Taoweave, Inc. quarterly report, Q1 FY2016

Glowpoint, Inc. — Q1 2016 Form 10-Q

Entity note: The supplied filing is for Glowpoint, Inc., not Taoweave, Inc. It covers the three months ended March 31, 2016; financial statements are unaudited.

Business context

Glowpoint provides managed video collaboration and network services to enterprise and other customers. It reports one operating segment.

Financial results

MetricQ1 2016Q1 2015
Revenue$5.518 million$7.163 million
Gross profit and margin$2.059 million; 37.3%$3.214 million; 44.9%
Operating income (loss)$(295,000)$125,000
Net loss$(712,000)$(234,000)
Net loss attributable to common stockholders per share$(0.02)$(0.01)
Adjusted EBITDA (non-GAAP)$621,000$971,000
Operating cash flow$358,000$602,000
Capital expenditures$78,000$533,000

At March 31, 2016, cash was $2.031 million, including $83,000 restricted; working capital was $2.367 million. Total assets were $19.826 million and stockholders’ equity was $5.949 million. Debt carrying value was $11.006 million, net of debt discount; stated principal borrowings were $9.0 million on the term loan, $400,000 on the revolver, and $1.785 million on the SRS note. Interest expense and other expense totaled $380,000. The filing reports cash interest paid of $281,000.

Changes versus prior year

  • Revenue fell $1.645 million, or about 23%. Video collaboration revenue declined $1.292 million and network services revenue declined $380,000.
  • Management attributed much of the video-services decline to the loss of a significant customer (about 44% of that segment’s decline) and customer migration from meeting suites to desktop and mobile products (about 25%); other attrition accounted for the remainder.
  • Network services were affected by customer attrition, lower demand, competition, and pricing pressure. Cost of revenue fell less than revenue, increasing its share of sales from 55% to 63% and reducing gross margin.
  • Lower sales and marketing and general and administrative expenses partly offset weaker revenue. Adjusted EBITDA declined $350,000. Operating cash flow declined $244,000, while capital spending was substantially lower.

Outlook, risks and unusual items

  • Management expects the year-over-year revenue decline to continue through the remainder of 2016, citing competitive conditions and limited resources for sales and marketing. Sales cycles are estimated at six to eighteen months; the timing of any revenue stabilization or growth is uncertain.
  • Management forecasts likely violations of both fixed-charge-coverage and debt-to-Adjusted-EBITDA covenants beginning in mid-2016. It is exploring covenant renegotiation, a capital raise, debt-to-equity conversion, or refinancing. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
  • If debt is accelerated after a covenant or other default, the company says it would not have sufficient resources to repay it; lenders could enforce collateral rights. Access to additional facility availability is not assured. Management’s expectation of sufficient resources for at least twelve months is conditional on addressing forecast covenant violations.
  • After quarter-end, Glowpoint paid $400,000 against the revolver; as of the filing date, the revolver had no outstanding borrowings.
  • UTC Associates seeks $2.107 million in damages in a contract lawsuit. One fraud claim was dismissed with prejudice; two contract claims remain. Glowpoint disputes the claims and filed counterclaims. The filing does not state a clear estimate of any probable loss or accrual.
  • Q1 included $312,000 of stock-based compensation expense. No impairment charge was recorded, compared with $125,000 in Q1 2015. The company capitalized $62,000 of internal-use software costs, versus $523,000 in the prior-year quarter.

Important facts for investors to verify

  • Whether Glowpoint obtained lender waivers, amended covenants, or secured refinancing or new capital before projected mid-2016 covenant breaches.
  • Subsequent cash, debt, and liquidity position, including use of remaining credit availability and required principal payments.
  • Whether revenue declines continued, particularly following the major customer loss and ongoing competitive and pricing pressure.
  • Developments in the UTC litigation and whether any loss contingency was recognized in later filings.
  • Potential dilution from equity financing and the substantial unvested equity awards disclosed in the filing.