NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)
Note 1 - Basis of Presentation and Liquidity
The Business
Glowpoint, Inc. (“
Glowpoint
” or “
we
” or “
us
” or the “
Company
”) is a provider of video collaboration services and network services. Our services enable our customers to use videoconferencing as an efficient and effective method of communication for their business meetings. Our customers include Fortune 1000 companies, along with small and medium enterprises in a variety of industries. We market our services globally through a multi-channel sales approach that includes direct sales and channel partners.
The Company was formed as a Delaware corporation in May 2000. The Company operates in
one
segment and therefore segment information is not presented.
Liquidity
As of
June 30, 2014
, we had
$2,101,000
of cash and working capital of
$1,395,000
. Our cash balance as of
June 30, 2014
includes restricted cash of
$185,000
(as discussed in Note 3). For the
six
months ended
June 30, 2014
, we generated a net loss of
$833,000
and net cash provided by operating activities of
$1,246,000
. We generated cash flow from operations even though we incurred a net loss due to certain non-cash expenses and changes in working capital.
In October 2013, the Company entered into a loan agreement by and among the Company and its subsidiaries, and Main Street Capital Corporation (“Main Street”), as lender and as administrative agent and collateral agent for itself and the other lenders from time to time party thereto (the "Main Street Loan Agreement"). The Main Street Loan Agreement provides for an
$11,000,000
senior secured term loan facility (“Main Street Term Loan”) and a
$2,000,000
senior secured revolving loan facility (the “Main Street Revolver”). As of
June 30, 2014
, the Company had outstanding borrowings of
$9,000,000
under the Main Street Term Loan and
$197,000
on the Main Street Revolver.
Based on our current projection of revenue, expenses, capital expenditures and cash flows, the Company believes that it has, and will have, sufficient resources and cash flows to service its debt obligations and fund its operations for at least the next twelve months following the filing of this Quarterly Report on Form 10-Q. As of
June 30, 2014
, we have availability of
$1,803,000
under the Main Street Revolver and
$2,000,000
under the Main Street Term Loan (subject to approval by Main Street under the terms of the Main Street Loan Agreement). In the event we need to raise additional capital to fund operations and provide growth capital, we have historically been able to raise capital in private placements. 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 or future 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
June 30, 2014
and for the
six and three
months ended
June 30, 2014
and
2013
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
June 30, 2014
, and the results of operations for the
six and three
months ended
June 30, 2014
and
2013
, the statement of stockholders' equity for the
six
months ended
June 30, 2014
and the statement of cash flows for the
six
months ended
June 30, 2014
and
2013
. The results for the
six and three
months ended
June 30, 2014
are not necessarily indicative of the results to be expected for the entire year. The condensed balance sheet as of
December 31, 2013
was derived from audited financial statements as of
December 31, 2013
. 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 audited consolidated financial statements and the footnotes thereto for the fiscal year ended
December 31, 2013
as
filed
with the Securities and Exchange Commission (the "
SEC
") with our Form 10-K on March 6, 2014 (the "
Audited 2013 Financial Statements
").
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Glowpoint and our
100%
-owned subsidiaries, Affinity VideoNet, Inc. ("Affinity") and 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 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 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 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 valuation of goodwill, the valuation of intangible assets and their estimated lives, and the estimated lives and recoverability of property and equipment.
See "
Summary of Significant Accounting Policies
" in the Company's Audited
2013
Financial Statements for a discussion on the estimates and judgments necessary in the Company's accounting for financial instruments, concentration of credit risk, goodwill, intangible assets, property and equipment, income taxes, stock-based compensation, and accrued sales taxes and regulatory fees.
Accounting Standards Updates
On May 28, 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for us on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
Revenue Recognition
Revenue billed in advance for video collaboration 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 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.
Allowance for Doubtful Accounts
We record an allowance for doubtful accounts based on specifically identified amounts that are believed to be uncollectible. We also record additional allowances based on our aged receivables, which are determined based on historical experience and an 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, the receivable is written off against the allowance. We do not obtain collateral from our customers to secure accounts receivable. The allowance for doubtful accounts was
$107,000
and
$221,000
at
June 30, 2014
and
December 31, 2013
, respectively.
Taxes Billed to Customers and Remitted to Taxing Authorities
We recognize taxes billed to customers in revenue and taxes remitted to taxing authorities in our cost of revenue. For the
six and three
months ended
June 30, 2014
, we included taxes of
$654,000
and
$328,000
, respectively, in revenue, and we included taxes of
$623,000
and
$313,000
, respectively, in cost of revenue. For the
six and three
months ended
June 30, 2013
, we included taxes of
$668,000
and
$340,000
, respectively, in revenue, and we included taxes of
$635,000
and
$323,000
, respectively, in cost of revenue.
Impairment of Long-Lived Assets and Intangible Assets
We evaluate impairment losses on long-lived assets used in operations, primarily fixed assets and purchased intangible assets subject to amortization, when events and circumstances indicate that the carrying value of the assets might not be recoverable. 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
six
months ended
June 30, 2014
, the Company recorded an impairment loss of
$101,000
relating to idle property and equipment, primarily consisting of furniture and leasehold improvements, located in our Pennsylvania office. As discussed in Note 11, during the
six
months ended
June 30, 2014
, the Company vacated our Pennsylvania office and we are currently marketing such space for sublease. During the
six and three
months ended
June 30, 2014
, we recorded a loss on disposal of
$4,000
and
$4,000
, respectively, for network equipment. In the
six and three
months ended
June 30, 2013
, there was an impairment loss of
$474,000
and
$39,000
, respectively, recorded for network equipment no longer being utilized in the Company's business.
Goodwill
Goodwill is not amortized but is subject to periodic testing for impairment. The test for impairment is conducted annually or more frequently if events occur or circumstances change indicating that the fair value of the goodwill may be below its carrying amount. The Company determined that no events occurred or circumstances changed during the
six
months ended
June 30, 2014
that would indicate that the fair value of goodwill may be below its carrying amount. However, if market conditions deteriorate, or if the Company is unable to execute on its strategies, it may be necessary to record impairment charges in the future.
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 condensed 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
six and three
months ended
June 30, 2014
, we capitalized internal use software costs of
$1,096,000
and
$668,000
, respectively, and we amortized
$299,000
and
$136,000
, respectively, of these costs. For the
six and three
months ended
June 30, 2013
, we capitalized internal use software costs of
$79,000
and
$27,000
, respectively, and we amortized
$259,000
and
$121,000
, respectively, of these costs. An impairment loss of
$65,000
was recorded during the
six and three
months ended
June 30, 2013
, respectively. During the
six and three
months ended
June 30, 2014
, we recorded an impairment loss of
$73,000
and
$73,000
, respectively, for certain software costs previously capitalized.
Note 3 - Restricted Cash
As of
June 30, 2014
, our cash balance of
$2,101,000
included restricted cash of
$185,000
. The
$185,000
lette
r of credit that serves as the security deposit for our lease of office space in Colora
do (as discussed in Note 11) is
secured by an equal amount of cash pledged as collateral and such cash is held in a restricted bank account.
As of
December 31, 2013
, our cash balance of
$2,294,000
included restricted cash of
$242,000
.
Note 4 - Accrued Expenses and Other Liabilities
Accrued expenses consisted of the following at
June 30, 2014
and
December 31, 2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
Accrued compensation
|
$
|
488
|
|
|
$
|
755
|
|
Accrued severance costs
|
21
|
|
|
306
|
|
Accrued communication costs
|
267
|
|
|
328
|
|
Accrued professional fees
|
36
|
|
|
138
|
|
Accrued lease termination
|
159
|
|
|
—
|
|
Accrued interest
|
139
|
|
|
—
|
|
Other accrued expenses
|
227
|
|
|
390
|
|
Deferred revenue
|
118
|
|
|
197
|
|
Customer deposits
|
451
|
|
|
163
|
|
Accrued expenses and other liabilities
|
$
|
1,906
|
|
|
$
|
2,277
|
|
Note 5 - Debt
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
June 30, 2014
|
December 31, 2013
|
SRS Note
|
$
|
1,885
|
|
$
|
1,885
|
|
Main Street Term Loan
|
9,000
|
|
9,000
|
|
Main Street Revolver
|
197
|
|
300
|
|
|
11,082
|
|
11,185
|
|
Less current maturities
|
(197
|
)
|
(950
|
)
|
Long-term debt, net of current portion
|
$
|
10,885
|
|
$
|
10,235
|
|
On October 17, 2013, the Company entered into the Main Street Loan Agreement by and among the Company and its subsidiaries, and Main Street Capital Corporation, as lender and as administrative agent and collateral agent for itself and the other lenders from time to time party thereto. The Main Street Loan Agreement provides for an
$11,000,000
senior secured term loan facility and a
$2,000,000
senior secured revolving loan facility. As of
June 30, 2014
, the Company had outstanding borrowings of
$9,000,000
under the Main Street Term Loan and
$197,000
on the Main Street Revolver.
Borrowings under the Main Street Term Loan and Main Street Revolver mature on October 17, 2018 and October 17, 2015, respectively, unless sooner terminated as provided in the Main Street Loan Agreement. The Main Street Loan Agreement provides that the Main Street Term Loan borrowings bear interest at
12%
per annum and the Main Street Revolver borrowings bear interest at
8%
per annum. Interest payments on the outstanding borrowings under both the Main Street Term Loan and Main Street Revolver are due monthly. The Company is required to make quarterly principal payments on the Main Street Term Loan as follows: (i) starting on February 15, 2014 to April 15, 2015 in an amount equal to
33%
of Excess Cash Flow generated by the Company (as defined in the Main Street Loan Agreement and effectively equal to cash flow from operations less capital expenditures less principal payments on capital leases) during the trailing fiscal quarter and (ii) from August 15, 2015 to August 15, 2018 in an amount equal to
50%
of Excess Cash Flow generated by the Company during the trailing fiscal quarter. In the event there are outstanding borrowings on the Main Street Revolver, any quarterly principal payments are first applied to the Main Street Revolver and then to the Main Street Term Loan. During the three months ended
June 30, 2014
, the Company made a quarterly principal payment of
$54,000
on the Main Street Revolver.
The Company may prepay borrowings under the Main Street Loan Agreement at any time without premium or penalty, subject to certain notice and minimum prepayment requirements. The obligations of the Company under the Main Street Loan Agreement are secured by substantially all of the assets of the Company, including all intellectual property, equity interests in subsidiaries, equipment and other personal property. The Main Street Loan Agreement contains standard representations, warranties and covenants for a transaction of its nature, including, among other things, covenants relating to (i) financial reporting and notification, (ii) payment of obligations, (iii) compliance with applicable laws and (iv) notification of certain events. The Main Street Loan Agreement also contains various covenants and restrictive provisions which may, among other things, limit the Company's ability to sell assets, incur additional indebtedness, make investments or loans and create liens. The Main Street Loan Agreement also contains financial covenants, including a fixed charge coverage ratio covenant and a debt to Adjusted EBITDA ratio covenant. Adjusted EBITDA, a non-GAAP financial measure, is defined as net income (loss) before depreciation, amortization, interest and other expense, net, taxes, severance, acquisition costs, stock-based compensation and
impairment charges. The Main Street Loan Agreement contains events of default customary for similar financings with corresponding grace periods, including failure to pay any principal or interest when due, failure to perform or observe covenants, breaches of representations and warranties, certain cross defaults, certain bankruptcy related events, monetary judgments defaults and a change in control. Upon the occurrence of an event of default, the outstanding obligations under the Main Street Loan Agreement may be accelerated and become immediately due and payable. As of
June 30, 2014
, the Company was in compliance with all required covenants.
As of
June 30, 2014
, the current portion of long-term debt recorded on the Company's balance sheet was
$197,000
and represents the outstanding borrowings on the Main Street Revolver. The Company expects that any principal payments under the Main Street Loan Agreement, which are based on a percentage of Excess Cash Flow as discussed above, will be applied to outstanding borrowings on the Main Street Revolver during the twelve months ending June 30, 2015. Therefore, the Company expects that no principal payments will be applied against the Main Street Term Loan during the twelve months ended June 30, 2015; and thus all outstanding borrowings on the Main Street Term Loan are classified as long term debt as of
June 30, 2014
. The principal payments related to these debt agreements are estimates and actual payments may vary.
In connection with the October 2012 acquisition of Affinity, the Company issued a promissory note (the “SRS Note”) to Shareholder Representative Services LLC ("SRS"), on behalf of the prior stockholders of Affinity. As of
December 31, 2013
and
June 30, 2014
, the principal balance on the SRS Note was
$1,885,000
. The interest rate on the SRS Note is
10.0%
per annum and interest is payable quarterly in arrears. The final maturity date of the SRS Note is January 4, 2016 and the Company is required to make monthly principal payments in the amount of
$50,000
in the event the Company's trailing
three
month Adjusted EBITDA exceeds
$1,500,000
. The Company is required to make additional payments on the principal amount on each of June 30, 2014 and December 31, 2014 in an amount equal to
40%
of the Company’s trailing
six
month Adjusted EBITDA less
$3,000,000
. As of
June 30, 2014
, the Company has not made any principal payments on the SRS Note as the Company has not yet met the Adjusted EBITDA threshold.
Unamortized financing costs related to our debt agreements of
$88,000
are included in prepaid expenses and other current assets and
$232,000
are included in other assets as of
June 30, 2014
, in the accompanying condensed consolidated balance sheet. Unamortized financing costs related to our debt agreements of
$363,000
are included in other assets as of December 31, 2013. The financing costs are amortized using the effective interest method over the term of each loan through each maturity date. During the
six
months ended
June 30, 2014
and
2013
, there was
$44,000
and
$121,000
respectively, of amortization of financing costs, and
$0
and
$69,000
respectively, of amortization of debt discount.
Note 6 - Capital Lease Obligations
During the
six
months ended
June 30, 2014
, the Comp
any did not enter into any non-cancelable capital lease agreements. Depreciation expense on the equipment unde
r the capital lease obligations for the
six and three
months ended
June 30, 2014
and
2013
was
$79,000
and
$40,000
, respectively, and
$79,000
and
$40,000
, respectively. Future minimum commitments under all non-cancelable capital leases as of
June 30, 2014
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Total
|
|
Interest
|
|
Principal
|
Remaining 2014
|
88
|
|
|
2
|
|
|
86
|
|
2015
|
43
|
|
|
1
|
|
|
42
|
|
2016
|
1
|
|
|
—
|
|
|
1
|
|
|
$
|
132
|
|
|
$
|
3
|
|
|
$
|
129
|
|
The current portion of the Company's capital lease obligations is
$116,000
and the long-term portion is
$13,000
at
June 30, 2014
.
Note 7 - Preferred Stock
Our Certificate of Incorporation authorizes the issuance of up to
5,000,000
shares of preferred stock. As of
June 30, 2014
, there were:
100
shares of Series B-1 Preferred Stock authorized, and
no
shares issued or 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 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. As of
June 30, 2014
, the Company has recorded approximately
$30,000
in accrued dividends on the accompanying condensed consolidated balance sheet related to the Series A-2 Preferred Stock.
Note 8 - Stock Options
On April 22, 2014, the Board of Directors of the Company (the “Board”) adopted the Glowpoint, Inc. 2014 Equity Incentive Plan (the “2014 Plan”), subject to requisite stockholder approval. On May 28, 2014, the 2014 Plan was approved by the Company’s stockholders at the Company’s 2014 Annual Meeting of Stockholders (the “Annual Meeting”). Also on May 28, 2014, the Board terminated the Company’s 2007 Stock Incentive Plan (the “2007 Plan”). Notwithstanding the termination of the 2007 Plan, outstanding awards under the 2007 Plan will remain in effect accordance with their terms.
The purpose of the 2014 Plan is to promote the success of the Company and to increase stockholder value by providing an additional means to attract, motivate, retain and reward selected employees and other eligible persons through the grant of equity awards. Awards may be granted under the 2014 Plan to officers, employees, directors and consultants of the Company or its subsidiaries. The 2014 Plan permits the grant of stock options, stock appreciation rights, restricted shares, restricted stock units, cash awards and other awards, including stock bonuses, performance stock, performance units, dividend equivalents, or similar rights to purchase or acquire shares, whether at a fixed or variable price or ratio related to the Company’s common stock, upon the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions, or any combination thereof, or any similar securities with a value derived from the value of or related to the Company’s common stock and/or returns thereon. A total of
4,400,000
shares of the Company’s common stock are available for issuance pursuant to awards under the 2014 Plan. No awards were granted under the 2014 Plan during the three months ended
June 30, 2014
.
A summary of stock options granted, exercised, expired and forfeited under our stock incentive plans and stock options outstanding as of, and changes made during, the
six
months ended
June 30, 2014
, is presented below (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
|
Number of Shares Underlying Options
|
|
Weighted
Average
Exercise
Price
|
|
Number of Shares Underlying Options
|
|
Weighted
Average
Exercise
Price
|
Options outstanding, December 31, 2013
|
1,792
|
|
|
$
|
2.21
|
|
|
410
|
|
$
|
2.71
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(50
|
)
|
|
0.90
|
|
|
|
|
|
Expired
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited and canceled
|
(248
|
)
|
|
2.75
|
|
|
|
|
|
Options outstanding, June 30, 2014
|
1,494
|
|
|
$
|
2.16
|
|
|
750
|
|
$
|
2.35
|
|
For the
six
months ended
June 30, 2014
,
50,000
options were exercised and converted into
20,000
shares of common stock. For the
six
months ended
June 30, 2014
, there were no options granted and none expired. 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
six and three
months ended
June 30, 2013
:
|
|
|
|
|
|
Six Months Ended
|
|
Three Months Ended
|
|
June 30,
|
|
June 30,
|
|
2013
|
|
2013
|
Risk free interest rate
|
0.8%
|
|
1.1%
|
Expected option lives
|
5 years
|
|
5 years
|
Expected volatility
|
103.2%
|
|
101.3%
|
Estimated forfeiture rate
|
10%
|
|
10%
|
Expected dividend yields
|
—
|
|
—
|
Weighted average grant date fair value of options
|
$1.39
|
|
$0.67
|
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 expected option lives and forfeiture rates are estimated based on the Company’s exercise and employment termination experience. 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 assumptions used in the Black-Scholes option valuation model are highly subjective and can materially affect the resulting valuations.
Stock option compensation expense is allocated as follows for the
six and three
months ended
June 30, 2014
and
2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Three Months Ended
|
|
June 30,
|
|
June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
General and administrative
|
151
|
|
|
357
|
|
|
10
|
|
|
147
|
|
|
$
|
151
|
|
|
$
|
357
|
|
|
$
|
10
|
|
|
$
|
147
|
|
The remaining unrecognized stock-based compensation expense for options as of
June 30, 2014
was
$1,011,000
, of which
$20,000
, representing
10,000
options, will only be expensed upon a “
change in control
” as defined in our stock incentive plan, and the remaining
$991,000
will be amortized over a weighted average period of approximately
1.29
years.
There was no tax benefit recognized for stock-based compensation for the
six and three
months ended
June 30, 2014
or
2013
. No compensation costs were capitalized as part of the cost of an asset during the periods presented.
Note 9 - Restricted Stock
A summary of restricted stock granted, vested, forfeited and unvested outstanding as of, and changes made during, the
six
months ended
June 30, 2014
, is presented below (shares in thousands):
|
|
|
|
|
|
|
|
|
Restricted Shares
|
|
Weighted Average
Grant Price
|
Unvested restricted shares outstanding, December 31, 2013
|
465
|
|
|
$
|
2.03
|
|
Granted
|
522
|
|
|
1.53
|
|
Vested
|
(122
|
)
|
|
1.54
|
|
Forfeited
|
(195
|
)
|
|
2.43
|
|
Unvested restricted shares outstanding, June 30, 2014
|
670
|
|
|
$
|
1.61
|
|
The number of restricted shares vested during the
six
months ended
June 30, 2014
includes
40,000
shares withheld and repurchased by the Company on behalf of employees to satisfy
$66,000
of minimum statutory tax withholding requirements. Such shares are held in the Company's treasury stock as of
June 30, 2014
.
Restricted stock compensation expense is allocated as follows for the
six and three
months ended
June 30, 2014
and
2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Three Months Ended
|
|
June 30,
|
|
June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Cost of revenue
|
$
|
23
|
|
|
$
|
8
|
|
|
$
|
7
|
|
|
$
|
3
|
|
Research and development
|
6
|
|
|
3
|
|
|
3
|
|
|
—
|
|
Sales and marketing
|
10
|
|
|
26
|
|
|
8
|
|
|
11
|
|
General and administrative
|
100
|
|
|
296
|
|
|
28
|
|
|
(79
|
)
|
|
$
|
139
|
|
|
$
|
333
|
|
|
$
|
46
|
|
|
$
|
(65
|
)
|
During the six months ended
June 30, 2014
, additional paid in capital was increased by
$204,000
relating to the issuance of restricted stock for settlement of bonuses, of which
$165,000
was recorded in accrued expenses as of December 31, 2013. Stock based compensation expense related to these accrued bonuses was recorded during the year ended December 31, 2013.
The remaining unrecognized stock-based compensation expense for restricted stock as of
June 30, 2014
was
$818,000
, of which
$38,000
, representing
15,000
shares, will only be expensed upon a “
change in control
” and the remaining
$780,000
will be amortized over a weighted average period of
3.15
years.
There was no tax benefit recognized for stock-based compensation for the
six and three
months ended
June 30, 2014
or
2013
. No compensation costs were capitalized as part of the cost of an asset during the periods presented.
Note 10 - Earnings (Loss) Per Share
Earnings (loss) per share is calculated by dividing net earnings attributable to common stockholders by the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings (loss) per share reflects the potential dilution from the conversion or exercise into Common Stock of securities such as stock options and warrants.
For the
six and three
months ended
June 30, 2014
and
2013
, diluted net loss per share is the same as basic net loss per share due to the Company's net loss attributable to common shareholders and the potential shares of Common Stock that could have been issuable have been excluded from the calculation of diluted net loss per share because the effects, as a result of our net loss attributable to common shareholders, would be anti-dilutive. Such potentially dilutive shares of Common Stock consist of the following (in thousands):
|
|
|
|
|
|
|
|
Six Months Ended
|
|
June 30,
|
|
2014
|
|
2013
|
Common Stock options
|
1,494
|
|
|
2,092
|
|
Unvested restricted stock
|
670
|
|
|
719
|
|
Warrants
|
—
|
|
|
33
|
|
Note 11 - Commitments and Contingencies
Operating Leases
We lease several facilities under operating leases expiring through 2018. Certain leases require us to pay increases in real estate taxes, operating costs and repairs over certain base year amounts. Lease payments for the
six and three
months ended
June 30, 2014
were
$319,000
and
$154,000
, respectively. Lease payments for the
six and three
months ended
June 30, 2013
were
$384,000
and
$193,000
, respectively.
During the
six
months ended
June 30, 2014
, the Company vacated its Pennsylvania office space in an effort to lower future rent expense. The monthly rent expense for this lease approximates
$15,000
and the Company leases this office space through August 30, 2017. During the
six and three
months ended
June 30, 2014
, the Company recorded an impairment charge of
$225,000
and
$0
, respectively, representing the estimated net present value of the Company’s contractual obligation over the remaining lease term, adjusted for estimated sublease payments and other associated costs. This impairment charge is recorded in General and Administrative expenses on the Company’s condensed consolidated statements of operations for the
six
months ended
June 30, 2014
. As of
June 30, 2014
, the Company has
$159,000
recorded in accrued expenses relating to this impairment charge. In July 2014, the Company entered into a termination agreement relating to this lease, effective August 15, 2014. In exchange for the Company's termination payment of
$150,000
, which is to be paid in
two
equal installments in August 2014 and January 2015, the Company was released from all future obligations under the lease.
Future minimum rental commitments under all non-cancelable operating leases as of
June 30, 2014
, are as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
|
Remaining 2014
|
$
|
236
|
|
2015
|
401
|
|
2016
|
439
|
|
2017
|
400
|
|
2018
|
308
|
|
2019
|
88
|
|
2020
|
8
|
|
|
$
|
1,880
|
|
In July 2014, the Company entered into an operating lease for office space in Oxnard, California. The estimated commencement date for this lease is October 1, 2014 and the term of the lease is for
64
months. The monthly rent expense for this office space will approximate
$7,000
. The future minimum lease commitments shown above include commitments for this new operating lease.
The Company entered into short term leases totaling
$115,000
for the New Jersey location in April 2014, which extended the term through August 31, 2014. The future minimum lease commitments include
$46,000
in 2014 for our New Jersey location. The future minimum lease commitments do not include any future lease commitments for the New Jersey location beyond August 31, 2014. We plan to lease office space in different location in New Jersey.
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. Historically, 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.
Letters of Credit
As of
June 30, 2014
, the Company had an outstanding irrevocable standby letter of credit with Comerica Bank for
$185,000
to serve as our security deposit for our lease of office space in Colorado.
Note 12 – Major Customers
Major customers are those customers or wholesale partners that account for more than 10% of revenues. For the
six and three
months ended
June 30, 2014
, approximately
11%
and
11%
of revenues, respectively, were derived from
one
major wholesale partner and the accounts receivable from this major partner represented approximately
12%
of total accounts receivable as of
June 30, 2014
. The Company also had
one
other customer that represented
15%
of accounts receivable at
June 30, 2014
. For the
six and three
months ended
June 30, 2013
, approximately
21%
and
21%
of revenues, respectively, were derived from
two
major wholesale partners. The loss of any one of these partners would have a material adverse effect on the Company’s financial results and operations.
Note 13 - Related Party Transactions
The Company provides video collaboration services to ABM Industries, Inc. ("
ABM
"). James S. Lusk, who serves on the Board of Directors of the Company, is an officer of ABM. Revenue from ABM for the
six
months ended
June 30, 2014
and
2013
was
$66,000
and
$70,000
, respectively. As of
June 30, 2014
, the accounts receivable attributable to ABM was
$2,000
.
The Company received general corporate strategy and management consulting services under a Consulting Agreement entered into on September 1, 2010 from Jon A. DeLuca (the “
Consulting Agreement
”), who until April 4, 2014 served as a member of our Board of Directors. The Consulting Agreement was a month-to-month engagement pursuant to which the Company paid Mr. DeLuca
$12,500
per month, plus any pre-authorized expenses incurred in providing services. Related party consulting fees pursuant to this agreement for the
six
months ended
June 30, 2014
and
2013
were
$39,000
and
$75,000
, respectively; and such fees have been recorded in General and Administrative expenses on the Company's condensed consolidated statements of operations. As of
June 30, 2014
, there were no remaining payment obligations to Mr. DeLuca. The Consulting Agreement was terminated on April 4, 2014 in connection with Mr. DeLuca’s resignation as a director of the Company.
During 2013, the Company received financial advisory services from Burnham Hill Partners, LLC ("
BHP
") under certain engagement agreements. Jason Adelman, a principal of BHP, is a greater than
5%
shareholder of the Company. In October 2013, the Company terminated all such engagement agreements with BHP. Financial advisory fees for BHP for the
six
months ended
June 30, 2014
and
2013
were
$0
and
$72,000
, respectively; and such fees have been recorded in General and Administrative expenses on the Company's condensed consolidated statements of operations. As of
June 30, 2014
, there were no remaining payment obligations to BHP.
Pursuant to a Sales Partner Agreement between Glowpoint and Nancy K. Holst, Ms. Holst was entitled to certain sales commissions. Ms. Holst is the wife of Peter Holst, the Company's President and CEO. The Company terminated the Sales Partner Agreement with Ms. Holst effective December 31, 2013. For the
six
months ended
June 30, 2014
and
2013
, she earned the sum of
$0
and
$6,000
, respectively; and such fees have been recorded in Sales and Marketing expenses on the Company's condensed consolidated statements of operations. As of
June 30, 2014
, there were no remaining payment obligations to Ms. Holst.
As of
June 30, 2014
, GP Investment Holdings, LLC (“GPI”) owns
15,276,138
shares, or
43%
, of the Company’s Common Stock. GPI is an investment vehicle affiliated with Main Street Capital Corporation, our debt lender, along with individual investors (see Note 5).
Transactions with related parties, including the transactions referred to above, are reviewed and approved by independent members of the Board of Directors of the Company.