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GLOWPOINT, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) Certain statements in this Quarterly Report on Form 10-Q (the "Report") are "forward-looking statements." These forward-looking statements include, but are not limited to, statements about the plans, objectives, expectations and intentions of Glowpoint, Inc. ("Glowpoint" or "we" or "us" or the "Company"), a Delaware corporation, and other statements contained in this Report that are not historical facts. Forward-looking statements in this Report or hereafter included in other publicly available documents filed with the Securities and Exchange Commission (the "Commission") reports to our stockholders and other publicly available statements issued or released by us involve known and unknown risks, uncertainties and other factors that could cause our actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Such future results are based upon management's best estimates based upon current conditions and the most recent results of operations. When used in this Report, the words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions are generally intended to identify forward-looking statements, because these forward-looking statements involve risks and uncertainties. There are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors that are discussed under the section entitled "Risk Factors," as well as our consolidated financial statements and the footnotes thereto, for the fiscal year ended December 31, 2011 as filed with the Commission with our Annual Report on Form 10-K filed on March 8, 2012. The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Report. Overview Glowpoint, Inc. ("Glowpoint" or "we" or "us" or the "Company") is a provider of cloud and managed visual communication services. Our services, delivered via our cloud-based OpenVideo™ platform (as discussed in further detail below), are securely accessible via any network (private or public) and are technology-agnostic. The -16--------------------------------------------------------------------------------- Table of Contents Company delivers services to more than 500 different enterprises in over 68 countries supporting thousands of video endpoints, immersive telepresence rooms, and infrastructure for business-quality, real-time, two-way visual communications. Glowpoint's managed services solve the challenges associated with achieving consistent high-quality video experiences and controlling the total cost of ownership related to technology and support, while increasing the return on investment (ROI) of its end users' video equipment by providing seamless access to video equipment outside of their immediate enterprise network. On October 1, 2012, the Company completed the acquisition of privately held Affinity VideoNet, Inc. ("Affinity"), a provider of public videoconferencing rooms and managed videoconferencing services to professional service organizations globally (as discussed in Note 14 to our consolidated financial statements attached hereto). Glowpoint's solutions are hardware-agnostic, meaning the video equipment may be manufactured by Cisco, Polycom, Avaya, Logitech, StarLeaf, Sony or others and network-neutral, in that connectivity may be via native Internet or network provided by AT&T, Verizon, TATA Communications, British Telecom or others, supporting all recognized video standards across any IP network. With its carrier-grade, multi-tenant OpenVideo™ platform built in-house, Glowpoint provides a range of remote monitoring and management services that increase the utilization of the video deployment by ensuring all systems are on, all the time, and calls start on time with the highest possible quality. Glowpoint's core value proposition for customers includes the enablement of integration of their video deployment into the unified communications environment, allowing wide adoption and usage of video communications, increasing ROI and lowering the total cost of ownership. With its multi-tenant infrastructure in the cloud, Glowpoint provides an alternative to capital-intensive, premise-based infrastructure, which customers traditionally have had to purchase for the video environment to function, as well as the tools and services to enable wide adoption of video communications throughout their business. Glowpoint is a leader in managed video and global video exchange services that provide businesses and service providers a way to link together their "islands of video" across third party private networks and enable organizations to drive adoption. The Company has been recognized in the industry for focusing on providing an innovative customer experience through our use of IP-based video functionality and innovation. Industry awards and recognition over the last few years include: Excellence in Globalization Award (Frost and Sullivan); Top Ten Managed Service Provider (MSP mentor); Best US Managed Conferencing Services Provider (Telepresence and Videoconferencing Insight Newsletter); PACE Award for contributions to the advancement of video communications (Telespan); and Growth Company of the Year, Finalist (New Jersey Technology Council). We are also widely followed and discussed in market research by the leading industry and research analyst firms, including Gartner, Forrester, Frost and Sullivan, and Wainhouse Research. Glowpoint, a Delaware corporation, was formed in May 2000. The Company operates in one segment and therefore segment information is not presented Glowpoint Services and Features Today's telepresence and video conferencing environments have become a key part of a complete unified business communications strategy. For organizations that are already using video, and for those exploring its benefits for the first time, OpenVideo™ is a unique platform that can help them achieve a successful video collaboration program. Traditionally, video has presented challenges by presenting a complex maze of systems and networks that must be navigated through and closely managed - and although most of the business-quality video systems today are "standards-based," there are inherent interoperability problems between different vendors' video equipment, resulting in communication islands. Glowpoint's suite of cloud managed video services can be accessed and utilized by customers regardless of the technology and network they are using. Customers who purchase a Cisco, Polycom, Avaya, LifeSize (Logitech), StarLeaf or use any other third-party video communications software, may all take advantage of the Glowpoint OpenVideo™ cloud regardless of their choice of network. Glowpoint's core services are offered as part of OpenVideo™ to generate monthly recurring revenue for the Company. OpenVideo™ is a cloud platform that offers telepresence, video and unified communications and collaboration users a way to meet and communicate across the varying hardware/software platforms and carrier networks in a secure and seamless fashion. OpenVideo™ combines years of best practices, experience and technology development into video collaboration platform that provides instant connectivity, self-serve and managed help desk resources, and the ease of use that makes video collaboration seamless and effortless. Beyond the technology and -17--------------------------------------------------------------------------------- Table of Contents applications, OpenVideo™ is built around security protocols to ensure that enterprises and organizations of any size can communicate to any other desired video users in a secure, high-quality and reliable fashion. Glowpoint's services are categorized as follows: Monitoring & Management Services and Collaboration Services ("Managed Services Combined") We provide end-to-end cloud managed services for telepresence, conference room, desktop, mobile solutions, and video infrastructure. We have a team of video experts utilizing the latest in remote management technologies. These engineering and operational customer support resources operate out of our four Video Network Operations Centers (VNOCs) located in the United States, in California, Colorado, Pennsylvania, and New Jersey. These VNOC facilities provide global 24/7 support to our network and managed service customers, including our wholesale branded partners customers. The primary functions of these operational resources located in these centers are customer service, conference production, network operation monitoring and remediation, and help desk technical support. The company also maintains Point-of Presence (POP) locations that house the technology and infrastructure along with the servers and database warehousing for the OpenVideo platform and support systems of the business. There are currently three POPs located in the United States (Newark, New Jersey and Chicago, Illinois) and United Kingdom (London), with additional POPs planned as needed. These carrier-neutral data centers are co-location facilities where network equipment that serves our video infrastructure is housed and acts as shared or dedicated infrastructure for our business customers. The POPs provide power redundancy and UPS (uninterrupted Power Supply) systems, which are constantly monitored and maintained. They also have physical security, flood controls, fire detection and suppression systems and are structurally designed for protection from earthquakes. We offer a complete portfolio of remote monitoring and management services that can help make video more widely available, improve up-time, drive higher usage, off-load IT teams, or all of the above. Our service packages can be customized to suit the needs of the business, whether for a large enterprise, or small or medium sized business. Glowpoint provides wholesale programs and private-labeled resale options for hardware manufacturers, network operators and systems integrators seeking to offer video services as a value-added addition to their collaboration and communications offerings. All of Glowpoint's unique features and services have been designed so that the entire suite can be private labeled by other service providers or companies who want to integrate video communications into their existing products quickly and cost effectively. Glowpoint will provide all of the video infrastructure and support, including customer portals and billing applications, as a private label service for a third party. This means that our services are branded with the other company's name, logo and other information, our live operators answer calls using the other company's name, and the other company's end user customers view the service as provided by that other company even though it is actually "powered by Glowpoint." Glowpoint has been involved in a number of private label opportunities and currently provides branding of its services to six strategic global partners that serve 165 customers with these services and support from Glowpoint through their unique brands. These services account for approximately 38% of Glowpoint's total revenue for the nine months ended September 30, 2012. Many strategic global companies in the unified communications industry have recognized Glowpoint's value to their own sales and marketing efforts. These strategic partnerships are core to the Company's global sales strategy. Glowpoint's collaboration services, hosted via the OpenVideo™ cloud, are designed to connect video users all over the world whether they are on immersive telepresence, conference room, desktop or mobile devices. Customers that are registered to the OpenVideo™ cloud can connect to any other customer in the OpenVideo™ cloud and get access to Glowpoint's full suite of cloud managed video services, including the Virtual Video Room, video bridging, and webcasting services. Through our extensive partnerships, OpenVideo™ customers can also have business-to-business connectivity across other service providers platforms. Network Services In order to provide customers with access to the OpenVideo™ cloud, Glowpoint maintains a dedicated video overlay network. We have partnered with Tier 1 MPLS providers, including Global Crossing, Masergy, XO, Qwest, TATA, PCCW and Verizon Business, to provide a global access footprint with flexible options to consume our suite of OpenVideo™ services. Our OpenVideo™ cloud is also connected to the Equnix Ethernet Carrier Exchange to provide native Layer 2 Ethernet services to enterprise customers. -18--------------------------------------------------------------------------------- Table of Contents Glowpoint leverages the last mile and network connectivity of carriers and provides an option for businesses to purchase a full overlay network for their video only needs. The network bandwidth that we provide for these dedicated overlay networks ranges from 1.5Mbps to 1Gbps. As a result of this, our network services business carries variable costs associated with the purchasing and reselling of this connectivity. With our network services, we provide customers with the flexibility to either source the entire network from a single provider, maintain existing network and extend a logical connection to the OpenVideo™ cloud or bring bandwidth to OpenVideo™ datacenters. Although a declining component of our revenue stream, we believe that network services will continue to be an integral part of our revenue mix in the future, driven by new connectivity needs to connect and peer with Glowpoint's OpenVideo™ cloud. However, Glowpoint does not consider this a core driver or measurement of its market share in the cloud managed video service industry. Professional and Other Services With the growing interest in convergence and the desire by some enterprises to add the transport of video to their enterprise networks, we have provided professional services and believe the market for such services is growing. Additionally, our extensive knowledge of all leading video conferencing vendors' equipment makes our video engineers a valuable resource for manufacturers, partners and end users on an outsourced basis. While our primary focus is generating monthly recurring revenue from our subscription services, our professional services have been a valuable lead for video communication opportunities leading to sales of our managed video services. Glowpoint provides professional services to its partners and customers for custom solutions but does not consider this a core driver or measurement of its market share in the cloud managed video service industry. We have bundled certain components of our managed services to offer video communication solutions for broadcast/media content acquisition and event services. Customers have used our managed video services during events to cost-effectively acquire video content for broadcasters, cable companies and other media enterprises, especially in the sports, news and entertainment industries. While it includes our core managed video services, IP-based broadcasting and event services require more project management and dedicated operational and engineering personnel than our standard subscription services. Rather than using an expensive satellite feed, companies can acquire broadcast-quality standard or high definition footage at a fraction of the cost from Glowpoint over a dedicated IP connection. Since 2002, we have provided this service to ESPN during the professional football and basketball drafts. ESPN has used our service for interviews from team locations with coaches, players and analysts during their coverage. In 2007, we launched a High Definition (HD) content acquisition solution that we branded TeamCamHD and RemoteCamHD. This offering provides two-way HD video communication for content acquisition from remote locations. Glowpoint now provides a full suite of HD solutions for the broadcast, entertainment and media industry and is considered a high-quality alternative to the traditional means of acquiring content in many applications, including interviews and even full motion video. Critical Accounting Policies and Estimates There have been no changes to our critical accounting policies in the three months ended September 30, 2012. Critical accounting policies and the significant estimates made in accordance with them are regularly discussed with our audit committee. Those policies are discussed under "Critical Accounting Policies" in our "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7, as well as in our consolidated financial statements and the footnotes thereto for the fiscal year ended December 31, 2011, as filed with the Commission with our Annual Report on Form 10-K filed on March 8, 2012. Results of Operations Nine and Three Months Ended September 30, 2012 ("2012 Period" and the "2012 Quarter," respectively) compared to Nine and Three Months Ended September 30, 2011 ("2011 Period" and the "2011 Quarter," respectively) Revenue. Total revenue decreased $657,000, or 3.2%, in the 2012 Period to $20,107,000 from $20,764,000 in the 2011 Period. Total revenue decreased $268,000 or 3.9% in the 2012 Quarter to $6,561,000 from $6,829,000 in the 2011 Quarter. The following are the changes in the components of our revenue: • Revenue for Managed Services Combined, which represents subscription (monitoring and management) services generally tied to contracts of 12 months or more and usage based collaboration services, increased -19--------------------------------------------------------------------------------- Table of Contents 3.9% to $9,705,000 and 1.3% to $3,204,000 in the 2012 Period and 2012 Quarter, respectively. Revenue for Managed Services Combined accounted for 48.3% of our total revenue in the 2012 Period compared to 45.0% for the 2011 Period. The increase in revenue for Managed Services Combined was primarily attributable to new customer acquisitions. • Revenue for network services, which represents network sales and related services generally tied to contracts of 12 months or more, decreased 9.8% to $9,168,000 and 8.7% to $2,998,000 in the 2012 Period and 2012 Quarter, respectively. Revenue for network services accounted for 45.6% of total revenue in the 2012 Period compared to 48.9% for the 2011 Period. The decrease in revenue for network services was primarily attributable to customers disconnecting or transitioning to managed service in their portfolio of Glowpoint services. The trends in the economy, the commoditization of IP networking, along with the availability of converged networking services such that end users can purchase one network and use for all their unified communications applications to include video, have all contributed to the decline in these revenues for Glowpoint. We believe our network service revenue will continue to decline in the current year, although at a slower pace than the previous year. • Revenue for professional and other services, which represent non-recurring services, decreased 1.9% to $1,234,000 in the 2012 Period and increased 6.3% to $359,000 in the 2012 Quarter. Revenue for professional and other services accounted for 6.1% of revenue in the 2012 Period compared to 6.1% for the 2011 Period. The decrease in revenue for professional and other services in the 2012 Quarter was primarily attributable to a lower number of special projects for our wholesale partners. Nine Months Ended September 30, Three Months Ended September 30, (in thousands) (in thousands) Increase % Change Increase % Change 2012 2011 (Decrease) 2012 2011 (Decrease) Revenue Managed Services Combined $ 9,705 $ 9,344 $ 361 3.9 % $ 3,204 $ 3,164 $ 40 1.3 % Network services 9,168 10,162 (994 ) (9.8 ) 2,998 3,282 (284 ) (8.7 ) Professional and other services 1,234 1,258 (24 ) (1.9 ) 359 383 (24 ) (6.3 ) Total revenue $ 20,107 $ 20,764 $ (657 ) (3.2 )% $ 6,561 $ 6,829 $ (268 ) (3.9 )% Network and Infrastructure Expenses. Network and infrastructure expenses decreased 12.0% to $6,297,000 in the 2012 Period and 8.7% to $2,076,000 in the 2012 Quarter. Network and infrastructure expenses include all external costs, exclusive of depreciation and amortization, related to the Glowpoint network and hosting facilities for our cloud-based infrastructure. This operating expense category also includes the cost for taxes which have been billed to customers. The decrease was primarily attributed to customers disconnecting or reducing their portfolio of Glowpoint services and the achievement of cost efficiencies exclusive of the lost customers. Global Managed Services Expenses. Global managed services expenses decreased 7.2% to $5,262,000 in the 2012 Period and increased 0.2% to $1,801,000 in the 2012 Quarter. Global managed services expenses include all costs for delivering and servicing our managed services, such as delivering customer service operations, internal costs of maintaining the network and infrastructure, and the development and implementation of operating support systems and associated hardware enhancements. The decrease in the 2012 Period was primarily attributed to automation and efficiencies in use of capacity of platform. Sales and Marketing Expenses. Sales and marketing expenses increased 12.4% to $2,954,000 in the 2012 Period and increased 35.7% to $1,090,000 in the 2012 Quarter. The increase in the 2012 Period and Quarter was primarily attributed to investments in expanding the sales force. General and Administrative Expenses. General and administrative expenses, which include direct corporate expenses related to costs of personnel in the various corporate support categories, including executive, finance, -20--------------------------------------------------------------------------------- Table of Contents human resources and information technology, increased 4.9% to $4,384,000 in the 2012 Period and 16.1% to $1,732,000 in the 2012 Quarter. The increase in the 2012 Period and 2012 Quarter was primarily due to expenses related with the acquisition of Affinity. Depreciation and Amortization Expenses. Depreciation and amortization expenses increased 32.6% to $1,301,000 in the 2012 Period and 6.9% to $436,000 in the 2012 Quarter, due to purchases of property and equipment (as discussed in Note 13 to our consolidated financial statements attached hereto) exceeding the retirement of these assets. Income (Loss) from Operations. Income from operations decreased by $240,000 in the 2012 Period to a $91,000 loss and $629,000 in the 2012 Quarter to a $574,000 loss. The primary drivers of the decrease were due to acquisition related expenses and a decline in revenue associated with professional services. Interest and Other Expense. Interest and other expense in the 2012 Period was $76,000, which principally reflected $43,000 of interest charges from vendors and $33,000 of the amortization of financing charges related to our Revolving Loan Facility. Interest and other expense in the 2011 Period was $93,000, which principally reflected $47,000 of interest charges from vendors and $46,000 of the amortization of financing charges related to our Revolving Loan Facility. Interest and other expense in the 2012 Quarter was $18,000, which principally reflected $14,000 of interest charges from vendors and $4,000 of the amortization of financing charges related to our Revolving Loan Facility. Interest and other expenses in the 2011 Quarter was $30,000, which principally reflected $15,000 of interest charges from vendors and $15,000 of the amortization of financing charges related to our Revolving Loan Facility. Income Taxes. As a result of our current taxable income, we recorded a $5,000 provision for incomes taxes for certain minimum taxes in the 2012 Period. There was no provision recorded in the 2012 Quarter, 2011 Period or 2011 Quarter. Any deferred tax asset that would be related to our losses has been fully reserved under a valuation allowance, reflecting the uncertainties as to realization evidenced by our historical results and restrictions on the usage of the net operating loss carry forwards. Income (Loss) from Continuing Operations. Income from continuing operations decreased by $223,000 to a $167,000 loss in the 2012 Period, and by $617,000 to a $592,000 loss in the 2012 Quarter. This increase was due to acquisition related expenses and a reduction in revenue as noted above. Income from Discontinued Operations. Income from discontinued operations decreased by $29,000 to $0 in the 2012 Period and $11,000 to $0 in the 2012 Quarter. This decrease was a result of the transfer of our ISDN resale business completed in the third quarter of 2011. Net Income (Loss). Net Income decreased by $257,000 to a $172,000 loss or, or $(0.01) per basic and diluted share, in the 2012 Period. Net Income decreased by $628,000 to a $592,000 loss, or $(0.02) per basic and diluted share, in the 2012 Quarter. The primary drivers of the decrease were due to acquisition related expenses and a decline in professional services revenue. Liquidity and Capital Resources For the nine months ended September 30, 2012, we had a net loss of $172,000 and a positive cash flow from operations of $707,000. As of September 30, 2012, we had $1,650,000 of cash, positive working capital of $1,157,000 and an accumulated deficit of $164,871,000. In June 2012, the Company entered into the Second Loan Modification Agreement (as amended, the "Revolving Loan Facility") with Silicon Valley Bank ("SVB") pursuant to which the Company may borrow up to $5,000,000 for working capital purposes and under which we had unused borrowing availability of approximately $2,662,000 as of September 30, 2012 (as discussed in Note 10 to our consolidated financial statements attached hereto). In October 2012, the Revolving Loan facility with SVB was terminated in connection with repayment of outstanding amounts due and replaced with a revolving line of credit with Comerica Bank (the "Comerica Revolver") which will bear interest at a rate equal to the Prime Rate (as defined in the Comerica Loan Agreement) plus 2.00% and matures on April 1, 2014. -21--------------------------------------------------------------------------------- Table of Contents Also in October 2012, Loan and Security Agreements ("Loan Agreement") were entered into with Comerica Bank and Escalate Capital Partners SBIC I, L.P. ("Escalate") in order to finance a portion of the Affinity acquisition (as discussed in Note 14 to our consolidated financial statements attached hereto). The Loan Agreement with Comerica Bank provided the Company with a $2.0 million term loan (the "Comerica Term Loan") and will bear interest at a rate equal to the Prime Rate (as defined in the Comerica Loan Agreement) plus 3.00%. The Comerica Term Loan matures on November 1, 2015. The Loan Agreement with Escalate provided the Company with a $6.5 million term loan (the "Escalate Term Loan") for a term of 60 months and bears interest at a fixed rate of 12.0% per annum, with interest-only payable monthly for the first 24 months, commencing after such interest-only period, monthly payments of the outstanding principal amount, plus accrued interest, for the remainder of the term. Pursuant to the terms of our Series A-2 Preferred Stock and Series B-1 Preferred Stock, the Company will be obligated to pay dividends commencing on January 1, 2013. Based primarily on our efforts to manage costs and our Loan Agreements and Comerica Revolver, along with our cash flow projection, the Company believes that it has, and will have, sufficient cash flow to fund its operations through at least November 30, 2013. We have historically been able to raise capital in private placements as needed to fund operations and provide growth capital. There can be no assurances, however, that we will be able to raise additional capital as may be needed or upon acceptable terms, or that current economic conditions will not negatively impact us. If the current economic conditions negatively impact us and we are unable to raise additional capital that may be needed on terms acceptable to us, it could have a material adverse effect on the Company. Off-Balance Sheet Arrangements As of September 30, 2012, we had no off-balance sheet arrangements. Adjusted EBITDA Adjusted EBITDA is defined as income (loss) from continuing operations before depreciation, amortization, interest expense, interest income, taxes, severance, acquisition costs and stock-based compensation. Adjusted EBITDA is not intended to replace operating income (loss), net income (loss), cash flow or other measures of financial performance reported in accordance with generally accepted accounting principles. Rather, Adjusted EBITDA is an important measure used by management to assess the operating performance of the Company. Adjusted EBITDA as defined here may not be comparable to similarly titled measures reported by other companies due to differences in accounting policies. A reconciliation of Adjusted EBITDA to net income (loss) from continuing operations is shown below: Nine Months Ended Three Months Ended September 30, September 30, 2012 2011 2012 2011Income (loss) from continuing operations $ (167 ) $ 56 $ (592 ) $ 25 Depreciation and amortization 1,301 981 436 408 Amortization of financing costs 33 46 4 15 Interest expense 43 47 14 15 EBITDA 1,210 1,130 (138 ) 463 Stock-based compensation 448 181 229 34 Severance - 351 - 340 Acquisition costs 480 - 480 - Adjusted EBITDA $ 2,138 $ 1,662 $ 571 $ 837 InflationManagement does not believe inflation had a significant effect on the condensed consolidated financial statements for the periods presented. |