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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 September 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
November 12, 2004 was 37,870,490.
GLOWPOINT, INC.
Index
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements*.....................................................................1
Consolidated Balance Sheets September 30, 2004 and December 31, 2003............................1
Consolidated Statements of Operations For the Nine Months and Three Months Ended
September 30, 2004 and 2003............................................................2
Consolidated Statements of Cash Flows For the Nine Months Ended September 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..................9
Item 3. Quantitative and Qualitative Disclosures and Market Risk..............................................16
Item 4. Controls and Procedures...............................................................................16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................................16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...........................................17
Item 3. Defaults Upon Senior Securities.......................................................................17
Item 4. Submission of Matters to a Vote of Security Holders...................................................17
Item 5. Other Information.....................................................................................17
Item 6. Exhibits and Reports on Form 8-K......................................................................17
Signatures.......................................................................................................19
Certifications...................................................................................................20
* 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
September 30, 2004 December 31, 2003
------------------ -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 7,280,262 $ 4,184,897
Escrowed cash .......................................................... 336,701 335,188
Accounts receivable, net of allowance for doubtful accounts
of $81,444 and $71,620, respectively ........................... 3,081,401 2,305,552
Other current assets ................................................... 1,699,308 1,439,978
------------- -------------
Total current assets ............................................... 12,397,672 8,265,615
Furniture, equipment and leasehold improvements, net ........................ 12,753,154 13,024,055
Goodwill .................................................................... 2,547,862 2,547,862
Other assets ................................................................ 314,810 149,574
------------- -------------
Total assets ....................................................... $ 28,013,498 $ 23,987,106
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 1,919,002 $ 2,368,484
Accrued expenses ....................................................... 1,484,359 900,690
Deferred revenue ....................................................... 947,447 --
Current portion of capital lease obligations ........................... 68,609 131,182
------------- -------------
Total current liabilities .......................................... 4,419,417 3,400,356
------------- -------------
Noncurrent liabilities:
Capital lease obligations, less current portion ........................ -- 34,972
------------- -------------
Total noncurrent liabilities ....................................... -- 34,972
------------- -------------
------------- -------------
Total liabilities .................................................. 4,419,417 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 shares authorized;
37,870,490 and 30,543,672 shares outstanding, respectively ......... 3,787 3,054
Treasury stock, 39,891 shares at cost .................................. (239,742) (239,742)
Deferred compensation .................................................. (1,538,394) (1,650,607)
Additional paid-in capital ............................................. 157,290,482 137,449,109
Accumulated deficit .................................................... (131,922,052) (116,748,231)
------------- -------------
Total stockholders' equity ......................................... 23,594,081 18,813,583
------------- -------------
Total liabilities and stockholders' equity ......................... $ 28,013,498 $ 23,987,106
============= =============
See accompanying notes to consolidated financial statements.
1
Glowpoint, Inc.
Consolidated Statements of Operations
(Unaudited)
Nine Months Ended September 30, Three Months Ended September 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net revenues ....................................... $ 11,736,042 $ 7,482,963 $ 4,384,643 $ 2,581,476
Cost of revenues ................................... 9,469,909 7,387,191 3,434,562 2,488,291
------------ ------------ ------------ ------------
Gross margin .................................... 2,266,133 95,772 950,081 93,185
------------ ------------ ------------ ------------
Operating expenses
Research and development ........................ 1,027,827 934,240 364,534 327,020
Selling ......................................... 5,863,846 3,693,703 2,116,919 1,359,461
General and administrative ...................... 5,670,580 4,060,224 1,958,380 1,428,211
Impairment losses on long-lived assets .......... -- 1,379,415 -- 1,379,415
------------ ------------ ------------ ------------
Total operating expenses ........................... 12,562,253 10,067,582 4,439,833 4,494,107
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Loss from continuing operations .................... (10,296,120) (9,971,810) (3,489,752) (4,400,922)
------------ ------------ ------------ ------------
Other (income) expense
Amortization of deferred financing
costs ......................................... 84,796 140,017 -- 47,254
Interest income ................................. (29,393) (6,684) (15,048) (884)
Interest expense ................................ 60,895 943,489 1,544 156,506
(Gain) loss on marketable equity
securities .................................... (132,284) -- 36,798 --
Amortization of discount on
subordinated debentures ....................... 3,165,037 1,490,213 -- 497,338
Loss on exchange of debt ........................ 1,354,000 -- -- --
------------ ------------ ------------ ------------
Total other expenses, net .......................... 4,503,051 2,567,035 23,294 700,214
------------ ------------ ------------ ------------
Net loss from continuing operations ................ (14,799,171) (12,538,845) (3,513,046) (5,101,136)
Loss from discontinued AV operations ............... -- (1,173,067) -- --
Loss from discontinued VS operations ............... (104,671) (3,467,676) (43,383) (2,529,183)
------------ ------------ ------------ ------------
Net loss ........................................... (14,903,842) (17,179,588) (3,556,429) (7,630,319)
Preferred stock dividends .......................... (269,979) -- (98,564) --
------------ ------------ ------------ ------------
Net loss attributable to common
stockholders .................................... $(15,173,821) $(17,179,588) $ (3,654,993) $ (7,630,319)
============ ============ ============ ============
Net loss from continuing operations per share:
Basic and diluted ............................... $ (0.41) $ (0.43) $ (0.10) $ (0.17)
============ ============ ============ ============
Loss from discontinued operations per share:
Basic and diluted ............................... $ -- $ (0.16) $ -- $ (0.09)
============ ============ ============ ============
Preferred stock dividends per share:
Basic and diluted ............................... $ (0.01) $ -- $ -- $ --
============ ============ ============ ============
Net loss attributable to common
stockholders per share:
Basic and diluted ............................... $ (0.42) $ (0.59) $ (0.10) $ (0.26)
============ ============ ============ ============
Weighted average number of common shares:
Basic and diluted ............................... 35,893,281 29,189,338 37,869,611 29,641,031
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
2
Glowpoint, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
-----------------------------------
2004 2003
------------ ------------
Cash flows from Operating Activities:
Net loss ................................................................ $(14,903,842) $(17,179,588)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization ....................................... 4,051,136 4,212,407
Amortization of deferred financing costs ............................ 84,796 140,017
Amortization of discount on subordinated debentures ................. 3,165,037 1,490,213
Loss on exchange of debt ............................................ 1,354,000 --
Non-cash compensation ............................................... 730,777 673,536
Proceeds from sale of marketable equity securities .................. 213,542 --
Impairment losses on long-lived assets .............................. -- 1,379,415
Increase (decrease) in cash attributable to changes in assets and
liabilities, net of effects of acquisitions:
Escrowed cash ................................................... (1,512) --
Accounts receivable ............................................. (775,849) (798,249)
Assets of discontinued AV operations ............................ -- 734,532
Assets of discontinued VS operations ............................ -- 6,874,912
Other current assets ............................................ (1,728,128) (2,907,057)
Other assets .................................................... (250,032) 23,880
Accounts payable ................................................ (449,483) (688,765)
Accrued expenses ................................................ 313,690 972,829
Liabilities of discontinued VS operations ....................... -- 1,952,125
Deferred revenue ................................................ 947,447 --
------------ ------------
Net cash used by operating activities ...................... (7,248,421) (3,119,793)
------------ ------------
Cash flows from Investing Activities:
Purchases of furniture, equipment and leasehold improvements ............ (2,524,980) (1,936,831)
Proceeds from sale of VS operations ..................................... -- 16,233,312
------------ ------------
Net cash provided (used) by investing activities .................... (2,524,980) 14,296,481
------------ ------------
Cash flows from Financing Activities:
Net proceeds from common stock offering ................................. 12,424,705 --
Costs of issuance/exchange of subordinated debentures .................. (15,232) (249,355)
Exercise of warrants and options, net ................................... 556,838 535,421
Proceeds from bank loans ................................................ -- 75,545,455
Payments on bank loans .................................................. -- (81,390,971)
Deferred financing costs ................................................ -- (66,367)
Payments on capital lease obligations ................................... (97,545) (29,899)
------------ ------------
Net cash provided (used) by financing activities .................... 12,868,766 (5,655,716)
------------ ------------
Increase in cash and cash equivalents ...................................... 3,095,365 5,520,972
Cash and cash equivalents at beginning of period ........................... 4,184,897 2,762,215
------------ ------------
Cash and cash equivalents at end of period ................................. $ 7,280,262 $ 8,283,187
============ ============
Supplement disclosures of cash flow information:
Cash paid during the period for:
Interest ................................................................ $ 60,895 $ 295,023
============ ============
Taxes ................................................................... $ -- $ --
============ ============
3
Non-cash financing and investing activities:
Equipment with costs totaling $232,100 was acquired under capital lease
arrangements during the nine months ended September 30, 2003.
Preferred stock dividends of $269,979 were accrued during the nine months ended
September 30, 2004.
See accompanying notes to consolidated financial statements.
4
GLOWPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 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. 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. 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 our company 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., 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.
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 nine months ended September 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 September 30, 2004, 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.
5
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Net loss as reported .............................. $ (14,903,842) $ (17,179,588) $ (3,556,429) $ (7,630,319)
Add: stock-based compensation expense
included in reported loss, net of tax .......... 5,179 2,118,936 -- 2,007,341
Deduct: total stock-based employee
compensation expense determined under the
fair value based method for all awards,
net of tax ..................................... (563,314) (5,452,137) (301,188) (3,597,455)
-------------- -------------- -------------- --------------
Pro forma net loss ................................ $ (15,461,977) $ (20,512,789) $ (3,857,617) $ (9,220,433)
============== ============== ============== ==============
Loss per share:
Basic and diluted - as reported.................... $ (0.42) $ (0.59) $ (0.10) $ (0.26)
Basic and diluted - pro forma...................... $ (0.43) $ (0.70) $ (0.10) $ (0.31)
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:
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------------- -----------------------------
2004 2003 2004 2003
-------- ---------- ---------- ------------
Risk free interest rate................... 4.29% 3.70% 4.23% 3.71%
Expected lives............................ 10 years 5.4 years 10 years 6.3 years
Expected volatility....................... 96.57% 91.95% 95.98% 71.78%
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 common shares outstanding during
the period. Diluted loss per share is calculated by dividing net loss
attributable to common stockholders by the weighted average number of common
shares 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 subordinated debentures using the
if-converted method.
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------ ------------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Weighted average shares outstanding ................ 35,893,281 29,189,338 37,869,611 29,641,031
Effect of dilutive options and warrants ............ -- -- -- --
---------- ---------- ---------- ----------
Weighted average shares outstanding
including dilutive effect of securities ......... 35,893,281 29,189,338 37,869,611 29,641,031
========== ========== ========== ==========
Weighted average options and warrants to purchase 12,670,041 and 12,267,580
shares of common stock and preferred stock convertible into 2,036,677 shares
common stock were outstanding during the nine and three months ended September
30, 2004. Weighted average options and warrants to purchase 12,266,347 and
11,795,107 shares of common stock and subordinated debentures convertible into
2,036,677 shares of common stock were outstanding during the nine and three
months ended September 30, 2003. These options and warrants were not included in
the computation of diluted EPS because the Company reported a net operating loss
for these periods and their effect would have been anti-dilutive.
6
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. On October 8, 2004, pursuant to Section 2.5 of the Asset Purchase
Agreement dated June 10, 2003, we were informed by the Chief Financial Officer
of Wire One Technology, Inc. (Gores' wholly owned subsidiary) that no earn-out
payment was due for the one-year period ending June 30, 2004 since Wire One's
Total Net Revenues plus the annual revenue derived from Pierce Technology
Services, Inc. videoconferencing services business for such year totaled
$84,742,000. 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 second 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 September 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 November 1, 2004, the parties have submitted their
initial analyses and additional requested information 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.
On October 8, 2004, Gores announced that it had signed a definitive agreement to
acquire V-SPAN, Inc., a video collaboration solutions company, in a merger
transaction with Wire One. Pursuant to the terms of the Asset Purchase Agreement
dated as of June 10, 2003, Gores agreed that, for a period of three years
commencing on the closing date, it would not, directly or indirectly, acquire or
own any equity interest in the restricted competitors listed on a schedule to
the Agreement in a transaction that would result in Gores directly or indirectly
marketing or selling services that are competitive with the our Network
Business. Our Network Business consists of the Glowpoint service as well as
bridging, gateway and network design operations. V-SPAN is one of the restricted
competitors listed on such schedule and we believe that substantially all of the
services offered by V-SPAN are competitive with our Network Business. The
Agreement further provides, however, that Gores may acquire any of the
restricted
7
competitors upon payment by Gores to us of a one-time fee of $5 million. Gores
announced that the transaction was expected to close in late October upon
receipt of regulatory and other approvals. The transaction has not closed as of
the date of this report.
At September 30, 2004, we were owed $2,432,732 from Gores and we owed Gores
$1,719,078, with this receivable and payable resulting from post-sale
transactions.
Revenues and pretax loss from discontinued VS operations are as follows:
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------------ -------------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Revenues .................... $ -- $ 40,253,589 $ -- $ --
Pretax loss ................. $ (104,671) $ (3,467,676) $ (43,383) $ (2,529,183)
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 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 assets summarized in a single line item on the consolidated
balance sheets and its results from operations summarized in a single line item
on the consolidated statements of operations.
Revenues and pretax loss from discontinued AV operations are as follows:
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------------ -------------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Revenues ..................... $ -- $ 3,873,822 $ -- $ --
Pretax loss .................. $ -- $ (1,173,067) $ -- $ --
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 the
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 nine months ended September 30, 2004.
8
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 nine months ended
September 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 nine months ended September
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. 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 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 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 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. 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
9
business communications. 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 our company 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., 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.
Wire One Technologies, Inc. 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, a privately held international
acquisition and management firm, in order to focus solely on growing our
GlowPoint network service. At that time, we changed our name to Glowpoint. 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, 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)
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------ ------------------------
2004 2003 2004 2003
------ ------ ------ ------
Net revenues ............................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues ........................................ 80.7 98.7 78.3 96.4
------ ------ ------ ------
Gross margin ............................................ 19.3 1.3 21.7 3.6
------ ------ ------ ------
Operating expenses
Research and development ........................... 8.7 12.5 8.3 12.7
Selling ............................................ 50.0 49.4 48.3 52.7
General and administrative ......................... 48.3 54.3 44.7 55.3
Impairment losses on long-lived assets ............. -- 18.4 -- 53.4
------ ------ ------ ------
Total operating expenses ................................ 107.0 134.6 101.3 174.1
------ ------ ------ ------
Loss from continuing operations ......................... (87.7) (133.3) (79.6) (170.5)
------ ------ ------ ------
Other (income) expense
Amortization of deferred financing costs ........... 0.7 1.9 -- 1.8
Interest income .................................... (0.3) (0.1) (0.3) --
Interest expense ................................... 0.5 12.6 -- 6.1
(Gain) loss on marketable equity securities ........ (1.1) -- 0.8 --
10
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------ ------------------------
2004 2003 2004 2003
------ ------ ------ ------
Amortization of discount on subordinated
debentures ....................................... 27.0 19.9 -- 19.2
Loss on exchange of debt .......................... 11.6 -- -- --
------ ------ ----- ------
Total other expenses, net ............................... 38.4 34.3 0.5 27.1
------ ------ ----- ------
Net loss from continuing operations ..................... (126.1) (167.6) (80.1) (197.6)
Loss from discontinued AV operations .................... -- (15.7) -- --
Loss from discontinued VS operations .................... (0.9) (46.3) (1.0) (98.0)
------ ------ ----- ------
Net loss attributable to common stockholders ............ (127.0) (229.6) (81.1) (295.6)
Preferred stock dividends ............................... (2.3) -- (2.2) --
------ ------ ----- ------
Net loss attributable to common stockholders ............ (129.3)% (229.6)% (83.3)% (295.6)%
====== ====== ===== ======
Nine Months Ended September 30, 2004 ("2004 period") Compared to Nine Months
Ended September 30, 2003 ("2003 period") and Three Months Ended September 30,
2004 ("September 2004 quarter") Compared to Three Months Ended September 30,
2004 ("September 2003 quarter").
Net Revenues. Net revenues from continuing operations increased $4.2 million, or
57%, in the 2004 period to $11.7 million from $7.5 million for the 2003 period.
Contractual revenue increased $4.0 million, or 84%, in the 2004 period to $8.7
million from $4.7 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. The largest component of this
revenue category, GlowPoint subscription and related revenue, increased $2.9
million, or 61%, in the 2004 period to $7.6 million from $4.7 million for the
2003 period. Our newest and second category of contractual revenue is from the
NuVision base and totaled $1.1 million in the 2004 period. The growth in
subscription and related revenue was the result of having, on average, 443 more
billable subscriber locations in the 2004 period than in the 2003 period and
those billable subscriber locations each producing an average of $719 per month
in revenue. There were 1,194 average billable subscriber locations in the 2004
period and 751 in the 2003 period. The average monthly subscription and related
revenue per subscriber location rose 1% from $698 in the 2003 period to $706 in
the 2004 period. The increase in average monthly subscription and related
revenue per subscriber location is related to sales of our "All You Can See"
unlimited video calling plan service bundles introduced in January 2004.
Non-contractual revenue increased $0.2 million, or 11%, in the 2004 period to
$3.0 million from $2.8 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 $0.2 million increase in non-contractual revenue resulted
from $0.7 million in revenue from NuVision customers, offset by a $0.4 million
decrease in bridging revenue from $2.3 million in the 2003 period to $1.9
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 $4.4 million for the September 2004 quarter represent an
increase of $1.8 million, or 70 %, over the $2.6 million in revenues reported
for the September 2003 quarter. Contractual revenue increased $1.3 million, or
72%, in the September 2004 quarter to $3.2 million from $1.9 million for the
September 2003 quarter. The largest component of this revenue category,
GlowPoint subscription and related revenue, increased $0.7 million, or 40%, in
the September 2004 quarter to $2.6 million from $1.9 million for the September
2003 quarter. The growth in subscription and related revenue was the result of
having, on average, 270 more billable subscriber locations in the September 2004
quarter than in the September 2003 quarter and those billable subscriber
locations each producing an average of $929 per month in revenue. There were
1,202 average billable subscriber locations in the September 2004 quarter and
932 in the September 2003 quarter. The average monthly subscription and related
revenue per subscriber location increased 9 % to $727 in the September 2004
quarter from $668 in the September 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
September 2004 quarter. The second category of contractual revenue is from the
NuVision base and totaled $0.6 million in the September 2004 quarter.
Non-contractual revenue increased 65% to $1.2 million the September 2004
11
quarter from $0.7 million in the September 2003 quarter. The net increase in
non-contractual revenue resulted from $0.4 million in revenue for services
provided to NuVision customers, $0.2 million in event revenue and a $0.1 million
decrease in installation revenue. Events in the 2004 quarter included broadcast
production support to the NFL Training Camps and the Democratic National
Convention.
Cost of Revenue. Cost of revenue increased $2.1 million, or 28%, in the 2004
period to $9.5 million from $7.4 million for the 2003 period but declined as a
percentage of revenue from 98.7% in the 2003 period to 80.7% in the 2004 period.
Infrastructure costs (defined as backbone related costs of network) remained
flat at $2.4 million in the 2004 and 2003 periods. Access costs (defined as
costs of connecting subscriber locations to the network) increased $0.8 million,
or 26%, in the 2004 period to $3.9 million from $3.1 million for the 2003
period. The growth in access costs was the result of having, on average, 443
more billable subscriber locations in the 2004 period than in the 2003 period
and those billable subscriber locations each costing an average of $197 per
month for access to the network. There were 1,194 average billable subscriber
locations in the 2004 period and 751 in the 2003 period. The average monthly
access costs per subscriber location fell 21% from $454 in the 2003 period to
$359 in the 2004 period. 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 include the personnel costs
related to providing the GlowPoint service together with the ISDN network costs
of providing H.320 bridging and other services to both GlowPoint and NuVision
customers. These costs increased $1.3 million, or 64%, in the 2004 period to
$3.2 million from $1.9 million for the 2003 period. This increase resulted
primarily from the costs of revenues generated by the NuVision base of customers
which totaled $1.2 million.
Cost of revenue increased $0.9 million, or 38%, in the September 2004 quarter to
$3.4 million from $2.5 million for the September 2003 quarter but declined as a
percentage of revenue from 96.4% in the 2003 quarter to 78.3% in the September
2004 quarter. Infrastructure costs remained flat at $0.8 million in the
September 2004 and September 2003 quarters. Access costs increased $0.2 million,
or 22%, in the September 2004 quarter to $1.2 million from $1.0 million for the
September 2003 quarter. The growth in access costs was the result of having, on
average, 270 more billable subscriber locations in the September 2004 quarter
than in the September 2003 quarter and those billable subscriber locations each
costing an average of $280 per month for access to the network. There were 1,202
average billable subscriber locations in the September 2004 quarter and 932 in
the September 2003 quarter. The average monthly access costs per subscriber
location fell 6% from $371 in the September 2003 quarter to $350 in the
September 2004 quarter. The decline in average monthly access costs per
subscriber location is the result of increasing use of DSL as the means of
accessing the network. Other costs of revenue increased $0.7 million, or 108%,
in the September 2004 quarter to $1.4 million from $0.7 million for the
September 2003 quarter as a result of the costs of revenue generated by the
NuVision base of customers which totaled $0.7 million.
Gross Margins. Gross margins increased approximately $2.2 million in the 2004
period from $0.1 million in the 2003 period to $2.3 million. As a percentage of
revenue, gross margins increased in the 2004 period to 19.3%, as compared to
1.3% of net revenues in the 2003 period. Gross margins were $1.0 million in the
September 2004 quarter, compared to $0.1 million in the September 2003 quarter.
As a percentage of revenue, gross margins increased to 21.7% in the September
2004 quarter as compared to 3.6% of net revenues in the September 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 32% in the September 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 $1.0 million from $0.9 million in the 2003 period but were down as a
percentage of revenue from 12.5% in the 2003 period to 8.7% of revenue in the
2004 period. Research and development costs were $0.3 million in both the
September 2004 and 2003 quarters but were down as a percentage of revenue from
12.7% in the September 2003 quarter to 8.3% of revenue in the September 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.
12
Selling. Selling expenses, which include sales salaries, commissions, overhead,
and marketing costs, increased $2.2 million in the 2004 period to $5.9 million,
from $3.7 million in the 2003 period. Selling expenses as a percentage of net
revenues increased from 49.4% in the 2003 period to 50.0% in the 2004 period.
Selling expenses increased $0.7 million in the September 2004 quarter to $2.1
million from $1.4 million in the September 2003 quarter, but were down as a
percentage of revenue from 52.7% in the September 2003 quarter to 48.3% in the
September 2004 quarter. The primary causes of the increase in costs for the 2004
period are the $1.1 million increase in salaries and benefits resulting from the
addition of 15 employees, the $0.4 million increase in marketing costs incurred
related to trade shows, new product launch activities, channel diversification
activities and remaining customer trials and the $0.1 million increase in
consulting costs related to expanding our product set, sales and marketing
activities in the government vertical, and activating our new resellers. In
addition, $0.4 million of the increase results from higher commissions and
bonuses associated with higher revenue levels. The primary causes of the
increase in costs for the September 2004 quarter were the $0.5 million increase
in salaries and benefits resulting from the addition of 20 new employees and the
$0.1 million increase in marketing costs incurred related to trade shows, new
product launch activities, channel diversification activities and remaining
customer trials. 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 $1.6
million, to $5.7 million in the 2004 period from $4.1 million in the 2003
period. General and administrative expenses as a percentage of revenue for the
2004 period declined to 48.3% from 54.3% in the 2003 period. General and
administrative expenses increased $0.6 million to $2.0 million in the September
2004 quarter from $1.4 million in the September 2003 quarter but declined as a
percentage of net revenues from 55.3% in the September 2003 quarter to 44.7% in
the September 2004 quarter. The primary components of the increase in costs in
the 2004 period were $0.6 million in non-cash expense recorded in connection
with the issuance of restricted stock as compensation, $0.3 million of
additional professional fess 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 $0.3 million increase in corporate-related fees and taxes including proxy
filing costs, franchise tax, Nasdaq listing, SEC filing and Board of Director's
fees and director's and officer's insurance. The primary components of the
increase in costs in the September 2004 quarter were $0.2 million in non-cash
expense recorded in connection with the issuance of restricted stock as
compensation, $0.1 million of additional professional fess 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 and a $0.1 million increase in corporate-related fees and
taxes including proxy filing costs, franchise tax, Nasdaq listing, SEC filing
and Board of Director's fees and director's and officer's insurance.
Impairment Losses on Other Long-Lived Assets. In the third quarter of 2003, as a
result of our periodic evaluation of long-lived assets used in operations, we
determined that fixed assets with a net book value of $1.4 million were no
longer being used in our IP video network and generating cash flows to support
their carrying values. In accordance with FASB Statement No. 144, these assets
were written down to their fair value.
Other (Income) Expenses. Other expenses increased $1.9 million to $4.5 million
in the 2004 period from $2.6 million in the 2003 period. The increase was
primarily due to accelerated amortization of the discount on subordinated
debentures totaling $3.2 million resulting from the exchange of the subordinated
debentures for preferred stock in the 2004 period. This caused a $1.7 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 2004. Offsetting these two items were a decrease in interest
expense of $0.9 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 JPMorgan Chase in February 2004, and an increase in
(gain) loss on marketable equity securities of $0.1 million in the 2004 period
as stock received in settlement of an account receivable was sold at a gain.
Other (income) expenses decreased $677,000 to $23,000 in the September 2004
quarter from $700,000 in the September 2003 quarter. Interest expense decreased
$155,000 and amortization of discount on subordinated debentures decreased
$497,000 million in the September 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 JPMorgan Chase in February
2004.
13
Discontinued Operations. We treated our AV division and VS segment as
discontinued operations because: 1) the operations and cash flows of this
division and this 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 two lawsuits 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 $3.5 million. In the September 2004 quarter, there
was no income (loss) from discontinued AV operations and a $43,000 loss from VS
operations relating to settlement of a lawsuit related to this segment. In the
September 2003 quarter, there was no income (loss) from discontinued AV
operations and a loss of $2.5 million from discontinued VS operations.
Net Loss. Net loss attributable to common stockholders decreased to $15.2
million, or $0.42 per basic and diluted share, in the 2004 period from $17.2
million, or $0.59 per basic and diluted share, for the 2003 period. Net loss
attributable to common stockholders decreased to $3.7 million, or $0.10 per
basic and diluted share, in the September 2004 quarter from $7.6 million, or
$0.26 per basic and diluted share, in the September 2003 quarter. Earnings
before interest, taxes, depreciation and amortization ("EBITDA") is not a
standard financial measurement under accounting principals 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 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 manger. The following table provides a
reconciliation of the net loss attributable to common stockholders to EBITDA
from continuing operations.
Nine Months Ended September 30, Three Months Ended September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
------------ ------------ ------------ -----------
Net loss attributable to common stockholders ..... $(15,173,821) $(17,179,588) $(3,654,993) $(7,630,319)
Depreciation and amortization ............... 4,051,136 4,212,407 1,478,271 1,196,171
Amortization of deferred financing costs .... 84,796 140,017 -- 47,254
Amortization of discount on
subordinated debentures ................... 3,165,037 1,490,213 -- 497,338
Loss on exchange of debt .................... 1,354,000 -- -- --
Loss on impairment of long-lived assets ..... -- 1,379,415 -- 1,379,415
Non cash compensation ....................... 730,777 673,536 170,953 --
Loss from discontinued AV operations ........ -- 1,173,067 -- --
Loss from discontinued VS operations ........ 104,671 3,467,676 43,383 2,529,183
Preferred stock dividends ................... 269,979 -- 98,564 --
Interest expense, net ....................... 31,502 374,864 (13,504) 155,622
------------ ------------ ----------- -----------
EBITDA from continuing operations ................ $ (5,381,923) $ (4,268,393) $(1,877,326) $(1,825,336)
============ ============ =========== ===========
Liquidity and Capital Resources
At September 30, 2004, we had working capital of $8.0 million compared to $4.9
million at December 31, 2003, an increase of approximately 64.0%. We had $7.3
million in cash and cash equivalents at September 30, 2004 compared to $4.2
million at December 31, 2003. The $3.1 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 $7.2 million usage of
cash in operations in the 2004 period and the purchase of $2.5 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
14
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 nine months ended
September 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 nine months ended September
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 September 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) .......... $2,475,389 $ 970,090 $1,309,375 $ 195,924 $ --
Operating lease obligations ....... 185,841 73,059 112,782 -- --
Capital lease obligations ......... 68,609 33,638 34,971 -- --
---------- ---------- ---------- ---------- ----------
Total ........................ $2,729,839 $1,076,787 $1,457,128 $ 195,924 $ --
========== ========== ========== ========== ==========
(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 $7.2 million as
compared to net cash used in operations of $3.1 million during the 2003 period.
The primary source of operating cash in 2004 was the $0.3 million increase in
accrued expenses. Significant uses of cash included funding the $5.5 million
cash loss from operations (net of the $14.9 million net loss and the total
non-cash expenses of $9.4 million), the $1.7 million increase in other current
assets, the $0.3 million increase in other assets and the $0.4 million decrease
in accounts payable.
Investing activities for the 2004 period included purchases of $2.5 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.
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.
15
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. Because
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
September 30, 2004 and December 31, 2003, we had deferred approximately $28,000
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.
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.
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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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
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
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
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(i) On July 29, 2004, we filed a Form 8-K containing a press release
announcing our results of operations and financial condition for the
three- and six- month periods ended June 30, 2004 and the text of the July
29, 2004, conference call to review our second quarter results.
(ii) On September 7, 2004, we filed a Form 8-K announcing the resignation of
James Kuster from our Board of Directors as a result of his acceptance of
a new position at a company whose internal guidelines require him to
resign from all of his existing board positions and not as the result of
any disagreement between Mr. Kuster and GlowPoint.
(iii) On September 21, 1004, we filed a Form 8-K announcing the appointment of
James Spanfeller to the Audit Committee of the Board of Directors
effective September 21, 2004.
(iv) On October 8, 2004, we filed a Form 8-K announcing that Gores Technology
Group, LLC announced that it signed a definitive agreement to acquire
V-SPAN, Inc., a video collaboration solutions company, in a merger with
Wire One Technology, Inc., a videoconferencing equipment integration and
service company. Pursuant to the terms of the asset purchase agreement
dated as of June 10, 2003 (the "Agreement") between us and Gores, Gores
agreed that, for a period of three years commencing on the September 23,
2003 closing date, it would not, directly or indirectly, acquire or own
any equity interest in the restricted competitors listed on a schedule to
the Agreement in a transaction that would result in Gores directly or
indirectly marketing or selling services that are competitive with our
network business consisting of GlowPoint service as well as bridging,
gateway and network design operations. V-SPAN is one of the restricted
competitors identified on such schedule and we believe that substantially
all of the services offered by V-SPAN are competitive with our network
business. The Agreement further provided, however, that Gores may acquire
any of the restricted competitors upon payment to us of a one-time fee of
$5 million.
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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: November 15, 2004 By: /s/ David C. Trachtenberg
--------------------------------------------
David C. Trachtenberg,
Chief Executive Officer
(principal executive officer)
Date: November 15, 2004 By: /s/ Christopher A. Zigmont
--------------------------------------------
Christopher A. Zigmont,
Chief Financial Officer
(principal financial and accounting officer)
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