NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
Note 1 - Basis of Presentation
The Business
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, are securely accessible via any network (private or public) and are technology-agnostic. The 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. 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).
Glowpoint, a Delaware corporation, was formed in May 2000. The Company operates in one segment and therefore segment information is not presented.
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 to withstand 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 (SMB).
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 OpenVideo™ Room (reservationless video conference bridging service), managed 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. 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.
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.
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.
Liquidity
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). 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.
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). 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.
Quarterly Financial Information and Results of Operations
The condensed consolidated financial statements as of
September 30, 2012
and for the
nine and three
months ended
September 30, 2012
and 2011 are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position as of
September 30, 2012
, and the results of operations for the
nine and three
months ended
September 30, 2012
and 2011, the statement of stockholders’ equity for the
nine
months ended
September 30, 2012
and the statement of cash flows for the
nine
months ended
September 30, 2012
and 2011. The results for the
nine and three
months ended
September 30, 2012
are not necessarily indicative of the results to be expected for the entire year. While management of the Company believes that the disclosures presented are adequate to make the information not misleading, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the footnotes thereto for the fiscal year ended December 31, 2011 as filed with the Securities and Exchange Commission with our Form 10-K on March 8, 2012 (the “Audited 2011 Financial Statements”).
Note 2 – Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Glowpoint and our wholly-owned subsidiary, GP Communications, LLC, whose business function is to provide interstate telecommunications services for regulatory purposes. All material inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates
Preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from the estimates made. We continually evaluate estimates used in the preparation of the condensed consolidated financial statements for reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. The significant areas of estimation include determining the allowance for doubtful accounts, deferred tax valuation allowance, accrued sales taxes, the estimated life of customer relationships and the estimated lives and recoverability of property and equipment.
See “Summary of Significant Accounting Policies” in the Company’s Audited 2011 Financial Statements for a discussion on the estimates and judgments necessary in the Company’s accounting for the allowance for doubtful accounts, financial instruments, concentration of credit risk, property and equipment, income taxes, stock-based compensation, and accrued sales taxes and regulatory fees.
Accounting Standards Updates
There have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended
September 30, 2012
, as compared to the recent accounting pronouncements described in the Company’s Audited 2011 Financial Statements, that are of material significance, or have potential material significance to the Company.
Revenue Recognition
Revenue billed in advance for monitoring and management services is deferred until the revenue has been earned, which is when the related services have been performed. Other service revenue, including amounts passed through based on surcharges from our telecom carriers, related to the network services and collaboration services are recognized as service is provided. As the non-refundable, upfront installation and activation fees charged to the subscribers do not meet the criteria as a separate unit of accounting, they are deferred and recognized over the
12
to
24
month period estimated life of the customer relationship. Revenue related to professional services is recognized at the time the services are performed. Revenues derived from other sources are recognized when services are provided or events occur.
Taxes Billed to Customers and Remitted to Taxing Authorities
We recognize taxes billed to customers in revenues and taxes remitted to taxing authorities in our operating costs, network and infrastructure. For the
nine and three
months ended
September 30, 2012
, we included taxes of
$1,143,000
and
$347,000
, respectively, in revenues and we included taxes of
$1,122,000
and
$357,000
, respectively, in network and infrastructure costs. For the
nine and three
months ended
September 30, 2011
, we included taxes of
$1,237,000
and
$391,000
, respectively, in revenue and we included taxes of
$1,129,000
and
$328,000
, respectively, in network and infrastructure costs.
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 as required by ASC topic 360
“Property, Plant and Equipment.”
For purposes of evaluating the recoverability of long-lived assets, the undiscounted cash flows estimated to be generated by those assets are compared to the carrying amounts of those assets. If and when the carrying values of the assets exceed their fair values, then the related assets will be written down to fair value. In the
nine and three
months ended
September 30, 2012
and 2011, no impairment losses were recorded.
Capitalized Software Costs
The Company capitalizes certain costs incurred in connection with developing or obtaining internal-use software. All software development costs have been appropriately accounted for as required by ASC Topic 350.40
“Intangible – Goodwill and Other – Internal-Use Software.”
Capitalized software costs are included in “Property and Equipment” on our consolidated balance sheets and are amortized over three to four years. Software costs that do not meet capitalization criteria are expensed as incurred. For the
nine and three
months ended
September 30, 2012
, we capitalized internal use software costs of
$287,000
and
$126,000
, respectively, and we amortized
$421,000
and
$142,000
, respectively, of total software costs. For the
nine and three
months ended
September 30, 2011
, we capitalized internal use software costs of
$284,000
and
$87,000
, respectively, and we amortized
$206,000
and
$79,000
, respectively, of these costs. During the
nine and three
months ended
September 30, 2012
and 2011, no impairment losses were recorded.
Note 3 – Stock Options
We periodically grant stock options to employees and directors in accordance with the provisions of our stock option plans, with the exercise price of the stock options being set at or above the closing market price of the common stock on the date of grant. The intrinsic value of options outstanding and exercisable at
September 30, 2012
and 2011 was
$151,000
and
$185,000
, respectively. Options exercised during the
nine and three
months ended
September 30, 2012
were
5,000
and
0
, respectively. Options exercised during the
nine and three
months ended
September 30, 2011
were
154,000
and
30,000
, respectively.
The weighted average fair value of each option granted is estimated on the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions during the
nine and three
months ended
September 30, 2012
and 2011:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Risk free interest rate
|
0.9%
|
|
2.0%
|
|
0.6%
|
|
1.5%
|
Expected option lives
|
5 years
|
|
5 years
|
|
5 years
|
|
5 years
|
Expected volatility
|
111.0%
|
|
117.3%
|
|
107.8%
|
|
116.1%
|
Estimated forfeiture rate
|
10%
|
|
10%
|
|
10%
|
|
10%
|
Expected dividend yields
|
—
|
|
—
|
|
—
|
|
—
|
Weighted average grant date fair value of options
|
$2.30
|
|
$1.84
|
|
$1.51
|
|
$1.67
|
The Company calculates expected volatility for a stock-based grant based on historic daily stock price observations of its common stock during the period immediately preceding the grant that is equal in length to the expected term of the grant. The expected term of the options and forfeiture rates are estimated based on the Company’s exercise and employment termination experience. The risk free interest rate is based on U.S. Treasury yields for securities in effect at the time of grants with terms approximating the expected life of the grants. The assumptions used in the Black-Scholes option valuation model are highly subjective and can materially affect the resulting valuations.
A summary of options granted, exercised, expired and forfeited under our plans and options outstanding as of, and changes made during, the
nine
months ended
September 30, 2012
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
|
Number of Options
|
|
Weighted
Average
Exercise
Price
|
|
Number of Options
|
|
Weighted
Average
Exercise
Price
|
Options outstanding, January 1, 2012
|
750
|
|
$
|
2.90
|
|
|
570
|
|
$
|
3.12
|
|
Granted
|
1,210
|
|
|
3.20
|
|
|
|
|
|
Exercised
|
(5
|
)
|
|
1.70
|
|
|
|
|
|
Expired
|
(11
|
)
|
|
7.61
|
|
|
|
|
|
Forfeited
|
(180
|
)
|
|
3.03
|
|
|
|
|
|
Options outstanding, September 30, 2012
|
1,764
|
|
|
$
|
3.07
|
|
|
608
|
|
$
|
2.92
|
|
Stock option compensation expense is allocated as follows for the
nine and three
months ended
September 30, 2012
and 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Three Months Ended September 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Global managed services
|
$
|
8
|
|
|
$
|
35
|
|
|
$
|
2
|
|
|
$
|
(3
|
)
|
Sales and marketing
|
4
|
|
|
8
|
|
|
—
|
|
|
(2
|
)
|
General and administrative
|
143
|
|
|
16
|
|
|
63
|
|
|
—
|
|
|
$
|
155
|
|
|
$
|
59
|
|
|
$
|
65
|
|
|
$
|
(5
|
)
|
The remaining unrecognized stock-based compensation expense for options at
September 30, 2012
was
$2,478,000
, of which
$2,135,000
, representing
850,000
options, will only be expensed upon a “change in control” and the remaining
$343,000
will be amortized over a weighted average period of approximately
1.3
years.
The tax benefit recognized for stock-based compensation for the
nine and three
months ended
September 30, 2012
was diminimus. There was no tax benefit recognized for stock-based compensation for the
nine and three
months ended
September 30, 2011
. No compensation costs were capitalized as part of the cost of an asset.
Note 4 - Restricted Stock
A summary of restricted stock granted, vested, forfeited and unvested outstanding as of, and changes made during, the
nine
months ended
September 30, 2012
, is presented below (in thousands):
|
|
|
|
|
|
|
|
|
Restricted Shares
|
|
Weighted Average
Grant Price
|
Unvested restricted shares outstanding, January 1, 2012
|
836
|
|
|
$
|
2.15
|
|
Granted
|
827
|
|
|
2.66
|
|
Vested
|
(105
|
)
|
|
2.10
|
|
Forfeited
|
(260
|
)
|
|
2.37
|
|
Unvested restricted shares outstanding, September 30, 2012
|
1,298
|
|
|
$
|
2.44
|
|
Restricted stock compensation expense is allocated as follows for the
nine and three
months ended
September 30, 2012
and 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Three Months Ended September 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Global managed services
|
$
|
27
|
|
|
$
|
23
|
|
|
$
|
11
|
|
|
$
|
5
|
|
Sales and marketing
|
47
|
|
|
16
|
|
|
17
|
|
|
7
|
|
General and administrative
|
219
|
|
|
83
|
|
|
136
|
|
|
27
|
|
|
$
|
293
|
|
|
$
|
122
|
|
|
$
|
164
|
|
|
$
|
39
|
|
The remaining unrecognized stock-based compensation expense for restricted stock at
September 30, 2012
was
$2,783,000
, of which
$330,000
, representing
130,000
shares, will only be expensed upon a “change in control” and the remaining
$2,453,000
will be amortized over a weighted average period of
8.3
years.
The tax benefit recognized for stock-based compensation for the
nine and three
months ended
September 30, 2012
was diminimus. There was no tax benefit recognized for stock-based compensation for the
nine and three
months ended
September 30, 2011
. No compensation costs were capitalized as part of the cost of an asset.
Note 5 – Warrants
There were
no
warrants granted, exercised, exchanged or forfeited during the
nine
months ended
September 30, 2012
. There were
33,000
warrants outstanding as of
September 30, 2012
with an exercise price of
$1.60
and an expiration date of November 25, 2013.
Note 6 – Earnings (Loss) Per Share
Loss per share is calculated by dividing net income by the weighted average number of shares of common shares outstanding during the period. Diluted loss per share reflects the potential dilution from the conversion or exercise into common stock of securities such as stock options and warrants. Dilutive loss per share for the
nine and three
months ended
September 30, 2012
, is the same as basic loss per share.
For the
nine and three
months ended
September 30, 2011
, diluted earnings per share included
90,000
and
82,000
, respectively, shares of common stock associated with outstanding options and warrants,
235,000
shares issuable upon conversion of our convertible preferred stock calculated using the treasury stock method, and
804,000
shares of unvested restricted stock.
Note 7 – Preferred Stock
Our Certificate of Incorporation authorizes the issuance of up to
5,000,000
shares of preferred stock. As of
September 30, 2012
, there were:
100
shares of Series B-1 Preferred Stock authorized, issued and outstanding;
7,500
shares of Series A-2 Preferred Stock authorized and
53
shares issued and outstanding; and
4,000
shares of Series D Preferred Stock authorized and
no
shares issued or outstanding.
Each share of Series B-1 Preferred Stock has a stated value of
$100,000
per share (the “Series B-1 Stated Value”), and a liquidation preference equal to the Series B-1 Stated Value plus all accrued and unpaid dividends (the “Series B-1 Liquidation Preference”). The Series B-1 Preferred Stock is not convertible into common stock. The Series B-1 Preferred Stock is senior to all other classes of equity and, commencing on January 1, 2013, is entitled to cumulative dividends from January 1, 2013, at a rate of
4%
per annum, payable quarterly, based on the Series B-1 Stated Value. Commencing January 1, 2014, the cumulative dividend rate increases to
6%
per annum, payable quarterly, based on the Series B-1 Stated Value. The Company may, at its option at any time, redeem all or a portion of the outstanding shares of Series B-1 Preferred Stock by paying the Series B-1 Liquidation Preference.
Each share of Series A-2 Preferred Stock has a stated value of
$7,500
per share (the “A-2 Stated Value”), a liquidation preference equal to the Series A-2 Stated Value, and is convertible at the holder’s election into common stock at a conversion price per share of
$3.00
. Therefore, each share of Series A-2 Preferred Stock is convertible into
2,500
shares of common stock. The Series A-2 Preferred Stock is subordinate to the Series B-1 Preferred Stock but senior to all other classes of equity, has weighted average anti-dilution protection and, commencing on January 1, 2013, is entitled to cumulative dividends at a rate of
5%
per annum, payable quarterly, based on the Series A-2 Stated Value. Once dividend payments commence, all dividends are payable at the option of the holder in cash or through the issuance of a number of additional shares of Series A-2 Preferred Stock with an aggregate liquidation preference equal to the dividend amount payable on the applicable dividend payment date.
In April 2012, a holder of the Company's Series A-2 Preferred Stock elected to convert
41
shares of Series A-2 Preferred Stock into
102,000
shares of common stock of the Company at the original conversion price. Each of the Series A-2 Preferred Stock shares was exchanged for
2,500
shares of common stock, pursuant to the terms of the Series A-2 Preferred Stock Certificate of Designation.
In accordance with ASC Topic 815, we evaluated whether our convertible preferred stock contains provisions that protect holders from declines in our stock price or otherwise could
result in modification of the exercise price and/or shares to be issued under the respective preferred stock agreements based on a variable that is not an input to the fair
value of a “fixed-for-fixed” option and require a derivative liability. The Company determined no derivative liability is required under ASC Topic 815 with respect to our convertible preferred stock. A contingent beneficial conversion amount is required to be calculated and recognized when and if the adjusted
$3.00
conversion price of the convertible preferred stock is adjusted to reflect a down round stock issuance that reduces the conversion price below the
$1.16
fair value of the common stock on the issuance date of the convertible preferred stock.
Note 8 - Commitments and Contingencies
Operating Leases
We lease several facilities under operating leases expiring through 2017. Certain leases require us to pay increases in real estate taxes, operating costs and repairs over certain base year amounts. Lease payments for the
nine and three
months ended
September 30, 2012
were
$395,000
and
$131,000
, respectively. Lease payments for the
nine and three
months ended
September 30, 2011
were
$371,000
and
$124,000
, respectively.
Future minimum rental commitments under all non-cancelable operating leases are as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
|
2012 remaining
|
$
|
121
|
|
2013
|
496
|
|
2014
|
167
|
|
2015
|
140
|
|
2016
|
145
|
|
2017
|
87
|
|
|
$
|
1,156
|
|
Capital Lease Obligation
In 2012, the Company entered into two non-cancelable lease agreements for
$90,000
and
$30,000
with interest rates of
9%
and
3%
, respectively. In 2011, the Company entered into two non-cancelable lease agreements for
$512,000
and
$40,000
with interest rates of
6%
and
0%
, respectively. These leases are accounted for as capital leases. Depreciation expense on the equipment under the capital leases for the
nine and three
months ended
September 30, 2012
was
$94,000
and
$36,000
, respectively. Depreciation expense on the equipment under capital leases for the
nine and three
months ended
September 30, 2011
was
$25,000
. Future minimum commitments under all non-cancelable capital leases are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Interest
|
|
Principal
|
2012 remaining
|
61
|
|
|
7
|
|
|
54
|
|
2013
|
243
|
|
|
18
|
|
|
225
|
|
2014
|
194
|
|
|
6
|
|
|
188
|
|
2015
|
15
|
|
|
—
|
|
|
15
|
|
|
$
|
513
|
|
|
$
|
31
|
|
|
$
|
482
|
|
Commercial Commitments
We have entered into a number of agreements with telecommunications companies to purchase communications services. Some of the agreements require a minimum amount of services to be purchased over the life of the agreement, or during a specified period of time.
Glowpoint believes that it will meet its commercial commitments. In certain instances where Glowpoint did not meet the minimum commitments, no penalties for minimum commitments have been assessed and the Company has entered into new agreements. It has been our experience that the prices and terms of successor agreements are similar to those offered by other carriers.
Glowpoint does not believe that any loss contingency related to a potential shortfall should be recorded in the condensed consolidated financial statements because it is not probable, from the information available and from prior experience, that Glowpoint has incurred a liability.
Letter of Credit
In November 2010, the Company entered into an irrevocable standby letter of credit (the “LOC”) for
$115,000
to secure our security deposit for the sublease of our corporate headquarters. The LOC was obtained from Silicon Valley Bank (“SVB”) and will be renewed yearly until January 2014, the expiration date of our sublease. In October 2012, the Company entered into another letter of credit for
$115,000
with Comerica Bank to replace the SVB LOC.
Note 9 – Major Customers
Major customers are those customers / wholesale partners that account for more than
10%
of revenues. For the
nine and three
months ended
September 30, 2012
, approximately
38%
and
38%
of revenues, respectively, were derived from
three
major wholesale partners and the accounts receivable from these major partners represented approximately
48%
of total accounts receivable as of
September 30, 2012
. For the
nine and three
months ended
September 30, 2011
, approximately
25%
and
24%
of revenues, respectively, were derived from
two
major wholesale partners. The loss of any one of these partners would have a material adverse affect on the Company’s operations.
Note 10 – Revolving Loan Facility
On June 12, 2012, the Company entered into the Second Loan Modification Agreement (as amended, the “Revolving Loan Facility”) which amends its existing Loan and Security Agreement with SVB pursuant to which the Company may borrow up to
$5,000,000
for working capital purposes. The Revolving Loan Facility matures
June 2014
. The amounts that can be borrowed at any given time are equal to the lesser of
$5,000,000
or
80%
of the eligible accounts receivable, as defined. As of
September 30, 2012
, we had unused borrowing availability of
$2,662,000
. Outstanding principal amounts under the Revolving Loan Facility were modified to bear interest at a floating Prime rate per annum equal to
Prime Rate as announced by Wall Street Journal ("WSJ") plus one and a quarter percent
(
1.25%
), payable monthly in arrears. The Company is no longer obligated to pay a minimum monthly interest but a fee equal to
0.35%
of the unused borrowing amount each year. The WSJ Prime Rate was
3.25%
as of
September 30, 2012
. The Revolving Loan Facility is secured by a first priority security interest in all the Company’s assets, including, without limitation, its intellectual property. The Revolving Loan Facility contains a number of financial covenants, including, but not limited to, covenants relating to minimum unrestricted cash balances and minimum monthly Adjusted EBITDA, as defined, in the Revolving Loan Facility. At
September 30, 2012
, we were in compliance with the covenants, as defined and set forth in the Revolving Loan Facility and there was
$750,000
outstanding.
The Revolving Loan Facility financing costs, net of accumulated amortization, which are included in other assets in the accompanying consolidated balance sheets, were
$29,000
as of
September 30, 2012
. The financing costs for the Revolving Loan Facility are being amortized over the
12
- to
24
-month period through the maturity date of the Revolving Loan Facility. During the quarters ended
September 30, 2012
and 2011, the amortization of financing costs was
$4,000
and
$15,000
was included as “Amortization of Deferred Financing Costs” in the consolidated statement of operations in Interest and Other Expense.
Note 11 – Discontinued Operations
As our ISDN resale services no longer fit into our overall strategic plan, in September 2010, we entered into an agreement with an independent telecommunications service provider to transfer these services and the related customers, and the Company receives a
15%
monthly recurring referral fee for those revenues for as long as the customers maintain service. Such amounts were diminimis for the
nine and three
months ended
September 30, 2012
and 2011. The transfer of the customers was completed in the third quarter of 2011, and the Company has no continuing involvement with the ISDN product line.
The Company accordingly classified these ISDN related revenues and expenses as discontinued operations in accordance with ASC 205.20 “
Discontinued Operations.”
The accompanying condensed consolidated financial statements reflect the operating results and balance sheet items of the discontinued operations separately from continuing operations.
Revenues from the ISDN resale services, reported as discontinued operations, for the
nine and three
months ended
September 30, 2011
were
$81,000
and
$0
, respectively. Net income from the ISDN resale services, reported as discontinued operations for the
nine and three
months ended
September 30, 2011
were
$29,000
and
$11,000
, respectively. The assets and liabilities from the ISDN resale services, reported as net current liabilities of discontinued operations, as of
September 30, 2011
were
$50,000
. No income tax provision was required to be recognized by the Company against income from the ISDN resale services over the related periods.
Note 12 – Related Party Transactions
The Company provides cloud-managed video services (the “Video Services”) to a company in which one of our directors is an officer. Management believes that such transactions contain terms that would have been obtained from unaffiliated third parties. Related party Video Services revenue for the
nine
months ended
September 30, 2012
and 2011 were
$168,000
and
$230,000
, respectively, and for the three months ended September 30, 2012 and 2011 were
$43,000
and
$69,000
, respectively. As of
September 30, 2012
, the accounts receivable for this company was
$36,000
.
The Company receives general corporate strategy and management consulting services from a consultant who is a director of Glowpoint. The Consulting Agreement was entered into as of September 1, 2010 and is a month-to-month engagement. The Company pays this individual director
$12,500
per month, plus any pre-authorized expenses incurred in providing services, under the Consulting Agreement. Management believes that such transaction contain terms that would have been obtained from unaffiliated third parties. Related party consulting fees for the
nine
months ended
September 30, 2012
and 2011 were
$112,500
and for the three months ended
September 30, 2012
and 2011 were
$37,500
. As of
September 30, 2012
, the accounts payable for this firm was
$12,500
.
In addition, the Company receives financial advisory services from a firm in which one of the principals is a shareholder of Glowpoint. Management believes that such transactions contain terms that would have been obtained from unaffiliated third parties. Related party financial advisory fees for the
nine
months ended
September 30, 2012
and 2011 were
$233,000
and
$108,000
, respectively, and for the three months ended
September 30, 2012
and 2011 were
$161,000
and
$36,000
, respectively. As of
September 30, 2012
, there was
$0
accounts payable for this firm.
Note 13 – Asset Purchase Agreement
On June 30, 2011, the Company issued
769,000
shares of common stock as consideration for the purchase of assets pursuant to the terms of a purchase agreement. The assets acquired are equipment primarily used in the delivery and management of hosted video bridging and help desk and concierge services and are classified as property and equipment on the accompanying consolidated balance sheet. The total number of shares was based on consideration equal to
$1,581,000
using the common stock’s
30
-day trailing volume-weighted average price for the period ended June 28, 2011 of
$2.05
(the “VWAP”). This transaction did not meet the requirements of a business combination and therefore was accounted for as an asset purchase with the fair value of the assets purchased equal to the consideration given. The equipment will be depreciated on a straight line basis over
five years
.
Pursuant to the agreement, if at any time between the first anniversary of the closing date and the date that is
18
months following the closing date (the “repurchase period”) the closing price of the Company’s common stock shall fall below the VWAP, then the seller has the right to demand that the Company repurchase from it, in a single transaction, not more than
50%
of the shares delivered to such seller at closing at a price equal to the VWAP. This will result in a derivative liability and will be accounted for with changes in fair value during the repurchase period recorded in earnings. As of
September 30, 2012
, there was no derivative liability.
Note 14 – Subsequent Events
Affinity Acquisition
On August 12, 2012, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Affinity VideoNet, Inc., a privately held Delaware corporation ("Affinity"), and GPAV Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company ("Merger Sub"). Pursuant to the Merger Agreement and subject to customary closing conditions, Merger Sub will merge with and into Affinity, and Affinity will become a wholly-owned subsidiary of the Company ("the Merger").
On October 1, 2012, (the “Closing Date”) the Company, and Merger Sub completed the Merger of Affinity for approximately
$8.0 million
in cash, a
$2.33 million
note, subject to adjustment, and approximately
2,650,000
shares of common stock, subject to adjustment, of the Company (“Common Stock”), on the terms previously disclosed in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 13, 2012. The Company had no prior material relationship with any of the parties to the transaction.
The Company and a representative of the prior stockholders of Affinity (the “Stockholder Representative”) also entered into an Escrow Agreement on the Closing Date with a third-party escrow agent (the “Escrow Agreement”), whereby the Company made a deposit of
$360,000
, a portion of the purchase price, with the escrow agent for the purpose of securing the payment obligations of Affinity, if any, with respect to certain retention bonus agreements entered into with its employees on or before the Closing Date. If any employee does not satisfy the conditions of receipt of the retention bonus, the Company and the Stockholder Representative will jointly direct that such funds on deposit be released to the Stockholder Representative on behalf of the prior stockholders of Affinity.
On the Closing Date, in connection with the approximately
2,650,000
shares of Common Stock issued to the prior stockholders of Affinity, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with the Stockholder Representative requiring the Company to file a Registration Statement on Form S-3 with respect to the resale of such shares as soon as practicable, but in no event more than
90 days
after the Closing Date, and to have such resale registration statement declared effective as soon as practicable.
On the Closing Date, in order to assist with the transition, the Company entered into an employment agreement with Peter Holst, the former Chief Executive Officer and a former stockholder of Affinity, for a position as the Senior Vice President of Business Development of the Company. In addition to a base salary, should Affinity achieve certain performance milestones, the Company will be obligated to issue to Mr. Holst up to
150,000
shares of Common Stock, pursuant to the Company’s 2007 Stock Incentive Plan. Mr. Holst is not deemed an executive officer of the Company for Section 16 and proxy reporting purposes.
The Merger will be treated by the Company under the acquisition method of accounting, as prescribed in Accounting Standards Codification 805, “Business Combinations,” for business combinations under GAAP. The Company will be deemed to have acquired the assets and liabilities of Affinity and the results of operations will be consolidated into the results of operations of the Company as of the completion of the Merger. Financial statements in quarterly and annual filings of the new Company issued after the Merger will reflect only the operations of the Company's business after the Merger and will not be restated retroactively to reflect the historical financial position or results of operations of the Company.
Financing
In connection with the Merger, on the Closing Date, the Company entered into a Loan and Security Agreement (“Comerica Loan Agreement”) with Comerica Bank, providing the Company with a
$2.0 million
term loan (the “Comerica Term Loan”) and a revolving line of credit (the “Comerica Revolver” and, together with the Comerica Term Loan, the “Comerica Loans”), pursuant to which the Company can borrow, for working capital needs, an amount up to the lesser of (i)
80%
of eligible accounts receivable and (ii)
$3.0 million
. The Company requested and was provided with an advance of
$780,000
from the Comerica Revolver on the Closing Date. The proceeds of the Comerica Term Loan and the Comerica Revolver were used to finance a portion of the Merger and refinance the
$750,000
previously outstanding pursuant to the Revolving Loan Facility, between the Company and SVB (as discussed in Note 10). The SVB Revolving Loan Facility was terminated in connection with the repayment of outstanding amounts thereunder, effective as of the Closing Date. The Comerica Term Loan will bear interest at a rate equal to the Prime Rate (as defined in the Comerica Loan Agreement) plus
3.00%
, and borrowings under the Comerica Revolver will bear interest at a rate equal to the Prime Rate (as defined in the Comerica Loan Agreement) plus
2.00%
. The Comerica Loans are secured by substantially all of the assets of the Company and secured guarantees executed by GP Communications, LLC, a wholly-owned subsidiary of the Company (“GP Communications”) and Affinity. The Comerica Loan Agreement contains certain restrictive covenants customary for facilities of this type (subject to negotiated exceptions and baskets), including restrictions on indebtedness, liens, acquisitions and investments, restricted payments and dispositions. The Comerica Loans are subject to certain customary financial covenants, including, without limitation, covenants that require the Company to maintain a total funded debt to adjusted EBITDA ratio, to maintain a senior funded debt to adjusted EBITDA ratio and to maintain a fixed charge coverage ratio. The Comerica Loan Agreement also provides for customary events of default, with corresponding grace periods, including failure to pay principal or interest when due, failure to pay other obligations within ten days after becoming due, failure to comply with covenants, breaches of representations and warranties, default under certain other indebtedness, certain insolvency events affecting the Company, the occurrence of certain material judgments or if any guaranty of the Company’s obligations ceases to be in full force and effect. The Comerica Term Loan matures on November 1, 2015 and the Comerica Revolver matures on April 1, 2014.
On the Closing Date, the Company also entered into a Loan and Security Agreement (the “Escalate Loan Agreement”) with Escalate Capital Partners SBIC I, L.P. (“Escalate”), providing the Company with a
$6.5 million
term loan (the “Escalate Term Loan”) for a term of
60 months
. The Escalate Term Loan will bear interest at a fixed rate of
12.0%
per annum, with interest-only payable monthly for the first
24 months
after the Closing Date and, commencing after such interest-only period, monthly payments of the outstanding principal amount, plus accrued interest, for the remainder of the term. The proceeds of the Escalate Term Loan were used to finance a portion of the Affinity acquisition. The Escalate Term Loan is secured by substantially all of the assets of the Company and secured guarantees executed by GP Communications and Affinity, and is subordinated to the Comerica Loans. The Escalate Loan Agreement contains certain restrictive covenants customary for facilities of this type (subject to negotiated exceptions and baskets), including restrictions on indebtedness, liens, acquisitions and investments, restricted payments and dispositions. The Escalate Loan Agreement also provides for customary events of default,
with corresponding grace periods, including failure to pay principal when due, failure to pay interest within three business days after becoming due, failure to pay other obligations within ten days after becoming due, failure to comply with covenants, breaches of representations and warranties, default under certain other indebtedness, certain insolvency events affecting the Company and its subsidiaries or the occurrence of certain material judgments. The Escalate Loan Agreement also provides for certain management rights for Escalate, including (i) the ability for Escalate to consult with and advise management of the Company on significant business issues, including management’s proposed annual operating plans and (ii) the ability for Escalate to examine the books and records of the Company and inspect the Company’s facilities during normal business hours with reasonable notice, provided, that access to attorney/client privileged communications and other sensitive information need not be provided. In connection with the Escalate Term Loan, the Company issued to Escalate on the Closing Date,
295,000
shares of Common Stock (the “Escalate Shares”) at a purchase price of
$0.01
per share. Escalate received standard piggyback and demand registration rights with respect to the Escalate Shares.
The Comerica Loans and Escalate Term Loans financing costs, net of accumulated amortization, which were included in the other assets in the accompanying balance sheets, were
$199,000
and
$0
as of
September 30, 2012
and December 31, 2011, respectively. The financing costs are being amortized over the term of each loan through each maturity date. During the
nine and three
months ended
September 30, 2012
there was no amortization of financing costs.
On the Closing Date, the Company also issued a promissory note (the “Note”), in favor of the Stockholder Representative, in original principal amount of
$2.33 million
, due and payable on December 31, 2014. The principal amount of the note will accrue interest at a rate of
8.0%
per annum, and such interest shall be payable in arrears in quarterly payments commencing on April 1, 2013. Beginning on April 1, 2013 and on the first day of each month thereafter, if the Company has achieved a minimum EBITDA (as defined the Comerica Loan Agreement), the Company shall make a principal payment in the amount of
$50,000
. The Company shall make additional payments on the principal amount on each of June 30, 2013, December 31, 2013, June 30, 2014 and December 31, 2014 in amount equal to
40%
of the Company’s trailing six month EBITDA (as defined in the Comerica Loan Agreement) less
$3.0 million
, provided that the June 30, 2013 principal payment shall only be made if the Company is in compliance with the Modified Fixed Charge Ratio (as defined in the Note).