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Glowpoint, Inc. (NYSEMKT:GLOW)

Q4 2013 Earnings Conference Call

March 6, 2014 4:30 p.m. ET

Executives

Pete Holst - President and Chief Executive Officer

David Clark - Chief Financial Officer

Analysts

Operator

Good afternoon, everyone. Welcome to Glowpoint's 2013 Year End Results Conference Call. Before we begin, I want to remind listeners that this call is being webcast live over the Internet, and then a webcast replay will also be available on the company's website at www.glowpoint.com following the call.

The call is being hosted by Glowpoint's CEO and President, Pete Holst; and CFO, David Clark. There will be a brief question-and-answer period following the company's prepared remarks.

Slide two summarizes the company's Safe Harbor statement, the company's partial discussion of its financial results should be read in conjunction with the consolidated financial statements and related notes contained in the company's annual report of Form 10-K for the year ended December 31, 2013, filed today with the SEC.

Various remarks about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Although the company believes the assumptions upon which preliminary or initial results, financial information and forward-looking statements are based on reasonable as of today's date. These forward-looking statements are not guarantees of future performance, and therefore investors should not place undue reliance on them.

Also, these statements are based on facts known and expected as of the date of this conference call and the company undertakes no obligation to update these statements to reflect the events or circumstances that might arise after this call.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's annual report on Form 10-K and other filings with the SEC.

In addition, today's call and webcast may include non-GAAP financial measures within the meaning of the SEC Regulation G and a reconciliation of such measures to GAAP measures is contained in the slides.

I would now like to turn the call over to Pete Holst, Glowpoint's CEO and President.

Pete Holst

Thanks, Doug, and good afternoon everyone. I would like to welcome you all to our fourth quarter and fiscal 2013 earnings call.

Let me begin by saying that 2013 was a year in which the company underwent a substantial amount of change as part of a long-term plan to create a single platform for managing service relationships, not only within IT, but across the enterprise.

Based on extensive customer feedback, we believe our core service objectives going into 2014 are as follows; consolidate legacy, redundant and next-generation video enabled devices to a single system, standardize our service delivery model using globally recognized frameworks, implement zero-touch automation to replace manual redundant task such as reporting and level one trouble shooting, and deliver an intuitive approachable and business grade experience for our partners and customers.

The market for collaboration products has expanded significantly, and customers need access to a variety of video, voice and collaboration tools, but also the ability to supplement existing IT expertise on an as needed basis to support a growing and diverse set of complex meeting requirements. The business meeting has been evolving since the inception of teleconferencing years ago. Data collaboration enhanced the voice conferencing experience and with recent advancements in video capability, we believe the next-generation of collaboration services will be consumed in a hybrid manner, seeking to blend video, voice and content to multiple applications across multiple devices.

In the press release issued just prior to today's call, we provided additional guidance on each item, but fundamentally our plan hasn't changed. Our goal is simple; become an elite service platform enabling partners and customers to deliver not only our applications, but hybrid levels of support around them.

In 2013, our objectives were as follows; simply a complex capital structure while adding an institutional financial partner to enable our long-term goals, 2) add key personnel with financial, operational sales and information systems and technology expertise, 3) eliminate non-core assets and costs, and 4) we architect our service design model with the focus on automation, scale and enablement. In short, our focus in 2013 was primarily internal and centered on mobilizing key assets and institutional knowledge for 2014 and beyond.

Historically, the company has relied primarily on its ability to provide specialized solutions for many of its customers, where the primary focus was on connecting, managing and monitoring conventional hardware-based, also known as telepresence video systems.

While we firmly believe in continuing to support the "Uber high-touch platforms," it's abundantly clearly that future demand requires a multi-faceted level of support for high, mid and low touch users. Whether you use a $500,000 purpose built system or a built-in camera from your tablet, users will want to connect with an expectation similar to a voice call. Our target verticals will focus on middle market and larger enterprise, primarily in legal, consulting, financial and healthcare services, where the business requirements are far more complex, including security, business class service levels and global support.

As customers migrate from a pure hardware-based environment to a hybrid of owned and virtualized infrastructure, we believe demand for additional support will increase proportionate to the level of meeting complexity. I have witnessed a similar trend during my time with Raindance as the market shifted from high-touch to automated calls, and learned that companies who ultimately prospered were once focused on system automation, product mix and economies of scale.

Short-term dynamics driven by price and technology shift are omnipresent, and will persist through the next few years. Our objective is to provide a business class level of service around each of the leading technologies as they develop. As I stated on our last call, and while there maybe an initial near-term revenue decrease as a result of migrating an existing customer, we believe our strength lies in the long-term relationship we have with them, and our proven ability to handle higher degree of meeting complexity.

In the prior quarter, I spoke about three key areas of focus as we headed in 2014, they were as follows; information systems, video architecture and automation, key partnerships and channel alliances and expanding our operating leverage. Well, I spoke in detail about each of these areas last quarter, I would like to provide an update and expand the scope to include additional items.

Collectively, the following represents an outline of our five-point plan for renewed growth. 1) Information systems, in September of last year we hired Ted Tzeng to head our infrastructure efforts, and begin the process of re-architecting our systems, network and application layers. We've also hired a number of engineers and outsourced professionals to assist in designing our next-generation services over the last 90 days, and have made good progress in all key areas. We are aggressively developing our new platform in collaboration with our customers and look forward to delivering new enhancements and features over the next three to six months.

2) Key partnerships and channel alliances. In November the company hired Scott Zumbahlen from Polycom to lead our sales efforts. Scott's focus during these initial 90 days has been primarily internal and centered on messaging and structure. As mentioned in the prior call, we believe Scott will leverage his deep experience in channel sales to expand our opportunities exponentially through partners, and I'm excited about the philosophy and drive he brings to our organization. In Q1 alone, we are deploying a next-generation network solution for Russell Reynolds, a new outsource arrangement with a global provider of collaboration services, and after 18 months of commitment and effort on both parts, a global managed service delivery for Regus.

3) Expanding our operating leverage. As outlined in the press release, we continue to focus on gross margins and the opportunity to significantly enhance them. We believe the combination of higher degrees of automation in our new systems, combined with more efficient pricing models for tiered services, as well as the introduction of new features throughout the year will yield measurable results.

4) Product expansion and mergers and acquisitions. Lastly and consistent with our ongoing plan, we plan to use our capital resources to fund in aggressive product development and acquisition strategy. Specifically, we plan to continue to pursue a number of potential acquisition opportunities to increase our market share, to accelerate our platform revenue and to broaden our technology portfolio. This will require the company to make substantial investments in the first half of 2014, which we strongly believe will begin to yield results later this year.

5) Investor relations. We believe in not only managing the company back to a strong growth phase, but also communicating that message effectively to the public markets. In an effort to grow the company's public image, we've conducted a thorough search over the last three months to find an investor relations partner with a knowledge-driven approach who is willing to devote substantial time and resource to understanding the dynamics in our industry.

To that end, I'm pleased to announce that we have engaged LHA Advisors effective today as our partner in helping to develop and significantly enhance the public persona of Glowpoint.

Now, let me turn over to David for a closer look at our financial performance last year.

David Clark

Thanks, Pete. I'll begin with a review of our revenue that's summarized on Slide 9.

Revenue for 2013 was $33.5 million, up 15% from $29.1 million in 2012. This increase was driven by a full year of revenue contribution in 2013 from the acquisition of Affinity, whereas 2012 only includes revenue contribution from Affinity for the fourth quarter since the acquisition closed on October 1, 2012.

2013 revenue was down approximately 10% from pro-forma 2012 revenue. Pro-forma 2012 revenue assumes the Affinity acquisition closed on January 1, 2012.

Revenue for the fourth quarter of 2013 was $7.9 million, down 12% as compared to $8.96 million for the fourth quarter of 2012. These decreases were primarily driven by pricing pressure on certain managed and network services and technology shifts towards more mobile and automated services. We expect revenue for 2014 to be approximately leveled with 2013, based on the drivers that Pete outlined earlier.

Turning to the next slide, this summarizes the reconciliation of our net income or loss to adjusted EBITDA. Adjusted EBITDA is an important non-GAAP measure that we use to assess the operating performance of the company and in the calculation of our loan covenants.

Adjusted EBITDA increased by 43% to $4.4 million in 2013 from $3.1 million in 2012. For the fourth quarter of 2013, adjusted EBITDA increased by 25% to $1.2 million as compared to $1 million for the same period last year. The improvement in adjusted EBITDA for 2013 versus 2012 was mainly due to the net increase in gross margin, primarily gained through the Affinity acquisition and lower sales and marketing and R&D expenses.

The improvement in adjusted EBITDA for Q4 2013 versus Q4 2012 was mainly due to lower G&A and sales and marketing expenses. Our adjusted EBITDA is a percentage of revenue improved to 135 for 2013 as compared to 11% for 2012, and to 15% for Q4 2013 from 11% for the same period last year. These improvements are primarily due to lower G&A, R&D and sales and marketing expenses as a percentage of revenue.

The next slide summarizes the capital restructuring we successfully completed in 2013. We simplified our capital structure by exchanging all outstanding shares of B1 preferred stock into common stock during the second half of 2013. This transaction eliminated $10.2 million of liquidation preference on this preferred stock, and eliminated annual dividends on $600,000 that would have commenced accruing in 2014.

We also refinanced our debt agreements in Q4 2013 to reduce near-term debt service requirements and provide additional borrowing capacity for strategic growth plans. We secured a new credit facility for Main Street Capital consisting of $11 million term loan commitment and a $2 million revolver. As of December 31, 2013 we had outstanding borrowings of $9 million on the term loan and $300,000 on the revolver.

During 2013, and in connection with entry into the Main Street credit facility, we repaid $9.3 million on former debt agreements that existed as of December 31, 2012. We also amended the note issued in connection with the Affinity acquisition, which reduced the amount by $203,000 to $1.9 million and extended the maturity base from December 31, 2014 to January 4, 2016.

Our former debt agreements would have required principal payments of $3.6 in 2014 and $3 million in 2015 based on scheduled maturities. Under our new and amended debt agreements, our principal payments are based on excess cash flow and achievement of EBITDA. We are currently projecting $950,000 of principal payments in 2014.

Turning to Slide 7, I'll review key data for our cash flow and balance sheet. We generated positive cash flow from operations of $2.3 million for 2013, up $1.5 million as compared to $0.8 million for 2012.

Our capital expenditures totaled $856,000 for 2013, and primarily related to key investments in our infrastructure to better serve customers. And our cash position was $2.3 million at the end of 2013, as compared to $2.2 million as of the end of 2012.

This last slide summarizes our financial outlook for 2014. As mentioned earlier, revenue for 2014 is expected to be approximately level with 2013. Gross margins are expected to gradually improve in the second half of 2014 from 42% in 2013. Adjusted EBITDA for 2014 is expected to grow by approximately 10% from 2013 driven by improvements in gross margins and reductions in operating expenses. And capital expenditures for 2014 are expected to approximate $2 million, and are expected to be funded from positive cash flow from operations in 2014.

Now, I'll turn the call back over to Pete.

Pete Holst

Thanks, Dave. This is a great industry to be in right now. And 2014 is our opportunity to create new services that distinguish ourselves from the growing hoard of technology applications and conventional service providers that haven't meaningfully invested in their video strategy.

Our new management team is highly committed and invigorated by the opportunity ahead. We have a supportive capital partner, who is actively assisting and helping us grow the business. We have a clearly defined product strategy with the right people and technology partners to execute.

Finally, the market dynamics are such that new applications emerge almost every month, creating a combination of buzz and confusion for customers, but also an opportunity for Glowpoint to provide the guidance and support to make it work for them. We are confident that continuing to build out our service portfolio and progressively moving our company towards a platform-centric business model will position Glowpoint to deliver high value to customers, partners and shareholders alike. I look forward to updating you on our progress on future calls.

And with that, I'll pass the call back to the operator.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions)

Gentlemen, there are no questions in the phone queue at this time.

Pete Holst

Great. Thanks, Doug. Again, we appreciate everyone joining the call today, and look forward to speaking to you about our improvements and results after the first quarter.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.

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