Glowpoint, Inc. — Form 10-Q Summary
Period: Quarter ended September 30, 2011; results compare the three and nine months ended September 30, 2011 with the corresponding 2010 periods. The filing identifies the registrant as Glowpoint, Inc., not Taoweave, Inc.
Business context and results
Glowpoint provides cloud-managed video services to more than 500 enterprises in over 35 countries. Its offerings include video connectivity, hosted conferencing, and managed support. The company reports one operating segment. Its ISDN resale business was transferred to a third party during the third quarter and is reported as discontinued operations.
| Metric ($ thousands, except per-share data) | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | 6,829 | 6,944 | 20,764 | 20,541 |
| Operating income (loss) | 55 | (861) | 149 | (2,289) |
| Net income (loss), continuing operations | 25 | (912) | 56 | (2,396) |
| Net income (loss), including discontinued operations | 36 | (844) | 85 | (2,216) |
| Adjusted EBITDA | 837 | (375) | 1,662 | (1,032) |
| Basic and diluted EPS attributable to common stockholders | 0.00 | (0.04) | 0.00 | (0.16) |
Operating margin, calculated from reported figures, was approximately 0.8% in Q3 2011 and 0.7% for the nine-month period, versus losses in the comparable 2010 periods. Reported EPS rounds to $0.00 despite positive net income.
Revenue trends and material changes
- Nine-month revenue rose 1.1%; Q3 revenue fell 1.7% year over year.
- Managed video services grew 23.8% for nine months and 20.3% in Q3. They represented 45.0% of nine-month revenue, up from 36.7%.
- OV Connect network services declined 16.5% for nine months and 17.6% in Q3, reflecting a shift in revenue mix.
- Professional and other services grew 51.7% for nine months and 15.7% in Q3.
- Operating expenses fell overall, principally from network cost reductions and managed-services efficiencies. General and administrative expense rose 8.3% for nine months, including $351,000 of severance and costs related to moving headquarters. Depreciation and amortization increased 20.8% for nine months.
Cash, debt, and liquidity
- At September 30, cash was $1.359 million, current assets were $4.411 million, and current liabilities were $4.584 million, resulting in negative working capital of $173,000. The accumulated deficit was $164.983 million.
- Nine-month operating cash flow was positive $117,000, including $52,000 from continuing operations. Investing cash outflow was $793,000, primarily for capital expenditures. Cash declined $676,000 from year-end 2010.
- The company had $750,000 outstanding on its revolving facility and $1.535 million of unused borrowing availability. The facility allows up to $5 million subject to eligible receivables, is secured by company assets including intellectual property, and matures in June 2012. The company reported covenant compliance at quarter-end.
- Capital lease liabilities totaled $512,000, including $161,000 current and $351,000 noncurrent. No off-balance-sheet arrangements were reported.
- Management said it expected sufficient cash flow to fund operations through at least November 30, 2012 in MD&A; the liquidity note instead states through at least the fourth quarter of 2012. Management cautioned that additional capital may be needed and may not be available on acceptable terms.
Capital, unusual items, and risks
- In June, Glowpoint issued 769,000 common shares valued at approximately $1.581 million to purchase equipment. A contractual repurchase right may create a derivative liability during a future period; none was recorded at September 30.
- In August, holders converted 965 Series A-2 preferred shares into 2.413 million common shares and exchanged 679,000 warrants for 360,000 common shares. Common shares outstanding increased to 25.144 million from 21.354 million at year-end.
- Series B-1 preferred stock has a $10 million liquidation preference and is nonconvertible. Cumulative dividends begin in 2013; the stated rates are 4% from January 2013 and 6% from January 2014. Series A-2 preferred dividends also begin in 2013 at 5%.
- Two major customers accounted for 24.9% of nine-month revenue and 23.5% of Q3 revenue. The filing warns that losing these customers could materially harm operations.
- The company recorded a $23,000 Q3 impairment of capitalized software. Approximately $89.25 million of federal net operating loss carryforwards are expected to expire unused because of ownership-change limitations; deferred tax assets remain fully reserved.
- Management gave no specific revenue or earnings guidance. It cited cost management and service efficiencies as drivers of improved results. The filing reported no material change in risk factors, no legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Clarify the cash runway disclosure: “through at least November 30, 2012” in MD&A versus “through at least the fourth quarter of 2012” in the liquidity note.
- Assess whether growth in managed video services can offset continued declines in OV Connect revenue and support sustainable operating cash flow.
- Monitor liquidity, borrowing availability, facility covenants, and the June 2012 loan maturity.
- Evaluate customer concentration and the impact of the two major customers on revenue and receivables.
- Review dilution and preferred-stock terms, including future dividend obligations and the asset-purchase repurchase provision.