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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 June 30, 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 (I.R.S. Employer Number)
of 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
August 9, 2004 was 37,869,865.
GLOWPOINT, INC.
Index
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements*.......................................................... 1
Consolidated Balance Sheets June 30, 2004 and December 31, 2003.......................... 1
Consolidated Statements of Operations For the Six Months and Three Months Ended
June 30, 2004 and 2003............................................................... 2
Consolidated Statements of Cash Flows For the Six Months Ended June 30, 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 and Market Risk.................................... 15
Item 4. Controls and Procedures..................................................................... 15
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........................................................................... 16
Item 6. Exhibits and Reports on Form 8-K............................................................ 16
Signatures........................................................................................... 18
Certifications....................................................................................... 50
* The 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
June 30, 2004 December 31, 2003
------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 10,365,847 $ 4,184,897
Escrowed cash ......................................................... 336,244 335,188
Accounts receivable, net of allowance for doubtful accounts of
$98,238 and $71,620, respectively ................................. 3,212,809 2,305,552
Other current assets .................................................. 2,068,688 1,439,978
------------- -------------
Total current assets .............................................. 15,983,588 8,265,615
Furniture, equipment and leasehold improvements-net ........................ 12,931,988 13,024,055
Goodwill ................................................................... 2,547,862 2,547,862
Other assets ............................................................... 326,314 149,574
------------- -------------
Total assets ...................................................... $ 31,789,752 $ 23,987,106
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 2,133,893 $ 2,368,484
Accrued expenses ...................................................... 1,583,798 900,690
Deferred revenue ...................................................... 887,453 --
Current portion of capital lease obligations .......................... 101,679 131,182
------------- -------------
Total current liabilities ......................................... 4,706,823 3,400,356
------------- -------------
Noncurrent liabilities:
Capital lease obligations, less current portion ....................... -- 34,972
------------- -------------
Total noncurrent liabilities ...................................... -- 34,972
------------- -------------
Total liabilities ................................................. 4,706,823 3,435,328
------------- -------------
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 authorized; 37,867,452
and 30,543,672 shares outstanding, respectively ................... 3,787 3,054
Treasury stock, 39,891 shares at cost ................................. (239,742) (239,742)
Deferred compensation ................................................. (1,709,347) (1,650,607)
Additional paid-in capital ............................................ 157,295,290 137,449,109
Accumulated deficit ................................................... (128,267,059) (116,748,231)
------------- -------------
Total stockholders' equity ........................................ 27,082,929 18,813,583
------------- -------------
Total liabilities and stockholders' equity ........................ $ 31,789,752 $ 23,987,106
============= =============
See accompanying notes to consolidated financial statements.
1
Glowpoint, Inc.
Consolidated Statements of Operations
(Unaudited)
Six Months Ended June 30, Three Months Ended June 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net revenues ...................................... $ 7,351,399 $ 4,901,488 $ 4,126,449 $ 2,674,630
Cost of revenues .................................. 6,035,347 4,898,606 3,295,594 2,604,320
------------ ------------ ------------ ------------
Gross margin ................................... 1,316,052 2,882 830,855 70,310
------------ ------------ ------------ ------------
Operating expenses
Research and development ....................... 663,293 610,709 336,646 301,539
Selling ........................................ 3,746,927 2,330,754 1,911,772 1,353,245
General and administrative ..................... 3,712,201 2,632,012 1,830,102 1,397,348
------------ ------------ ------------ ------------
Total operating expenses .......................... 8,122,421 5,573,475 4,078,520 3,052,132
------------ ------------ ------------ ------------
Loss from continuing operations ................... (6,806,369) (5,570,593) (3,247,665) (2,981,822)
------------ ------------ ------------ ------------
Other (income) expense
Amortization of deferred financing
costs ........................................ 84,796 92,763 -- 47,254
Interest income ................................ (14,345) (5,800) (12,824) (611)
Interest expense ............................... 59,351 786,983 6,330 413,933
Unrealized gain on marketable equity
securities ................................... (169,083) -- (169,083) --
Amortization of discount on
subordinated debentures ...................... 3,165,037 992,875 -- 458,250
Loss on exchange of debt ....................... 1,354,000 -- -- --
------------ ------------ ------------ ------------
Total other expenses, net ......................... 4,479,756 1,866,821 (175,577) 918,826
------------ ------------ ------------ ------------
Net loss from continuing operations ............... (11,286,125) (7,437,414) (3,072,088) (3,900,648)
Loss from discontinued AV operations .............. -- (1,173,067) -- (380,045)
Loss from discontinued VS operations .............. (61,288) (938,493) (61,288) (619,014)
------------ ------------ ------------ ------------
Net loss .......................................... (11,347,413) (9,548,974) (3,133,376) (4,899,707)
Preferred stock dividends ......................... (171,415) -- (97,492) --
------------ ------------ ------------ ------------
Net loss attributable to common
stockholders ................................... $(11,518,828) $ (9,548,974) $ (3,230,868) $ (4,899,707)
============ ============ ============ ============
Net loss from continuing operations per share:
Basic and diluted .............................. $ (0.33) $ (0.26) $ (0.09) $ (0.14)
============ ============ ============ ============
Loss from discontinued operations per
share:
Basic and diluted .............................. $ -- $ (0.07) $ -- $ (0.03)
============ ============ ============ ============
Preferred stock dividends per share:
Basic and diluted .............................. $ -- $ -- $ -- $ --
============ ============ ============ ============
Net loss attributable to common
stockholders per share:
Basic and diluted .............................. $ (0.33) $ (0.33) $ (0.09) $ (0.17)
============ ============ ============ ============
Weighted average number of common shares:
Basic and diluted .............................. 34,888,750 29,113,216 37,360,933 29,195,477
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
2
Glowpoint, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
-----------------------------
2004 2003
------------ ------------
Cash flows from Operating Activities
Net loss ................................................................. $(11,347,413) $ (9,548,974)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation and amortization ........................................ 2,572,866 3,016,236
Amortization of deferred financing costs ............................. 84,796 92,763
Amortization of discount on subordinated debentures .................. 3,165,037 992,875
Loss on exchange of debt ............................................. 1,354,000 --
Non-cash compensation ................................................ 559,824 673,536
Increase (decrease) in cash attributable to changes in assets and
liabilities, net of effects of acquisitions:
Escrowed cash .................................................... (1,056) --
Accounts receivable .............................................. (907,257) (738,300)
Assets of discontinued AV operations ............................. -- 734,532
Assets of discontinued VS operations ............................. -- 6,369,170
Other current assets ............................................. (1,370,498) (1,770,059)
Other assets ..................................................... (261,536) (10,196)
Accounts payable ................................................. (234,591) 581,906
Accrued expenses ................................................. 511,693 (56,117)
Liabilities of discontinued VS operations ........................ -- 505,741
Deferred revenue ................................................. 887,453 --
Other current liabilities ........................................ -- (66,127)
------------ ------------
Net cash provided (used) by operating activities ............ (4,986,682) 776,986
------------ ------------
Cash flows from Investing Activities
Purchases of furniture, equipment and leasehold improvements ............. (1,739,011) (1,409,578)
------------ ------------
Net cash used by investing activities ................................ (1,739,011) (1,409,578)
------------ ------------
Cash flows from Financing Activities
Net proceeds from common stock offering .................................. 12,424,705 --
Costs of issuance/exchange of subordinated debentures .................... (15,232) (171,248)
Exercise of warrants and options, net .................................... 561,645 293,700
Proceeds from bank loans ................................................. -- 51,820,394
Payments on bank loans ................................................... -- (53,146,169)
Deferred financing costs ................................................. -- (19,112)
Payments on capital lease obligations .................................... (64,475) --
------------ ------------
Net cash provided (used) by financing activities ..................... 12,906,643 (1,222,435)
------------ ------------
Increase (decrease) in cash and cash equivalents ............................ 6,180,950 (1,855,027)
Cash and cash equivalents at beginning of period ............................ 4,184,897 2,762,215
------------ ------------
Cash and cash equivalents at end of period .................................. $ 10,365,847 $ 907,188
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ................................................................. $ 14,834 $ 225,059
============ ============
Taxes .................................................................... $ -- $ --
============ ============
Non-cash financing and investing activities:
Equipment with costs totaling $232,100 was acquired under capital lease
arrangements during the six months ended June 30, 2003.
Preferred stock dividends of $171,415 were accrued during the six months ended
June 30, 2004.
See accompanying notes to consolidated financial statements.
3
GLOWPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
Note 1 -- The Business
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 (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 we 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, we, then
known as Wire One Technologies, Inc. ("Wire One"), completed the sale of our
Video Solutions ("VS") business which had been central to our operations, to an
affiliate of Gores Technology Group ("Gores"), 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.
On April 20, 2004, we 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, we 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, 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, is being provided exclusively by GlowPoint under a
multi-year agreement. In addition, Glowpoint assumed current contractual
commitments with AT&T, MCI and Sprint from Network Systems, which are being
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.
Note 2 -- Basis of Presentation
The accompanying unaudited financial statements of GlowPoint 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 six months ended June 30, 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 our 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 GlowPoint 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
At June 30, 2004, we account for our 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 comply 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".
4
The following table illustrates, in accordance with the provisions of SFAS No.
148, the effect on net loss and loss per share if we had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation.
Six Months Ended Three Months Ended
June 30, June 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net loss as reported ............................ $ (11,347,413) $ (9,548,974) $ (3,133,376) $ (4,899,707)
Add: stock-based compensation expense
included in reported loss, net of tax ........ 5,179 111,595 -- 55,262
Deduct: total stock-based employee
compensation expense determined under the
fair value based method for all awards,
net of tax ................................... (262,126) (1,854,682) (142,854) (665,587)
------------- ------------- ------------- -------------
Pro forma net loss .............................. $ (11,604,360) $ (11,292,061) $ (3,276,230) $ (5,510,032)
============= ============= ============= =============
Loss per share:
Basic and diluted - as reported ................. $ (0.33) $ (0.33) $ (0.09) $ (0.17)
Basic and diluted - pro forma ................... $ (0.33) $ (0.39) $ (0.09) $ (0.19)
The fair value of our stock-based option awards to employees was estimated
assuming no expected dividends and the following weighted-average assumptions:
Six Months Ended Three Months Ended
June 30, June 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Risk free interest rate......... 4.82% 3.69% 4.59% 3.61%
Expected lives.................. 10 years 5 years 10 years 5 years
Expected volatility............. 101.32% 102.04% 99.34% 57.76%
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 of common stock that would be issued upon exercise of stock options and
warrants using the treasury stock method and the deemed conversion of
subordinated debentures using the if-converted method.
Six Months Ended Three Months Ended
June 30, June 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Weighted average shares outstanding ........... 34,888,750 29,113,216 37,360,933 29,195,477
Effect of dilutive options and warrants ....... -- -- -- --
---------- ---------- ---------- ----------
Weighted average shares outstanding
including dilutive effect of securities .... 34,888,750 29,113,216 37,360,933 29,195,477
========== ========== ========== ==========
Weighted average options and warrants to purchase 12,868,730 and 13,400,458
shares of common stock and preferred stock convertible into 2,036,677 shares
common stock were outstanding during the six and three months ended June 30,
2004. Weighted average options and warrants to purchase 12,010,926 and
11,832,214 shares of common stock and subordinated debentures convertible into
2,036,677 shares of common stock were outstanding during the six and three
months ended June 30, 2003. These options, warrants and convertible securities
were not
5
included in the computation of diluted EPS because we reported a net operating
loss for these periods and their effect would have been anti-dilutive.
Note 5 -- Discontinued Operations
On September 23, 2003, we completed the sale of all of the properties, rights,
interests and other tangible and intangible assets that relate in any material
respect to our VS segment to Gores under the terms of the asset purchase
agreement dated June 10, 2003. Stockholders at our 2003 annual meeting of
stockholders held in August 2003 approved the sale of our VS segment. The VS
segment included our 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.
We are 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. Gores may pay us an earn-out for the years ended June 30, 2004 and
June 30, 2005 within sixty days after these dates, 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 us $2
million less amounts previously paid pursuant to the preceding sentence. 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) our accounts payable,
customer deposits, deferred revenue and accrued liabilities related to the VS
segment.
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 net assets. The gain on the sale of the VS segment
totaled $645,000, excluding the cash holdback and note amounts, and was deferred
as a component of accrued expenses in the accompanying consolidated balance
sheets as of December 31, 2003 and June 30, 2004 pending settlement of any
potential claims by Gores. Gores has since concluded that it does not agree with
our determination of the net assets of the VS segment and as a result, we have
entered into an arbitration proceeding with them. The asset purchase agreement
for the transaction provided that if the parties were unable to agree on the
determination of net assets of the VS segment as of June 30, 2003, the matter
would be submitted to an independent firm of certified public accountants to
make the determination. PricewaterhouseCoopers LLP has been chosen to conduct
the arbitration. As of July 26, 2004, the parties have submitted their inital
analyses to the arbitrator and await his response to the submissions. Through
our accounting for the sale of the VS segment, we believe we have recognized
adequate reserves related to the loss exposure, if any, on this matter and the
range of additional losses, if any, cannot be determined at this time.
At June 30, 2004, we were owed $2,356,119 from Gores and we owed Gores
$1,673,731, with this receivable and payable resulting from post-sale
transactions.
Revenues and pretax loss from discontinued VS operations are as follows:
Six Months Ended June 30, Three Months Ended June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues ....... $ -- $ 40,253,589 $ -- $ 21,977,752
Pretax loss .... $ (61,288) $ (938,493) $ (61,288) $ (619,014)
In March 2003, we completed the sale of certain assets and liabilities of our
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 us to focus more of our
resources to the development and marketing of our Glowpoint IP network and to
our 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:
Six Months Ended June 30, Three Months Ended June 30,
--------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues ........ $ -- $ 3,873,822 $ -- $ 1,631,897
Pretax loss ..... $ -- $(1,173,067) $ -- $ (380,045)
Note 6 -- Bank Loan Payable
In May 2002, we 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, we 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, we 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, we 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, we 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 our request. As a result, the
balance of the $505,074 in financing costs originally deferred, $84,796, was
written off to expense in the six months ended June 30, 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, 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 six months ended June 30, 2004.
In February 2004, we raised net proceeds of $12.4 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. We also 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.
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
7
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, we currently account 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 our consolidated
financial position and results of operations, the level of which is currently
being assessed.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with our 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 our relatively
short operating history; market acceptance and availability of new products and
services; rapid technological change affecting products and services we sell;
the impact of competitive products, services, and pricing, as well as
competition from other service providers; possible delays in the shipment of new
products; 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 we 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, then 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.
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.
On April 20, 2004, we 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,
8
we 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, 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, are being provided exclusively by us under a
multi-year agreement. In addition, we assumed current contractual commitments
with AT&T, MCI and Sprint from Network Systems, which are being 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.
Glowpoint, Inc.
Results of Operations
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
------------------ ------------------
2004 2003 2004 2003
------ ------ ------ ------
Net revenues ..................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ................................. 82.1 99.9 79.9 97.4
------ ------ ------ ------
Gross margin ................................ 17.9 0.1 20.1 2.6
------ ------ ------ ------
Operating expenses
Research and development .................... 9.0 12.5 8.1 11.3
Selling ..................................... 51.0 47.5 46.3 50.6
General and administrative .................. 50.5 53.7 44.4 52.2
------ ------ ------ ------
Total operating expenses ......................... 110.5 113.7 98.8 114.1
------ ------ ------ ------
Loss from continuing operations .................. (92.6) (113.6) (78.7) (111.5)
------ ------ ------ ------
Other (income) expense
Amortization of deferred financing costs .... 1.1 1.9 -- 1.8
Interest income ............................. (0.2) (0.1) (0.3) --
Interest expense ............................ 0.8 16.1 0.1 15.5
Unrealized gain on marketable securities .... (2.3) -- (4.1) --
Amortization of discount on subordinated
debentures ................................ 43.1 20.3 -- 17.1
Loss on exchange of debt .................... 18.4 -- -- --
------ ------ ------ ------
Total other expenses, net ........................ 60.9 38.2 (4.3) 34.4
------ ------ ------ ------
Net loss from continuing operations .............. (153.5) (151.8) (74.4) (145.9)
Loss from discontinued AV operations ............. -- (23.9) -- (14.2)
Loss from discontinued VS operations ............. (0.8) (19.1) (1.5) (23.1)
------ ------ ------ ------
Net loss ......................................... (154.3) (194.8) (75.9) (183.2)
Preferred stock dividends ........................ (2.3) -- (2.4) --
------ ------ ------ ------
Net loss attributable to common stockholders ..... (156.6)% (194.8)% (78.3)% (183.2)%
====== ====== ====== ======
Six Months Ended June 30, 2004 ("2004 period") Compared to Six Months Ended June
30, 2003 ("2003 period") and Three Months Ended June 30, 2004 ("June 2004
quarter") Compared to Three Months Ended June 30, 2003 ("June 2003 quarter").
Net Revenues. Net revenues from continuing operations increased $2.5 million, or
50%, in the 2004 period to $7.4 million from $4.9 million for the 2003 period.
Contractual revenue increased $2.6 million, or 92%, in the 2004 period to $5.5
million from $2.9 million for the 2003 period. Contractual revenue, which
includes Glowpoint subscription and related revenue as has been reported in
prior quarters plus NuVision revenue directly related to those customers that
are under contract, is a new categorization resulting from the NuVision
acquisition completed in the June 2004 quarter. This change has been made to
better reflect the core drivers of our combined business without losing
visibility into comparisons with prior quarters. The largest component of this
revenue category, Glowpoint subscription and related revenue, increased $2.1
million, or 74%, in the 2004 period to $5.0 million from $2.9 million for the
2003 period. Our newest and second category of contractual revenue is from the
NuVision base
9
and totaled $0.5 million in the 2004 period. The growth in subscription and
related revenue was the result of having, on average, 521 more billable
subscriber locations in the 2004 period than in the 2003 period and those
billable subscriber locations each producing an average of $673 per month in
revenue. There were 1,190 average billable subscriber locations in the 2004
period and 669 in the 2003 period. The average monthly subscription and related
revenue per subscriber location fell 2% from $713 in the 2003 period to $695 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 in the second
half of 2003. Non-contractual revenue decreased $0.1 million, or 8%, in the 2004
period to $1.9 million from $2.0 million for the 2003 period. Non-contractual
revenue includes GlowPoint non-subscription revenue (our event-driven category
of revenue) plus NuVision revenue generated by customers that are not currently
under contract. The $0.1 million decrease in non-contractual revenue resulted
from $0.3 million in revenue from NuVision customers, offset by a $0.4 decrease
in bridging revenue from $1.6 million in the 2003 period to $1.2 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.
Net revenues of $4.1 million for the June 2004 quarter represent an increase of
$1.4 million, or 54%, over the $2.7 million in revenues reported for the June
2003 quarter. Contractual revenue increased $1.4 million, or 92%, in the June
2004 quarter to $3.0 million from $1.6 million for the June 2003 quarter. The
largest component of this revenue category, Glowpoint subscription and related
revenue, increased $0.9 million, or 61%, in the June 2004 quarter to $2.5
million from $1.6 million for the June 2003 quarter. The growth in subscription
and related revenue was the result of having, on average, 441 more billable
subscriber locations in the June 2004 quarter than in the June 2003 quarter and
those billable subscriber locations each producing an average of $721 per month
in revenue. There were 1,204 average billable subscriber locations in the June
2004 quarter and 763 in the June 2003 quarter. The average monthly subscription
and related revenue per subscriber location increased 2% to $700 in the June
2004 quarter from $688 in the June 2003 quarter. The increase in average monthly
subscription and related revenue per subscriber location is the result of the
introduction in early January 2004 of our "All You Can See" unlimited video
calling plans at higher price points and the decline in the number of billable
subscriber locations using the $199 per month pay as you go plan during the June
2004 quarter. The second category of contractual revenue is from the NuVision
base and totaled $0.5 million in the June 2004 quarter. Non-contractual revenue
in the June 2004 quarter was flat with the $1.1 million level achieved in the
June 2003 quarter. The $0.3 million in revenue from NuVision customers was
offset by a $0.2 million decrease in bridging revenue from $0.8 million in the
June 2003 quarter to $0.6 million in the June 2004 quarter and a $0.1 decrease
in installation revenue.
Cost of Revenues. Cost of revenues increased $1.1 million, or 23%, in the 2004
period to $6.0 million from $4.9 million for the 2003 period. Infrastructure
costs (defined as backbone related costs of network) remained flat at $1.6
million in the 2004 and 2003 periods. Access costs (defined as costs of
connecting subscriber locations to the network) increased $0.6 million, or 28%,
in the 2004 period to $2.6 million from $2.0 million for the 2003 period. The
growth in access costs was the result of having, on average, 521 more billable
subscriber locations in the 2004 period than in the 2003 period and those
billable subscriber locations each costing an average of $179 per month for
access to the network. There were 1,190 average billable subscriber locations in
the 2004 period and 669 in the 2003 period. The average monthly access costs per
subscriber location fell 28% from $505 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 in the second half of 2003 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
along with the ISDN network costs of providing H.320 bridging and other services
to both Glowpoint and NuVision customers. These costs increased $0.5 million, or
45%, in the 2004 period to $1.8 million from $1.3 million for the 2003 period.
This increase resulted primarily from the costs of revenue generated by the
NuVision base of customers which totaled $0.6 million.
Cost of revenues increased $0.7 million, or 27%, in the June 2004 quarter to
$3.3 million from $2.6 million for the June 2003 quarter. Infrastructure costs
remained flat at $0.8 million in the June 2004 and June 2003 quarters. Access
costs increased $0.2 million, or 18%, in the June 2004 quarter to $1.3 million
from $1.1 million for the June 2003 quarter. The growth in access costs was the
result of having, on average, 441 more billable subscriber locations in the June
2004 quarter than in the June 2003 quarter and those billable subscriber
locations each costing an average of $149 per month for access to the network.
There were 1,204 average billable subscriber locations in the June 2004 quarter
and 763 in the June 2003 quarter. The average monthly access costs per
subscriber location
10
fell 25% from $486 in the June 2003 quarter to $362 in the June 2004 quarter.
The decline in average monthly access costs per subscriber location is the
result of the increasing use of DSL as the means of accessing the network. Other
costs of revenue increased $0.5 million, or 70%, in the June 2004 quarter to
$1.2 million from $0.7 million for the June 2003 quarter as a result of the
costs of revenue generated by the NuVision base of customers which totaled $0.6
million.
Gross Margins. Gross margins increased approximately $1.3 million in the 2004
period from $2,882 in the 2003 period to $1.3 million. As a percentage of
revenue, gross margins increased in the 2004 period to 17.9%, as compared to
0.1% of net revenues in the 2003 period. Gross margins increased approximately
$0.8 million in the June 2004 quarter to $830,000 from $70,000 for the June 2003
quarter. As a percentage of revenue, gross margins increased in the June 2004
quarter to 20.1%, as compared to 2.6% of net revenues in the June 2003 quarter.
The major factors in these positive movements in gross margin have been the pass
through of the Universal Service Fee tax that had not previously been charged to
our customers in 2003, the continued impact of new customers coming on with our
higher margin "All You Can See" unlimited video calling plans targeted at a
60-65% margin, and improving the margins on legacy accounts through very
targeted transition to our new unlimited annual subscription plans. In addition,
gross margins on the NuVision business amounted to 30% in the June 2004 quarter
which favorably impacted our overall gross margins.
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, increased $0.1 million in the 2004 period
to $0.7 million from $0.6 million in the 2003 period but were down as a
percentage of revenue from 12.5% in the 2003 period to 9.0% of revenue in the
2004 period. Research and development remained flat at $0.3 million in the June
2004 quarter and were down as a percentage of revenue from 11.3% in the June
2003 quarter to 8.1% of revenue in the June 2004 quarter. It is expected that
research and development costs 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 without increasing current staffing levels.
Selling. Selling expenses, which include sales salaries, commissions, overhead
and marketing costs, increased $1.4 million in the 2004 period to $3.7 million
from $2.3 million in the 2003 period. Selling expenses increased $0.6 million in
the June 2004 quarter to $1.9 million from $1.3 million in the June 2003
quarter, but were down as a percentage of revenue from 50.6% in the June 2003
quarter to 46.3% in the June 2004 quarter. The primary causes of the increase in
costs for the 2004 period are the $0.7 million increase in salaries and benefits
resulting from the addition of 13 new employees, the $0.3 million of marketing
costs incurred related to trade shows, new product launch activities, channel
diversification activities and remaining customer trials and $0.1 million in
consulting costs related to expanding our product set, sales and marketing
activities in the government vertical, and maintaining our webcast service
infrastructure. In addition, $0.2 million of the increase results from higher
commissions and bonuses associated with higher revenue levels. The primary cause
of the increase in costs for the June 2004 quarter is the $0.4 million increase
in salaries and benefits resulting from the addition of 13 new employees. In
addition, $0.1 million of the increase results from higher commissions and
bonuses associated with higher revenue levels.
General and administrative. General and administrative expenses increased $1.1
million in the 2004 period to $3.7 million from $2.6 million in the 2003 period.
General and administrative expenses as a percentage of net revenues for the 2004
period declined from 53.7% in the 2003 period to 50.5% in the 2004 period.
General and administrative expenses increased $0.4 million to $1.8 million in
the June 2004 quarter from $1.4 million in the June 2003 quarter, but were down
as a percentage of revenue from 52.2% in the June 2003 quarter to 44.4% in the
June 2004 quarter. The primary components of the increase in costs in the 2004
period were $0.5 million in non-cash expense recorded in connection with the
issuance of restricted stock as compensation, $0.2 million of additional
professional fees related to executive searches conducted during the period for
new members of senior management, $0.2 million of additional provisions for bad
debts related to the increase in the size of our business and a $0.1 million
increase in corporate-related fees/taxes including proxy filing costs, franchise
tax, Nasdaq listing, SEC filing and Board of Directors fees. The primary
components of the increase in costs in the June 2004 quarter were $0.3 million
in non-cash expense recorded in connection with the issuance of restricted stock
as compensation and $0.1 million of additional provisions for bad debts related
to the increase in the size of our business.
Other (income) expense. Other expenses increased $2.6 million to $4.5 million in
the 2004 period from $1.9 million in the 2003 period. The increase was primarily
due to accelerated amortization of the discount on
11
subordinated debentures totaling $3.2 million resulting from the exchange of the
subordinated debentures for preferred stock in the 2004 period. This caused a
$2.2 million increase in amortization of discount on subordinated debentures
between the two periods. 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. Offsetting these two
items were a decrease in interest expense of $0.7 million, resulting from the
exchange of convertible subordinated debentures for convertible preferred stock
in January 2004 and the termination of the line of credit with JP Morgan Chase
in February 2004, and an increase in unrealized gain on marketable equity
securities of $0.2 million in the 2004 period as stock received in settlement of
an account receivable appreciated in value.
Other (income) expenses decreased $1.1 million to $(0.2) million in the June
2004 quarter from $0.9 million in the June 2003 quarter. Interest expense
decreased $0.4 million and amortization of discount on subordinated debentures
decreased $0.4 million in the June 2004 quarter, resulting from the exchange of
convertible subordinated debentures for convertible preferred stock in January
2004 and the termination of the line of credit with JP Morgan Chase in February
2004, and unrealized gain on marketable equity securities increased $0.2 million
in the June 2004 quarter as stock received in settlement of an account
receivable appreciated in value.
Discontinued Operations. 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 operation of the division or the segment. In the
2004 period, there was no income (loss) from discontinued AV operations and a
$(0.1) million loss from discontinued VS operations that resulted from the
settlement of a lawsuit related to this segment. In the 2003 period, we incurred
a loss from discontinued AV operations of $1.2 million and from discontinued VS
operations of $0.9 million. In the June 2004 quarter, there was no income (loss)
from discontinued AV operations and a $(0.1) million loss from discontinued VS
operations that resulted from the settlement of a lawsuit related to this
segment. In the June 2003 quarter, we incurred a loss from discontinued AV
operations of $0.4 million and from discontinued VS operations of $0.6 million.
Net Loss. Net loss attributable to common stockholders increased to $11.5
million, or $0.33 per basic and diluted share, in the 2004 period from $9.5
million, or $0.33 per basic and diluted share, for the 2003 period. Net loss
attributable to common stockholders decreased to $3.2 million, or $0.09 per
basic and diluted share, in the June 2004 quarter from $4.9 million, or $0.17
per basic and diluted share, for the June 2003 quarter. 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.
Six Months Ended June 30, Three Months Ended June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net loss attributable to common stockholders ..... $(11,518,828) $ (9,548,974) $ (3,230,868) $ (4,899,707)
Depreciation and amortization ............... 2,572,866 3,016,236 1,232,408 1,641,950
Amortization of deferred financing costs .... 84,796 92,763 -- 47,254
Amortization of discount on
subordinated debentures ................... 3,165,037 992,875 -- 458,250
Loss on exchange of debt .................... 1,354,000 -- -- --
Non cash compensation ....................... 559,824 673,536 271,038 429,993
Loss from discontinued AV operations ........ -- 1,173,067 -- 380,045
Loss from discontinued VS operations ........ 61,288 938,493 61,288 619,014
Preferred stock dividends ................... 171,415 -- 97,492 --
Interest expense, net ....................... 45,006 219,242 (6,494) 38,591
------------ ------------ ------------ ------------
12
Six Months Ended June 30, Three Months Ended June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
EBITDA from continuing operations ................ $ (3,504,596) $ (2,442,762) $ (1,575,136) $ (1,284,610)
============ ============ ============ ============
Liquidity and Capital Resources
At June 30, 2004, we had working capital of $11.3 million compared to $4.9
million at December 31, 2003, an increase of approximately 132%. We had $10.4
million in cash and cash equivalents at June 30, 2004 compared to $4.2 million
at December 31, 2003. The $6.4 million increase in working capital resulted
primarily from the net proceeds from the February 2004 private placement of
common stock of $12.4 million and net proceeds from the exercise of stock
options of $0.6 million offset by the funding of the $5.0 million usage of cash
in operations in the 2004 period and the purchase of $1.7 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 gave 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 six months ended June 30, 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 six months ended June 30, 2004.
In February 2004, we raised net proceeds of $12.4 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 protections. 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.
The following summarizes our contractual cash obligations and commercial
commitments at June 30, 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) ......... $ 3,700,139 $ 2,196,857 $ 1,282,909 $ 220,373 $ --
Operating lease obligations ...... 188,887 132,168 56,719 -- --
Capital lease obligations ........ 101,679 101,679 -- -- --
----------- ----------- ----------- ----------- -----------
Total ....................... $ 3,990,705 $ 2,430,704 $ 1,339,628 $ 220,373 $ --
=========== =========== =========== =========== ===========
(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 $5.0 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
increase in accrued expenses. We used this cash to partially fund the $3.6
million cash loss from operations (net of the $11.3 million net loss and the
total non-cash expenses of $7.7 million) and the $1.4 million increase in other
current assets, the $0.3 million increase in other assets, and the $0.2 million
decrease in accounts payable.
Investing activities for the 2004 period included purchases of $1.7 million for
network, computer 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.
13
Financing activities for the 2004 period included receipt of the $12.4 million
of net proceeds from the February 2004 private placement of common stock and the
$0.6 million of net proceeds from the exercise of stock options.
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 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 relationships. 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.
Prepaid commissions
Prior to the sale of the VS operation, we paid commissions to VS employees for
their efforts in obtaining year-long 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 June
30, 2004 and December 31, 2003, we had deferred approximately $60,000 and
$200,000, 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 FASB Statement 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.
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.
14
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently defending any suit or claim. We have entered into an
arbitration proceeding with Gores Technology Group in connection with the sale
of our VS business to Gores in September 2003. The asset purchase agreement for
the transaction provided that if the parties were unable to agree on the
determination of the net assets of the VS business as of June 30, 2003, the
matter would be submitted to an independent firm of certified public accountants
to make the determination. The parties were unable to agree on this
determination and, accordingly, have engaged PricewaterhouseCoopers LLP to
conduct the arbitration.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting ("Annual Meeting") of Stockholders was held on May 27,
2004.
The 29,865,140 shares of common stock present at the Annual Meeting out of
a then total of 37,378,150 shares outstanding and entitled to vote acted as
follows with respect to the following proposals; with the following results:
Proposal 1. (a) That the following constitutes the number of shares voted
with respect to the election of Michael Toporek for Director:
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FOR AGAINST ABSTAIN
29,820,316 44,824 --
(b) That the following constitutes the number of shares voted with
respect to the election of David Trachtenberg for Director:
FOR AGAINST ABSTAIN
29,820,316 44,824 --
Proposal 2. That the following constitutes the number of shares voted with
respect to the approval of BDO Seidman as independent auditors for the year
ending December 31, 2004.
FOR AGAINST ABSTAIN
29,771,772 83,951 9,466
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Notice of Restricted Stock Award, Restricted Stock Award Agreement
and Investment Representation Statement - James Spanfeller dated
June 23, 2004
10.2 Amended and Restated Employment Agreement - Michael Brandofino dated
July 1, 2004
10.3 Employment Agreement - Christopher A. Zigmont dated July 1, 2004
10.4 Consulting Agreement - Aurelius Consulting Group dated July 21, 2004
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) On June 24, 2004, we furnished a Form 8-K containing a press release
announcing that we would enter into an arbitration proceeding with
Gores Technology Group ("Gores") in connection with the sale of our
video solutions business to Gores in September 2003.
(ii) On April 30, 2004, we furnished a Form 8-K containing a press
release announcing that we entered into an agreement with Tandberg,
Inc., to acquire certain assets of their wholly-owned subsidiary,
Network Systems, LLC, formerly NuVision.
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(iii) On April 30, 2004, we furnished a Form 8-K containing a press
release announcing our results of operation and financial condition
for the three months ended March 31, 2004 and the text of the April
26, 2004, conference call to review our first quarter results.
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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: August 16, 2004 By: /s/ David C. Trachtenberg
--------------------------------------------
David C. Trachtenberg,
Chief Executive Officer
(principal executive officer)
Date: August 16, 2004 By: /s/ Christopher A. Zigmont
--------------------------------------------
Christopher A. Zigmont,
Chief Financial Officer
(principal financial and accounting officer)
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