SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended March 31, 2004.
or
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
Commission file number: 0-25940
GLOWPOINT, INC.
(Exact Name of registrant as Specified in its Charter)
Delaware 77-0312442
(State or other Jurisdiction of (I.R.S. Employer Number)
Incorporation or Organization)
225 Long Avenue, Hillside, New Jersey 07205
(Address of Principal Executive Offices)
973-282-2000
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes |X| No |_|
Check whether the registrant is an accelerated filer as defined in Rule
12b-2 of the Exchange Act of 1934.
Yes |_| No |X|
The number of shares outstanding of the registrant's Common Stock as of
May 10, 2004 was 37,197,271.
GLOWPOINT, INC
Index
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements*
Consolidated Balance Sheets at March 31, 2004 and December 31, 2003 .................... 1
Consolidated Statements of Operations For the Three Months Ended March 31, 2004 and 2003 2
Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2004 and 2003 3
Notes to Consolidated Financial Statements ............................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ....... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk .................................. 14
Item 4. Controls and Procedures ..................................................................... 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ........................................................................... 15
Item 2. Changes in Securities and Use of Proceeds ................................................... 15
Item 3. Defaults Upon Senior Securities ............................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders ......................................... 15
Item 5. Other Information ........................................................................... 15
Item 6. Exhibits and Reports on Form 8-K ............................................................ 15
Signatures ........................................................................................... 16
Certifications ....................................................................................... 17
* The Consolidated Balance Sheet at December 31, 2003 has been taken from
the audited financial statements at that date. All other financial
statements are unaudited.
Glowpoint, Inc.
Consolidated Balance Sheets
March 31, 2004 December 31, 2003
-------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 13,312,698 $ 4,184,897
Escrowed cash ................................................. 335,644 335,188
Accounts receivable, net of allowance for doubtful accounts of
$108,021 and $71,620, respectively ........................ 2,599,803 2,305,552
Other current assets .......................................... 1,369,794 1,439,978
------------- -------------
Total current assets ...................................... 17,617,939 8,265,615
Furniture, equipment and leasehold improvements, net ............... 13,074,274 13,024,055
Goodwill, net ...................................................... 2,547,862 2,547,862
Other assets ....................................................... 274,163 149,574
------------- -------------
Total assets .............................................. $ 33,514,238 $ 23,987,106
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 1,707,316 $ 2,368,484
Accrued expenses .............................................. 1,161,190 900,690
Deferred revenue .............................................. 795,720 --
Current portion of capital lease obligations .................. 127,374 131,182
------------- -------------
Total current liabilities ................................. 3,791,600 3,400,356
------------- -------------
Noncurrent liabilities:
Capital lease obligations, less current portion ............... 756 34,972
------------- -------------
Total noncurrent liabilities .............................. 756 34,972
------------- -------------
------------- -------------
Total liabilities ......................................... 3,792,356 3,435,328
------------- -------------
Commitments and contingencies:
Subordinated debentures ............................................ -- 4,888,000
Discount on subordinated debentures ................................ -- (3,149,805)
------------- -------------
Subordinated debentures, net .................................. -- 1,738,195
------------- -------------
Stockholders' Equity:
Preferred stock, $.0001 par value; 5,000,000 shares authorized,
203.667 shares outstanding ................................ -- --
Common stock, $.0001 par value; 100,000,000 shares authorized;
37,166,262 and 30,543,672 shares outstanding, respectively 3,717 3,054
Treasury stock, 39,891 shares at cost ......................... (239,742) (239,742)
Deferred compensation ......................................... (1,804,445) (1,650,607)
Additional paid-in capital .................................... 156,798,542 137,449,109
Accumulated deficit ........................................... (125,036,190) (116,748,231)
------------- -------------
Total stockholders' equity ................................ 29,721,882 18,813,583
------------- -------------
Total liabilities and stockholders' equity ................ $ 33,514,238 $ 23,987,106
============= =============
See accompanying notes to consolidated financial statements.
1
Glowpoint, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31,
---------------------------------
2004 2003
------------ ------------
Net revenues .......................................... $ 3,224,950 $ 2,226,858
Cost of revenues ...................................... 2,739,753 2,294,287
------------ ------------
Gross margin ....................................... 485,197 (67,429)
------------ ------------
Operating expenses
Research and development ........................... 326,646 301,538
Selling ............................................ 1,835,155 985,141
General and administrative ......................... 1,882,099 1,234,664
------------ ------------
Total operating expenses .............................. 4,043,900 2,521,343
------------ ------------
Loss from continuing operations ....................... (3,558,703) (2,588,772)
------------ ------------
Other (income) expense
Amortization of deferred financing costs ........... 84,796 45,509
Interest income .................................... (1,520) (5,189)
Interest expense ................................... 53,021 373,050
Amortization of discount on subordinated debentures 3,165,036 534,625
Loss on exchange of debt ........................... 1,354,000 --
------------ ------------
Total other expenses, net ............................. 4,655,333 947,995
------------ ------------
Net loss from continuing operations ................... (8,214,036) (3,536,767)
Loss from discontinued AV operations .................. -- (793,022)
Loss from discontinued VS operations .................. -- (319,478)
------------ ------------
Net loss .............................................. (8,214,036) (4,649,267)
Preferred stock dividends ............................. (73,923) --
------------ ------------
Net loss attributable to common stockholders .......... $ (8,287,959) $ (4,649,267)
============ ============
Net loss from continuing operations per share:
Basic and diluted .................................. $ (0.25) $ (0.12)
============ ============
Loss from discontinued operations per share:
Basic and diluted .................................. $ -- $ (0.04)
============ ============
Net loss attributable to common stockholders per share:
Basic and diluted .................................. $ (0.25) $ (0.16)
============ ============
Weighted average number of common shares:
Basic and diluted .................................. 32,391,261 29,029,894
============ ============
See accompanying notes to consolidated financial statements.
2
Glowpoint, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
-------------------------------
2004 2003
------------ ------------
Cash flows from Operating Activities
Net loss ................................................................ $ (8,214,036) $ (4,649,267)
Adjustments to reconcile net loss to net cash (used) provided by
operating activities:
Depreciation and amortization ....................................... 1,340,458 1,756,285
Amortization of deferred financing costs ............................ 84,796 45,509
Amortization of discount on subordinated debentures ................. 3,165,036 534,625
Loss on exchange of debt ............................................ 1,354,000 --
Non-cash compensation ............................................... 288,786 243,543
Increase (decrease) in cash attributable to changes in assets
and liabilities, net of effects of acquisitions:
Escrowed cash ................................................... (456) --
Accounts receivable ............................................. (294,251) 2,568,209
Inventory ....................................................... -- 496,260
Net assets of discontinued AV operations ........................ -- 2,177,363
Other current assets ............................................ (331,590) (995,185)
Other assets .................................................... (209,385) (8,471)
Accounts payable ................................................ (661,168) (903,793)
Accrued expenses ................................................ 186,577 (465,182)
Deferred revenue ................................................ 795,720 12,767
------------ ------------
Net cash (used) provided by operating activities ........... (2,495,513) 812,663
------------ ------------
Cash flows from Investing Activities
Purchases of furniture, equipment and leasehold improvements ............ (988,903) (515,275)
------------ ------------
Net cash used by investing activities ............................... (988,903) (515,275)
------------ ------------
Cash flows from Financing Activities
Proceeds from common stock offering ..................................... 12,543,737 --
Costs of exchange/issuance of subordinated debentures ................... (15,232) (36,316)
Exercise of warrants and options, net ................................... 121,735 41,214
Proceeds from bank loans ................................................ -- 25,788,354
Payments on bank loans .................................................. -- (28,112,292)
Deferred financing costs ................................................ -- (5,774)
Payments on capital lease obligations ................................... (38,023) (78,082)
------------ ------------
Net cash provided (used) by financing activities .................... 12,612,217 (2,402,896)
------------ ------------
Increase (decrease) in cash and cash equivalents ........................... 9,127,801 (2,105,508)
Cash and cash equivalents at beginning of period ........................... 4,184,897 2,762,215
------------ ------------
Cash and cash equivalents at end of period ................................. $ 13,312,698 $ 656,707
============ ============
Supplement disclosures of cash flow information: Cash paid during the period
for:
Interest ................................................................ $ 8,504 $ 72,873
============ ============
Taxes ................................................................... $ -- $ --
============ ============
Non-cash financing and investing activities:
Preferred stock dividends of $73,923 were accrued during the three months ended
March 31, 2004. Equipment with costs totaling $232,100 was acquired under
capital lease arrangements during the three months ended March 31, 2003.
See accompanying notes to consolidated financial statements.
3
GLOWPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
Note 1 -- The Business
Glowpoint, Inc. ("Glowpoint" or the "Company"), a Delaware corporation, provides
comprehensive feature-rich video communications services with telephone-like
reliability and ease-of-use on the industry's only carrier-grade, IP (Internet
Protocol) based subscriber network that is designed exclusively for video
communications. The network spans across three continents, enabling users to
connect across the United States, as well as to virtually any business center
around the world. The growth of subscriptions was fairly steady through early
2003, when it was determined that separating the video communications service
from the equipment sales side of the business would open up a much larger
distribution channel for the Glowpoint network. On September 23, 2003,
Glowpoint, formerly known as Wire One Technologies, Inc. ("Wire One"), completed
the sale of its Video Solutions ("VS") business which had been central to the
Company's operations, to an affiliate of Gores Technology Group ("Gores"), in
order to focus solely on growing its video communications services. Glowpoint's
mission is to significantly improve the ease-of-use, cost-effectiveness,
functionalities and quality of existing video communications in order to make it
an integral part of business communications.
Note 2 -- Basis of Presentation
The accompanying unaudited financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 2004 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report for the
fiscal year ended December 31, 2003 as filed with the Securities and Exchange
Commission.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, AllComm Products Corporation ("APC") and VTC
Resources, Inc. ("VTC"). All material inter-company balances and transactions
have been eliminated in consolidation.
Note 3 -- Stock-Based Compensation
The Company accounts for its stock-based compensation plans using the intrinsic
value method in accordance with the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", and SFAS
No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure".
The following table illustrates, in accordance with the provisions of SFAS No.
148, the effect on net loss and loss per share if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation.
4
Three Months Ended
March 31,
-----------------------------
2004 2003
----------- -----------
Net loss as reported ..................... $(8,214,036) $(4,649,267)
Add: stock-based compensation expense
included in reported loss, net of tax . 5,179 56,333
Deduct: total stock-based employee
compensation expense determined under
the fair value based method for all
awards, net of tax .................... (119,272) (1,189,095)
----------- -----------
Pro forma net loss ....................... $(8,328,129) $(5,782,029)
=========== ===========
Loss per share:
Basic and diluted - as reported .......... $ (0.25) $ (0.16)
Basic and diluted - pro forma ............ $ (0.26) $ (0.20)
The fair value of the Company's stock-based option awards to employees was
estimated assuming no expected dividends and the following weighted-average
assumptions:
Three Months Ended
March 31,
-----------------------------
2004 2003
----------- -----------
Risk free interest rate .................. 4.87% 3.77%
Expected lives ........................... 10 Years 5 Years
Expected volatility ...................... 101.76% 146.32%
Note 4 -- Loss Per Share
Basic loss per share is calculated by dividing net loss attributable to common
stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted loss per share is calculated by dividing
net loss attributable to common stockholders by the weighted average number of
shares of common stock outstanding plus the weighted-average number of net
shares that would be issued upon exercise of stock options and warrants using
the treasury stock method and the deemed conversion of preferred stock using the
if-converted method.
Three Months Ended
March 31,
-----------------------------
2004 2003
----------- -----------
Weighted average shares outstanding ...... 32,391,261 29,029,894
Effect of dilutive options and warrants .. -- --
----------- -----------
Weighted average shares outstanding
including dilutive effect of securities. 32,391,261 29,029,894
=========== ===========
Weighted average options and warrants to purchase 12,337,003 shares of common
stock and preferred stock convertible into 2,036,677 shares of common stock were
outstanding during the three months ended March 31, 2004. Weighted average
options and warrants to purchase 12,282,257 shares of common stock and
subordinated debentures convertible into 2,036,677 shares of common stock were
outstanding during the three months ended March 31, 2003. These options and
warrants were not included in the computation of diluted earnings per share
because the Company reported a net operating loss for these periods and their
effect would have been anti-dilutive.
5
Note 5 -- Discontinued Operations
On September 23, 2003, the Company completed the sale of all of the properties,
rights, interests and other tangible and intangible assets that relate in any
material respect to its VS segment to Gores under the terms of the asset
purchase agreement dated June 10, 2003. The Company is entitled to receive total
consideration of up to $24 million for the transaction, consisting of $21
million in cash, including $19 million received at closing and a $2 million
holdback, an unsecured $1 million promissory note maturing on December 31, 2004
and bearing an interest rate of 5% per annum and a $2 million earn-out based on
performance of the assets over the two years following the closing. The holdback
is intended to cover potential purchase price adjustments payable by Glowpoint
arising under the asset purchase agreement. The $2 million cash holdback and the
$1 million unsecured promissory note were not recorded as part of the sales
price as Gores had not yet completed their evaluation of the acquired assets and
as a result they are contingent payments. The gain on the sale of the VS
operation totaled $645,000 excluding the contingent amounts and was deferred as
a component of accrued expenses in the accompanying consolidated balance sheet
as of December 31, 2003 and March 31, 2004 pending settlement of any potential
claims by Gores. Gores may pay Glowpoint an earn-out on each of June 30, 2004
and June 30, 2005 additional payments, not to exceed an aggregate of $2 million,
equal to five percent of the sum of (1) the amounts billed by Gores from the
operation of the VS segment by Gores after the closing, plus (2) the annual
revenues derived from the video solutions business of Pierce Technology
Services, Inc. (formerly Forgent Networks, Inc.) for such year in excess of $96
million. If Gores sells substantially all of the assets of its video solutions
business prior to June 30, 2005, whether by merger, sale of stock or sale of
assets, for total consideration greater than $35 million, Gores will pay the
Company $2 million less amounts previously paid. As partial consideration for
the purchase of assets, Gores assumed certain liabilities related to the VS
segment, including (1) all liabilities to be paid or performed after the closing
date that arise from or out of the performance or non-performance by Gores after
the closing date of any contracts included in the assets or entered into after
June 10, 2003 and (2) the Company's accounts payable, customer deposits,
deferred revenue and accrued liabilities related to the VS segment.
Stockholders at the Company's 2003 annual meeting of stockholders held in August
2003 approved the sale of the Company's VS segment.
The VS segment included the Company's videoconferencing equipment distribution,
system design and engineering, installation, operation and maintenance
activities consisting of: a headquarters and warehouse facility in Miamisburg,
Ohio; a help desk operation in Camarillo, California; 24 sales offices and
demonstration facilities across the United States; and a client list of
approximately 3,000 active customers with an installed base of approximately
22,000 videoconferencing systems. As a result, this segment is classified as a
discontinued operation in the accompanying financial statements, with its
results from operations summarized in a single line item in the consolidated
statement of operations. At March 31, 2004, the Company was owed $2,271,444 and
owed Gores $1,999,028, with this receivable and payable resulting from post-sale
transactions.
Revenues and pretax loss from discontinued VS operations are as follows:
Three Months Ended March 31,
-----------------------------
2004 2003
----------- -----------
Revenues ................................. $ -- $18,275,837
Pretax loss .............................. $ -- $ (319,478)
In March 2003, the Company completed the sale of certain assets and liabilities
of its Audio-Visual ("AV") division to Signal Perfection Limited ("SPL") for
approximately $807,000, $250,000 of which was paid in cash at the close of the
transaction and the balance of which was paid in the form of a promissory note
payable in five equal consecutive monthly payments commencing on April 15, 2003.
The sale of the AV division was aimed at enabling the Company to focus more of
its resources to the development and marketing of its subscriber-based IP
network, Glowpoint, and to its VS segment. As a consequence, this division,
previously part of the VS segment, has been classified as a discontinued
operation in the accompanying financial statements, with its results from
operations summarized in a single line item in the consolidated statements of
operations.
6
Revenues and pretax loss from discontinued AV operations are as follows:
Three Months Ended March 31,
-----------------------------
2004 2003
----------- -----------
Revenues ................................. $ -- $ 2,241,925
Pretax loss .............................. $ -- $ (793,022)
Note 6 -- Bank Loan Payable
In May 2002, the Company entered into a $25 million working capital credit
facility with JPMorgan Chase Bank and incurred $505,074 in deferred financing
costs. Under terms of the three-year agreement for this facility, loan
availability was based on (1) 80% of eligible accounts receivable and (2) the
lesser of 50% against eligible finished goods inventory or 80% against the net
eligible amount of the net orderly liquidation value by category of finished
goods inventory as determined by an outside appraisal firm, subject to an
inventory cap of $2 million. Borrowings bore interest at the lender's base rate
plus 1 1/2% per annum. The credit facility contained certain financial and
operational covenants. In March 2003, the Company concluded an amendment to the
credit facility, which, among other things, reduced the commitment amount of the
line of credit from $25 million to $15 million. As compensation for this
amendment, the Company granted warrants to purchase 100,000 shares of common
stock with an exercise price of $2.06 to JPMorgan Chase. The fair value of these
warrants was determined to be $187,210 using the Black Scholes valuation method
and this amount was charged to interest expense in 2003. Some additional
highlights of the amendment include: (1) revised EBITDA covenant levels for the
remainder of the term of the credit agreement and (2) maintenance of the
interest rate, loan fees and provisions of the borrowing formula at the same
levels as previously negotiated. In September 2003, the Company signed a letter
agreement with JPMorgan Chase to further reduce the commitment amount of the
line of credit from $15 million to $7.5 million. In connection with these
amendments, the Company wrote off approximately $188,000 of deferred financing
costs in 2003. In February 2004, the working capital credit facility with
JPMorgan Chase was terminated at the Company's request. As a result, the balance
of the $505,074 in financing costs originally deferred, $84,796, was written off
to expense in the three months ended March 31, 2004.
Note 7 -- Stockholder's Equity
In January 2004, in exchange for the cancellation and termination of notes with
an aggregate face value of $4,888,000 and forfeiture of any and all rights of
collection, claim or demand under the notes, the Company agreed to give the
holders of the notes: (i) an aggregate of 203.667 shares of series B convertible
preferred stock; (ii) an aggregate of 250,000 shares of restricted common stock;
and (iii) a reduction of the exercise price of the warrants issued pursuant to
the original purchase agreement from $3.25 to $2.75. The fair market value of
the items exchanged equaled approximately $6,242,000 (the fair value of the
203.667 shares of series B convertible preferred stock was determined to be
approximately $5,499,000, the fair value of the 250,000 shares of restricted
stock was determined to be approximately $675,000, and the fair value of the
warrant repricing was determined to be approximately $68,000). As a result, the
Company recorded a $1,354,000 loss on exchange of debt in the three months ended
March 31, 2004 equal to the excess fair value of the items exchanged over the
$4,888,000 principal balance of the subordinated debentures. In addition, the
$3.1 million of unamortized discount on subordinated debentures as of December
31, 2003 was written off to expense in the three months ended March 31, 2004.
In February 2004, the Company raised net proceeds of $12.5 million in a private
placement of 6,100,000 shares of its common stock at $2.25 per share. Investors
in the private placement were also issued warrants to purchase 1,830,000 shares
of common stock at an exercise price of $2.75 per share. The warrants expire
five and a half years after the closing date. The warrants are subject to
certain anti-dilution protection. The Company also issued to its placement agent
five and a half year warrants to purchase 427,000 shares of common stock at an
exercise price of $2.71 per share.
7
Note 8 -- Effect of Recently Issued Accounting Standards
In March 2004, the Financial Accounting Standards Board ("FASB") issued a
proposed Statement, "Share-Based Payment", that addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed statement would eliminate the ability to account for share-based
compensation transactions using APB Opinion No. 25, "Accounting for Stock Issued
to Employees", and would generally require that such transactions be accounted
for using a fair value-based method. As discussed in Note 3, the Company
currently accounts for share-based compensation transactions using APB Opinion
No. 25. If this statement is issued, the adoption of this interpretation will
have a material negative impact on the Company's consolidated financial position
and results of operations, the level of which is currently being assessed.
Note 9 -- Subsequent Events
On April 20, 2004, the Company entered into a strategic alliance with Tandberg,
Inc., a wholly owned subsidiary of Tandberg ASA (OSLO: TAA.OL), a global
provider of visual communications solutions. As part of the alliance agreement,
the Company acquired certain assets and the customer base of Tandberg owned
Network Systems LLC (successor to the NuVision Companies). Network Systems
customers, primarily ISDN-based video users, will have immediate access to
Glowpoint's video bridging and webcasting services. As part of the alliance,
Tandberg's corporate use of IP video communications and other telecommunications
services, formerly purchased through Network Systems, will be provided
exclusively by Glowpoint in a multi-year agreement. In addition, Glowpoint
assumed current contractual commitments with AT&T, MCI and Sprint from Network
Systems, which will be consolidated into new agreements with these carriers.
Lastly, Tandberg named the GlowPoint Certified Program as a recognized external
testing partner for its hardware and software products.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto. 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.
The statements contained herein, other than historical information, are or may
be deemed to be forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended, and involve factors, risks and uncertainties
that may cause our actual results in future periods to differ materially from
such statements. These factors, risks and uncertainties, include market
acceptance and availability of new video communications services; the
non-exclusive and terminable at-will nature of sales agent agreements; rapid
technological change affecting demand for our services; competition from other
video communication service providers; and the availability of sufficient
financial resources to enable us to expand our operations.
Overview
Glowpoint, Inc. ("Glowpoint", "us", or "we"), a Delaware corporation, provides
comprehensive feature-rich video communications services with telephone-like
reliability and ease-of-use on the industry's only carrier-grade IP based
subscriber network that is designed exclusively for video communications. The
network spans three continents, enabling users to connect across the United
States, as well as to virtually any business center around the world. The growth
of subscriptions was fairly steady through early 2003, when it was determined
that separating the video communications service from the equipment sales side
of the business would open up a much larger distribution channel for our video
communications service. On September 23, 2003, we, formerly known as Wire One
Technologies, Inc., or Wire One, completed the sale of our videoconferencing
equipment business that had previously been central to our operations, in order
to focus solely on growing our video communications services. Our mission is to
significantly improve the ease-of-use, cost-effectiveness, functionalities and
quality of existing video communications in order to make it an integral part of
business communications.
8
Wire One was formed on May 18, 2000 by the merger of All Communications
Corporation and View Tech, Inc. From July 2000 through November 2001, we made
several small acquisitions for a total of approximately $9.3 million in cash and
stock. In October 2001, we sold our Voice communications business for
approximately $2 million and in March 2003, we sold our audio-visual business
for approximately $0.8 million.
On September 23, 2003, we sold substantially all of the assets of our Video
Solutions (VS) business to an affiliate of Gores Technology Group ("Gores"), a
privately held international acquisition and management firm, in order to focus
solely on growing our Glowpoint network service. The VS segment included our
videoconferencing equipment distribution, system design and engineering,
installation, operation and maintenance activities and consisted of: a
headquarters and warehouse facility in Miamisburg, Ohio; a help desk operation
in Camarillo, California; 24 sales offices and demonstration facilities across
the United States; and a client list of approximately 3,000 active customers
with an installed base of approximately 22,000 video conferencing systems. As a
result, this segment is classified as a discontinued operation in the
accompanying financial statements with its results from operations summarized in
a single line item in the consolidated statement of operations. See Note 5 to
the financial statements for further information.
Glowpoint, Inc.
Results of Operations Three Months Ended March 31,
(Unaudited) ----------------------------
2004 2003
----------- ------------
Net revenues ........................................... 100.0% 100.0%
Cost of revenues ....................................... 85.0 103.0
------ ------
Gross margin ........................................... 15.0 (3.0)
------ ------
Operating expenses
Research and development .......................... 10.1 13.5
Selling ........................................... 56.9 44.2
General and administrative ........................ 58.4 55.5
------ ------
Total operating expenses ............................... 125.4 113.2
------ ------
Loss from continuing operations ........................ (110.4) (116.2)
------ ------
Other (income) expense
Amortization of deferred financing costs .......... 2.6 2.0
Interest income ................................... 0.0 (0.2)
Interest expense .................................. 1.6 16.8
Amortization of discount on subordinated debentures 98.1 24.0
Loss on extinguishment of debt .................... 42.0 0.0
------ ------
Total other expenses, net .............................. 144.3 42.6
------ ------
Net loss from continuing operations .................... (254.7) (158.8)
Loss from discontinued AV operations ................... 0.0 (35.6)
Loss from discontinued VS operations ................... 0.0 (14.4)
------ ------
Net loss ............................................... (254.7) (208.8)
Preferred stock dividends .............................. (2.3) 0.0
------ ------
Net loss attributable to common stockholders ........... (257.0)% (208.8)%
====== ======
Three Months Ended March 31, 2004 ("2004 period") Compared to Three Months Ended
March 31, 2003 ("2003 period").
Net Revenues. Net revenues from continuing operations increased $1.0 million, or
45%, in the 2004 period to $3.2 million from $2.2 million for the 2003 period.
Subscription and related revenue increased $1.1 million, or 91%, in the 2004
period to $2.4 million from $1.3 million for the 2003 period. Non-subscription
revenue consisting of
9
bridging, events and other one-time fees decreased $0.1 million, or 17%, in the
2004 period to $0.8 million from $0.9 million for the 2003 period. The growth in
subscription and related revenue was the result of having, on average, 600 more
billable subscriber locations in the 2004 period than in the 2003 period and
those billable subscriber locations each producing an average of $645 per month
in revenue. There were 1,176 average billable subscriber locations in the 2004
period and 576 in the 2003 period. The average monthly subscription and related
revenue per subscriber location fell 6% from $737 in the 2003 period to $690 in
the 2004 period. The decline in average monthly subscription and related revenue
per subscriber location is the result of the growth in the number of billable
subscriber locations using the $199 per month pay as you go plan. The $0.1
million decrease in non-subscription revenue resulted from a $0.2 million
decline in H.320 bridging revenue from $0.5 million in the 2003 period to $0.3
million in the 2004 period, caused by an overall decline in H.320 or ISDN
bridging services and the continued growth of endpoints with built-in
multi-point bridging capabilities; offset by a $0.1 million increase in
professional services provided including those related to the NFL draft for
ESPN.
Cost of Revenue. Cost of revenue increased $0.45 million, or 19%, in the 2004
period to $2.74 million from $2.29 million for the 2003 period. Infrastructure
costs (defined as backbone related costs of network) increased $0.08 million, or
11%, in the 2004 period to $0.8 million from $0.72 million for the 2003 period.
Access costs (defined as costs of connecting subscriber locations to the
network) increased $0.36 million, or 39%, in the 2004 period to $1.28 million
from $0.92 million for the 2003 period. The growth in access costs was the
result of having, on average, 600 more billable subscriber locations in the 2004
period than in the 2003 period and those billable subscriber locations each
costing an average of $201 per month for access to the network. There were 1,176
average billable subscriber locations in the 2004 period and 576 in the 2003
period. The average monthly access costs per subscriber location fell 32% from
$532 in the 2003 period to $363 in the 2004 period. The decline in average
monthly access costs per subscriber location is the result of the growth in the
number of billable subscriber locations using the $199 per month pay as you go
plan and by the increasing use of DSL as the means of accessing the network.
Other costs of revenue include the personnel costs related to providing the
Glowpoint service, depreciation on network equipment along with the ISDN network
costs of providing H.320 bridging services. In the 2004 period these costs were
flat with the 2003 period level of $0.65 million. There were two offsetting
factors accounting for this result: (1) increased depreciation of $0.1 million
related to increased equipment deployed in the network; and (2) reduced ISDN
network costs of $0.1 million in line with the decline in H.320 bridging
revenue.
Gross Margins. Gross margins increased approximately $0.6 million in the 2004
period from $0.1 million in the 2003 period to $0.5 million. As a percentage of
revenue, gross margins increased in the 2004 period to 15.0%, as compared to
negative 3.0% of net revenues in the 2003 period. The increase in gross margins
is attributable to the beginning impact of new customers coming on with our
higher margin "All You Can See" unlimited video calling plans - $0.5 million;
the pass through of the Universal Service Fee ("USF") that had not previously
been charged to our customers - $0.2 million; and a $0.1 million increase in
gateway, usage and other network services gross margin. Partially offsetting
these factors were the negative impact on gross margin of the increase in
infrastructure costs - $0.1 million, and the loss of $0.1 million of H.320
bridging gross margin. We believe that our gross margins will continue to
improve over the coming months and quarters as the impact is felt from our
fourth quarter product realignment, which was designed to drive average variable
gross margins of 60 to 65% for each new billable subscriber location on the
Glowpoint network. The impact to our results should be increasingly evident in
2004 as the new products take hold in our distribution channel to become a
larger percentage of our embedded billable subscriber location base. We will
also be focusing on minimizing our cost per subscriber location in order to
deliver the Glowpoint service in the most efficient manner possible.
Research and Development. Research and development costs, which include the
costs of the personnel in this group, the equipment they use and their use of
the network for development projects, were flat in the 2004 period with the 2003
period level of $0.3 million but were down as a percentage of revenue from 13.5%
in the 2003 period to 10.1% in the 2004 period. It is expected that research and
development costs on a dollar basis will remain flat in coming quarters as we
design and develop new service offerings to meet customer demand and test new
products and technologies across the network.
10
Selling. Selling expenses, which include sales salaries, commissions, overhead
and marketing costs, increased $0.8 million in the 2004 period to $1.8 million,
from $1.0 million in the 2003 period, and increased as a percentage of revenue
from 44.2% in the 2003 period to 56.9% of revenue in the 2004 period. The
primary causes of the increase in costs for the 2004 period are the $0.3 million
increase in salaries and benefits resulting from the addition of 16 new
employees and the $0.3 million of marketing costs incurred related to new
product launch activities, channel diversification activities and remaining
customer trials. In addition, $0.2 million of the increase results from higher
commissions and bonuses associated with higher revenue levels.
General and Administrative. General and administrative expenses increased $0.7
million in the 2004 period to $1.9 million from $1.2 million in the 2003 period.
General and administrative expenses as a percentage of net revenues for the 2004
period increased from 55.5% in the 2003 period to 58.4% in the 2004 period. The
primary components of the increase in costs were $0.2 million in non-cash
expense recorded in connection with the issuance of restricted stock and
warrants as compensation and for consulting services, $0.1 million of additional
professional fees related to executive searches conducted during the period for
new members of senior management, $0.1 million of additional provisions for bad
debts related to the increase in the size of our business, a $0.1 million
increase in amortization/depreciation related to purchased computer hardware and
software and capitalized internal costs related to web-site development and
equipment maintenance contracts and a $0.1 million increase in corporate-related
fees/taxes including franchise tax, Nasdaq listing, SEC filing and Board of
Directors fees.
Other (Income) Expenses. Other expenses increased $3.7 million to $4.6 million
in the 2004 period from $0.9 million in the 2003 period. The $3.7 million
increase was primarily due to accelerated amortization of the discount on
subordinated debentures of $3.2 million resulting from the exchange of the
subordinated debentures for preferred stock in the 2004 period. This caused a
$2.6 million increase in amortization of discount on subordinated debentures. In
addition, the exchange of the subordinated debentures for preferred stock
resulted in the recognition of a $1.4 million non-cash charge on the exchange of
debt in the 2004 period.
Discontinued Operations. In the 2004 and 2003 periods, we treated our AV
division and VS segment as discontinued operations because: (1) the operations
and cash flows of this division and segment have been eliminated from our
ongoing operations as a result of disposal transactions; and (2) we do not have
any significant continuing involvement in the operations of the division and
segment. In the 2004 period, there was no income (loss) from discontinued AV
operations. We incurred a loss from discontinued AV operations in the 2003
period of $0.8 million. In the 2004 period, there was no income (loss) from
discontinued VS operations. We incurred a loss from discontinued VS operations
in the 2003 period of $0.3 million.
Net Loss. Net loss attributable to common stockholders increased to $8.3
million, or $.25 per diluted share, in the 2004 period from $4.6 million, or
$.16 per diluted share, for the 2003 period. Earnings before interest, taxes,
depreciation and amortization (EBITDA) is not a standard financial measurement
under accounting principles generally accepted in the United States of America
(GAAP). EBITDA should not be considered as an alternative to net loss or cash
flow from operating activities as a measure of liquidity or as an indicator of
operating performance or any measure of performance derived in accordance with
GAAP. EBITDA is provided below to more clearly present the financial results
that management uses to internally evaluate its business. Management believes
that this non-GAAP financial measure allows investors and management to evaluate
and compare our operating results from continuing operations from period to
period in a meaningful and consistent manner. The following table provides a
reconciliation of the net loss attributable to common stockholders to EBITDA
from continuing operations.
11
Three Months Ended March 31,
-------------------------------
2004 2003
----------- -----------
Net loss attributable to common stockholders ............. $(8,287,959) $(4,649,267)
Depreciation and amortization ..................... 1,340,458 1,374,285
Amortization of deferred financing costs .......... 84,796 45,509
Amortization of discount on subordinated debentures 3,165,036 534,625
Loss on exchange of debt .......................... 1,354,000 --
Non-cash compensation ............................. 288,786 243,543
Loss from discontinued AV operations .............. -- 793,022
Loss from discontinued VS operations .............. -- 319,478
Preferred stock dividend .......................... 73,923 --
Interest expense, net ............................. 51,501 180,651
----------- -----------
EBITDA from continuing operations ........................ $(1,929,459) $(1,158,154)
=========== ===========
Liquidity and Capital Resources
At March 31, 2004, we had working capital of $13.8 million compared to $4.9
million at December 31, 2003, an increase of approximately $8.9 million. We had
$13.3 in cash and cash equivalents at March 31, 2004 compared to $4.2 million at
December 31, 2003. The $8.9 million increase in working capital resulted
primarily from the net proceeds from the February 2004 private placement of
common stock of $12.5 million which was offset by the funding of the $2.5
million usage of cash in operations in the 2004 period and the purchase of $1.0
million of furniture, equipment and leasehold improvements.
In January 2004, in exchange for the cancellation and termination of notes with
an aggregate face value of $4,888,000 and forfeiture of any and all rights of
collection, claim or demand under the notes, we agreed to give the holders of
the notes: (i) an aggregate of 203.667 shares of series B convertible preferred
stock; (ii) an aggregate of 250,000 shares of restricted common stock; and (iii)
a reduction of the exercise price of the warrants issued pursuant to the
original purchase agreement from $3.25 to $2.75. The fair market value of the
items exchanged equaled approximately $6,242,000 (the fair value of the 203.667
shares of series B convertible preferred stock was determined to be
approximately $5,499,000, the fair value of the 250,000 shares of restricted
stock was determined to be approximately $675,000, and the fair value of the
warrant repricing was determined to be approximately $68,000). As a result we
recorded a $1,354,000 loss on exchange of debt in the three months ended March
31, 2004 equal to the excess fair value of the items exchanged over the
$4,888,000 principal balance of the subordinated debentures. In addition, the
$3.1 million of unamortized discount on subordinated debentures as of December
31, 2003 was written off to expense in the three months ended March 31, 2004.
In February 2004, we raised net proceeds of $12.5 million in a private placement
of 6,100,000 shares of our common stock at $2.25 per share. We also issued
warrants to purchase 1,830,000 shares of our common stock at an exercise price
of $2.75 per share. The warrants expire on August 17, 2009. The warrants are
subject to certain anti-dilution protection. In addition, we issued to our
placement agent five and a half year warrants to purchase 427,000 shares of
common stock at an exercise price of $2.71 per share.
At December 31, 2003, we had a $7.5 million working capital credit facility with
JPMorgan Chase Bank. Borrowings under this facility bear interest at the
lender's base rate plus 1 1/2% per annum. In February 2004, this credit facility
was terminated at our request. As a result of the termination of this credit
facility, the $84,796 of unamortized deferred financing costs as of December 31,
2003 was written off to expense in the first quarter of 2004.
12
The following summarizes our contractual cash obligations and commercial
commitments at March 31, 2004, and the effect such obligations are expected to
have on liquidity and cash flow in future periods.
Contractual Obligations Total 2004 2005 2006 2007
- ------------------------------------ ---------- ---------- ---------- -------- -------
Purchase obligations (1) ........... $5,125,636 $3,637,826 $1,275,179 $212,631 $ --
Operating lease obligations ........ 254,971 198,252 56,719 -- --
Capital lease obligations .......... 139,974 103,842 36,132 -- --
---------- ---------- ---------- -------- -------
Total ....................... $5,520,581 $3,939,920 $1,368,030 $212,631 $ --
---------- ---------- ---------- -------- -------
- ---------
(1) Under agreements with providers of infrastructure and access circuitry for
our network, we are obligated to make payments under commitments ranging
from 0-3 years.
Net cash used by operating activities for the 2004 period was $2.5 million as
compared to net cash provided by operations of $0.8 million during the 2003
period. The primary source of operating cash in 2004 was the $0.5 million
reduction in accounts receivable resulting from improved collections (net of a
$0.3 million increase in accounts receivable and a $0.8 million increase in
deferred revenue). We used this cash to fund the $2.0 million cash loss from
operations (net of the $8.2 million net loss and the total non-cash expenses of
$6.2 million) and the $0.7 million decrease in accounts payable.
Investing activities for the 2004 period included purchases of $1.0 million for
network, computer and demonstration equipment and leasehold improvements. The
Glowpoint network is currently built out to handle the anticipated level of
subscriptions for 2004. Although we anticipate current expansion of the network,
we have no significant commitments to make capital expenditures in 2004.
Financing activities for the 2004 period included receipt of the $12.5 million
of net proceeds from the February 2004 private placement of common stock.
Management believes, based on current circumstances, we have adequate capital
resources to support current operating levels for at least the next twelve
months.
Critical accounting policies
We prepare our financial statements in accordance with accounting principles
generally accepted in the United States of America. Preparing financial
statements in accordance with generally accepted accounting principles requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclose contingent assets and liabilities as of the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The following paragraphs include a discussion of
some critical areas where estimates are required.
Revenue recognition
We recognize service revenue related to the Glowpoint network subscriber service
and the multi-point video and audio bridging services as service is provided. As
the non-refundable, upfront activation fees charged to the subscribers do not
meet the criteria as a separate unit of accounting, they are deferred and
recognized over the life of the customer contracts. Revenues derived from other
sources are recognized when services are provided or events occur.
Allowance for doubtful accounts
We record an allowance for doubtful accounts based on specifically identified
amounts that we believe to be uncollectible. We also record additional
allowances based on certain percentages of our aged receivables, which are
determined based on historical experience and our 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, we write off the receivable
against the allowance.
13
Prepaid commissions
Prior to the sale of the VS operation, we paid commissions to VS employees for
their efforts in obtaining yearlong customer subscriptions on the Glowpoint
network. These costs have been recorded as prepaid commissions and are amortized
to selling expenses over the term of the related customer agreement. Payments
made to resellers for their efforts in obtaining customer subscriptions are
treated similarly in the accompanying consolidated financial statements. At
March 31, 2004 and 2003, we had deferred approximately $128,000 and $171,000,
respectively, related to prepaid commissions.
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 in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal
of Long-lived Assets". 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, the related assets
will be written down to fair value. In the 2004 period, no impairment losses
were recorded.
Goodwill and other intangible assets
We follow SFAS No. 142, "Goodwill and Other Intangible Assets" in accounting for
goodwill and other intangible assets. SFAS No. 142 requires, among other things,
that companies no longer amortize goodwill, but instead test goodwill for
impairment at least annually. In addition, SFAS 142 requires that we identify
reporting units for the purposes of assessing potential future impairments of
goodwill, reassess the useful lives of other existing recognized intangible
assets, and cease amortization of intangible assets with indefinite useful
lives. An intangible asset with an indefinite useful life should be tested for
impairment in accordance with the guidance in SFAS No. 142.
Inflation
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to interest rate risk related to our cash equivalents
portfolio. The primary objective of our investment policy is to preserve
principal while maximizing yields. Our cash equivalents portfolio is short-term
in nature; therefore changes in interest rates will not materially impact our
consolidated financial condition. However, such interest rate changes can cause
fluctuations in our results of operations and cash flows.
There are no other material qualitative or quantitative market risks particular
to us.
ITEM 4. CONTROLS AND PROCEDURES
As of end of the period covered by this report, we carried out an evaluation,
under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information relating to us (including our consolidated subsidiaries) required to
be included in our periodic SEC filings. There has been no change in our
internal control over financial reporting that occurred during our most recent
fiscal quarter that has materially affected or is reasonably likely to
materially affect our internal control over financial reporting.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are defending several suits in the ordinary course of business that are
not material to our business, financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 2004, in exchange for the cancellation and termination of notes
with an aggregate face value of $4,888,000 and forfeiture of any and all rights
of collection, claim or demand under the notes, we issued to the holders of the
notes: (i) an aggregate of 203.667 shares of series B convertible preferred
stock; (ii) an aggregate of 250,000 shares of restricted common stock; and (iii)
a reduction of the exercise price of the warrants issued pursuant to the
original purchase agreement from $3.25 to $2.75.
In February 2004, we raised net proceeds of $12.5 million in a private
placement of 6,100,000 shares of our common stock at $2.25 per share. Investors
in the private placement were also issued warrants to purchase 1,830,000 shares
of common stock at an exercise price of $2.75 per share. The warrants expire
five and a half years after the closing date. The warrants are subject to
certain anti-dilution protection. We also issued to its placement agent five and
a half year warrants to purchase 427,000 shares of common stock at an exercise
price of $2.71 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
(i) Form 8-K dated March 25, 2004 announcing the written plan of our
Chairman of the Board, Richard Reiss, to periodically sell shares of
our common stock pursuant to Rule 10b5-1(C) of the Securities
Exchange Act of 1934, as amended.
(ii) Form 8-K dated March 3, 2004 containing a press release announcing
our results of operations and financial condition for the three and
twelve months ended December 31, 2003 and the text of the of the
March 2, 2004, conference call to review the our 2003 fourth quarter
results.
(iii) Form 8-K dated February 26, 2004 announcing the completion of the
sale of $13.7 million of our common stock and warrants in a private
placement transaction on February 17, 2004.
15
Signatures
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
GLOWPOINT, INC.
Registrant
Date: May 14, 2004 By: /s/ David C. Trachtenberg
------------------------------------------------
David C. Trachtenberg, Chief Executive Officer
(principal executive officer)
Date: May 14, 2004 By: /s/ Christopher Zigmont
------------------------------------------------
Christopher Zigmont, Chief Financial Officer
(principal financial and accounting officer)
16