interest expense on outstanding debt, net of interest income, (ii) $122,000 of amortization of deferred financing costs related to our debt obligations, and
(iii) $31,000 of amortization of debt discount. This increase in interest and other expense, net is primarily attributable: (i) a full year of interest expense in 2013 related to the debt incurred in October 2012 in connection with the Affinity acquisition and (ii) the 2013 write off of unamortized deferred financing costs and the debt discount associated with our former debt obligations upon the closing of our debt refinancing in October 2013 (see Note 7 to our consolidated financial statements).

Income Taxes. For 2012, an income tax benefit of $2,221,000 was recorded as a result of the change of the Company's valuation allowance related to deferred tax liabilities that arose in the acquisition of Affinity. This income tax benefit had no impact on cash flows from operations for the year ended December 31, 2012. For 2013, an income tax benefit of $30,000 was recorded related to an income tax refund. Any deferred tax asset that would be related to our historical 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). For 2012, net income was $1,051,000 as compared to a net loss of $4,211,000 for 2013. The increase in our net loss is primarily attributable to an increase in our loss from operations of $846,000, an increase in our interest and other expense, net of $2,225,000 and the $2,221,000 tax benefit recorded in 2012 compared to the tax benefit of $30,000 in 2013.

Adjusted EBITDA

Adjusted EBITDA, a non-GAAP financial measure, is defined as net income (loss) before depreciation, amortization, interest and other expense, net, taxes, severance, acquisition costs, stock-based compensation and asset impairment charges. 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 and is used in the calculation of financial covenants in the Main Street Loan 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 Adjusted EBITDA to net income (loss) is shown below:

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                                                            Year Ended December 31,
                                                                                   Increase
                                                      2013           2012         (Decrease)
Net income (loss)                                 $   (4,211 )   $    1,051     $     (5,262 )
Benefit from income taxes                                (30 )       (2,221 )          2,191
Depreciation and amortization                          2,860          2,085              775
Amortization of financing costs and debt discount      1,703            153            1,550
Interest and other expense, net                        1,096            421              675
EBITDA                                                 1,418          1,489              (71 )
Stock-based compensation                               1,203            678              525
Severance                                                860             48              812
Acquisition costs                                        259            857             (598 )
Asset impairment                                         680             17              663
Adjusted EBITDA                                   $    4,420     $    3,089     $      1,331

We currently expect that Adjusted EBITDA for the year ended December 31, 2014 will grow by approximately 10% as compared to Adjusted EBITDA for the year ended December 31, 2013. We expect this growth in Adjusted EBITDA will be achieved primarily through reductions in our operating expenses.

Liquidity and Capital Resources

As of December 31, 2013, we had $2,294,000 of cash and working capital of $836,000. Our cash balance as of December 31, 2013 includes restricted cash of $242,000 (as discussed in Note 3 to our consolidated financial statements). For the year ended December 31, 2013, we generated a net loss of $4,211,000 and net cash provided by operating activities of $2,300,000. We generated cash flow from operations even though we incurred a net loss as our net loss includes certain non-cash expenses that are added back to our cash flow from operations as shown on our consolidated statements of cash flows.

During 2013, we completed a refinancing of the Company's debt obligations as discussed below to improve the Company's expected liquidity and reduce expected near-term debt service obligations. The former debt obligations with Escalate Capital, Comerica Bank and SRS would have required minimum principal payments of $3,630,000 in 2014 and $3,000,000 in 2015. Our new debt obligations with Main Street Capital Corporation ("Main Street") and our amended Shareholder Representative Services LLC ("SRS") Note have no required minimum principal payments in 2014 and 2015 as principal payments are based on a percentage of excess cash flow generated by the Company for the Main Street Term Loan and achievement of certain EBITDA levels for the SRS Note (see further discussion below). The Company expects principal payments on our debt obligations will approximate $950,000 in 2014 (see Note 7 to our consolidated financial statements).

During 2013, we also simplified our capital structure by exchanging all outstanding shares of Series B-1 preferred stock into common stock (see Note 14 to our consolidated financial statements). This transaction eliminated $10,247,000 of liquidation preference on the exchanged preferred stock and eliminated future annual dividends of $600,000 that would have commenced accruing in 2014.

On October 17, 2013, the Company entered into a loan agreement by and among the Company and its subsidiaries, and Main Street, 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"). The Main Street Loan Agreement provides for an $11,000,000 senior secured term loan facility ("Main Street Term Loan") and a $2,000,000 senior secured revolving loan facility (the "Main Street Revolver"). As of December 31, 2013, the Company has borrowed $9,000,000 under the Main Street Term Loan and $300,000 on the Main Street Revolver and the Company used the proceeds from this debt issuance to repay existing debt obligations summarized below.

During 2013, the Company received proceeds of $9,000,000 from the Main Street Term Loan and $300,000 from the Main Street Revolver, less facility fees and expenses of $322,000. Also during 2013, the Company repaid the following obligations: (i) an existing term loan of $6,500,000 with Escalate Capital Partners SBIC I, L.P. ("Escalate"), (ii) an existing term loan of $2,000,000 with Comerica Bank ("Comerica"), (iii) existing borrowings on a revolving line of credit with Comerica of $780,000, and (iv) a $300,000 fee that was due to Escalate upon repayment of the $6,500,000 term loan.

Net cash used in financing activities for 2013 was $1,324,000, attributable to:
(i) net proceeds of $8,978,000 related to the proceeds from debt issuance to Main Street, less facility fees and expenses described above, (ii) repayment of former debt obligations

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and related fees and expenses totaling $9,762,000, (iii) $289,000 of transaction costs related to the exchange of Series B-1 preferred stock to common stock in 2013 (see Note 14 to our consolidated financial statements), and (iv) $251,000 of principal payments on our capital lease obligations.

Borrowings under the Main Street Term Loan and Main Street Revolver mature on October 17, 2018 and October 17, 2015, respectively, unless sooner terminated as provided in the Main Street Loan Agreement. The Main Street Loan Agreement provides that Main Street Term Loan borrowings bear interest at 12% and the Main Street Revolver borrowings bear interest at 8%. Interest payments on the outstanding borrowings under the Main Street Term Loan and Main Street Revolver are due monthly. The Company is required to make quarterly principal payments on the Main Street Loan Agreement 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 Main Street 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.

In February 2014, the Company amended and restated the promissory note issued to SRS for the benefit of the prior stockholders of Affinity in connection with the Affinity acquisition (the "SRS Note"). The amended SRS Note, which was effective as of December 31, 2013, (i) reduced the principal amount of the SRS Note to $1,885,000, (ii) increased the interest rate from 8% to 10% per annum and (iii) extended the maturity date from December 31, 2014 to January 4, 2016.

Annual interest payments on the $9,000,000 of borrowings under the Main Street Term Loan and $1,885,000 of borrowings under the SRS Note, assuming no principal payments are made to reduce such balances, would approximate an aggregate amount of $1,269,000. 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 December 31, 2013, the current portion of long-term debt recorded on the Company's balance sheet was $950,000, which reflects the principal amounts the Company expects to pay in 2014 on the Main Street Term Loan, Main Street Revolver and SRS Note.

Net cash used in investing activities for 2013 was $900,000, primarily related to the purchase of property and equipment. For 2014, we plan to invest approximately $2,000,000 in capital expenditures; mainly related to strengthening our core infrastructure, networking equipment and systems to improve and automate the delivery of the Company's service offerings to our customers. We expect to fund these capital expenditures from the cash flow from operations the Company expects to generate in 2014.

Based on our current projection of revenue, expenses, capital expenditures and cash flows, the Company believes that it has, and will have, sufficient resources and cash flows to service its debt obligations and fund its operations for at least the next twelve months following the filing of this Report. As of December 31, 2013, we had availability of $1,700,000 under the Main Street Revolver and $2,000,000 under the Main Street Term Loan (subject to approval by Main Street under the terms of the Main Street Loan Agreement). 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.

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 video collaboration 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 our customers 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

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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. During 2013 and 2012, we recorded impairment losses of $615,000 and $17,000 respectively, related to network equipment and fixed assets no longer being utilized in the Company's business.

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 2013, we recorded an impairment loss of $65,000 for certain software costs previously capitalized. No 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". We test for impairment on an annual basis or more frequently if events occur or circumstances change indicating that the fair value of the goodwill may be below its carrying amount. The performance of the impairment test involves a two-step process. The first step of the goodwill impairment test involves comparing the fair value of the reporting unit to the carrying value, including goodwill. We established November 30 as the date of our annual impairment test for goodwill. We determined the fair value of our reporting unit using a combination of a market-based approach using quoted market prices in active markets and the discounted cash flow ("DCF") methodology. The DCF methodology requires us to make key assumptions such as projected future cash flows, growth rates, terminal value and a weighted average cost of capital. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit's goodwill with the carrying value of that goodwill. Based on the goodwill impairment test performed at November 30, 2013, the estimated fair value of the reporting unit significantly exceeded its carrying value, and therefore, the second step of the goodwill impairment test was not required. However, if market conditions deteriorate, or if the Company is unable to execute on its business plan, it may be necessary to record impairment charges in the future.

Intangible Assets. Intangible assets include customer relationships, affiliate network and trademarks recorded in connection with the acquisition of Affinity in October 2012. 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. During the year ended December 31, 2013, the Company performed an impairment test of intangible assets and determined that no impairment charges were required.

Inflation

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

Off-Balance Sheet Arrangements

As of December 31, 2013 and 2012 we had no off-balance sheet arrangements. Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements during the year ended December 31, 2013 that are expected to have a material impact on our consolidated financial statements.

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