SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30, 2003.
or
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
Commission file number: 0-25940
GLOWPOINT, INC.
(Exact Name of registrant as Specified in its Charter)
Delaware 77-0312442
(State or other Jurisdiction of (I.R.S. Employer Number)
Incorporation or Organization)
225 Long Avenue, Hillside, New Jersey 07205
(Address of Principal Executive Offices)
973-282-2000
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes |X| No |_|
Check whether the registrant is an accelerated filer as defined in Rule
12b-2 of the Exchange Act of 1934.
Yes |_| No |X|
The number of shares outstanding of the registrant's Common Stock as of
November 10, 2003 was 29,844,260.
AMENDMENT OF PRIOR FINANCIAL INFORMATION
Glowpoint, Inc. ("Glowpoint" or the "Company") is amending its report on Form
10-Q to reflect a non-cash charge related to the extension of the post-
termination exercise period for options held by former employees of the
Company's discontinued Video Solutions("VS") operations.
The amendment arises from the accounting for option modifications in
accordance with Financial Accounting Standards Board (FASB) Interpretation No.
44, Accounting for Certain Transactions Involving Stock Compensation (an
Interpretation of APB Opinion No. 25) ("FIN 44"). As part of the 2003 annual
audit, the Company determined that in order to comply with FIN 44, it was
appropriate to amend the third quarter 10-Q to reflect the non-cash charge as of
the date of the former employees' termination of employment from the Company
when the VS business was sold.
The financial results presented in this report reflect the Company's amended
financial results. The non-cash charge does not impact continuing operations.
The financial impact is an increase in the Company's loss from discontinued VS
operations of $1,952,125, or 129% and 338% for the nine months and three months
ended September 30, 2003, respectively, and an increase in the net loss
attributable to common stockholders of $1,952,125, or 13% and 34% for the nine
months and three months ended September 30, 2003, respectively. The loss from
discontinued VS operations per share increases from $0.05 to $0.12 per share for
the nine months ended September 30, 2003, and increases from $0.02 to $0.09 for
the three months ended September 30, 2003. The net loss attributable to common
stockholders per share increases from $0.52 to $0.59 per share for the nine
months ended September 30, 2003, and increases from $0.19 to $0.26 for the
three months ended September 30, 2003.
In order to preserve the nature and character of the disclosures set forth in
such items as originally filed, this Amendment No. 1 does not reflect events
occurring after the filing of the original Quarterly Report on Form 10-Q on
November 14, 2003, or modify or update the disclosures presented in the original
Quarterly Report on Form 10-Q, except to reflect the revisions described above.
Certain amounts in the historical periods presented have been reclassified to
conform to current presentation standards.
AMENDED ITEMS
The Company hereby amends the following items, financial statements, exhibits or
other portions of its Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003, as set forth herein:
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The financial information of the Company is amended in its entirety to read as
set forth at pages 1 through 9 herein and is incorporated herein by reference.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" is amended in its
entirety to read as set forth at pages 9 through 16 herein and is incorporated
herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
The list of exhibits set forth in, and incorporated by reference from, the
Exhibit Index, is amended to include the following additional exhibits, filed
herewith:
EXHIBIT
NO. DESCRIPTION
------- ----------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a), as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a), as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
GLOWPOINT, INC.
Index
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements* ....................................................... 1
Consolidated Balance Sheets September 30, 2003 and December 31, 2002 ................. 1
Consolidated Statements of Operations For the Nine Months and Three Months Ended
September 30, 2003 and 2002 ....................................................... 2
Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2003
and 2002 .......................................................................... 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 ................................. 15
Item 4. Controls and Procedures .................................................................. 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ........................................................................ 15
Item 2. Changes in Securities and Use of Proceeds ................................................ 15
Item 3. Defaults Upon Senior Securities .......................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders ...................................... 16
Item 5. Other Information ........................................................................ 17
Item 6. Exhibits and Reports on Form 8-K ......................................................... 17
Signatures .......................................................................................... 18
Certifications ........................................................................................ 38
* The Balance Sheet at December 31, 2002 has been taken from the audited
financial statements at that date.
All other financial statements are unaudited.
Glowpoint, Inc.
Consolidated Balance Sheets
September 30, 2003 December 31, 2002
------------------ -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 8,283,187 $ 2,762,215
Accounts receivable-net ........................................... 2,076,139 1,277,891
Assets of discontinued AV operations .............................. 72,535 807,067
Assets of discontinued VS operations .............................. -- 41,314,701
Other current assets .............................................. 2,420,893 727,262
------------- -------------
Total current assets .......................................... 12,852,754 46,889,136
Furniture, equipment and leasehold improvements-net .................... 11,794,128 11,512,415
Goodwill ............................................................... 2,547,862 2,547,862
Other assets ........................................................... 454,722 552,251
------------- -------------
Total assets .................................................. $ 27,649,466 $ 61,501,664
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 1,560,250 $ 1,055,427
Accrued expenses .................................................. 1,654,199 681,369
Liabilities of discontinued VS operations ......................... -- 17,333,120
Current portion of capital lease obligations ...................... 130,161 --
------------- -------------
Total current liabilities ..................................... 3,344,610 19,069,916
Noncurrent liabilities:
Bank loan payable ................................................. -- 5,845,516
Capital lease obligations, less current portion ................... 72,041 --
------------- -------------
Total noncurrent liabilities .................................. 72,041 5,845,516
------------- -------------
Total liabilities ............................................. 3,416,651 24,915,432
------------- -------------
Commitments and contingencies
Subordinated debentures ................................................ 4,888,000 4,888,000
Discount on subordinated debentures .................................... (3,647,142) (4,888,000)
------------- -------------
Subordinated debentures, net ...................................... 1,240,858 --
------------- -------------
Stockholders' Equity:
Preferred stock, $.0001 par value; 5,000,000 shares authorized,
none issued ................................................... -- --
Common Stock, $.0001 par value; 100,000,000 authorized;
29,729,820 and 28,931,660 shares outstanding, respectively .... 2,973 2,893
Treasury stock, 39,891 shares at cost ............................. (239,742) (239,742)
Additional paid-in capital ........................................ 134,717,607 131,132,374
Accumulated deficit ............................................... (111,488,881) (94,309,293)
------------- -------------
Total stockholders' equity .................................... 22,991,957 36,586,232
------------- -------------
Total liabilities and stockholders' equity .................... $ 27,649,466 $ 61,501,664
============= =============
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,
------------------------------- --------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net revenues ................................... $ 7,482,963 $ 3,883,471 $ 2,581,476 $ 1,525,494
Cost of revenues ............................... 7,387,191 3,616,071 2,488,291 1,440,224
------------ ------------ ------------ ------------
Gross margin ................................... 95,772 267,400 93,185 85,270
------------ ------------ ------------ ------------
Operating expenses
Research and development .................... 934,240 734,444 327,020 273,645
Selling ..................................... 3,693,703 2,961,210 1,359,461 1,238,204
General and administrative .................. 4,060,224 3,462,872 1,428,211 1,095,153
Impairment losses on long-lived assets ...... 1,379,415 -- 1,379,415 --
Restructuring ............................... -- 260,000 -- --
------------ ------------ ------------ ------------
Total operating expenses ....................... 10,067,582 7,418,526 4,494,107 2,607,002
------------ ------------ ------------ ------------
Loss from continuing operations ................ (9,971,810) (7,151,126) (4,400,922) (2,521,732)
------------ ------------ ------------ ------------
Other (income) expense
Amortization of deferred financing costs .... 140,017 106,456 47,254 46,762
Interest income ............................. (6,684) (68,045) (884) (9,913)
Interest expense ............................ 943,489 182,176 156,506 76,389
Amortization of discount on subordinated
debentures ................................ 1,490,213 -- 497,338 --
------------ ------------ ------------ ------------
Total other expenses, net ...................... 2,567,035 220,587 700,214 113,238
------------ ------------ ------------ ------------
Net loss from continuing operations ............ (12,538,845) (7,371,713) (5,101,136) (2,634,970)
Loss from discontinued AV operations ........... (1,173,067) (1,837,588) -- (569,114)
Loss from discontinued VS operations ........... (3,467,676) (1,900,990) (2,529,183) (1,131,821)
Loss from discontinued Voice operations ........ -- (151,339) -- (50,000)
------------ ------------ ------------ ------------
Net loss attributable to common stockholders ... $(17,179,588) $(11,261,630) $ (7,630,319) $ (4,385,905)
============ ============ ============ ============
Net loss from continuing operations per
share:
Basic and diluted ........................... $ (0.43) $ (0.26) $ (0.17) $ (0.09)
============ ============ ============ ============
Loss from discontinued AV operations per
share:
Basic and diluted ........................... $ (0.04) $ (0.06) $ -- $ (0.02)
============ ============ ============ ============
Loss from discontinued VS operations per
share:
Basic and diluted ........................... $ (0.12) $ (0.07) $ (0.09) $ (0.04)
============ ============ ============ ============
Loss from discontinued Voice operations per
share:
Basic and diluted ........................... $ -- $ -- $ -- $ --
============ ============ ============ ============
Net loss attributable to common stockholders
per share:
Basic and diluted ........................... $ (0.59) $ (0.39) $ (0.26) $ (0.15)
============ ============ ============ ============
Weighted average number of common shares:
Basic and diluted ........................... 29,189,338 28,731,560 29,641,031 28,942,177
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
2
Glowpoint, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2003 2002
------------ ------------
Cash flows from Operating Activities
Net loss ................................................................ $(17,179,588) $(11,261,630)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ....................................... 4,212,407 3,811,168
Amortization of deferred financing costs ............................ 140,017 106,456
Amortization of discount on subordinated debentures ................. 1,490,213 --
Non-cash compensation ............................................... 673,536 230,409
Impairment losses on long-lived assets .............................. 1,379,415 --
Discontinued operations ............................................. 1,952,125 151,339
Increase (decrease) in cash attributable to changes in assets and
liabilities, net of effects of acquisitions:
Accounts receivable ............................................ (798,249) 9,144,844
Inventory ...................................................... -- (2,774,005)
Assets of discontinued AV operations ........................... 734,532 --
Assets of discontinued VS operations ........................... 6,874,912 --
Other current assets ........................................... (2,907,057) (6,359,056)
Other assets ................................................... 23,880 (563,995)
Accounts payable ............................................... (688,765) (1,134,620)
Accrued expenses ............................................... 972,829 (937,473)
Deferred revenue ............................................... -- (1,107,031)
Other current liabilities ...................................... -- (1,465,049)
------------ ------------
Net cash used in operating activities ...................... (3,119,793) (12,158,643)
------------ ------------
Cash flows from Investing Activities
Purchases of furniture, equipment and leasehold improvements ............ (1,936,831) (3,598,265)
Proceeds from sale of VS operation ...................................... 16,233,312 --
------------ ------------
Net cash (used in) provided by investing activities ................. 14,296,481 (3,598,265)
------------ ------------
Cash flows from Financing Activities
Proceeds from common stock offering ..................................... -- 20,257,962
Costs of issuance of subordinated debentures ............................ (249,355) --
Exercise of warrants and options, net ................................... 535,421 370,735
Proceeds from bank loans ................................................ 75,545,455 47,072,644
Payments on bank loans .................................................. (81,390,971) (48,760,035)
Deferred financing costs ................................................ (66,367) --
Payments on capital lease obligations ................................... (29,899) (44,394)
------------ ------------
Net cash provided by (used in) financing activities ................. (5,655,716) 18,896,912
------------ ------------
Increase in cash and cash equivalents ...................................... 5,520,972 3,140,004
Cash and cash equivalents at beginning of period ........................... 2,762,215 1,689,451
------------ ------------
Cash and cash equivalents at end of period ................................. $ 8,283,187 $ 4,829,455
============ ============
Supplement disclosures of cash flow information:
Cash paid during the period for:
Interest ................................................................ $ 295,023 $ 182,176
============ ============
Taxes ................................................................... $ -- $ --
============ ============
Non-cash financing and investing activities:
Equipment with costs totaling $258,110 was acquired under capital lease
arrangements during the nine months ended September 30, 2003.
See accompanying notes to consolidated financial statements.
3
GLOWPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
Note 1 -- The Business
Glowpoint, Inc. ("Glowpoint" or the "Company") operates the first IP-based
subscriber network service dedicated to video communications. Launched in late
2000, Glowpoint carries video calls throughout the United States and to Europe,
South America and Asia on a network provisioned through carrier-class backbone
and last mile access partners over a variety of solutions including SDSL, HDSL,
Fractional and Full T1's, DS3, T1, ATM and Gigabit Ethernet. The Glowpoint
service presently carries over 8,000 video calls per month on behalf of nearly
250 customers. The network service offers guaranteed up-time, real-time billing
and usage information, gateway services to ISDN, multi-point bridging, live
operator assistance, encryption, scheduling features and international
least-cost routing, among other value-added features. The Company operates a
state-of-the-art network operations center at its corporate headquarters in
Hillside, New Jersey, where research and development, software development,
network engineering, product development, product management, customer service
and help desk functions are located. The Company also maintains an operations
center in Camarillo, California where multi-point bridging, live-operator
assistance and other customer service functions are performed and redundant
capability for the network is maintained. Glowpoint's network spans 14 points of
presence across three continents and is able to host video calls to virtually
any business center around the world.
On September 23, 2003, the Company, formerly known as Wire One Technologies,
Inc., completed the sale of substantially all of the assets of its Video
Solutions ("VS") business to an affiliate of Gores Technology Group ("Gores"), a
privately held international acquisition and management firm, in order to focus
solely on growing its Glowpoint network service. Upon completing of the sale,
the name "Wire One Technologies" was transferred to Gores and the resulting
company, now exclusively focused on providing video communications services,
changed its name to Glowpoint, Inc. The VS segment included the Company's
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 assets and liabilities summarized in
single line items on the consolidated balance sheets and its results from
operations summarized in a single line item on the consolidated statement of
operations. See Note 6 for further information.
Note 2 -- Basis of Presentation
The accompanying unaudited financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine months ended September
30, 2003 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2003. For further information, refer to the
financial statements and footnotes thereto included in the Company's Annual
Report for the fiscal year ended December 31, 2002 as filed with the Securities
and Exchange Commission.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, AllComm Products Corporation ("APC"), VTC
Resources, Inc. ("VTC") and Wire One Travel Services, Inc. ("WOTS"). All
material intercompany balances and transactions have been eliminated in
consolidation.
Note 3 -- Effect of Recently Issued Accounting Standards
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Instruments
with Characteristics of both Liabilities and Equity". SFAS No. 150 establishes
standards for how an issuer classifies and measures certain
4
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
the scope of SFAS No. 150 as a liability. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective beginning September 1, 2003. The provisions of SFAS No. 150, which
the Company adopted in 2003, did not have a material impact on the consolidated
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements", addresses
consolidation by business enterprises of variable interest entities. Under
current practice, two enterprises generally have been included in consolidated
financial statements because one enterprise controls the other through voting
interests. This interpretation defines the concept of "variable interests" and
requires existing unconsolidated variable interest entities to be consolidated
by their primary beneficiaries if the entities do not effectively disperse the
risks among the parties involved. The provisions of FIN 46, which the Company
adopted in 2003, did not have a material impact on the consolidated financial
statements.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). This interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of this interpretation are
effective for interim and annual periods after December 15, 2002. The initial
recognition and initial measurement requirements of this interpretation are
effective prospectively for guarantees issued or modified after December 31,
2002. The provisions of FIN 45, which the Company adopted in 2003, did not have
a material impact on the consolidated financial statements.
In November 2002, the Emerging Issues Task Force (EITF) reached consensus on
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables". Revenue
arrangements with multiple deliverables include arrangements which provide for
the delivery or performance of multiple products, services and/or rights to use
assets where performance many occur at different points in time or over
different periods of time. EITF Issue No. 00-21 is effective for fiscal periods
beginning after June 15, 2003. This standard, which the Company adopted in 2003,
did not have a material impact on the consolidated financial statements.
Note 4 -- Stock-Based Compensation
At September 30, 2003, 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,
----------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ----------- -----------
Net loss as reported ....................... $(17,179,588) $(11,261,630) $(7,630,319) $(4,385,905)
Add: stock-based compensation expense
included in reported loss, net of tax ... 2,118,936 230,409 2,007,341 69,719
Deduct: total stock-based employee
compensation expense determined
under the fair value based method for
all awards, net of tax .................. (5,452,137) (3,294,404) (3,597,455) (1,036,482)
------------ ------------ ----------- -----------
Pro forma net loss ......................... $(20,512,789) $(14,325,625) $(9,220,433) $(5,352,668)
============ ============ =========== ===========
Loss per share:
Basic and diluted - as reported ............ $ (0.59) $ (0.39) $ (0.26) $ (0.15)
Basic and diluted - pro forma .............. $ (0.70) $ (0.50) $ (0.31) $ (0.19)
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,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
Risk free interest rate .... 3.70% 4.02% 3.71% 4.02%
Expected lives ............. 5.4 years 4.7 years 6.3 years 6.1 years
Expected volatility ........ 91.95% 105.32% 71.78% 135.95%
Effective June 24, 2003, the Company's board of directors voted to approve the
extension of the post-termination exercise period of all options outstanding for
employees who are related to the Company's VS business from 90 to 270 days. In
accordance with FIN 44, this modification results in a new measurement date as
of the date of the board vote to extend these options. On June 24, 2003, the
Company valued these options using the intrinsic value method prescribed by
Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued
to Employees." On September 23, 2003, the date of the sale of the VS business to
Gores (see Note 1), the Company recorded a non-cash compensation charge of
$1,952,125 related to the modification of these options. The effect of this
charge on the Company's Form 10-Q previously filed on November 14, 2003 is as
follows for the nine and three months ended September 30, 2003:
Nine Months Ended Three Months Ended
September 30, 2003 September 30, 2003
------------------ ------------------
LOSS FROM DISCONTINUED VS OPERATIONS
Loss from discontinued VS operations, as
previously reported $ (1,515,551) $ (577,058)
Non-cash stock-based compensation charge on
stock option modification $ (1,952,125) $ (1,952,125)
--------------- ---------------
Adjusted loss from discontinued VS
operations, as reported in the accompanying
consolidated statements of operations $ (3,467,676) $ (2,529,183)
=============== ===============
Adjusted loss from discontinued VS operations
per share:
Basic and diluted $ (0.12) $ (0.09)
=============== ===============
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
Net loss attributable to common stockholders $ (15,227,463) $ (5,678,194)
Non-cash stock-based compensation charge on
stock option modification $ (1,952,125) $ (1,952,125)
--------------- ---------------
Adjusted net loss attributable to common
stockholders, as reported in the accompanying
consolidated statements of operations $ (17,179,588) $ (7,630,319)
=============== ===============
Adjusted net loss attributable to common
stockholders per share:
Basic and diluted $ (0.59) $ (0.26)
=============== ===============
Note 5 -- 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,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Weighted average shares outstanding ........... 29,189,338 28,731,560 29,641,031 28,942,177
Effect of dilutive options and warrants ....... -- -- -- --
---------- ---------- ---------- ----------
Weighted average shares outstanding
including dilutive effect of securities .... 29,189,338 28,731,560 29,641,031 28,942,177
========== ========== ========== ==========
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
common shares were outstanding during the nine and three months ended September
30, 2003. Weighted average options and warrants to purchase 10,818,595 and
11,241,703 shares of common stock were outstanding during the nine and three
months ended September 30, 2002. 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.
Note 6 -- Discontinued Operations
In March 2003, the Company completed the sale of certain assets and liabilities
of its Audio-Visual ("AV") division to Signal Perfection Limited ("SPL") for
approximately $807,000, $250,000 of which was paid in cash at the close
6
of the transaction and the balance of which was paid in the form of a promissory
note payable in five equal consecutive monthly payments commencing on April 15,
2003. The sale of the AV division was aimed at enabling the Company to focus
more of its resources to the development and marketing of its subscriber-based
IP network, Glowpoint, and to its VS segment. As a consequence, this division,
previously part of the VS segment, has been classified as a discontinued
operation in the accompanying financial statements, with its 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.
Assets of discontinued AV operations consist of the following:
September 30, 2003 December 31, 2002
------------------ -----------------
Inventory ............................. $72,535 $300,000
Earnings in excess of billings ........ -- 507,067
------- --------
Total ........................ $72,535 $807,067
======= ========
Revenues and pretax loss from discontinued AV operations are as follows:
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------- --------------------------------
2003 2002 2003 2002
----------- ------------ ------------- -----------
Revenues ........ $ 3,873,822 $ 13,760,642 $ -- $ 4,667,407
Pretax loss ..... $(1,173,067) $ (1,837,588) $ -- $ (569,114)
In September 2003, the Company completed the sale of all of the properties,
rights, interests and other tangible and intangible assets that relate in any
material respect to its VS segment to Gores pursuant to the terms of the asset
purchase agreement dated as of June 10, 2003. The Company received total
consideration of up to $24 million for the transaction, consisting of $21
million in cash, including $19 million 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 earnout based on performance
of the assets over the next two years. Gores held back $2 million to cover
potential purchase price adjustments payable by Glowpoint arising under the
asset purchase agreement. The $2 million cash holdback and the $1 million
unsecured promissory note were not recorded on the consolidated balance sheet as
of September 30, 2003 as the Company thought it prudent to wait until the 90 day
post-closing review period had expired.
Gores will also pay Glowpoint on each of June 30, 2004 and June 30, 2005
additional payments, not to exceed an aggregate of $2 million, equal to five
percent of the sum of (1) the amounts billed by Gores from the operation of the
VS segment by Gores after the closing, plus (2) the annual revenues derived from
the video solutions business of Pierce Technology Services, Inc. (formerly
Forgent Networks, Inc.) for such year in excess of $96 million. If Gores sells
substantially all of the assets of its video solutions business prior to June
30, 2005, whether by merger, sale of stock or sale of assets, for total
consideration greater than $35 million, Gores will pay the Company $2 million
less amounts previously paid.
As partial consideration for the purchase of assets, Gores assumed certain
liabilities related to the VS segment, including (1) all liabilities to be paid
or performed after the closing date that arise from or out of the performance or
non-performance by Gores after the closing date of any contracts included in the
assets or entered into after June 10, 2003 and (2) the Company's accounts
payable, customer deposits, deferred revenue and accrued liabilities related to
the VS segment.
The sale of the Company's VS segment was approved by stockholders at the
Company's 2003 Annual Meeting of Stockholders held Thursday, August 21, 2003.
The closing of the sale took place on September 23, 2003.
The VS segment included the Company's videoconferencing equipment distribution,
system design and engineering, installation, operation and maintenance
activities consisting of: a headquarters and warehouse facility in Miamisburg,
Ohio; a help desk operation in Camarillo, California; 24 sales offices and
demonstration facilities
7
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 assets and liabilities
summarized in single line items on the consolidated balance sheets and its
results from operations summarized in a single line item on the consolidated
statement of operations.
Assets of discontinued VS operations consist of the following:
September 30, 2003 December 31, 2002
------------------ -----------------
Accounts receivable .................. $ -- $24,163,666
Inventory ............................ -- 8,122,996
Other current assets ................. -- 6,149,214
Fixed assets ......................... -- 2,684,264
Other assets ......................... -- 194,561
-------------- -----------
Total ....................... $ -- $41,314,701
============== ===========
Liabilities of discontinued VS operations consist of the following:
Accounts payable ..................... $ -- $ 7,994,535
Accrued expenses ..................... -- 1,441,444
Deferred revenue ..................... -- 7,871,267
Other liabilities .................... -- 25,874
-------------- -----------
Total ....................... $ -- $17,333,120
============== ===========
Revenues and pretax loss from discontinued VS operations are as follows:
Nine Months Ended September 30, Three Months Ended September 30,
--------------------------------- --------------------------------
2003 2002 2003 2002
------------ -------------- -------------- ------------
Revenues ....... $ 40,253,589 $ 58,860,578 $ -- $ 17,295,369
Pretax loss .... $ (3,467,676) $ (1,900,990) $ (2,529,183) $ (1,131,821)
Note 7 -- Bank Loan Payable
In May 2002, the Company entered into a $25 million working capital credit
facility with JPMorgan Chase Bank. Under the terms of the three-year agreement
for this facility, loan availability is 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 bear interest at the
lender's base rate plus 1 1/2% per annum. The credit facility contains certain
financial and operational covenants. In March 2003, the Company concluded an
amendment to the credit facility which, among other things, reduced the
commitment amount of the line of credit from $25 million to $15 million. For the
period from July 1, 2003 through September 30, 2003, the Company was in
compliance with the covenants of its credit agreement. At September 30, 2003,
there were no outstanding borrowings under the facility and the interest rate
was 5.50%. Proceeds from the sale of the VS segment were used to pay down the
outstanding balance under the facility to zero. The credit facility remained in
place at September 30, 2003; however, the Company is currently in negotiations
with the lender to amend the facility to reflect the borrowing needs of the
Company's continuing operations. The loan has been classified as non-current in
the accompanying consolidated balance sheet because the facility matures on May
31, 2005.
8
Note 8 -- Business Segments
The Company followed SFAS No. 131, Disclosures about Segments of a Business
Enterprise and Related Information, which establishes standards for reporting
information about operating segments, for the period beginning January 1, 2002
and thereafter. Operating segments were defined as components of the Company
about which separate financial information was evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and to assess
financial performance.
Prior to 2002, the Company was engaged in one business, providing customers with
a single source for video products and services. During fiscal 2002, the
Company's direct investment in the Glowpoint network had increased and the
financial results of the Video Network segment became more material to the
Company so that the Company determined that it was in two reportable segments
for fiscal 2002 and, accordingly reported two operating segments, Video
Solutions and Video Network.
Pursuant to the Company's June 10, 2003 signing of the asset purchase agreement
with Gores to sell the VS segment which resulted in the segment's results being
reported as a discontinued operation, the Company is now engaged in one
business, operating its IP-based subscriber network, Glowpoint.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto. The discussion of
results, causes and trends should not be construed to imply any conclusion that
such results or trends will necessarily continue in the future.
The statements contained herein, other than historical information, are or may
be deemed to be forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended, and involve factors, risks and uncertainties
that may cause the Company's actual results in future periods to differ
materially from such statements. These factors, risks and uncertainties, include
the relatively short operating history of the Company; market acceptance and
availability of new products and services; rapid technological change affecting
products and services sold by the Company; the impact of competitive products,
services, and pricing, as well as competition from other service providers;
possible delays in the shipment of new products; and the availability of
sufficient financial resources to enable the Company to expand its operations.
Overview
Glowpoint operates the first communication service dedicated exclusively to
video. Launched in late 2000, Glowpoint carries video calls within the United
States and to Europe, South America and Asia on a network provisioned through
top-tier backbone partners and last mile access partners over a variety of
solutions including SDSL, HDSL, Fractional and Full T1's, DS3, ATM and Gigabit
Ethernet. A recipient of Network World magazine's top rated World Class Award
for "Quality of Service-guaranteed IP videoconferencing service", the Glowpoint
service presently carries over 8,000 calls per month on behalf of nearly 250
customers. The network service offers guaranteed up-time, real-time billing and
usage information, gateway services to legacy ISDN-based sites, multi-point
bridging, live operator assistance, encryption, scheduling features and
international least-cost routing, among other value-added features. Revenue
related to the Glowpoint network subscriber service and the multi-point video
and audio bridging services we offer is recognized through a monthly billing
process after services have been rendered.
In March 2003, we completed the sale of certain assets and liabilities of our AV
division to 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 our AV division was aimed at enabling us to focus
more of our resources on the development and marketing of our Glowpoint network
and to our VS business. As a result, this division, previously a component of
the VS segment, is classified as a discontinued operation in the accompanying
financial statements, with its assets
9
summarized in a single line item on our consolidated balance sheets and its
results from operations summarized in a single line item on our consolidated
statements of operations. See footnote 6 to the consolidated financial
statements for further information.
In September 2003, we completed the sale of all properties, rights, interests
and other tangible and intangible assets that related in any material respect to
our VS segment to Gores pursuant to the terms of the asset purchase agreement
dated as of June 10, 2003. We received total consideration of up to $24 million
for the transaction consisting of $21 million in cash, including $19 million 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 earnout based on performance of the assets over the next two years.
Gores held back $2 million to cover potential purchase price adjustments payable
by Glowpoint arising under the asset purchase agreement. The sale of the VS
business was aimed at enabling us to further focus our resources on the
development and marketing of Glowpoint, our subscriber-based IP network. As a
result, this segment is classified as a discontinued operation in the
accompanying financial statements, with its assets and liabilities summarized in
single line items on the consolidated balance sheets and its results from
operations summarized in a single line item on the consolidated statements of
operations. See footnote 6 to the consolidated financial statements for further
information.
Effective June 24, 2003, the Company's board of directors voted to approve the
extension of the post-termination exercise period of all options outstanding for
employees who are related to the Company's VS business segment from 90 to 270
days. In accordance with FIN 44, this modification results in a new measurement
date as of the date of the board vote to extend these options. On June 24, 2003,
the Company valued these options using the intrinsic value method prescribed by
Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued
to Employees." On September 23, 2003, the date of the sale of the VS business
segment to Gores (see Note 1), the Company recorded a non-cash compensation
charge of $1,952,125 related to the modification of these options. The effect of
this charge on the Company's Form 10-Q previously filed on November 14, 2003 is
as follows for the nine and three months ended September 30, 2003:
Nine Months Ended Three Months Ended
September 30, 2003 September 30, 2003
------------------ ------------------
LOSS FROM DISCONTINUED VS OPERATIONS
Loss from discontinued VS operations, as
previously reported $ (1,515,551) $ (577,058)
Non-cash stock-based compensation charge on
stock option modification $ (1,952,125) $ (1,952,125)
---------------- ----------------
Adjusted loss from discontinued VS
operations, as reported in the accompanying
consolidated statements of operations $ (3,467,676) $ (2,529,183)
================ ================
Adjusted loss from discontinued VS operations
per share:
Basic and diluted $ (0.12) $ (0.09)
================ ================
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
Net loss attributable to common stockholders $ (15,227,463) $ (5,678,194)
Non-cash stock-based compensation charge on
stock option modification $ (1,952,125) $ (1,952,125)
---------------- ----------------
Adjusted net loss attributable to common
stockholders, as reported in the accompanying
consolidated statements of operations $ (17,179,588) $ (7,630,319)
================ ================
Adjusted net loss attributable to common
stockholders per share:
Basic and diluted $ (0.59) $ (0.26)
================ ================
Glowpoint, Inc.
Results of Operations
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------- --------------------
2003 2002 2003 2002
------ ------ ------ ------
Net revenues ..................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ................................. 98.7 93.1 96.4 94.4
------ ------ ------ ------
Gross margin ..................................... 1.3 6.9 3.6 5.6
------ ------ ------ ------
Operating expenses
Research and Development .................... 12.5 18.9 12.7 17.9
Selling ..................................... 49.4 76.3 52.7 81.2
General and administrative .................. 54.2 89.2 55.3 71.8
Impairment losses on long-lived assets ...... 18.4 -- 53.4 --
Restructuring ............................... -- 6.7 -- --
------ ------ ------ ------
Total operating expenses ......................... 134.5 191.1 174.1 170.9
------ ------ ------ ------
Loss from continuing operations .................. (133.2) (184.2) (170.5) (165.3)
------ ------ ------ ------
Other (income) expense
Amortization of deferred financing costs .... 1.9 2.7 1.8 3.1
Interest income ............................. (0.1) (1.8) -- (0.6)
Interest expense ............................ 12.6 4.7 6.1 5.0
Amortization of discount on subordinated
debentures ............................... 19.9 -- 19.2 --
------ ------ ------ ------
Total other expenses, net ........................ 34.3 5.6 27.1 7.5
------ ------ ------ ------
Net loss from continuing operations .............. (167.5) (189.8) (197.6) (172.8)
Loss from discontinued AV operations ............. (15.7) (47.3) -- (37.3)
Loss from discontinued VSB operations ............ (46.4) (49.0) (98.0) (74.2)
Loss from discontinued Voice operations .......... -- (3.9) -- (3.3)
------ ------ ------ ------
Net loss attributable to common stockholders ..... (229.6)% (290.0)% (295.6)% (287.6)%
====== ====== ====== ======
10
Nine Months Ended September 30, 2003 ("2003 period") Compared to Nine Months
Ended September 30, 2002 ("2002 period") and Three Months Ended September 30,
2003 ("September 2003 quarter") Compared to Three Months Ended September 30,
2002 ("September 2002 quarter").
Net Revenues. Net revenues from continuing operations increased $3.6 million, or
93%, in the 2003 period to $7.5 million from $3.9 million for the 2002 period.
Subscription and related revenue increased $3.3 million, or 237%, in the 2003
period to $4.7 million from $1.4 million for the 2002 period. Non-subscription
revenue consisting of bridging, events and other one-time fees increased $0.3
million, or 11%, in the 2003 period to $2.8 million from $2.5 million for the
2002 period. The growth in subscription and related revenue was the result of
having, on average, 545 more billable subscriber locations in the 2003 period
than in the 2002 period and those billable subscriber locations each producing
an average of $692 per month in revenue. There were 757 average billable
subscriber locations in the 2003 period and 212 in the 2002 period. The average
monthly subscription and related revenue per subscriber location fell 6% from
$735 in the 2002 period to $692 in the 2003 period. The decline in average
monthly subscription and related revenue per subscriber location is the result
of the growth in the number of billable subscriber locations using the $199 per
month pay as you go plan. The $0.3 million increase in non-subscription revenue
resulted from the following: 1) a $0.4 million increase in H.323 bridging
revenue from $0.5 million in the 2002 period to $0.9 million in the 2003 period
resulting from increased billable subscriber locations; 2) a $0.2 million
increase in installation revenue from $0.1 million in the 2002 period to $0.3
million in the 2003 period due to the increase in installations from 252 in the
2002 period to 534 in the 2003 period; and 3) a $0.3 million decline in H.320
bridging revenue from $1.7 million in the 2002 period to $1.4 million in the
2003 period.
Net revenues of $2.6 million for the September 2003 quarter represent an
increase of $1.1 million, or 69%, over the $1.5 million in revenues reported for
the September 2002 quarter. Subscription and related revenue increased $1.2
million, or 174%, in the September 2003 period to $1.9 million from $0.7 million
for the 2002 period. Non-subscription revenue decreased $0.1 million, or 16%, in
the 2003 period to $0.7 million from $0.8 million for the September 2002
quarter. The growth in subscription and related revenue was the result of
having, on average, 626 more billable subscriber locations in the September 2003
quarter than in the September 2002 quarter and those billable subscriber
locations each producing an average of $692 per month in revenue. There were 932
average billable subscriber locations in the September 2003 quarter and 306 in
the September 2002 quarter. The average monthly subscription and related revenue
per subscriber location fell 10% from $742 in the September 2002 quarter to $668
in the September 2003 quarter. The decline in average monthly subscription and
related revenue per subscriber location is the result of the growth in the
number of billable subscriber locations using the $199 per month pay as you go
plan. The $0.1 million decrease in non-subscription revenue resulted from a
$160,000 decline in event driven revenue. The other three categories of
non-subscription revenue (H.323 bridging, installation and H.320 bridging) in
the September 2003 quarter were flat with the September 2002 quarter.
Cost of Revenue. Cost of revenue increased $3.8 million, or 104%, in the 2003
period to $7.4 million from $3.6 million for the 2002 period. Infrastructure
costs (defined as backbone related costs of network) increased $0.9 million, or
63%, in the 2003 period to $2.4 million from $1.5 million for the 2002 period.
This increase resulted from two factors: 1) the build out of the network to
handle the video traffic of approximately 4,000 billable subscriber locations -
$0.6 million of the increase; and 2) the evolution of the network to gain
long-term cost efficiencies or as a result of backbone provider issues - $0.3
million of the increase. Access costs (defined as costs of connecting subscriber
locations to the network) increased $1.9 million, or 163%, in the 2003 period to
$3.1 million from $1.2 million for the 2002 period. The growth in access costs
was the result of having, on average, 545 more billable subscriber locations in
the 2003 period than in the 2002 period and those billable subscriber locations
each costing an average of $463 per month for access to the network. There were
757 average billable subscriber locations in the 2003 period and 212 in the 2002
period. The average monthly access costs per subscriber location fell 21% from
$587 in the 2002 period to $463 in the 2003 period. The decline in average
monthly access costs per subscriber location is the result of the growth in the
number of billable subscriber locations using the $199 per month pay as you go
plan and by the increasing use of DSL as the means of accessing the network.
Other costs of revenue include the personnel costs related to providing the
Glowpoint service along with the ISDN network costs of providing H.320 bridging
services. These costs increased $0.7 million, or 56%, in the 2003 period to $1.9
million from $1.2 million for the 2002 period. This increase resulted primarily
from two factors: 1) increased depreciation related to increased equipment
deployed in the network - $341,000; and 2) in the September 2002 quarter we
recorded credits of approximately $250,000 related to refunds of previously paid
infrastructure and access fees. ISDN network costs fell $0.1 million in line
with the decline in H.320 bridging revenue.
Cost of revenue increased $1.1 million, or 73%, in the September 2003 quarter to
$2.5 million from $1.4 million for the September 2002 quarter. Infrastructure
costs increased $0.2 million, or 30%, in the September 2003 quarter to $0.8
million from $0.6 million for the September 2002 quarter. Though currently built
out to handle the video traffic of approximately 4,000 billable subscriber
locations, in each of the past two quarters, we have incurred approximately $0.1
million of costs to relocate our points of presence in Dallas, Chicago, Boston,
Japan and the U.K. to gain cost efficiencies or as a result of backbone provider
issues. Access costs increased $0.4 million, or 64%, in the September 2003
quarter to $1.0 million from $0.6 million for the September 2002 quarter. The
growth in access costs was the result of having, on average, 626 more billable
subscriber locations in the September 2003 quarter than in the September 2002
quarter and those billable subscriber locations each costing an average of $371
per month for access to the network. There were 932 average billable subscriber
locations in the September 2003 quarter and 306 in the September 2002 quarter.
The average monthly access costs per subscriber location fell 46% from $689 in
the September 2002 quarter to $371 in the September 2003 quarter. The decline in
average monthly access costs per subscriber location is the result of the growth
in the number of billable subscriber locations using the $199 per month pay as
you go plan and by the increasing use of DSL as the means of accessing the
network. Other costs of revenue increased $0.2 million, or 47%, in the September
2003 quarter to $0.6 million from $0.4 million for the September 2002 quarter.
This increase resulted primarily from the credits recorded in the September 2002
quarter of approximately $250,000 related to refunds of previously paid
infrastructure and access fees.
Gross Margins. Gross margins decreased approximately $0.2 million in the 2003
period from $0.3 million in the 2002 period to $0.1 million. As a percentage of
revenue, gross margins decreased in the 2003 period to 1.3%, as compared to 6.9%
of net revenues in the 2002 period. Gross margins were $0.1 million in both the
September 2003 and 2002 quarters. The primary causes of the overall decline in
the gross margins in the 2003 period were the increased fixed costs incurred to
continue the build out of the network ($1.0 million impact), the costs to
re-configure portions of the network that were incurred ($0.3 million impact)
and the impact in the September 2002 quarter of approximately $250,000 in
refunds of previously paid infrastructure and access fees. These items countered
the increase in gross margin that was anticipated due to increased revenue ($1.4
million impact assuming a 40% marginal gross margin on the additional $3.6
million in revenue). We believe that we will improve our marginal gross margin
over the coming months and quarters as we re-evaluate our product offering from
the perspectives of profitability, competitiveness and meeting customer needs
and make changes to standardize this offering with a focus on the most
profitable pricing plans. We will also be focusing on minimizing our cost per
subscriber location in order to deliver the Glowpoint service in the most
efficient manner possible.
Research and Development. Research and development costs, which include the
costs of the personnel in this group, the equipment they use and their use of
the network for development projects, increased $0.2 million in the 2003 period
to $0.9 million from $0.7 million in the 2002 period but were down as a
percentage of revenue from 18.9% in the 2002 period to 12.5% of revenue in the
2003 period. Research and development remained flat at $0.3 million in the
September 2003 quarter and was down as a percentage of revenue from 17.9% in the
2002 quarter to 12.7% of revenue in the 2003 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.
Selling. Selling expenses, which include sales salaries, commissions, overhead,
and marketing costs, increased $0.7 million in the 2003 period to $3.7 million,
from $3.0 million but were down as a percentage of revenue from 76.3% in the
2002 period to 49.4% of revenue in the 2003 period. Selling expenses increased
$0.1 million in the September 2003 quarter, to $1.3 million from $1.2 million in
the September 2002 quarter, but were down as a percentage of revenue from 81.2%
in the September 2002 quarter to 52.7% in the September 2003 quarter. The
primary cause for the $0.7 million increase in costs for the 2003 period is the
$0.5 million of marketing costs incurred in the 2003 period related to the NBA
draft ($0.3 million) and customer trials ($0.2 million). The remainder of the
variance results from higher commissions and bonuses associated with higher
revenue levels. The $0.1 million increase in costs for the September 2003
quarter results from higher commissions and bonuses associated with higher
revenue levels.
General and Administrative. General and administrative expenses increased $0.6
million in the 2003 period to $4.1 million from $3.5 million in the 2002 period.
General and administrative expenses as a percentage of net revenues for the 2003
period declined from 89.2% in the 2002 period to 54.2% in the 2003 period.
General and administrative expenses increased $0.3 million to $1.4 million in
the September 2003 quarter from $1.1 million in the September 2002 quarter, but
were down as a percentage of revenue from 71.8% in the September 2002 quarter to
55.3% in the September 2003 quarter. The primary cause for the $0.6 million
increase in costs for the 2003 period is the $0.5 million of professional fees
incurred related to the search for a new CEO, filing the proxy and holding the
annual meeting in August, divestitures and other corporate activities. The $0.3
million increase in costs for the September 2003 quarter results from higher
higher professional fees related to the search for a new CEO and filing the
proxy and holding the annual meeting in August. The normalized quarterly run
rate for this category of expense is approximately $1.2 million and is fixed in
nature in the short term.
11
Restructuring. A restructuring charge of $260,000 was recorded in the 2002
period. This restructuring charge was related to severance and other
personnel-related costs and was taken to position us to realize $2.0 million in
annual operating expense savings.
Other (Income) Expenses. Other expenses increased $2.4 million to $2.6 million
in the 2003 period from $0.2 million in the 2002 period. The increase was
primarily due to the recognition of $1.5 million in amortization of discount on
the subordinated debentures issued in December 2002. The other major component
of this category, interest expense, increased $0.7 million to $0.9 million. This
increase was primarily due to higher interest expense on our line of credit
facility of $0.1 million; the Black-Scholes value assigned to the 100,000
warrants granted to JPMorgan Chase Bank in the 2003 period of $0.2 million; and
interest accrued on the subordinated debentures of $0.4 million.
Discontinued Operations. In the 2003 period, we treated our AV division and VS
segment as a discontinued operations because: 1) the operations and cash flows
of this division and segment have been eliminated from our ongoing operations as
a result of disposal transactions; and 2) we do not have any significant
continuing involvement in the operation of the division and segment. We incurred
a loss from discontinued AV operations in the 2003 period of $1.2 million which
was $0.6 million less than the $1.8 million loss incurred in the 2002 period.
Loss from discontinued VS operations increased $1.6 million in the 2003 period
to $3.5 million from the $1.9 million loss incurred in the 2002 period.
Net Loss. Net loss attributable to common stockholders increased in the 2003
period to $17.2 million, or $0.59 per diluted share, from $11.3 million, or
$0.39 per diluted share, for the 2002 period. Earnings before interest, taxes,
depreciation and amortization ("EBITDA") from continuing operations is a
measurement tool management used to understand our results of operations. As
EBITDA from continuing operations does not include non-cash charges and the
results of discontinued operations, it serves as a more accurate gauge of our
current operating results. In addition, our primary covenant with our
asset-based lender is based on EBITDA results. 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,
------------------------------- --------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net loss from continuing operations ........ $(12,538,845) $ (7,371,713) $ (5,101,136) $ (2,634,970)
Depreciation and amortization ......... 4,212,407 2,939,496 1,196,172 870,027
Amortization of deferred financing
costs ............................... 140,017 106,456 47,254 46,761
Amortization of discount on
subordinated debentures ............. 1,490,213 -- 497,338 --
Non cash compensation ................. 673,536 230,409 -- 69,719
Impairment losses on fixed assets ..... 1,379,415 -- 1,379,415 --
Interest expense, net ................. 374,865 114,131 155,622 66,477
------------ ------------ ------------ ------------
EBITDA from continuing operations .......... $ (4,268,392) $ (3,981,221) $ (1,825,335) $ (1,581,986)
Loss from discontinued AV
operations .......................... (1,173,067) (1,837,588) -- (569,114)
Loss from discontinued VS
operations .......................... (523,415) (1,029,318) (577,058) (703,735)
Loss from discontinued Voice
operations .......................... -- (151,339) -- (50,000)
------------ ------------ ------------ ------------
TOTAL EBITDA ............................... $ (5,964,874) $ (6,999,466) $ (2,402,393) $ (2,904,835)
============ ============ ============ ============
Liquidity and Capital Resources
At September 30, 2003, we had working capital of $9.5 million compared to $27.8
million at December 31, 2002, a decrease of approximately 65.8%. We had $8.3
million in cash and cash equivalents at September 30, 2003 compared to $2.8
million at December 31, 2002. The $18.3 million decrease in working capital
resulted primarily
12
from the net pay down of $5.8 million of bank loans, the funding of the $7.3
million cash loss from operations in the 2003 period and the purchase of $1.9
million of furniture, equipment and leasehold improvements.
Net cash used by operating activities for the 2003 period was $3.1 million as
compared to net cash used in operations of $12.2 million during the 2002 period.
The primary source of operating cash in 2003 was the decrease in net assets of
discontinued operations of $7.6 million. We used this cash to fund the $7.3
million cash loss from operations and the $2.9 million increase in other current
assets.
Investing activities for the 2003 period included purchases of $1.9 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 2003. Although we anticipate current expansion of the network,
we have no significant commitments to make capital expenditures in 2003. In
addition, the sale of the VS segment yielded net proceeds of $16.2 million.
Financing activities in the 2003 period included net pay-downs under our
revolving credit line totaling $5.8 million.
We currently have a $15.0 million working capital credit facility with JPMorgan
Chase Bank. Borrowings under this facility bear interest at the lender's base
rate plus 1 1/2% per annum. At September 30, 2003, there were no outstanding
borrowings under this facility. Proceeds from the sale of the VS segment were
used to pay down the outstanding balance under the facility to zero. The credit
facility remained in place subsequent to the closing of the VS sale transaction;
however, we are currently in negotiations with the lender to amend the facitily
to reflect the borrowing needs of our continuing operations. Our credit facility
contains certain financial and operational covenants. To date in 2003, we were
in compliance with these covenants.
Management believes, based on current circumstances, we have adequate capital
resources to support current operating levels for at least the next twelve
months.
Critical accounting policies
We prepare our financial statements in accordance with accounting principles
generally accepted in the United States of America. Preparing financial
statements in accordance with generally accepted accounting principles requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclose contingent assets and liabilities as of the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The following paragraphs include a discussion of
some critical areas where estimates are required.
Revenue recognition
Revenue related to the Glowpoint network subscriber service and the multi-point
video and audio bridging services we offer are recognized through a monthly
billing process after services have been rendered.
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.
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
13
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
In June 2001, the FASB finalized FASB Statements No. 141, "Business
Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). SFAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interest method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also required that we
recognize acquired intangible assets apart from goodwill if they meet certain
criteria. SFAS 141 applies to all business combinations initiated after June 30,
2001 and for purchase business combinations completed on or after July 1, 2001.
The FASB also requires, upon adoption of SFAS 142, that we classify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 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 an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS 142. SFAS 142 was adopted in 2002 and we will review goodwill
and other intangible assets on an annual basis with an as of date of September
30.
Any future business combinations will be accounted for under the purchase
method, which may result in the recognition of goodwill and other intangibles
assets, some of which may subsequently be charged to operations, either by
amortization or impairment charges.
Recent Pronouncements of the Financial Accounting Standards Board
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Instruments
with Characteristics of both Liabilities and Equity". SFAS No. 150 establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS No. 150
requires that an issuer classify a financial instrument that is within the scope
of SFAS No. 150 as a liability. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective beginning September 1, 2003. The provisions of SFAS No. 150, which we
adopted in 2003, did not have a material impact on the consolidated financial
statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements", addresses
consolidation by business enterprises of variable interest entities. Under
current practice, two enterprises generally have been included in consolidated
financial statements because one enterprise controls the other through voting
interests. This interpretation defines the concept of "variable interests" and
requires existing unconsolidated variable interest entities to be consolidated
by their primary beneficiaries if the entities do not effectively disperse the
risks among the parties involved. The provisions of FIN 46, which we adopted in
2003, did not have a material impact on the consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). This interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of this interpretation are
effective for interim and annual periods after December 15, 2002. The initial
recognition and initial measurement requirements of this interpretation are
effective prospectively for guarantees issued or modified after December 31,
2002. The provisions of FIN 45, which we adopted in 2003, did not have a
material impact on the consolidated financial statements.
14
In November 2002, EITF reached consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables". Revenue arrangements with multiple
deliverables include arrangements which provide for the delivery or performance
of multiple products, services and/or rights to use assets where performance may
occur at different points in time or over different periods of time. EITF Issue
No. 00-21 is effective for fiscal periods beginning after June 15, 2003. The
adoption of this standard did not have a material impact on the consolidated
financial statements.
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.
We maintain borrowings under a $15 million working capital credit facility with
an asset based lender that are not subject to material market risk exposure
except for such risks relating to fluctuations in market interest rates. The
carrying value of these borrowings approximates fair value because they bear
interest at a floating rate based on the "prime" rate. There are no other
material qualitative or quantitative market risks particular to our business or
operations.
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 defending several suits or claims in the ordinary course of
business, none of which individually or in the aggregate is material to our
business, financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting ("Annual Meeting") of Stockholders was held on August
21, 2003.
The 28,740,889 shares of common stock present at the Annual Meeting out of
a then total of 29,641,835 shares outstanding and entitled to vote acted as
follows with respect to the following proposals; with the following results:
Proposal 1. That the following constitutes the number of shares voted with
respect to the approval of the sale of our Video Solutions business to an
affiliate of Gores pursuant to the asset purchase agreement dated as of June 10,
2003:
FOR AGAINST ABSTAIN
15,789,122 335,336 60,420
---------- ------- ------
Proposal 2. That the following constitutes the number of shares voted with
respect to the approval of an amendment to our amended and restated certificate
of incorporation and to our amended and restated bylaws to effect a change of
our corporate name from "Wire One Technologies, Inc." to "Glowpoint, Inc."
immediately following the consummation of the asset sale:
FOR AGAINST ABSTAIN
15,816,037 328,784 40,057
---------- ------- ------
Proposal 3. (a) That the following constitutes the number of shares voted
with respect to the election of James Kuster for Director:
FOR AGAINST ABSTAIN
28,411,795 329,094
---------- ------- ------
(b) That the following constitutes the number of shares voted
with respect to the election of Michael Sternberg for Director:
FOR AGAINST ABSTAIN
28,304,409 436,480
---------- ------- ------
The terms of office of our directors Richard Reiss, Dean Hiltrik, Lewis
Jaffe and Michael Toporek continue after the Annual Meeting.
Proposal 4. That the following constitutes the number of shares voted with
respect to the approval of an amendment to our 2000 Stock Incentive Plan to
increase the number of shares of common stock reserved for issuance thereunder
from 4,400,000 to 6,500,000:
FOR AGAINST ABSTAIN
12,257,123 3,885,273 42,482
---------- ------- ------
Proposal 5. That the following constitutes the number of shares voted with
respect to the approval of BDO Seidman as our independent auditors for the year
ending December 31, 2003:
FOR AGAINST ABSTAIN
28,580,356 113,499 47,034
---------- ------- ------
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Proposal 6. That the following constitutes the number of shares voted with
respect to the approval of an adjournment or postponement of the Annual Meeting,
in order to solicit additional proxies, to such time and place as designated by
the presiding officer of the Annual Meeting:
FOR AGAINST ABSTAIN
27,795,042 753,772 192,075
---------- ------- -------
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement with David C. Trachtenberg, dated
October 3, 2003.
10.2 Amended and Restated Employment Agreement with Richard Reiss,
dated October 14, 2003.
10.3 Amended Employment Agreement with Michael Brandofino, dated
September 23, 2003.
10.4 Termination Agreement with Leo Flotron, dated September 23,
2003.
10.5 Restricted Stock Award Agreement with David C. Trachtenberg,
dated October 3, 2003
10.6 Form of Restricted Stock Award Agreements with Karen Basian,
dated November 4, 2003, and with James Kuster, Michael
Sternberg and Michael Toporek, each dated August 22, 2003.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
(i) On July 23, 2003, we furnished a Form 8-K containing a press
release announcing our preliminary results of operation and
financial condition for the second quarter ended June 30,
2003.
(ii) On August 6, 2003, we furnished a Form 8-K containing a press
release announcing our results of operation and financial
condition for the second quarter ended June 30, 2003.
(iii) On September 29, 2003, we filed a Form 8-K containing a press
release announcing that we completed the sale of substantially
all of the assets of our Video Solutions segment to an
affiliate of Gores Technology Group.
17
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: February 26, 2004 By: /s/ David C. Trachtenberg
------------------------------------
David C. Trachtenberg, Chief
Executive Officer (principal
executive officer)
Date: February 26, 2004 By: /s/ Christopher A. Zigmont
------------------------------------
Christopher A. Zigmont, Chief
Financial Officer (principal
financial and accounting officer)
18