Oblong, Inc. - Annual Report: 2006 (Form 10-K)
U.
S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
x ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the year ended December 31, 2006
OR
o TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from ________ to __________
Commission
file number: 0-25940
GLOWPOINT,
INC.
(Exact
name of registrant as specified in its Charter)
Delaware
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77-0312442
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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225
Long Avenue, Hillside, NJ
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07205
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code: (312)
235-3888
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Securities
registered under Section 12(b) of the Exchange
Act:
None
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Title
of each class
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Name
of each exchange on which registered
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None
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Not
applicable
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Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, $0.0001 par value
(Title
of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
the Rule 405 of the Securities Act of 1933. o Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934. o Yes x No
Indicate
by check mark whether the Registrant: (1) filed all reports required to be
filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. o Yes x No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (as defined See definition of
“accelerated filer” and “large accelerated filer” in Rule 12b-2 of the
Securities Exchange Act of 1934).
Large
accelerated filer Accelerated filer
Non-accelerated filer x
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Exchange Act of 1934) o
Yes x
No
The
aggregate market value of the voting and non-voting stock held by non-affiliates
of the Registrant, based upon the closing sales price of the common stock
quoted
in the Pink Sheets of $0.777 on June 1, 2007 was $28,038,422.
The
number of shares of the Registrant’s common stock outstanding as of May 31, 2007
was 47,209,673
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s definitive Proxy Statement for the period ended December 31,
2006 to be filed with the Securities Exchange Commission are incorporated
by
reference into Part III.
TABLE
OF CONTENTS
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Item
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Page
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PART
I
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1.
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Business
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1
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1A
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Risk
Factors
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18
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1B
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Unresolved
Staff Comments
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25
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2.
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Properties
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25
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3.
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Legal
Proceedings
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26
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4.
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Submission
of Matters to a Vote of Security Holders
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26
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PART
II
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5.
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Market
for Registrant’s Common Equity and Related Stockholder Matters and Issuer
Purchases of Equity Securities
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26
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6.
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Selected
Financial Data
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29
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7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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30
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7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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41
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8.
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Financial
Statements and Supplementary Data
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41
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9.
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Changes
in Disagreements with Accountants on Accounting and Financial
Disclosure
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41
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9A
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Controls
and Procedures
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42
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9B
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Other
Information
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42
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PART
III
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10.
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Directors,
Executive Officers and Corporate Governance
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43
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11.
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Executive
Compensation
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47
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12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholders Matters
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47
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13.
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Certain
Relationships and Related Transactions, and Director
Independence
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49
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14.
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Principal
Accounting Fees and Services
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49
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PART
IV
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15.
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Exhibits,
Financial Statement Schedules
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50
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Signatures
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54
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2
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
annual report on Form 10-K contains statements that are considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities and Exchange Act
of
1934, as amended. Forward-looking statements give Glowpoint's current
expectations and forecasts of future events. All statements other than
statements of current or historical fact contained in this annual report,
including statements regarding Glowpoint's future financial position, business
strategy, budgets, projected costs and plans and objectives of management for
future operations, are forward-looking statements. The words "anticipate,"
"believe," "estimate," "expect," "intend," "may," "plan," and similar
expressions, as they relate to Glowpoint, are intended to identify
forward-looking statements. These statements are based on Glowpoint's current
plans, and Glowpoint's actual future activities and results of operations may
be
materially different from those set forth in the forward-looking statements.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from the statements made. Any
or
all of the forward-looking statements in this annual report may turn out to
be
inaccurate. Glowpoint has based these forward-looking statements largely on
its
current expectations and projections about future events and financial trends
that it believes may affect its financial condition, results of operations,
business strategy and financial needs. The forward-looking statements can be
affected by inaccurate assumptions or by known or unknown risks, uncertainties
and assumptions. Glowpoint undertakes no obligation to publicly revise these
forward-looking statements to reflect events occurring after the date hereof.
All subsequent written and oral forward-looking statements attributable to
Glowpoint or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements contained in this annual report on Form
10-K.
PART
I
Overview
Glowpoint,
Inc. ("Glowpoint" or "we" or "us"), a Delaware corporation, is a premiere
broadcast-quality, IP (Internet Protocol)-based managed video services provider.
We offer a vast array of managed video services, including video application
services, managed network services, IP and ISDN videoconferencing services,
multi-point conferencing (bridging), technology hosting and management, and
professional services. We provide these services to a wide variety of companies,
from large enterprises and governmental entities to small and medium-sized
businesses. Glowpoint is exclusively focused on high quality two-way video
communications and has been supporting millions of video calls since its launch
in 2000. We have bundled some of our managed services to offer video
communication solutions for broadcast/media content acquisition and for video
call center applications. Recently, with the advent of HD (High Definition)
Telepresence solutions, we have combined various components of our features
and
services into a comprehensive “white glove” service offering that can support
virtually any of the telepresence solutions on the market today.
Glowpoint’s
managed video services are hardware agnostic, supporting all recognized video
standards. As a result, we have become the global video interconnection point,
linking together “islands of video” across third party networks (e.g., AT&T,
SBC, Qwest and others), protocols (e.g., H320, H323, IP, SIP, and VoIP), and
devices (e.g., desktop, laptop, and mobile phone). Glowpoint’s services provide
users with a consistent experience - regardless of how they are connecting
or
where they are connecting from.
Glowpoint’s
managed video services involve two major components, the Glowpoint video
applications services and the Glowpoint network services. The video application
services are network agnostic and may be leveraged by customers on any QOS
(Quality of Service) network that supports two-way video transport. The
Glowpoint network services leverage the Glowpoint network, a multiple protocol
layer switching (MPLS) QOS network that is dedicated to high-quality two-way
video transport built and managed by Glowpoint. The Glowpoint network is
exclusively dedicated to IP-based video communications, which allows us to
optimize performance and routing of video and audio packets so as to offer
broadcast quality images with telephony-like reliability, features and
ease-of-use. The Glowpoint network spans 11 points of presence (POPs), with
POPs
in the United States, Canada, the United Kingdom and Australia. A unique feature
of the Glowpoint network is its sophisticated gatekeeper infrastructure and
configuration along with its patent-pending call control capabilities (see
“Intellectual Property” below), which enable customers to seamlessly connect to
nearly any standards-based video communications user, whether they are still
using ISDN or the internet, across the United States as well as to virtually
any
major city around the world. Since videoconferencing users typically can only
communicate to others on the same service, Glowpoint is bridging these isolated
islands of video and making video communications more ubiquitous.
1
In
late
2000, we launched our subscription service. From 2000 to 2003, we were a
division of Wire One Technologies Inc. (“Wire One”), a reseller of
videoconferencing equipment from leading manufacturers. Wire One was formed
in
May 2000 by the merger of All Communications Corporation and View Tech, Inc.
After steady growth of the IP-based video service business through early 2003,
we determined that separating the Glowpoint managed video services business
from
the Wire One equipment reselling business could create larger distribution
channels for Glowpoint, allow for more aggressive product development, and
provide us with the opportunity to develop business relationships based solely
on the objective of expanding our video service product offering and increasing
the size of our customer base.
On
September 23, 2003, we completed the sale of the equipment business and
officially changed our name from Wire One to Glowpoint in order to focus solely
on growing Glowpoint’s managed video services. Since 2003, we have been
exclusively focused on making video communications as reliable and as easy
to
use as the telephone - offering ten-digit dialing (as opposed to using IP
addresses), operator assistance, video mailboxes and many other features that
consumers have grown accustomed to with their telephone. We have also redefined
the two-way video communications marketplace by creating and offering unique
IP-based features that were integrated into the industry’s first “All You Can
See” subscription-calling plans, which are similar to Voice over IP (VoIP)
broadband-calling packages or unlimited mobile phone packages. Glowpoint’s
mission continues to be improving the ease-of-use, cost-effectiveness,
functionality, and quality of existing video communications in order to make
it
an integral and ubiquitous part of everyday business and personal
communications. We believe video communications should be as easy and
spontaneous to use as your telephone, but with the power of face-to-face
communication.
Glowpoint
is recognized as one of the premier video-over-IP service providers in the
market today. Our track record and quality-of-service commitment of 99.99%
network uptime has earned us various awards and credits. We have been recognized
in the industry for focusing on providing an innovative customer experience
through our use of IP-based video functionality. We believe we have been a
leader in setting policy through our participation in standards boards,
including chairing a committee of the IMTC H.323 forum on International Dialing
Plans in 2004. Our industry awards include: receipt of Frost & Sullivan’s
Technical Innovations award in 2001; selection as one of the 14 most innovative
companies by “Telephony Magazine” in 2004; and selection of our Chief Technology
Officer as a finalist for 2005 New Jersey Technology Council’s “CIO/CTO of the
Year” for Glowpoint’s technology leadership in video communications. In February
2007, Glowpoint was named one of the best providers of always-on IP Networks
dedicated to videoconferencing in 2006 by Videoconferencing Insight Newsletter,
a newsletter on the videoconferencing industry reporting from a user perspective
for more than a decade (www.vcinsight.com).
Industry
Overview
The
videoconferencing industry has been transformed in recent years. When Glowpoint
was launched, videoconferencing was a niche industry with unproven technology
and questionable quality. We set out to change that. Today, video communications
is becoming more mainstream and reliable, with technology giants such as
Hewlett-Packard and Cisco Systems joining in and validating what we set out
to
accomplish. Currently, we view the video communications industry segregated
into
five categories, each of which is a potential partner and/or customer for
Glowpoint’s managed video services:
· |
Videoconferencing
Equipment Manufacturers;
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· |
Videoconferencing
Equipment Resellers;
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· |
Network
Providers;
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· |
Videoconferencing
Services Providers (Multi-Point Conference Services);
and
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· |
Telepresence
and High Definition (HD).
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2
Videoconferencing
Equipment Manufacturers. Manufacturers
of videoconferencing equipment continue to focus on selling video infrastructure
equipment. With the introduction of HD and Telepresence, however, we believe
they are becoming increasingly aware that in order to sell complex solutions,
they must partner with service providers (such as Glowpoint) who make it easier
for customers to buy and use their products.
Videoconferencing
Equipment Resellers.
Video
equipment resellers and integrators are facing margin pressures as well as
increasingly complex solutions related to videoconferencing equipment sales.
Among their only options we believe is to attempt to reproduce the features,
experience and services provided by Glowpoint or to become resellers of
Glowpoint’s services. Many have chosen the latter and Glowpoint will continue to
nurture and grow its distribution channel.
There
are
some videoconferencing equipment resellers who have chosen to compete with
us
rather than resell our services (see “Competition” below). We believe that these
companies offer only a rudimentary subset of the features and services that
Glowpoint provides. To date, we know of no company that provides comparable
video communication services and, given our proprietary technology (see
“Intellectual Property” below), we believe it would difficult for any competitor
to match our comprehensive service offering.
Network
Providers.
Network
providers have always played a role in videoconferencing, because all equipment
requires some network for transporting the video communication. Historically,
this was done using ISDN services provided by major carriers around the world.
According to some estimates, there may still be as many as 500,000 to 1,000,000
videoconferencing systems still using ISDN. With the emergence of IP
videoconferencing, these network providers have been offering services that
include high quality virtual private networks (VPNs) on which customers may
support data, voice and video applications. This is often referred to as a
“converged network” or “convergence”. At this time, however, converged solutions
provided by network providers are bandwidth only and provide little or no
IP-based video communication applications services. This means that customers
are free to connect their video conferencing equipment to the converged network,
but must then figure out how to support the video application on their own.
This
amounts to “self service” videoconferencing where the customer is isolated on
the converged network with no video application services or support available.
Glowpoint
offers high quality and reliable “bandwidth” via the Glowpoint Network. At first
it may appear that any network provider is our competitor. However, many of
these network providers lack video expertise and do not offer IP video services
or support. They essentially only offer bandwidth and their video services,
if
any, are still focused on ISDN. Glowpoint has been able to leverage this
distinction by offering Glowpoint’s managed video application services over
third party networks (rather than the Glowpoint network). We call it
“Glowpoint-enabling” another network. This solution has permitted us to retain
some accounts when customers have sought the benefits of a converged solution,
has given us sales opportunities with large enterprises that already have
established network provider relationships, and has allowed us to partner,
rather than compete, with network providers on opportunities where we would
otherwise be considered competitors. With our Glowpoint enabled solution, we
have the potential to provide all or part of the video solution in almost every
opportunity we encounter.
Videoconferencing
Service Providers.
A number
of companies, including some equipment resellers, network providers and audio
conferencing service providers, offer videoconferencing services almost
exclusively focused on multi-point conferencing (bringing multiple locations
into one video call). These videoconferencing service providers, however, are
still heavily dependent on ISDN as the network transport for these multi-point
videoconferences and, we understand, as much as 80-90% of their customers are
still on ISDN. Glowpoint, on the other hand, not only offers multi-point
conferencing services, but has introduced a full range of managed video
solutions that are primarily IP-based. IP-based services offer more flexibility,
higher quality and, because there are no long distance charges, lower costs.
Telepresence
and HD.
Telepresence is creating a “buzz” in the video conferencing industry. In
reality, it is a term that represents what Glowpoint has been providing since
soon after its launch in 2000 -- high quality, easy to use video communications
where the technology does not interfere with the purpose for the meeting. The
most popular representation of the telepresence concept is a specially designed
room configured to support a “true to life” meeting environment. Everything from
multiple monitors, special furniture, strategic camera placement and sound
panels are deployed to create an immersive experience so participants feel
as
though they are all sitting in the same physical room even though they may
be
continents apart. Entrance into the telepresence market by Hewlett-Packard
and
Cisco Systems has brought new competition to the traditional videoconferencing
equipment leaders (e.g., Polycom and Tandberg); more importantly for Glowpoint,
however, we believe their telepresence offering and vision have validated our
business plan and brought new life and interest to the video communication
industry.
3
As
manufacturers and resellers attempt to garner a share of the “telepresence”
market, they are quickly facing the realization that the High Definition (HD)
equipment used in telepresence rooms has an extremely high demand for bandwidth.
In many cases, they also require dedicated network and “white glove” video
application services.
We
believe Glowpoint is uniquely positioned to address all of these new
developments. We have been focused exclusively on providing IP-based managed
video services since our launch in 2000 and our patented and patent pending
technology is tailored to support any available HD equipment. Our proprietary
managed video service provides HD video communication with as little as 2 Mbps
of bandwidth per call, while other network providers typically require at least
6 Mbps, and as much as 45 Mbps, of bandwidth for HD video communications.
Regardless of the equipment used or bandwidth required, we believe that
Glowpoint can be an excellent partner with any of the providers of telepresence
solutions.
Market
Need.
Despite
the fact that many enterprises may already have private networks, a relatively
small percentage can actually support video communications. According to a
recent announcement by Cisco Systems (as reported in the Wall Street Journal),
only 10-15% of Cisco’s customers can support quality videoconferencing on their
networks. Even if a customer network can support videoconferencing, many are
reluctant to run a video application over the same network that supports their
enterprise data and other applications. Among other concerns, the video
communications applications would be required to share bandwidth with data
applications (e.g., CRM applications, financial applications, e-mail and file
transfers) on a common network. Allocating enough bandwidth in a corporate
local
area network or Intranet to handle real-time transmission of audio and images,
in addition to data applications, can be difficult and can significantly impede
overall network performance. In addition, most businesses already find it
difficult to effectively maintain and manage existing applications because
of
the shortage of information technology and network personnel. As a result,
businesses increasingly require a solution employing a network dedicated to
video, which enables them to manage video communications, isolating it from
other applications and existing communications infrastructure. An effective
video network must also be easily scalable in much the same way that a company
can simply add more phone lines as its employee base and operations grow.
Moreover, widespread adoption by both enterprise and consumer users requires
a
video communications solution that provides the same reliability as public
telephone service. We believe that there exists a significant market opportunity
to provide an IP-based video communications solution that is as scalable,
dependable and, ultimately, as commonplace as voice telephony.
The
recent surge in deployment of Voice over IP (VoIP) is an example of a technology
that has been technically feasible for years, but did not gain popularity until
the full feature and services people were accustomed to with their traditional
telephones became available. Features like publicly-available phone numbers,
operator services, voicemail and the ability to seamlessly call to phones off
of
a company’s private IP phone network were the critical application components
that facilitated adoption of VoIP phones. Because most companies would not
provide those features on their own, VoIP service providers developed them
and
now companies simply “plug” their VoIP networks into traditional telephony
companies for these application services and off-net transport.
Glowpoint
is the “video” telephony company offering video application services largely
unavailable from anyone else at this time and difficult (or possibly even
impossible) for customers to build on their own (see “Intellectual Property”
below). Glowpoint provides ten-digit dialing video phone numbers automatically
routed to IP video systems, video operator services, video mailboxes, seamless
video calling to off-net locations anywhere in the world and other video
application services, all of which permit customers to “plug” in their VidOIP
(video over IP) networks.
Telepresence
and HD video solutions require a very high amount of bandwidth, which we believe
has caused a number of companies to be concerned about the feasibility of
supporting video on their own networks. We believe there is a significant market
for service providers, such as Glowpoint, who can support this new
technology.
4
Market
Size. According
to some industry leaders, only about 5-8% of conference rooms in United States
businesses have videoconferencing equipment. We believe the industry still
has
not begun to realize the potential deployment of video to individual desktops
or
in consumer environments. As a result, we believe there is still a large
untapped potential market for video communications. Major technology companies
such as Cisco Systems and Hewlett-Packard have publicly announced that they
feel
the telepresence market alone can become a billion dollar industry in the coming
years. According to some industry analysts, the services side of the
videoconferencing industry that is currently dominated by network providers
and
managed services like multi-point conferencing is anticipated to grow globally
to more than four billion dollars over the next few years. Therefore, we believe
that Glowpoint’s aggregate potential addressable market is significant, though
we can give no assurance as to what our market share will be in the coming
years.
Glowpoint
Services and Features
Glowpoint
offers a vast array of managed video services, including video application
services, managed network services, IP and ISDN videoconferencing services,
multi-point conferencing (bridging), technology hosting and management, and
professional services. We are focused exclusively on high quality two-way video
communications and have been supporting millions of video calls since we
launched our service in late 2000. We believe our experience, expertise,
video-centric focus, unique features and services, and world class support
are
unrivaled and a key differentiator in the industry. We have bundled some of
our
managed services to offer video communication solutions for broadcast/media
content acquisition and for video call center applications and recently, with
the advent of HD (High Definition) telepresence solutions, we offered a
comprehensive “white glove” solution that can support any of the telepresence
solutions on the market today (see “Market Solutions” below).
Video
Application Services and Managed Network Services; Glowpoint Subscription
Services
Glowpoint’s
core managed video service offering bundles our proprietary video application
communications features and services with our Quality-of-Service (QOS) managed
network offering. This bundled offering gives customers a single point of
contact for their high quality video communication needs and we believe makes
video as easy and spontaneous as using the telephone - but with the power of
face-to-face communications. Our subscription plans are priced according to
the
video call requirements of a location. The amount and type of bandwidth ordered
depends on the number of video endpoints and is generally billed on a monthly
recurring basis per location. We have established packages to accommodate the
most popular requirements, with the basic bundled solution currently starting
at
$499 per month for video calls up to 512 Kbps. Typically, we begin providing
service within 30 days following the customer’s order. We also routinely offer
custom video communications solutions with individual customer-requested terms
and conditions.
Regardless
of the subscription plan, all offerings include our proprietary video
application services and features and provide for unlimited IP-based video
communication usage on the Glowpoint video network. Our video application
services include:
· |
“All
You Can See” unlimited video calling
plans
|
Customers
can make and receive unlimited calls to video systems on the Glowpoint video
network or the public Internet for one fixed price (there are no additional
usage charges).
· |
10-Digit
Direct Dialing for IP Video Calls
|
We
are
the only service provider to provide IP-based video systems with real phone
numbers. Typically, IP-based video callers must use an IP address, which, we
believe, is unfamiliar, difficult to use, and impedes adoption of video
communications.
· |
“000”
Live Video Operator Assistance
|
With
our
patented live video operator support, customers obtain live, face-to-face
assistance simply by dialing “000” from any Glowpoint subscribed endpoint.
Whatever the need, Glowpoint operators are there to help.
5
· |
“Lisa”,
Glowpoint’s Video Call
Assistant
|
When
a
video call is not answered, fails to connect, or the recipient is busy, callers
are greeted by “Lisa”, Glowpoint’s video call assistant, explaining why the call
did not complete and providing the caller with an interactive menu to select
options, including a connection to a live operator by selecting the option
on
the menu. We developed this feature to simplify video communications.
Non-Glowpoint videoconferencing users typically are met with a blank screen,
a
cryptic technical error message or worse, and have no idea why a call was not
completed. Our error-handling feature is user-friendly and removes much of
the
guesswork, which simplifies the video calling experience and promotes further
adoption and use of video communications.
· |
VideoMailbox
|
Glowpoint
has brought voicemail to the video communications world. If a Glowpoint customer
receives a video call and is not available or his video system is turned off,
the call is automatically re-routed to a VideoMailbox where the caller is
greeted with an outgoing video personally recorded by the Glowpoint customer.
The caller may then leave his/her own video message in the VideoMailbox. The
Glowpoint customer then receives a message which is stored on his VideoMailbox
and receives an email alert with an image of the caller and associated
information. Our customer may then view the message as a media file either
through the online portal or checking messages from his/her video endpoint.
· |
IP-to-ISDN
and/or Internet Gateway
Access
|
By
combining one of the most sophisticated gatekeeper infrastructures that we
believe has ever been deployed with patent pending call control technology,
Glowpoint has created a seamless transition between ISDN and IP technologies.
Glowpoint’s ability to provide real telephone numbers to customer video
endpoints allows our customers to place video calls off of the Glowpoint network
to ISDN or Internet connected systems seamlessly across the United States and
to
virtually any major city around the world. Glowpoint customers may also receive
incoming calls from virtually any ISDN video system or voice phone in the world.
This is one of the ways we are accomplishing our goal of connecting the various
“islands” of video.
· |
Reduced
Rate International Calling
|
Much
of
the world continues to utilize ISDN as a means for video communications and
the
cost of placing video calls overseas can cost hundreds of dollars per hour.
Glowpoint offers customers significantly reduced rates for ISDN calling by
utilizing our least cost routing capabilities driven by our routing techniques
through points of presence around the globe. We route video calls to the most
cost effective point, where the call is then handed off the network to the
in-region ISDN network, thereby eliminating or reducing long distance charges.
· |
Firewall
Traversal
|
In
an
increasingly popular world of convergence, many businesses seek to leverage
their own networks for video transport, but increasingly face the challenge
of
placing video calls outside of their own network which becomes its own “island
of video”. In these situations Glowpoint becomes the video “telephony” company
with solutions that provide firewall traversal, effectively allowing customers
to get off of their private networks and connect to any other means, while
taking advantage of all the other Glowpoint services.
· |
Reservation-Less,
Multi-Person Video Calls
|
This
“bridging on demand” service permits multiple users to see and communicate
simultaneously on one screen. The “Brady Bunch” effect (also known as
“continuous presence”) allows all parties to see each other at the same time in
a collaborative conference session. This spontaneous service feature is a great
alternative to pre-scheduled managed multi-point calls. This offers traditional
conference set up and activation customary of audio teleconferencing with a
pin
number for all participants to use for inclusion in multi-point video calls
at
an extremely cost effective rate. We also recently announced our high definition
version of this service, which is the first of its kind.
6
· |
Video
Endpoint Management
|
Many
customers enjoy the option of having a single point of contact for all of their
video communication needs. Therefore, we offer remote video endpoint management
services and can provide proactive monitoring and support, along with
maintenance of video endpoints (such as providing required software updates),
to
ensure our customer’s video endpoints are always ready and reliably
available.
These
proprietary video application services are the subject of patented and
patent-pending technology (see “Intellectual Property” below) and were developed
by Glowpoint over years of focusing exclusively on video communications. While
not an application per
se,
Glowpoint customers have access to video communications support and expertise
that we do not believe is available anywhere else. Our Network Operations Center
(NOC) provides solutions and support for the physical network as well as the
video experience and unique programs that businesses may support with video.
We
do not just monitor and trouble-shoot the network and leave customers to their
own devices to support video communications. We are our customers’ video
communications partner and provide support to ensure a high-quality, easy-to-use
and reliable video experience.
Our
managed network services includes “last mile” (or local loop) connectivity,
which is the network connection between Glowpoint’s network backbone and the
customer’s location to which our service is delivered. The price of the managed
network service component is typically based on the amount of bandwidth required
to support the number of video endpoints at each customer locations. In late
2006, we formed GP Communications, LLC (“GP Comm”), a wholly-owned subsidiary of
Glowpoint, Inc., to provide the last mile connection. Among other things, the
creation of GP Comm had the benefit of repositioning our managed video service
offering to unbundle (or separate) the video application services from the
managed network offering. We believe this has permitted us to compete more
effectively in the marketplace (see “Competition” below) and has created sales
opportunities for “Glowpoint-enabling” other networks. A key differentiator for
our managed network services is our 99.99% service level availability (SLA)
and
QoS commitment, and the fact that our network was designed exclusively for
two-way video communications, which we believe is the industry’s highest quality
and reliable network service offering.
Customers
wishing to use their own network or one provided by another network provider
may
still enjoy the benefits of Glowpoint’s video application services. We market
this as our “Glowpoint Connect” service and refer to it as “Glowpoint-enabling”
another network. This is a “bring-your-own-access” (“BYOA”) offering and permits
customers to leverage their existing internal IP networks or VPNs (virtual
private networks), as an alternative to using the Glowpoint managed network.
Customers simply register their video endpoints with Glowpoint to take advantage
of our video application services. Since Glowpoint Connect does not use our
managed network service, the Glowpoint Connect fee is lower than our full
bundled managed video service offering.
Managed
Multi-Point Conferencing (Bridging) Services, including HD Bridging
Managed
multi-point conferencing services enable customers to utilize Glowpoint’s
Multi-point Control Units (MCUs, which are also known as “bridges”) in order to
facilitate video conference meetings with more than two locations at the same
time. Glowpoint has the ability to support both ISDN and IP for multi-conference
events with enough capacity to support over 500 participating locations at
one
time. With our managed multi-point conferencing service, virtually anyone can
participate on a video call together, including:
· |
Other
Glowpoint video or enabled
locations;
|
· |
Non-Glowpoint
video locations using legacy ISDN technology or the
Internet;
|
· |
Geographically
unlimited locations in the United States and around the world;
and
|
· |
Non-video
locations (e.g., participants without videoconferencing equipment
and
persons out of the office who can only attend by voice only using
cell
phones).
|
7
Our
world-class global conferencing service and skilled professional technicians
provide the highest quality service to fulfill all conferencing needs - at
a
competitive price. Glowpoint’s multi-point conferencing service includes:
· |
Enhanced
continuous presence;
|
· |
Multiple
viewing options (up to 27 different
layouts);
|
· |
Pre-call
site certification;
|
· |
PowerPoint
display and data collaboration;
|
· |
No
cancellation fees;
|
· |
Call
monitoring and recording;
|
· |
Standing
reservations;
|
· |
Online
scheduling;
|
· |
Conference
dial-in numbers; and
|
· |
ISDN
Gateway reduced calling.
|
In
addition to our reservation-less HD capabilities, we recently launched the
industry’s first High Definition (HD) managed multi-point conferencing service,
which brings HD to Glowpoint’s fully-managed, scheduled “white-glove”
offering.
Our
managed multi-point conferencing service is a valuable sales avenue into new
accounts. It permits customers to experience Glowpoint’s video communications
service and support without having to commit to a contract term. For Glowpoint,
it provides us the ability to drive net new revenue without the need to install
any new services. Later, we attempt to sell the customer our subscription
services and, a majority of the time, empirically show the customer, based
on
usage data gained from providing multi-point conferencing services, that our
subscription services will benefit the customer.
Though
typically an event-based service, we signed a number of minimum commitment
contracts with managed multi-point conferencing customers in 2006 in order
to
have some predictable revenue from the service offering. We continue to pursue
minimum commitment contracts.
Technology
Hosting and Management Services; Private Labeling
In
constructing Glowpoint’s global network and service offering, we developed
technical and operational expertise relating to supporting two-way video
communications. In early 2006, we decided to leverage this intellectual property
and video infrastructure by offering to host other companies’ video-related
equipment and applications. Additionally, we “packaged” our services and
expertise so they can be branded for use by other companies in a private label
fashion. When we have private labeled our services, our live operators answer
calls using the other company’s name, we re-brand “Lisa” to use the other
company’s name, logo and other information, and the other company’s end user
customers view the service as provided by that other company even though it
is
actually “powered by Glowpoint.”
Our
technology hosting revenue is comprised of a non-recurring fee for setup and
installation, and an ongoing monthly hosting and support fee. For enterprise
customers, the majority of hosting revenue is centered on hosting and managing
MCUs (bridges). For other service providers, Glowpoint hosts components of
the
provider’s video solution.
All
of
Glowpoint’s unique features and services have been designed so that the entire
suite can be “private labeled” by other service providers or companies who want
to integrate video communications into their existing products quickly and
cost
efficiently. “Glowpoint Enabling” is very similar to the concept of “Intel
inside” where, for example, Glowpoint provides all of the video infrastructure
and support, including customer portals and billing applications, as a private
label service for a third party, who in turn sells these services to their
customers. Glowpoint has been involved in a number of private label
opportunities, including Sony and Vision Net in Australia. Other examples of
leveraging our video application services across other networks include
Glowpoint-enabling the networks of providers such as Masergy, Savvis, AT&T,
and Qwest.
Professional
Services
As
with
technology hosting and management services, we sought new revenue sources using
what we believe are our unrivaled network and video engineering capabilities.
With the growing interest in convergence and the desire by some enterprises
to
add the transport of video to their enterprise networks, we have provided
professional services and believe that market is growing. Additionally, our
extensive knowledge of all leading video conferencing equipment makes our video
engineers a valuable resource for manufacturers on an outsourced basis. While
our primary focus is generating monthly recurring revenue from our subscription
services, our professional services have been a valuable sales avenue into
video
communication opportunities and have led to sales of our managed video
services.
8
Market
Solutions: Bundled Offerings for Broadcast, Telepresence and Video Call
Centers
We
have
bundled certain components of our managed services to offer video communication
solutions for broadcast/media content acquisition, video call centers, and
telepresence usage.
Managed
IP Video Service for Broadcast and Event Services
Our
managed video services have been used during events to cost-effectively acquire
video content for broadcasters, cable companies and other media enterprises,
especially in the sports, news and entertainment industries. While it includes
our core managed video services, IP-based broadcasting and event services
require more project management and dedicated operational and engineering
personnel than our standard subscription services. Rather than using an
expensive satellite feed, companies can acquire broadcast-quality standard
definition footage at a fraction of the cost from Glowpoint over a dedicated
IP
connection. Since 2002, we have provided this service to ESPN during the NFL
and
NBA drafts. ESPN has used it for interviews from team locations with coaches,
players and analysts during their coverage. Our managed services for
IP-broadcast solutions are currently used by many well-known media companies,
including ESPN and NFL Network, amongst many others.
In
2007,
we launched a High Definition (HD) content acquisition solution that we branded
TeamCamHD and RemoteCamHD. This offering provides two-way HD video communication
for content acquisition from remote locations. In April 2007, we announced
a
multi-year agreement with NASCAR Images as the first customer to deploy the
TeamCamHD solution, which will be used to provide the NASCAR industry the
ability to acquire content, such as driver interviews between races, which
may
then be distributed to key media outlets for dissemination.
Telepresence
Support Services
Glowpoint
has been providing the highest quality “white glove” service as part of its
product offerings for years. Now, with the introduction of telepresence
technology and the accompanying high expectations in the marketplace for the
quality, performance and service, we believe we are well positioned to provide
telepresence support services. Our telepresence support services include the
following video network operations center (“VNOC”) support:
· Single
Point of Contact:
VNOC
“at
your service” support is a single point of contact accessible via our video
concierge service (a branded version of our patented live video operator
assistance), which is integrated with a “support” button on the control panel or
phone that then provides dedicated toll-free dial-in access or Web mail/portal
access.
· Scheduling: Scheduling
includes a dedicated toll-free number (direct dial for international calls),
concierge service, and Web portal scheduling tools. Confirmation notifications
are provided both to requestors and to participants. All scheduling options
may
be private labeled to match our customer’s attributes (e.g., name and marketing
tagline). Dedicated toll-free reservations numbers are answered with our
customer’s specific script and we provide a dedicated Glowpoint reservation
email address. We can even provide a branded on-line scheduling tool to match
the company attributes of the customer (e.g., name, logo, color scheme, and
marketing information).
· Call
Launching and Monitoring:
A
Glowpoint telepresence operator will manage the successful launch and connection
of all sites in the telepresence meeting, including point-to-point or
multi-point calls. Our VNOC team then continuously supports and monitors all
telepresence calls, including digitally monitoring connectivity levels by a
qualified Glowpoint video producer. Our goal is to ensure that the technology
is
transparent to our users.
9
· Help
Desk Support:
Our VNOC
provides technical support for all active calls during a telepresence meeting.
When required, we will coordinate with hardware vendors and integrators to
repair or replace any component parts or resolve room integration issues. As
the
single point of technical support for your telepresence solutions, our top
priority is resolving endpoint or connectivity issues.
· Training:
We
believe that successful use and adoption of video communication requires ease
of
use, which is in large part a result of knowing how best to use the system.
We
host training sessions for customers and provide periodic training updates
as
reasonably requested.
· Interoperability
Testing and Support:
We
believe we are the industry leader in evaluating and testing video communication
equipment for reliability and interoperability through our Glowpoint Certified
Program (see “Intellectual - Hardware
Interoperability”
below).
As telepresence continues to evolve, we expect to continue leading the industry
in our interoperability and certification testing to assist our telepresence
customers.
· Stewardship
Reporting and Service Reviews:
We
provide monthly stewardship reports that capture key metrics related to the
performance of the telepresence room, the associated network, and various
support levels, including statistics related to usage (number of telepresence
meetings, duration, and hours of use), network and telepresence room
connectivity availability, network and telepresence room mean time to repair,
and failure/root cause analysis. We have quarterly meetings with our customers
to review these statistics, providing a forum to discuss areas of success,
areas
in need of improvement, and address any other concern.
The
Glowpoint Telepresence Solution may be bundled with our Quality of Service
(QoS)
managed network service or offered on its own by Glowpoint-enabling another
network service. Customers who purchase a Cisco Systems 3000
TelepresenceTM
solution, Polycom RPXTM,
or
Tandberg ExperiaTM
solution, for example, may all take advantage of the Glowpoint Telepresence
Solution regardless of their choice of network. A typical telepresence room
requires 6 megabits per second (mbps) per video device, of which there are
typically usually two or three per telepresence room. Therefore, the total
bandwidth per telepresence room is usually at least 18 mbps. Multi-point calls
(bridging calls) require even more bandwidth, often as much as a DS-3 (45 mbps)
to support one session. Our managed network solution is ideal to support the
telepresence suites, especially when customer networks cannot handle those
demanding requirements.
Video
Call Center Solution
Glowpoint
is leading the way in developing unique applications using video communications.
Leveraging our patented live video operator service, we developed a proprietary
product that allows businesses to bring video to their call centers, turning
their most talented resources into a global sales team. We call this application
“Customer Connect” and it is the “middle ware” that plugs into, and accesses all
of the intelligence in, existing call management systems in a call center or
other location. We believe that service
and retail sales businesses are always seeking more effective ways to connect
with customers. Our video call center solution, permitting a “Remote Video
Expert” on demand, is a way for businesses to differentiate themselves.
Our
Customer Connect solution is currently being used by a major retail bank to
provide high definition “video banking” services to clients around the country.
With one touch of screen inside a local branch location, an existing or
potential bank customer is instantly immersed in a telepresence call with a
highly trained bank professional. Rather than needing to have these
professionals scattered at local branches when their services may not always
be
required, our call center solution permits the retail bank to centrally locate
its trained professionals and provide services as and when needed, supporting
a
region rather than one or two locations. Our business customer is now able
to
train fewer people, support a greater number of branches and cross-sell products
more effectively. This appears to be a growing trend where businesses will
use
video communications as a tool to interact more cost effectively and efficiently
with their customers. We call this a business-to-business-to-consumer (B2B2C)
application and believe it will make video communications a critical application
across many industries.
10
Our
video
call center “Customer Connect” solution provides the same experience as its
audio call center counterpart, such as automated attendant, interactive menus,
multiple languages, multiple skills-based call routing, on hold, call transfer,
and call center statistics. It is simple and cost effective for businesses
to
implement and easy for consumers to use. Some features (and differentiators)
of
this product include:
· |
private
labeling to include the brand of our business customer, so its customers
only know that they are interacting with the business’ call
center;
|
· |
customization
to interact with the video elements of choice (agnostic to all video
endpoints);
|
· |
integration
with our business customer’s existing call management system technology in
its call center; and
|
· |
scalability
to thousands of remote locations (e.g., local bank branches) that
will
interact with one call center, or as many call centers as our business
customer needs.
|
As
with
all of our managed video services, our Glowpoint Video Call Center solution
may
be
bundled with our QoS managed network service or offered on its own by
Glowpoint-enabling another network service.
Intellectual
Property
Supporting
these unique services and features is Glowpoint’s patented and patent-pending
proprietary technology developed specifically for two-way video communications.
Over the past six years, we have spent in excess of $7 million and tens of
thousands of engineering hours in designing, building, and perfecting our
managed video services and spent in excess of $8 million building the Glowpoint
network. We have focused our research and development on the three key factors
that we believe are essential to the successful delivery and widespread adoption
of video communications: (i) network architecture; (ii) video applications
and
telephony features; and (iii) hardware interoperability. Our research and
development has led to a patent and a number of patent applications
(see
below)
and
various solutions. We know of no competitor that offers any service with
comparable features, performance, reliability, and scalability, and we believe
there are significant barriers to create one.
Network
Architecture
We
designed and built our global network to meet and exceed what we believe to
be
the needs and expectations of two-way video communications. Our architecture
includes patented and patent pending technologies that provide advantages over
other networks that are capable of carrying video, including such Glowpoint
features as interoperability between IP and ISDN systems, fast re-route of
video
calls, varied and flexible “last mile” connectivity options that support
multiple protocols, 99.99% Quality of Service (“QoS”) commitment, and a fully
redundant and secure backbone design.
Our
network is a secure, state-of-the-art multiple protocol layer switching (MPLS)
backbone with the redundancy and reliability businesses demand for their
critical applications. Our network is a ring with mesh points to provide full
redundancy on the backbone. Utilizing carrier grade Cisco products in the core,
we have been able to design a backbone that is scalable and can easily grow
as
demand dictates. With the increasing adoption of HD (High Definition) video
systems and telepresence rooms, the expectation is that the demand for more
bandwidth per video call will also grow. Our investment in our backbone
architecture accounted for this and our backbone capacity can more than triple
with modest additional investment.
We
maintain a state-of-the-art network operations center (NOC) at our Hillside,
NJ
headquarters, from which we monitor the operations of our network on a 24x7
basis. The NOC’s primary functions are to monitor the network, manage and
support all backbone equipment, and provide proactive and on-demand support
for
our customers. Video traffic does not pass through our NOC, nor does usage
information or authentication packets. We designed our network to handle those
functions at our POPs, which was done for improved video performance and, more
importantly, to address security and disaster recovery/business continuity
matters. We utilize Netcool, HP OpenView and NetVigil network management tools
to monitor and support our network. We also use Remedy for workflow in order
to
track and report trouble tickets.
11
Our
proprietary network architecture includes Glowpoint-owned equipment installed
at
collocation centers across the country, connected by multiple dedicated
high-speed circuits. These Points of Presence (POPs) are connected in a ring
topology with strategic mesh points, which virtually eliminate the risk of
a
single point of failure and provide industry-leading throughput, scalability
and
mission-critical resiliency. We have contracted with numerous network providers
for backbone circuits, aggregate hubs and collocation facilities. Our primary
vendors in the United States are (i) Qwest for backbone connectivity, (ii)
Qwest, Verizon Business/MCI and Covad for the aggregate hubs, and (iii) Equinix
for collocation facilities. We have also contracted with a number of “last mile”
providers in the United States and abroad to deliver local loops to our customer
locations. In the United States, Covad Communications and New Edge are our
primary SDSL providers with Qwest, Verizon Business/MCI, and XO Communications
providing private line DS-1 services. We use Network-I and Easynet for DSL
as
well as T-Systems, Asia Netcom, Savvis, Masergy, Telstra, Global Crossings
and
others for international connectivity. Our goal is to partner with carriers
who
can provide dedicated broadband access to our network using either digital
subscriber lines (DSL) or dedicated 1.5 mbps (DS-1) or 45 mbps (DS-3) lines.
We
have many access options for connecting customer locations to the backbone,
including SDSL, HDSL, T1, DS3, Sonet, ATM and Gigabit Ethernet options.
Our
network architecture was specially designed for the efficient and cost-effective
delivery of feature-rich two-way video content. The network boasts a fully
deployed and sophisticated gatekeeper infrastructure that can support thousands
of video endpoints with redundancy. This design enables us to provide a unique
set of value-added services, such as intelligent call routing and an exclusive
consolidated video call detail record (CDR) feature that allows for detailed
tracking on a call-by-call basis for point-to-point, gateway and multi-point
calls. Competitive providers of network, such as telecommunications carriers
(see “Competition” below), would have to install video-specific gatekeeper
technology throughout their networks to provide the additional functionality
necessary to create similar service capability. The challenge facing these
carriers to replicate our network features is two-fold: (i) the sheer volume
of
data traffic carried by their networks would make such a project enormously
expensive and, most likely, cost prohibitive and (ii) the gatekeepers alone
do
not route calls and track usage, it is our other proprietary technology that
augments the gatekeeper functionality. We have also developed a specialized
configuration of software, hardware and global positioning technology that
enables us to accurately monitor jitter, packet loss and latency to maximize
overall network performance.
With
our
origins in videoconferencing equipment sales and service, we have a broad
understanding of the unique demands placed on a network by a video communication
application. Telecommunication carrier networks were simply not designed for
two-way video communications. Unlike a standard data application, video
applications immediately expose network performance limitations. It was this
need for quality and reliability that prompted us to develop our own network
dedicated exclusively to two-way video communications, but designed using
standard (and proven) network concepts and methodologies. We also understood
that a network alone would not offer a sustainable competitive advantage.
Accordingly, we developed and continue to develop proprietary software and
hardware-based service offerings that leverage our dedicated proprietary network
architecture and enables us to offer high quality and easy-to-use video
communications.
Video
Applications and Telephony Features
We
developed and offer a full array of pioneering applications and features
targeted to the specific demands of two-way video communications, making it
as
easy and spontaneous as using the telephone but with the power of face-to-face
communications. We were recently awarded a U.S. Patent for our live video
operator assistance feature. This patented technology provides customers the
ability to obtain live, face-to-face assistance and has widespread application,
from general video call assistance to “video concierge” services. This patent is
an essential component of providing “expert on demand” and telepresence “white
glove” (our VNOC) services.
Other
proprietary features and services include call forwarding, the video call
distributor, unassisted incoming and outgoing gateway calling,
bridging-on-demand meeting rooms, least-cost international call routing,
web-based scheduling, video endpoint authentication via LDAP servers, firewall
traversal services, customer information center, data collection and statistical
analysis tools. Many of these features and services are the subject of patented
and patent-pending technology (see
below)
and
were developed to offer a unique set of video communication capabilities,
services and features that are difficult for any competitor to
match.
12
Hardware
Interoperability
We
are
hardware agnostic. Therefore, we strive to ensure that our managed video
services work with any available standards-based videoconferencing equipment.
Through the Glowpoint Certification Program, we test and assess new equipment,
options and configurations for use throughout our network. The program sets
strict standards for equipment performance and service levels. Customers can
be
assured that Glowpoint-certified products conform to the highest standards
of
compliancy as well as interoperability with other leading manufacturers of
similar products. Our certification team has created a comprehensive testing
and
evaluation methodology requiring that each manufacturer’s class of video
communications equipment meet or exceed performance, reliability and
interoperability levels in the areas of video, audio, data, feature and
capability set. We maintain a close relationship with all of the leading video
equipment manufacturers, such as Polycom, Tandberg, Sony, Cisco, Life Size
and
Radvision, and provide each of them with information about their products’
performance.
Patents
and Patents-Pending
Because
we were the first dedicated IP-video service provider, the development of our
network architecture and video applications resulted in a significant amount
of
intellectual property - from real-time rating and billing for video calls to
video call center applications for customer support. In 2007, we received our
first patent and a number of others have been filed and are in various stages
of
the patent process. This patented and patent-pending proprietary technology
provides an important barrier for competitive offerings of similar
telephony-like managed video services. We are unique and, given our proprietary
technology, believe we are especially well positioned to partner with
telecommunications carriers, virtual private network providers, equipment
manufacturers, resellers and other companies focused on integrating innovative
and high quality video solutions into their product mix.
As
mentioned above, we were recently awarded U.S. Patent No. 7,200,213 B2 for
our
live video operator assistance feature. This patented technology provides
customers the ability to obtain live, face-to-face assistance and has widespread
application, from general video call assistance to “video concierge” services.
This patent is an essential component of providing “expert on demand” and
telepresence “white glove” (our VNOC) services. We believe this patent helps
solidify our position as the leader in developing solutions that make video
communications a critical business application for our customers.
We
have
substantial intellectual property with regard to two-way video communications.
Due to resource prioritization matters, we have only pursued those patent
applications we believe are the most strategic. The following is a brief
description of our pending patents and their role in our managed video service
offering:
· Video
Call Director
- When
you place a voice telephone call, you expect some resolution of it - a completed
call, a busy signal, or a message that you dialed the wrong number. In the
IP-video world, we do not believe that this functionality existed before
Glowpoint. Customers placing IP video calls would receive cryptic error codes
or
invalid network error messages. We developed the Video Call Director technology
to intelligently redirect calls based on various conditions. The technology
is
deployed as “Lisa”, our video call assistant. Now, when a Glowpoint customer
places a video call that does not connect, he is greeted with an interactive
video message from “Lisa” explaining some reasons and offering him the option of
reaching a live video operator for assistance. The ability to intelligently
route video calls based on various conditions lends itself to numerous other
capabilities and services, including video mailbox, follow-me video numbers
(see
below), and video call transfers and forwarding.
· Method
and Process for the Glowpoint Video Call Distributor
- Our
video call distributor technology permits businesses to route real-time, two-way
video calls over an IP network using a call management system (e.g., a
traditional PBX-based automatic call distribution system) that may serve
multiple possible endpoints (for example, a call center environment). This
video
call distributor integrates the features and services of traditional voice
call
distribution systems with video calls. It is built on previously patented
Glowpoint technology as well as new technology developed specifically for this
solution, which is marketed as Glowpoint’s Customer Connect offering. We believe
this patent-pending technology is a critical component of skills-based video
call centers, where video calls can be routed to the appropriate person based
on
predetermined skill sets or criteria. For example, in our previously mentioned
video banking pilot, this patent-pending technology has been used to route
video
calls to English and Spanish speaking video bankers depending on a selection
made at the remote branch location.
13
· Method
and Process for Consolidated Video Call Detail Records (CDR)
- Many
of the individual video conferencing products have the ability to create their
own CDRs. However, in a service provider environment with many independent
products supporting a complex suite of services, the ability to gather and
provide call details in a consolidated manner did not, to our knowledge, exist.
Without that capability, it would be virtually impossible to bill customers
for
usage-based video calls, and difficult to run a video communications business.
Therefore, we developed the technology and method for automatically gathering
video call details. Even though we provide unlimited usage across the Glowpoint
network, the technology has been applied to expanded uses, including providing
customers with online call detail, specialized utilization reports, stewardship
reports, and tracking unique billing codes to every video call. This
patent-pending technology has been instrumental in selling our managed video
services to law firms, consultants and professional services
customers.
· Method
and Process for Video over IP Network Management
- When
Glowpoint was launched, we found no network existed at the time to support
high
quality two-way video communications. As a result, we developed a highly
sophisticated network that included our backbone network architecture and our
video network architecture. We combined off the shelf components with
proprietary design and technology to create the world’s first dedicated IP video
network. In addition to the method and process for building this network, we
developed and deployed unique testing tools that enable us to closely monitor
key metrics associated with successful high quality video communications. With
the introduction of HD and telepresence, there are increased concerns carrying
this video traffic with data traffic on the same network. We believe this
underscores the need to carry video communications on Glowpoint’s patent-pending
dedicated IP video network.
· Systems
and Method for Video Transport Services (Service Provider Based Firewall
Traversal)
- Our
initial product offering included customers using our video applications and
managed network services as a completely outsourced solution for all video
communications. However, as convergence (using one network for data, voice
and
video) gained acceptance, we were asked by customers to support a hybrid
solution, where some video endpoints remained on the customer’s network but
other locations and the video application services (multi-point conferencing,
gateway to ISDN, etc.) were provided across Glowpoint’s network. In order to
accommodate the need to traverse the customer’s network in a secure fashion, we
developed our Video Transport Service (VTS) specifically to provide firewall
traversal solutions in a managed service offering. While individual firewall
traversal products can be purchased from various hardware manufacturers, we
believe our patent-pending technology is the first complete service
solution.
· Systems
and Method for Automated Routing of Incoming and Outgoing Video Calls between
IP
and ISDN network -
Even
though adoption of IP video has seen a surge recently, a significant portion
of
video communications users in the world still utilize legacy ISDN networks.
Early on, we wanted to ensure that the migration from ISDN to IP would be
painless and we understood the need to be able to seamlessly connect IP users
with ISDN systems around the world. We believe Glowpoint is still the only
service that assigns real phone numbers to customers that enable them to simply
dial the phone number to “gateway” from their IP system on Glowpoint to ISDN
systems. In addition, Glowpoint customers can be called directly from virtually
any ISDN video system or even a phone anywhere in the world. This patent-pending
automated call routing capability has been leveraged to provide a least cost
gateway to customers, routing the call to the most inexpensive gateway exit
point off the Glowpoint network before entering the PSTN/ISDN
network.
· Video
Communications Control System/Parental Control
- In
late 2005, Glowpoint introduced IVE (Instant Video Everywhere), a software-based
video service that works with a simple web camera over the Internet. During
the
development and market research it became apparent that the early adopters
of
consumer based two-way video communications would be teenagers and young adults.
Given that demographic and the recent proliferation of tools to help parents
control what websites are visited by their children, we felt that parental
control of two-way video communications was a logical requirement as video
communications became more mainstream. This patent-pending technology leverages
existing parental control codes and guidelines to restrict video calls from
being placed or received from blocked callers. It also permits parents to
establish a “friends and family” directory of allowable video numbers that can
be called. While currently ahead of its time, we believe this patent-pending
technology will be valuable in the future.
14
· Method
and Process for Follow-Me Video Phone Number
- Our
IVE (Instant Video Everywhere) product offering was intended to enable traveling
business people to stay connected by video wherever they go. These “road
warriors” could log into IVE from a hotel room, airport lounge, or anywhere else
a quality broadband connection was available, and place and receive video calls.
In order to enhance the experience and integration with the video systems in
their offices, Glowpoint developed technology to create a Follow-Me Video number
capability. Essentially, the user has one video phone number and, if logged
into
IVE, the video call will automatically route there instead of the video system
in the user’s office. This patent-pending technology allows our customer to have
one video number, one video mailbox, and yet literally be reached by video
anywhere in the world.
Sales
and Marketing
We
market
and sell our managed video services to a broad range of businesses in many
industries through both direct and indirect sales channels. As noted above
(see
“Overview - Industry
Overview”),
videoconferencing equipment manufacturers, equipment resellers, audio/visual
integrators, and network providers have expanded our indirect sales channels.
Many of the complex solutions sought in today’s market have created new and
unique opportunities for the sale of Glowpoint services. We also continue to
diversify our lead generation and sales efforts by integrating these indirect
sales channels with aggressive internal lead generation programs and vertical
industry focused marketing and promotional efforts. No matter the lead
generation, sales or distribution channel, our goal is to provide all with
a
world-class service, sales and collateral materials, training, and management
tools to reduce barriers and increase our return on investment against our
sales, marketing and promotional efforts.
One
of
our main sales challenges has been that video communications is not generally
perceived as a critical application for most companies. This has resulted in
historically moderate growth and longer sales cycles. Recognizing this, we
set
out to create new markets where video communications plays a critical role
in
business practices. Two areas we have focused on are the legal and
broadcast/media sectors. Law firms have been using video conferencing for years,
but poor performance and the difficulty of associating its usage to clients
prevented widespread utilization and growth in the sector. Glowpoint introduced
a legal industry-focused video solution in 2005, which combined Glowpoint’s
high-quality managed video services with special billing features that enable
law firms to enter a client/matter billing code before placing a video call.
This innovation established Glowpoint as a key component of many law firms’
communication infrastructures and translated into more sales
success.
For
the
broadcast/media industry, we recognized its need to acquire more content and
do
so more cost effectively. Therefore, we introduced a highly managed and
supported service that has been utilized to acquire video content for
broadcasters, cable companies and other media enterprises, especially in the
sports, news and entertainment industries. Rather than utilizing an expensive
satellite feed, companies can acquire broadcast-quality standard definition
(SD)
and high definition (HD) content over a dedicated Glowpoint IP connection at
a
fraction of the cost. The initial SD use of Glowpoint in the broadcast sector
was in 2002 when we provided this service to ESPN during the NFL and NBA Drafts.
ESPN has used it for interviews from team locations with coaches, players and
analysts during their coverage of the drafts every year since 2002. In 2007,
we
launched a High Definition (HD) content acquisition solution that we branded
TeamCamHD and RemoteCamHD and announced a multi-year agreement with NASCAR
Images as the first customer to deploy this solution, which will be utilized
to
provide the NASCAR industry the ability to acquire content, such as driver
interviews between races, which may then be distributed to key media outlets
for
television broadcast. This sales focus on the broadcast/media sector translated
into approximately a 67% revenue growth rate from 2005 to 2006.
Our
current plans include mining our existing customer base for additional sales,
targeting select market segments that have shown the greatest promise (e.g.,
legal and broadcast/media), focusing on “business-to-business-to-consumer”
(“B2B2C”) applications and telepresence support services, strengthening our
indirect sales channel relationships, and continued conversion of ISDN users.
Depending on the source, anywhere from 50% to 70% of installed video systems
are
still using legacy ISDN services. Considering that there are an estimated
500,000 to 1,000,000 video systems in the United States alone, we believe there
is still a huge untapped market available to convert to Glowpoint IP services.
We will continue to create sales programs designed to convince legacy ISDN
users
to migrate to IP, which may include bundles with resellers, where equipment
and
services are sold to the customer as one package.
15
The
decision about what network or service to use is generally made at the same
time
a customer purchases video conferencing equipment. Because we do not sell video
equipment, we have not been included in a number of opportunities at the point
of sale. The only way to ensure Glowpoint is involved at the point of sale
is
through the indirect channel, mostly made up of companies that also sell video
equipment. Glowpoint initiated a campaign in May 2006 to re-energize that sales
channel and reestablish relationships. The result was an increase from 10%
of
new sales coming through that channel prior to May 2006 to approximately 40%
of
new sales from June through December 2006 coming through that
channel.
We
view
the B2B2C opportunities as the most exciting, and likely most “disruptive”, in
the market. While the Glowpoint products and service have tremendous potential
in the consumer market, we are not currently positioned to realize that
potential. Therefore, we are developing and marketing solutions to other
businesses where the ultimate user is that business’ customer. An example of
this is video banking, where a bank is currently using Glowpoint’s patented and
patent-pending technology to sell services to customers at branch office
locations from a central video banking call center. By going to market with
a
B2B2C offering, we can reap the benefits of consumers using our managed video
services without the expense and risk of trying to reach out to them
directly.
Customers
We
have a
stable, growing customer base of over 625 customers ranging from Fortune 100
companies to federal, state, and municipal governmental entities to businesses
and service professionals (e.g., accountants and lawyers) to non-profit
organizations. Our top ten current market segments at the end of 2006, listed
in
order of contribution to revenue, are: legal and law enforcement, approximately
17% of revenue; governmental entities (local, state and federal), 15%;
broadcast/media, 11%; banking and finance, 9%; manufacturing, 6%; healthcare
and
medicine, 6%; services (including consulting), 5%; food and beverage, 5%;
engineering and construction, 5%; and education, 4%. All revenue percentages
are
approximations. No single customer accounts for more than 10% of our revenue
or
accounts receivable.
Employees
As
of
December 31, 2006, we had 59 full-time employees. Of these employees, 10 are
involved in backbone engineering and development, 21 in customer service and
operations, 14 in sales and marketing and 14 in corporate functions. None of
our
employees is represented by a labor union. We believe that our employee
relations are good.
Competition
For
the
sale of our video application services and managed network services, we mainly
compete against telecommunications carriers, VPN service providers, and
videoconferencing equipment resellers. Many of our competitors have greater
resources than we do, including, without limitation, financial, engineering,
personnel, intellectual property, research and development, and network.
Telecommunications carriers, such as AT&T, Verizon Business/MCI, Sprint and
some of the regional Bell operating companies, mainly compete on the basis
of
offering network and a converged solution of data, voice and video. VPN service
providers and smaller regional network providers, such as Masergy
Communications, XO Communications, and SAVVIS, are all capable of supporting
video over their networks, but do not offer video services directly. Typically,
these providers partner with a video service provider, such as Wire One/VSPAN
or
IVCI, to compete directly with us. These relationships generally are not
exclusive and we have been able to partner with a number of would-be competitors
with the intent of selling our video application services to be delivered over
their networks. Glowpoint-enabled third party networks is one way Glowpoint
ensures it can work closely with carriers and customers to deliver video
services even if Glowpoint’s network is not selected. Some videoconferencing
equipment resellers have opted to create their own video services offering,
using third party networks (such as Savvis or Masergy) to sell video services
at
the equipment point of sale. We do not believe that any of these offerings
have
the full range and scope of services that Glowpoint offers.
16
For
our
multi-point conferencing services, we compete against other multi-point
conferencing providers, many of whom also have greater resources than we do,
including, without limitation, financial, engineering, personnel, intellectual
property, research and development, and network. In addition to the
above-mentioned telecommunications carriers, competitors include audio
conferencing companies that have added video functionality, such as InterCall
(a
subsidiary of West Corporation), ACT Teleconferencing, Genesys Conferencing,
and
Wire One/VSPAN. We believe these competitors are still heavily dependent on
ISDN
and have little or no expertise in IP video. By combining our managed video
service with our multi-point conferencing services, we offer tremendous
performance and cost savings to our customers that we believe is difficult,
if
not nearly impossible, for the competition to match at this time.
We
compete primarily on the basis of our:
· |
sole
focus on two-way video
communications;
|
· |
breadth
of service offerings;
|
· |
full
support of all industry standards;
|
· |
unique
custom built applications and
services;
|
· |
global
network presence;
|
· |
technical
expertise;
|
· |
knowledgeable
video service and training personnel; and
|
· |
commitment
to world-class customer service and
support.
|
More
than
just a provider of bandwidth for video communications, we have developed a
comprehensive approach to significantly improve video communications so that
it
can become an integral tool for business communications. We not only designed
a
network specifically for two-way video communications but also have continued
to
develop proprietary network applications that ensure a high quality, reliable
and easy-to-use experience. Glowpoint supports any standards-based
videoconferencing equipment and, through our certification program, we have
developed expertise in the area of hardware interoperability across IP networks.
Our value-added services include video operators, multi-point video conferencing
(bridging), seamless connectivity from IP to ISDN (gateway services), on-line
real-time billing and a call detail portal. Our services offer subscribers
substantially reduced transmission costs and superior video communications
quality, remote monitoring and management of all video endpoint subscriber
locations utilizing SNMP for products that support SNMP, video streaming,
firewall transport services and VNOC support for telepresence rooms.
We
believe that our ability to compete successfully will depend on a number of
factors both within and outside of our control, including the adoption and
evolution of technologies relating to our business, the pricing policies of
competitors and suppliers, the ability to hire and retain key technical and
management personnel, the availability of adequate working capital to fund
our
sales and marketing plans, and industry and general economic
conditions.
Available
Information
We
are
subject to the reporting requirements of the Securities Exchange Act of 1934,
as
amended, and its rules and regulations. The Securities Exchange Act requires
us
to file periodic reports, proxy statements and other information with the SEC.
Copies of these periodic reports, proxy statements and other information can
be
inspected and copied at:
SEC
Public Reference Room
100
F
Street, N.E.
Washington,
D.C. 20549
17
You
may
obtain information on the operation of the Public Reference Room by calling
the
SEC at 1-800-SEC-0330. You may also obtain copies of any material we have filed
with the SEC by mail at prescribed rates from:
Public
Reference Section
Securities
and Exchange Commission
100
F
Street N.E.
Washington,
D.C. 20549
You
may
obtain these materials electronically by accessing the SEC’s website on the
Internet at www.sec.gov.
In
addition, we make available, free of charge, on our internet website, our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to these reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after we electronically file this material with, or furnish it
to,
the SEC. You may review these documents on our website at www.glowpoint.com
Item
1A. Risk Factors.
Glowpoint’s
business faces numerous risks, including those set forth below or those
described elsewhere in this Form 10-K Annual Report or in our other filings
with
the Securities and Exchange Commission. The risks described below are not the
only risks that we face, nor are they necessarily listed in order of
significance. Other risks and uncertainties may also affect our business. Any
of
these risks may have a material adverse effect on Glowpoint’s business,
financial condition, results of operations and cash flow.
Risks
Relating To Our Securities
We
need future capital to refinance our existing obligations and for working
capital. If we are able to raise additional capital, it may dilute our existing
stockholders or restrict our ability to operate our
business.
If
we are unable to refinance our existing obligations, it would have a material
adverse effect on the Company.
Our
working capital requirements continue to be significant. To date, we have been
dependent primarily on the net proceeds of private placements of convertible
debt and equity securities. Our 10% Senior Secured Convertible Notes (“10%
Notes”) issued in March and April 2006 in aggregate principal amount of
$6,180,000, together with additional notes issued to satisfy the quarterly
interest payments (“10% Interest Notes”), mature in September 2007. We are
currently evaluating options with regard to the 10% Notes and 10% Interest
Notes. Options include renegotiating the terms and maturity date and issuing
new
debt or equity to repay the 10% Notes and 10% Interest Notes. If we are unable
to renegotiate the maturity of the 10% Notes and 10% Interest Notes or issue
new
securities on favorable terms to repay them, it would have a material adverse
effect on the Company and we would not have sufficient funds to continue as
a
going concern.
Furthermore,
our working capital requirements depend and will continue to depend on numerous
factors, including the timing of revenues, the expense involved in development
of our products, realizing cost reductions on our technology, and the cost
involved in protecting our proprietary rights. Accordingly, assuming we are
able
to refinance or renegotiate the maturity of the 10% Notes and the 10% Interest
Notes, the proceeds from our recent financing and our other existing capital
resources may not be sufficient to fund our future operations. We currently
have
no committed sources of, or other arrangements with respect to, additional
financing. If additional working capital is required, it may dilute our existing
stockholders or restrict our ability to run our business.
Our
financial statements are prepared assuming we are a going concern.
The
accompanying financial statements do not include any adjustments that might
result from being unable
to raise the necessary additional capital, renegotiate or refinance the 10%
Notes, and realize projected operational savings.
Our
consolidated financial statements have been prepared assuming that we will
continue as a going concern. Since inception, we have incurred recurring
operating losses and negative operating cash flows, including a net loss
attributable to common shareholders of $11,137,000 and negative operating cash
flows of $4,694,000 for the year ended December 31, 2006. At December 31,
2006 we had cash and cash equivalents of $2,153,000, a working capital deficit
of $11,868,000, and an accumulated deficit of $172,623,000. Additionally,
the 10% Notes and the 10% Interest Notes mature in September 2007. The foregoing
factors, among others, raise substantial doubt as to our ability to continue
as
a going concern. In 2006, we implemented a corporate restructuring plan designed
to reduce certain operating, sales and marketing and general and administrative
costs (see Note 18 to the consolidated financial statements for further
information). We raised capital in March and April of 2006, but continue
to sustain losses and negative operating cash flows. Assuming we realize
all of the savings from our restructured operating activities, assuming we
are
able to negotiate favorable terms with the authorities regarding our sales
and
use taxes and regulatory fees (see Note 6 to the consolidated financial
statements for further information) and assuming we are able to renegotiate
or
refinance the 10% Notes and the 10% Interest Notes (see Note 9 to the
consolidated financial statements for further information), we believe that
our
available capital as of December 31, 2006 will enable us to continue as a going
concern during 2007. There are no assurances, however, that those
assumptions will be realized. The accompanying financial statements do not
include any adjustments that might result from this uncertainty. The
potential adjustments that might result include:
18
|
·
|
Substantial
disposition of assets outside the ordinary course of
business;
|
|
·
|
Externally
forced revisions of our operations or similar actions;
and
|
|
·
|
Restructuring
of our debt or a reorganization of our
business.
|
We
have reported weaknesses in our internal controls for financial reporting.
If we
fail to maintain an effective system of internal controls, we may not be able
to
accurately report our financial results or prevent fraud. As a result, current
and potential stockholders may not be confident in our financial reporting,
which would harm our business and the price of our common
stock.
Effective
internal controls are necessary for us to provide reliable financial reports
and
effectively prevent fraud. If we cannot provide reliable financial reports
or
prevent fraud, our business and operating results could be harmed.
We
may be required to issue more shares of common stock upon adjustment of the
conversion price of our outstanding Series B convertible preferred stock and
the
10% Notes or the exercise price of our outstanding warrants, resulting in
dilution of our existing stockholders.
The
conversion or exercise of some or all of our outstanding preferred stock, 10%
Notes, options and warrants will dilute the ownership interests of our
stockholders. If we sell common stock or common stock equivalents at a price
per
share that is below the then-applicable conversion price of our outstanding
Series B convertible preferred stock, the 10% Notes and/or below the
then-applicable exercise price of certain of our outstanding warrants, then
the
conversion price or exercise price, as the case may be, of such securities
may
adjust downward and, as a result, the amount of shares of common stock issuable
upon conversion or exercise of such securities would increase. As a result
of
the foregoing, we may be required to issue more shares of common stock than
previously anticipated which would result in the dilution of our existing
stockholders.
Sales
of substantial amounts of common stock in the public market could reduce the
market price of our common stock and make it more difficult for us and our
stockholders to sell our equity securities in the
future.
Under
the
terms of the prior financings, including the Note and Warrant Purchase Agreement
in March/April 2006 and the Common Stock Purchase Agreement in February 2004,
a
substantial number of shares of our common stock must be registered for resale.
Resale of a significant number of these shares into the public market, once
registered, could depress the trading price of our common stock and make it
more
difficult for our stockholders to sell equity securities in the future. In
addition, to the extent other restricted shares become freely available for
sale, whether through an effective registration statement or under Rule 144
of the Securities Act of 1933, as amended (the “Securities Act”), or if we issue
additional shares that might be or become freely available for sale, our stock
price could decrease.
Although
the sale of these additional shares to the public might increase the liquidity
of our stockholders’ investments, the increase in the number of shares available
for public sale could drive the price of our common stock down, thus reducing
the value of your investment and perhaps hindering our ability to raise
additional funds in the future.
19
We
do not believe the Series B warrants are exercisable. If our position is
challenged and we do not prevail, there will be significant
dilution.
In
connection with our March/April 2006 financing, we issued Series B warrants
to
purchase 6,180,000 shares of common stock at an exercise price of $0.01 per
share. The Series B warrants only become exercisable if we fail to achieve
positive operating income in the fourth quarter of 2006, excluding certain
restructuring and non-cash charges identified in such warrant. While we reported
positive operating income, excluding those restructuring and non-cash charges
identified on Schedule A to the Series B warrants, as amended, for the fourth
quarter of 2006 and do not believe the Series B warrants are exercisable, there
can be no assurance that the Series B warrant holders will not challenge our
results. In the event of a challenge and an adverse outcome against us,
6,180,000 shares of common stock may be issued for one cent per share and there
will be significant dilution.
We
do not intend to pay any dividends on our common
stock.
We
have
not declared and paid any dividends on our common stock and we do not intend
to
declare and pay any dividends on our common stock. Earnings, if any, will be
re-invested in our business. We have dividend payment obligations on our
Series B convertible preferred stock which has priority in the payment of
the dividends over our common stock.
We
expect our future operating results to vary from quarter to quarter, and
increase the likelihood that we may fail to meet the expectations of securities
analysts and investors at any given time.
We
expect
our revenues and operating results to vary significantly from quarter to
quarter. In addition, the Company will be required to incur interest expense
until conversion of the 10% Notes or Series B preferred stock into common stock
at the time of, and to the extent of, such conversion. We also expect that
our
operating results could vary significantly from quarter to quarter based on
changes to the estimated fair value of the derivative liabilities related to
the
Series A warrants, the conversion feature of the 10% Notes and the 2004
Financing. The derivative liabilities are calculated using the Black-Scholes
formula and such estimates are revalued at each balance sheet date, with changes
in value at some time recorded as other income or other expense. As a result
of
each of the foregoing, quarter-to-quarter comparisons of our revenues, interest
expense and operating results may not be meaningful. In addition, due to our
stage of development, we cannot predict our future revenues or results of
operations accurately. It is possible that in one or more future quarters our
operating results will fall below the expectations of securities analysts and
investors. If this happens, the trading price of our common stock may decline.
Our
common stock is thinly traded and subject to volatile price
fluctuations.
Our
common stock is thinly traded, and it is therefore susceptible to wide price
swings. Our common stock is not traded or authorized for quotation on any
exchange or on NASDAQ. However, bid prices for our common stock appear from
time to time in the Pink Sheets under
the
symbol “GLOW.PK.” The Pink Sheets
is a
quotation service for over-the-counter securities that is maintained by
Pink
Sheets LLC, a private company. Thinly traded, illiquid stocks are more
susceptible to significant and sudden price changes than stocks that are widely
followed by the investment community and actively
traded on an exchange or NASDAQ. The liquidity of our common stock depends
upon
the presence in the marketplace of willing buyers and sellers. We cannot assure
you that you will be able to find a buyer for your shares. Regional
broker/dealers facilitate trades of our common stock, matching interested
buyers and sellers. In the future, if we successfully list the common stock
on a
securities exchange or obtain NASDAQ trading authorization, we will not be
able
to assure you that an organized public market for our securities will develop
or
that there will be any private demand for the common stock. We could
also
fail
subsequently to satisfy the standards for continued exchange listing or NASDAQ
trading, such as standards having to do with a minimum share price, the minimum
number of public shareholders or the aggregate market value of publicly held
shares. Any holder of our securities should regard them as a long-term
investment and should be prepared to bear the economic risk of an investment
in
our securities for an indefinite period.
20
We
may be subject to litigation resulting from common stock volatility and other
factors, which may result in substantial costs and a diversion of our
management’s attention and resources and could have a negative effect on our
business and results of operations.
The
stock
market has, from time to time, experienced extreme price and volume
fluctuations. Many factors caused, and may in the future cause, the market
price
for our common stock to decline, perhaps substantially, including (without
limitation) demand for our common stock, technological innovations by
competitors or in competing technologies, investor perception of our industry
or
our prospects, or general technological or economic trends. In the past,
companies that have experienced volatility in the market price of their stock
have been the subject of securities class action litigation. As a result, we
may
be involved in a securities class action litigation in the future. Such
litigation often results in substantial costs and a diversion of management’s
attention and resources and could have a negative effect on our business and
results of operation.
Penny
stock regulations may impose certain restrictions on the marketability of our
securities.
The
Securities and Exchange Commission (the “Commission”) has adopted regulations
which generally define “penny stock” to be any equity security that has a market
price (as defined) less than $5.00 per share, subject to certain exceptions.
Our
common stock is presently subject to these regulations which impose additional
sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally those with assets in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with their
spouse). For transactions covered by these rules, the broker-dealer must make
a
special suitability determination for the purchase of such securities and have
received the purchaser’s written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a “penny stock”, unless
exempt, the rules require the delivery, prior to the transaction, of a risk
disclosure document mandated by the Commission relating to the “penny stock”
market. The broker-dealer must also disclose the commission payable to both
the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market maker, the broker-dealer
must disclose this fact and the broker-dealer’s presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the “penny stock” held in the account and information on the
limited market in “penny stocks”. Consequently, the “penny stock”
rules
may
restrict
the
ability of broker-dealers
to sell our securities and may negatively affect the ability of purchasers
of
our shares of common stock to sell such securities.
Risks
Related to Our Business
Our
history of substantial net losses may continue indefinitely and may make it
difficult to fund our operations.
Glowpoint
was formed by the merger of All Communications Corporation and View Tech, Inc.
in May 2000. We reported a substantial loss from operations in 2000, 2001,
2002,
2003, 2004, 2005 and 2006. We cannot assure you that we will achieve revenue
growth or profitability or generate positive cash flow on a quarterly or annual
basis in the future, or at all. If we do not become profitable in the future,
the value of our common stock may be adversely impacted and we could have
difficulty obtaining funds to continue our operations.
Our
success is highly dependent on the evolution of our overall market.
The
market for video communication services is evolving rapidly. Although certain
industry analysts project significant growth for this market, their projections
may not be realized. Our Glowpoint network service utilizes IP (H.323) standards
and provide high quality video communications. As a result, our future growth,
if any, will depend on a desire for higher quality video communications and
the
continued trend of businesses to migrate to IP-based standards and away from
the
older, less reliable Integrated Services Digital Network (“ISDN”) technology.
Additionally, our future growth depends on acceptance and adoption of video
communications. There can be no assurance that the market for our services
will
grow, that our services will be adopted, that customers will desire higher
quality, or that businesses will use IP-based videoconferencing equipment or
our
IP subscriber network. If we are unable to react quickly to changes in the
market, if the market fails to develop, or develops more slowly than expected,
or if our services do not achieve market acceptance, then we are unlikely to
become or remain profitable.
21
Our
future plans could be adversely affected if we are unable to attract or retain
key personnel.
We
have
attracted a highly skilled management team and specialized workforce. Our future
success is dependant in part on attracting and retaining qualified management
and technical personnel. Our inability to hire qualified personnel on a timely
basis, or the departure of key employees, could materially and adversely affect
our business development and therefore, our business, prospects, results of
operations and financial condition.
We
may have difficulty managing our growth.
If
we
successfully increase our sales substantially, we expect to hire more employees
and expand our operations. This growth may place a strain on our management,
our
operations and our systems. Our ability to manage this growth will depend upon
our ability to broaden our management team and our ability to attract, hire
and
retain skilled employees. Our success will also depend on the ability of our
officers and key employees to continue to implement and improve our operational,
financial and other systems, to manage multiple customer relationships
concurrently, and to hire, train and manage our employees. Our future success
is
dependent upon growth. If we cannot scale our business appropriately or
otherwise adapt to this growth, a key part of our strategy may not be
successful.
Our
gross revenue may decline significantly during 2007 due to the planned decline
of our ISDN resale business, attributable in part to the cessation of a customer
contract.
We
resell
ISDN and other services to Tandberg, from whom we acquired our ISDN resale
business in April 2004 (formerly known as “NuVision”). While we resell ISDN
services to many customers, in the year ended December 31, 2006, approximately
50% of our resold ISDN revenues, or $1,265,000, were from Tandberg, which is
approximately 6.5% of our total gross revenues. Pursuant to the terms of
the April 2004 purchase, as amended, Tandberg was contractually obligated to
exclusively purchase certain enumerated services from us through January 31,
2007. While Tandberg has informed us that it will continue to purchase
services from us after January 31, 2007, Tandberg does intend to transfer its
business from Glowpoint, which may occur at any time. Because this revenue
is our lowest margin revenue, however, we expect our overall gross margin
percentage to increase once we lose this gross revenue. Additionally, we are
actively considering whether to sell, transfer or just discontinue our ISDN
resale business.
If
our actual liability for sales and use taxes and regulatory fees is different
from our accrued liability, it could have a material impact on our financial
condition.
Sales
and
use taxes and regulatory fees are supposed to be, or are routinely, collected
from customers and remitted to the applicable authorities in certain
circumstances. Historically, we were not properly collecting and remitting
all
such taxes and regulatory fees and, as a result, have accrued a liability.
We
used estimates when accruing our sales and use tax and regulatory fee liability,
including interest and penalties, and assumed, among other things, various
credits we expect to receive from taxing authorities and/or our underlying
service providers. All of our tax positions are subject to audit and a number
of
taxing authorities have already scheduled audits to commence in 2007. While
we
believe all of our estimates and assumptions are reasonable and will be
sustained upon audit, actual liabilities and credits may differ significantly.
If so, it may materially impact our financial condition, negatively if we
underestimated our liability or positively if we overestimated our liability.
Our
failure to obtain or maintain the right to use certain intellectual property
may
negatively affect our business.
Our
future success and competitive position depends in part upon our ability to
obtain or maintain certain proprietary intellectual property to be used in
connection with our services. This may be achieved in part by prosecuting claims
against others who we believe are infringing on our rights and by defending
claims of intellectual property infringement by our competitors. While we are
not currently engaged in any intellectual property litigation, we could become
subject to lawsuits in which it is alleged that we have infringed the
intellectual property rights of others or we could commence lawsuits against
others who we believe are infringing upon our rights. Our involvement in
intellectual property litigation could result in significant expense to us,
adversely affecting the development of sales of the challenged product or
intellectual property and diverting the efforts of our technical and management
personnel, whether or not such litigation is resolved in our favor.
22
In
the
event of an adverse outcome as a defendant in any such litigation, we may,
among
other things, be required to: pay substantial
damages; cease the development, use or sale of services that infringe upon
other
patented intellectual property; expend significant resources to develop or
acquire non-infringing intellectual property; discontinue the use or
incorporation of infringing technology; or obtain licenses to the infringing
intellectual property. We
cannot
assure you that we would be successful in such development or acquisition or
that such licenses would be available upon reasonable terms. Any such
development, acquisition or license could require the expenditure of substantial
time and other resources and could have a negative effect on our business and
financial results.
An
adverse outcome as plaintiff, in addition to the costs involved, may, among
other things, result in the loss of the intellectual property (such as a patent)
that was the subject of the lawsuit by a determination of invalidity or
unenforceability, significantly increase competition as a result of such
determination, and require the payment of penalties resulting from counterclaims
by the defendant.
We
may not be able to protect the rights to our intellectual
property
Failure
to protect our existing intellectual property rights may result in the loss
of
our exclusivity or the right to use our technologies. If we do not adequately
ensure our freedom to use certain technology, we may have to pay others for
rights to use their intellectual property, pay damages for infringement or
misappropriation and/or be enjoined from using such intellectual property.
We
rely on patent, trade secret, trademark and copyright law to protect our
intellectual property. Some of our intellectual property is not covered by
any
patent or patent application. As we further develop our services and related
intellectual property, we expect to seek additional patent protection. Our
patent position is subject to complex factual and legal issues that may give
rise to uncertainty as to the validity, scope and enforceability of a particular
patent. Accordingly, we cannot assure you that: any of the patents owned by
us
or other patents that other parties license to us in the future will not be
invalidated, circumvented, challenged, rendered unenforceable or licensed to
others; any of our pending or future patent applications will be issued with
the
breadth of claim coverage sought by us, if issued at all; or any patents owned
by or licensed to us, although valid, will not be dominated by a patent or
patents to others having broader claims. Additionally, effective patent,
trademark, copyright and trade secret protection may be unavailable, limited
or
not applied for in certain foreign countries.
We
also
seek to protect our proprietary intellectual property, including intellectual
property that may not be patented or patentable, in part by confidentiality
agreements. We cannot assure you that these agreements will not be breached,
that we will have adequate remedies for any breach or that such persons will
not
assert rights to intellectual property arising out of these
relationships.
We
depend upon our network providers and facilities infrastructure.
Our
success depends upon our ability to implement, expand and adapt our national
network infrastructure and support services to accommodate an increasing amount
of video traffic and evolving customer requirements at an acceptable cost.
This
has required and will continue to require that we enter into agreements with
providers of infrastructure capacity, equipment, facilities and support services
on an ongoing basis. We cannot assure you that any of these agreements can
be
obtained on satisfactory terms and conditions. We also anticipate that future
expansions and adaptations of our network infrastructure facilities may be
necessary in order to respond to growth in the number of customers served.
We
depend upon suppliers and have limited sources of supply for some services.
We
rely
on other companies to supply some components of our network infrastructure
and
the means to access our network. Some of the products and services that we
resell and certain components that we require for our network are available
only
from limited sources. We could be adversely affected if such sources were to
become unavailable to us on commercially reasonable terms. We cannot assure
you
that, on an ongoing basis, we will be able to obtain third-party services
cost-effectively and on the scale and within the timeframes we require, or
at
all. Failure to obtain or to continue to make use of such third-party services
would have a material adverse effect on our business, financial condition and
results of operations.
23
Our
network could fail, which could negatively impact our revenues.
Our
success depends upon our ability to deliver reliable, high-speed access to
our
partners’ data centers and upon the ability and willingness of our
telecommunications providers to deliver reliable, high-speed telecommunications
service through their networks. Our network and facilities, and other networks
and facilities providing services to us, are vulnerable to damage, unauthorized
access, or cessation of operations from human error and tampering, breaches
of
security, fires, earthquakes, severe storms, power losses, telecommunications
failures, software defects, intentional acts of vandalism including computer
viruses, and similar events, particularly if the events occur within a high
traffic location of the network or at one of our data centers. The occurrence
of
a natural disaster or other unanticipated problems at the network operations
center, key sites at which we locate routers, switches and other computer
equipment that make up the backbone of our network infrastructure, or at one
or
more of our partners’ data centers, could substantially and adversely impact our
business. We cannot assure you that we will not experience failures or shutdowns
relating to individual facilities or even catastrophic failure of the entire
network. Any damage to or failure of our systems or service providers could
result in reductions in, or terminations of, services supplied to our customers,
which could have a material adverse effect on our business.
Our
network depends upon telecommunications carriers who could limit or deny us
access to their network or fail to perform, which would have a material adverse
effect on our business.
We
rely
upon the ability and willingness of certain telecommunications carriers and
other corporations to provide us with reliable high-speed telecommunications
service through their networks. If these telecommunications carriers and other
corporations decide not to continue to provide service to us through their
networks on substantially the same terms and conditions (including, without
limitation, price, early termination liability, and installation interval),
if
at all, it would have a material adverse effect on our business, financial
condition, results of operations, and ability to even provide service.
Additionally, many of our service level objectives are dependent upon
satisfactory performance by our telecommunications carriers. If they fail to
so
perform, it may have a material adverse effect on our business.
We
compete in a highly competitive market and many of our competitors have greater
financial resources and established relationships with major corporate
customers.
The
video
communications industry is highly competitive. A number of telecommunications
carriers and other corporations, including AT&T, Verizon Business/MCI,
Sprint, Cisco and Hewlett-Packard, have entered into the video communications
industry. Many of these organizations have substantially greater financial
and
other resources than us, furnish some of the same services provided by us,
and
have established relationships with major corporate customers that have policies
of purchasing directly from them. We believe that as the demand for video
communications systems continues to increase, additional competitors, many
of
which may have greater resources than us, will continue to enter the video
communications market.
Our
Glowpoint managed video services have limited market awareness.
Our
Glowpoint video communications offering was introduced in December 2000 and
was
only a small part of our operations until the sale of our video solutions
business in September 2003. Our future success will be dependent in significant
part on our ability to generate demand for our Glowpoint managed video services
and professional services. To this end, our direct marketing and indirect sales
operations must increase market awareness of our service offering to generate
increased revenue. Our products and services require a sophisticated sales
effort targeted at the senior management of our prospective customers. All
new
hires will require training and will take time to achieve full productivity.
We
cannot be certain that our new hires will become as productive as necessary
or
that we will be able to hire enough qualified individuals or retain existing
employees in the future. We cannot be certain that we will be successful in
our
efforts to market and sell our products and services, and if we are not
successful in building market awareness and generating increased sales, future
results of operations will be adversely affected.
24
As
we expand our Glowpoint network and its use, any system failures or
interruptions in our network may cause loss of customers.
Our
success depends on the seamless, uninterrupted operation of our Glowpoint
network and on the management of traffic volumes and route preferences over
our
network. As we continue to expand our network to increase both its capacity
and
reach, and as traffic volume continues to increase, we will face increasing
demands and challenges in managing our capacity and traffic management systems.
Any prolonged failure of our network or other systems or hardware that causes
significant interruptions to our operations could seriously damage our
reputation and result in customer attrition and financial loss.
We
may be unable to adequately respond to rapid changes in technology.
The
market for our Glowpoint network and related services is characterized by
rapidly changing technology, evolving industry standards and frequent product
introductions. The introduction of products and services embodying new
technology and the emergence of new industry standards may render our existing
managed video services obsolete and unmarketable if we are unable to adapt
to
change. A significant factor in our ability to grow and to remain competitive
is
our ability to successfully introduce new products and services that embody
new
technology, anticipate and incorporate evolving industry standards and achieve
levels of functionality and price acceptable to the market. If our managed
video
services are unable to meet expectations or unable to keep pace with
technological changes in the video communication industry, our managed video
services could eventually become obsolete. We may be unable to allocate the
funds necessary to upgrade our managed video services as improvements in video
communication technologies are introduced. In the event that other companies
develop more technologically advanced networks, our competitive position
relative to such companies would be harmed.
We
incur significant accounting and other control costs that impact our financial
condition.
As
a
publicly traded corporation, we incur certain costs to comply with regulatory
requirements. If regulatory requirements were to become more stringent or if
controls thought to be effective later fail, we may be forced to make additional
expenditures, the amounts of which could be material. Some of our competitors
are privately owned so their accounting and control costs can be a competitive
disadvantage for us. Should our sales decline or if we are unsuccessful at
increasing prices to cover higher expenditures for internal controls and audits,
our costs associated with regulatory compliance will rise as a percentage of
sales.
Other
issues and uncertainties may include:
· |
New
accounting pronouncements or changes in accounting policies;
and
|
· |
Legislation
or other governmental action that detrimentally impacts our expenses
or
reduces sales by adversely affecting our
customers.
|
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
Our
headquarters are located at 225 Long Avenue, Hillside, New Jersey 07205. These
premises consist of approximately 16,000 square feet of leased office space
and
3,000 square feet of leased warehouse facilities. Our lease currently expires
on
the earlier of December 31, 2007 and six months following notice that we intend
to vacate the premises. We are in the process of possibly extending the lease
term for up to an additional two years. In the event we are unable to obtain
an
extension on acceptable terms, we will seek a new location. The base rent for
the premises is currently $218,200 per annum. In addition, we are obligated
to
pay our share of the landlord’s operating expenses (that is, those expenses
incurred by the landlord in connection with the ownership, operation,
management, maintenance and repair of the premises, including, among other
things, the cost of common-area electricity, operational services and real
estate taxes). The Hillside premises house our corporate functions and our
network operations center. In addition to our headquarters, we lease a technical
facility in Ventura, California that houses our Bridging Services group, help
desk and technical personnel. We believe our current facilities are suitable
and
adequate for our business needs and growth prospects.
25
We
are
not currently defending any suit or claim.
None.
PART
II
As
of
October 5, 2005, Glowpoint’s securities were delisted from the NASDAQ Stock
Market. Therefore, there is no established public trading market of Glowpoint’s
common stock and sales of Glowpoint’s securities are currently reported on the
Pink Sheets under the symbol “GLOW.PK”. The Pink
Sheets
is an
electronic quotation system that displays quotes from broker dealers for certain
over-the-counter securities. We are contemplating regaining trading of our
securities on the Over-The-Counter Bulletin Board and eventually applying for
listing on either the NASDAQ or the American Stock Exchange. There is no
assurance that we will be accepted for listing and, if accepted for listing,
an
active market for our securities will develop in the future.
The
following table sets forth high and low closing sale prices per share for our
common stock for each quarter of 2005 and 2006 and the first quarter of 2007,
based upon information obtained from NASDAQ for the period up to October 5,
2005
and from the Pink Sheets for the period after October 5, 2005. All such reported
sales prices on the Pink Sheets reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not necessarily represent actual
transactions.
Glowpoint
|
|||||||
Common
Stock
|
|||||||
High
|
Low
|
||||||
Year
Ended December 31, 2005
|
|||||||
First
Quarter
|
$
|
2.50
|
$
|
1.35
|
|||
Second
Quarter
|
1.84
|
1.23
|
|||||
Third
Quarter
|
1.71
|
0.92
|
|||||
Forth
Quarter
|
1.16
|
0.66
|
|||||
Year
Ended December 31, 2006
|
|||||||
First
Quarter
|
$
|
0.74
|
$
|
0.51
|
|||
Second
Quarter
|
0.67
|
0.35
|
|||||
Third
Quarter
|
0.65
|
0.37
|
|||||
Forth
Quarter
|
0.38
|
0.25
|
|||||
Quarter
Ended March 31, 2007
|
$
|
0.74
|
$
|
0.38
|
On
June
1, 2007, the closing sale price of our common stock was $0.777 per share as
reported on the Pink Sheets, and 47,209,673 shares of our common stock were
held
by approximately 223 holders of record. American Stock Transfer & Trust
Company of Brooklyn, New York is the transfer agent and registrar of our common
stock.
26
Dividends
Our
board
of directors has never declared or paid any cash dividends on our common stock
and does not expect to do so for the foreseeable future.
The
holders of record of our Series B preferred stock, which was issued in January
2004, are entitled to receive, out of any assets at the time legally available
therefore and when and as declared by our board of directors, dividends at
the
rate of eight percent (8%) of the stated value per share of $24,000.00 per
share
per year through July 21, 2005, which increased to twelve percent (12%) after
July 22, 2005, payable annually at our option in cash or, so long as we have
available shares reserved for issuance, in shares of common stock. Dividends
on
the Series B preferred stock accrue and are payable annually. Dividends on
the
Series B preferred stock must be paid prior and in preference to any declaration
or payment of any distribution on any outstanding shares of junior stock. We
recognized dividends of $347,000 for the 2006 period, $315,000 for the 2005
period and $369,000 for the 2004 period. The March 2005 exchange of 83.333
shares of our outstanding Series B convertible preferred stock for 1,333,328
shares of our common stock and warrants to purchase 533,331 shares of our common
stock caused the decrease in dividends in the 2005 period. In the 2004 period,
dividends were based on 203.667 outstanding shares of our Series B convertible
preferred stock.
We
recognized deemed dividends of $1,167,000 for 2005 in connection with warrants
and a reduced conversion price, which were offered as an inducement to holders
to convert our Series B convertible preferred stock into common stock. In
addition, we recognized deemed dividends of $115,000 in 2005 in connection
with
an anti-dilution adjustment to the conversion price of our Series B convertible
preferred stock resulting from our March 2005 issuance of common stock and
warrants. There were no deemed dividends previously reported.
Other
than dividends to be paid on our Series B convertible preferred stock, we
currently intend to retain any earnings to finance the growth and development
of
our business. Our board of directors will make any future determination of
the
payment of dividends based upon conditions then existing, including our
earnings, financial condition and capital requirements, as well as such economic
and other conditions as our board of directors may deem relevant. In addition,
the payment of dividends may be limited by financing arrangements which we
may
enter into in the future.
Recent
Sales of Unregistered Securities; Use of Proceeds from Registered Securities
There
have been no sales of securities in the past three years that have not been
previously reported in a Quarterly Report on Form 10-Q or in a Current Report
on
Form 8-K.
Purchases
of Equity Securities by Glowpoint and Affiliated
Purchasers
There
were no purchases of any Glowpoint securities by Glowpoint or any affiliated
purchaser during the fourth quarter of 2006.
Stock
Performance Graph
The
graph
below compares the cumulative total stockholder return on our common stock
with
the cumulative total return on the Nasdaq National Market Index and a peer
group
selected by our company on an industry and line-of-business basis. The period
shown commences on December 31, 2002 and ends on December 31, 2006,
the end of our last fiscal year. The graph assumes an investment of $100 on
December 31, 2002, and the reinvestment of any dividends.
27
The
comparisons in the graph below are based on historical data and are not
indicative of, nor intended to forecast, future performance of our common
stock.
Indexed
Stock Quotes
|
12/31/2002
|
12/31/2003
|
12/31/2004
|
12/31/2005
|
12/31/2006
|
|||||||||||
The
Nasdaq National Market Index
|
100.000
|
102.716
|
111.538
|
113.070
|
123.836
|
|||||||||||
Nasdaq
Telecommunications Index
|
100.000
|
77.577
|
83.781
|
77.737
|
99.320
|
|||||||||||
Glowpoint,
Inc.
|
100.000
|
28.135
|
24.920
|
10.772
|
6.109
|
|||||||||||
Stock
Quotes
|
12/31/2002
|
12/31/2003
|
12/31/2004
|
12/31/2005
|
12/31/2006
|
|||||||||||
The
Nasdaq National Market Index
|
1,335.510
|
2,003.370
|
2,175.440
|
2,205.320
|
2,415.290
|
|||||||||||
Nasdaq
Telecommunications Index
|
108.790
|
183.570
|
198.250
|
183.950
|
235.020
|
|||||||||||
Glowpoint,
Inc.
|
2.790
|
1.750
|
1.550
|
0.670
|
0.380
|
28
Item
6. Selected Financial Data
The
following selected consolidated financial information should be read in
conjunction with “Item 7 - Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and, with respect to the years ended
December 31, 2006, 2005 and 2004, the audited consolidated financial statements
and footnotes included elsewhere in this Form 10-K. The selected consolidated
financial information for the years ended December 31, 2003 and 2002 was derived
from unaudited consolidated financial information of the Company. In connection
with restating
our annual financial statements for the 2004 fiscal year and the quarters ended
March 31, 2005, June 30, 2005 and September 30, 2005, we
identified errors that would have affected the previously reported consolidated
financial statements for the years ended December 31, 2003 and 2002. The
identified errors were related to the capitalization of costs that should have
been expensed, allocations of costs between cost of revenue and general and
administrative expenses, depreciation, expense accruals, sales tax audits,
bad
debt expenses, amortization of goodwill, stock-based compensation, prepaid
expenses, amortization of discount on subordinated debentures, gain on the
sale
of marketable equity securities, installation revenues and costs, sales and
use
taxes and regulatory fees, and operating expenses improperly charged to the
loss
on the sale of discontinued operations. Based solely on these identified errors,
we have adjusted the information presented below from previously reported
financial statements for the years ended December 31, 2003 and 2002 to reflect
these identified errors. See Notes 1 and 2 below for additional
information.
Years
Ended December 31,
|
||||||||||||||||
Derived
from Unaudited Financial
Information
|
||||||||||||||||
2006
|
2005
|
2004
|
2003(1)
|
2002(1)
|
||||||||||||
Statement
of Operations Information:
|
(in
thousands, except per share data)
|
|||||||||||||||
Revenue
|
$
|
19,511
|
$
|
17,735
|
$
|
15,867
|
$
|
10,250
|
$
|
5,599
|
||||||
Cost
of revenue
|
13,583
|
14,984
|
16,019
|
13,247
|
6,937
|
|||||||||||
Gross
margin (loss)
|
5,928
|
2,751
|
(152
|
)
|
(2,997
|
)
|
(1,338
|
)
|
||||||||
Operating
expenses:
|
||||||||||||||||
Research
and development
|
816
|
1,242
|
1,078
|
1,261
|
1,024
|
|||||||||||
Sales
and marketing
|
2,570
|
4,028
|
3,265
|
5,693
|
3,830
|
|||||||||||
General
and administrative
|
11,049
|
14,120
|
12,598
|
6,424
|
3,882
|
|||||||||||
Amortization
of goodwill
|
—
|
—
|
—
|
—
|
2,548
|
|||||||||||
Total
operating expenses
|
14,435
|
19,390
|
16,941
|
13,378
|
11,284
|
|||||||||||
Loss
from continuing operations
|
(8,507
|
)
|
(16,639
|
)
|
(17,093
|
)
|
(16,375
|
)
|
(12,622
|
)
|
||||||
Other
expense (income):
|
||||||||||||||||
Interest
expense
|
3,969
|
3
|
63
|
2,024
|
471
|
|||||||||||
Amortization
of deferred financing costs
|
389
|
—
|
448
|
286
|
123
|
|||||||||||
(Decrease)
increase in fair value of derivative financial instruments
|
(1,992
|
)
|
271
|
134
|
—
|
—
|
||||||||||
Interest
income
|
(83
|
)
|
(100
|
)
|
(92
|
)
|
(7
|
)
|
(72
|
)
|
||||||
Other
income
|
—
|
—
|
(5,000
|
)
|
—
|
—
|
||||||||||
Amortization
of discount on subordinated debentures
|
—
|
—
|
2,650
|
—
|
—
|
|||||||||||
Gain
on marketable equity securities
|
—
|
—
|
(132
|
)
|
(53
|
)
|
—
|
|||||||||
Gain
on settlement with Gores
|
—
|
(379
|
)
|
—
|
—
|
—
|
||||||||||
Loss
on exchange of debt
|
—
|
—
|
743
|
—
|
—
|
|||||||||||
Total
other expense (income), net
|
2,283
|
(205
|
)
|
(1,186
|
)
|
2,250
|
522
|
|||||||||
Net
loss from continuing operations
|
$
|
(10,790
|
)
|
$
|
(16,434
|
)
|
$
|
(15,907
|
)
|
$
|
(18,625
|
)
|
$
|
(13,144
|
)
|
|
Net
loss from continuing operations per share:
|
||||||||||||||||
Basic
and diluted
|
$
|
(0.23
|
)
|
$
|
(0.37
|
)
|
$
|
(0.44
|
)
|
$
|
(0.63
|
)
|
$
|
(0.46
|
)
|
|
Weighted
average number of common shares and share equivalents
outstanding:
|
||||||||||||||||
Basic
and diluted
|
46,242
|
44,348
|
36,416
|
29,456
|
28,792
|
29
Years
Ended December 31,
|
||||||||||||||||
2006
|
2005
|
2004
|
2003(1)
|
2002(2)
|
||||||||||||
Balance
Sheet Information:
|
(in
thousands)
|
|||||||||||||||
Cash
and cash equivalents
|
$
|
2,153
|
$
|
2,023
|
$
|
4,497
|
$
|
4,105
|
$
|
—
|
|
|||||
Working
capital (deficit)
|
(11,868
|
)
|
(3,526
|
)
|
(2,158
|
)
|
105
|
—
|
||||||||
Total
assets
|
8,393
|
9,037
|
14,992
|
14,532
|
—
|
|||||||||||
Long-term
debt (including current portion)
|
4,326
|
—
|
35
|
1,904
|
—
|
|||||||||||
Total
stockholders’ equity (deficit)
|
$
|
(11,591
|
)
|
$
|
(2,405
|
)
|
$
|
1,699
|
$
|
4,581
|
$
|
—
|
||||
(1)
2003
and 2002 Selected Financial Data is derived from unaudited consolidated
financial information.
The
selected consolidated financial information for the years ended December
31,
2003 and 2002 was derived from our unaudited consolidated financial information.
We previously disclosed that we could not determine whether we would be able
to
restate our consolidated financial statements for the fiscal years ended
December 31, 2002 and 2003 due to certain identified matters. These matters
primarily relate to our discontinued operations (the equipment resale business
that was sold in late 2003). We have also previously disclosed that we lacked
adequate internal controls and had a material weakness resulting from several
significant deficiencies. We believe that all material adjustments identified
in
the restatement process affecting our continuing operations (see the
introductory paragraph of this Item 6 for the areas of adjustment and additional
information) that we are currently aware of have been reflected in the Selected
Financial Data presented above and believe it fairly presents our balance
sheet
as of December 31, 2003 and our continuing operations for the fiscal years
ended December 31, 2002 and 2003. In
the
event a restatement of the 2003 and 2002 financial information was determined
by
the Company to be possible and such an audit was completed, the information
presented above could change materially. Investors should exercise caution
in
reviewing and relying upon the 2003 and 2002 unaudited information
presented.
(2)
2002
Balance Sheet Information.
Information is omitted because we are unable to segregate information in
these
categories between our discontinued operations and our continuing
operations. Presentation of the omitted data would not be indicative
of the balance sheet categories described. See Note 1 above.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion should be read in conjunction with our consolidated balance
sheets as of December 31, 2006 and 2005 and the related consolidated statements
of operations, stockholders’ equity (deficit) and cash flows for the three years
in the period ended December 31, 2006 and the notes attached hereto as an
exhibit. All statements contained herein that are not historical facts,
including, but not limited to, statements regarding anticipated future capital
requirements, our future development plans, our ability to obtain debt, equity
or other financing, and our ability to generate cash from operations, are based
on current expectations. The discussion of results, causes and trends should
not
be construed to imply any conclusion that such results or trends will
necessarily continue in the future
The
statements contained herein, other than historical information, are or may
be
deemed to be forward-looking statements within the meaning of Section 27A of
the
Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended, and involve factors, risks and uncertainties
that may cause our actual results in future periods to differ materially from
such statements. These factors, risks and uncertainties are discussed below
and
elsewhere in this Form 10-K, particularly in Item 1A, “Risk Factors”, and
include market acceptance and availability of new video communication services,
the nonexclusive and terminable at will nature of sales agent agreements, rapid
technological change affecting demand for our services, competition from other
video communication service providers, our ability to extend the maturity date
or refinance the 10% Notes and the 10% Interest Notes, and the availability
of
sufficient financial resources to enable us to pay our existing obligations
and
expand our operations, as well as other risks detailed from time to time in
our
filings with the Securities and Exchange Commission.
Overview
Glowpoint
provides comprehensive managed video services to users across the United States
and to business centers around the world. Prior to 2004, Glowpoint, then known
as Wire One Technologies, Inc., sold substantially all of the assets of its
video solutions (VS) business to an affiliate of Gores Technology Group
(“Gores”). See Note 3 to the consolidated financial statements for further
information.
30
In
April
2004, we entered into an agreement with Tandberg, Inc. (“Tandberg”), a wholly
owned subsidiary of Tandberg ASA, a global provider of visual communications
solutions. As part of the agreement, we acquired for $1.00 certain assets and
the customer base of Tandberg-owned Network Systems LLC (successor to the
NuVision Companies). Network Systems customers, primarily ISDN-based video
users, obtained immediate access to our video bridging and webcasting services.
As part of the agreement, Tandberg's corporate use of IP video communications
and other telecommunications services, formerly purchased through Network
Systems, is being provided exclusively by us under a multi-year agreement.
In
addition, we assumed contractual commitments with AT&T, MCI and Sprint from
Network Systems LLC, which were subsequently consolidated into new agreements
with these carriers. For accounting purposes, such commitments did not result
in
any additional asset or liability recognition. Tandberg named the Glowpoint
Certified Program as a recognized external testing partner for its hardware
and
software products. The transaction was accounted for following purchase
accounting under Statement of Financial Accounting Standard (“SFAS”) No.
141,
“Business Combinations”.
In
applying SFAS No. 141, the fair value of tangible assets acquired and
liabilities assumed were nominal. Accordingly, we did not record any value
of
intangible assets acquired.
On
December 7, 2004, we entered into a strategic partnership with Integrated
Vision, an Australian video conferencing solution provider with a dedicated
IP-based network for global video communications. The agreement is our first
international interconnection agreement for “Glowpoint Enabling” an existing IP
communications network, i.e., delivering our patent-pending video communication
applications over a partner's existing IP bandwidth. Integrated Vision is
responsible for the sales, marketing, operations and customer support of the
Glowpoint branded service in Australia.
In
March
2005, we announced a settlement agreement with Gores, resolving the outstanding
disputes relating to the sale of the assets of our VS business to Gores in
September 2003. The agreement also covered Gores' acquisition of V-SPAN Inc.
in
November 2004. Pursuant to the terms of the settlement agreement, Gores paid
us
$2,750,000 and released to us the $335,000 that was escrowed at the closing
of
the asset sale. Also as part of the settlement, we dismissed our lawsuit against
Gores relating to the V-SPAN acquisition.
In
March
2005, 83.333 shares of our outstanding Series B convertible preferred stock
and
accrued dividends of $183,000 were exchanged for 1,333,328 shares of our common
stock and warrants to purchase 533,331 shares of our common stock with an excess
aggregate fair value of $1,167,000. We recognized deemed dividends of $1,167,000
during the 2005 period in connection with the warrants and a reduced conversion
price, which were offered as an inducement to holders to convert our Series
B
convertible stock into common stock.
In
March
2005, we entered into a common stock purchase agreement with several unrelated
institutional investors in connection with the offering of (i) an aggregate
of
6,766,667 shares of our common stock and (ii) warrants to purchase up to an
aggregate of 2,706,667 shares of our common stock. We received proceeds from
this offering of $10,150,000, less our expenses relating to the offering, which
were $774,000, a portion of which represents investment advisory fees totaling
$711,000 to Burnham Hill Partners, our financial advisor. The warrants are
exercisable for a five-year period, are subject to anti-dilution protection
(minimum price of $1.61) and have an initial exercise price of $2.40 per share.
The warrants may be exercised by cash payment of the exercise price or by
“cashless exercise”. As a result of subsequent financings, the conversion price
of these warrants has been adjusted to $1.79 as of December 31, 2006.
In
May
2005, we engaged, for a six month period, Burnham Hill Partners to advise us
with respect to potential strategic transactions, which might have included
an
acquisition, partnership, strategic alliance merger or sale. As consideration
for the engagement, we agreed to issue warrants to Burnham Hill Partners to
purchase 100,000 shares of our common stock. The warrants are exercisable for
a
five-year period, have an exercise price of $1.50 per share and may be exercised
by cash payment of the exercise price or by "cashless exercise”. In addition, we
extended the expiration date of warrants held by Burnham Hill Partners to
purchase 130,500 shares of common stock from June 2005 and August 2006 to
December 2009. We accounted for the transaction using the fair value based
method, which resulted in an expense of $196,000. As part of the March and
April
2006 financing, the exercise price of the warrants with Burnham Hill Partners
has been adjusted to $0.65.
31
In
March
2006, we implemented a corporate restructuring plan designed to reduce certain
operating, sales and marketing and general and administrative costs. The costs
of this restructuring, approximately $1,200,000, consisting of severance
payments, acceleration of vesting of stock options and benefit reimbursements,
were recorded in the first quarter of 2006 and will be paid through April 2007.
As part of the restructuring initiative, we implemented management changes,
including the departure of twenty-one employees and the promotion of Michael
Brandofino to Chief Operating Officer with principal responsibility for the
implementation and management of the restructuring plan. David Trachtenberg,
President and Chief Executive Officer since October 2003, and Gerard Dorsey,
Executive Vice President and Chief Financial Officer since December 2004, left
Glowpoint in April 2006. In connection with their separation, Messrs.
Trachtenberg and Dorsey were paid severance based upon their employment
agreements of approximately $500,000 and $155,000, respectively, over the
following year and receive other benefits (e.g., accelerated vesting of
restricted stock or options) valued at approximately $180,000 and $9,000,
respectively. The amount to be paid to them is a portion of the $1,200,000
of
restructuring costs recorded in the first quarter of 2006. In April 2006, Mr.
Brandofino was appointed President and Chief Executive Officer and a member
of
the Board of Directors, Edwin Heinen was appointed Chief Financial Officer,
and
Joseph Laezza was appointed Chief Operating Officer.
March
and April 2006 Financing
In
March
and April 2006, we issued senior secured convertible notes and warrants to
purchase common stock in a private placement to private investors. In the March
and April 2006 transactions, we issued $5,665,000 and $515,000, respectively,
with a total aggregate principal amount of $6,180,000 of our 10% Senior Secured
Convertible Notes (“10% Notes”), Series A warrants to purchase 6,180,000 shares
of common stock at an exercise price of $0.65 per share and Series B warrants
to
purchase 6,180,000 shares of common stock at an exercise price of $0.01 per
share. Both warrants are subject to certain anti-dilution protection. The Series
B warrants only become exercisable (i) after we make available to the public
our
financial statements for the fourth quarter of 2006 and (ii) if we fail to
achieve positive operating income, excluding certain restructuring and non-cash
charges, identified on Schedule A of the Series B warrants, as amended, in
the
fourth quarter of 2006. Management has determined that the Series B warrants
are
not exercisable because we achieved positive operating income, excluding the
restructuring and non-cash charges listed on Schedule A of the Series B
warrants, as amended, in the fourth quarter of 2006 (see “Non-Exercisability
of Series B Warrants”
below).
We
also
agreed to reduce the exercise price of previously issued warrants to purchase
3,625,000 shares of common stock held by the investors in this offering to
$0.65
from a weighted average price of $3.38, and to extend the expiration date of
any
such warrants to no earlier than three years after the offering date. The new
weighted average expiration date of the warrants will be 3.5 years from a
previous weighted average expiration date of 2.9 years. In addition, we issued
to Burnham Hill Partners placement agent warrants to purchase 618,000 shares
of
our common stock at an exercise price of $0.55 per share. The warrants are
subject to certain anti-dilution protection. The $5,123,000 and $462,000 net
proceeds of the March and April 2006, respectively, financings are being used
to
support our corporate restructuring program and for working capital.
The
10%
Notes bear interest at 10% per annum, mature on September 30, 2007 and, at
the
election of the holder, are convertible into common stock at a conversion rate
of $0.50 per share. We have the option to pay the accrued interest for the
10%
Notes in cash or additional 10% Notes. All interest payments have been made
by
issuing additional 10% Notes (the 10% Interest Notes”). As of May 31, 2007, the
principal amount of such 10% Interest Notes total approximately $787,600. We
are
currently evaluating options with regard to the 10% Notes and 10% Interest
Notes. Options include renegotiating the terms and maturity date and issuing
new
debt or equity to repay the 10% Notes and 10% Interest Notes. If we are unable
to renegotiate the maturity of the 10% Notes and 10% Interest Notes or issue
new
securities on favorable terms to repay them, it would have a material adverse
effect on the Company.
32
Non-Exercisability
of Series B Warrants
We
determined that the Series B warrants are not exercisable because we achieved
positive operating income, excluding the restructuring and non-cash charges
listed on Schedule A of the Series B warrants, as amended (“Adjusted Positive
Operating Income”), of $156,000 in the fourth quarter of 2006. The Series B
warrants only become exercisable (i) after we make available to the public
our
financial statements for the fourth quarter of 2006 and (ii) if we fail to
achieve Adjusted Positive Operating Income in the fourth quarter of 2006. The
identified restructuring and non-cash charges were set forth on Schedule A
to
the Series B warrants, as amended, which included:
“1. $200,000
in connection with severance payments for reduction in force, defined as any
costs related to a reduction in force, including ongoing contractual payments
for employees terminated in support of restructuring of the
business.
2. $50,000
in connection with termination liabilities, defined as any costs to terminate
a
contract or consolidate facilities as part of the restructuring
plan.
3. The
costs
of this capital raise, defined as the amortization or expense of costs related
to this financing, calculated in accordance with GAAP.
4. $450,000
of depreciation expense, calculated in accordance with GAAP.
5. $150,000
of deferred non-cash compensation expense, calculated in accordance with
GAAP.
Amounts
not used under any item of this Schedule A may be used under any other item
of
this Schedule A if the limit of such item has been surpassed in the fourth
quarter of 2006.”
We
determined that our unaudited 2006 fourth quarter loss from operations was
$497,000. Because we do not issue quarterly financial statements for a fourth
quarter, we calculated this loss from operations by subtracting (i) Glowpoint’s
“Loss from operations” of $8,507,000 for the year ended December 31, 2006, as
reported in our audited Consolidated Statements of Operations in Item 8 of
this
Form 10-K, from (ii) the “Loss from operations” of $8,010,000 for the nine
months ended September 30, 2006, as reported in our unaudited Consolidated
Statements of Operations on Form 10-Q for September 30, 2006.
To
that
$497,000 loss from operations, we added back a total of $653,000 of permitted
restructuring and non-cash charges, which included:
· |
$457,000
of depreciation (the difference between the “Depreciation and
Amortization” of $1,947,000 for the year ended December 31, 2006, as
reported in our audited Consolidated Statements of Cash Flows in
Item 8 of
this Form 10-K, and $1,490,000 for the nine months ended September
30,
2006, as reported in our unaudited Consolidated Statements of Cash
Flows
on Form 10-Q for September 30,
2006);
|
· |
$125,000
of deferred non-cash compensation expense (the difference between
the
“Stock-based Compensation” of $781,000 for the year ended December 31,
2006, as reported in our audited Consolidated Statements of Cash
Flows in
Item 8 of this Form 10-K, and $656,000 for the nine months ended
September
30, 2006, as reported in our unaudited Consolidated Statements of
Cash
Flows on Form 10-Q for September 30, 2006); and
|
· |
$71,000
of severance payments (defined to include ongoing
contractual payments for employees terminated in support of restructuring
of the business, which, though not separately disclosed in our financial
statements, are derived from our books and records).
|
33
Therefore,
we believe Glowpoint achieved $156,000 of Adjusted Positive Operating Income
in
the fourth quarter of 2006. The following table summarizes our
analysis:
Schedule
A Adj.
|
4th
Quarter 2006
|
||||||
Loss
from operations
|
$
|
(
497
|
)
|
||||
Schedule
A adjustments:
|
|||||||
1.
Severance payments
|
71
|
||||||
2.
Termination liabilities
|
—
|
||||||
3.
Capital raise costs
|
—
|
||||||
4.
Depreciation
|
457
|
||||||
5.
Deferred non-cash compensation
|
125
|
||||||
Total
Schedule A adjustments
|
653
|
||||||
Adjusted
Positive Operating Income
|
$
|
156
|
Going
Concern
Our
consolidated financial statements have been prepared assuming that we will
continue as a going concern. We have incurred recurring operating losses and
negative operating cash flows since our inception including a net loss
attributable to common stockholders of $11,137,000 and negative operating cash
flows of $4,694,000 for the year ended December 31, 2006. At December 31, 2006
we had cash and cash equivalents of $2,153,000, a working capital deficit of
$11,868,000 and an accumulated deficit of $172,623,000. Additionally, the 10%
Notes and the 10% Interest Notes mature in September 2007. These factors raise
substantial doubt as to our ability to continue as a going concern. We raised
capital in March and April 2006, but continue to sustain losses and negative
operating cash flows. In 2006, we implemented a corporate restructuring plan
designed to reduce certain operating, sales and marketing and general and
administrative costs (see Note 18 to the consolidated financial statements
for
further information). Assuming we realize all of the savings from our
restructured operating activities, assuming we are able to negotiate favorable
terms with the authorities regarding our sales and use taxes and regulatory
fees
(see Note 6 to the consolidated financial statements for further information)
and assuming we are able to renegotiate or refinance the 10% Notes and the
10%
Interest Notes (see Note 9 to the consolidated financial statements for further
information), we believe that our available capital as of December 31, 2006
will
enable us to continue as a going concern during 2007. There are no assurances
that we will be able to raise additional capital as needed upon acceptable
terms
nor any assurances that we will be able renegotiate the terms and maturity
date
of the 10% Notes and the 10% Interest Notes. If we are unable to renegotiate
the
maturity of the 10% Notes and 10% Interest Notes or issue new securities on
favorable terms to repay them, it would have a material adverse effect on the
Company. The accompanying financial statements do not include any adjustments
that might result from this uncertainty.
Critical
Accounting Policies
We
prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States. Preparing consolidated
financial statements in accordance with accounting principles generally accepted
in the United States requires us to make a number of estimates and assumptions
that affect the reported amounts of assets and liabilities and disclose
contingent assets and liabilities as of the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Our significant accounting policies are described in Note
2 to
our consolidated financial statements attached hereto. We believe the following
critical accounting policies involve the most significant judgments and
estimates used in the preparation of our consolidated financial
statements:
Revenue
Recognition
We
recognize subscription revenue when the applicable services have been performed.
Revenues billed in advance are deferred until the revenue has been earned.
Other
service revenue, including amounts related to surcharges charged by our
carriers, related to the Glowpoint managed network service and the multi-point
video and audio bridging services as service is provided. As the non-refundable,
upfront activation fees charged to the subscribers do not meet the criteria
as a
separate unit of accounting, they are deferred and recognized over the
twenty-four month period estimated life of the customer relationship. At
December 31, 2006 and 2005, we had deferred activation fees of $288,000 and
$308,000, respectively, and related installation costs of $53,000 and $63,000,
respectively. Revenues derived from other sources are recognized when services
are provided or events occur.
34
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 continued
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, sales and use tax obligations, regulatory fees and related
penalties and interest, the estimated life of customer relationships, the
estimated lives of property and equipment and the fair value of derivative
financial instruments.
Allowance
for Doubtful Accounts
We
record
an allowance for doubtful accounts based on specifically identified amounts
that
we believe to be uncollectible. We also record additional allowances based
on
certain percentages of our aged receivables, which are determined based on
historical experience and our 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, we write off the receivable against the
allowance.
Long-Lived
Assets
We
evaluate impairment losses on long-lived assets used in operations, primarily
fixed assets, when events and circumstances indicate that the carrying value
of
the assets might not be recoverable in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 144 “Accounting
for the Impairment or Disposal of Long-Lived Assets”.
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, the related assets will be written down to fair
value.
Results
of Operations
The
following table sets forth, for the three years in the period ended December
31,
2006, the percentages of revenues represented by selected items reflected in
our
consolidated statements of operations. The comparisons of financial results
are
not necessarily indicative of future results:
2006
|
2005
|
2004
|
||||||||
Revenue
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
Cost
of revenue
|
69.6
|
84.5
|
101.0
|
|||||||
Gross
margin (loss)
|
30.4
|
15.5
|
(1.0
|
)
|
||||||
Operating
expenses:
|
||||||||||
Research
and development
|
4.2
|
7.0
|
6.8
|
|||||||
Sales
and marketing
|
13.2
|
22.7
|
20.6
|
|||||||
General
and administrative
|
56.6
|
79.6
|
79.4
|
|||||||
Total
operating expenses
|
74.0
|
109.3
|
106.8
|
|||||||
Loss
from operations
|
(43.6
|
)
|
(93.8
|
)
|
(107.8
|
)
|
||||
Other
expense (income):
|
||||||||||
Interest
expense
|
20.3
|
—
|
0.4
|
|||||||
Amortization
of deferred financing costs
|
2.0
|
—
|
2.8
|
|||||||
(Decrease)
increase in fair value of derivative financial instruments
|
(10.2
|
)
|
1.5
|
0.8
|
||||||
Interest
income
|
(0.4
|
)
|
(0.5
|
)
|
(0.6
|
)
|
||||
Gain
on settlement with Gores
|
—
|
(2.1
|
)
|
—
|
||||||
Other
income
|
—
|
—
|
(31.5
|
)
|
||||||
Amortization
of discount on subordinated debentures
|
—
|
—
|
16.7
|
|||||||
Gain
on marketable equity securities
|
—
|
—
|
(0.8
|
)
|
||||||
Loss
on exchange of debt
|
—
|
—
|
4.7
|
|||||||
Total
other expense (income), net
|
11.7
|
(1.1
|
)
|
(7.5
|
)
|
|||||
Net
loss
|
(55.3
|
)
|
(92.7
|
)
|
(100.3
|
)
|
||||
Preferred
stock dividends
|
1.8
|
1.8
|
2.3
|
|||||||
Preferred
stock deemed dividends
|
—
|
7.2
|
—
|
|||||||
Net
loss attributable to common stockholders
|
(57.1
|
)%
|
(101.7
|
)%
|
(102.6
|
)%
|
||||
35
Year
ended December 31, 2006 (the “2006 period”) compared to year ended December 31,
2005 (the “2005 period”)
Revenue
- Revenue
increased by $1,776,000, or 10.0%, to $19,511,000 in the 2006 period from
$17,735,000 in the 2005 period. Subscription and related revenue increased
$1,689,000, or 15.0%, to $12,934,000 in the 2006 period from $11,245,000 in
the
2005 period. The increased subscription and related revenue is caused by a
5%
increase in installed subscription circuits and an increase in the subscription
revenue per circuit. The increased subscription revenue per circuit is a result
of the Company evaluating circuit profitability and upon circuit renewal either
increasing the monthly subscription charges or canceling unprofitable circuits.
Non-subscription revenue consisting of bridging, events and other one-time
fees
increased $87,000, or 1.3%, to $6,577,000 in the 2006 period from $6,490,000
in
the 2005 period.
Cost
of revenues
- Cost
of revenue decreased by $1,401,000, or 9.3%, to $13,583,000 in the 2006 period
from $14,984,000 in the 2005 period. The decline in costs as a percentage of
revenue in the 2006 period is the result of the renegotiation of rates and
the
migration of service to lower cost providers where possible. Savings were also
generated in connection with our Points of Presences (“POP”). A POP is where our
customers gain access to the Glowpoint network. We eliminated three of our
fourteen POPs and excess capacity in several other POPs. This reduction was
partially offset by the inclusion of $324,000 of taxes and regulatory fees
which
had previously been recorded in General and Administrative
expenses.
Gross
margin
- Gross
margin increased by $3,177,000, or 115.5%, to $5,928,000 from $2,751,000 in
the
2005 period. These savings discussed in Cost of Revenue section and the
additional revenue caused our gross margin to increase to 30.4% in the 2006
period from 15.5% in the 2005 period. Since the cost of revenue decreased
primarily from the renegotiation of rates and the migration of service, the
rate
of increase in our gross margin percentage is not indicative of results expected
to be achieved in subsequent periods.
Research
and development
-
Research and development expenses, which include the costs of the personnel
in
this group, the equipment they use and their use of the network for development
projects, decreased by $426,000, or 34.3%, to $816,000 in the 2006 period from
$1,242,000 in the 2005 period. The decrease was a result of reduced staffing
levels related to the March 2006 corporate restructuring and decreased usage
of
outside contractors. Research and development expenses, as a percentage of
revenue, were 4.2% for the 2006 period versus 7.0% for the 2005
period.
Sales
and marketing
- Sales
and marketing expenses, which include sales personnel salaries, commissions,
overhead and marketing costs, decreased $1,458,000, or 36.2%, to $2,570,000
in
the 2006 period from $4,028,000 in the 2005 period. The primary causes of the
decrease in costs for the 2006 period were an $842,000 decrease in salaries
and
benefits resulting from reduced staffing levels related to the March 2006
corporate restructuring, a decrease of $413,000 in marketing expenses for
advertising, trade shows and other initiatives and a decrease of $139,000 in
travel and entertainment expenses. Sales and marketing expenses, as a percentage
of revenue, were 13.2% for the 2006 period versus 22.7% for the 2005
period.
36
General
and administrative
-
General and administrative expenses, which includes direct corporate expenses
related to costs of personnel in the various corporate support categories,
including executive, finance, human resources and information technology
decreased $3,071,000, or 21.7%, in the 2006 period to $11,049,000 from
$14,120,000 in the 2005 period. In March 2006, we implemented a corporate
restructuring plan (the “March 2006 Restructuring”) designed to reduce certain
operating, sales and marketing and general and administrative costs. The costs
of the March 2006 Restructuring totaled approximately $1,200,000, consisting
of
severance payments, acceleration of vesting of stock options and benefit
reimbursements, were recorded in the first quarter of 2006 and were paid through
April 2007. As part of the March 2006 Restructuring initiative, we implemented
management changes, including the departure of twenty-one employees. We
implemented additional restructuring efforts in the second half of 2006 as
well.
There were no restructuring costs in the 2005 period. The primary components
of
the decrease, after the charge for the March 2006 Restructuring, were a
reduction of $1,551,000 in salaries, benefits and training resulting from
reduced staffing levels related to the March 2006 Restructuring, $561,000 in
consulting expenses, $455,000 in equipment rentals, expense and repairs,
$407,000 in accounting and legal fees, $359,000 in estimated sales and use
taxes
and regulatory fees, $338,000 of communication costs, $186,000 in travel and
entertainment, $149,000 in deferred compensation, $133,000 in postage, dues
and
subscriptions, $95,000 in bad debt expense and $90,000 in depreciation. Sales
taxes and regulatory fees are supposed to be, or are routinely, collected from
customers and remitted to the applicable authorities in certain circumstances.
Through September 2006 we had not been collecting and remitting such taxes
and
regulatory fees and as a result our general and administrative expenses include
costs for such matters that would otherwise not have been incurred. Beginning
in
October 2006, through our wholly-owned subsidiary GP Communications, LLC, we
began charging and collecting such taxes and fees from our customers. Sales
taxes and regulatory fees were $829,000 in the 2006 period and approximately
$1.1 million in the 2005 period. The amounts charged to customers are included
in revenues and the related taxes and regulatory fees are included in cost
of
revenues. General and administrative expenses, as a percentage of revenue,
were
56.6% in the 2006 period versus 79.6% in the 2005 period.
Other
expense (income)
- Other
expense of $2,283,000 principally reflects interest expense of $3,969,000
comprised of $1,850,000 for expensing of the beneficial conversion feature
related to the 10% Notes, $1,359,000 for the accretion of the discount related
to the 10% Notes, $483,000 of accrued interest expense related to the 10% Notes
and $277,000 of accrued interest expense related to the sales and use taxes
and
regulatory fees. Amortization of deferred financing costs incurred in connection
with the 10% Notes was $389,000. Those expenses are partially offset by a
$1,992,000 decrease in fair value of derivative financial instruments and
$83,000 of interest income. Other income of $205,000 in the 2005 period
principally reflects a $379,000 gain on the settlement of an amount owed to
Gores and $100,000 of interest income and partially reduced by $271,000 for
the
increase in the fair value of derivative financial instruments.
Income
taxes - As
a
result of our losses we recorded no provision for incomes taxes in the years
ended December 31, 2006 and 2005. Any deferred tax asset that would be related
to our losses has been fully reserved under a valuation allowance, reflecting
the uncertainties as to realization evidenced by the Company’s historical
results and restrictions on the usage of the net operating loss carryforwards.
Net
loss -
Net
loss decreased by $5,644,000, or 34.3%, to $10,790,000 in the 2006 period from
$16,434,000 in the 2005 period.
Preferred
stock dividends
- We
recognized preferred stock dividends of $347,000 for the 2006 period and
$315,000 for the 2005 period. The increase in 2006 preferred stock dividends
results from an increase in the dividend rate to 12% from 10% in July 2005
partially reduced by the March 2005 exchange of 83.333 shares of our outstanding
Series B convertible preferred stock for 1,333,328 shares of our common stock
and warrants to purchase 533,331 shares of our common stock.
Preferred
stock deemed dividends
- We
recognized no preferred stock deemed dividends in the 2006 period and $1,167,000
for the 2005 period in connection with the issuance of warrants and the
reduction of the conversion price, which were offered as an inducement to the
holders to convert our Series B convertible preferred stock. In addition, we
recognized preferred stock deemed dividends of $115,000 in the 2005 period
in
connection with an anti-dilution adjustment to the conversion price of our
Series B convertible preferred stock resulting from our March 2005 financing.
37
Net
loss attributable to common stockholders
- Net
loss attributable to common stockholders was $11,137,000 or $0.24 per basic
and
diluted share in the 2006 period. For the 2005 period, the net loss attributable
to common stockholders was $18,031,000, or $0.41 per basic and diluted share.
Year
ended December 31, 2005 compared to year ended December 31, 2004 (the “2004
period”)
Revenue
- Revenue
increased by $1,868,000, or 11.8%, to $17,735,000 in the 2005 period from
$15,867,000 in the 2004 period. Subscription and related revenue (which includes
contractual revenue related to the ISDN resale business, formerly known as
Network Services and NuVision) increased $998,000, or 9.7%, to $11,245,000
in
the 2005 period from $10,247,000 in the 2004 period. Contractual revenue related
to the ISDN resale business was $287,000 in the 2005 period and $283,000 in
the
2004 period. We began receiving revenue from the ISDN resale business when
we
acquired it from Tandberg in April 2004. Non-subscription revenue consisting
of
bridging, events and other one-time fees increased $870,000, or 15.5%, to
$6,490,000 in the 2005 period from $5,620,000 in the 2004 period. The growth
in
non-subscription revenue was the result of an increase of $602,000, or 24.4%,
to
$3,072,000 in the 2005 period in revenue from the ISDN resale business from
$2,470,000 in the 2004 period.
Cost
of revenues
- Cost
of revenue decreased by $1,035,000, or 6.5%, to $14,984,000 in the 2005 period
from $16,019,000 in the 2004 period. The decline in costs as a percentage of
revenue in the 2005 period is the result of the renegotiation of rates and
the
migration of service to lower cost providers where possible. For the 2005
period, additional revenue associated with the ISDN resale business, which
began
in the second quarter of 2004, resulted in increased gross margins.
Gross
margin (loss) -
Gross
margin increased by $2,903,000 to $2,751,000 from a gross loss of $152,000
in
the 2004 period. This decline in cost of goods sold and the additional revenue
caused our gross margin to increase to 15.5% in the 2005 period from a negative
1.0% in the 2004 period. The rate of increase in our gross margin percentage
is
not indicative of results expected to be achieved in subsequent
periods.
Research
and development
-
Research and development expenses, which include the costs of the personnel
in
this group, the equipment they use and their use of the network for development
projects, increased by $164,000, or 15.2%, to $1,242,000 in the 2005 period
from
$1,078,000 in the 2004 period. The increase was a result of increased staffing
levels and increased usage of outside contractors to meet the demand for
application development in conjunction with new product development for us
and
certain of our partners. Research and development expenses, as a percentage
of
revenue, were 7.0% for the 2005 period versus 6.8% for the 2004
period.
Sales
and marketing
- Sales
and marketing expenses, which include sales salaries, commissions, overhead
and
marketing costs, increased $763,000, or 23.4%, to $4,028,000 in the 2005 period
from $3,265,000 in the 2004 period. The primary causes of the increase in costs
for the 2005 period were a $315,000 increase in salaries, benefits and travel
costs resulting from the addition of a direct sales force of 11 employees and
an
increase of $277,000 in marketing expense associated with a sales lead
generation program and other initiatives. Sales and marketing expenses, as
a
percentage of revenue, were 22.7% for the 2005 period versus 20.6% for the
2004
period.
General
and administrative
-
General and administrative expenses, which includes direct corporate expenses
related to costs of personnel in the various corporate support categories,
including executive, finance, human resources and information technology
increased $1,522,000, or 12.1%, in the 2005 period to $14,120,000 from
$12,598,000 in the 2004 period. The primary components of the increase were
$1,227,000 for professional fees incurred in connection with the restatement
of
our consolidated financial statements and the related audit committee
investigation, $1,175,000 in salaries and benefits related to executive
management and increased staffing levels, $306,000 for increased equipment
rentals and communication costs and $196,000 of financial advisory fees. These
increases were partially offset by a reduction of $598,000 in consulting fees,
$283,000 in bad debt expense, $212,000 in travel costs and $180,000 in legal
fees (excluding those related to the restatement and audit committee
investigation). General and administrative expenses include (i) estimated sales
and use taxes, regulatory fees and related penalties and interest and (ii)
a tax
obligation of a predecessor of Glowpoint which totaled approximately $1.1
million in both the 2005 period and the 2004 period. Sales taxes and regulatory
fees are supposed to be, or are routinely, collected from customers and remitted
to the applicable authorities in certain circumstances. We have not been
collecting and remitting such taxes and regulatory fees and as a result our
general and administrative expenses include costs for such matters that would
otherwise not have been incurred. General and administrative expenses, as a
percentage of revenue, were 79.6% in the 2005 period versus 79.4% in the 2004
period.
38
Other
income
- Other
income of $205,000 in the 2005 period principally reflects a $379,000 gain
on
the settlement of an amount owed to Gores and $100,000 of interest income and
partially reduced by $271,000 for the increase in the fair value of derivative
financial instruments. Other income of $1,186,000 for the 2004 period
principally reflects a $5,000,000 gain recognized in connection with the
acquisition by Gores of V-SPAN, pursuant to our agreement with Gores and a
$132,000 gain on the sale of marketable equity securities received in the
settlement of an accounts receivable, partially reduced by $2,650,000 accretion
of discount on subordinated debentures and $448,000 of related deferred
financing costs, a $743,000 loss on exchange of the debentures for Series B
convertible preferred stock, common stock and a modification to warrants and
$134,000 for the increase in the fair value of derivative financial instruments.
Income
taxes - As
a
result of our losses we recorded no provision for incomes taxes in the years
ended December 31, 2005 and 2004. Any deferred tax asset that would be related
to our losses has been fully reserved under a valuation allowance, reflecting
the uncertainties as to realization evidenced by the Company’s historical
results and restrictions on the usage of the net operating loss carryforwards
Net
loss -
Net
loss increased by $527,000, or 3.3%, to $16,434,000 in the 2005 period from
$15,907,000 in the 2004 period.
Preferred
stock dividends
- We
recognized preferred stock dividends of $315,000 for the 2005 period and
$369,000 for the 2004 period. The March 2005 exchange of 83.333 shares of our
outstanding Series B convertible preferred stock for 1,333,328 shares of our
common stock and warrants to purchase 533,331 shares of our common stock caused
the decrease in preferred stock dividends in the 2005 period. In the 2004 period
dividends were based on 203.667 outstanding shares of our Series B convertible
preferred stock.
Preferred
stock deemed dividends
- We
recognized preferred stock deemed dividends of $1,167,000 for the 2005 period
in
connection with the issuance of warrants and the reduction of the conversion
price, which were offered as an inducement to the holders to convert our Series
B convertible preferred stock. In addition, we recognized preferred stock deemed
dividends of $115,000 in the 2005 period in connection with an anti-dilution
adjustment to the conversion price of our Series B convertible preferred stock
resulting from our March 2005 financing. There were no preferred stock deemed
dividends previously reported.
Net
loss attributable to common stockholders
- Net
loss attributable to common stockholders was $18,031,000 or $0.41 per basic
and
diluted share in the 2005 period. For the 2004 period, the net loss attributable
to common stockholders was $16,276,000, or $0.45 per basic and diluted share.
Liquidity
and Capital Resources
We
have
incurred recurring operating losses and negative operating cash flows since
our
inception including a net loss attributable to common stockholders of
$11,137,000 and negative operating cash flows of $4,694,000 for the year ended
December 31, 2006. At December 31, 2006 we had cash and cash equivalents of
$2,153,000, a working capital deficit of $11,868,000 and an accumulated deficit
of $172,623,000. In 2006 we commenced a restructuring of the current business
(see Note 18 in our consolidated financial statements). These factors raise
substantial doubt as to our ability to continue as a going concern. We raised
capital in March and April 2006, but continue to sustain losses and negative
operating cash flows. Our primary liquidity requirements include capital
expenditures and working capital needs, and for 2007, payment of the principal
and interest on the 10% Notes and the 10% Interest Notes, which mature on
September 30, 2007. See also, “Commitments and Contractual Obligations” below.
We fund our liquidity requirements primarily through existing cash and, to
the
extent necessary and available, through issuing equity or debt. We are currently
evaluating options with regard to the 10% Notes and the 10% Interest Notes.
Options include renegotiating the terms and maturity date of the 10% Notes
and
the 10% Interest Notes or issuing new debt or equity to repay the 10% Notes
and
the 10% Interest Notes. We believe that our available capital as of December
31,
2006 together with our restructured operating activities and either the
renegotiation of the 10% Notes and the 10% Interest Notes or obtaining new
financing sources will enable us to continue as a going concern through December
31, 2007. There are no assurances that we will be able to raise additional
capital on favorable terms as needed or renegotiate the terms and maturity
date
of the 10% Interest Notes and the 10% Interest Notes. The accompanying financial
statements do not include any adjustments that might result from this
uncertainty.
39
If
we are
unable to renegotiate the maturity of the 10% Notes or issue new debt or equity
to repay the 10% Notes, it will have a material adverse effect on the Company.
We cannot provide any assurance that we will be able to renegotiate the terms
of
the 10% Notes on terms that are acceptable to us. We also may raise additional
funds through public or private financing, collaborative relationships or other
arrangements. We cannot be assured that additional funding, if sought, will
be
available or will be on terms favorable to us. Further, any additional equity
financing may be dilutive to stockholders, and debt financing, if available,
may
involve restrictive covenants. Our failure to raise capital when needed would
harm our business and operating results.
Cash
flows
At
December 31, 2006, we had a working capital deficit of $11,868,000, compared
to
a working capital deficit of $3,526,000 at December 31, 2005, a reduction of
$8,342,000. We had $2,153,000 in cash and cash equivalents at December 31,
2006,
compared to $2,023,000 at December 31, 2005. The $130,000 increase in cash
and
cash equivalents primarily resulted from the $5,585,000 provided by the March
and April 2006 financing partially reduced by $4,694,000 of net cash used in
operating activities and the purchase of $761,000 of property, equipment and
leasehold improvements.
Net
cash
used in operating activities was $4,694,000 for the 2006 period. For the 2006
period, the components of the net cash usage were the net loss of $10,790,000
which was increased by $1,992,000 for the increase in the estimated fair value
of derivative financial instruments issued in connection with the 10% Notes
and
February 2004 capital raise, a $577,000 increase in accounts receivable and
an
$86,000 decrease in deferred revenue. This cash usage was reduced by $1,850,000
related to the beneficial conversion feature on the 10% Notes, $1,359,000 for
accretion of discount on the 10% Notes, depreciation and amortization expense
of
$1,947,000, an increase of $1,868,000 in accounts payable and accrued expenses,
sales taxes and regulatory fees, stock-based compensation of $781,000, $389,000
for amortization of deferred financing costs, an increase in other assets of
$205,000, an increase of $183,000 in prepaid expenses and other current assets
and loss on disposal of furniture and equipment of $169,000.
Net
cash
used by investing activities was $761,000 for the 2006 period for the purchase
of property, equipment and leasehold improvements. The Glowpoint network is
currently built out to handle the anticipated level of subscriptions without
significant expansion through at least 2007.
Cash
provided by financing activities for the 2006 period was $5,585,000 related
to
the March and April 2006 financing.
Off-Balance
Sheet Arrangements
We
had no
off-balance sheet arrangements at December 31, 2006.
Commitments
and Contractual Obligations
The
following table summarizes our contractual cash obligations and commercial
commitments at December 31, 2006, and the effect such obligations are expected
to have on liquidity and cash flow in future periods (in
thousands).
Contractual
Obligations:
|
Total
|
Less
than 1 Year
|
1-3
Years
|
3-5
Years
|
More
than 5 Years
|
|||||||||||
Long
term debt - 10% Notes
|
$
|
6,606
|
$
|
6,606
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
Derivative
liabilities
|
4,301
|
4,301
|
-
|
-
|
-
|
|||||||||||
Commercial
commitments
|
7,136
|
3,811
|
3,325
|
-
|
-
|
|||||||||||
Operating
lease obligations
|
293
|
287
|
6
|
-
|
-
|
|||||||||||
Total
|
$
|
18,336
|
$
|
15,005
|
$
|
3,331
|
$
|
-
|
$
|
-
|
||||||
40
Recent
Accounting Pronouncements
In
February 2006, the FASB issued SFAS No. 155, "Accounting
for Certain Hybrid Financial Instruments".
SFAS
No. 155 amends SFAS No. 133 and SFAS No. 140, and addresses issues raised in
SFAS No. 133 Implementation Issue No. D1, "Application
of Statement 133 to Beneficial Interests in Securitized Financial
Assets”.
SFAS No.
155 is effective for all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15,
2006.
The Company does not believe it will be materially affected by the adoption
of
SFAS No. 155.
In
June
2006, the FASB issued FASB Interpretation Number (“FIN”) 48, "Accounting
for Uncertainty in Income Taxes—An interpretation of FASB Statement No.
109",
regarding accounting for, and disclosure of, uncertain tax positions. FIN No.
48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
"Accounting
for Income Taxes."
FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. FIN No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN No. 48 is effective for fiscal years beginning
after December 15, 2006. The Company does not believe its results of operations
and financial position will be materially affected by the adoption of FIN No.
48.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) No. 108, "Considering
the Effects on Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements".
SAB No.
108 requires registrants to quantify errors using both the income statement
method (i.e. iron curtain method) and the rollover method and requires
adjustment if either method indicates a material error. If a correction in
the
current year relating to prior year errors is material to the current year,
then
the prior year financial information needs to be corrected. A correction to
the
prior year results that are not material to those years would not require a
"restatement process" where prior financials would be amended. SAB No. 108
is
effective for fiscal years ending after November 15, 2006. We have adopted
SAB
No. 108 and it did not have a material effect on our financial position, results
of operations or cash flows.
In
September 2006, the FASB issued SFAS No. 157, "Fair
Value Measurements",
to
define fair value, establish a framework for measuring fair value in accordance
with generally accepted accounting principles, and expand disclosures about
fair
value measurements. SFAS No. 157 will be effective for fiscal years beginning
after November 15, 2007, the beginning of the Company's 2008 fiscal year. The
Company is assessing the impact the adoption of SFAS No. 157 will have on the
Company's financial position and results of operations.
In
February 2007, the FASB issued SFAS No. 159 “The
Fair Value Option for Financial Assets and Financial
Liabilities”.
SFAS
No. 159 permits entities to choose to measure many financial assets and
financial liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. SFAS
No.
159 is effective for fiscal years beginning after November 15, 2007. The
Company is currently assessing the impact of SFAS No. 159 on its financial
position and results of operations.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
We
have
exposure to interest rate risk related to our cash equivalents portfolio.
The
primary objective of our investment policy is to preserve principal while
maximizing yields. Our cash equivalents portfolio is short-term in nature;
therefore changes in interest rates will not materially impact our consolidated
financial condition. However, such interest rate changes can cause fluctuations
in our results of operations and cash flows.
There
are
no other material qualitative or quantitative market risks particular to
us.
Item
8. Financial Statements and Supplemental Data
The
information required by this Item 8 is incorporated by reference herein from
Item 15, Part IV, of this Form 10-K.
Item
9. Change in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
41
Item
9A. Controls and Procedures
This
Form
10-K should be read in conjunction with our 2005 audited financial statements
filed with the SEC on Form 8-K on February 27, 2007 and our March 31, 2006,
June
30, 2006 and September 30, 2006 Quarterly Reports on Forms 10-Q/A, which were
filed with the SEC on May 31, 2007. Those filings disclosed that we lacked
adequate internal controls and that we believe that a material weakness in
our
internal controls arose as the result of aggregating several specified
significant deficiencies. Additional significant deficiencies which have come
to
our attention included (i) processes which were insufficient to recognize
obligations for sales and use taxes, certain regulatory fees, predecessor
entities and carrier credits and (ii) recordkeeping controls which were
insufficient regarding tracking the issuance of options, the authorization
of
non-senior level bonuses, recording a transaction entered into on behalf of
the
Company involving the issuance and modification of warrants, and maintaining
supporting documentation for accounts receivable customer files. Another
material weakness is that we have not released timely financial information
to
the general public, though we attribute such delays principally to the
restatements of prior periods.
Our
current management team has initiated improvements to the internal accounting
and recordkeeping controls, including the hiring of our General Counsel and
the
utilization of outside tax and regulatory professionals, to address the above
mentioned deficiencies. We have also instituted improved internal accounting
controls, including the institution of a formal monthly closing process,
including account analysis, oversight of all closing processes, formal monthly
review of the financial statements and the implementation of monthly written
reports to the Board of Directors and an internally maintained warrant registry.
As for timely filing financial information, we have hired additional staff
to
permit our Company personnel to focus on, and issue, current financial
statements.
The
information set forth in this Item 9A shall not be considered filed under the
Exchange Act. Management acknowledges its responsibility for establishing and
maintaining adequate internal control over financial reporting and management
is
continuing to evaluate and improve our internal control procedures, where
applicable under the supervision of the Chief Financial Officer and Chief
Executive Officer. This Annual Report does not include an attestation report
of
our registered public accounting firm regarding internal control over financial
reporting. Our assessment of our internal controls over financial reporting
was
not subject to attestation by our registered public accounting firm pursuant
to
temporary rules of the SEC that permit us to provide only our report in this
Annual Report.
Item
9B. Other Information
None.
42
PART
III
Directors,
Executive Officers, Promoters and Control Persons
The
following table sets forth information with respect to our current directors
and
executive officers.
Name
|
Age
|
Position
with Company
|
Aziz
Ahmad (5)
|
44
|
Class
III Director
|
Bami
Bastani (1)(2)(3)
|
53
|
Class
II Director
|
Michael
Brandofino
|
42
|
Chief
Executive Officer, President and Class II Director
|
Dean
Hiltzik (2)(3)
|
53
|
Class
III Director
|
James
S. Lusk (1)(2)
|
51
|
Class
I Director
|
Richard
Reiss
|
50
|
Class
III Director
|
Peter
Rust (1)(3)(4)
|
53
|
Class
I Director
|
|
|
|
Non-Director
Executive Officers:
|
|
|
Edwin
F. Heinen
|
55
|
Chief
Financial Officer and Executive Vice President, Finance
|
Joseph
Laezza
|
37
|
Chief
Operating Officer
|
David
W. Robinson
|
38
|
Executive
Vice President and General Counsel
|
|
|
|
(1)
|
Member
of the Audit Committee.
|
(2)
|
Member
of the Compensation Committee.
|
(3)
|
Member
of the Nominating Committee.
|
(4)
|
Alternate
Member of the Compensation Committee
|
(5)
|
Alternate
Member of the Audit, Compensation and Nominating
Committees
|
43
Biographies
Aziz
Ahmad, Class III Director.
Mr.
Ahmad joined our board of directors in June 2006 and his term will expire at
the
annual meeting of stockholders in 2008. He is co-founder and a board member
of
Netria Systems, a joint venture between Vonair and Broadsoft that develops
client management solutions for service providers of converged networks
solutions. Mr. Ahmad is also the CEO and co-founder of Vonair, a firm focused
on
developing client applications for the Voice over IP and Video IP wireline
and
wireless markets, and CEO of UTC Associates, a leading systems and network
integration professional services company. He holds B.E. and M.E. degrees in
Electrical Engineering from The City College of New York.
Bami
Bastani, Class II Director.
Dr.
Bastani joined our board of directors in February 2007 and his term will expire
at the next annual meeting of stockholders. He is President and CEO of ANADIGICS
(NASDAQ:ANAD), a leading supplier of semiconductor radio frequency integrated
circuits for the broadband and wireless communications markets. Prior to joining
ANADIGICS in 1998, he held senior positions with Fujitsu Microelectronics and
National Semiconductor. Dr. Bastani currently serves on the board of directors
of ANADIGICS and Nitronex, a private company; he previously served on the board
of directors of Globespan Virata in 2003 and was a national member of the AEA
board of directors until 2007. Dr. Bastani earned his Ph.D and his MSEE in
Microelectronics from Ohio State University and his BS (Electrical Engineering)
from the University of Arkansas. He also holds three US patents.
Michael
Brandofino, Chief Executive Officer, President and Class II
Director.
Mr. Brandofino was named our Chief Executive Officer and President and a
member of our board of directors in April 2006. His term as a director expires
at the next annual meeting of stockholders. Mr. Brandofino previously served
as
our Chief Operating Officer and, before that, served as our Executive Vice
President and Chief Technology Officer since October 2000. Prior to that,
Mr. Brandofino was co-founder and President of Johns Brook Co., Inc., a
technology consulting company acquired by us in 2000. Mr. Brandofino holds
a B.S. degree in Management Information Systems from Pace
University.
Dean
Hiltzik,Class III Director. Mr. Hiltzik
has been a member of our board of directors since May 2000 and his term will
expire at the annual meeting of stockholders in 2008. From September 1999 until
May 2000, Mr. Hiltzik was a member of the board of directors of
All
Communications Corporation (“ACC”).
Mr. Hiltzik, a certified public accountant, is a partner and director of
consulting services at Schneider & Associates LLP, which he joined in 1979.
Schneider provides tax and consulting services to Glowpoint. Mr. Hiltzik
received a B.A. from Columbia University and an M.B.A. in Accounting from
Hofstra University.
James
S. Lusk, Class I Director. Mr.
Lusk
joined our board of directors in February 2007 and his term will expire at
the
next annual meeting of stockholders. He is currently Executive Vice President
of
ABM Industries Incorporated (NYSE:ABM), a leading facility services contractor
in the United States and Canada. Effective December 31, 2007, Mr. Lusk will
become ABM’s Chief Financial Officer. Prior to joining ABM, he was Vice
President, Business Services of Avaya, Chief Financial Officer, Treasurer of
BioScrip/MIM, President of Lucent Technologies’ Business Solutions division, and
interim Chief Financial Officer of Lucent Technologies. Mr. Lusk earned his
BS
(Economics), cum laude, from the Wharton School, University of Pennsylvania,
and
his MBA (Finance) from Seton Hall University. He is a CPA and was inducted
into
the AICPA Business and Industry Leadership Hall of Fame in 1999.
Richard
Reiss, Class III Director. Mr. Reiss
has been a member of our board of directors since May 2000 and
his
term will expire at the annual meeting of stockholders in 2008.
He
is
co-founder and currently serves as President of Prime Communications, an Avaya
Business Partner that installs technologically advanced communication systems
for businesses of all sizes. Mr. Reiss previously
served as Chairman of our board from May 2000 to December 2006 and served as
our
Chief Executive Officer from May 2000 to October 2003. Mr. Reiss also
served as our President from May 2000 to April 2002. Mr. Reiss served as
Chairman of the Board of Directors, President and Chief Executive Officer of
ACC
from ACC’s formation in 1991 until the formation of Glowpoint’s
predecessor pursuant to the merger of ACC and View Tech, Inc. (VTI) in May
2000.
Peter
Rust, Class I Director.
Mr. Rust joined our board of directors in May 2006 and his term will expire
at the next annual meeting of stockholders. Mr. Rust has over 27 years of
experience in the telecommunications and computer industries. He is
currently CEO of Bank Street Consulting Group, a firm that works with mid-cap
companies helping them achieve their growth objectives. Previously,
he consulted for a number of telecommunications, technology and financial
firms and served as President and CEO of Con Edison Communications from February
1999 until May 2005. He is also a former director of NEON Communications,
a current director for two non-profits and a member of the Communications Sector
of the NYC Investment Fund. Mr. Rust holds an M.B.A. in Corporate Finance from
Adelphi University, a Master of Science in Biomedical Engineering from
Polytechnic University of New York, and a B.A. from Brown University in Rhode
Island.
44
Executive
Officers
The
following individuals are our executive officers but are not
directors:
Edwin
F. Heinen, Chief Financial Officer and Executive Vice President,
Finance. Mr. Heinen,
a certified public accountant, has been our Chief Financial Officer since April
2006 and previously served as our Controller since March 2005. Mr. Heinen
joined the Company from Communications Network Enhancement, Inc., an audio
conferencing company, where he was CFO since September 2001. Before that,
Mr. Heinen served in senior financial executive positions with
responsibility for accounting, auditing, treasury, analysis, budgeting, and
financial and tax reporting. Mr. Heinen received a B.S. in Business
Administration from Cornell University and an M.B.A in Finance from the
University of Detroit.
Joseph
Laezza, Chief Operating Officer. Mr. Laezza
has been our Chief Operating Officer since April 2006 and previously served
as
our Vice President, Operations since March 2004. Mr. Laezza joined the Company
from Con Edison Communications, where he was Vice President, Network Operations.
He previously held management positions at a number of telecommunications
service providers, including AT&T and XO Communications, where he was
responsible for operations, service delivery, and customer service.
David
W. Robinson, Executive Vice President and General
Counsel.
Mr.
Robinson has been our Executive Vice President and General Counsel since May
2006. Prior to joining the Company, Mr. Robinson was Vice President and General
Counsel of Con Edison Communications from August 2001 until March 2006, when
Con
Edison Communications was purchased by RCN Corporation. Before that, Mr.
Robinson served in senior executive positions with other telecommunications
service providers and provided legal and business counseling to other
businesses. Mr. Robinson received a B.A. from the University of Pennsylvania
(magna
cum laude)
and a
Juris Doctorate from Boston College Law School.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a)
of the Securities Exchange Act of 1934, as amended, requires executive officers
and directors and persons who beneficially own more than 10% of a registered
class of our equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Executive officers,
directors and greater than 10% stockholders are required by regulations of
the
Securities and Exchange Commission to furnish us with copies of all
Section 16(a) reports they file.
Based
solely on our review of the copies of reports we received, or written
representations that no such reports were required for those persons, we believe
that, for 2006, all statements of beneficial ownership required to be filed
with
the Securities and Exchange Commission were filed on a timely
basis.
Code
of Ethics
We
have
adopted a code of business conduct and ethics, which is designed to promote:
honest and ethical conduct; full, fair, accurate, timely and understandable
disclosure in our filings with the SEC and other public communications;
compliance with applicable laws, rules and regulations; prompt internal
reporting of violations of the code of business conduct and ethics; and
accountability for adherence to the code of business conduct and ethics. The
code of business conduct and ethics applies to our employees, officers and
directors, including our principal executive officer, principal financial
officer, principal accounting officer and controller. A copy of our code of
business conduct and ethics is available at our website at www.glowpoint.com.
You may request a copy of the code of business conduct and ethics, at no cost,
by telephoning us at (866) GLOWPOINT or writing us at the following address:
Glowpoint, Inc., 225 Long Avenue, Hillside, New Jersey 07205, Attention:
Investor Relations. We may post amendments to or waivers of
the
provisions of the code of business conduct and ethics, if any, made with respect
to our principal executive officer, principal financial officer, principal
accounting officer or controller on that website. Please note, however, that
the
information contained on the website is not incorporated by reference in, or
considered to be part of, this document.
45
Corporate
Governance
Corporate
governance is typically defined as the system that allocates duties and
authority among a company’s stockholders, board of directors and management. The
stockholders elect the board and vote on extraordinary matters; the board is
the
company’s governing body, responsible for hiring, overseeing and evaluating
management, particularly the chief executive officer; and management runs the
company’s day-to-day operations. The primary responsibilities of the board of
directors are oversight, counseling and direction to our management in the
long-term interests of us and our stockholders. Our board of directors currently
consists of seven directors. The current board members include five independent
directors and one current member and one former member of our senior
management.
Independent
Directors.
Other
than Mr. Reiss (a former member of our senior management) and Mr. Brandofino
(our current President and CEO), each of our directors qualifies as
“independent” in accordance with the published listing requirements of the
Company Guide of the American Stock Exchange. This independence definition
includes a series of objective tests, such as that the director is not an
employee of the company and has not engaged in various types of business
dealings with the company. In addition, the board has made a subjective
determination as to each independent director that no relationship exist which,
in the opinion of the board, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director.
Board
Committees.
The
board has an audit committee, a compensation committee and a nominating
committee. Each committee has a charter that is available for review on our
website at www.glowpoint.com. You may request a copy of each charter, at no
cost, by telephoning us at (866) GLOWPOINT or writing us at the following
address: Glowpoint, Inc., 225 Long Avenue, Hillside, New Jersey 07205,
Attention: Investor Relations.
Audit
Committee.
We
currently have an audit committee consisting of James Lusk, Peter Rust and
Bami
Bastani. Aziz Ahmad serves as an alternate member of the audit committee.
Mr. Lusk is the chairman of the audit committee. The audit committee
consults and meets with our Registered Public Accounting Firm and chief
financial officer and accounting personnel, reviews potential conflict of
interest situations where appropriate, and reports and makes recommendations
to
the full board of directors regarding such matters.
The
members of the audit committee each qualify as “independent” under the
heightened standards established for members of audit committees pursuant to
Rule 10A-3 under the Securities Exchange Act. The audit committee is also
required to have at least one independent member who is determined by the board
to meet the qualifications of an “audit committee financial expert” in
accordance with SEC rules, including that the person meets the relevant
definition of an “independent director.” Each member of the audit committee has
been determined to be an audit committee financial expert and independent
director. Stockholders should understand that this designation is a disclosure
requirement of the SEC related to these directors’ experience and understanding
with respect to certain accounting and auditing matters. The designation does
not impose upon these directors any duties, obligations or liability that are
greater than are generally imposed on them as a member of the audit committee
and the board, and their designation as an audit committee financial expert
pursuant to this SEC requirement does not affect the duties, obligations or
liability of any other member of the audit committee or the board.
Compensation
Committee.
We
currently have a compensation committee consisting of Dean Hiltzik, Bami Bastani
and James Lusk. Aziz Ahmad and Peter Rust each serve as alternate members of
the
compensation committee. Each member of the compensation committee meets the
required independence standard. The compensation committee is responsible for
supervising our executive compensation policies, reviewing officers’ salaries,
reviewing and discussing with management the Compensation Discussion and
Analysis, providing the Compensation Committee Report for inclusion I our Proxy
Statement, and performing such other duties as the board of directors may
prescribe from time to time.
46
Nominating
Committee.
We
currently have a nominating committee consisting of Dean Hiltzik, Peter Rust
and
Bami Bastani. Aziz Ahmad serves as an alternate member of the nominating
committee. Each member of the nominating committee meets the required
independence standard. The nominating committee is responsible for assessing
the
performance of our board of directors and making recommendations to our board
regarding nominees for the board. The nominating committee was formed in
February 2004. Prior to the formation of the committee, its functions were
performed by the board of directors. The
nominating committee considers qualified candidates to serve as a member of
our
board of directors suggested by our stockholders. Stockholders can suggest
qualified candidates for director by writing to our Corporate Secretary at
225
Long Avenue, Hillside, New Jersey 07205. Stockholder submissions that are
received in accordance with our by-laws and that meet the criteria outlined
in
the nominating committee charter are forwarded to the members of the nominating
committee for review. There have been no changes to the procedures by which
stockholders may recommend nominees to our board of directors in the last two
years.
The
information called for by this item is incorporated herein by reference to
the
information contained in our definitive Proxy Statement for the period ended
December 31, 2006, which will be filed with the Securities and Exchange
Commission.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Equity
Compensation Plan Information
The
following table provides information regarding the aggregate number of
securities to be issued under all of our stock options and equity-based plans
upon exercise of outstanding options, warrants and other rights and their
weighted-average exercise prices as of December 31, 2006. The securities issued
under equity compensation plans not approved by security holders consist
entirely of options issued with respect to individual compensation arrangements
for officers, directors and consultants.
Plan
Category
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options,
Warrants
and Rights
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and
Rights
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (excluding Securities Reflecting in Column
(a))
|
|||||||
Equity
compensation plans approved by security holders
|
3,690,554
|
$
|
1.99
|
521,890
|
||||||
Equity
compensation plans not approved by security holders
|
1,409,643
|
2.98
|
—
|
|||||||
Total
|
5,100,197
|
$
|
2.26
|
521,890
|
||||||
47
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth information regarding the beneficial ownership of
common stock as of May 24, 2007
by each
of the following:
|
•
|
each
person (or group within the meaning of Section 13(d)(3) of the
Securities Exchange Act of 1934) known by us to own beneficially
5% or
more of the common stock;
|
|
•
|
our
directors and named executive officers;
and
|
|
•
|
all
of our directors and executive officers as a
group.
|
As
used
in this table, “beneficial ownership” means the sole or shared power to vote or
direct the voting or to dispose or direct the disposition of any security.
A
person is considered the beneficial owner of securities that can be acquired
within 60 days of May 31, 2007 through the exercise of any option, warrant
or
right. Shares of common stock subject to options, warrants or rights which
are
currently exercisable or exercisable within 60 days of May 31, 2007 are
considered outstanding for computing the ownership percentage of the person
holding such options, warrants or rights, but are not considered
outstanding
for
computing the ownership percentage of any other person. The amounts and
percentages are based on 47,209,564 shares of common stock outstanding as
of June 1, 2007.
NAME
AND ADDRESS OF BENEFICIAL OWNERS (1)
|
NUMBER
OF SHARES OWNED (2)
|
PERCENTAGE
OF OUTSTANDING SHARES
|
|||||
Executive
Officers and Directors:
|
|||||||
Michael
Brandofino
|
878,243
|
(3) |
1.8
|
%
|
|||
Joseph
Laezza
|
330,000
|
(4) |
*
|
||||
Edwin
F. Heinen
|
299,666
|
(5) |
*
|
||||
David
W. Robinson
|
233,333
|
(6) |
*
|
||||
Aziz
Ahmad
|
86,000
|
(7) |
*
|
||||
Bami
Bastani
|
84,000
|
(8) |
*
|
||||
Dean
Hiltzik
|
174,000
|
(9) |
*
|
||||
James
Lusk
|
84,000
|
(10) |
*
|
||||
Richard
Reiss
|
3,578,250
|
(11) |
7.5
|
%
|
|||
Peter
Rust
|
90,500
|
(12) |
*
|
||||
David
Trachtenberg
|
360,000
|
*
|
|||||
All
directors and executive officers as a group (11 people)
|
6,197,992
|
(13) |
12.6
|
%
|
|||
5%
Owners:
|
|||||||
North
Sound Capital LLC
20
Horseneck Lane, Greenwich, Connecticut 06830
|
13,697,324
|
(14) |
23.3
|
%
|
|||
Coghill
Capital Management LLC
One
North Wacker Drive, New York, New York 10006
|
9,789,628
|
(15) |
18.6
|
%
|
|||
Vicis
Capita
126
East 56th
Street, New York, New York 10022
|
5,656,800
|
(16) |
10.7
|
%
|
|||
*
Less than 1%
|
48
(1)
Unless otherwise noted, the address of each person listed is c/o Glowpoint,
Inc., 225 Long Avenue, Hillside, New Jersey 07205.
(2)
Unless otherwise noted indicated by footnote, the named persons have sole voting
and investment power with respect to the shares of common stock beneficially
owned.
(3)
Includes 400,000 shares of restricted stock that are subject to forfeiture
and
473,208 shares subject to stock options presently exercisable or exercisable
within 60 days.
(4)
Includes 100,000 shares of restricted stock that are subject to forfeiture
and
175,000 shares subject to stock options presently exercisable or exercisable
within 60 days.
(5)
Includes 200,000 shares of restricted stock that are subject to forfeiture
and
89,666 shares subject to stock options presently exercisable or exercisable
within 60 days.
(6)
Includes 93,333 shares of restricted stock that are subject to forfeiture and
33,333 shares subject to stock options exercisable within 60 days.
(7)
Includes 60,000 shares of restricted stock that are subject to forfeiture and
6,000 subject to presently exercisable stock options.
(8)
Includes 60,000 shares of restricted stock that are subject to forfeiture and
4,000 subject to presently exercisable stock options.
(9)
Includes 94,000 shares subject to presently exercisable stock
options.
(10)
Includes 60,000 shares of restricted stock that are subject to forfeiture and
4,000 subject to presently exercisable stock options.
(11)
Includes 303,000 shares subject to presently exercisable stock options and
82,500 shares held by a trust for the benefit of Mr. Reiss' children, of which
he is the trustee.
(12)
Includes 40,000 shares of restricted stock that are subject to forfeiture and
10,500 subject to presently exercisable stock options.
(13)
Includes 1,013,333 shares of restricted stock
that are subject to forfeiture and 1,192,707 shares subject to stock options
presently exercisable or exercisable within 60 days.
(14)
Ownership information is based on the Schedule 13G filed by North Sound Capital
Management, L.L.C. on April 19, 2007. Includes 2,322,361 shares issuable upon
conversion of our Series B preferred stock, 3,497,001 shares subject to
presently exercisable warrants, and 5,638,762 shares issuable upon conversion
of
our 10% Senior Secured Convertible Notes, together with interest
notes.
(15)
Ownership information is based on the Schedule 13G filed by Coghill Capital
Management, L.L.C. on February 14, 2006. Includes 2,166,667 shares subject
to
presently exercisable warrants and 3,383,258 shares issuable upon conversion
of
our 10% Senior Secured Convertible Notes, together with interest notes.
(16)
Includes 2,273,542 shares subject to presently exercisable warrants and
3,383,258 shares issuable upon conversion of our 10% Senior Secured Convertible
Notes, together with interest notes.
Item
13. Certain Relationships and Related Transactions, and Director
Independence
We
receive financial and tax services from Schneider & Associates LLP, an
accounting firm in which Dean Hiltzik, one of our directors, is a partner.
In
the last five years, we have incurred fees of approximately $237,500 for
services received from this firm, approximately $31,500 of which was incurred
in
2006.
Audit
Fees
Since
its
engagement on March 1, 2007, Amper, Politziner & Mattia, P.C. (“Amper”) has
billed us $173,000 in the aggregate for professional services rendered by it
for
the audit of our annual financial statements for the 2006 fiscal year and the
reviews of the financial statements included in our quarterly reports on
Form 10-Q for the 2006 fiscal year. Eisner LLP (“Eisner”) billed us
$1,331,000 in the aggregate for professional services rendered by it for the
audit of our annual financial statements for the 2005 fiscal year, the reviews
of the financial statements included in our quarterly reports on Form 10-Q
for the 2005 fiscal year, and the restatements of our annual financial
statements for the 2004 fiscal year and the quarters ended March 31, 2005,
June
30, 2005 and September 30, 2005. BDO Seidman LLP billed us $15,000 for
professional services rendered by it for the review of financial statements
included in our quarterly report on Form 10-Q for the first quarter of
2005.
49
Audit-Related
Fees
Neither
Amper nor Eisner billed us for any assurance and related services that are
reasonably related to the performance of the audit and review of our financial
statements that are not already reported in the paragraph immediately above.
All
of these fees were billed in connection with our filings with the Securities
and
Exchange Commission, consultation with respect to financial accounting
pronouncements and attendance at audit committee meetings.
Tax
Fees
Neither
Amper nor Eisner rendered any professional services to us for tax compliance,
tax advice and tax planning in 2006 or 2005.
All
Other Fees
Neither
Amper nor Eisner billed us in 2006 or 2005 for any services or products other
than Audit Fees, as listed above.
In
accordance with audit committee policy and the requirements of law, all services
provided by Amper and Eisner were pre-approved by the audit committee and all
services to be provided by Amper will be pre-approved. Pre-approval includes
audit services, audit-related services, tax services and other services. To
avoid certain potential conflicts of interest, the law prohibits a publicly
traded company from obtaining certain non-audit services from its auditing
firm.
We obtain these services from other service providers as needed.
PART
IV
A. |
The
following documents are filed as part of this
report:
|
1.
Consolidated Financial Statements:
Page
|
||
Report
of Independent Registered Public Accounting Firm, Amper, Politziner
and
Mattia, P.C.
|
F-1
|
|
Report
of Independent Registered Public Accounting Firm, Eisner
LLP
|
F-2
|
|
Consolidated
Balance Sheets at December 31, 2006 and 2005
|
F-3
|
|
Consolidated
Statements of Operations for the years ended December 31, 2006, 2005
and
2004
|
F-4
|
|
Consolidated
Statements of Stockholders’ Equity (Deficit) for the years ended December
31, 2006, 2005 and 2004
|
F-5
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2006, 2005
and
2004
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
2.
Financial Statement Schedules have been omitted since they are either not
required, not applicable, or the information is otherwise included.
3.
Exhibits:
A
list of
exhibits required to be filed as part of this report is set forth in the Exhibit
Index on page 51 of this Form 10-K, which immediately precedes such exhibits,
and is incorporated by reference.
50
EXHIBIT
INDEX
Exhibit
Number
|
|
|
|
Description
|
|||
3.1
|
|
Amended
and Restated Certificate of Incorporation. (1)
|
|
3.2
|
|
Certificate
of Amendment to the Amended and Restated Certificate of Incorporation
of
Wire One Technologies, Inc. changing its name to Glowpoint, Inc.
(11)
|
|
3.3
|
|
Certificate
of Designations, Preferences and Rights of Series B Preferred Stock.
(11)
|
|
3.4
|
|
Amended
and Restated Bylaws. (11)
|
|
4.1
|
|
Specimen
Common Stock Certificate. (20)
|
|
10.1
|
|
Glowpoint,
Inc. 2000 Stock Incentive Plan. (2)
|
|
10.2
|
|
Form
of Warrant to purchase Common Stock, dated January 10, 2002. (3)
|
|
10.3
|
|
Lease
Agreement for premises located at 225 Long Avenue, Hillside, New
Jersey,
dated March 20, 1997, between Registrant and Vitamin Realty Associates,
L.L.C. (4)
|
|
10.4
|
|
First
Amendment to Lease Agreement, dated as of December 1997, between
Registrant and Vitamin Realty Associates, L.L.C. (1)
|
|
10.5
|
|
Second
Amendment to Lease Agreement, dated as of December 20,1999, between
Registrant and Vitamin Realty Associates, L.L.C. (1)
|
|
10.6
|
|
Third
Amendment to Lease Agreement, dated as of June 1, 2000, between Registrant
and Vitamin Realty Associates, L.L.C. (7)
|
|
10.7
|
|
Fourth
Amendment to Lease Agreement, dated as of August 29, 2000, between
Registrant and Vitamin Realty Associates, L.L.C. (2)
|
|
10.8
|
|
Fifth
Amendment to Lease Agreement, dated as of May 1, 2001, between Registrant
and Vitamin Realty Associates, L.L.C. (7)
|
|
10.9
|
|
Sixth
Amendment to Lease Agreement, dated as of May 1, 2002, between Registrant
and Vitamin Realty Associates, L.L.C. (7)
|
|
10.10
|
|
Seventh
Amendment to Lease Agreement, dated as of April 22, 2005, between
Registrant and Vitamin Realty Associates, L.L.C. (20)
|
|
10.11
|
|
Form
of Warrant to Purchase Shares of common stock of Registrant. (5)
|
|
10.12
|
|
Registration
Rights Agreement dated as of December 17, 2002, between Registrant
and the
Purchasers set forth therein. (5)
|
|
10.13
|
|
Note
and Warrant Purchase Agreement dated as of December 17, 2002, between
Registrant and the Purchasers set forth therein. (5)
|
|
10.14
|
|
Warrant
to Purchase Shares of common stock of Glowpoint, Inc. (6)
|
|
10.15
|
|
Common
Stock Purchase Agreement between Registrant and the Purchasers Listed
on
Exhibit A. (6)
|
|
10.16
|
|
Placement
Agent Agreement, dated August 4, 2003, between Registrant and Burnham
Hill
Partners, as amended as of January 29, 2004. (11)
|
|
10.17
|
|
Form
of Class A Warrant to Purchase common stock of Registrant. (8)
|
10.18
|
|
Form
of Class B Warrant to Purchase common stock of Registrant. (8)
|
|
10.19
|
|
Form
of Warrant to Purchase Common Stock, dated August 8, 2001. (9)
|
|
10.20
|
|
Form
of Warrant to Purchase Common Stock, dated August 8, 2001. (9)
|
|
10.21
|
|
Form
of Warrant to Purchase Common Stock, dated June 14, 2000. (10)
|
|
10.22
|
|
Warrant
to Purchase common stock issued to JPMorgan Chase on March 6, 2003.
(7)
|
|
10.23
|
|
Employment
Agreement with Joseph Laezza, dated as of March 11, 2004. (11)
|
|
10.24
|
|
Amended
and Restated Employment Agreement with Michael Brandofino, dated
July 1,
2004. (12)
|
|
10.25
|
|
Form
of Common Stock Purchase Agreement, dated March 14, 2005. (13)
|
|
10.26
|
|
Form
of Warrant to Purchase Common Stock, dated March 14, 2005. (13)
|
|
10.27
|
|
Form
of Exchange Agreement, dated March 14, 2005. (14)
|
|
10.28
|
Placement
Agent Agreement, dated March 19, 2005, between Registrant and Burnham
Hill
Partners. (20)
|
||
10.29
|
|
Settlement
and Release Agreement between Glowpoint, Inc. and Gores Technology
Group,
dated March 4, 2005. (14)
|
51
10.30
|
Third
Amended and Restated Employment Agreement with Richard Reiss, dated
December 31, 2005. (15)
|
|
10.31
|
Separation
Agreement with Rod Dorsey, dated March 28, 2006. (20)
|
|
10.32
|
|
Separation
Agreement with Stuart Gold, dated as of April 5, 2006. (20)
|
10.33
|
|
Separation
Agreement with David C. Trachtenberg dated as of April 6, 2006.
(20)
|
10.34
|
|
Note
and Warrant Purchase Agreement, dated as of March 31, 2006, between
Glowpoint and the purchasers set forth therein, which reflects the
same
terms as the Note and Warrant Purchase Agreement, dated April 12,
2006.
(16)
|
10.35
|
|
10%
Senior Secured Convertible Promissory Note, dated as of March 31,
2006,
which reflects the same terms as the 10% Senior Secured Convertible
Promissory Note, dated April 12, 2006. (16)
|
10.36
|
|
Form
of Series A Warrant to Purchase Common Stock dated as of March 31,
2006,
which reflects the same terms as the Series A Warrant to Purchase
Common
Stock, dated April 12, 2006. (16)
|
10.37
|
|
Form
of Series B Warrant to Purchase Common Stock dated as of March 31,
2006,
which reflects the same terms as the Series B Warrant to Purchase
Common
Stock, dated April 12, 2006. (16)
|
10.38
|
Registration
Rights Agreement, dated as of March 31, 2006, between Glowpoint and
the
purchasers set forth therein, which reflects the same terms as the
Registration Rights Agreement, dated April 12, 2006. (16)
|
|
10.39
|
Security
Agreement, dated as of March 31, 2006, between Glowpoint and the
secured
parties set forth therein, to which a joinder agreement was executed
on
April 12, 2006. (16)
|
|
10.40
|
|
Form
of Placement Agent Warrant, dated as of March 31, 2006, between Glowpoint
and the parties set forth therein. (16)
|
10.41
|
|
Employment
Agreement with David W. Robinson, dated May 1, 2006 (17)
|
10.42
|
|
Form
of Restricted Stock Award Agreement with Schedule of Recently Reported
Restricted Stock Awards. (20)
|
10.43
|
|
Employment
Agreement with Edwin F. Heinen, dated January 30, 2007. (18)
|
10.44
|
|
Employment
Agreement Amendment with David W. Robinson, dated April 24, 2007.
(19)
|
10.45
|
|
Employment
Agreement Amendment with Edwin F. Heinen, dated April 24, 2007.
(19)
|
10.46
|
Employment
Agreement Amendment with Michael Brandofino, dated May 15, 2007
(19)
|
|
10.47
|
|
Employment
Agreement Amendment with Joseph Laezza, dated May 15, 2007. (19)
|
21.1
|
|
Subsidiaries
of Glowpoint, Inc. (20)
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
(20)
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
(20)
|
|
32.1
|
|
Section
1350 Certification of the Chief Executive Officer. (20)
|
32.2
|
Section
1350 Certification of the Chief Financial Officer. (20)
|
|
|
_______________________
|
|
(1)
|
Filed
as an appendix to View Tech, Inc.’s Registration Statement on Form S-4
(File No. 333-95145) and incorporated herein by
reference.
|
(2)
|
Filed
as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2000, and incorporated herein by
reference.
|
(3)
|
Filed
as an exhibit to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 15, 2002, and incorporated
herein by reference.
|
(4)
|
Filed
as an exhibit to Registrant’s Registration Statement on Form SB-2
(Registration No. 333-21069), and incorporated herein by reference.
|
(5)
|
Filed
as an exhibit to Registrant’s Current Report on Form 8-K, dated December
23, 2002, and incorporated herein by reference.
|
(6)
|
Filed
as an exhibit to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 26, 2004, and incorporated
herein by reference.
|
(7)
|
Filed
as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2002, and incorporated herein by reference.
|
(8)
|
Filed
as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2001, and incorporated herein by reference.
|
52
(9)
|
Filed
as an exhibit to Registrant’s Registration Statement on Form S-3
(Registration No. 333-69432) and incorporated herein by reference.
|
(10)
|
Filed
as an exhibit to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on June 10, 2000, and incorporated
herein by reference.
|
(11)
|
Filed
as an Exhibit to Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2003, and incorporated herein by reference.
|
(12)
|
Filed
as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2004, and incorporated herein by reference.
|
(13)
|
Filed
as an exhibit to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 14, 2005, and incorporated
herein by reference.
|
(14)
|
Filed
as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2004, and incorporated herein by reference.
|
(15)
|
Filed
as an exhibit to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 21, 2005, and incorporated
herein by reference.
|
(16)
|
Filed
as an exhibit to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on April 4, 2006, and incorporated
herein by reference.
|
(17)
|
Filed
as an exhibit to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 5, 2006, and incorporated
herein
by reference.
|
(18)
|
Filed
as an exhibit to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 2, 2007, and incorporated
herein by reference.
|
(19)
|
Filed
as an exhibit to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 21, 2007, and incorporated
herein by reference.
|
(20)
|
Filed
herewith.
|
53
Signatures
Pursuant
to the requirement of section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GLOWPOINT, INC. | ||
|
|
|
June 6, 2007 | By: | /s/ Michael Brandofino |
Michael
Brandofino
Chief
Executive Officer
|
POWER
OF ATTORNEY
KNOW
ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Michael Brandofino and Edwin F. Heinen jointly and
severally, his attorneys-in-fact, each with power of substitution, for him
in
any and all capacities, to sign any amendments to this Report on Form 10-K,
and
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant as of
this 6th day of June 2007 in the capacities indicated.
/s/
Michael Brandofino
|
Chief
Executive Officer (Principal Executive Officer)
|
||
Michael
Brandofino
|
/s/
Edwin F. Heinen
|
Chief
Financial Officer (Principal Financial Officer)
|
||
Edwin
F. Heinen
|
/s/
Aziz Ahmad
|
Director
|
||
Aziz
Ahmad
|
/s/
Bami Bastani
|
Director
|
||
Bami
Bastani
|
/s/
Dean Hiltzik
|
Director
|
||
Dean
Hiltzik
|
/s/
James Lusk
|
Director
|
||
James
Lusk
|
/s/
Richard Reiss
|
Director
|
||
Richard
Reiss
|
/s/
Peter Rust
|
Director
|
||
Peter
Rust
|
54
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Stockholders of Glowpoint, Inc.
We
have
audited the accompanying consolidated balance sheet of Glowpoint, Inc and
Subsidiaries (the ”Company”) as of December 31, 2006, and the related
consolidated statements of operations, stockholders’ deficit and cash flows for
the year then ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of their internal control over
financial reporting. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Glowpoint, Inc. and
Subsidiaries as of December 31, 2006, and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of
America.
As
discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for stock-based compensation upon the adoption
of Statement of Financial Accounting Standard No. 123 (R), “Share-Based
Payment”.
The
accompanying financial statements have been prepared assuming Glowpoint, Inc.
and Subsidiaries will continue as a going concern. As more fully described
in
Note 2, the Company has a working capital deficiency and recurring net losses,
and is in the process of seeking additional capital. The Company has not yet
secured sufficient capital to fund its operations. These conditions raise
substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that may result from the
outcome of this uncertainty.
AMPER,
POLITZINER & MATTIA, P.C.
|
||
|
|
May
30,
2007
Edison,
New Jersey
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Stockholders
Glowpoint,
Inc.
We
have
audited the accompanying consolidated balance sheets of Glowpoint, Inc. and
subsidiaries as of December 31, 2005 and the related consolidated statements
of
operations, stockholders’ equity (capital deficit), and cash flows for the years
ended December 31, 2005 and 2004. These consolidated financial statements
are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Glowpoint, Inc.
and
subsidiaries as of December 31, 2005 and the consolidated results of their
operations and their consolidated cash flows for the years ended December
31,
2005 and 2004 in conformity with accounting principles generally accepted
in the
United States of America.
Eisner
LLP
Florham
Park, New Jersey
February
23, 2007
F-2
GLOWPOINT,
INC.
CONSOLIDATED
BALANCE SHEETS
December
31, 2006 and 2005
(In
thousands, except par value)
Year
Ended December 31,
|
|||||||
2006
|
2005
|
||||||
ASSETS
|
|||||||
Current
assets:
|
|||||||
Cash
and cash equivalents
|
$
|
2,153
|
$
|
2,023
|
|||
Accounts
receivable, net of allowance for doubtful accounts of $121 and $145;
respectively
|
2,748
|
2,171
|
|||||
Prepaid
expenses and other current assets
|
327
|
510
|
|||||
Total
current assets
|
5,228
|
4,704
|
|||||
Property
and equipment, net
|
2,762
|
4,117
|
|||||
Other
assets
|
403
|
216
|
|||||
Total
assets
|
$
|
8,393
|
$
|
9,037
|
|||
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|||||||
Current
liabilities:
|
|||||||
Accounts
payable
|
$
|
1,957
|
$
|
1,586
|
|||
Accrued
expenses
|
2,008
|
1,961
|
|||||
Accrued
sales taxes and regulatory fees
|
4,216
|
3,063
|
|||||
Current
portion of derivative financial instruments
|
4,301
|
1,246
|
|||||
10%
Convertible notes, net of discount of $2,280
|
4,326
|
—
|
|||||
Deferred
revenue
|
288
|
374
|
|||||
Total
current liabilities
|
17,096
|
8,230
|
|||||
Long
term liabilities:
|
|||||||
Derivative
financial instruments, less current portion
|
—
|
324
|
|||||
Total
liabilities
|
17,096
|
8,554
|
|||||
Preferred
stock, $.0001 par value; 5,000 shares authorized and redeemable;
0.120
Series B shares issued and outstanding, (stated value of $2,888;
liquidation value of $3,735 and $3,388), respectively
|
2,888
|
2,888
|
|||||
Commitments
and contingencies
|
|||||||
Stockholders’
deficit:
|
|||||||
Common
stock, $.0001 par value; 100,000 shares authorized; 46,390 shares
issued
and 46,086 shares issued and issuable; 46,350 and 46,046 shares
outstanding, respectively
|
5
|
5
|
|||||
Additional
paid-in capital
|
161,267
|
160,219
|
|||||
Accumulated
deficit
|
(172,623
|
)
|
(161,833
|
)
|
|||
Deferred
compensation
|
—
|
(556
|
)
|
||||
(11,351
|
)
|
(2,165
|
)
|
||||
Less:
Treasury stock, 40 common shares at cost
|
(240
|
)
|
(240
|
)
|
|||
Total
stockholders’ deficit
|
(11,591
|
)
|
(2,405
|
)
|
|||
Total
liabilities and stockholders’ deficit
|
$
|
8,393
|
$
|
9,037
|
See
accompanying notes to consolidated financial statements.
F-3
GLOWPOINT,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
Ended December 31, 2006, 2005 and 2004
(In
thousands, except per share data)
Year
ended December 31,
|
||||||||||
2006
|
2005
|
2004
|
||||||||
Revenue
|
$
|
19,511
|
$
|
17,735
|
$
|
15,867
|
||||
Cost
of revenue
|
13,583
|
14,984
|
16,019
|
|||||||
Gross
margin (loss)
|
5,928
|
2,751
|
(152
|
)
|
||||||
Operating
expenses:
|
||||||||||
Research
and development
|
816
|
1,242
|
1,078
|
|||||||
Sales
and marketing
|
2,570
|
4,028
|
3,265
|
|||||||
General
and administrative
|
11,049
|
14,120
|
12,598
|
|||||||
Total
operating expenses
|
14,435
|
19,390
|
16,941
|
|||||||
Loss
from operations
|
(8,507
|
)
|
(16,639
|
)
|
(17,093
|
)
|
||||
Other
expense (income):
|
||||||||||
Interest
expense
|
3,969
|
3
|
63
|
|||||||
Amortization
of deferred financing costs
|
389
|
—
|
448
|
|||||||
(Decrease)
increase in fair value of derivative financial instruments
|
(1,992
|
)
|
271
|
134
|
||||||
Interest
income
|
(83
|
)
|
(100
|
)
|
(92
|
)
|
||||
Gain
on settlement with Gores
|
—
|
(379
|
)
|
—
|
||||||
Other
income
|
—
|
—
|
(5,000
|
)
|
||||||
Amortization
of discount on subordinated debentures
|
—
|
—
|
2,650
|
|||||||
Gain
on marketable equity securities
|
—
|
—
|
(132
|
)
|
||||||
Loss
on exchange of debt
|
—
|
—
|
743
|
|||||||
Total
other expense (income), net
|
2,283
|
(205
|
)
|
(1,186
|
)
|
|||||
Net
loss
|
(10,790
|
)
|
(16,434
|
)
|
(15,907
|
)
|
||||
Preferred
stock dividends
|
(347
|
)
|
(315
|
)
|
(
369
|
)
|
||||
Preferred
stock deemed dividends
|
—
|
(1,282
|
)
|
—
|
||||||
Net
loss attributable to common stockholders
|
$
|
(11,137
|
)
|
$
|
(18,031
|
)
|
$
|
(16,276
|
)
|
|
Net
loss attributable to common stockholders per share:
|
||||||||||
Basic
and diluted
|
$
|
(0.24
|
)
|
$
|
(0.41
|
)
|
$
|
(0.45
|
)
|
|
Weighted
average number of common shares:
|
||||||||||
Basic
and diluted
|
46,242
|
44,348
|
36,416
|
See
accompanying notes to consolidated financial statements.
F-4
GLOWPOINT,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
Years
Ended December 31, 2006, 2005 and 2004
(In
thousands)
|
|
Common
Stock
|
|
Additional
Paid In
|
|
Accumulated
|
|
Comprehensive
|
|
Deferred
|
|
Treasury
Stock
|
|
|
|
|||||||||||||
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Income
|
|
Comp.
|
|
Shares
|
|
Amount
|
|
Total
|
|
|||||||||
Balance
at January 1, 2004
|
|
|
30,555
|
|
$
|
3
|
|
$
|
135,730
|
|
$
|
(129,492
|
)
|
$
|
78
|
|
$
|
(1,498
|
)
|
|
40
|
|
$
|
(240
|
)
|
$
|
4,581
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,907
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,907
|
)
|
Reversal
of unrealized loss upon sale of marketable securities
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(78
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(78
|
)
|
Comprehensive
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,985
|
)
|
Deferred
compensation related to the issuance of restricted stock (including
80
shares issuable which were issued in 2005)
|
|
|
270
|
|
|
—
|
|
|
511
|
|
|
—
|
|
|
—
|
|
|
(511
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization
of deferred compensation from the issuance of restricted
stock
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
699
|
|
|
—
|
|
|
—
|
|
|
699
|
|
Forfeiture
of deferred stock compensation
|
|
|
(40
|
)
|
|
—
|
|
|
(134
|
)
|
|
—
|
|
|
—
|
|
|
134
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Extension
of expiration date of stock options services
|
|
|
—
|
|
|
—
|
|
|
67
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
67
|
|
Issuance
of stock options for consulting services
|
|
|
—
|
|
|
—
|
|
|
32
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32
|
|
Exercise
of stock options
|
|
|
782
|
|
|
—
|
|
|
570
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
570
|
|
Exchange
of subordinated debentures for preferred stock, common stock and
modification of warrants
|
|
|
250
|
|
|
—
|
|
|
743
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
743
|
|
Issuance
of common stock and warrants in connection with private
placement
|
|
|
6,100
|
|
|
1
|
|
|
11,315
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,316
|
|
Issuance
of shares in lieu of interest on subordinated debentures
|
|
|
18
|
|
|
—
|
|
|
45
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
45
|
|
Preferred
stock dividends
|
|
|
—
|
|
|
—
|
|
|
(369
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(369
|
)
|
Balance
at December 31, 2004
|
|
|
37,935
|
|
|
4
|
|
|
148,510
|
|
|
(145,399
|
)
|
|
—
|
|
|
(1,176
|
)
|
|
40
|
|
|
(240
|
)
|
|
1,699
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,434
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,434
|
)
|
Comprehensive
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,434
|
)
|
Amortization
of deferred compensation from the issuance of restricted
stock
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
620
|
|
|
—
|
|
|
—
|
|
|
620
|
|
Compensation
from extension of stock options
|
|
|
—
|
|
|
—
|
|
|
48
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
48
|
|
Issuance
and extension of warrants for consulting services
|
|
|
—
|
|
|
—
|
|
|
196
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
196
|
|
Issuance
of stock options for consulting services
|
|
|
—
|
|
|
—
|
|
|
148
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
148
|
|
Exercise
of stock options
|
|
|
50
|
|
|
—
|
|
|
74
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
74
|
|
Exchange
of subordinated debentures for preferred stock, common stock and
modification of warrants
|
|
|
1,334
|
|
|
—
|
|
|
2,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,000
|
|
Issuance
of common stock and warrants in connection with private
placement
|
|
|
6,767
|
|
|
1
|
|
|
9,375
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,376
|
|
Fair
value of inducement to convert preferred stock and accrued dividends
of
$183
|
|
|
—
|
|
|
—
|
|
|
1,350
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,350
|
|
Deemed
dividend for inducement to convert preferred stock
|
|
|
—
|
|
|
—
|
|
|
(1,167
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,167
|
)
|
Preferred
stock dividends
|
|
|
—
|
|
|
—
|
|
|
(315
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(315
|
)
|
Balance
at December 31, 2005
|
|
|
46,086
|
|
|
5
|
|
|
160,219
|
|
|
(161,833
|
)
|
|
—
|
|
|
(556
|
)
|
|
40
|
|
|
(240
|
)
|
|
(2,405
|
)
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,790
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,790
|
)
|
Comprehensive
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,790
|
)
|
Reclassification
of deferred compensation
|
|
|
—
|
|
|
—
|
|
|
(556
|
)
|
|
—
|
|
|
—
|
|
|
556
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance
of restricted stock
|
|
|
364
|
|
|
—
|
|
|
354
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
354
|
|
Stock-based
compensation
|
|
|
—
|
|
|
—
|
|
|
473
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
473
|
|
Restricted
stock compensation and modification of option terms related to
restructuring
|
|
|
—
|
|
|
—
|
|
|
217
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
217
|
|
Forfeiture
of restricted stock
|
|
|
(60
|
)
|
|
—
|
|
|
(45
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(45
|
)
|
Placement
agent warrants - 10% Notes
|
|
|
—
|
|
|
—
|
|
|
296
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
296
|
|
Warrant
price and term modification - 10% Notes, net of financing costs
of
$110
|
|
|
—
|
|
|
—
|
|
|
656
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
656
|
|
Preferred
stock dividends
|
|
|
—
|
|
|
—
|
|
|
(347
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(347
|
)
|
Balance
at December 31, 2006
|
|
|
46,390
|
|
$
|
5
|
|
$
|
161,267
|
|
$
|
(172,623
|
)
|
$
|
—
|
|
$
|
—
|
|
|
40
|
|
$
|
(240
|
)
|
$
|
(11,591
|
)
|
See
accompanying notes to consolidated financial statements.
F-5
GLOWPOINT,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended December 31, 2006, 2005 and 2004
(In
thousands)
Year
Ended December 31,
|
||||||||||
2006
|
2005
|
2004
|
||||||||
Cash
flows from Operating Activities:
|
||||||||||
Net
loss
|
$
|
(10,790
|
)
|
$
|
(16,434
|
)
|
$
|
(15,907
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||
Depreciation
and amortization
|
1,947
|
2,294
|
2,236
|
|||||||
Amortization
of deferred financing costs
|
389
|
—
|
448
|
|||||||
Accretion
of discount on subordinated debentures
|
—
|
—
|
2,650
|
|||||||
Beneficial
conversion feature for 10% Notes
|
1,850
|
—
|
—
|
|||||||
Accretion
of discount on 10% Notes
|
1,359
|
—
|
—
|
|||||||
Loss
on exchange of debt
|
—
|
—
|
743
|
|||||||
Loss
on disposal of equipment
|
169
|
—
|
—
|
|||||||
Other
expense recognized for the (decrease) increase in the estimated fair
value
of derivative financial instruments
|
(1,992
|
)
|
271
|
134
|
||||||
Common
stock issued for interest on convertible debentures
|
—
|
—
|
45
|
|||||||
Gain
on settlement with Gores
|
—
|
(379
|
)
|
—
|
||||||
Stock-based
compensation
|
781
|
1,012
|
798
|
|||||||
Other
|
—
|
—
|
(78
|
)
|
||||||
Increase
(decrease) in cash attributable to changes in assets and liabilities,
net
of effects of acquisition:
|
||||||||||
Accounts
receivable.
|
(577
|
)
|
(299
|
)
|
496
|
|||||
Prepaid
expenses and other current assets
|
183
|
44
|
415
|
|||||||
Other
assets
|
205
|
42
|
(195
|
)
|
||||||
Accounts
payable
|
371
|
(1,398
|
)
|
616
|
||||||
Accrued
expenses, sales taxes and regulatory fees.
|
1,497
|
1,152
|
1,580
|
|||||||
Deferred
revenue
|
(86
|
)
|
109
|
46
|
||||||
Receivable
from Gores Technology Group
|
—
|
—
|
(5,539
|
)
|
||||||
Accrued
stock-based compensation.
|
—
|
(82
|
)
|
82
|
||||||
Net
cash used in operating activities.
|
(4,694
|
)
|
(13,668
|
)
|
(11,430
|
)
|
||||
Cash
flows from Investing Activities:
|
||||||||||
Proceeds
from discontinued operations, including escrowed cash
|
—
|
3,087
|
—
|
|||||||
Purchases
of property, equipment and leasehold improvements
|
(761
|
)
|
(1,308
|
)
|
(1,097
|
)
|
||||
Net
cash (used in) provided by investing activities
|
(761
|
)
|
1,779
|
(1,097
|
)
|
|||||
Cash
flows from Financing Activities:
|
||||||||||
Proceeds
from issuance of 10% Notes, net of financing costs of $595
|
5,585
|
—
|
—
|
|||||||
Proceeds
from issuance of common stock and warrants
|
—
|
9,376
|
11,316
|
|||||||
Proceeds
attributed to derivative financial instruments
|
—
|
—
|
1,164
|
|||||||
Proceeds
from exercise of stock options
|
—
|
74
|
570
|
|||||||
Payments
on capital lease obligations
|
—
|
(35
|
)
|
(131
|
)
|
|||||
Net
cash provided by financing activities
|
5,585
|
9,415
|
12,919
|
|||||||
Increase
(decrease) in cash and cash equivalents
|
130
|
(2,474
|
)
|
392
|
||||||
Cash
and cash equivalents at beginning of year
|
2,023
|
4,497
|
4,105
|
|||||||
Cash
and cash equivalents at end of year
|
$
|
2,153
|
$
|
2,023
|
$
|
4,497
|
F-6
Year
Ended December 31,
|
||||||||||
2006
|
2005
|
2004
|
||||||||
Supplement
disclosures of cash flow information:
|
||||||||||
Cash
paid during the period for interest
|
$
|
0
|
$
|
3
|
$
|
63
|
||||
Non-cash
investing and financing:
|
||||||||||
Preferred
stock dividends
|
$
|
347
|
$
|
315
|
$
|
369
|
||||
Additional
10% Notes issued as payment for interest
|
483
|
—
|
—
|
|||||||
Deferred
financing costs for 10% Notes incurred by issuance of placement
agent
warrants
|
296
|
—
|
—
|
|||||||
Preferred
stock deemed dividends
|
—
|
1,282
|
—
|
|||||||
Conversion
of Series B convertible preferred stock to common stock
|
—
|
2,000
|
—
|
|||||||
Equity
issued as consideration for accrued preferred stock
dividends
|
—
|
183
|
—
|
|||||||
Issuance
of Series B convertible preferred stock in exchange for convertible
debentures
|
—
|
—
|
4,888
|
|||||||
Deferred
compensation and additional paid-in capital recorded for the issuance
of
restricted
common stock
|
—
|
—
|
511
|
|||||||
Reduction
in deferred compensation and additional paid-in capital for the
forfeiture
of restricted common stock
|
—
|
—
|
134
|
See
accompanying notes to consolidated financial statements.
F-7
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006, 2005 and 2004
Note
1 - The Business
Glowpoint,
Inc. ("Glowpoint" or "we" or "us"), a Delaware corporation, is a premiere
broadcast-quality, IP (Internet Protocol)-based managed video services provider.
We offer a vast array of managed video services, including video application
services, managed network services, IP and ISDN videoconferencing services,
multi-point conferencing (bridging), technology hosting and management, and
professional services. We provide these services to a wide variety of companies,
from large enterprises and governmental entities to small and medium-sized
businesses. Glowpoint is exclusively focused on high quality two-way video
communications and has been supporting millions of video calls since its launch
in 2000. We have bundled some of our managed services to offer video
communication solutions for broadcast/media content acquisition and for video
call center applications. Recently, with the advent of HD (High Definition)
Telepresence solutions, we have combined various components of our features
and
services into a comprehensive “white glove” service offering that can support
any of the telepresence solutions on the market today. Prior to 2004, Glowpoint,
then known as Wire One Technologies, Inc., sold substantially all of the assets
of its video solutions (VS) equipment sales business to an affiliate of Gores
Technology Group (“Gores”) and accordingly, the accompanying consolidated
financial statements do not include such operations (see Note 3). Our services
include IP-based and ISDN-based videoconferencing services, which are provided
principally on a subscription basis, and managed bridging conferencing services
for multi-point video and audio communications among three or more participants.
We also provide hosting, IP-based broadcasting and event services.
In
April
2004, we entered into an agreement with Tandberg, Inc., a wholly owned
subsidiary of Tandberg ASA, a global provider of visual communications
solutions. As part of the agreement, we acquired for $1.00 certain assets and
the customer base of Tandberg owned Network Systems LLC (successor to the
NuVision Companies). Network Systems customers, primarily ISDN-based video
users, obtained immediate access to our video bridging and webcasting services.
As part of the agreement, Tandberg’s corporate use of IP video communications
and other telecommunications services, formerly purchased through Network
Systems, is being provided exclusively by us under a multi-year agreement.
In
addition, we assumed contractual commitments with AT&T, MCI and Sprint from
Network Systems, which were subsequently consolidated into new agreements with
these carriers. For accounting purposes, such commitments did not result in
any
additional asset or liability recognition. The purchase price for this
transaction was $1.00 and was accounted for following purchase accounting under
Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business
Combinations”.
The
fair value of tangible assets acquired and liabilities assumed were nominal.
Accordingly, we did not record any value of intangible assets acquired. Results
of operations of the acquired business are included in the accompanying
consolidated financial statements from April 20, 2004, the date of acquisition.
The following unaudited proforma information for the year ended December 31,
2004 gives effect to the acquisition as if it had occurred on January 1, 2004
(in thousands, except per share amounts):
Revenue
|
$
|
16,857
|
||
Gross
margin
|
361
|
|||
Net
loss
|
(15,602
|
)
|
||
Net
loss attributable to common stockholders
|
(15,971
|
)
|
||
Net
loss attributable to common stockholders per share
|
$
|
(0.44
|
)
|
F-8
Note
2 - Basis of Presentation, Liquidity and Summary of Significant Accounting
Policies
Going
concern
Our
consolidated financial statements have been prepared assuming that we will
continue as a going concern. We have incurred recurring operating losses and
negative operating cash flows since our inception including a net loss
attributable to common stockholders of $11,137,000 and negative operating cash
flows of $4,694,000 for the year ended December 31, 2006. At December 31, 2006
we had cash and cash equivalents of $2,153,000, a working capital deficit of
$11,868,000 and an accumulated deficit of $172,623,000. These factors raise
substantial doubt as to our ability to continue as a going concern. In 2006
we
commenced a restructuring of the current business (see Note 18). We raised
capital in March and April 2006, but continue to sustain losses and negative
operating cash flows. Assuming we realize all of the savings from our
restructured operating activities, assuming we are able to negotiate favorable
terms with the authorities regarding our sales and use taxes and regulatory
fees
and assuming we are able to renegotiate or refinance the 10% Notes and the
10%
Interest Notes (see Note 9 to the consolidated financial statements for further
information), we believe that our available capital as of December 31, 2006
will
enable us to continue as a going concern during 2007. There are no
assurances, however, that those assumptions will be realized. The
accompanying financial statements do not include any adjustments that might
result from this uncertainty.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Glowpoint and our
wholly-owned subsidiaries, GP Communications LLC, AllComm Products Corporation,
and VTC Resources, Inc. All material inter-company balances and transactions
have been eliminated in consolidation.
Reclassifications
Certain
amounts from 2005 and 2004 have been reclassified to conform to the 2006
presentation.
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 continued
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, sales and use tax obligations, regulatory fees and related
penalties and interest, the estimated life of customer relationships, the
estimated lives of property and equipment and the fair value of derivative
financial instruments.
Allowance
for Doubtful Accounts
We
perform ongoing credit evaluations of our customers. 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 certain
percentages of 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.
F-9
Changes
to our allowance for doubtful accounts during the three years ended December
31,
2006 are summarized as follows (in thousands):
2006
|
2005
|
2004
|
||||||||
Balance
at beginning of year
|
$
|
145
|
$
|
305
|
$
|
190
|
||||
Charged
to expense
|
34
|
129
|
412
|
|||||||
Deductions
|
(58
|
)
|
(289
|
)
|
(297
|
)
|
||||
Balance
at end of year
|
$
|
121
|
$
|
145
|
$
|
305
|
Revenue
Recognition
We
recognize subscription revenue when the related services have been performed.
Revenues billed in advance are deferred until the revenue has been earned.
Other
service revenue, including amounts related to surcharges charged by our
carriers, related to the Glowpoint managed network service and the multi-point
video and audio bridging services are recognized as service is provided. As
the
non-refundable, upfront activation fees charged to the subscribers do not meet
the criteria as a separate unit of accounting, they are deferred and recognized
over the twenty-four month period estimated life of the customer relationship.
Revenues derived from other sources are recognized when services are provided
or
events occur.
Cash
and Cash Equivalents
We
consider all highly liquid debt instruments with an original maturity of three
months or less when purchased to be cash equivalents.
Concentration
of Credit Risk
Financial
instruments that potentially subject us to significant concentrations of credit
risk consist principally of cash and cash equivalents, and trade accounts
receivable. We place our cash and cash equivalents primarily in commercial
checking accounts and money market funds. Commercial bank balances may from
time
to time exceed federal insurance limits; money market funds are
uninsured.
Property
and Equipment
Property
and equipment are stated at cost and are depreciated over the estimated useful
lives of the related assets, which range from three to five years. Leasehold
improvements are amortized over the shorter of either the asset's useful life
or
the related lease term. Depreciation is computed on the straight-line method
for
financial reporting purposes. Property and equipment include fixed assets
subject to capital leases which are depreciated over the life of the respective
asset.
Long-Lived
Assets
We
evaluate impairment losses on long-lived assets used in operations, primarily
fixed assets, whenever events and circumstances indicate that the carrying
value
of an asset may not be recoverable in accordance with SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets".
For
purposes of evaluating the recoverability of long-lived assets, the undiscounted
cash flows estimated to be generated by those assets would be compared to the
carrying amounts of those assets. If and when the carrying values of the assets
exceed their fair values, the related assets will be written down to fair
value.
Income
Taxes
We
use
the asset and liability method to determine our income tax expense or benefit.
Deferred tax assets and liabilities are computed based on temporary differences
between the financial reporting and tax bases of assets and liabilities and
are
measured using the enacted tax rates that are expected to be in effect when
the
differences are expected to recovered or settled. Any resulting net deferred
tax
assets are evaluated for recoverability and, accordingly, a valuation allowance
is provided when it is more likely than not that all or some portion of the
deferred tax asset will not be realized.
F-10
Earnings
(Loss) per Share
Basic
loss per share is calculated by dividing net loss attributable to common
stockholders by the weighted average number of shares of common shares
outstanding during the period. Diluted loss per share for 2006, 2005 and 2004
is
the same as basic loss per share. Potential shares of common stock associated
with 19,849,000, 14,752,000 and 12,566,000, respectively, outstanding options
and warrants, 1,875,000, 1,301,000 and 2,080,000, respectively, shares issuable
upon conversion of our Series B convertible preferred stock and 13,214,000,
0
and 0, respectively, shares issuable upon conversion of the March and April
2006
10% Senior Secured Convertible Notes have been excluded from the calculation
of
diluted loss per share because the effects would be anti-dilutive.
Stock-based
Compensation
We
periodically grant stock options to employees and directors in accordance with
the provisions of our stock option plans, with the exercise price of the stock
options being set at the closing market price of the common stock on the date
of
grant. Effective January 1, 2006, the Company adopted Statement of Financial
Standards No. 123R, Share-Based
Payment
(“SFAS
No. 123R”) which requires that compensation cost relating to share-based payment
transactions be recognized as an expense in the financial statements and that
measurement of that cost be based on the estimated fair value of the equity
or
liability instrument issued. Under SFAS No. 123R, the pro forma disclosures
previously permitted under SFAS No. 123, Accounting
for Stock-Based Compensation
(“SFAS
No. 123”) are no longer an alternative to financial statement recognition. SFAS
No. 123R also requires that forfeitures be estimated and recorded over the
vesting period of the instrument.
Prior
to
January 1, 2006, as permitted by SFAS No. 123, the Company accounted for
share-based payments to employees using the intrinsic value method under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, Accounting
for Stock Issued to Employees
(“APB
25”), and related interpretations. Under this method, compensation cost is
measured as the amount by which the market price of the underlying stock exceeds
the exercise price of the stock option at the date at which both the number
of
options granted and the exercise price are known. As previously permitted by
SFAS No. 123, the Company had elected to apply the intrinsic-value-based method
of accounting under APB No. 25 described above, and adopted only the disclosure
requirements of SFAS No. 123 which were similar in most respects to SFAS No.
123R, with the exception of option forfeitures, which, under SFAS No. 123,
had
been accounted for as they occurred.
The
Company has adopted SFAS No. 123R using the modified prospective method which
requires that share-based expense recognized includes: (a) earned share-based
expense for all awards granted prior to, but not yet vested, as of the adoption
date and (b) earned share-based expense for all awards granted subsequent to
the
adoption date. Since the modified prospective application method is being used,
there is no cumulative effect adjustment upon the adoption of SFAS No. 123R,
and
the Company’s December 31, 2005 financial statements do not reflect any restated
amounts. No modifications were made to outstanding options prior to the adoption
of SFAS No. 123R, and the Company did not change the quantity, type or payment
arrangements of any share-based payments programs.
Since
the
market price exceeded the exercise price for options outstanding and exercisable
at December 31, 2006 there is no intrinsic value. The total intrinsic value
of
options exercised during the year ended December 31, 2006 was $0.
The
remaining unrecognized stock-based compensation expense at December 31, 2006
was
$358,000.
The
Company uses the same valuation methodologies and assumptions in estimating
the
fair value of options under both SFAS No. 123R and the pro forma disclosures
under SFAS No. 123.
Stock
options or warrants issued in return for services rendered by non-employees
are
accounted for using the fair value based method. The following table illustrates
the effect on net loss attributable to common shareholders and net loss per
share for the years ended December 31, 2005 and 2004 if the fair value based
method using the Black-Scholes model at the grant date had been applied to
all
awards: (in thousands except per share data):
2005
|
2004
|
||||||
Net
loss attributable to common stockholders, as reported
|
$
|
(18,031
|
)
|
$
|
(16,276
|
)
|
|
Add:
stock-based employee compensation expense included in reported net
loss.
|
668
|
766
|
|||||
Deduct:
total stock-based employee compensation expense determined under
the fair
value based method
|
(1,412
|
)
|
(2,010
|
)
|
|||
Pro
forma net loss attributable to common stockholders
|
$
|
(18,775
|
)
|
$
|
(
17,520
|
)
|
|
Net
loss attributable to common stockholders per share:
|
|||||||
Basic
and diluted - as reported herein
|
$
|
(0.41
|
)
|
$
|
(0.44
|
)
|
|
Basic
and diluted - pro forma
|
$
|
(0.42
|
)
|
$
|
(0.48
|
)
|
F-11
The
pro
forma effect of applying SFAS No. 123R may not be representative of the effect
on reported net income in future years because options vest over several years
and varying amounts are generally made each year. See Note 13 for more
information on the Company’s stock-based compensation.
Fair
value of Financial Instruments
Financial
instruments reported in our consolidated balance sheet consist of cash and
cash
equivalents, March and April 2006 10% senior secured convertible notes, accounts
receivable and accounts payable, the carrying value of which approximated fair
value at December 31, 2006 and 2005 due to the short-term nature of these
instruments.
Derivative
Financial Instruments
The
Company’s objectives in using debt related derivative financial instruments are
to obtain the lowest cash cost source of funds within a targeted range of
variable to fixed-rate debt obligations. Derivatives are recognized in the
consolidated balance sheets at fair value based on the criteria specified in
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”.
The estimated fair value of the derivative liabilities is calculated using
the
Black-Scholes formula where applicable and such estimates are revalued at each
balance sheet date with changes in value recorded as other income or
expense.
F-12
Software
Development Costs
The
company incurs costs for the development of its “Customer Connect” software that
is to be sold, leased or licensed to third parties in the future. All software
development costs have been appropriately accounted for in accordance with
SFAS
86 “Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed”.
Software development costs are required to be capitalized when a product’s
technological feasibility has been established by completion of a detailed
program design or working model of the product, and ending when a product is
available for release to customers. The Company capitalized $49,000, $0, and
$0
of software development costs for the years ended December 31, 2006, 2005 and
2004, respectively. The Company did not capitalize any costs related to the
purchase of software and related technologies and content.
Deferred
Financing Costs
The
costs
incurred when undertaking financing activities, excluding any internal costs,
have been capitalized and are amortized on a straight-line basis over the term
of the financing. Amortization of deferred financing costs was $389,000, $0
and
$448,000 for the years ended December 31, 2006, 2005 and 2004. At December
31,
2006 and 2005, included in other assets in the accompanying consolidated balance
sheets are $392,000 and $0, respectively, of deferred financing
costs.
Recent
Accounting Pronouncements
In
February 2006, the FASB issued SFAS No. 155, "Accounting
for Certain Hybrid Financial Instruments".
SFAS
No. 155 amends SFAS No. 133 and SFAS No. 140, and addresses issues raised in
SFAS No. 133 Implementation Issue No. D1, "Application
of Statement 133 to Beneficial Interests in Securitized Financial
Assets”.
SFAS No.
155 is effective for all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15,
2006.
The Company does not believe it will be materially affected by the adoption
of
SFAS No. 155.
In
June
2006, the FASB issued FASB Interpretation Number (“FIN”) 48, "Accounting
for Uncertainty in Income Taxes—An interpretation of FASB Statement No.
109",
regarding accounting for, and disclosure of, uncertain tax positions. FIN No.
48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
"Accounting
for Income Taxes."
FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. FIN No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN No. 48 is effective for fiscal years beginning
after December 15, 2006. The Company does not believe its results of operations
and financial position will be materially affected by the adoption of FIN No.
48.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) No. 108, "Considering
the Effects on Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements".
SAB No.
108 requires registrants to quantify errors using both the income statement
method (i.e. iron curtain method) and the rollover method and requires
adjustment if either method indicates a material error. If a correction in
the
current year relating to prior year errors is material to the current year,
then
the prior year financial information needs to be corrected. A correction to
the
prior year results that are not material to those years would not require a
"restatement process" where prior financials would be amended. SAB No. 108
is
effective for fiscal years ending after November 15, 2006. We have adopted
SAB
No. 108 and it did not have a material effect on our financial position, results
of operations or cash flows.
In
September 2006, the FASB issued SFAS No. 157, "Fair
Value Measurements",
to
define fair value, establish a framework for measuring fair value in accordance
with generally accepted accounting principles, and expand disclosures about
fair
value measurements. SFAS No. 157 will be effective for fiscal years beginning
after November 15, 2007, the beginning of the Company's 2008 fiscal year. The
Company is assessing the impact the adoption of SFAS No. 157 will have on the
Company's financial position and results of operations.
F-13
In
February 2007, the FASB issued SFAS No. 159 “The
Fair Value Option for Financial Assets and Financial
Liabilities”.
SFAS
No. 159 permits entities to choose to measure many financial assets and
financial liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. SFAS
No.
159 is effective for fiscal years beginning after November 15, 2007. The
Company is currently assessing the impact of SFAS No. 159 on its financial
position and results of operations.
Note
3 - Sale of VS Business
In
September 2003, we completed the sale of all of the assets of our VS business
to
Gores pursuant to the terms of the asset purchase agreement dated as of June
10,
2003. The total consideration payable to us under the agreement was up to
$24,000,000, consisting of $21,000,000 in cash, of which $19,000,000 was payable
as of closing ($335,000 was placed in an escrow account) and $2,000,000 was
held
back by Gores to cover potential purchase price adjustments, an unsecured
$1,000,000 promissory note maturing on December 31, 2004 (bearing interest
at 5%
per annum) and up to $2,000,000 in earn-out payments based on performance of
the
assets over the two years following the closing. As partial consideration for
the purchase of assets, Gores also assumed certain liabilities related to the
VS
business, including (1) all liabilities to be paid or performed after the
closing date that arose from or out of the performance or non-performance by
Gores after the closing date of any contracts included in the assets or entered
into after June 10, 2003 and (2) our accounts payable, customer deposits,
deferred revenue and accrued liabilities related to the VS
business.
Pursuant
to the agreement, Gores agreed that, for a period of three years commencing
on
the closing date, it would not, directly or indirectly, acquire or own any
equity interest in certain of our competitors identified in the agreement.
The
agreement further provided that Gores could acquire an identified competitor
upon payment to us of a one-time fee of $5,000,000. In November 2004, Gores
acquired V-SPAN, Inc., which was one of the identified competitors.
Following
the closing of the sale to Gores, we were unable to reach agreement with Gores
on the amount, if any, of the adjustment to be made to the purchase price,
which
was based on the net assets, as defined, of the VS business sold to Gores as
of
June 30, 2003. Consequently, we entered into arbitration with Gores in July
2004, with PriceWaterhouseCoopers as the arbitrator. In January 2005, the
arbitrator concluded that the net assets of the VS business sold to Gores should
be reduced by $4,340,000.
In
March
2005, we entered into a settlement agreement with Gores, resolving the
outstanding disputes between the companies relating to the sale of the VS
business, various payables between the companies and Gores’ acquisition of
V-SPAN. Pursuant to the agreement, Gores paid us $2,750,000 and released the
$335,000, including interest thereon that was escrowed at the closing of the
asset sale. We dismissed our lawsuit against Gores relating to the V-SPAN
acquisition. We will not receive any payments under the earn-out provision
in
the agreement.
The
ultimate settlement of amounts due to/from Gores that arose subsequent to the
transaction closing date and unrelated to the sale transaction, including
$363,000 of revenues that we recognized during the year ended December 31,
2004
have been excluded from the sale transaction, and a gain from the settlement
of
these items of $379,000 has been recognized during the year ended December
31,
2005, when the settlement was reached with Gores.
The
arbitrator’s adjustment of $4,340,000 related to the correction of specific
financial reporting errors. Accordingly, the accompanying consolidated financial
statements reflect these items prior to 2004 and the gain or loss on the
transaction has been accounted for upon the closing in 2003. Pursuant to the
settlement agreement with Gores in 2005, each party was released from amounts
due to the other beyond the payment by Gores of $2,750,000 and the release
of
the escrowed cash to us. Accordingly, we recognized the gain on settlement
in
the quarter ended March 31, 2005.
Note
4 - Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets consist of the following at December 31,
2006
and 2005 (in thousands):
2006
|
2005
|
||||||
Prepaid
maintenance contracts
|
$
|
135
|
$
|
136
|
|||
Prepaid
insurance
|
—
|
95
|
|||||
Deferred
installation costs
|
53
|
63
|
|||||
Due
from vendors and tax authorities
|
34
|
134
|
|||||
Other
prepaid expenses
|
105
|
82
|
|||||
$
|
327
|
$
|
510
|
F-14
Note
5 - Property and Equipment
Property
and equipment, net consist of the following at December 31, 2006 and 2005 (in
thousands):
|
2006
|
2005
|
Estimated
Useful Life
|
|||||||
Network
equipment and software
|
$
|
7,695
|
$
|
7,849
|
3
to 5 Years
|
|||||
Computer
equipment and software
|
1,995
|
1,906
|
3
to 4 Years
|
|||||||
Bridging
equipment
|
1,828
|
1,828
|
5
Years
|
|||||||
Leasehold
improvements
|
214
|
214
|
5
Years
|
|||||||
Office
furniture and equipment
|
166
|
359
|
5
Years
|
|||||||
Videoconferencing
equipment
|
74
|
74
|
3
Years
|
|||||||
11,972
|
12,230
|
|||||||||
Accumulated
depreciation and amortization
|
(
9,210
|
)
|
(
8,113
|
)
|
||||||
$
|
2,762
|
$
|
4,117
|
Depreciation
and amortization expense was $1,947,000, $2,294,000 and $2,236,000 for the
years
ended December 31, 2006, 2005 and 2004, respectively.
Note
6 - Accrued Sales Taxes and Regulatory Fees
Accrued
sales taxes and regulatory fees are $4,216,000 and $3,063,000 as of December
31,
2006 and 2005, respectively. Included in this accrual are (i) certain estimated
sales and use taxes, regulatory fees and related penalties and interest, (ii)
a
tax obligation of a predecessor of Glowpoint and (iii) sales taxes and
regulatory fees collected from customers and to be remitted to taxing
authorities. Sales and use taxes and regulatory fees are supposed to be, or
are
routinely, collected from customers and remitted to the applicable authorities
in certain circumstances. Historically, we were not properly collecting and
remitting all such taxes and regulatory fees and, as a result, have accrued
a
liability. We used estimates when accruing our sales and use tax and regulatory
fee liability, including interest and penalties, and assumed, among other
things, various credits we expect to receive from taxing authorities and/or
our
underlying service providers. All of our tax positions are subject to audit
and
a number of taxing authorities have already scheduled audits to commence in
2007. While we believe all of our estimates and assumptions are reasonable
and
will be sustained upon audit, actual liabilities and credits may differ
significantly.
Note
7 - Accrued Expenses
Accrued
expenses consist of the following at December 31, 2006 and 2005 (in
thousands):
2006
|
2005
|
||||||
Accrued
dividends
|
$
|
847
|
$
|
501
|
|||
Accrued
compensation
|
417
|
787
|
|||||
Restructuring
costs
|
212
|
—
|
|||||
Other
accrued expenses
|
532
|
673
|
|||||
$
|
2,008
|
$
|
1,961
|
F-15
Note
8 - Bank Loan Payable
In
February 2004, we terminated a working capital credit facility with JPMorgan
Chase. As a result of the termination of this credit facility, we wrote off
$85,000 of unamortized deferred financing costs to expense in the year ended
December 31, 2004.
Note
9 - 10% Senior Secured Convertible Notes
10%
Senior Secured Convertible Notes and 10% Note Discount
In
March
and April 2006, we issued our 10% Senior Secured Convertible Notes (“10% Notes”)
in a private placement to private investors. Activity for the 10% Notes and
the
related discount during the year ended, and as of December 31, 2006, was as
follows (in thousands):
Total
|
|||||||
Principal
of 10% Notes:
|
|||||||
March
2006 financing
|
$
|
5,665
|
|||||
April
2006 financing
|
515
|
||||||
Additional
10% Notes
|
426
|
||||||
$
|
6,606
|
||||||
Discount:
|
|||||||
Derivative
financial instrument - Series A Warrants
|
(2,873
|
)
|
|||||
Reduction
of exercise price and extension of expiration dates of
warrants
|
(766
|
)
|
|||||
(3,639
|
)
|
||||||
Accretion
of discount
|
1,359
|
||||||
(2,280
|
)
|
||||||
10%
Notes, net of discount
|
$
|
4,326
|
In
the
March and April 2006 transactions, we issued $5,665,000 and $515,000,
respectively, with a total aggregate principal amount of $6,180,000 of our
10%
Notes, Series A warrants to purchase 6,180,000 shares of common stock at an
exercise price of $0.65 per share and Series B warrants to purchase 6,180,000
shares of common stock at an exercise price of $0.01 per share. Both warrants
are subject to certain anti-dilution protection. The Series B warrants only
become exercisable after we make available to the public our financial
statements for the fourth quarter of 2006 if we fail to achieve positive
operating income excluding restructuring and non-cash charges, as identified
on
Schedule A of the Series B warrants, as amended.. In addition, the Series B
warrants will be cancelled if we consummate a strategic transaction or repay
the
10% Notes prior to the date we make our consolidated financial statements for
the fourth quarter of 2006 available to the public. Management has determined
that the Series B warrants are not exercisable because we achieved positive
operating income, excluding the restructuring and non-cash charges, as
identified on Schedule A of the Series B warrants, as amended, in the fourth
quarter of 2006. We also agreed to reduce the exercise price of 3,625,000
previously issued warrants held by the investors in this offering to $0.65
from
a weighted average price of $3.38, and to extend the expiration date of any
such
warrants to no earlier than three years after the offering date. The new
weighted average expiration date of the warrants will be 3.5 years from a
previous weighted average expiration date of 2.9 years. In addition, we issued
to Burnham Hill Partners placement agent warrants to purchase 618,000 shares
of
our common stock at an exercise price of $0.55 per share. The warrants are
subject to certain anti-dilution protection. The $5,123,000 and $462,000 net
proceeds of the March and April 2006 financings, respectively, are being used
to
support our corporate restructuring program and for working capital.
The
10%
Notes bear interest at 10% per annum and mature on September 30, 2007. They
are
convertible into common stock at a conversion rate of $0.50 per share. We have
the option to pay the accrued interest for the 10% Notes in cash or additional
10% Notes. In the period ended December 31, 2006 we issued an additional
$426,000 of 10% Notes to pay accrued and unpaid interest. As of December 31,
2006 the 10% Notes and accrued and unpaid interest was $6,606,000 and $57,000,
respectively. The Series A warrants are exercisable for a period of 5 years.
The
Series B warrants would have been exercisable for a period of 5
years.
F-16
We
accounted for the reduction of the exercise price of 3,625,000 previously
issued
warrants held by the investors in this offering to $0.65 from a weighted
average
price of $3.38, and the extension of the expiration date of any such warrants
to
no earlier than three years after the offering date at fair value as a
debt
discount with an offsetting credit to paid in capital. A portion of the
finance
costs of the 10% Notes in March and April 2006 will be allocated to this
transaction and charged to paid in capital. The estimated fair value of
this
modification is based on the excess of the fair value of these warrants
at the
date of the financings over the fair value of these warrants at their original
terms. In the March and April 2006 financings $716,000 and $50,000,
respectively, of the proceeds was attributed to the estimated fair value
of the
modification of price and term of these warrants. The $766,000 fair value
of
this modification will be treated as a discount of the Note and expensed,
using
the imputed interest method, over the 18 month period to the Note’s maturity
date.
Financing
Costs
The
financing costs, which are included in other assets in the accompanying
consolidated balance sheets, and accumulated amortization as of December
31,
2006, are as follows (in thousands):
March
2006
|
April
2006
|
2006
|
||||||||
Cash
financing costs:
|
||||||||||
Placement
agent fees - Burnham Hill Partners
|
$
|
440
|
$
|
40
|
$
|
480
|
||||
Other
financing costs
|
105
|
10
|
115
|
|||||||
545
|
50
|
595
|
||||||||
Non-cash
financing costs:
|
||||||||||
Placement
agent warrants - Burnham Hill Partners
|
279
|
17
|
296
|
|||||||
Financing
costs charged to additional paid in capital
|
(101
|
)
|
(9
|
)
|
(110
|
)
|
||||
Total
financing costs
|
$
|
723
|
$
|
58
|
781
|
|||||
Accumulated
amortization
|
(389
|
)
|
||||||||
$
|
392
|
The
financing costs are being amortized over the 18 month period through September
30, 2007, the maturity date of the 10% Notes.
Our
financing costs related to the 10% Notes were comprised of cash and non-cash
charges. Our cash financing costs related to the issuance of the 10% Notes
in
March and April 2006 were $545,000, and $50,000, respectively, for a total
of
$595,000, a portion of which represents placement fees of $480,000 to
Burnham Hill Partners, our placement agent. Our non-cash financing costs
were based on the fair value of various components of the transactions.
These
included the convertibility of the 10% Notes, the issuance of the Series
A
warrants, modifications to previously issued warrants held by investors
in the
financing and the issuance to the placement agent of warrants. A portion
of the
finance costs of the 10% Notes in March and April 2006, $101,000 and $9,000,
respectively, were allocated to the $766,000 fair value of the modification
of
warrant exercise prices and extension of expirations dates for 3,625,000
previously issued warrants held by the investors in this offering.
The
issuance to Burnham Hill Partners of placement agent warrants to purchase
618,000 shares of our common stock at an exercise price of $0.55 per share
was
valued at $279,000 and $17,000 for the March and April 2006 financings,
respectively. As a result of the issuance of the placement agent warrants
we
recognized Additional Paid in Capital of $296,000.
F-17
Accounting
for Conversion Feature and Series A Warrants Derivative
Liabilities
Activity
for derivative liabilities during the year ended, and as of December 31,
2006
and 2005, was as follows (in thousands):
Dec.
31, 2005
|
2006
Activity
|
Decrease
in Fair Value
|
Dec.
31, 2006
|
||||||||||
Derivative
financial instrument - February 2004 capital raise (See Note
12)
|
$
|
1,570
|
$
|
—
|
$
|
(334
|
)
|
$
|
1,236
|
||||
Derivative
financial instrument - Beneficial conversion feature - 10%
notes
|
—
|
1,850
|
(184
|
)
|
1,666
|
||||||||
Derivative
financial instrument - Series A Warrants
|
—
|
2,873
|
(1,474
|
)
|
1,399
|
||||||||
1,570
|
$
|
4,723
|
$
|
(1,992
|
)
|
4,301
|
|||||||
Current
portion
|
(1,246
|
)
|
(4,301
|
)
|
|||||||||
$
|
324
|
$
|
—
|
We
accounted for the convertibility of the 10% Notes into common stock at
a
conversion rate of $0.50 per share as a derivative liability subject to
SFAS No.
133. Management determined that the events or actions necessary to deliver
registered shares are not controlled by the Company and that the holders
have
the right to demand that the Company pay the holders in cash, calculated
as
defined in the Senior Secured Convertible Promissory Note, under certain
circumstances. Accordingly the Company accounted for the beneficial conversion
feature as a derivative liability. The estimated fair value of the derivative
liability is based on the prepayment amount that would be owed to a 10%
Notes
holder if payment is required. The prepayment amount is the greater of
125% of
the value of the 10% Notes and accrued interest or the value if the 10%
Notes
and accrued interest are converted at $0.50 per share and then multiplied
by the
then current stock price. Since the 10% Notes are convertible at the issuance
date an expense related to the derivative liability is recognized on that
date.
In the March and April 2006 financings $1,586,000 and $129,000, respectively,
of
the proceeds was attributed to the estimated fair value of the derivative
liability and an expense of $1,715,000 was recognized. During the year
unpaid
interest on the 10% Notes was paid in additional 10% Notes and the estimated
fair value of the derivative liability and an expense of $135,000 was
recognized. We estimated the fair value of the derivative liability as
of
December 31, 2006 to be $1,666,000. During the year ended December 31,
2006 we
recognized income of $184,000 for the decrease in the derivative
liability.
We
accounted for the issuance of the Series A warrants to purchase 6,180,000
shares
of common stock at an exercise price of $0.65 per share as a derivative
liability subject to SFAS No. 133. Management determined that the events
or
actions necessary to deliver registered shares are not controlled by the
Company
and that the holders have the right to demand that the Company pay the
holders
in cash, calculated as defined in the Series A warrant, under certain
circumstances. Accordingly the Company accounted for the Series A warrants
as a
derivative liability. The estimated fair value of the derivative liability
is
calculated using the Black-Scholes formula and such estimates are revalued
at
each balance sheet date with changes in value recorded as other income
or
expense. In the March and April 2006 financings $2,708,000 and $165,000,
respectively, of the proceeds was attributed to the estimated fair value
of the
derivative liability. The $2,873,000 expense for the derivative liability
will
be treated as a discount on the 10% Notes and expensed, using the imputed
interest method, over the 18 month period to the 10% Notes’ maturity date. We
estimated the fair value of the derivative liability as of December 31,
2006 to
be $1,399,000. During the year ended December 31, 2006 we recognized income
of
$1,474,000 for the decrease in the derivative liability.
As
management has determined that the Series B warrants are not exercisable
because
we achieved positive operating income, excluding the restructuring and
non-cash
charges identified in the Series B warrant, in the fourth quarter of 2006
there
is no fair value charge for these warrants.
F-18
Note
10 - Interest Expense
The
components of interest expense for the year ended December 31, 2006 are
presented below (in thousands):
2006
|
||||
Beneficial
conversion feature for 10% Notes
|
$
|
1,850
|
||
Accretion
of discount on 10% Notes
|
1,359
|
|||
Interest
on 10% Notes
|
483
|
|||
Interest
expense for sales and use taxes and regulatory fees
|
277
|
|||
$
|
3,969
|
Note
11 - Subordinated Debentures
In
December 2002, we raised net proceeds of $4,233,000 in a private placement
offering of $4,888,000 principal amount of 8% convertible debentures. The
debentures were convertible into 2,036,677 shares of common stock at $2.40
per
share. The debentures were to mature in February 2004, or 90 days following
the
expiration (in May 2005) or earlier termination of the credit facility,
whichever was later. We had the option of paying interest quarterly on
the
debentures in the form of either cash or shares of our common stock. Investors
in the private placement offering also received five-year warrants to purchase
814,668 shares of common stock at an exercise price of $3.25 per share.
The
warrants are subject to certain anti-dilution adjustments. We also issued
to our
placement agent warrants to purchase 40,733 shares of common stock at an
exercise price of $0.001 per share with an expiration date of January 31,
2003.
We
allocated the proceeds received to the debentures and the related warrants
based
on the relative fair value method. The fair value of the debentures was
determined based on the market value of the 2,036,677 common shares into
which
the debentures were convertible and the fair value of the warrants was
determined using the Black Scholes pricing model. Of the proceeds, $1,292,000
was allocated to the warrants and was recorded as debt discount and additional
paid-in capital and $3,596,000 was allocated to the debentures. Based on
the
market value of the common shares issuable upon conversion, as compared
to the
proceeds allocated to the debentures, further debt discount and additional
paid-in capital of $2,107,000 was recorded for the beneficial conversion
feature. The aggregate discount of $3,399,000 has been amortized over the
term to maturity following the effective yield method.
In
January 2004, in exchange for the cancellation and termination of debentures
with an aggregate face value of $4,888,000 and forfeiture of any and all
rights
of collection, claim or demand under the debentures, we agreed to give
the
holders of the debentures: (i) an aggregate of 203.667 shares of Series
B
convertible preferred stock with a face value of $4,888,000; (ii) an aggregate
of 250,000 shares of restricted common stock with a fair value of $675,000;
and
(iii) a reduction of the exercise price of the warrants issued pursuant
to the
original purchase agreement from $3.25 to $2.75 which had an incremental
fair
value of $68,000. As a result of the subsequent financings, the exercise
price
was reduced to $1.85.
The
Company incurred costs of $609,000 in connection with the financing, which
were
allocated to the warrants and the convertible debentures based on their
relative
fair values. The portion allocated to the warrants was recorded as a reduction
to additional paid-in capital and the portion allocated to the convertible
debentures was recorded as deferred financing costs, which have been amortized
consistently with the debt discount.
There
are
no subordinated debentures outstanding as of December 31, 2006 and 2005.
F-19
Note
12 - Stockholders’ Deficit
Common Stock
In
February 2004, we raised net proceeds of $12,480,000 in a private placement
offering of 6,100,000 shares of our common stock at $2.25 per share. We
also
issued warrants to the investors in the private placement offering to purchase
1,830,000 shares of our common stock at an exercise price of $2.75 per
share.
The warrants expire five and a half years after the closing date. The warrants
are subject to certain anti-dilution protection (minimum price of $2.60)
and as
a result of the March 2005 financing, the exercise price was reduced to
$2.60
(the incremental fair value was nominal). In addition, we issued to our
placement agent five and a half year warrants to purchase 427,000 shares
of
common stock at an exercise price of $2.71 per share with an estimated
fair
value of $895,000. The placement agent warrants are subject to anti-dilution
protection (minimum price of $2.60) and as a result of the March 2005 financing,
the exercise price was reduced to $2.60 (the incremental fair value was
nominal).
The
registration rights agreement for the February 2004 financing provides
for
liquidated damages of 3% of the aggregate purchase price for the first
month and
1.5% for each subsequent month if we failed to register the common stock
and the
shares of common stock underlying the warrants or maintain the effectiveness
of
such registration. We accounted for the registration rights agreement as
a
separate freestanding instrument and accounted for the liquidated damages
provision as a derivative liability subject to SFAS No. 133. The estimated
fair
value of the derivative liability is based on estimates of the probability
and
costs expected to be incurred and such estimates are revalued at each balance
sheet date with changes in value recorded as other income or expense. $1,164,000
of the proceeds of the financing was attributed to the estimated fair value
of
the derivative liability. We estimated the fair value of the derivative
liability as of December 31, 2006, 2005 and 2004 to be $1,236,000, $1,570,000
and $1,299,000, respectively. For the year ended December 31, 2006 we recognized
other income of $334,000 for a decrease in the fair value of the derivative
liability and for the years ended December 31, 2005 and 2004 we recognized
an
expense of $271,000 and $134,000, respectively, respectively, for increases
in
the estimated fair value of the derivative liability.
In
March
2005, we raised net proceeds of $9,376,000 in a private placement offering
of
6,766,667 shares of our common stock at $1.50 per share. Investors in the
private placement offering were also issued warrants to purchase 2,706,667
shares of common stock at an exercise price of $2.40 per share. The warrants
expire five years after the closing date. The warrants are subject to certain
anti-dilution protection (minimum price of $1.61). The warrants may be
exercised
by cash payment of the exercise price or by "cashless exercise”. As a result of
subsequent financings, the conversion price of these warrants has been
adjusted
to $1.79 as of December 31, 2006.
Preferred
Stock
Our
Certificate of Incorporation authorizes the issuance of up to 5,000,000
shares
of preferred stock. Except for the 2,450 shares of Series A preferred stock
issued prior to 2004 (all of which were converted into common stock prior
to
2004) and the 203.667 shares of Series B convertible preferred stock issued
in
January 2004, the rights and privileges of the preferred stock have not
yet been
designated.
The
Series B convertible preferred stock ranks senior to our common stock and
subordinate to any indebtedness we may have outstanding. The Series B
convertible preferred stockholders are entitled to receive dividends at
the rate
of eight percent (8%) of the stated value per share of $24,000 per year
through
July 21, 2005, increasing to twelve percent (12%) on July 22, 2005, payable
annually at our option in cash or shares of common stock. We must obtain
the
affirmative vote of the holders of at least 75% of the outstanding shares
of
Series B convertible preferred stock in order to issue any securities ranking
senior to or on parity with the Series B convertible preferred stock. Other
than
as described in the preceding sentence or as required by Delaware law,
the
Series B convertible preferred stock has no voting rights. If we liquidate,
dissolve or wind up our affairs, the holders of the Series B convertible
preferred stock are entitled to receive a liquidation preference equal
to the
stated value per share plus accrued and unpaid dividends. The Series B
convertible preferred stock is convertible into our common stock at the
conversion price of $2.40 per share of common stock and has anti-dilution
rights. Upon a change of control, the holders of the Series B convertible
preferred stock can require that we redeem their shares at the stated value
per
share plus accrued and unpaid dividends. Accordingly, the Series B convertible
preferred stock is not classified in Stockholders’ Deficit. We also have the
option to redeem the outstanding shares of Series B convertible preferred
stock
at a price per share equal to 110% of the stated value plus accrued and
unpaid
dividends. Accordingly the Series B Convertible Preferred Stock is presented
outside of Stockholders’ Deficit.
F-20
As
described in Note 11, in January 2004, in exchange for the cancellation
and
termination of convertible debentures with an aggregate face value of $4,888,000
and forfeiture of any and all rights of collection, claim or demand under
the
debentures, we agreed to give the holders of the debentures: (i) an aggregate
of
203.667 shares of Series B convertible preferred stock; (ii) an aggregate
of
250,000 shares of restricted common stock; and (iii) a reduction of the
exercise
price of the warrants issued pursuant to the original purchase agreement
from
$3.25 to $2.75.
As
a
result of this exchange, the unamortized discount on subordinated debentures
and
deferred financing costs were written off to expense, resulting in accretion
of
discount of $2,650,000 and amortization of deferred financing costs of
$363,000
for the year ended December 31, 2004. Additionally, we recognized a $743,000
loss on the exchange in 2004. The investors have anti-dilution rights.
As a
result of the February 2004 and March 2005 financings the conversion price
of
the Series B convertible preferred stock and the exercise price of the
814,668
warrants have been adjusted as of December 31, 2005 to $2.22 and $2.47,
respectively. We recognized deemed dividends of $115,000 for the year ended
December 31, 2005. The corresponding amount in the 2004 period was nominal.
Accordingly, as of December 31, 2005, the Series B convertible preferred
shares
outstanding were convertible into 1,301,000 shares of common stock. As
a result
of the March 2006 and April 2006 financings, the conversion price of the
Series
B convertible preferred stock and the exercise price of the warrants have
been
further adjusted to $1.67 and $1.85, respectively.
In
March
2005, 83.333 shares of our outstanding Series B convertible preferred stock
and
accrued dividends of $183,000 were exchanged for 1,333,328 shares of our
common
stock and warrants to purchase 533,331 shares of our common stock with
an excess
aggregate fair value of $1,167,000. We recognized deemed dividends of $1,167,000
during the 2005 period in connection with the warrants and a reduced conversion
price, which were offered as an inducement to convert.
Note
13 - Stock options and warrants
Glowpoint
2000 Stock Incentive Plan
Pursuant
to the Glowpoint 2000 Stock Incentive Plan (the “2000 Plan”), as amended,
4,400,000 shares of common stock have been reserved for issuance thereunder.
The
2000 Plan permits the grant of incentive stock options (“ISOs”) to employees or
employees of our subsidiaries. Non-qualified stock options (“NQSOs”) may be
granted to employees, directors and consultants. As of December 31, 2006,
options to purchase a total of 3,440,000 shares were outstanding and 522,000
shares remained available for future issuance under the 2000 Plan.
The
exercise price of the awards is established by the administrator of the
plan
and, in the case of ISOs issued to employees who are less than 10% stockholders,
the per share exercise price must be equal to at least 100% of the fair
market
value of a share of the common stock on the date of grant or not less than
110%
of the fair market value of the shares in the case of an employee who is
a 10%
stockholder. The administrator of the plan determines the terms and provisions
of each award granted under the 2000 Plan, including the vesting schedule,
repurchase provisions, rights of first refusal, forfeiture provisions,
form of
payment, payment contingencies and satisfaction of any performance criteria.
F-21
1996
Stock Option Plan
Under
the
1996 Stock Option Plan (the “1996 Plan”), as amended, 2,475,000 shares of common
stock have been reserved for issuance thereunder. The 1996 Plan provides
for the
granting of options to officers, directors, employees and advisors. The
exercise
price of incentive stock options (“ISOs”) issued to employees who are less than
10% stockholders shall not be less than the fair market value of the underlying
shares on the date of grant or not less than 110% of the fair market value
of
the shares in the case of an employee who is a 10% stockholder. The exercise
price of restricted stock options shall not be less than the par value
of the
shares to which the option relates. Options are not exercisable for a period
of
one year from the date of grant. Under the 1996 Plan, no individual will
be
granted ISOs corresponding to shares with an aggregate exercise price in
excess
of $100,000 in any calendar year less the aggregate exercise price of shares
under other stock options granted to that individual that vest in such
calendar
year. No options were granted under the 1996 Plan in years ended December
31,
2006, 2005 and 2004. As of December 31, 2006, options to purchase a total
of
28,000 shares were outstanding and no shares remained available for future
issuance under the 1996 Plan.
VTI
Stock Option Plans
As
part
of the merger with View Tech, Inc. (“VTI”) in May 2000, we assumed the
outstanding options of the four stock option plans maintained by VTI. These
plans generally require the exercise price of options to be not less than
the
estimated fair market value of the stock at the date of grant. Options
vest over
a maximum period of four years and may be exercised in varying amounts
over
their respective terms. In accordance with the provisions of such plans,
all
outstanding options become immediately exercisable upon a change of control,
as
defined, of VTI. The plans will terminate in 2009. Options assumed as part
of
the merger with VTI totaled 361,605. No options were granted under these
Plans
in years ended December 31, 2006, 2005 and 2004. As of December 31, 2006,
options to purchase a total of 223,000 shares of Glowpoint’s common stock were
outstanding and no shares remained available for future issuance.
Options
outside our Qualified Plans
We
have
also issued stock options outside of our qualified plans in prior years
though
none in the years ended December 31, 2006, 2005 and 2004. At December 31,
2006,
the total of these options outstanding was 1,410,000.
Other
Option Information
The
weighted average fair value of each option granted is estimated on the
date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions during the years ended December 31, 2006, 2005 and
2004:
|
2006
|
2005
|
2004
|
|||||||
Risk
free interest rate
|
4.8
|
%
|
4.1
|
%
|
3.5
|
%
|
||||
Expected
option lives
|
5
Years
|
5
Years
|
5
Years
|
|||||||
Expected
volatility
|
95.4
|
%
|
108.2
|
%
|
113.2
|
%
|
||||
Estimated
forfeiture rate
|
20
|
%
|
20
|
%
|
20
|
%
|
||||
Expected
dividend yields
|
None
|
None
|
None
|
|||||||
Weighted
average grant date fair value of options
|
$
|
0.30
|
$
|
1.12
|
$
|
1.05
|
Expected
volatility was calculated using the historical volatility of the appropriate
industry sector index. The expected term of the options is estimated based
on
the Company’s historical exercise rate and forfeiture rates are estimated based
on employment termination experience. 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 term of the grants. The assumptions used in the Black-Scholes
option valuation model are highly subjective, and can materially affect
the
resulting valuation.
F-22
A
summary
of options granted, exercised, expired and forfeited under our plans and
options
outstanding as of December 31, 2006, 2005 and 2004, is presented below
(options
in thousands):
Outstanding
|
Exercisable
|
||||||||||||
|
Number
of Options
|
|
Weighted
Average
Exercise
Price
|
|
Number
of Options
|
|
Weighted
Average
Exercise
Price
|
||||||
Options
outstanding, January 1, 2004
|
5,793
|
$
|
3.12
|
||||||||||
Granted
|
1,626
|
1.31
|
|||||||||||
Exercised
|
(782
|
)
|
0.73
|
||||||||||
Forfeited
|
(1,539
|
)
|
3.90
|
||||||||||
Options
outstanding, December 31, 2004
|
5,098
|
2.68
|
|||||||||||
Granted
|
943
|
1.35
|
|||||||||||
Exercised
|
(50
|
)
|
1.46
|
||||||||||
Forfeited
|
(995
|
)
|
2.35
|
||||||||||
Options
outstanding, December 31, 2005
|
4,996
|
2.51
|
3,614
|
$
|
2.92
|
||||||||
Granted
|
1,134
|
0.41
|
|||||||||||
Exercised
|
—
|
0.00
|
|||||||||||
Expired
|
(11
|
)
|
5.41
|
||||||||||
Forfeited
|
(1,019
|
)
|
1.36
|
||||||||||
Options
outstanding, December 31, 2006
|
5,100
|
$
|
2.26
|
3,664
|
$
|
2.86
|
|||||||
Shares
of common stock available for future grant under company plans
|
522
|
Additional
information as of December 31, 2006 with respect to all outstanding options
is
as follows (options in thousands):
|
Outstanding
|
Exercisable
|
||||||||||||||
Range
of price
|
Number
of
Options
|
Weighted
Average
Remaining
Contractual
Life
(In Years)
|
Weighted
Average
Exercise
Price
|
Number
of
Options
|
Weighted
Average
Exercise
Price
|
|||||||||||
$
0.36 - 1.10
|
1,145
|
9.38
|
$
|
0.47
|
94
|
$
|
0.78
|
|||||||||
1.13
- 2.15
|
1,345
|
6.80
|
1.45
|
997
|
1.48
|
|||||||||||
2.20
- 3.10
|
1,345
|
0.67
|
3.01
|
1,343
|
3.01
|
|||||||||||
3.39
- 4.13
|
1,107
|
4.54
|
3.78
|
1,072
|
3.79
|
|||||||||||
4.40
- 6.00
|
158
|
3.82
|
5.26
|
158
|
5.26
|
|||||||||||
$
0.36 - 6.00
|
5,100
|
5.18
|
$
|
2.26
|
3,664
|
$
|
2.86
|
F-23
A
summary
of nonvested options at December 31, 2006 and changes during the year ended
December 31, 2006, is presented below (options in thousands):
|
Options
|
Weighted
Average
Grant
Date
Fair
Value
|
|||||
Nonvested
options outstanding, January 1, 2006
|
1,380
|
$
|
1.16
|
||||
Granted
|
1,134
|
0.30
|
|||||
Vested
|
(416
|
)
|
1.15
|
||||
Forfeited
|
(662
|
)
|
0.95
|
||||
Nonvested
options outstanding, December 31, 2006
|
1,436
|
$
|
0.59
|
At
January 1 and December 31, 2006, there was $873,000 and $161,000, respectively,
of total unrecognized compensation costs related to non-vested options
granted
prior to January 1, 2006 that are expected to be recognized over a
weighted-average period of 1.34 and 0.90 years, respectively. The Company
has
recorded $781,000 related to its stock-based expenses in general and
administrative expenses for the year ended December 31, 2006. There was
no
income tax benefit recognized for stock-based compensation for the year
ended
December 31, 2006. No compensation costs were capitalized as part of the
cost of
an asset.
The
fair
value of nonvested options at January 1 and December 31, 2006 was $1,601,000
and
$844,000, respectively.
Restricted
Stock
A
summary
of restricted stock granted, vested, forfeited and unvested restricted
stock
outstanding during the year ended December 31, 2006, is presented below
(restricted shares in thousands):
|
Restricted
Shares
|
Weighted
Average
Exercise
Price
|
|||||
Unvested
restricted shares outstanding, January 1, 2006
|
313
|
$ |
2.44
|
||||
Granted
|
363
|
0.43
|
|||||
Vested
|
(299
|
)
|
1.89
|
||||
Forfeited
|
(60
|
)
|
2.20
|
||||
Unvested
restricted shares outstanding, December 31, 2006
|
317
|
$
|
0.71
|
F-24
Warrants
The
exercise price of 12,496,000 warrants at December 31, 2006 are subject
to
further anti-dilution protection. A summary of warrants granted, exercised
and
forfeited and warrants outstanding as of December 31, 2006, 2005 and 2004,
is
presented below (warrants in thousands):
|
Warrants
|
Weighted
Average
Exercise
Price
|
|||||
Warrants
outstanding, January 1, 2004
|
5,211
|
$
|
6.09
|
||||
Granted
|
2,257
|
2.74
|
|||||
Exercised
|
—
|
—
|
|||||
Forfeited
|
—
|
—
|
|||||
Warrants
outstanding, December 31, 2004
|
7,468
|
4.64
|
|||||
Granted
|
3,340
|
2.37
|
|||||
Exercised
|
—
|
—
|
|||||
Forfeited
|
(1,052
|
)
|
6.53
|
||||
Warrants
outstanding, December 31, 2005
|
9,756
|
3.42
|
|||||
Granted
|
6,798
|
0.64
|
|||||
Exercised
|
—
|
—
|
|||||
Forfeited
|
(1,805
|
)
|
3.15
|
||||
Warrants
outstanding, December 31, 2006
|
14,749
|
$
|
1.28
|
Additional
information as of December 31, 2006 with respect to all outstanding warrants
is
as follows (warrants in thousands):
Range
of Price
|
Number
Outstanding
|
Weighted
Average
Remaining
Contractual
Life
(In Years)
|
Weighted
Average
Exercise
Price
|
|||||||
$
0.001
|
103
|
0.87
|
$
|
.001
|
||||||
0.50
- 1.00
|
10,573
|
3.70
|
0.64
|
|||||||
1.79
- 2.60
|
3,653
|
2.73
|
2.17
|
|||||||
10.00
|
420
|
0.03
|
10.00
|
|||||||
$
0.001 - 10.00
|
14,749
|
3.34
|
$ |
1.28
|
Note
14 - Income Taxes
We
had no
tax provision for the years ended December 31, 2006, 2005 and 2004. Our
effective tax rate differs from the statutory federal tax rate for the
years
ended December 31, 2006, 2005 and 2004 as shown in the following table
(in
thousands):
F-25
2006
|
2005
|
2004
|
||||||||
U.S.
federal income taxes at the statutory rate
|
$
|
(3,782
|
)
|
$
|
(5,587
|
)
|
$
|
(5,401
|
)
|
|
State
taxes, net of federal effects
|
(667
|
)
|
(986
|
)
|
(953
|
)
|
||||
Nondeductible
expenses
|
722
|
311
|
—
|
|||||||
Beneficial
conversion feature
|
618
|
—
|
1,060
|
|||||||
Nondeductible
loss on extinguishment of debt
|
—
|
—
|
297
|
|||||||
Change
in valuation allowance
|
2,888
|
6,243
|
4,401
|
|||||||
Adjustments
to prior years’ options and other charges
|
221
|
—
|
419
|
|||||||
Other
|
—
|
19
|
177
|
|||||||
|
$ | — |
$
|
—
|
$
|
—
|
The
tax
effect of the temporary differences that give rise to significant portions
of
the deferred tax assets and liabilities as of December 31, 2006 and 2005
is
presented below (in thousands):
Deferred
tax assets:
|
2006
|
2005
|
|||||
Tax
benefit of operating loss carry forward
|
$
|
44,392
|
$
|
42,586
|
|||
Reserves
and allowances
|
1,620
|
1,261
|
|||||
Accrued
expenses
|
72
|
252
|
|||||
Goodwill
|
665
|
736
|
|||||
Warrants
issued for services
|
575
|
—
|
|||||
Equity
based compensation
|
369
|
807
|
|||||
Fixed
assets
|
285
|
118
|
|||||
Fair
value adjustments to derivative financial instruments
|
703
|
162
|
|||||
Restricted
stock
|
106
|
—
|
|||||
Total
deferred tax assets
|
48,787
|
45,922
|
|||||
Valuation
allowance
|
(
48,787
|
)
|
(
45,922
|
)
|
|||
Net
deferred tax assets
|
$
|
—
|
$
|
—
|
We
and
our subsidiaries file federal returns on a consolidated basis and separate
state
tax returns. At December 31, 2006, we have net operating loss (“NOL”)
carry-forwards of $113,864,000 for federal income tax purposes which expire
in
various amounts through 2026. The utilization of a portion of our NOL is
limited
each year as a result of an "ownership change" (as defined by Section 382
of the
Internal Revenue Code of 1986, as amended). Our NOL's may be subject to
further
limitation due to past and future issuances of stock. We provide a full
valuation allowance, which increased by $2,888,000 and by $6,243,000 during 2006
and 2005, respectively, against our deferred tax assets due to the uncertainly
about the realization of such assets.
Note
15 - 401(k) Plan
We
have
adopted a 401(k) retirement plan under Section 401(k) of the Internal Revenue
Code. The 401(k) plan covers substantially all employees who met minimum
age and
service requirements. The plan was non-contributory on our part. Effective
with
the merger with VTI, we assumed the 401(k) Plan of VTI, combined its assets
with
those of the existing plan and began making contributions to the new plan.
Employer contributions to the 401(k) plan for the years ended December
31, 2006,
2005 and 2004 were $38,000, $43,000 and $26,000, respectively.
F-26
Note
16 - Related Parties
We
receive consulting and tax services from an accounting firm in which one
of our
directors is a partner. Management believes that such transactions are
at
arm’s-length and for terms that would have been obtained from unaffiliated
third
parties. For the years ended December 31, 2006, 2005 and 2004, we incurred
fees
for these services of $32,000, $10,000 and $23,000, respectively.
Note
17 - Quarterly Financial Data (Unaudited) - See Note 1
The
following is a summary of our unaudited quarterly results of operations
for the
years ended December 31, 2006, 2005 and 2004 (in thousands, except per
share
amounts):
1st
Quarter
|
2006
|
2005
|
2004
|
|||||||
Revenue
|
$
|
4,721
|
$
|
4,202
|
$
|
3,186
|
||||
Gross
margin (loss)
|
1,235
|
516
|
(353
|
)
|
||||||
Loss
from operations
|
(4,418
|
)
|
(3,934
|
)
|
(3,759
|
)
|
||||
Net
loss
|
(6,029
|
)
|
(3,594
|
)
|
(7,653
|
)
|
||||
Net
loss attributable to common stockholders
|
(6,114
|
)
|
(4,965
|
)
|
(7,727
|
)
|
||||
Net
loss per share - basic and diluted
|
$
|
(0.13
|
)
|
$
|
(0.13
|
)
|
$
|
(0.24
|
)
|
|
Weighted
average number of common shares - basic and diluted
|
46,046
|
39,100
|
32,363
|
|||||||
|
|
|
|
|||||||
2nd
Quarter
|
|
|
|
|||||||
Revenue
|
$
|
4,981
|
$
|
4,397
|
$
|
4,179
|
||||
Gross
margin
|
1,631
|
391
|
107
|
|||||||
Loss
from operations
|
(2,022
|
)
|
(4,553
|
)
|
(3,803
|
)
|
||||
Net
loss
|
(3,493
|
)
|
(4,562
|
)
|
(3,814
|
)
|
||||
Net
loss attributable to common stockholders
|
(3,580
|
)
|
(4,620
|
)
|
(3,911
|
)
|
||||
Net
loss per share - basic and diluted
|
$
|
(0.08
|
)
|
$
|
(0.10
|
)
|
$
|
(0.10
|
)
|
|
Weighted
average number of common shares - basic and diluted
|
46,207
|
46,046
|
37,390
|
|||||||
|
|
|
|
|||||||
3rd
Quarter
|
|
|
|
|||||||
Revenue
|
$
|
4,850
|
$
|
4,558
|
$
|
4,383
|
||||
Gross
margin
|
1,558
|
883
|
143
|
|||||||
Loss
from operations
|
(1,570
|
)
|
(4,394
|
)
|
(4,219
|
)
|
||||
Net
loss
|
(7
|
)
|
(4,384
|
)
|
(4,106
|
)
|
||||
Net
loss attributable to common stockholders
|
(94
|
)
|
(4,442
|
)
|
(4,205
|
)
|
||||
Net
loss per share - basic and diluted
|
$
|
(0.00
|
)
|
$
|
(0.10
|
)
|
$
|
(0.11
|
)
|
|
Weighted
average number of common shares - basic and diluted
|
46,361
|
46,046
|
37,921
|
|||||||
|
|
|
|
|||||||
4th
Quarter
|
|
|
|
|||||||
Revenue
|
$
|
4,959
|
$
|
4,578
|
$
|
4,119
|
||||
Gross
margin (loss)
|
1,504
|
961
|
(49
|
)
|
||||||
Loss
from operations
|
(497
|
)
|
(3,758
|
)
|
(5,312
|
)
|
||||
Net
loss
|
(1,261
|
)
|
(3,894
|
)
|
(334
|
)
|
||||
Net
loss attributable to common stockholders
|
(1,349
|
)
|
(4,004
|
)
|
(433
|
)
|
||||
Net
loss per share - basic and diluted
|
$
|
(0.03
|
)
|
$
|
(0.09
|
)
|
$
|
(0.01
|
)
|
|
Weighted
average number of common shares - basic and diluted
|
46,350
|
46,046
|
37,916
|
F-27
Net
loss
per share is computed independently for each of the quarters presented.
The sum
of the quarterly net loss per share figures in the years ended December
31, 2005
and 2004 does not equal the total computed for that year.
Note
18 - March 2006 Restructuring
In
March
2006, we implemented a corporate restructuring plan designed to reduce
certain
operating, sales and marketing and general and administrative costs. The
costs
of this restructuring, approximately $1,200,000, consisting of severance
payments, acceleration of vesting of stock options and benefit reimbursements,
were recorded in the first quarter of 2006 and will be paid through April
2007.
As part of the restructuring initiative, we implemented management changes,
including the departure of twenty-one employees and the promotion of Michael
Brandofino to Chief Operating Officer. David Trachtenberg, President and
Chief
Executive Officer since October 2003, and Gerard Dorsey, Executive Vice
President and Chief Financial Officer since December 2004 had left Glowpoint.
In
connection with their separation, Messrs. Trachtenberg and Dorsey were
paid
severance based upon their employment agreements of approximately $500,000
and
$155,000, respectively, over the following year and receive other benefits
(e.g., accelerated vesting of restricted stock or options) valued at
approximately $180,000 and $7,000, respectively. The amount paid to them
is a
portion of the $1,200,000 of restructuring costs recorded in 2006. In April
2006, Mr. Brandofino was appointed President and Chief Executive Officer
and a
member of the Board of Directors, Edwin Heinen was appointed Chief Financial
Officer, and Joseph Laezza was appointed Chief Operating Officer. The following
is a summary of our March 2006 restructuring activity during the year ended
December 31, 2006 (in thousands):
Accrual
as of December 31, 2005
|
$
|
0
|
||
Provision
for severance
|
1,200
|
|||
Less:
amounts paid
|
(988
|
)
|
||
Accrual
as of December 31, 2006
|
$
|
212
|
Note
19 - Commitments and Contingencies
Employment
Agreements
We
had
employment agreements with our prior President and Chief Executive Officer
("CEO") and our prior Executive Vice President and Chief Financial Officer
("CFO"), both of whom left Glowpoint in April 2006. We also have agreements
with
our Executive Vice President and Chief Technology Officer ("CTO"), who
became
Chief Operating Officer in March 2006 and then President and Chief Executive
Officer in April 2006, our Chief Operating Officer (“COO”) and our Executive
Vice President and General Counsel (“GC”) such employment agreements provide
for:
President
and Chief Executive Officer -We entered into an agreement with the then
CTO
Michael Brandofino having a three-year term commencing January 1, 2001,
which
has been subsequently amended numerous times to reflect agreed upon annual
base
salary, incentive compensation and other stock option grants. Under the
amended
three year agreement, dated July 1, 2004, the CTO is entitled to an annual
base
salary in each year, an ability to earn annual incentive compensation in
an
amount equivalent to forty percent (40%) of his then annual base salary,
subject
to the achievement of goals and metrics established by the CEO, with such
goals
and metrics being updated on an annual basis. Compensation expense of $267,000,
253,000 and $249,000 was recorded during the years ended December 31, 2006,
2005
and 2004, respectively. In addition, the CTO's agreement stipulates that
if we
enter into a sale agreement during the term of the agreement and the CTO
realizes less than $200,000 from the exercise of all outstanding options,
then
he is entitled to a bonus in an amount equal to the difference between
$200,000
and the amount realized. The agreement also provides for a grant of an
option to
purchase 100,000 shares of common stock under the 2000 Plan, with 25% vesting
immediately and the remaining options vesting in three equal annual installments
at the anniversary date of the agreement. Either we or the CTO may terminate
his
employment at any time, for any reason or no reason at all; however, if
the CTO
is terminated without cause or resigns for good reason or if he dies, he
is
entitled to one year of his then annual base salary and one year of accelerated
vesting of the stock options granted under the amended employment agreement.
If
the CTO's employment is terminated with cause or if he voluntarily resigns,
he
is entitled to his base salary and other benefits through the last day
actually
worked (see Note 20 - Subsequent Events).
F-28
Chief
Operating Officer - In March 2004, we entered into an employment agreement
with
Joseph Laezza under which he became the Vice President, Operations (“VPO”).
Under the agreement, the VPO is entitled to an annual base salary and,
subject
to the sole discretion of our Compensation Committee, annual incentive
compensation in an amount equivalent to forty percent (40%) of his then-annual
base salary, taking into consideration the achievement of goals and metrics
established by the President and CEO, which goals and metrics shall be
updated
on an annual basis. In March 2006 he became Chief Operating Officer.
Compensation expense of $228,000 was recorded during the year ended December
31,
2006. The agreement also provides for a grant to Mr. Laezza of 55,000 restricted
shares of the Company’s common stock, with one-third of such restricted shares
of common stock vesting on March 11 of each of the following years. Either
we or
the VPO may terminate his employment at any time, for any reason or no
reason at
all; however, if the VPO is terminated without cause or resigns for good
reason
or if he dies, he is entitled to twelve months of his then-annual base
salary,
as well as the pro-rated amount of incentive compensation due as of the
effective date of termination and one year of accelerated vesting of the
restricted stock under the employment agreement. If the VPO’s employment is
terminated with cause or if he voluntarily resigns, he is entitled to his
base
salary and other benefits through the last day actually worked (see Note
20 -
Subsequent Events).
Executive
Vice President and General Counsel - In May 2006, we entered into a two-year
employment agreement with David Robinson. Under the agreement, the GC is
entitled to an annual base salary and, subject to the sole discretion of
our
Compensation Committee, annual incentive compensation in an amount equivalent
to
forty percent (40%) of his then-annual base salary, taking into consideration
the achievement of goals and metrics established by the President and CEO,
which
goals and metrics shall be updated on an annual basis. Compensation expense
of
$154,000, was recorded during the year ended December 31, 2006 The agreement
also provided for a grant of 200,000 shares of restricted common stock,
with
60,000 shares vesting upon commencement of employment and one-third of
the
remaining restricted shares (or 46,666 shares) vesting annually thereafter.
Either we or the GC may terminate his employment at any time, for any reason
or
no reason at all; however, if the GC is terminated without cause or resigns
for
good reason or if he dies, he is entitled to six months of his then-annual
base
salary, as well as the pro-rated amount of incentive compensation due as
of the
effective date of termination and one year of accelerated vesting of the
restricted stock under the employment agreement. If the GC’s employment is
terminated with cause or if he voluntarily resigns, he is entitled to his
base
salary and other benefits through the last day actually worked.
Chief
Financial Officer - In January 2007 we entered into a two-year employment
agreement with Edwin Heinen (see Note 20 - Subsequent Events).
Operating
Leases
We
lease
several facilities under operating leases expiring through 2007. Certain
leases
require us to pay increases in real estate taxes, operating costs and repairs
over certain base year amounts. Lease payments for the years ended December
31,
2006, 2005 and 2004 were $288,000, $299,000 and $304,000, respectively.
F-29
Future
minimum rental commitments under all non-cancelable operating leases are
as
follows (in thousands):
Year
Ending December 31
|
||||
2007
|
$
|
287
|
||
2008
|
3
|
|||
2009
|
3
|
|||
$
|
293
|
Capital
Lease Obligations
We
lease
certain equipment under non-cancelable lease agreements. These leases are
accounted for as capital leases. Future minimum lease payments under capital
lease obligations at December 31, 2004 of $35,000 were paid during
2005.
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 purchased over the life of the agreement, or during
a
specified period of time.
Glowpoint
believes that it will meet its commercial commitments. In certain instances
where Glowpoint did not meet the minimum commitments no such 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
agreement 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 financial statements because it is not probable,
from
the information available and from prior experience, that Glowpoint has
incurred
a liability.
Future
minimum commercial commitments under carrier agreements are as follows
(in
thousands):
Year
Ending December 31
|
||||
2007
|
$
|
3,811
|
||
2008
|
2,131
|
|||
2009
|
1,194
|
|||
$
|
7,136
|
Note
20 - Subsequent Events
In
January 2007, we entered into a two-year employment agreement with Edwin
F.
Heinen, our Chief Financial Officer. Under the employment agreement, Mr.
Heinen
is entitled to a base salary of not less than $200,000 per calendar year
and, at
the discretion of the Board of Directors and based on meeting certain corporate
and personal goals, he is eligible to receive an annual incentive bonus
of up to
40% of his base salary. The agreement also provides for a grant to Mr.
Heinen of
200,000 restricted shares of the Company’s common stock, with one-third of such
restricted shares of common stock vesting on January 30 of each of the
following
three years.
In
May
2007, we amended the employment agreements of Michael Brandofino, our Chief
Executive Officer and President, and Joseph Laezza, our Chief Operating
Officer.
Mr. Brandofino’s agreement was amended to (i) reflect his title as Chief
Executive Officer and President, (ii) grant 400,000 restricted shares of
the
Company’s common stock, with one-half of such restricted shares vesting on each
of May 15, 2009 and May 15, 2011, and (iii) grant an option to purchase
200,000
shares of the Company’s common stock, with one-half of such options vesting
immediately and the remaining 100,000 options vesting in equal installments
on
May 15, 2008, May 15, 2009, and May 15, 2010.
F-30
Mr.
Laezza’s agreement was amended to (i) reflect his title as Chief Operating
Officer, (ii) grant 100,000 restricted shares of the Company’s common stock,
with one-half of such restricted shares vesting on each of May 15, 2009
and May
15, 2011, and (iii) grant an option to purchase 250,000 shares of the Company’s
common stock, with one-half of such options vesting immediately and the
remaining 125,000 options vesting in equal installments on May 15, 2008,
May 15,
2009, and May 15, 2010.
F-31