Glowpoint, Inc. — Q3 2017 Form 10-Q
Issuer note: The filing identifies the registrant as Glowpoint, Inc., not Taoweave, Inc. It covers the quarter and nine months ended September 30, 2017; financial statements are unaudited.
Business context and financial results
Glowpoint provides managed video-collaboration and network services. Revenue has declined amid customer attrition, competitive pricing pressure, and reduced demand for meeting-room video services. The company operates as one segment.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $3.481m | $4.344m | $11.417m | $14.950m |
| Gross profit, approximate | $1.493m | $1.735m | $4.720m | $5.763m |
| Gross margin, approximate | 42.9% | 40.0% | 41.3% | 38.5% |
| Operating loss | $(2.000)m | $(1.288)m | $(2.449)m | $(1.778)m |
| Net income (loss) | $7.104m | $(1.705)m | $5.846m | $(3.021)m |
| Adjusted EBITDA, non-GAAP | $0.254m | $0.161m | $1.010m | $1.277m |
| Operating cash flow | Not separately reported for quarter | $1.073m | $0.265m |
Q3 and nine-month revenue fell 20% and 24%, respectively. Nine-month video collaboration revenue declined 18% and network services revenue declined 30%. The reported 2017 net income primarily reflects a $9.045m gain on extinguishment of debt; the company continued to report operating losses. Gross margins improved as a percentage of revenue, mainly due to lower taxes and fixed network costs.
Financial position, liquidity, and debt
- At September 30, cash was $1.439m, including $0.018m restricted cash; working capital was $0.696m. Total assets were $13.330m and stockholders’ equity was $9.963m.
- Debt had a $2.096m gross principal balance, with a $0.308m unamortized discount and $1.788m net carrying value. Cash and cash equivalents increased $0.299m over the nine-month period.
- Operating cash flow was $1.073m; investing cash outflow was $0.093m and financing cash outflow was $0.681m. The nine-month operating cash flow included the benefit of noncash adjustments and working-capital changes.
- July’s debt recapitalization extinguished the former Main Street and SRS obligations and reduced debt and accrued-interest obligations by $9.362m. It was funded in part with new Western Alliance and Super G borrowings. The company also repurchased 7.7m shares from Main Street for $2.55m and issued 7.3m shares to settle SRS debt.
- At quarter-end, borrowings were $1.000m under Western Alliance’s receivables revolver and $1.096m under Super G’s term loan. The company reported compliance with both lenders’ covenants at September 30. Scheduled debt service remained significant, including 2018 principal and interest payments of $0.823m to Super G and $0.400m of principal to Western Alliance.
Material changes, outlook, and risks
- Revenue declines were attributed to customer attrition, lower demand, competition, and pricing pressure. Management expected the year-over-year decline to continue through the remainder of 2017 and into 2018. Enterprise sales cycles were described as typically six to eighteen months.
- In October 2017, after quarter-end, the company raised $2.8m gross, estimated $2.325m net, through a registered offering of Series B convertible preferred stock. The stock converts at $0.28 per common share, subject to adjustments. The lead investor received participation rights in future offerings and consent rights over certain future securities issuances and debt.
- Management planned to use some or all of the offering proceeds for product development, sales and marketing, and capital expenditures, and said it would seek amendments to certain Western Alliance financial covenants for 2018 and 2019.
- The filing states that continued revenue declines and planned spending may reduce operating cash flow; available cash and offering proceeds may not cover operations, investment, and debt service. Management disclosed substantial doubt about the company’s ability to continue as a going concern. Additional financing may be needed, with no assurance it can be obtained on acceptable terms.
- Q3 impairment charges totaled $1.707m, including a $1.475m goodwill impairment and $0.232m related to capitalized software. Further declines in revenue, cash flow, or share price could trigger additional impairments.
- Two customers represented 23% and 16% of Q3 revenue. The largest customer had filed for Chapter 11 in January 2017; it had paid amounts due at filing and continued to pay for ongoing services, but rejection of its contract could materially affect the business.
- The filing reported no legal proceedings and no material changes to the risk factors in the 2016 Form 10-K. Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether revenue declines stabilize and whether planned product and sales investments generate customer wins or improved cash flow.
- Cash runway, debt-service capacity, and compliance with Western Alliance and Super G covenants, including the outcome of covenant amendment discussions.
- The actual net proceeds and dilution from the Series B preferred stock, including conversion and investor consent provisions.
- Exposure to the bankrupt major customer and the concentration of revenue and receivables among the two largest customers.
- The sustainability of operating cash flow and the effect of the debt-extinguishment gain and impairment charges when assessing underlying performance.