U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

ý

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

ýANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2008

2009

OR

¨

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

¨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)

Delaware77-0312442

Delaware

77-0312442

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification No.)

225 Long Avenue, Hillside, NJ

07205

(Address of principal executive offices)

(Zip Code)

Registrant's telephone number, including area code:(312) 235-3888

Securities registered under Section 12(b) of the Exchange Act:None

Title of each class

Name of each exchange on which registered

None

Not applicable


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.¨ Yes ý 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.¨ Yes ý 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.ýYes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o
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.¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

¨

Accelerated filer

¨

Non-accelerated filer

¨ (Do(Do not check if a smaller reporting company)

Smaller reporting company

ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  ¨Yesý No

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of June 30, 2008,2009, the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $24,355,000.

$15,078,000.

The number of shares of the Registrant’s common stock outstanding as of March 27, 200926, 2010 was approximately 47,510,063.

65,150,232.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 20092010 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2008,2009, are incorporated by reference into Part III of this Annual Report on Form 10-K.



 
TABLE OF CONTENTS
 
   
Item Page
 
PART I
 
   
1.
Business
1
1A.
Risk Factors
21
1B.
Unresolved Staff Comments
28
2.
Properties
28
3.
Legal Proceedings
28
4.
Submission of Matters to a Vote of Security Holders
28
   
 
PART II
 
   
5.
Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchase of Equity Securities
29
6.
Selected Financial Data
31
7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
33
7A.
Quantitative and Qualitative Disclosures about Market Risk
47
8.
Financial Statements and Supplementary Data
47
9.
Changes in Disagreements with Accountants on Accounting and Financial Disclosure
47
9A.
Controls and Procedures
47
9B.
Other Information
48
   
 
PART III
 
   
10.
Directors, Executive Officers and Corporate Governance
49
11.
Executive Compensation
49
12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
49
13.
Certain Relationships and Related Transactions, and Director Independence
49
14.
Principal Accounting Fees and Services
49
   
 
PART IV
 
   
15.
Exhibits, Financial Statement Schedules
50
 
Signatures
54





 

TABLE OF CONTENTS

 

 

 

 

Item

 

Page

 

PART I

 

 

 


1.

Business

1

1A

Risk Factors

15

1B

Unresolved Staff Comments

20

2.

Properties

20

3.

Legal Proceedings

20

4.

Submission of Matters to a Vote of Security Holders

20


 



PART II



 


5.

Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchase of Equity Securities

21

6.

Selected Financial Data

23

7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

7A.

Quantitative and Qualitative Disclosures about Market Risk

36

8.

Financial Statements and Supplementary Data

37

9.

Changes in Disagreements with Accountants on Accounting and Financial Disclosure

37

9A

Controls and Procedures

37

9B

Other Information

37


 



PART III



 


10.

Directors, Executive Officers and Corporate Governance

38

11.

Executive Compensation

40

12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters


41

13.

Certain Relationships and Related Transactions, and Director Independence

41

14.

Principal Accounting Fees and Services

41


 



PART IV



 


15.

Exhibits, Financial Statement Schedules

42


Signatures

47




-i-


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 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 p lans,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

Item 1.  Business

Overview

“Glowpoint's mission is to enable a global community where video communications is a part of everyday life.”


Glowpoint, Inc. ("Glowpoint" or "we" or "us" or the “Company”), a Delaware corporation, is a leadingcarrier-grade provider of advancedmanaged services for telepresence and video communications solutions.conferencing.  Our suite of advanced and robust telepresence and video communications solutions enablemanaged services empower organizations to seamlessly and consistently communicate via video over any network and with each other over disparate networks andany video technology platforms – empowering business, governmental agencies and educational institutionsplatform, enabling them to sharply boost the impact and productivity of their internal and external communications while at the same time reducingreduce their on-going operating costs.  We supportcosts and total cost of ownership.  Glowpoint supports thousands of video communications systemsendpoints in overmore than 35 countries withand our 24/7 managed video and global business-to-business (B2B) exchange services poweringare driving video collaboration for Fortune® 500 companies, major broadcasters,governmental and educational institutions, and media and entertainment broadcasters. Glowpoint also provides resale and wholesale programs, including private-labeled (branded) resale options for manufacturers, carriers, unified communications providers, and integrators seeking to offer this service as wella value-add to their collaboration and communications offerings.
Glowpoint’s core service offerings include video operations (VNOC) managed service, business-to-business exchange, video conferencing services, and professional services.
·  Glowpoint’s VNOC managed services provide a single point of contact for monitoring, scheduling, and the support and management of telepresence rooms and traditional conference rooms. 
·  
Glowpoint’s Telepresence interExchange Network (TEN) provides secure B2B calling between subscribed video endpoints. TEN is hosted in our service cloud, and is a suite of services and applications designed to overcome the challenges of using video communications outside of a company's private IP network, including the challenges associated with interconnectivity and interoperability. Our services are primarily sold on a monthly recurring contracted basis.
·  Glowpoint’s conferencing services offer scalable, pre-scheduled and “ad-hoc” conferencing resources to clients with Glowpoint’s hosted infrastructure in the Cloud. In addition to connecting in virtually any device to a call, our conference producers can manage, record, and stream video events to the web, video event based services.
·  Glowpoint’s professional services provide a compliment to our core managed service offerings and may be applied toward a branding program or even a video deployment evaluation by an enterprise. Today, Glowpoint has branded its video services for Polycom, the world’s leading video equipment manufacturer, for AVI-SPL, one of the largest integrators in the world, for a global telecommunications carrier, and for a host of others who offer Glowpoint’s managed services to their client base.
Glowpoint’s services are accessible globally and enable two-way interactive video communications through our “in the cloud” service support and hosted infrastructure.  Glowpoint’s service cloud is fully equipped with multi-tenant infrastructure, technology platforms, and applications, much of which is proprietary. Customers simply plug into the Glowpoint service cloud to gain access to video infrastructure, systems, applications, and unmatched video expertise.  In this regard, our services are analogous to the “software as global carriers anda service” industry or other cloud-based services, such as salesforce.com or rackspace.com. 
A critical differentiator of Glowpoint is that our solutions are hardware agnostic (e.g., the video equipment manufacturersmay be manufactured by Cisco, Polycom, Tandberg, or Life Size) and their customers around the world.

We view our services as analogous to cellular service providers in the cellular telephone industry. Regardless of the cellular phone purchased, users must select a cellular service provider to make it work. Users make that service decision based on the features, reliability and price offerednetwork neutral (i.e., connectivity may be via native Internet or network provided by the service provider. In our industry,AT&T, Verizon, TATA Communications, British Telecom, or others), supporting all recognized video standards across any IP network. As such, regardless of the video conferencing or telepresence equipment purchased or the network connecting it, Glowpoint provides the managedGlowpoint’s services to make it work. In doing so, we offer a vast arraymay be applied.

    Glowpoint’s core value proposition for customers includes driving wide adoption and usage of video communications, solutions, includingincreasing their return on investment, lowering their total cost of ownership, and providing access to expertise and skills not available elsewhere.  Glowpoint provides an alternative to capital intensive, premise-based infrastructure, which customers typically have had to purchase for the video application services, video operations services (VNOC) for telepresence, managed network services, IPenvironment to function, as well as the tools and ISDN videoconferencing services, multi-point conferencing (bridging), technology hosting and management, and professional services. We provide these services to aenable wide variety of companies, from large enterprises and governmental entities to small and medium-sized bus inesses. Glowpoint is primarily focused on high quality two-way video communications. With the advent of HD (High Definition) and telepresence solutions, we combined various components of our features and services, and developed new ones, to create a comprehensive service offering for enterprises and their end users that can support anyadoption of the telepresence products on the market today. Glowpoint also wholesales these services and provides private-labeled branding for manufacturers, carriers, and integrators seeking to offer this service as a value-add to their offerings for their customer bases.

Glowpoint’s video communications solutions are hardware and network agnostic, supporting all recognized video standards across any high-quality network. As a result, we havethroughout their business.  Glowpoint has become the recognized leader of managed video and global video interconnection point, linkingexchange services that provide businesses and service providers a way to link together their “islands of video” across third party private networks (e.g., provided by AT&T, SBC, Qwest and others), protocols (e.g., H320, H323, IP, SIP, and VoIP), and devices (e.g., telepresence, desktop, laptop, and mobile phone)enabling organizations to drive wide adoption.

Glowpoint’s service cloud is hosted in carrier neutral facilities across the globe, also referred to as access points of presence (POPs). Glowpoint’s services provide usersThese access POPs are all connected with a consistent experience - regardless of how they are connecting or where they are connecting from.

Glowpoint’s video communications solutions involve two major components, the Glowpoint managed video applications services and the Glowpoint managed network, services. Glowpoint has focused its sales and marketing efforts on the managed video application services, which are network agnostic and may be leveraged by customers on any QoS (Quality of Service) network that supports two-way video transport.  Glowpoint’s services for telepresence are in increased demand because they address the need for a single point of contact to provide monitoring, scheduling, support, and management of telepresence rooms and the associated equipment.  Additionally, companies look to Glowpoint as a resource to provide secure business-to-business (B2B) support when using the video systems to communicate beyond their internal enterprise use. Our Telepresence inter-Exchange Network (TEN) is a



1


suite of services and applications designed to overcome the challenges of using video outside of a company's private network, such as interconnectivity and interoperability, and we believe will be a critical component for enhanced B2B video communications. Our managed video application services are sold as a monthly subscription service and may also include Glowpoint managed network services as an option.

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 transporttransport. The Glowpoint network, which was built and managed by Glowpoint. The Glowpoint networkinternally, is exclusively dedicated to IP-based video communications, which allows uscommunications. It was designed to optimize the performance and routing of video and audio packets so asin order to offerensure broadcast quality images with telephony-like reliability, scalable features and ease-of-use. Because of the commoditized nature of network services and the investment that couldwould be required by today’s high-bandwidth telepresence uses, Glowpoint haswe have de-emphasized its aggressive salesour managed network service offering to focus more on the managed services and marketing ofB2B exchange offerings.  Our previously referenced managed network services, though that service is still utilizednow principally a means for clients to access our service cloud and TEN. Customers can access the Glowpoint service cloud and TEN exchange in demandone of four ways: (i) via public networks, such as the native Internet or public switched telephone network (PSTN); (ii) via private network peering; (iii) via existing network provider peering; or (iv) via an overlay network provided and managed by a multitude of video users. Glowpoint’s network reach spans the globe, with 11 points of presence (POPs) in secure, hardened facilities and virtually unlimited peering and interconnect capability to cost effectively deliver Glowpoint services to customers in virtually any region in the world. The interconnection points also serve as secure connection point for TEN.Glowpoint.  A unique feature of the Glowpoint network and TEN is its sophisticated gatekeepercall control infrastructure and configuration, along with its patent-pending call control capabilities (see “Intellectual Property” below), which enable. This design enables customers to seamlessly connect to nearly any standards-based video communications user in the world, whether they are still usingon ISDN, or the Internet, acrossor their own private network, virtually eliminating the United States as well as to virtually any major city around the world. Sincehistorical challenge where videoconferencing users typically cantraditionally could only communicate to others on the same service, Glowpoint is bridging these isolated islands of videohardware and making video communications more ubiquitous.  

In less than 10 years, Glowpoint has established itself as the technology leader in advanced video communications services. Ournetwork service.

Glowpoint’s services have been in production and commercially available since late 2000 when we launched our managed video subscription service, and have evolved to support the next generation of telepresence and high definition video. From 2000 to 2003, we were a division of Wire One Technologies Inc. (“Wire One”), a reseller of videoconferencing equipment that 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.  In September 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 video communications solutions. Since 2003, we have been exclusively focused on making video communications as reliable and as easy to use as the telephone and have redefined the two-way video communications marketplace.

Glowpoint is recognized as one of the premier video-over-IPa respected leading managed service providers in the market today.provider. 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.functionality and innovation. Our industry awards include: 2009 Excellence in Globalization Award (Frost and Sullivan); 2009 Top Ten Managed Service Provider (MSP mentor); 2009 Best US Managed Conferencing Services Provider (Telepresence and Videoconferencing Insight Newsletter); PACE Award for contributions to the advancement of video communications (Telespan 2008); Best US Managed Video Service Provider (VC Insight, 2008, 2007 and 2006); and Growth Company of the Year, Finalist (New Jersey Technology Council, 2007);.  We are also widely followed and Technology Innovation Award (discussed in market research by the leading industry and research analysts, such as Gartner, IDC, Frost and Sullivan,, 2002).

and Wainhouse Research.

As the video conferencing, telepresence, and telepresenceunified communications industries continue to mature, Glowpoint believes it has established itself as the “go-to” provider for enterprisesorganizations and other service providers to support their unified communication services.

needs.

Industry Overview

Overview.The videoconferencingvideo communications industry continues to transform and rapidly mature. When Glowpoint was initially launched, videoconferencing was a niche industry with unproven technology and questionable quality. We set out to capitalize on that by offering a high-quality, IP-based, reliable service. Today, video communications, especially in the form of telepresence, is becoming a more mainstream, mission critical service.technology. “Telepresence” is a termprovides an experience 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 of the meeting. The most popular representation of telepresence 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 that 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 Cisco Systems and Hewlett-Packard has brought new competition to theothers, and consolidation of some traditional videoconferencing equipment leadersmanufacturers (e.g., PolycomCisco’s announced acquisition Tandberg and Tandberg); more importantly for Glowpoint, however,Logitech’s acquisition of Life Size Communications) have, we believe, their telepresence offerings and vision have validated our business plan and brought new life and interest to the video communications industry.

Currently, we view the video communications industry segregated into four categories, each of which is a potential partner and/or customer for Glowpoint’s managed video services:

·

Videoconferencing and Telepresence Equipment Manufacturers;

·

Carriers (Network Providers);

·  Videoconferencing and Telepresence Equipment Manufacturers;
·  Carriers (Network Providers);
·  Managed Service/Conferencing Services Providers (Multi-Point Conference Services); and
·  System Integrators and Video and Telepresence Equipment Resellers.


2


·

Managed Service/Conferencing Services Providers (Multi-Point Conference Services); and

·

Video and Telepresence Equipment Resellers and Systems Integrators.


Videoconferencing and Telepresence Equipment Manufacturers.Manufacturers. Manufacturers of videoconferencing and telepresence equipment such as Polycom, Tandberg and Lifesize, focus on selling video endpoint, room, and infrastructure equipment. With the introduction of HD and telepresence, the manufacturers are recognizing that, as part of offering these more complex solutions, there is increased demand from their customers for them to also provide managed services in order to ensure a successful and problem-freeso video communications experience.usage programs inside enterprises may be successful. As such, they recognize and appreciate the need to partner with experienced service providers, like Glowpoint, who make it seamless for customers to buy and use the manufacturer’s products.  Glowpoint’s managed services offerprovide purchasers of this equipment, especially expensive telepresence systems, the peace of mindknowledge that their video conferences and telepresence rooms will be managed rel iably,reliably, maximizing the customer’s use (and return on investment) of the expensive equipment.

Carriers (Network Providers). Carriers, or network providers, play a critical role in video communications because of the need to transport video calls over high-quality IP bandwidth. Historically, ISDN services were the primary means of transport provided by major carriers around the world. According to some estimates, there may be 500,000 or more videoconferencing systems globally that still usinguse ISDN. With the emergence of the more robust, scalable, and scalablesophisticated IP network capabilities for videoconferencing and telepresence, the network providers are now aggressively offering services that include high qualityintelligent virtual private networks (VPNs) on which customers may support data, voice and video applications simultaneously. 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 noRecently, more IP-based video communicationcommunications applications o rand managed services. This means that customers may connect their video conferencing equipment to aservices have emerged as an integral part of converged network but must then figure out howofferings. Although in its infancy, we believe that trend will continue as the demand and requirements for video communications continue to support the video applications on their own. This amounts to "self service" videoconferencing, where video usersgrow.  Glowpoint services and hosted infrastructure are isolated on the converged network with no video application services or support available.

While it may appear that other network providers are competitors, most of the network providers lack dedicated video expertise and do not offer IP video services or support. Essentially, their offering is simply bandwidth and their video services, ifaccessible across any are still focused on ISDN. Glowpoint has been able to leverage this distinction by offering its services over third party networks (rather than the Glowpoint network). We call it "Glowpoint-enabling" or "Exchange Interconnect," which effectively gives a customer’s private network access to Glowpoint’s video application services. This allows network providers to partner with Glowpoint and remainprovider’s network. So, carriers can be a trusted and comprehensive provider for their video communications customers.

customers by partnering and peering with Glowpoint, offering the Glowpoint service cloud as part of their network service offerings.  This strategy has the added benefit of increasing the demand for network bandwidth, thereby increasing the carrier’s network sale.


Managed Service/Conferencing Services 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 service providers are heavily dependent on legacy ISDN as the network transport for these multi-point conferences – we understand as much as 80-90% of their multi-point revenue is derived from ISDN. Glowpoint, on the other hand, offers both multi-point conferencing services as well as a full range of managed video services that are primarily IP-based. IP-based services offer more flexibility, higher quality and, because there are no long distance usage charges, at lower and more predictable costs.

Video and Telepresence Equipment Resellers and Systems Integrators. Video and telepresence equipment resellers and systems integrators, who typically derive nearly all their revenue from one-time equipment and integration services, are facing growing margin pressures as well as increased competition related to videoconferencing equipment sales. We believe they may need to transform their business models, possibly to generate recurring revenue.  To do so, these providers may attempt to either reproduce the features, experience and services provided by Glowpoint or to become a reseller or wholesale partner of Glowpoint's services themselves. While some videoconferencing equipment resellers have chosen to competeattempt competing with us,the Glowpoint offerings, others have chosen to partner with and resell Glowpoint’s services to increase their speed to market and transform their businesses.

Market Need.   The complexity of video communications is increasing. Most businesses already findincreasing, while usage of video is becoming more critical in the mix of unified communications. Many enterprises have become dependent on video communications for increased productivity while also reducing operating costs, and have made it difficult topart of their core business practices. These same enterprises have difficulty and incur considerable cost in effectively maintainmaintaining and managemanaging their existing business applicationsvideo communication deployments because of the shortage of experienced information technology and network personnel. Many customers appreciateenterprises also recognize that supporting video communications ininside their enterpriseorganization distracts their core support organization from other critical business application supportapplications and requires a different skill set than normal business IT support. As a result, businesses are increasingly require outsourced solutionsseeking out managed services and providershosted, cloud-based infrastructure to support theand power their user community and manage their network dedicated to video.video technologies. In fact, isolating and extending the video applicationapplications from other business applications and existing communications infrastructure has become an increasingly important capability for larger organizations.  AsWith the rapid advancements in video technologies, it has become increasingly expensive and difficult for enterprises to maintain the infrastructure itself, werequired to power these technologies. We believe that many customers cannot full yfully support quality videoconferencingvideo communications on their networks. And, even if a customer network can support videoconferencing, manyexisting infrastructure and network. Many businesses 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 inWe view the network, however, as a corporate local area network or Intranetmeans to handle real-time transmission of imagesaccess video applications and audio, in addition to data applications, can be difficult and can significantly impede overall network performance. An effective video network must also be easily scalable in much the same way thatinfrastructure. Therefore, we believe 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 tel ephone service. We believe that there exists a significantgreater market opportunity to continueneed is to provide an IP-basedaccess to current and next generation infrastructure across those networks. Glowpoint’s “video in the cloud” approach allows enterprises of all sizes to connect via any network connection to power their video communications solution that is as scalable, dependable and, ultimately, as commonplace as voice telephony.



3


deployments.

The surge in deployment of Voice over IP (VoIP) is an example of a technology that hashad been technically feasible for years, but did not gain popularity until the full feature and services people were accustomedit was easy 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.use. Because most companies did not provide those featuresaccomplish this on their own, VoIP service providers developed themfeatures and nowservices to make VoIP simple to adopt and use.  Now companies can simply “plug” their VoIP networks into traditional telephony companiesthe Cloud for these application services and off-net transport.

services.

Glowpoint is the “video” telephony company offeringservice provider with services and features enabling wide adoption of video communications for businesses and their users. We specialize in making video communications easy to use and offer application services largely unavailable from anyone else at this time and difficult, if not impossible, for customers to build on their own (see “Intellectual Property” below). Glowpoint providestime. Glowpoint’s unique features and services, such as seamless and secure business-to-business video calling, a comprehensive video exchange directory of businesses connected to TEN, ten-digit dialing video phone numbers automatically routed to IP video systems, live on-demand video operator services, video mailboxes, seamless video calling to off-net locations anywhere in the world and other video application services, allare available to customers by simply “plugging” their video systems or rooms into the Glowpoint service cloud.


Market Size.According to somemany industry leaders, only about 5-8% of conference rooms in United States businesses have videoconferencing equipment. We believeanalysts, the industry still has not begun to fully 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 both in the business and consumer markets. Major technology companies such as Cisco Systems and Hewlett-Packard have publicly announced that they feel the telepresence market alone can become a multi-billion dollar industry in the coming years.

According to some industry analysts, market research by IDC and published Cisco white papers, the network services side of the videoconferencing industry (currently dominated by network providers) and managed services (such as video operations and multi-point conferencing) is anticipated to grow to more than $4billions of dollars annually in the coming years. Gartner Research, for example, predicts the videoconferencing products and services market worldwide – which includes equipment, network and managed services – will reach $8.6 billion globally overby 2013, with the next few years. Further market data continues to support these projections, with some exceeding the numbers when considering the economic crisis and its impact on video usage and adoption. While still in its relative infancy, wefor services totaling approximately $3.8 billion.* We believe that Glowpoint’s aggregate potential addressable market, which includes end-user customers and industry partners, is significant, though we can give no assurance as to what our market share will be in the coming years.

*Gartner publication date: 28 September 2009 ID Number: G00171041 – Dataquest Insight: Videoconferencing Products and Services Market Forecast, Worldwide, 2007-2013
Glowpoint Services and Features

Glowpoint offers a vast array of video communications managed serviceservices and solutions including video operation services, conferencing services, managed network services, technology hosting and management, and professional services. We are focused primarily on high qualityspecifically designed to support two-way video communications and our offerings have evolved to meet market demands. In the process we have supported 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 superior support are unrivaled and a key differentiator in the industry. We have also bundled some of ourcommunications. Our managed services to offer unique video communication solutions for broadcast/media content acquisitionare delivered and video call center applications. In addition,supported via our hosted infrastructure platform and proprietary applications, systems, and processes, along with our expert operations, engineering, and development resources that make up the growth of HD (High Definition) telepresence solutions, we have productized comprehensive video operation services we call our VNOC (video network operations center) services. Theseservice teams. Our services can support any of the telepresence and HD solutions on the market today, regardlessand are designed to enable enterprises of any size to connect as an extension of their own video environment or as an alternative to building one. We believe our experience, expertise, superior support, video-centric focus, unique features and services, hosted infrastructure and exchange are unrivaled and key differentiators in the industry. We have also been successful in bundling some of our services to offer unique video communication solutions that are market and application specific, such as broadcast/media content acquisition and business-to-business private and public exchange applications.
TEN Connect
Glowpoint’s Telepresence interExchange Network (TEN) resides inside Glowpoint’s service cloud and is made up of infrastructure housed in several global carrier-neutral hardened and redundant facilities that are all connected by a global IP MPLS network. Our TEN connect service provides multiple options to establish connectivity into Glowpoint’s hosted exchange and service infrastructure. For enterprises with private networks, this connection is typically referred to as an “extranet connection” to Glowpoint, which enables connecting endpoint devices and rooms to be part of Glowpoint’s global business-to-business community on TEN and automatically gain access to Glowpoint’s video infrastructure and managed services.  Registration with TEN is established on a per device/per room basis and may be accomplished via four different connection options: (i) via public networks, such as the native Internet or PSTN; (ii) via private network connection.

peering; (iii) via existing network provider peering; or (iv) via an overlay network provided and managed by Glowpoint. The following outlines the four connectivity options in more detail:

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Internet Connect (Public Network) – For non-telepresence video systems and desktop video conferencing, the native Internet is sometimes considered an acceptable means to communicate with others. However, when those users attempt to communicate via the Internet in to or out of a private enterprise, they are almost always blocked because common industry security practices do not allow inbound or outbound video from the Internet. By registering those video endpoints with Glowpoint, however, users will have access to Glowpoint’s hosted video infrastructure, access to Glowpoint’s unique features and services, and make communication from one registered Internet connected endpoint to another registered Internet connected endpoint possible.

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Enterprise Connect (Private Network Enablement) – In the increasingly popular world of convergence, many enterprises seek to leverage their own networks for video transport, but face challenges when making video calls off of their own network. In these situations, Glowpoint provides them with secure interconnectivity and firewall traversal capabilities that effectively allow them to get off of their private "island of video" and connect to other video endpoints, while taking advantage of all the other Glowpoint services and infrastructure. This secure interconnect gives customers connectivity to Glowpoint’s TEN, permitting B2B calling, access to Glowpoint’s hosted infrastructure, and access to Glowpoint’s unique features and services.

·  
Carrier Connect (via existing IP network carrier) – Glowpoint’s exchange is peered with numerous carriers in the world and provides the ability for customers to gain access to TEN through these carriers’ network services. For carriers, the opportunity to enhance their network offering with Glowpoint’s TEN provides them with a value-added service that is increasingly required for an enterprise’s video applications. Today, Glowpoint provides both customer initiated and carrier branded peering to enable access to our award-winning B2B services, hosted infrastructure, and other unique features and services.

·  
Overlay Connect – Glowpoint can also provide a dedicated, Quality of Service (QoS), managed IP network video connection directly to each customer site with video endpoints. This managed network service may include “last mile” (or local loop) connectivity, which is the network connection between a TEN access point and the customer’s location.  A Glowpoint managed router is placed on site and then connected to the customer’s video endpoint(s). All video traffic is transported through this dedicated connection, which can be delivered from as little as a 512 kbps connection, over the Glowpoint IP video purposed network that connects the TEN access points of presence globally. All Glowpoint overlay connect customers have access to Glowpoint’s hosted infrastructure, have an automatic connection to TEN, and are equipped with all of Glowpoint’s unique features and services.

Video Operations Services – VNOC Elite(Premier and VNOC Premier

Select)

Glowpoint has been providing the highestis recognized as a video communications expert and industry leader in delivering high quality “white glove” service as part of its product offeringsmanaged services for years. Now, with HD and telepresence technology and the accompanying high expectations in the marketplace for the quality, performance and service, the company isany video environment.  We continue to be well positioned with its offering to support the latest customer demands. Our video operations services have been positioned to support high-touch, fully managed environments (VNOC ElitePremier offering) as well as self-use support environments (VNOC PremierSelect offering). The services includeOur global VNOC service offering includes the following:

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Room Certification; Proactive Monitoring and “Room Sweeps”: Each customer location, such as a telepresence room, is certified by Glowpoint

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Room Certification; Proactive Monitoring and “Room Sweeps”: Each customer location, such as a telepresence room, is certified by the VNOC to verify the operational capabilities of that room, including video devices, room technology and video infrastructure. Thereafter, the room is proactively monitored with dozens of alarm points to allow the VNOC to identify and fix any technology trouble before users are impacted. In addition to the proactive monitoring, we conduct a “room sweep” using a proprietary application, which is not available from any other managed service provider in the industry today.  Our proactive monitoring and room sweeps ensure that certified rooms remain operational and are ready for the start of every conference.
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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 provides dedicated dial-in access or Web mail/portal access right from the room.  We also provide this support service in multiple common foreign languages (e.g., Spanish, French, German, Japanese and Mandarin).
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Scheduling: Scheduling with the VNOC service removes any concerns of room management and allows customers to book room resources through all available means, such as a dedicated toll-free number (direct dial for international calls), concierge service through video one touch dialing, and Web portal scheduling tools which are integrated with Microsoft Outlook and Lotus Notes. 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, logo and marketing tagline). Glowpoint’s advanced online scheduling tool solves many of the challenges large enterprises encounter with room resource management today.

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Conference Production and Monitoring: A Glowpoint telepresence conference producer will set up and manage the successful launch and connection of all sites in the telepresence meeting or video call, including point-to-point or multi-point calls. Our VNOC team then continuously supports and monitors all calls, including digitally monitoring connectivity levels by a qualified video producer. Our goal is to ensure that the technology is transparent to our users.
·  
Help Desk Support: Our VNOC team provides technical support for all active calls during a 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 video solutions, our top priority is resolving endpoint or connectivity issues.
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Training: We believe that successful use and adoption of video communications 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.
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Stewardship Reporting and Service Reviews: We provide monthly stewardship reports that capture key metrics related to the performance of the room, the associated network, and various support levels, including statistics related to usage (number of meetings, duration, and hours of use), network and room connectivity availability, network and 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.
·  
Advanced Network Monitoring: If a client chooses to use another network to support its telepresence rooms, Glowpoint offers advanced network monitoring which allows the VNOC service to not only qualify the room readiness at all times, but to also monitor the performance of the network supporting that room. We will set thresholds based on the requirements of video traffic and react and report on any deficiencies.
Glowpoint’s VNOC services can be accessed and utilized by customers regardless of the technology and video infrastructure. Thereafter, the room is proactively monitored with dozens of alarm points to allow Glowpoint to identify and fix any technology trouble before usersnetwork they are impacted. In addition to the proactive monitoring, Glowpoint conducts a “room sweep” using its proprietary tools, which are not available to any other managed service provider in the industry today.  Glowpoint’s proactive monitoring and room sweeps ensure that certified rooms remain operational and are ready for the start of every conference.

·

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 provides dedicated toll-free dial-in access or Web mail/portal access.

·

Scheduling:Scheduling with the VNOC service removes any concerns of room management and allows customers to book room resources through all available means, such as a dedicated toll-free number (direct dial for international calls), concierge service through video one touch dialing, and Web portal scheduling tools which are



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integrated with Microsoft Outlook and Lotus Notes. Glowpoint’s online scheduling tool is advanced and solves many of the challenges with room resource management that many large enterprises encounter today. 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, logo and marketing tagline).

·

Conference Production and Monitoring: A Glowpoint telepresence conference producer will set up and 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.

·

Help Desk Support: Our VNOC team provides technical support for all active calls during a 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 video 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 room, the associated network, and various support levels, including statistics related to usage (number of meetings, duration, and hours of use), network and room connectivity availability, network and 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.

·

Advanced Network Monitoring: If a client chooses to use another network to support its telepresence rooms, Glowpoint offers advanced network monitoring which allows the VNOC service to not only qualify the room readiness at all times, but to also monitor the performance of the network supporting that room. We will set thresholds based on the requirements of video traffic and react and report on any deficiencies.

The Glowpoint VNOC solution may be bundled with our Quality of Service (QoS) managed network service or offered on its own by Glowpoint-enabling another network service.using. Customers who purchase a Cisco, Polycom, or Tandberg Telepresence or HD video solution, for example, may all take advantage of the Glowpoint VNOC solution regardless of their choice of network. Customers choosing to Glowpoint-enable their network may interconnect with Glowpoint’s Telepresence inter-Exchange Network (TEN) with sufficient bandwidth to handle business-to-business (B2B) telepresence calls. 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 ne twork solution is ideal to support the telepresence suites, especially when customer networks cannot handle those demanding requirements.  

Managed Network Service

purchasing Glowpoint’s managed network service is an extranet connection to Glowpoint, enabling connecting endpoints to be part of Glowpoint’s global business-to-business (B2B) community, TEN, andservices also gain access to Glowpoint’s video application services.  This is primarily done in two ways – (i) registering video endpoints or (ii) via a full high-quality IP network overlay.Most network providers lack dedicated video expertiseour service cloud (hosted infrastructure and do not offer IP video services or support. Instead, they tend to offer bandwidthservices), such as on-demand B2B telepresence calls and their video services, if any, are still focused on ISDN. Glowpoint has been able to capitalize on this deficiency by offering its IP-based services over those third party networks (rather than the Glowpoint network); allowing network providers to partner with Glowpoint and remain a trusted and comprehensive providervirtual meeting rooms.

Award-winning Applications for their video communications customers. We call it "Glowpoint-enabling" or "E xchange Interconnect," which is a “bring-your-own-access” (“BYOA”) offering and permits customers to leverage their existing internal IP networks or VPNs (virtual private networks) while still enabling a customer’s video systems to (i) communicate with other video users on separate networks and on different video platforms and (ii) grant access to Glowpoint’s video application services. There are three ways to connect:

·

Network Overlay –Glowpoint provides a dedicated, Quality of Service (QoS), managed IP network video connection directly to each customer site with video endpoints. This managed network services may include “last mile” (or local loop) connectivity, which is the network connection between Glowpoint’s network backbone and the customer’s



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location.  A Glowpoint managed router is placed on site and thenVideo

Once connected to the customer’s endpoint(s). All video traffic is transported through this dedicated connection, which can be delivered from 512 kbps and up, over the Glowpoint IP video network. All Glowpoint network overlay customers have access to Glowpoint’s shared infrastructure (e.g. MCUs, gateways, etc.), have an automatic connection to Glowpoint’s B2B Telepresence inter-Exchange Network (TEN), and are equipped with all of Glowpoint’s unique features and services.


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. 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.


·

Private Network Enablement – 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 off of their own network. In these situations, Glowpoint provides companies with a secure interconnect and firewall traversal capabilities that effectively allow them to get off of their private "island of video" and connect to other video endpoints, while taking advantage of all the other Glowpoint services. This secure interconnect gives customers connectivity to Glowpoint’s TEN Network permitting B2B calling, access to Glowpoint’s shared infrastructure (e.g. MCUs, gateways, etc.), and access to Glowpoint’s unique features and services.


·

Public Network (Native Internet) Enablement – For non-telepresence video systems and desktop video conferencing, the native Internet is sometimes considered an acceptable means to communicate with others. However, when those users attempt to communicate via the Internet in to or out of a private enterprise, they are almost always blocked because common industry security practices do not allow inbound or outbound video from the Internet. By registering those video endpoints with Glowpoint, however, users will have access to Glowpoint’s shared infrastructure (e.g. MCUs, gateways, etc.), access to Glowpoint’s unique features and services, and make communication from one Internet connected endpoint to another registered endpoint possible.


Managed Video Application Services

Once connected via Glowpoint’s managed network service,cloud, or interconnected by virtue of being a VNOC customer, customers gain access to Glowpoint’s award winningaward-winning video application services,applications, which arecontinue to offer some of the most unique features available today. today, including:

·  
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 monthly price.  Glowpoint customers also receive a dedicated 10-digit “phone number” for each video endpoint, which people are accustomed to dialing and, we believe, facilitates adoption of video communications.


·  
Traffic and Technology Monitoring– Glowpoint provides 24x7x365 monitoring of its network and infrastructure to maintain its Quality of Service (QoS) commitment to its customers, which is required for today's mission critical video communications.  Customer IT departments are often required to determine network problems, such as latency, jitter, packet loss and overall connection quality, which can challenge an IT group, especially while a video call is occurring. Glowpoint’s monitoring gives those professionals peace of mind and can make the video experience predictable and successful.
·  
Unified Call Scheduling and Call Launching– Glowpoint’s unified video call scheduling service is provided by our proprietary web-based portal, which can be synchronized with an enterprise resource scheduler, such at Microsoft Outlook or Lotus Notes, or through a live reservationist via telephone or email. Glowpoint also provides a call launching service, thereby guaranteeing the successful start of scheduled video conferences. Prior to the start of a scheduled conference, skilled Glowpoint conference producers or Glowpoint’s proprietary systems call each video endpoint to ensure that it is properly connected for the call.
·  
“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 registered endpoint. Video operators can help callers with general questions about their service and can provide them the dialing information they need to process calls.
·  
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.
·  
Automated 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 automated 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. 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 video endpoint.

·  
IP-to-ISDN and/or Internet Gateway Access; Reduced Rate International Calling – Glowpoint’s shared infrastructure is equipped with a sophisticated gatekeeper platform that enables a seamless transition between ISDN and IP technologies and Internet-based endpoints. Essentially, this capability allows Glowpoint IP customers to place and receive calls with any ISDN or Internet-based video system or voice phone in the world. 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. We route video calls over our IP network to our nearest point of presence, where the call is then handed off to the in-region ISDN network, thereby eliminating or reducing long distance charges.
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Reservation-Less, Bridging on Demand (“Meet Me Rooms”) – This “bridging on demand” (BOD) service permits multiple users to see and communicate simultaneously on one screen in a virtual room, without the need for reservations or call management. The shared infrastructure MCU enables various modes of viewing, including continuous presence that allows all parties to see each other at the same time in a collaborative conference session, allows Speaker Only, allows Speaker voice activated, and various other layouts. The BOD service is a cost effective, automated alternative to pre-scheduled managed multi-point calls. We offer this service in both standard and high definition.
These proprietary features and services are designed to facilitate use and drive wider adoption -- making video as easy and spontaneous as using the telephone, but with the power of face-to-face communications.  Our proprietary video application services and features include:

·

Video calling plan–Customers can make and receive unlimited calls to video systems on the Glowpoint video network or the public Internet for one fixed monthly price.  Glowpoint customers also receive a dedicated 10-digit “phone number” for each video endpoint, which people are accustomed to dialing and, we believe, facilitates adoption of video communications.

·

Traffic and Technology Monitoring–Glowpoint provides 24x7x365 monitoring of its network and infrastructure to maintain its Quality of Service (QoS) commitment to its customers, which is required for today's mission critical video communications.  Customer IT departments are often required to determine network problems, such as latency, jitter, packet loss and overall connection quality, which can challenge an IT group, especially while a video call is occurring. Glowpoint’s monitoring gives those professionals peace of mind and can make the video experience predictable and successful.

·

Unified Call Scheduling and Call Launching– Glowpoint’s unified video call scheduling service is provided by our proprietary web-based portal, which can be synchronized with an enterprise resource scheduler, such at Microsoft Outlook or Lotus Notes, or through a live reservationist via telephone or email. Glowpoint also provides a call launching service, thereby guaranteeing the successful start of scheduled video conferences. Prior to the start of a scheduled conference, skilled Glowpoint conference producers call each video endpoint to ensure that each is properly connected for the call.

·

“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. Video operators can help callers with general questions about their service and can provide them the dialing information they need to process calls.



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·

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.

·

Automated 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 automated 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. 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 video endpoint.

·

IP-to-ISDN and/or Internet Gateway Access; Reduced Rate International Calling –Glowpoint’s shared infrastructure is equipped with a sophisticated gatekeeper platform that enables a seamless transition between ISDN and IP technologies and Internet-based endpoints. Essentially, this capability allows Glowpoint IP customers to place and receive calls with any ISDN or Internet-based video system or voice phone in the world. 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. We route video calls over our IP network to our nearest point of presence, where the call is then handed off to the in-region ISDN network, thereby eliminating or reducing long distance charges.

·

Reservation-Less, Bridging on Demand (“Meet Me Rooms”) –This “bridging on demand” (BOD) service permits multiple users to see and communicate simultaneously on one screen in a virtual room, without the need for reservations or call management. The shared infrastructure MCU enables various modes of viewing, including continuous presence that allows all parties to see each other at the same time in a collaborative conference session, allows Speaker Only, allows Speaker voice activated, and various other layouts. The BOD service is a cost effective, automated alternative to pre-scheduled managed multi-point calls. We offer this service in both standard and high definition.

These proprietary video application services, many of which are the subject of patented and patent-pending technology (see “Intellectual Property” below), were developed by Glowpoint over many years of focusing exclusively on video communications. While not an applicationper se, Glowpoint customers also have access to video communications support and expertise that we do not believe is available anywhere else.unmatched in experience and skills. Our Network Operations CenterVNOC 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.

Managed Conferencing Services

Glowpoint’s managed conferencing services include managedscheduled and on-demand multi-point video conferencing, event management and web streaming.


·

Managed Video Conferencing –

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Managed Video Conferencing – 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.  Our world-class global conferencing service and skilled professional technicians provide high quality service to fulfill all conferencing needs – at a competitive price. With our managed multi-point conferencing service, virtually anyone can participate on a video call together. Glowpoint also launched one time.  Our world-class global conferencing service and skilled professional technicians provide high quality service to fulfill all conferencing needs – at a competitive price. With our managed multi-point conferencing services, virtually anyone can participate on a video call together. Glowpoint was recognized as offering the world’s first High Definition (HD) and telepresence managed multi-point conferencing services.

·  
Event Management – Glowpoint provides a full range of event management services to support mission critical conferences. Glowpoint’s broadcasting, room rental capabilities and streaming services extend the range of a customer’s video equipment to participants around the globe, and Glowpoint’s experienced technicians provide the expertise needed for a well organized, professional meeting.

·  
Web Streaming Events – Glowpoint provides a full complement of streaming media solutions that enable our customers to leverage their existing video environment and broadcast their meetings over the web for extended viewership. Our solutions offer both live and on-demand offerings.


·

Event Management –Glowpoint provides a full range of event management services to support mission critical conferences. Glowpoint’s satellite broadcasting, room rental capabilities and streaming services extend the range of a



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customer’s video equipment to participants around the globe, and Glowpoint’s experienced technicians provide the expertise needed for a well organized, professional meeting.


·

Web Streaming Events –Glowpoint provides a full complement of streaming media solutions that enable our customers to leverage their existing video environment and broadcast their meetings over the web for extended viewership. Our solutions offer both live and on-demand offerings.


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 the market for such services 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.

Private Labeling; Technology Hosting and Management Services
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 will provide all of the video infrastructure and support, including customer portals and billing applications, as a private label service for a third party. This means that our services are branded with the other company’s name, logo and other information, our live operators answer calls using the other company’s name, 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.”  Glowpoint has been involved in a number of private label opportunities, branding various services, including VNOC services, for multiple strategic global partners.  For example, Polycom, a leading video conferencing equipment manufacturer, has branded Glowpoint’s services as their own Polycom managed video services for sale by Polycom salespeople.  Additionally, AVI/SPL, one of the largest audio/visual integrators in the world, has also branded Glowpoint’s managed video services as their own. Many other strategic global companies in the unified communications industry have recognized Glowpoint’s value to their own sales and marketing efforts and have, or have indicated they will, brand Glowpoint’s services as part of their own product and service offerings.
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 began leveraging our intellectual property and video infrastructure by offering to host other companies’ video-related equipment and applications. 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.
Market Solutions:Solution: Bundled OfferingsOffering for Broadcast and Video Call Centers

Event Services.  We have bundled certain components of our managed services to offer video communication solutions for broadcast/media content acquisition and video call centers.

Managed IP Video Service for Broadcast and Event Services

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 professional football and professional basketball 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 companie s,companies, including ESPN and NFL Network.

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 announcedGlowpoint now provides a multi-year agreement with NASCAR Images asfull suite of HD solutions for the first customerbroadcast, entertainment and media industry and is considered a high-quality alternative to deploy the TeamCamHD solution, which will be used to provide the NASCAR industry the ability to acquiretraditional means of acquiring content such as driverin many applications, including interviews between races, which may then be distributed to key media outlets for dissemination.

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 alleven full motion video.


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Table 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 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.

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)  and integration with our business customer’s existing call management system technology in its call center.

Private Labeling; Technology Hosting and Management Services

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 will provide all of the video infrastructure and support, including customer portals and billing applications, as a private label service for a third party – that is, our services are branded with the other company’s name, logo and other information, our live operators answer calls using the other company’s name, and the other company’s end user customers view the service as provided by

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that other company even though it is actually “powered by Glowpoint.”  Glowpoint has been involved in a number of private label opportunities, including Sony and Vision Net (Australia), and, in the last 18 months, has branded various services for multiple strategic global partners specifically for VNOC services.

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. 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.

Intellectual Property

Supporting these unique services and features is Glowpoint’s patented and patent-pending proprietary technology developed specifically for two-way video communications. Since Glowpoint’s inception, we have spent millions of dollars and tens of thousands of engineering hours designing, building, and perfecting our managed video services and spent millions of additional dollars 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 patenttwo patents 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.

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. In April 2007, we were 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.  In February 2009, we were awarded a U.S. Patent for our technology to gather usage information on IP-based calls. This patented technology provides the ability to meter and bill an end-user on a transactional basis for IP-based video calls, just as traditional telephone calls are billed. This unique capability is a vital development as more and more telepresence and video conferencing calling traffic is distributed over disparate IP-based networks – rather than ISDN – as B2B calling is becoming much more common for video user.
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, 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.
Network Architecture

We designed and built our global network that connects the service cloud and TEN access points to meet andor exceed what we believe to beare 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

This 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 networkIt is a ring with mesh points to provide full redundancy on the backbone. Utilizing carrier grade Ciscoswitching and routing, along with session border controls to access 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 access points and backbone architecture accounted for this and our backbone capacityTEN exchange traffic and video sessions utilizing our infrastructure can more than triplescale with modest additional investment.  Because

We maintain a state-of-the-art network operations center (NOC) atstaffed command and control (network operations) centers in three locations across the United States – from our Hillside, NJ headquarters, to our facilities in Conshohocken, PA and in Venutra, CA – from which we monitor the operations of our network and infrastructure on a 24x724x7x365 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 Points of Presence (POPs),POPs, which was done for improved video performance and, more importantly, to address security and disaster recovery/business continuity matters. We utilize Zyrion Traverse, EXFO’s Brix solution,
Our access and Cisco Works network management tools to monitor and support our network. We also use Microsoft CRM for workflow in order to track and report trouble tickets.

Our proprietary network architecture includesexchange POPs include Glowpoint-owned equipment installed at carrier neutral collocation centers across the country,globe, connected by multiple dedicated high-speed circuits.circuits that make the fabric of our Telepresence interExchange Network (TEN).  These Points of Presence (POPs)access and exchange POPs contain our cloud-based application infrastructure, provide access to virtually every carrier in the world, and 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.  Our model is complimentary for any MPLS provider in the world to enable Glowpoint video application services on their respective networks.  We have contracted with numerouspurchase network from various providers, for backbone circuits, aggregate hubs and collocation facilities. Ourincluding our primary vendors in the United States are (i) Qwest and XO 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, are our primary SD SL providers withEasynet, Masergy, PCCW, Qwest, Verizon Business/MCI, andSprint, TATA Communications, XO Communications, providing private line DS-1 services. We use Network-I and Easynet for DSL as well as T-Systems, Masergy and others for international connectivity.Verizon Business/MCI.

 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 networkTEN architecture was specially designed for the efficient and cost-effective delivery of feature-rich two-way video content. The networkexchange 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 videoa patented IP-based call detail record (CDR) feature that allows for detailed tracking on a call-by-call basis for point-to-point,



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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 believed 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


Hardware Interoperability

We are hardware agnostic. Therefore, we strive to ensure that our managed video services work with any available videoconferencing equipment, both standards-based videoconferencing equipment.or SIP. 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 relationshiprelationships with all of the leading video equipment manufacturers, such a sas Polycom, Tandberg, Sony, Cisco, HaiVision, Life SizeLifeSize (a division of Logitech), 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

The development of our “video as a service” applications and network architecture and video applicationshave resulted in a significant amount of intellectual property – from real-time ratingmetering and billing for video calls to videointelligent call center applications for customer support.routing. In 2007, we received our first patent; in 2009, we were awarded a second patent.  A number of other applications have been filed with the United States Patent and Trademark Office and are in various stages of the patent process, which included initialinclude some rejections to which we have responded in due course.  We have abandoned one patent application, determining that the likelihood of an award and the cost to obtain it versus the value of the potential award did not justify proceeding any further.  While there can be no assurance that a patent will be awarded, we believe that thisour patented and patent-pending proprietary technology provides an important barrier for competitive offerings of similar video communications services. We are unique and, given our proprietary technology, believe we are especially well positioned to partner with telecommunications carriers, virtual priva te network providers, equipment manufacturers, resellers and other companies focused on integrating innovative and high qualityhigh-quality video solutions into their product mix.

As mentioned above, we were awarded U.S. Patent No. 7,200,213 B2 in April 2007 for our live video operator assistance feature. Thisfeature and awarded U.S. Patent No. 7,664,098 in February 2009 for our real-time metering and billing for IP-based calls. Our patented “Live Operator” 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. Our “Call Detail Records” (CDR) patent for IP-based calls provides the ability to meter and bill an end-user on a transactional basis, just as traditional telephone calls are billed. This unique capability is a vital development as more and more telepresence and video conferencing calling traffic is distributed over disparate IP-based networks – rather than ISDN – as B2B calling is becoming much more common for video users.  We believe this patent helpsthese patents help solidify our position as the leader in developing solutions that make video communications a critical business application for our customers.



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customers and help drive wider adoption and acceptance.

We have substantial intellectual property with regard to two-way video communications. Due to resource prioritization matters, we have initially only pursued those patent applications we believe are the most strategic.strategic and have limited them to the United States.  The following is a brief description of our pending patents and their role in our managed video service offering:

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Video Call Director - When you place a voice telephone call, you expect some resolution



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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 TEN subscribed 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.
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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 a video banking application, 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.
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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, which currently connects our TEN access POPs globally, along with our core video network architecture. We combined off the shelf components with proprietary design and technology to create what we believe was 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 successfully delivering high quality video communications.
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PC-Based Video Interface Tool – For the “road warrior” businessman who needs to participate in video meetings from any location with Internet access (e.g., hotel or airport), we developed a downloadable software interface that resides on your personal computer that automatically initiates video calls or a number of other functions utilizing point-and-click technology.  This tool takes advantage of our cloud-based intelligent call routing engine that initiates the communication session with the requested destination. Some examples include clicking a button to reach a live video operator, to retrieve video messages from a video mailbox, to access designated Web sites or tools (e.g., Web collaboration tools such as WebEx®), or to participate in point-to-point or multi-point video calls to other PC-based or hardware-based video systems from your address book.  Other features using this proprietary technology include the ability to record a video or audio session in addition to desktop data sharing with the click of a button.
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Table 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 vi deo mailbox, follow-me video numbers (see below), and video call transfers and forwarding.

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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 a video banking application, 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.

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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 tech nology has been instrumental in selling our managed video services to law firms, consultants and professional services customers.

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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 what we believe was 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 successfully delivering high quality video communications. With the introduction of HD and telepresence, there are increased concerns regarding carrying video traffic with data traffic on the same network. We believe these concerns underscore the need to carry video communications on a ded icated IP video network like Glowpoint’s patent-pending network.

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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 man ufacturers, we believe our patent-pending technology is the first complete service solution.

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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, 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

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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.

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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 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 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 it may be cu rrently ahead of its time, we believe this patent-pending technology will be valuable in the future.

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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.

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Systems and Method for Automated Routing of Incoming and Outgoing Video Calls between IP and ISDN networks – Even though adoption of IP video has continued to surge, there is still a large number of video communications users in the world using legacy ISDN networks. Early on, we recognized the need to ensure the migration from ISDN to IP to be simple and seamless in order to connect IP users with ISDN systems around the world. We believe Glowpoint is still the only service that assigns actual phone numbers to customers as their “alias” or identification within the TEN exchange, enabling users to simply dial the phone number to “gateway” from their IP system on Glowpoint’s TEN to ISDN systems globally. In addition, inbound dialing to a TEN registered video system is possible from virtually any ISDN video system, or even a desk phone or cellular phone anywhere in the world. This patent-pending automated call routing capability has been leveraged to provide a least cost routing and gateway method to customers, routing the call to the most inexpensive gateway exit point off the Glowpoint network before entering the PSTN/ISDN network.
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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 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 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.
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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”), strategic relationships with videoconferencing equipment manufacturers, unified communication providers, global integration service providers, equipment resellers, audio/visual integrators, and network providers have expanded our indirect sales channels. The global demand for video communications has also increased our opportunities for regional partnerships in the world, including in the emerging markets of Asia/Pacific, Middle East, and Central/Latin Americas.  Many of the complex solutions sought in today’s market, especially telepresence and unified communications solutions, 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 matterRegardless of 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 barr iersbarriers to buying, and increase our return on investment against our sales, marketing and promotional efforts.

investments.



Historically, one of our main sales challenges was that video communications was not generally perceived as a critical application for most companies. Thiscompanies, which resulted in historically moderate growth. Recentgrowth opportunities and results. Technology developments in the video communications industry, improvements in network offerings, and achanges in human behavior, driven by such global conditions as the recent economic downturn, in general economic conditions, however,security concerns and health concerns, have positioned video communications to play a mission critical role in business practices, whichpractices.  These changes, we believe, shouldwill result in greaterincreased demand for managed video services. Recognizing this, Glowpoint adjustedhas and will continue to adapt its product positioningservice offerings and simplified its offerings to not only fit into specific vertical markets, butstrategic relationships to address the unique needs of today’s and tomorrow’s video communications solutions, especially telepresence.

for telepresence and unified communications.

Purchasers of telepresence rooms and today’s other complex video products are typically spending hundreds of thousands of dollars.  They demand that it reliablythe technology is reliable and functions properly functions so as to be used to its fullest extentin order to maximize that investment.  They also want to use it to maketheir investment, while increasingly seeking B2B video calls to other businesses – business-to-business (B2B) – so as to increase the opportunities for use.calling capabilities. Glowpoint markets and sells its VNOC services and TEN its B2B global exchange, to these purchasers and to equipment manufacturers and integrators, who purchase our VNOC services on a wholesale basis and resell them in orderas a turnkey bundled offering. We will continue to ensure that their sold product is reliable and satisfactory to their customer, which will result in greater adoption and increased future sales of products.  We are focusingfocus more of our sales and marketing efforts on these strategic relationships and business development opportunities becausedue to increased interest has increased significantly and because the value of VNOC service sales tend to be of a larger magnitude than our historical sales opportunities of managed video services.  In many of these opportunities we have also found that some end user customers interestedThis strategy applies to all video applications, from telepresence to desktop video and is even expected to apply in VNOC services are also interested in havingconsumer applications as our service cloud model is adopted by business users for their non-telepresencepersonal video endpoints also managed, which can equal or rival the value of the VNOC service opportunity.communications needs. Since the second quarter of 2008, we have sold our VNOC services to support more than 100200 telepresence rooms and to more than another 500 standard room systems.

systems, with more than 30,000 video endpoint devices now certified to use our services.

We continue to sellmarket and marketsell to new markets and onesmarkets that we’ve created, where video communications can play a critical role in business practices.  ExamplesAn example of marketsa market we created for our services includeis the legal and broadcast/media sectors. Law firms have been using video conferencingsector, where we recognized a match between the need for years, but poor performancecost effective content acquisition and the difficultycapability of associating its usage to clients prevented widespread utilizationvideo communications technology combined with Glowpoint’s managed services and growth in the sector. Therefore, Glowpoint introduced a legal industry-focused video solution, which combines Glowpoint’s high-quality managed video services with special billing features that enable law firms to enter a client/matter



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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,TEN.  To support this market opportunity, we introduced a highly managed and supported service that has been utilizedis used 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 Glowpointmanaged IP network connection into TEN 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 professional football and basketball drafts. ESPN has used it for inte rviewsinterviews 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 abilityhas been used to acquire HD content such as driver interviews between races, which maythat is then be distributed to key media outletsoutlets. In early 2010, we announced the availability of our professional event services for television broadcast.

Other current plans include mining our existing customer basethe broadcast industry in high definition as well.

In the buying process, the decision for additional sales, strengthening our indirect sales channel relationships,network 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.

The decision about what network or managed service to use is generally made at the same time a customer purchases, video conferencing equipment. Because we do not selllaunches, or implements video equipment we have historically not been included in a number of opportunities at the point of sale.or programs. Part of our continuing strategy to ensure that Glowpoint is involved at the point of sale is to work with our indirect channels, which is mostly made up of companies that also sell video equipment.equipment and will evolve to the unified communications providers over time. Glowpoint initiated a campaign in May 2006continues to re-energize thatfocus on its indirect sales channel and reestablish relationships. The salesto foster greater growth, through our direct and indirect channels continues to grow, withwhich has resulted in the indirect sales channel contributing the highest amount of new sales on average through 2008.2009. Approximately 10%70% of new sales were realized through these channels in 2006, which grew to approximately 40% through 2007, and were2009, up from over 60% on average through 2008.  Our global indirect wholes alewholesale relationships, which include the “white label” branding of services, became increasingly productivecontinue their increased productivity in 2008.2009.  We will continue to focus sales and marketing efforts on these relationships so that they become a significant and consistent contributor to our growth going forward.


Customers

We have a stable, growing customer base of over 750more than 650 customers ranging from Fortune 100 companies toand federal, state, and municipal governmental entities to businesses and service professionals (e.g., accountants and lawyers) toand non-profit organizations. Our top ten current market segments at the end of 2008,2009, listed in order of approximate contribution to revenue, are: broadcast/media, 14% of revenue; electronics, 11%; legal and law enforcement, 18% of revenue; broadcast/media, 16%; financial services, 16%9%; governmental entities (local, state and federal), 8%9%; manufacturing,consulting, 7%; education, 5%financial services, 7%; healthcarebanking and medicine, 5%finance, 6%; engineering and construction, 4%6%; retail, 3%manufacturing, 5%; and services (including consulting), 3%education and teaching, 5%. As of the year end 2008, no singleOne major customer represents more than 10%approximately 15% of our revenue.

Employees

As of December 31, 2008,2009, we had 82approximately 100 full-time employees. Of these employees, 917 are involved in network and service engineering and development, 4254 in customer service and operations, 1816 in sales and marketing, and 13 in corporate functions. None of our employees are represented by a labor union. We believe that our employee relations are good.

Competition

For the sale of our managed video application services and managed network services, we mainly compete against select telecommunications carriers, VPNwho have begun to offer a managed service providers,for video as part of their core network offerings, and videoconferencing resellers.equipment resellers and integrators. Many of our competitors have greater resources than we do, including, without limitation, financial, engineering, personnel, intellectual property, research and development, and network resources. Telecommunications carriers, such asThese carrier competitors, which include AT&T, Verizon Business/MCI, Global Crossing, British Telecom (BT), Sprint/BT Conferencing 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 providersGlowpoint differentiates itself from these competitors based on its singular video expertise, flexibility, and smaller regional network providers, such as Masergy Communications, Virtela Communications, and SAVVIS, are all capable of supporting video over their networks, but we understand do not maintainresponsiveness to customer demands.  Other competitors have evolved from the audio/visual integration industry or sell a complete managed service offering directly. Typically, these providers partner with a video service provider, such as BT Conferencing/Wire One,videoconferencing equipment resale industry, including York Telecom, Iformata Communications Nortel’s MNOC orand BCS Global, toand compete directly with us. These relationships generally are not exclusivetheir own flavor of managed video services.  Glowpoint differentiates itself from these competitors based on its carrier grade services, providing the service levels and we have been able to partner24x7x365 global support enterprises demand for mission critical communications. Glowpoint has partnered with a number of would-be competitors with the intent of selling our video application services to be delivered over their networks.networks or as a complement to their offerings. Glowpoint-enabling a third party network is one way Glowpoint may reduce the threat of competition, as it can work closely with carriers and customers to deliver video services even if Glowpoint’s network is not selected. Some videoconferencing equipment manufacturers and resellers have opted to create their own video services offering, using third party networks (such as Savvis or Masergy) or a third party managed video service providers (such as Iformata Communications, York Telecom or Nortel’s MNOC) to sell video services at the equipment point of sale.services. We do not believe that any of thesethe competitive offerings havecurrently available in the market offer the full range and scop escope of the carrier grade managed services that Glowpoint offers.



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For our traditional conferencing services, we compete against other 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 resources. 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, Providea, and BT Conferencing/Wire One. We believe these competitors are still heavily dependent on ISDN and have substantially less expertise in IP video than Glowpoint. By combining our managed video service with our conferencing services hosted within our exchange, we believe we offer significant performance and cost savings for our customers, and we believe replicating or matching our comprehensive offering is difficult, if not nearly impossible, for t hethe competition.


We compete primarily on the basis of our:

·

full support of all industry standards and equipment manufacturers;

·

full support of all network types, regardless of whether private or public;

·

primary focus and competency on two-way video communications;

·

breadth of service offerings;

·

unique custom built applications and services;

·

global distribution and network presence;

·

technical expertise, with knowledgeable video service and training personnel;

·

commitment to world-class customer service and support; and

·

existing wholesale relationships with equipment manufacturers, global carriers, and audio/visual integrators.

More than just

·  full support of all industry standards and equipment manufacturers;
·  full support of all network types, regardless of whether private or public;
·  primary focus and competency on two-way video communications;
·  breadth of service offerings;
·  unique custom built applications and services;
·  global distribution and network presence;
·  technical expertise, with knowledgeable video service and training personnel;
·  commitment to world-class customer service and support; and
·  existing wholesale relationships with equipment manufacturers, global carriers, audio/visual integrators, and unified communications providers.
Glowpoint has established itself as a leading provider of bandwidth forthe managed services that are driving adoption and enabling video communications, Glowpoint has developed a comprehensive approach to significantly improve video communications so that it can become an integral, mission critical tool for business communications. In addition to designing a networkplatform and service portfolio specifically targeted for two-way video communications, Glowpoint has continued to develop proprietary applications that ensure a high quality, reliable and easy-to-use experience. Glowpoint supports any standards-based videoconferencing equipment and through our certification program, has developed expertise in the area of hardware interoperability across disparate technology and IP networks. Our value-added services include video operators, multi-point video conferencing (bridging), seamless connectivity from IP to ISDN (gateway services), on-line portal that allows customers to schedule conferences, access to an interactive directory of video communities, access to public rooms for video communications, real-time monitoring and diagnostics tools, interact with expert video communications support teams, and access to real-time billing, a ndand call/usage details for a customer’s video environment. Our managed services offer customers substantially reduced transmission costs and superior video communications quality, remote monitoring and management of all registered video endpoint subscriber locations, video streaming, firewall transport services and VNOC support for telepresencesupported rooms and other video endpoints/infrastructure.

infrastructure, and the ability for businesses to connect with other businesses in a seamless fashion.

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 capital to fund our capital improvements and product development, the availability of 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 Securities and Exchange Commission. 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

SEC Public Reference Room
100 F Street, N.E.
Washington, D.C. 20549
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

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 atwww.sec.gov.



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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 atwww.glowpoint.com.

www.glowpoint.com.

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Item 1A.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 for working capital or to fund our capital improvements and product development. 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 could have a material adverse effect on the Company.

Our capital requirements continue to be significant and depend, and will continue to depend, on numerous factors, including the timing of revenues, the expense involved in development of our systems and products, realizing cost reductions on our technology, capital improvements and the cost involved in protecting our proprietary rights. To date, we have funded those requirements from private placements, most recently in March 2010, March 2009 and November/December 2008 (collectively, the “Private Placements”). The proceeds from our private placements, however, 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 consolidated financial statements are prepared assuming we are a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from being unable

We may need to raise the necessary additional capital and realize projected operational savings.

Our consolidated financial statements have been prepared assuming thatto fund our operations.

For the year ended December 31, 2009, 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 $4,896,000$611,000 and negative operatingalthough we generated cash flowsfrom operations of $1,264,000$124,000 for the year ended December 31, 2008. The Company performed an evaluation of its long-lived assets and determined that there is an excess of projected2009, we have had negative operating cash flow on an undiscounted basis over the long-lived carrying amount.  Therefore, the Company believes that no impairment losses were required.flows since our inception.  At December 31, 2008,2009, we had cash and cash equivalents of $1,227,000,$587,000, a working capital deficit of $4,225,000$1,365,000 and an accumulated deficit of $185,409,000. Additionally, through December 31, 2008, $10,802,000 of the Senior Secured Notes and the accrued interest thereon$162,405,000.   However, we have historically been excha nged for our Series A Convertible Preferred Stock (the “Series A Preferred Stock”) and in March 2009 the remaining $1,722,000 were either exchanged for Series A-1 Convertible Preferred Stock or purchased and retired (see Note 19able to the consolidated financial statements). We raisedraise capital in private placements but continuemost recently $3,000,000 in March 2010, amended the terms of our Preferred Stock to sustain losseseliminate any dividends until January 2013 and negative operating cash flows. Additionally, current economic conditions may causehave reached settlements with a declinemajority of the taxing authorities in business and consumer spending which could adversely affect our business and financial performance.These factors raise substantial doubt as to our ability to continue as a going concern.  Assuming we are able to negotiate favorable terms with the authorities regarding ourhad accrued sales and use taxes and regulatory fees. Based primarily on our March 2010 financing (see also Note 524), along with our cash flow projection, the Company believes that it has and will have sufficient cash flow to the consolidated financial statements for further information) and we are not adversely affected by the current economic conditions, we believe that our available capital as of Decemberfund its operations through at least March 31, 2008 will enable us to continue as a going concern through December 31, 2009.2011. There arecan be no assurancesassurances; however, that we will be able to raise additional capital as may be needed or upon acceptable terms, nor that the current economic conditions will not negatively impact us.  If the current economic conditions negatively impact us we are unable to negotiate favorable terms with the authorities, orand we are unable to raise any additional capital asthat may be needed upon acceptable terms, it wouldcould have a material adverse effect on the Company.  The accompanying consolidated financial statements do not include any adjustments that might result from this uncertainy. The potential adjustments that might result include:

·

Substantial disposition of assets outside the ordinary course of business;

·

Externally forced revisions of our operations or similar actions; and

·

A reorganization of our business.

Company

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.




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We may be required to issue more shares of common stock upon adjustment of the conversion price of our outstanding preferred stock or the exercise price of our outstanding warrants, resulting in dilution of our existing stockholders.


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The conversion or exercise of any of our outstanding preferred stock,A-2 Preferred Stock, 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 A-1A-2 Preferred Stock 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. In this event, we may be required to issue more shares of common stock than previously anticipated which would result in further 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 prior financings, including the Private Placements, a substantial number of shares of our common stock are to or were to 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.

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 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, we will be required to incur dividend expense on our Series A-1 Convertible Preferred Stock (the “Series A-1 Preferred Stock”)preferred stock commencing on the first anniversary following issuancein January 2013 until their conversionsuch shares are redeemed or converted into common stock, if ever. 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 traded on the OTC Bulletin Board under the symbol “GLOW”“GLOW.OB”. Thinly traded 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. 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 subsequently fail to satisfy the standards for continued exchange listing or NASDAQ trading, such as sta ndardsstandards 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.

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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 or products 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.



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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 all years since 2000. 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 and on general economic conditions.

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 provides 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 orpurchase our IP subscriber network.suite of managed video services. If we are unable to react quickly to changes in t hethe 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. Additionally, current economic conditions may cause a decline in business and consumer spending which could adversely affect our business and financial performance.

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We are exposed to the credit and other counterparty risk of our customers in the ordinary course of our business.
    Our customers have varying degrees of creditworthiness. Although we evaluate the creditworthiness of each of our customers, we may not always be able to fully anticipate or detect deterioration in their creditworthiness and overall financial condition, which could expose us to an increased risk of nonpayment under our contracts with them. In the event that a material customer or customers default on their payment obligations to us, discontinue buying services from us or use their buying power with us to lower our revenue, this could materially adversely affect our financial condition, results of operations or cash flows.
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 dependent 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 due to the planned decline of our ISDN resale business, attributable in part to the cessation of a customer contract.

We are actively considering whether to sell, transfer or just discontinue our ISDN resale business. Currently, 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, 2008,2009, approximately 41%34% of our resold ISDN revenues, or approximately $921,000,$423,000, were from Tandberg, which was approximately 3.8%1.6% 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



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services from us through January 31, 2007. While Tandberg has continued to purchase services from us after January 31, 2007, Tandberg has been transitioning its business from Glowpoint and intends to cease buying these services 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.

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, we 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. Given the settlements negotiated in late 2009 and to date in 2010, the expiration of certain statute of limitations, along with the passage of time and the number of years that we have been collecting and remitting taxes, we do not believe there is a substantial likelihood of more than the already identified future payments being made.  While we believe all of our estimates and assumptions are reasonable and will be sustained upon audit, actual liabilities and credits may differ significantly.differ. If so, it may materially impact our financial condition, negatively if we underestimated our liability or positively if we overestimated our liability.

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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 litiga tionlitigation is resolved in our favor.

In the event of an adverse outcome as a defendant in any such litigation, we may, among other things, be required to: paysubstantial 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.  Due to resource constraints, we have limited our efforts on obtaining patents to the United States and no longer seek patents in any foreign jurisdiction.

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.


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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.

Our network could fail, which could negatively impact our revenues.

To an extent, 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 equipm entequipment that make up the backbone of our networkservice offering and hosted 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.network, service offering or hosted infrastructure. 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, British Telecom/BT Conferencing/WireOne,Conferencing, Global Crossing, 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 solutionsequipment resale 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



19


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.

As we expand our Glowpoint managed network services, and its use, any system failures or interruptions may cause loss of customers.

Our success depends, in part, on the seamless, uninterrupted operation of our Glowpoint managed network services and on the management of traffic volumes and route preferences over our network.service offering. As we continue to expand these services, and as trafficthe complexity and volume continuescontinue to increase, we will face increasing demands and challenges in managing them. Any prolonged failure of these services or other systems or hardware that cause 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 managed video services 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 necessar ynecessary 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,service offerings, 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.

·  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 17,400 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, 2010 and six months following notice that we intend to vacate the premises. The base rent for the premises is currently approximately $226,000 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 (i) in Ventura, California that houses our Bridging S ervicesServices group, help desk and technical personnel in approximately 3,500 square feet, the base rent of which is approximately $54,000$58,000 per annum, and (ii) in Conshohocken, Pennsylvania that houses our Dedicated Support Services Group in approximately 3,600square3,600 square feet, the base rent of which is approximately $86,000$88,000 per annum. We believe our current facilities are suitable and adequate for our business needs and growth prospects.


Item 3.  Legal Proceedings

We are not currently defending any suit or claim.

Item 4.  Submission of Matters to a Vote of Security Holders

None.


-28-


20


PART II

Item 5.5.  Market for Registrant’s Common Equity and Related Stockholder Matters

Since September 19, 2007,

Glowpoint’s securities have beenare traded on the Over-The-Counter Bulletin Board (“OTCBB”) under the symbol “GLOW”“GLOW.OB”. From October 5, 2005 until inclusion on the OTCBB, there was no established public trading market of Glowpoint’s common stock and sales of Glowpoint’s securities were reported on the Pink Sheets under the symbol “GLOW.PK”. On October 5, 2005, Glowpoint’s securities were delisted from the NASDAQ Stock Market. In the future, if we satisfy the listing criteria, we may apply for listing on either the NASDAQ or the American Stock Exchange,NYSE Amex, though 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 20072008 and 2008,2009, based upon information obtained from the Pink Sheets for the period before September 19, 2007 and from the OTCBB for the period on and after September 19, 2007.OTCBB. All reported sales prices 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, 2007

 

 

 

 

 

 

 

First Quarter

 

$

0.74

 

$

0.38

 

Second Quarter

 

 

0.78

 

 

0.47

 

Third Quarter

 

 

0.85

 

 

0.50

 

Fourth Quarter

 

 

0.75

 

 

0.40

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2008

 

 

 

 

 

 

 

First Quarter

 

$

0.­­65

 

$

0.41

 

Second Quarter

 

 

0.71

 

 

0.44

 

Third Quarter

 

 

0.64

 

 

0.42

 

Fourth Quarter

 

 

0.50

 

 

0.20

 

 

 

 

 

 

 

 

 

 Glowpoint 
 Common Stock 
 High Low 
Year Ended December 31, 2008      
First Quarter                                                                                                              $0.65 $0.41 
Second Quarter                                                                                                               0.71  0.44 
Third Quarter                                                                                                               0.64  0.42 
Fourth Quarter                                                                                                               0.50  0.20 
       
Year Ended December 31, 2009      
First Quarter                                                                                                              $0.­­45 $0.26 
Second Quarter                                                                                                               0.45  0.28 
Third Quarter                                                                                                               0.63  0.32 
Fourth Quarter                                                                                                               0.69  0.48 
       

On March 27, 2009,29, 2010, the closing sale price of our common stock was $0.37$0.64 per share as reported on the OTCBB, and 47,510,06365,150,232 shares of our common stock were held by approximately 221 holders of record. American Stock Transfer & Trust Company of Brooklyn, New York is the transfer agent and registrar of our common stock.

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. 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 2008.

2009.


-29-

21


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, 2008.2009. 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

     

 

4,922,667

 

     

 

$1.28 

 

     

 

1,348,837

 

 

Equity compensation plans not approved
by security holders

 

 

50,000

 

 

 

$2.98 

 

 

 

—

 

 

Total

 

 

4,972,667

 

 

 

$1.31 

 

 

 

1,348,837

 

 

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      4,686,051      $0.82       1,529,219 
Equity compensation plans not approved by security holders  20,000   3.94   — 
Total                                                                  4,706,051  $0.84   1,529,219 

-30-


22


Item 6.    Selected Financial Data

Beginning with the filing of these financial statements, we have decided to report our operations using the following financial statement format, which we believe provides readers with a better understanding of our operating cost components.  Over the last year, Glowpoint has continued to see a shift in the market to our managed video service offering, which includes, among other things, video operation services (“VNOC”), Telepresence inter-Exchange Network (“TEN”) services, conferencing and event based services, technology hosting and management, and professional services.  As a result, we expect less network resales going forward.  The revenues for these managed video services increased to $2,888,000 in 2009 from $391,000 in 2008.   The primary cost component of the managed service offering is associated with systems, process and people, as opposed to underlying carrier network costs associated with our legacy billable subscriber line services.  In 2009, we increased the expenses associated with VNOC managed service in order to deliver upon contracts won, increase our Network Operations Center resource coverage to support 24x7 service coverage, and staff accordingly for delivery of pipeline business opportunities.  As we analyzed the repositioning of our business and the resulting operating cost changes, we concluded that these operating costs needed to be more identifiable to the reader and better match our current and future business operations.  We believe that this new financial statement format will provide greater visibility into our operations as we transform from the dependency on the resale of network and facilities to a managed video services provider and provider of hosted cloud-based services for video applications. We also believe that this financial statement format is in line with the format used by other communications service providers. Prior year amounts have also been reclassified to conform to the current year presentation to help readers understand our business expenses. This new financial statement format had no impact on revenues, income (loss) from operations or net loss for any period presented.
The following summary of selected consolidated financial information, with respect to the years ended December 31, 20082009 and 20072008 should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and footnotes included elsewhere in this document. With respect to the yearyears ended December 31, 2007 and 2006, the summary should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and footnotes filed on Form 10-K filed on March 27, 2008.  With respect to the year ended December 31, 2005, the summary should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and footnotes filed on Form 10-K filed on June 6, 2007. The historical results presented below are not necessarily indicative of future results (000’s omitted). 

Consolidated Statement of Operations Information:

 

Years Ended December 31,

 

  

 

2008

 

 

2007

 

 

2006

Revenue

 

$

24,537

 

 

$

22,792

 

 

$

19,511

 

Cost of revenue

 

 

14,337

 

 

 

15,234

 

 

 

13,583

 

Gross margin

 

 

10,200

 

 

 

7,558

 

 

 

5,928

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

1,063

 

 

 

855

 

 

 

816

 

Sales and marketing

 

 

3,710

 

 

 

3,106

 

 

 

2,570

 

General and administrative

 

 

8,634

 

 

 

8,218

 

 

 

11,049

 

Total operating expenses

 

 

13,407

 

 

 

12,179

 

 

 

14,435

 

Loss from operations

 

 

(3,207

)

 

 

(4,621

)

 

 

(8,507

)

Interest and other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, including $141, $261, and $0, respectively, for Insider Purchasers

 

 

4,535

 

 

 

6,043

 

 

 

3,969

 

Amortization of deferred financing costs, including $46, $14, and $0, respectively, for Insider Purchasers

 

 

448

 

 

 

531

 

 

 

389

 

Loss on extinguishment of debt, including $99 for Insider Purchasers

 

 

1,816

 

 

 

—

 

 

 

—

 

Decrease in fair value of derivative financial instruments' liability, including $86, $440, and $0, respectively, for Insider Purchasers

 

 

(2,673

)

 

 

(5,665

)

 

 

(1,992

)

Interest income

 

 

(18

)

 

 

(59

)

 

 

(83

)

Total interest and other expense (income), net

 

 

4,108

 

 

 

850

 

 

 

2,283

 

Net loss

 

 

(7,315

)

 

 

(5,471

)

 

 

(10,790

)

Gain on redemption of preferred stock

 

 

2,419

 

 

 

799

 

 

 

—

 

Preferred stock dividends

 

 

—

 

 

 

(252

)

 

 

—

 

Net loss attributable to common stockholders

 

$

(4,896

)

 

$

(4,924

)

 

$

(10,790

)

  

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.11

)

 

$

(0.11

)

 

$

(0.24

)

Weighted average number of common shares and share equivalents outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

46,477

 

 

 

46,735

 

 

 

46,242

 

, except per share amounts. 


Balance Sheet Information:

 

December 31,

 

  

 

2008

 

 

2007

 

 

2006

 

Cash and cash equivalents

 

$

1,227

 

 

$

2,312

 

 

$

2,153

 

Working capital deficit

 

 

(4,225

)

 

 

(9,092

)

 

 

(11,868

)

Total assets

 

 

7,177

 

 

 

8,562

 

 

 

8,393

 

Long-term debt (including current portion)

 

 

1,715

 

 

 

7,231

 

 

 

4,326

 

Total stockholders’ deficit

 

$

(3,213

)

 

$

(17,172

)

 

$

(11,591

)

-31-
Consolidated Statement of Operations Information: Years Ended December 31, 
  
2009
  
2008
  
2007
  
2006
  
2005
 
Core Revenues
 $25,192  $21,942  $19,150  $16,679  $14,376 
Non-Core Revenues
  1,348   2,595   3,642   2,832   3,359 
Total Revenues
 $26,540  $24,537  $22,792  $19,511  $17,735 
Operating expenses:                    
Network and infrastructure
  11,838   12,762   13,917   11,910   12,956 
Global managed services
  7,476   5,849   4,092   4,342   7,055 
Sales and marketing
  3,193   3,382   2,732   2,230   3,684 
General and administrative
  4,465   4,662   5,398   6,744   7,461 
Depreciation and amortization
  1,056   1,261   1,467   1,947   2,292 
Sales taxes and regulatory fees
  (2,500)  (172)  (193)  845   926 
Total operating expenses
  25,528   27,744   27,413   28,018   34,374 
Income (loss) from operations
  1,012   (3,207)  (4,621)  (8,507)  (16,639)
Interest and other expense (income):                    
Interest (income) expense, net, including $0, $141, $261, $0 and $0 for expense, respectively, for Insider Purchasers  (543)  4,517   5,984   3,886   (97)
Amortization of deferred financing costs, including $0, $46, $14, $0, and $0 respectively, for Insider Purchasers  —   448   531   389   — 
Loss on extinguishment of debt, including $0 and $99, respectively, for Insider Purchasers  254   1,816   —   —   — 
Gain on settlement with Gores
  —   —   —   —   (379)
Increase (decrease) in fair value of derivative financial instruments' liability, including $0, $86, $440, $0 and $0, respectively, for Insider Purchasers  1,848   (2,673)  (5,665)  (1,992)      271 
Total interest and other expense (income), net
  1,559   4,108   850   2,283   (205)
Net loss
  (547)  (7,315)  (5,471)  (10,790)  (16,434)
(Loss) gain on redemption of preferred stock  (64)  2,419   799   —   — 
Preferred stock deemed dividends
  —   —   —   —   (1,282)
Preferred stock dividends
  —   —   (252)  (347)  (315)
Net loss attributable to common stockholders
 $(611) $(4,896) $(4,924) $(11,137) $(18,031)
                     
                     
Net loss attributable to common stockholders per share:                    
Basic and diluted
 $(0.01) $(0.11) $(0.11) $(0.24) $(0.41)
Weighted average number of common shares:                    
Basic and diluted
  52,938   45,477   45,914   46,246   44,348 
                     
-32-

Balance Sheet Information: as of December 31, 
  
2009
  
2008
  
2007
  
2006
  
2005
 
Cash
 $587  $1,227  $2,312  $2,153  $2,023 
Working capital deficit
  (1,365)  (4,225)  (9,092)  (11,868)  (3,526)
Total assets
  6,914   7,177   8,562   8,393   9,037 
Long-term debt (including current portion)
  —   1,715   7,231   4,326   — 
Total stockholders’ equity (deficit)
 $1,153  $(3,213) $(17,172) $(11,591) $(2,405)


23


Item 7.    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, 20082009 and 20072008 and the related consolidated statements of operations, stockholders’ deficitequity (deficit) and cash flows for the years ended December 31, 20082009 and 20072008 and the notes attached hereto. 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 Company operates in one segment and therefore segment information is not presented.

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 the Item 1A, “Risk Factors ”, and include market acceptance and availability of new video communication services, rapid technological change affecting demand for our services, competition from other video communication service providers, deteriorating economic conditions our ability to further extend the maturity date or refinance the Senior Secured Notes and the Senior Secured Interest Notes, and the availability of suff icientsufficient 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's mission is to enable a global community where video communications is a part of everyday life.”

Glowpoint, Inc. ("Glowpoint" or "we" or "us" or the “Company”), a Delaware corporation, is a leadingcarrier-grade provider of advancedmanaged services for telepresence and video communications solutions.conferencing.  Our suite of advanced and robust telepresence and video communications solutions enablemanaged services empower organizations to seamlessly and consistently communicate via video over any network and with each other over disparate networks andany video technology platforms – empowering business, governmental agencies and educational institutionsplatform, enabling them to sharply boost the impact and productivity of their internal and external communications while at the same time reducingreduce their on-going operating costs.  We supportcosts and total cost of ownership.  Glowpoint supports thousands of video communications systemsendpoints in overmore than 35 countries withand our 24/7 managed video and global business-to-business (“B2B”) exchange services poweringare driving video collaboration for Fortune® 500 companies, major broadcasters,governmental and educational institutions, and media and entertainment broadcasters. Glowpoint also provides resale and wholesale programs, including private-labeled (branded) resale options for manufacturers, carriers, unified communications providers, and integrators seeking to offer this service as well as global carriersa value-add to their collaboration and communications offerings.

Glowpoint’s core service offerings include video equipment manufacturersoperations (“VNOC”) managed service, business-to-business exchange, video conferencing services, and their customers around the world.

We viewprofessional services.   A critical differentiator of Glowpoint is that our services as analogous to cellular service providers in the cellular telephone industry. Regardless of the cellular phone purchased, users must select a cellular service provider to make it work. Users make that service decision based on the features, reliabilitysolutions are hardware agnostic and price offered by the service provider. In our industry,network neutral, supporting all recognized video standards across any IP network. As such, regardless of the video conferencing or telepresence equipment purchased or the network connecting it, Glowpoint provides the managedGlowpoint’s services to make it work. In doing so, we offer a vast arraymay be applied.

Glowpoint’s core value proposition for customers includes driving wide adoption and usage of video communications, solutions, includingincreasing their return on investment, lowering their total cost of ownership, and providing access to expertise and skills not available elsewhere.  Glowpoint provides an alternative to capital intensive, premise-based infrastructure, which customers typically have had to purchase for their video application services, video operations services (VNOC) for telepresence, managed network services, IPenvironment to function, as well as the tools and ISDN videoconferencing services, multi-point conferencing (bridging), technology hosting and management, and professional services. We provide these services to aenable wide variety of companies, from large enterprises and governmental entities to small and medium-sized bus inesses. Glowpoint is primarily focused on high quality two-way video communications. With the advent of HD (High Definition) and telepresence solutions, we combined various components of our features and services, and developed new ones, to create a comprehensive service offering for enterprises and their end users that can support anyadoption of the telepresence products on the market today. Glowpoint also wholesales these services and provides private-labeled branding for manufacturers, carriers, and integrators seeking to offer this service as a value-add to their offerings for their customer bases.

Glowpoint’s video communications solutions involve two major components,throughout their business.  Glowpoint has become the Glowpointrecognized leader of managed video applicationsand global video exchange services that provide businesses and the Glowpoint managed network services. Glowpoint has focused its salesservice providers a way to link together their “islands of video” across third party private networks and marketing efforts on the managed video application services, which are network agnostic and may be leveraged by customers on any QoS (Quality of Service) network that supports two-way video transport.  Glowpoint’s services for telepresence are in increased demand because they address the need for a single point of contactenabling organizations to provide monitoring, scheduling, support, and management of telepresence rooms and the associated equipment.  Additionally, companies look to Glowpoint as a resource to provide secure business-to-business (B2B) support when using the video systems to communicate beyond their internal enterprise use. Our Telepresence inter-Exchange Network (TEN) is a suite of services and applications designed to overcom e the challenges of using video outside of a company's private network, such as interconnectivity and interoperability, and we believe will be a critical component for enhanced B2B video communications. Our managed video application services are sold as a monthly subscription service and may also include Glowpoint managed network services as an option.

According to some industry analysts, market research by IDC and published Cisco white papers, the network services side of the videoconferencing industry (currently dominated by network providers) and managed services (such as video operations and multi-point conferencing) is anticipated to grow to $1 billion in 2010 and grow to more than $4 billion globally over the next few years. Further market data continues to support these projections, with some exceeding the numbers when considering the economic



24


crisis and its impact on video usage anddrive wide adoption. Glowpoint continues to focus on securing a prominent place in this burgeoning industry to capitalize on the increased demand for its services.  

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. 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:



Accrued Sales Taxes and Regulatory Fees
Included in accrued sales taxes and regulatory fees are (i) certain unpaid settlements of sales and use taxes, regulatory fees and related penalties and interest and (ii) 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.  Prior to October 2006, we may not have been properly collecting and remitting all such taxes and regulatory fees and, as a result, we accrued a liability based on what sales taxes and regulatory fees we thought would be applicable to our business.  Since October 2006, we believe that we have been properly collecting and remitting all taxes and regulatory fees and have continually revised what sales taxes and regulatory fees are applicable to our business.  With the goal of avoiding penalties and removing some of the uncertainty regarding potential amounts owed for past taxes, we began a process in 2007 of proactively contacting various taxing authorities and voluntarily disclosing potential tax liabilities, a process that was completed in 2009.  The settlement terms from this voluntarily disclosure program, all of which are subject to audit, have resulted in paying significantly less than the total amounts accrued due to, among other things, offsets allowed, the avoidance of penalties, and contracting for limited look-back periods.  As of December 31, 2009, we believe that the accrual should be $1,083,000 of which approximately $888,000 is included in current liabilities and $195,000 are included in long term liabilities. Given the settlements negotiated in late 2009 and to date in 2010, the expiration of certain statute of limitations, along with the passage of time and the number of years that we have been collecting and remitting taxes, we do not believe there is a substantial likelihood of more than the already identified future payments being made.  These factors resulted in the reversal of the prior year accrual and increase in operating income (loss) of approximately $2,500,000.
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 service, is 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 twelve to twenty-four month estimated life of the customer relationship. At December 31, 20082009 and 2007,2008, we had deferred activation fees of $325,000$259,000 and $330,000,$325,000, respectively, and related deferred installation costs of $75,000$97,000 and $67,000,$76,000, respectively. Revenue related to integration services is recognized at the time the services are performed and presented in accordance with EITF 99 - -19 “Reporting as required by ASC topic 605 “Revenue Gross as a Principal Versus Net as an Agent”Recognition”. Revenues derived from other sources are recognized when services are provided or events occur.

Use of Estimates

Preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from the estimates made. We continually evaluate estimates used in the preparation of the consolidated financial statements for reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. The significant areas of estimation include determining the allowance for doubtful accounts, deferred tax valuation allowance, accrued sales taxes, the estimated life of customer relationships, and the estimated lives and reco verability of property and equipment.

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 current 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.

-35-

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. 144as required by ASC topic “Accounting for the Impairment or Disposal of Long-Lived Assets”Property, Plant and Equipment”. 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.  The Company performed an evaluation of its long-lived assets on December 31, 2009 and 2008 and determined that there is an excess of cash flow over the long-lived carrying amount.  Therefore, the Company believes that no impairment losses were required in any of the periods presented.



25


Results of Operations
Beginning with the filing of these financial statements, we have decided to report our operations using the following financial statement format, which we believe provides readers with a better understanding of our operating cost components.  Over the last year, Glowpoint has continued see a shift in the market to our managed video service offering, which includes, among other things, video operation services (“VNOC”), Telepresence inter-Exchange Network (“TEN”) exchange services, conferencing and event based services, technology hosting and management, and professional services.  As a result, we expect less network resales going forward.  The revenues for these managed video services increased to $2,888,000 in 2009 from $391,000 in 2008.   The primary cost component of the managed service offering is associated with systems, process and people, as opposed to underlying carrier network costs associated with our legacy billable subscriber line services.  In 2009, we increased the expenses associated with VNOC managed service in order to deliver upon contracts won, increase our Network Operations Center resource coverage to support 24x7 service coverage, and staff accordingly for delivery of pipeline business opportunities.  As we analyzed the repositioning of our business and the resulting operating cost changes, we concluded that these operating costs needed to be more identifiable to the reader and better match our current and future business operations.  We believe that this new financial statement format will provide greater visibility into our operations as we transform from the dependency on the resale to a managed video services provider and provider of hosted cloud-based services for video applications.  Prior year amounts have also been reclassified to conform to the current year presentation to help readers understand our business expenses. This new financial statement format had no impact on revenues, income (loss) from operations or net loss for any period presented.

-36-

The following table sets forth, for the two years in the period ended December 31, 2008,2009, 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:

  

 

2008

 

 

2007

 

Revenue

 

 

100.0

%

 

 

100.0

%

Cost of revenue

 

 

58.4

 

 

 

66.8

 

Gross margin

 

 

41.6

 

 

 

33.2

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

4.3

 

 

 

3.8

 

Sales and marketing

 

 

15.1

 

 

 

13.6

 

General and administrative

 

 

35.2

 

 

 

36.0

 

Total operating expenses

 

 

54.6

 

 

 

53.4

 

Loss from operations

 

 

(13.0

)

 

 

(20.2

)

Interest and other expense (income):

 

 

 

 

 

 

 

 

Interest expense, including 0.6% and 1.2%, respectively, for Insider Purchasers

 

 

18.5

 

 

 

26.6

 

Amortization of deferred financing costs, including 0.2% and 0.1%, respectively, for Insider Purchasers

 

 

1.8

 

 

 

2.3

 

Loss on extinguishment of debt, including 0.4% for Insider Purchasers

 

 

7.4

 

 

 

—

 

Decrease in fair value of derivative financial instruments’ liability, including 0.4% and 1.9%, respectively, for Insider Purchasers

 

 

(10.9

)

 

 

(24.9

)

Interest income

 

 

(0.1

)

 

 

(0.3

)

Total interest and other expense (income), net

 

 

16.7

 

 

 

3.7

 

Net loss

 

 

(29.7

)

 

 

(23.9

)

Gain on redemption of preferred stock

 

 

9.9

 

 

 

3.5

 

Preferred stock dividends

 

 

—

 

 

 

(1.1

)

Net loss attributable to common stockholders

 

 

(19.8

)%

 

 

(21.5

)%

  

 

 

 

 

 

 

 

 

  
2009
  
2008
  
2007
  
2006
  
2005
 
Core Revenues
  94.9%  89.4%  84.0%  85.5%  81.1%
Non-Core Revenues
  5.1   10.6   16.0   14.5   18.9 
Total Revenues
  100.0%  100.0%  100.0%  100.0%  100.0%
Operating expenses:                    
Network and infrastructure
  44.6   52.0   61.1   61.0   73.1 
Global managed services
  28.2   23.8   18.0   22.3   39.8 
Sales and marketing
  12.0   13.8   12.0   11.4   20.8 
General and administrative
  16.8   19.0   23.7   34.6   42.1 
Depreciation and amortization
  4.0   5.1   6.4   10.0   12.9 
Sales taxes and regulatory fees
  (9.4)  (0.7)  (0.8)  4.3   5.2 
Total operating expenses
  96.2   113.0   120.4   143.6   193.9 
Income (loss) from operations
  3.8   (13.0)  (20.4)  (43.6)  (93.9)
Interest and other expense (income):                    
Interest (income) expense, net, including 0.0% and 0.6% of expense, respectively, for Insider Purchasers  (2.0)  18.4   26.3   19.9   (0.5)
Amortization of deferred financing costs, including 0.2%, 0.0% and 0.0% for Insider Purchasers  —   1.8   2.3   2.0   — 
Loss on extinguishment of debt, including 0.0% and 0.4%, respectively, for Insider Purchasers  1.0   7.4   —   —   — 
Gain on settlement with Gores
  —   —   —   —   (2.1)
Increase (decrease) in fair value of derivative financial instruments’ liability, including 0.0% , 0.4%, 0.0%, 0.0% and 0.0% respectively, for Insider Purchasers  7.0   (10.9)  (24.9)  (10.2)  1.5 
Total interest and other expense (income), net
  6.0   16.7   3.7   11.7   (1.1)
Net loss
  (2.2)  (29.7)  (24.1)  (55.3)  (92.8)
Loss (gain) on redemption of preferred stock  (0.2)  9.9   3.5   —   — 
Preferred stock deemed dividends
  —   —   —   —   (7.2)
Preferred stock dividends
  —   —   (1.1)  (1.8)  (1.8)
Net loss attributable to common stockholders
  (2.4)%  (19.8)%  (21.7)%  (57.1)%  (101.8)%
                     
-37-

Year ended December 31, 2009 (the “2009 year”) compared to year ended December 31, 2008 (the “2008 year”) compared to year ended December 31, 2007 (the “2007 year”)

Revenue - Revenue increased $1,745,000,$2,003,000, or 7.7%8.2%, in the 20082009 period to $24,537,000$26,540,000 from $22,792,000$24,537,000 in the 20072008 period.  We have separated our revenue into Core Revenue and Non-core Revenue.  Core Revenue is revenue derived from the products and services that meet our overall strategic goals from a growth, margin and core competency perspective. In Core Revenues the primary component of our growth were the managed video services which increased by $2,497,000 and bridging which increased by $515,000 while our network and related services were flat.   We believe these products and services offer the greatest prospects for high margin sales and growth and, therefore, our sales and marketing efforts are primarily focused on promoting them.  Non-core Revenue is revenue derived from products and services that we believe do not fit into our overall strategic plan.  These non-core products and services are typically low margin and, therefore, we do not spend sales or marketing efforts on them and expect them to decline over time.

Our “Core Revenue” includes:

·

Subscription and related services, which includes VNOC Support Services (described above), a new revenue stream for 2008, represent about 71% of our total current revenue and is generally tied to contracts of 12 months or more;

·

Multi-point Bridging, which represents about 16% of our total current revenue and is a usage based service where we enable customers to have video meetings with multiple locations on the screen at one time; and

·

Events and Professional Services, which represent about 2% of our total current revenue and is revenue derived from non-recurring services (e.g., the professional football draft event) or from providing professional services to develop custom solutions.

·  Subscription network and related services, represent about 65% of our total current revenue and is generally tied to contracts of 12 months or more;
·  Subscription managed video services, which represent about 10% of our total current revenue (up from 1% in 2008) and is generally tied to contracts of 12 months or more;
·  Multi-point Bridging, which represents about 17% of our total current revenue and is a usage based service where we enable customers to have video meetings with multiple locations on the screen at one time; and
·  Events and Professional Services, which represent about 3% of our total current revenue and is revenue derived from non-recurring services (e.g., the professional football draft event) or from providing professional services to develop custom solutions.
Our “Non-core Revenue” includes:

·

ISDN resale business, which represents about 9% of our total current revenue.  We do not actively pursue more ISDN resale business and have actively sought to reduce the amount of low margin revenue from this line of business; and



26


·

·  ISDN resale business, which represents about 5% of our total current revenue.  We do not actively pursue more ISDN resale business and have actively sought to reduce the amount of low margin revenue from this line of business; and
·  Integration services, which include integrating various hardware components, or procuring hardware components for our customers, to support our managed video services. In most cases, we provide integration services as a “pass-through” or at low margin in order to facilitate the completion of the project on behalf of our customer.  We do not actively pursue this type of revenue.
-38-
  
Year Ended December 31,
(in thousands)
 
Revenue 
2009
  
2008
  
Increase (Decrease)
  
% Change
 
Core revenue:            
Subscription revenue:            
Network and related services
 $16,993  $17,081  $(88)  (0.6%)
Managed video services (1)
  2,888   391   2,497   638.6%
   19,881   17,472   2,409   13.8%
Non-subscription revenue:                
Bridging (2)
  4,439   3,924   515   13.1%
Special events and professional services (3)
  872   546   326   59.7%
   25,192   21,942   3,250   14.8%
Non-core revenue:                
Integration services for a broadcast customer  (4)
  63   350   (287)  (82.0%)
ISDN resale revenue (5)
  1,285   2,245   (960)  (42.8%)
   1,348   2,595   (1,247)  (48.1%)
                 
Total revenue
 $26,540  $24,537  $2,003   8.2%
                 
(1)  These managed video services. In most cases, we provide integration services as a “pass-through” or at low margin in order to facilitate the completion of the project on behalf of our customer. We do not actively pursue this type of revenue.

  

 

Year Ended December 31,

 

Revenue

 

2008

 

 

2007

 

 

Increase (Decrease)

 

 

% Change

 

Core revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and related revenue (1)

 

$

17,472

 

 

$

15,368

 

 

$

2,104

 

 

 

13.7

%

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-subscription revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridging (2)

 

 

3,924

 

 

 

3,387

 

 

 

537

 

 

 

15.9

%

Special events and professional services (3)

 

 

546

 

 

 

395

 

 

 

151

 

 

 

38.2

%

  

 

 

21,942

 

 

 

19,150

 

 

 

2,792

 

 

 

14.6

%

Non-core revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Integration services for a broadcast customer (4)

 

 

350

 

 

 

973

 

 

 

(623

)

 

 

(64.0

%)

ISDN resale revenue (5)

 

 

2,245

 

 

 

2,669

 

 

 

(424

)

 

 

(15.9

%)

  

 

 

2,595

 

 

 

3,642

 

 

 

(1,047

)

 

 

(28.7

%

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

24,537

 

 

$

22,792

 

 

$

1,745

 

 

 

7.7

%

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  The increased subscription and related revenue is caused by increases in installed subscription circuits, revenue per circuit and VNOC support services which started in the 2nd4th quarter of 2008.

(2)  The increased bridging services revenue was a result of a concerted effort by the Company to grow revenue from bridging services. 

(3)  The increased special events and professional services revenue was a result of new events and a development project for a potential VNOCmanaged services customer.

(4)  In the 2008 year the Company provided integration services on equipment required by a VNOCmanaged video services customer and a broadcast customer and in the 2007 year a broadcast customer as part of the implementation of their subscription agreements.customer.  Glowpoint was asked to facilitate the procurement and integration of equipment on behalf of these customers and agreed to do so as a pass through service.  Therefore all equipment integrated into the solution was billed to the customers at cost and the related costs are included in cost of revenue.

(5)  We continue to consider alternatives with respect to our ISDN resale business, including without limitation whether to sell, transfer or discontinue this line of business. Currently, we resell ISDN and other services to Tandberg, Inc. (“Tandberg”), from whom we acquired our ISDN resale business in April 2004. While we resell ISDN services to many customers, in the year ended December 31, 2008, 41%2009, 35% of our resold ISDN revenues, or $921,000,$452,000, were from Tandberg, which was 3.8%1.7% 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 continued to purchase services from us after January 31, 2007, Tandberg has been transitioning its business from Glowpoint and intends to cease buying these services from Glowpoint, which we expect t oto occur in the coming months. Because this revenue

-39-

Network and Infrastructure – Network and infrastructure expenses, which include all external costs, exclusive of depreciation and amortization, related to the Glowpoint network, a high-quality two-way video transport built and managed by Glowpoint which is our lowest margin revenue, however, we expect our overall gross margin percentageexclusively dedicated to increase once we lose this gross revenue.

Cost of revenues - Cost of revenueIP-based video communications.    This operating expense category also includes the cost for taxes which have been billed to customers.  Network and infrastructure expenses decreased by $897,000,$924,000, or 5.9%7.2%, to $14,337,000$11,838,000 in the 2009 year from $12,762,000 in the 2008 year from $15,234,000 in the 2007 year.   The primary decrease was a reduction of $614,000 in costs for integration services on equipment required by broadcast customers, discussed in the Revenue section.  In the 2008 year, there were $308,000 of integration costs versus $922,000 in the 2007 year.   We also realized $506,000 of savings from the continuing efforts to eliminate costs in our network and our on-going activity involving the renegotiation of rates and the migration of service to lower cost providers where possible and a $211,000 reduction of $263,000 in depreciation costs.costs for integration services on equipment required by broadcast customers.  These savings were partially offset by $424,000the costs of new customers.   The network and infrastructure expenses should go down as a % of revenues as cloud-based and managed video revenues grow and customers do not require Glowpoint connectivity to use our services.

The components of network and infrastructure expenses and their percentage of revenues for the years ended December 31, 2009 and 2008 are summarized as follows (in thousands):
  
2009
  
% of 2009 Revenues
  
2008
  
% of 2008 Revenues
  
Change from Prior Year
  
% Change from Prior Year
 
Telecommunication carrier charges
 $10,026   37.8% $10,877   44.3% $(851)  (7.8%)
Cost for taxes billed to customers
  1,812   6.8%  1,885   7.7%  (73)  (3.9%)
Total for the year
 $11,838   44.6% $12,762   52.0% $(924)  (7.2%)
                         
Global Managed Services – Global managed services expenses, include all costs for delivering and servicing our managed services.  These include delivering customer service, maintaining the network and infrastructure and the development and implementation of hardware and software enhancements.  Global managed services expenses increased by $1,627,000 or 27.8%, to $7,476,000 in the 2009 year from $5,849,000 in the 2008 year.   The primary components of the increases were increased salaries, benefits and other costs related to the expansion of our services to encompass 24/7 staffing.



27


staffing and the opening of a new Network Operation Center in Philadelphia.

The components of cost of revenuesglobal managed services expenses and their percentage of revenues for the years ended December 31, 20082009 and 20072008 are summarized as follows (in thousands):

  

 

2008

 

 

% of 2008 Revenues

 

 

2007

 

 

% of 2007 Revenues

 

Telecommunication carrier charges

 

$

9,901

 

 

 

40.3

%

 

$

10,380

 

 

 

45.6

%

Sales taxes and regulatory fees

 

 

1,818

 

 

 

7.4

%

 

 

1,845

 

 

 

8.1

%

Depreciation

 

 

923

 

 

 

3.8

%

 

 

1,134

 

 

 

5.0

%

Salaries and benefits

 

 

1,051

 

 

 

4.3

%

 

 

728

 

 

 

3.2

%

General overhead costs

 

 

336

 

 

 

1.4

%

 

 

225

 

 

 

1.0

%

Integration costs

 

 

308

 

 

 

1.3

%

 

 

922

 

 

 

4.0

%

Total for the year

 

$

14,337

 

 

 

58.5

%

 

$

15,234

 

 

 

66.9

%

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin - Gross margin increased by $2,642,000, or 35.0%, to $10,200,000 from $7,558,000 in the 2008 year.  The savings discussed in the Cost

  
2009
  
% of 2009 Revenues
  
2008
  
% of 2008 Revenues
  
Change from Prior Year
  
% Change from Prior Year
 
Salaries and benefits
 $5,156   19.4% $3,700   15.1% $1,456   39.4%
Contract employees
  784   3.1%  615   2.5%  169   27.5%
Communication costs
  436   1.6%  389   1.6%  47   12.1%
Repairs and maintenance
  403   1.5%  429   1.7%  (26)  (6.1%)
Rent and occupancy
  389   1.5%  298   1.2%  91   30.5%
Office expenses
  117   0.4%  140   0.6%  (23)  (16.4%)
Travel and entertainment
  48   0.2%  132   0.5%  (84)  (63.6%)
Other expenses
  143   0.5%  146   0.6%  (3)  (2.1%)
Total for the year
 $7,476   28.2% $5,849   23.8% $1,627   27.8%
                         
-40-

Sales and marketing - Sales and marketing expenses, which include sales personnel salaries, commissions, overhead and marketing costs, increased $604,000,decreased $189,000, or 19.4%5.6%, to $3,710,000$3,193,000 in the 2009 year from $3,382,000 in the 2008 year from $3,106,000 in the 2007 year.
The primary components of the increase were $226,000 for salaries and benefits as a result of new employees for bridging and general salespeople, $162,000 for agent commissions, $81,000 in travel and entertainment costs, $62,000 for consultant fees, $61,000 for marketing and trade show expenses and $37,000 for communication costs.  These increases were partially offset by reductions of $45,000 for contract employees.   Salessales and marketing expenses as aand their percentage of revenue, were 15.1%revenues for the years ended December 31, 2009 and 2008 year versus 13.6% for the 2007 year.

are summarized as follows (in thousands):

  
2009
  
% of 2009 Revenues
  
2008
  
% of 2008 Revenues
  
Change from Prior Year
  
% Change from Prior Year
 
Salaries and benefits
 $2,458   9.3% $2,285   9.3% $173   7.6%
Agent commissions
  326   1.1%  362   1.5%  (36)  (9.9%)
Advertising and marketing
  178   0.7%  312   1.3%  (134)  (42.9%)
Travel and entertainment
  128   0.5%  224   0.9%  (96)  (42.9%)
Other expenses
  103   0.4%  199   0.8%  (96)  (48.2%)
Total for the year
 $3,193   12.0% $3,382   13.8% $(189)  (5.6%)
                         
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 $416,000,decreased $197,000, or 5.1%4.2%, in the 20082009 year to $8,634,000$4,465,000 from $8,218,000$4,662,000 in the 20072008 year.
The primary components of general and administrative expenses and their percentage of revenues for the increases were $486,000 for increased salaries, benefitsyears ended December 31, 2009 and other costs related2008 are summarized as follows (in thousands):
  
2009
  
% of 2009 Revenues
  
2008
  
% of 2008 Revenues
  
Change from Prior Year
  
% Change from Prior Year
 
Salaries and benefits
 $2,398   9.0% $2,361   9.6% $37   1.6%
Professional fees
  518   1.9%  653   2.8%  (135)  (20.7%)
Severance costs
  253   0.9%  —   0.0%  253   N/A 
Bad debts
  258   1.01%  257   1.0%  1   0.4%
Insurance
  147   0.6%  165   0.7%  (18)  (10.9%)
Communication costs
  133   0.5%  38   0.2%  95   250.0%
Board of director costs
  114   0.4%  171   0.7%  (57)  (33.3%)
Office expenses and postage
  102   0.4%  107   0.4%  (5)  (4.7%)
Consultants
  122   0.5%  351   1.4%  (229)  (65.2%)
Travel and entertainment
  74   0.3%  101   0.4%  (27)  (26.7%)
Rent
  77   0.3%  72   0.3%  5   6.9%
Repairs and maintenance
  54   0.2%  41   0.2%  13   31.7%
Other expenses
  215   0.8%  345   1.4%  (130)  (37.7%)
Total for the year
 $4,465   16.8% $4,662   19.1% $(197)  (4.2%)
                         
-41-

Depreciation and amortization – Depreciation and amortization expenses decreased $205,000, or 16.3%, in the 2009 year to $1,056,000 from $1,261,000 in the expansion2008 year.  Over the last few years the Company has been decreasing the size of our services to encompass 24/7 staffing, $310,000network which has resulted in fewer assets employed in this area and a reduction of sales$164,000 in deprecation and use taxesamortization in 2009.   Depreciation and regulatory fees that reflect a settlement with a state, $229,000 for receivable accounts that were written off and for an increase in the allowance for doubtful accounts to reflect the current economic conditions and $79,000 of maintenance and repairs. These increases were partially offset by reductions of $388,000 in professional fees primarily related to the restatements of 2004 a nd 2005 financial statements and $299,000 in deferred compensation.  General and administrativeamortization expenses, as a percentage of revenue, were 35.2%4.0% for the 2009 year versus 5.1% for the 2008 year.
Sales taxes and regulatory fees –Prior to October 2006, we may not have been properly collecting and remitting all such taxes and regulatory fees and, as a result, accrued a liability in 2006. Beginning in 2007, we began proactively contacting various taxing authorities and voluntarily disclosing potential tax liabilities, a process that continues to date.    The settlement terms from this voluntarily disclosure program, all of which are subject to audit, have resulted in paying significantly less than the total amounts accrued due to, among other things, offsets allowed, the avoidance of penalties, and contracting for limited look-back periods.  Based on these results and the Company’s historical experience in collecting and remitting these taxes, the Company has adjusted the accrued sales taxes and regulatory fees liability to amounts that reflect settlements with taxing authorities and amounts that we believe are probable and can be reasonably estimated.  This resulted in income of $2,500,000 in 2009 and $172,000 in 2008.
Income (loss) from operations – Net loss decreased by $4,219,000, or 131.6%, to a income from operations of $1,012,000 in the 2009 year from loss from operations of $3,207,000 in the 2008 year versus 36.0% in the 2007 year.

Interest and other expense (income) – Interest and other expense (income) in the 2009 period of $1,559,000 principally reflects $1,848,000 for an increase in the fair value of derivative financial instruments, $254,000 for the loss on the extinguishment of the remaining Senior Secured Notes and $241,000 of interest expenses.  These expenses were partially reduced by $784,000 for reductions in the interest accrual for sales taxes and regulatory fees.
Interest and other expense (income) in 2008 of $4,108,000 principally reflects interest expense of $4,535,000$4,517,000 comprised of $2,732,000 for the accretion of the discount related to the Senior Secured Notes, $1,420,000 of accrued but unpaid interest expense related to the Senior Secured Notes and $283,000$268,000 of accruedincreases in the interest expenseaccrual related to the sales and use taxes and regulatory fees, $78,000 of interest related to capital leases and $22,000$19,000 of other interest.  Since there was a substantial modification of the terms of the Senior Secured Notes in the 2008 Private Placement, a loss of $1,816,000 was generated on the extinguishment of debt.  Amortization of deferred financing costs incurred in connection with the Senior Secured Notes was $448,000.  Those expenses are partially offset by $2,673,000 decrease in fair value of derivative financial instruments’ liability and $18,000 of interest income.   

liability.


Income taxes -As a result of our losses, we recorded no provision for incomes taxes in the years ended December 31, 20082009 and 2007.2008.  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 increaseddecreased by $1,844,000,$6,768,000, or 33.7%92.5%, to $547,000 in the 2009 year from $7,315,000 in the 2008 year from $5,471,000 in the 2007 year.



28


Gain on redemption of preferred stock –As Our loss in 2009 of $64,000 in the redemption of Preferred Stock is comprised of the Preferred Stock Exchange in March 2009 in which we recognized a loss for the $1,999,000 excess of Series A-1 Preferred Stock Fair Value over the Series A Preferred Stock Carrying Amount in the 2009 period. In addition in the Preferred Stock Exchange in August 2009 we recognized a gain for the $1,935,000 excess of Series A-1 Preferred Stock Carrying Amount over the Series A-2 Preferred Stock Fair Value in the 2009 period.

-42-

In 2008, as a result of the Preferred Stock Exchange in November 2008, we recognized a gain for the $2,419,000 excess of Series C Carrying Amount over the Series A Fair Value during 2008.   As a result of the Preferred Stock Exchange in September 2007 we recognized a gain for the $799,000 excess of Series B Carrying Amount over the Series C Fair Value during 2007.  For earnings per share calculations this gain, though credited to Paid in Capital, reduces the net loss attributable to common stockholders.

Preferred stock dividends - We recognized preferred stock dividends of $0 and $252,000 for the 2008 year and 2007 year, respectively.  The decrease in 2008 preferred stock dividends results from the September 2007 issuance of 474.8126 shares of a new Series C Preferred Stock, which does not pay dividends, in exchange for all of our then issued and outstanding Series B Preferred Stock which bore 12% dividends.  For earnings per share calculations these dividends, though charged to Paid in Capital, increases the net loss attributable to common stockholders.

Net loss attributable to common stockholders - Net loss attributable to common stockholders was $611,000 or $0.01 per basic and diluted share in the 2009 year.  For the 2008 year, the net loss attributable to common stockholders was $4,896,000, or $0.11 per basic and diluted share in the 2008 year.  For the 2007 year, the net loss attributable to common stockholders was $4,924,000, or $0.11 per basic and diluted share.

Liquidity and Capital Resources

Going Concern

Our consolidated financial statements have been prepared assuming that

For the year ended December 31, 2009, 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 $4,896,000$611,000 and negative operatingalthough we generated cash flowsfrom operations of $1,264,000$124,000 for the year ended December 31, 2008.  The Company performed an evaluation of its long-lived assets, however, and determined that there is an excess of projected2009, we have had negative operating cash flow on an undiscounted basis over the long-lived carrying amount. Therefore, the Company believes that no impairment losses were required.flows since our inception.  At December 31, 2008,2009, we had cash and cash equivalents of $1,227,000,$587,000, a working capital deficit of $4,225,000$1,365,000 and an accumulated deficit of $185,409,000. Additionally, through December 31, 2008, $10,802,000$162,405,000.   However, we have historically been able to raise capital in private placements, most recently $3,000,000 in March 2010, amended the terms of our preferred stock to eliminate any dividends until January 2013 and have reached settlements with a majority of the Senior Secured Notes and thetaxing authorities in which we had accrued interest thereon have been exchang ed for our Series A Convertible Preferred Stock (the “Series A Preferred Stock”) and in March 2009, the remaining $1,722,000 were either exchanged for Series A-1 convertible preferred stock or purchased and retired (see below). We raised capital in the private placements (see below and Note 19 to the consolidated financial statements), but continue to sustain losses and negative operating cash flows. Additionally, current economic conditions may cause a decline in business and consumer spending which could adversely affect our business and financial performance.These factors raise substantial doubt as to our ability to continue as a going concern. Assuming we are able to negotiate favorable terms with the authorities regarding our sales and use taxes and regulatory fees. Based primarily on our March 2010 financing (see also Note 524), along with our cash flow projection, the Company believes that it has, and will have, sufficient cash flow to the consolidated financial statements for further information) and we are not adversely affected by the current economic conditions, we believe that our available capital as of Decemberfund its operations through at least March 31, 2008 will enable us to continue as a going concern through December 31, 2009.2011. There arecan be no assurances,assurances; however, that we will be able to negotiate favorable terms with the authorities, that we will be able to raise additional capital as may be needed or upon acceptable terms, ornor that the current economic conditions will not negatively impact us.  If the current economic conditions negatively impact us we are unable to negotiate favorable terms with the authorities, orand we are unable to raise any additional capital asthat may be needed upon acceptable terms, it wouldcould have a material adverse effect on the Company.  The accompanying consolidated financial statements do not include any adjustments that might result from these uncertainties.

Private Placement Transactions

Capital Raises
Over the last three years, with the most recent transaction occurring in March 2009 (the “2009 Private Placement”),2010, the Company has entered into several private placement transactions raising (i) gross proceeds of $3,000,000 by selling shares of the Company’s newly-created Perpetual Series B preferred stock (“Series B Preferred Stock”), (ii) gross proceeds of $9,718,000 for the Company by issuing Senior Secured Notes, which by March 2009 were ultimately exchanged for shares of the Company’s newly-created Series A-1 Convertible Preferred Stock (“Series A-1 Preferred Stock”)convertible preferred stock and (ii)(iii)  gross proceeds of $3,625,000 by selling additional shares of convertible preferred stock which ultimately became shares of the Company’s Series A-1A-2 convertible preferred stock (“Series A-2 Preferred Stock.Stock”).  In connection with those transactions the Company also exchanged shares of its previously issued preferred stock for ultimately, shares of Series A-1A-2 Preferred Stock and Series B Preferred Stock.

Elimination of Dividends until January 2013 and Warrant Exchange
In August 2009, the Company entered into a transaction that resulted in the Company eliminating dividends on its Series A-2 Preferred Stock until January 2013 and issuing 17,372,000 shares of common stock in exchange for warrants to acquire 39,088,000 shares of common stock with an exercise price of $0.40.
March 2010 Private Placement

In March 2010, the Company entered into a series of transactions that resulted in the Company raising growth capital and exchanging shares of its outstanding Series A-2 Convertible Preferred Stock with an aggregate liquidation preference of $22,589,000 for a newly-created Series B Preferred Stock and for shares of common stock.

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Pursuant to a Series B Preferred Stock Purchase Agreement, dated March 29,


2010 (the “Purchase Agreement”), the Company received approximately $3,000,000 of gross proceeds in a closing (the “Closing”) of a private placement of 30 shares of its Series B Preferred Stock.

Each share of Series B Preferred Stock has a stated value of $100,000 per share (the “Stated Value”) and a liquidation preference equal to the Stated Value together with all accrued and unpaid dividends.  The Series B Preferred Stock is not convertible into common stock. The Series B Preferred Stock is senior to all other classes of equity and, commencing on January 1, 2013, is entitled to cumulative dividends at a rate of 4% per annum, payable quarterly, based on the Stated Value.  Commencing January 1, 2014, the cumulative dividend rate increases to 12% per annum, payable quarterly, based on the Stated Value.  The Company may, at its option at any time, redeem all or a portion of the outstanding shares of Series B Preferred Stock by paying the Stated Value together with all accrued and unpaid dividends.
Pursuant to that certain Series A-2 Preferred Exchange Agreement, dated March 29, 2010 (the “Series A-2 Exchange Agreement”), (i) 50 shares of Series B Preferred Stock with a liquidation preference of $5,000,000 were issued in exchange for 1,333 shares of Series A-2 Preferred Stock with a liquidation preference of $10,000,000 and (ii) 15,452,000 shares of common stock were issued in exchange for 1,545 shares of Series A-2 Preferred Stock with a liquidation preference of $11,589,000 (reflecting the issuance of common stock at $0.75 per share).
Pursuant to that certain Series A-2 Preferred Consent Agreement, dated March 29, 2009, (the “Series A-2 Consent Agreement”) the holders of at least two-thirds (2/3) of the Company’s Series A-2 Preferred Stock (i) consented to the creation of the Series B Preferred Stock, (ii) repeal and eliminate the applicability of any adjustment to the Conversion Price (as defined in the Series A-2 Certificate of Designation) that may be authorized in the Series A-2 Certificate of Designation in certain circumstances, and (iii) amend and alter the provisions of Section 3(a) of the Series A-2 Certificate of Designation to replace $3,000,000 with $7,000,000 at the end thereof so as to read, “obtain and utilize any line of credit, factoring arrangement or other similar financing arrangement in connection with servicing the Company’s receivables in an aggregate amount up to $7,000,000”.
Immediately following the closing of these transactions, the Company’s outstanding capital stock consisted of; 80,602,000 shares of common stock; 1,630 shares of Series A-2 Convertible Preferred Stock, which have an aggregate liquidation preference of $12,226,000 and are convertible into 16,302,000 shares of common stock at $0.75 per share; 80 shares of Series B Preferred Stock, which have an aggregate liquidation preference of $8,000,000 but are not convertible into common stock; options to employees; and warrants to acquire 1,703,000 shares at an exercise price of $0.40, which expire on November 25, 2013 and Financial Advisory Warrants described below. 
Burnham Hill Partners LLC, acted as placement agent for the new financing and acted as financial advisor for the other transactions disclosed herein and received a fee of $210,000 at the Closing, which equaled seven (7%) percent of the gross proceeds received by the Company in the Closing.  Glowpoint also issued advisory warrants to Burnham Hill Partners LLC and/or its designees and assignees to purchase shares of common stock equal to one and two-tenths (1.2%) percent of the diluted common shares outstanding immediately following the closing of the above-described transactions at an exercise price of $0.632 per share, which equals 110% of the volume weighted average trading price for the ten days prior to the Closing, and are exercisable for a period of five years (the “Financial Advisory Warrants”).
Reduction of Fully Diluted Common Shares and Liquidation Preference
The Company’s equity following the 2009 Private Placement and some otherthese transactions (as described in Note 19 to the Company’s financial statements for the year ended December 31, 2008) consists of (i) common stock, (ii) Series A-1B Preferred Stock which is not convertible into common stock, (iii) Series A-2 Preferred Stock, which is convertible into common stock, (iii)(iv) options to acquire common stock, and (iv)(v) warrants to acquire common stock.  The following is a summary of the activity of the Company’s shares of common stock and common stock equivalents as of December 31, 20082009 and March 27, 200929, 2010 (000’s omitted):

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December 31, 2009
  
2010 Private Placement – Conversion of Series A-2 Preferred Stock
  
2010 Private Placement -
Series B Preferred Stock Exchange
  
Expiration of Warrants
  
Other Transactions (Note 1)
  
March 29, 2010
 
Common Shares Outstanding
  64,966   15,452   —   —   184   80,602 
Series B Preferred Stock
  —   —   —   —   —   — 
Options
  4,706   —   —   —   4   4,710 
Warrants
  3,464   —   —   (1,640)  (121)  1,703 
Series A-2 Preferred Stock
  45,087   (15,452)  (13,333)  —   —   16,302 
Total
  118,223   —   (13,333)  (1,640)  67   103,317 
Note 1 – Includes issuances of restricted stock and options to employees and consultants and cashless exercise of warrants.  Does not include Advisory Warrants to be issued in the interim period (000’s omitted):

  

 

December 31, 2008

 

 

2009 Private Placement

 

 

Other Transactions

 

 

March 27,
2009

 

Common Shares Outstanding

 

 

46,810

 

 

 

-

 

 

 

700

 

 

 

47,510

 

Options (Note 1)

 

 

4,973

 

 

 

-

 

 

 

432

 

 

 

5,405

 

Warrants

 

 

40,917

 

 

 

3,345

 

 

 

-

 

 

 

44,262

 

Series A-1 Preferred Shares

 

 

37,898

 

 

 

7,189

 

 

 

-

 

 

 

45,087

 

Total

 

 

130,598

 

 

 

10,534

 

 

 

1,132

 

 

 

142,264

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


The following briefly describes the Senior Secured Notes and preferred stock as of December 31, 2008 and March 27, 2009 and the chronological history of the transactions affecting these securities during the last three years which description is qualified in its entirety by reference to the provisions of the applicable exhibits to the Company's Form 8-K’s filed with the Securities and Exchange Commission on various dates.

Senior Secured Notes and Series A Preferred Stock as of December 31, 2008

As of December 31, 2008, there were $1,722,000 of Senior Secured Notes outstanding.  On March 16, 2009 all of these Senior Secured Notes were exchanged for shares of Series A-1 Preferred Stock.  Until exchanged in March 2009, the Senior Secured Notes bore interest at 16% per annum, matured on September 30, 2010 and were convertible into common stock at a conversion price of $0.50 per share (x) at any time at the holder’s election or (y) automatically if the closing bid price (as defined in the Senior Secured Notes) of the Company’s common stock exceeds $1.25 (as adjusted for stock splits, stock dividends, combinations and similar transactions) for twenty (20) consecutive trading days.  We had the option to pay the accrued interest for the Senior Secured Notes in cash or additional Senior Secured Notes.  To date, all interest payments have been made by issuing additional Senior Secured Notes.


As of December 31, 2008, there are 3,790 shares of the Series A Convertible Preferred Stock (“Series A Preferred Stock”) (outstanding with a fair value of $11,574,000).  Each share of Series A Preferred Stock has a stated value of $7,500 per share (the “Stated Value”), a liquidation preference equal to the Stated Value, and is convertible at the holder’s election into common stock at a conversion price per share of $0.75.  As of December 31, 2008 the Stated Value of the Series A Preferred Stock is $28,423,000.  Each share of Series A Preferred Stock is convertible into 10,000 shares of common stock. The Series A Preferred Stock is senior to all other classes of equity and, after the first anniversary of issuance (the “Dividend Grace Period”), is entitled to dividends at a rate of 5% per annum, payable quarterly in cash, based on the Stated Value.  After the Dividend Grace Period and so long as any of the Company’s Senior Secured Notes remain outstanding, dividends shall accrue quarterly and will not be paid.  The Series A Preferred Stock contains provisions providing weighted average anti-dilution protection.  In the March 2009 Private Placement these shares of Series A Preferred Stock were exchanged for shares of the Series A-1 Preferred Stock.

Placement.


In the March 2009 Private Placement all of the Series A Preferred Stock were exchanged for Series A-1 Preferred Stock. Each share of Series A-1 Preferred Stock has a stated value of $7,500 per share (the “Stated Value”), a liquidation preference equal to the Stated Value, and is convertible at the holder’s election into common stock at a conversion price per share of $0.75.  Therefore, each share of Series A-1 Preferred Stock is convertible into 10,000 shares of common stock. The Series A-1 Preferred Stock is senior to all other classes of equity, has weighted average anti-dilution protection and, after the first anniversary of the Issuance Date (the “Dividend Grace Period”), is entitled to dividends at a rate of 5% per annum, payable quarterly, based on the Stated Value.  After the Dividend Grace Period, all dividends shall be payable (i) if on or before September 30, 2010, at the Company’s optio n in cash or through the issuance of a number of additional shares of Series A-1 Preferred Stock with an aggregate liquidation preference equal to the dividend amount payable on the applicable dividend payment date and (ii) if after September 30, 2010, at the option of the holder in cash or through the issuance of a number of additional shares of Series A-1 Preferred Stock with an aggregate liquidation preference equal to the dividend amount payable on the applicable dividend payment date.  The “Issuance Date” is defined as the original issuance date of the Series A-1 Preferred Stock, except for shares of Series A-1 Preferred Stock issued upon the exchange of Series A Preferred Stock pursuant to the Series A Preferred Consent and Exchange Agreement (see below), in which case the “Issuance Date” is the date of issuance of the Series A Convertible Preferred Stock (i.e., either November 25, 2008 or December 31, 2008). Except for when dividends are payable, the Series A-1 Prefe rred Stock is the same as the Series A Preferred Stock created in November 2008.



30


March and April 2006 Private Placements

In March and April 2006, we issued Senior Secured Notes and warrants to purchase common stock in a private placement to accredited investors (the “2006 Private Placements”). In the 2006 Private Placement, we issued $6,180,000 of our Senior Secured Notes and Series A warrants to purchase 6,180,000 shares of common stock at an exercise price of $0.65 per share.  In connection with the 2008 Private Placements (defined below), the exercise price of the Series A warrants has been adjusted to $0.40 per share and some of which were exchanged for Series A-3 warrants.  The warrants are subject to certain anti-dilution protection.

In the 2006 Private Placements 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 private placement 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 was 3.5 years from a previous weighted average expiration date of 2.9 years.  In addition, we issued to the designees and assigns of Burnham Hill Partners (“BHP”) placement agent warrants to purchase 618,000 shares of our common stock at an exercise price of $0.55 per share.  All of the warrants issued are subject to certain anti-dilution protection.  The $5,585,000 net proceeds from the 2006 Private Placements were used to support our corporate restructuring program and for working capital.  

September 2007 Private Placement

In September 2007, we issued $3,538,000 of additional Senior Secured Notes and warrants in a private placement (the “2007 Private Placement”), the investors of which included (but were not limited to) some of the holders of our then outstanding Senior Secured Notes and participating Glowpoint officers and directors, which included Michael Brandofino, Aziz Ahmad, Bami Bastani, Edwin F. Heinen, Joseph Laezza and David W. Robinson.  The Senior Secured Notes and other transaction documents provided that the participating Glowpoint officers and directors were not entitled to all of the rights and benefits available to the other purchasers upon the occurrence of certain events, including, but not limited to, an event of default, the failure by Glowpoint to achieve specified EBITDA levels (see 2008 Private Placements for changes related to the EBITDA covenants).   Of the $3,538,000 raised, the Company paid a placement agent fee of $283,000 and received net proceeds of $3,230,000.  In this transaction, we issued $3,538,000 aggregate principal amount of our Senior Secured Notes and Series A-2 warrants to purchase 3,538,000 shares of common stock at an exercise price of $0.65 per share.  In connection with the November 2008 private placement, the exercise price of the Series A-2 warrants has been adjusted to $0.40 per share and some of which were exchanged for Series A-3 warrants.  The Series A-2 warrants are exercisable for a period of five years.  

Also in the 2007 Private Placement, pursuant to an Exchange Agreement, we issued an aggregate of 474.8126 shares of a new Series C convertible preferred stock (the “Series C Preferred Stock”) in exchange for cancelling all of our issued and outstanding Series B Preferred Stock, cancelling $1,098,000 of accrued but unpaid dividends due on the Series B Preferred Stock, and surrendering 1,525,000 shares of common stock held by North Sound Capital LLC entities.  Each share of Series C Preferred Stock, par value $0.0001 per share, had a liquidation preference equal to its stated value, which was $10,000 per share, and was convertible at the holder’s election into 10,000 shares of common stock, subject to adjustment.  The Series C Preferred Stock would automatically convert to common stock after the closing bid and ask prices of our common stock exceeds $2.00 (as adjusted for stock splits, stock dividends, combinations and similar transactions) for a period of ten consecutive trading days.   In the 2008 Private Placement, all of the shares of the Series C Preferred Stock were exchanged for shares of Series A Preferred Stock.

Also in the 2007 Private Placement, we amended the terms of our then outstanding Senior Secured Notes to, among other things, extend the maturity date to March 31, 2009 from September 30, 2007.  We also (i) amended the outstanding Series A warrants, to amend certain definitions; (ii) amended the Registration Rights Agreement, dated March 31, 2006, which amendment (x) included among the registrable securities the shares issuable upon conversion of the Senior Secured Notes issued on September 21, 2007, conversion of the Series C Preferred Stock and the exercise of the Series A-2 warrants and (y) provided Glowpoint additional time to file the required registration statement and cause its effectiveness; and (iii) amended the Security Agreement, dated March 31, 2006, to include as Permitted Liens (as defined therein) equipment purchase money financing and a credit facility collateralized by up to $1,000,000 of receivables.  In considera tion for amending the then outstanding Senior Secured Notes and other transaction documents, we issued Series A-2 warrants to the noteholders to purchase an aggregate of 4,772,822 shares of common stock (which represented thirty-three (33%) percent of the shares of common stock issuable upon conversion of the existing Senior Secured Notes.

BHP acted as placement agent for the 2007 Private Placement and acted as financial advisor for the other transactions occurring on September 21, 2007 and received a cash fee of $283,000, which equaled eight (8%) percent of the gross proceeds we received.  We also issued warrants to the designees and assignees of BHP to purchase (i) 566,080 shares of common stock at an exercise price of $0.55 per share and (ii) 250,000 shares of common stock at an exercise price of $0.65 per share (collectively, the “2007 BHP Warrants”).   In connection with the 2008 Private Placements, the exercise price of the 2007 BHP Warrants was adjusted to $0.40 per share and some of which were exchanged for Series A-3 warrants.




31


In December 2007, in light of, among other things, changes to Rule 144 of the Securities Act, we amended the Registration Rights Agreement to eliminate any requirement to register any shares other than those issuable upon exercise of the Series A, Series A-2, placement agent and advisory warrants, which effectively eliminated the right of the holders of the Senior Secured Notes to demand that the Company pay such holders an amount of cash, calculated in the Senior Secured Notes. Accordingly, the Company thereafter no longer accounted for the beneficial conversion feature as a derivative liability.  Therefore, in December 2007, the Company eliminated the $2,778,000 derivative liability related to the beneficial conversion feature that had been accrued as of that date.

November and December 2008 Private Placements

In November and December 2008, the Company entered into a series of transactions to recapitalize its balance sheet, raise funds, eliminate the derivative liabilities, extend the maturity date of the remaining Senior Secured Notes and limit the related interest rate (the “2008 Private Placements”).   

The following is a summary of the componentsactivity of the 2008 Private Placement transactions.

In November 2008,Company’s liquidation preference for the Company received $1,825,000 of gross proceeds in an initial closing (the “Initial Closing”) of a private placement of 456 shares of Series AA-2 Preferred Stock and Series A-3 warrants to acquire an aggregate of 2,281,000 shares of common stock pursuant to a Series A ConvertibleB Preferred Stock Purchase Agreement (the “2008 Purchase Agreement”). Pursuant to the 2008 Purchase Agreement, the Company may sell additional sharesas of Series A Preferred Stock and Series A-3 warrants in one or more subsequent closings that may occur during the 90-day period following the Initial Closing, up to a maximum offering amount of $8,000,000.  There can be no assurance, however, that the Company will raise any additional funds following the Initial Closing.  The Series A-3 warrants have an exercise price of $0.40 per share, contain provisions providing weighted average anti-dilution protection and are exerc isable for a period of five years.  In accordance with the terms of that certain Registration Rights Agreement dated November 25, 2008 and amended on February 19, 2009, we are obligated to file a registration statement within 90 days after written request by at least two-thirds of the shares underlying the Series A-3 warrants, registering for resale the shares of common stock issuable upon exercise of the Series A-3 warrants.   As of the date of this filing we have not received any such request for registration.

Also in November 2008, the Company issued 1,880 shares of its Series A Preferred Stock and Series A-3 warrants to acquire 9,401,000 shares of common stock in exchange for $7,521,000 of the Company’s Senior Secured Notes, which represented all but $4,931,000 of the Company’s then outstanding Senior Secured Notes (the “Retained Notes”).  All of the Senior Secured Notes held by the Insider Purchasers were exchanged in the transaction.  The Insider Purchasers have the same rights as the remaining holders of the Series A Preferred Stock, since there are no terms or conditions in the Series A Preferred Stock which are impacted by the results of the Company. Pursuant to an Amendment No. 2 to Senior Secured Notes, the Retained Notes were amended to, among other things, (i) extend the maturity date from MarchDecember 31, 2009 to September 30,and March 29, 2010 (ii) delete the provision providing that the Company achieve a certain Minimum Ad justed EBITDA levels (as defined therein), (iii) fix the interest rate at 16% per annum, and (iv) provide that no cash bonuses will be awarded to Company management in 2008 or for 2008 performance and no future cash bonuses, options or restricted stock awards will be granted until (x) the Company has realized two quarters of positive operating income and (y) the Company has a reasonable expectation of realizing positive operating income in the quarter in which any such grant is made, all as determined in accordance with U.S. GAAP. Such amendment was executed by holders holding $1,752,000 of Retained Notes.  In connection with amending the remaining $3,179,000 of the Retained Notes, the Company issued Series A-3 warrants to purchase 2,384,000 shares of common stock.

In December 2008, the Company issued 820 shares of its Series A Preferred Stock and Series A-3 warrants to acquire 2,976,000 shares of common stock in exchange for $3,281,000 of the Company’s Senior Secured Notes, which represents all but $1,722,000 of the Company’s then outstanding Senior Secured Notes. The terms of this exchange were substantially similar to the terms of the Company’s note exchange that closed on November 25, 2008.

Pursuant to that certain Series C Preferred Consent and Exchange Agreement, dated November 25, 2008, the holders of the Company’s Series C Convertible Preferred Stock (i) consented to the creation of the Series A Preferred Stock and (ii) were issued an aggregate of 633 shares of Series A Preferred Stock, which had a Stated Value of $4,748,100, in exchange for the outstanding 474.81 shares of Series C Convertible Preferred Stock, which also had a Stated Value of $4,748,100.

Pursuant to that certain Amendment to Warrants to Purchase Shares of Common Stock of Glowpoint Agreement, dated November 25, 2008, the holders of 19,525,000 Series A, A-2, placement agent and advisory warrants to purchase shares of common stock of the Company agreed to eliminate the provisions of their warrant agreements which required the Company to account for a derivative liability. In consideration for the elimination of the derivative liability, we reduced the exercise price of those warrants to $0.40 from a weighted average price of $0.63 and extended the expiration date five years (to November 25, 2013) from a weighted average expiration date of 2.8 years.

BHP, acted as placement agent for the private placements and acted as financial advisor for the other transactions disclosed herein and received a fee of $128,000 for the November 2008 transaction, which equaled seven (7%) percent of the gross proceeds received by the Company in the Initial Closing.  In the December 2008 transaction BHP was entitled to a fee of $150,000 in cash,



32


$75,000 of which was payable within three business days following the closing of the transaction and the remaining $75,000 was payable upon closing a subsequent capital raise with gross proceeds to the Company of at least $1,000,000.   In connection with the 2008 Private Placements, the Company also issued advisory warrants to BHP and/or its designees and assignees to purchase 1,000,000 shares of common stock at an exercise price of $0.40 per share and agreed to consolidate all prior warrant issuances to BHP, its designees and assignees, into a single warrant per such holder with the same terms as the Series A-3 warrants.

The foregoing brief descriptions of the 2008 Private Placements are qualified in their entirety by reference to the provisions of the applicable exhibits to the Company's Form 8-K’s filed with the Securities and Exchange Commission on November 26, 2008 and January 5, 2009.

March 2009 Private Placement

On March 16, 2009, the Company entered into a series of transactions that resulted in the Company raising additional working capital, exchanging or repaying all of its outstanding senior secured convertible promissory notes, and exchanging all of its Series A Convertible Preferred Stock for a newly-created Series A-1 Convertible Preferred Stock.  As a result, the Company is debt-free (other than normal course trade payables and existing capital lease obligations) and has a single class of preferred stock outstanding.

Pursuant to that certain Series A-1 Convertible Preferred Stock Purchase Agreement, dated March 16, 2009 (the “2009 Purchase Agreement”), the Company received $1,800,000 of gross proceeds in an initial closing (the “Initial 2009 Closing”) of a private placement of 450 shares of its newly-created Series A-1 Convertible Preferred Stock (the “Series A-1 Preferred Stock”) and amended Series A-3 warrants to acquire 2,250,000 shares of common stock. Pursuant to the 2009 Purchase Agreement, the Company may sell additional shares of Series A-1 Preferred Stock and Series A-3 warrants in one or more subsequent closings that may occur during the 90-day period following the Initial 2009 Closing, up to a maximum offering amount of $4,000,000. There can be no assurance, however, that the Company will raise any additional funds following the Initial Closing.

The Series A-3 warrants have an exercise price of $0.40 per share, contain provisions providing weighted average anti-dilution protection and are exercisable for a period of five years.  In accordance with the terms of that certain Registration Rights Agreement dated November 25, 2008 and amended on February 19, 2009, we are obligated to file a registration statement within 90 days after written request by at least two-thirds of the shares underlying the Series A-3 warrants, registering for resale the shares of common stock issuable upon exercise of the Series A-3 warrants.   As of the date of this filing we have not received any such request for registration.

Each share of Series A-1 Preferred Stock has a stated value of $7,500 per share (the “Stated Value”), a liquidation preference equal to the Stated Value, and is convertible at the holder’s election into common stock at a conversion price per share of $0.75.  Therefore, each share of Series A-1 Preferred Stock is convertible into 10,000 shares of common stock. The Series A-1 Preferred Stock is senior to all other classes of equity, has weighted average anti-dilution protection and, after the first anniversary of the Issuance Date (the “Dividend Grace Period”), is entitled to dividends at a rate of 5% per annum, payable quarterly, based on the Stated Value. After the Dividend Grace Period, all dividends shall be payable (i) if on or before September 30, 2010, at the Company’s option in cash or through the issuance of a number of additional shares of Series A-1 Preferred Stock with an aggregate liqui dation preference equal to the dividend amount payable on the applicable dividend payment date and (ii) if after September 30, 2010, at the option of the holder in cash or through the issuance of a number of additional shares of Series A-1 Preferred Stock with an aggregate liquidation preference equal to the dividend amount payable on the applicable dividend payment date.  The “Issuance Date” is defined as the original issuance date of the Series A-1 Preferred Stock, except for shares of Series A-1 Preferred Stock issued upon the exchange of Series A Preferred Stock pursuant to the Series A Preferred Consent and Exchange Agreement (see below), in which case the “Issuance Date” is the date of issuance of the Series A Convertible Preferred Stock (i.e., either November 25, 2008 or December 31, 2008). Except for when dividends are payable, the Series A-1 Preferred Stock is the same as the Series A Preferred Stock created in November 2008.

Pursuant to that certain Note Exchange Agreement, dated March 16, 2009, the Company issued 269 shares of its Series A-1 Preferred Stock and Series A-3 warrants to acquire 595,000 shares of common stock in exchange for $1,076,000 of the Company’s Senior Secured Notes, which represented all but $713,000 of the Company’s then outstanding Senior Secured Notes (the “Remaining Notes”). The Remaining Notes were purchased for $750,000 and retired by the Company pursuant to that certain Securities Purchase Agreement, dated March 16, 2009, which prepayment was funded from the sale of securities in the Initial 2009 Closing. Therefore, there are no Senior Secured Notes outstanding.

Pursuant to that certain Series A Preferred Consent and Exchange Agreement, dated March 16, 2009, the holders of the Company’s Series A Preferred Stock (i) consented to the creation of the Series A-1 Preferred Stock and (ii) were issued an aggregate of 3,790 shares of Series A-1 Preferred Stock in exchange for an aggregate of 3,790 shares of the Company’s Series A Preferred Stock.



33


BHP, acted as placement agent for the 2009 Private Placement and acted as financial advisor for the other transactions disclosed herein and received a fee of $126,000, which equaled seven (7%) percent of the gross proceeds received by the Company in the Initial 2009 Closing.  The Company also paid BHP an additional $75,000 which was payable in connection with fees earned in an earlier transaction that were deferred until the 2009 Private Placement.  

The foregoing brief descriptions of the 2009 Private Placements are qualified in their entirety by reference to the provisions of the applicable exhibits to the Company's Form 8-K’s filed with the Securities and Exchange Commission on March 19, 2009.

Calculation of Fully Diluted Shares


The Company’s equity consists of (i) common stock, (ii) Series A-1 Preferred Stock, which is convertible into common stock, (iii) options to acquire common stock, and (iv) warrants to acquire common stock. The following is a summary of the Company’s shares of common stock and common stock equivalents as of March 27, 2009, together with expiration dates and applicable exercise/conversion prices (000s(000’s omitted):


  

 

Potential Fully
Diluted Shares

 

 

Expiration
Dates

 

 

Weighted
Average
Exercise/
Conversion
Price(s)

 

 

Aggregate
Proceeds Paid
to Company if
Exercised

 

Common Shares Outstanding

 

 

47,510

 

     

 

—

 

     

$

—

 

     

$

—

 

Options (Note 1)

 

 

5,405

 

 

10/2009 – 3/2019

 

 

 

1.23

 

 

 

6,763

 

Warrants (Note 2)

 

 

40,912

 

 

11/2013 – 3/2014

 

 

 

0.40

 

 

 

16,365

 

Warrants (Note 2)

 

 

1,640

 

 

 

3/2010

 

 

 

1.61

 

 

 

2,640

 

Warrants (Note 2)

 

 

1,710

 

 

 

8/2009

 

 

 

2.56

 

 

 

4,370

 

Series A-1 Preferred Shares (Note 3)

 

 

45,087

 

 

 

—

 

 

 

0.75

 

 

 

—

 

Total

 

 

142,264

 

 

 

 

 

 

 

 

 

 

$

30,138

 


Note 1 – The options have a median exercise price of $0.59. All of the options can be exercised for cash or in a cashless exercise.

Note 2 – All of the warrants can be exercised for either cash or in a cashless exercise.

Note 3 - Each of the 4,509 shares of the Series A-1 Preferred Stock has a stated value of $7,500, a liquidation preference of $7,500 and is convertible at the holder’s election into common stock at a conversion price per share of $0.75. Therefore, each share of Series A-1 Preferred Stock is convertible into 10,000 shares of common stock.


Calculation of the Company’s potential fully diluted shares outstanding is based on the Company’s common stock price so as to determine (x) whether the options and warrants are in the money and likely to be exercised and (y) whether the Series A-1 Preferred Stock will likely be converted into common stock or the liquidation preference paid in cash. Each share of Series A-1 Preferred Stock has a conversion price of $0.75. Therefore, if the Company’s common stock price is less than $0.75 per share, we assume holders of the Series A-1 Preferred Stock will not convert into common stock. If the price is greater than or equal to $0.75, we assume holders of the Series A-1 Preferred will convert their shares into the Company’s common stock.


The following table illustrates the number of shares of common stock that would be outstanding as of March 27, 2009 at various notional common stock market prices. We have assumed that all holders of warrants and options elect a cashless exercise rather than pay the exercise price in cash. There can be no assurance that the notional common stock market price or the Company’s resulting enterprise value will equal these illustrative levels. There can be no assurance that the Company will experience a liquidity event at an amount that would result in any distribution to equity holders of the following illustrative amounts or any other amounts. All amounts are in thousands with the exception of the notional common stock price.


Notional Common Stock Price

 

$

0.35

 

 

$

0.50

 

 

$

0.75

 

 

$

1.00

 

 

$

1.50

 

Existing Common Shares Outstanding

 

 

47,510

 

 

 

47,510

 

 

 

47,510

 

 

 

47,510

 

 

 

47,510

 

Exercised Options

 

 

68

 

 

 

452

 

 

 

1,267

 

 

 

1,792

 

 

 

2,495

 

Exercised Warrants

 

 

-

 

 

 

8,183

 

 

 

19,098

 

 

 

24,561

 

 

 

30,024

 

Converted Series A-1 Preferred Shares

 

 

-

 

 

 

-

 

 

 

45,087

 

 

 

45,087

 

 

 

45,087

 

Resulting Common Shares Outstanding

 

 

47,578

 

 

 

56,145

 

 

 

112,962

 

 

 

118,950

 

 

 

125,116

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assumed Enterprise Value (Note A)

 

$

50,467

 

 

$

61,887

 

 

$

84,722

 

 

$

118,950

 

 

$

187,675

 

Less Series A-1 Preference (Note B)

 

 

33,815

 

 

 

33,815

 

 

 

-

 

 

 

-

 

 

 

-

 

Assumed Aggregate Theoretical Value of the resulting Common Shares Outstanding

 

$

16,652

 

 

$

28,072

 

 

$

84,722

 

 

$

118,950

 

 

$

187,675

 





34


Note A – Enterprise value is a non-GAAP concept calculated by (i) adding a company’s common stock market capitalization, outstanding debt and preferred stock and (ii) subtracting total cash and cash equivalents. In the foregoing illustration, we added the Company’s notional common stock market capitalization (common shares outstanding multiplied by the notional common stock price) and the Series A-1 preferred stock liquidation preference, which was assumed to be in effect only when the notional common stock price is less than $0.75. We have assumed that cash and cash equivalents and accounts receivables equal any short and long term debt and liabilities of the Company, though there may be no basis for such an assumption.

Note B – If the notional common stock price is less than $0.75 per share, we assume the holders of Series A-1 Preferred shares would elect to receive their liquidation preference rather than convert into shares of common stock. Therefore, there would be 45,087,000 less shares of common stock but the holders of the Series A-1 Preferred Stock would have the right to receive a liquidation preference of $33,815,000.


We do not as a matter of course make any statement as to any future results. However, we have prepared the information set forth above to present the theoretical fully diluted common shares outstanding and assumed enterprise value on the assumptions outlined above. The information was not prepared with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants, but, in the view of the Company, was prepared on a reasonable basis. However, this information is not fact and should not be relied upon as being necessarily indicative of any result, and readers are cautioned not to place undue reliance on the theoretical information presented.

  
December 31, 2009
  
2010 Private Placement -
Series B Preferred Stock Exchange
  
2010 Private Placement – Conversion of Series A-2 Preferred Stock
  
2010 Private Placement -
Sale of Series B Preferred Stock
  
March 29, 2010
 
Series B Preferred Stock
 $—  $5,000  $—  $3,000  $8,000 
Series A-2 Preferred Stock
  33,815   (10,000)  (11,589)  —   12,226 
Total
 $33,815  $(5,000) $(11,589) $3,000  $20,226 
                     
Cash Flows

flows

At December 31, 2008,2009, we had a working capital deficit of $4,225,000,$1,365,000, compared to a working capital deficit of $9,092,000 at December 31, 2007, a decrease of $4,867,000.  We had $1,227,000 in cash and cash equivalents$4,225,000 at December 31, 2008, compared to $2,312,000a decrease of $2,860,000.  We had $587,000 in cash at December 31, 2007,2009, compared to $1,227,000 at December 31, 2008, a decrease of $1,085,000.  

$640,000.

Net cash usedprovided by operating activities was $1,264,000$124,000 for the 20082009 year.  The cashprimary components provided by operationsof the generation of funds were $2,429,000 for$3,456,000 from the net loss excluding non-cash charges and an increase of $970,000 in accounts payable and accrued expenses andpartially offset by a $3,452,000 decrease in sales taxes and regulatory fees, and $54,000 for a decrease in prepaid expenses and other current assets.  These increases in cash flow were partially offset by $801,000 for an$491,000 increase in accounts receivable $107,000 forand a $364,000 decrease in customer deposits $5,000 for a decrease inand deferred revenue and $5,000 for an increase in other assets.

revenue.

Cash used in investing activities in the 20082009 year for the purchase of property, equipment and equipmentleasehold improvements was $1,179,000.  We anticipate capital expenditures in 2009 to be at a similar level as 2008.  

$1,213,000.

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Cash provided by financing activities in the 20082009 year was $1,825,000 providedcomprised of $1,800,000 received from the sale of our preferred stock and $17,000 received from the issuanceexercise of Series A Preferred Stock, which wasstock options, partially offset by $342,000our purchase of costs incurred in extension$750,000 of maturity date ofour Senior Secured Notes, $384,000 of costs related to the 2009 Private Placement and Series C Preferred Stock exchangeAugust 2009 Exchange and $125,000$234,000 of principal payments for a capital lease payments.

lease.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements atas of December 31, 2008.

Commitments and Contractual Obligations

2009.

Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued its final Statement of Financial Accounting Standards (“SFAS)” No. 168 – “The following table summarizes our contractual cash obligations and commercial commitments at December 31, 2008,FASB Accounting Standards ASC Topic 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

Senior Secured Notes

 

$

1,722

 

 

$

-

 

 

$

1,722

 

 

$

─

 

$

─

Operating lease obligations

 

 

540

 

 

 

278

 

 

 

262

 

 

 

─

 

 

─

Capital lease obligations

 

 

274

 

 

 

274

 

 

─

 

 

 

─

 

 

─

Commercial commitments

 

 

1,241

 

 

 

1,241

 

 

─

 

 

 

─

 

 

─

Total

 

$

3,777

 

 

$

1,793

 

 

$

1,984

 

 

$ 

─

 

$

─

RecentHierarchy of Generally Accepted Accounting Pronouncements

In December 2007,Principles a replacement of FASB Statement No. 162”. (“SFAS No. 168”).   SFAS No. 168 made the FASB issued SFAS No. 160, “Noncontrolling InterestsAccounting Standards Codification (the “ASC”) the single source of U.S. Generally Accepted Accounting Policies (“U.S. GAAP”) used by nongovernmental entities in Consolidated Financial Statements” (“SFAS 160”).  SFAS 160 amends ARB No. 51the preparation of financial statements, except for rules and interpretive releases of the SEC under authority of federal securities laws, which are sources of authoritative accounting guidance for SEC registrants. The ASC is meant to establishsimplify user access to all authoritative accounting guidance by reorganizing U.S. GAAP pronouncements into roughly 90 accounting topics within a consistent structure; its purpose is not to create new accounting and reporting guidance. The ASC supersedes all existing non-SEC accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary, in which the noncontrolling interest will be reclassified as equity; and the income, expense and comprehensive income from a noncontrolling interest will be fully consolidated. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, and therefore would bewas effective for the Company beginning JanuaryJuly 1, 2009. Following SFAS No. 168, the Board will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates. The adoption of this Statement didFASB will not have an impactconsider Accounting Standards Updates as authoritative in their own right; these updates will serve only to update the ASC topic, provide background information about the guidance, and provide the bases for conclusions on the Company's consolidated resultschange(s) in the ASC. In the description of operationsASC and financial condition.



35


Effective January 1, 2008, the Company adopted SFAS No. 157, "Fair Value Measurements"Accounting Standards Updates (“SFAS 157”ASU”). that follows, references in “italics” relate to ASC or ASU topics, and their descriptive titles, as appropriate.

In February 2008,April 2009, the FASB issued FASB Staff Position No. FAS 157-2, "Effective Date of FASB Statement No. 157",updated ASC topic 825, “Financial Instruments” (“ASC Topic 825”) which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements atrequires disclosures about fair value at least annually. Therefore, theof financial instruments for interim reporting periods as well as in annual financial statements.  The Company has adopted the amended provisions of SFAS 157 with respect to its financial assetsASC Topic 825 effective June 30, 2009 and liabilities only. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhanceshas included the required disclosures about fair value measurements. “Fair value” is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The adoption of this Statement did not have a material impact on the Company's consolidated results of operations and financial condition.

Note 12.

In May 2008, the FASB issued Statement No. 162, “The Hierarchyupdated ASC topic 470, “Debt – Debt with Conversion and Other Options” (“ASC Topic 470”) which clarifies the accounting treatment of Generally Accepted Accounting Principles” (“Statement No. 162”). The statement is intended to improve financial reporting by identifying a consistent hierarchy for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP. Prior to the issuance of Statement No. 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (“AICPA”) Statement on Auditing Standards (SAS) No. 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. Unlike SAS No. 69, Statement No. 162 is directed to the entity rather than the auditor. Statement No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformi ty with Generally Accepted Accounting Principles. Statement No. 162 did not have any material impact on the Company’s results of operations, financial condition or liquidity.

In May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (FSP APB 14-1). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon either mandatory or optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants.”  Additionally, FSP APB 14-1ASC Topic 470 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1ASC Topic 470 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fisca lfiscal years. We will adopt FSP APB 14-1adopted the amended sections of ASC Topic 470 beginning in the first quarter of 2009, and this standard must be applied on a retrospective basis. We areThe adoption of ASC Topic 470 did not have a material impact on the Company’s consolidated results of operations and financial condition.

In September 2009, the FASB issued ASU 2009-14, “Certain Revenue Arrangements That Include Software Elements” (“ASU 2009-14”), which excludes tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of Subtopic 985-605, “Revenue Recognition.” ASU 2009-14 is effective for periods beginning after December 15, 2009 with earlier adoption permitted. The Company is currently evaluating the timing of its adoption of ASU 2009-14 and the impact that ASU 2009-14 will have on its consolidated financial statements.

-46-

In October 2009, the FASB issued ASU 2009-13 which supersedes certain guidance in ASC 605-25, “Revenue Recognition — Multiple Element Arrangements”.  This topic requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. This topic is effective for annual reporting periods beginning after June 15, 2010. The Company is currently evaluating the impact the adoption of FSP APB 14-1 will have on our consolidated financial position and results of operations.

In June 2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). Equity-linked instruments (or embedded features) that otherwise meet the definition of a derivative as outlined in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” are not accounted for as derivatives if certain criteria are met, one of which is that the instrument (or embedded feature) must be indexed to the entity’s stock. EITF 07-5 provides guidance on determining if equity-linked instruments (or embedded features) such as warrants to purchase our stock are considered indexed to our stock. EITF 07-5 is effective for the financial statements issued for fiscal years and interim periods within those fiscal years, beginning after December 15, 2008 and will be applied to outstanding instruments as of the beginning of the fiscal year in which it is adopted. Upon adoption, a cumulative effect adjustment will be recorded, if necessary, based on amounts that would have been recognized if this guidance had been applied from the issuance date of the affected instruments. The Company is currently determining the impact, if any, that EITF 07-5topic will have on its consolidated financial statements.

Item 7A.

7A.  Quantitative and Qualitative Disclosures about Market Risk

Current economic conditions may cause a decline in business and consumer spending which could adversely affect our business and financial performance.  Our operating results are impacted by the health of the global economy, especially the North American economy.  Our business and financial performance, including collection of our accounts receivable and recoverability of assets, may be adversely affected by current and future economic conditions, such as a reduction in the availability of credit, financial market volatility, recession, etc.



36


Additionally, we may experience difficulties in scaling our operations to react to economic pressures in the United States.

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.

Item 9A.  Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by Glowpoint in the reports it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified by the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by Glowpoint in the reports it files or submits under the Exchange Act is accumulated and communicated to management, including the Co-Chief Executive Officers and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of management, including the Co-Chief Executive Officers and Chief Financial Officer, Glowpoint has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2008,2009, and, based upon this evaluation, the Co-Chief Executive Officers and Chief Financial Officer have concluded that these controls and procedures are effective in providing reasonable assurance of compliance.



Changes in Internal Control over Financial Reporting

Under the supervision and with the participation of management, including the Co-Chief Executive Officers and Chief Financial Officer, Glowpoint has evaluated changes in internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended December 31, 20082009 and have concluded that no change has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

Management’s Annual Report On Internal Control Over Financial Reporting

Glowpoint’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes, in accordance with generally accepted accounting principles. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.

Glowpoint’s management, including the Co-Chief Executive Officers and Chief Financial Officer, has conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 20082009 based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2008.

2009.

The information set forth in this Item 9A shall not be considered filed under the Exchange Act. This annual report does not include an attestation report of Amper, Politziner & Mattia, P.C.,LLP, Glowpoint’s independent registered public accounting firm, regarding internal control over financial reporting. Management’s report was not subject to attestation by Amper, Politziner & Mattia, P.C.LLP pursuant to temporary rules of the SEC that permit Glowpoint to provide only management’s report in this annual report.

Item 9B. Other Information

None.


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PART III

Item 10.  Directors, Executive Officers and Corporate Governance

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

Bami Bastani (1)(2)(3)

55

Class II Director

Dean Hiltzik (2)(3)

55

Class III Director

Joseph Laezza

38

Class III Director, Co-Chief Executive Officer, President, and Chief Operating Officer

James S. Lusk (1)(2)

53

Class I Director

David W. Robinson

40

Class III Director, Co-Chief Executive Officer, Executive Vice President, Business Development, and General Counsel

Peter Rust (1)(3)(4)

55

Class I Director

 Non-Director Executive Officer:

Edwin F. Heinen

57

Chief Financial Officer and Executive Vice President, Finance

———————

* Does not include applicable information for former directors Michael Brandofino, Richard Reiss and Aziz Ahmad, each of whom resigned without disagreement in March 2009, as reported on the Company’s Form 8-K filed on March 19, 2009.

(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

Biographies

Bami Bastani, Class II Director. Dr. Bastani joined our board of directors in February 2007 and his term will expire at the annual meeting of stockholders in 2010. Until August 2008, he was 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 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 M.S.E.E. in Microelectronics from Ohio State University and his B.S. (Electrical Engineering) from the University of Arkansas. He also holds three U.S. patents.

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 2011. 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 at the accounting and consulting firm of Marks Paneth & Shron LLP (“MPS”), which acquired his former firm Schneider & Associates LLP, which he joined in 1979. MPS 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.

Joseph Laezza, Co-Chief Executive Officer, President and Class III Director. Mr. Laezza has been our Co-Chief Executive Officer and Class III Director since March 2009, our President since June 2008, our Chief Operating Officer since April 2006 and previously served as our Vice President, Operations since March 2004. His term as a Class III Director will expire at the annual meeting of stockholders in 2011. 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.

James S. Lusk, Class I Director.Mr. Lusk joined our board of directors in February 2007 and his term will expire at the annual meeting of stockholders in 2009. He is Chief Financial Officer of ABM Industries Incorporated (NYSE:ABM), a leading facility services contractor in the United States and Canada, and was formerly ABM’s Executive Vice President. 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 B.S. (Economics), cum laude, from the Wharton School, University of Pennsylvania, and his M.B.A (Finance) from Seton Hall University. He is a CPA and was inducted into the AICPA Business and Industry Leadership Hall of Fame in 1999.



38


David W. Robinson, Co-Chief Executive Officer, Executive Vice President of Business Development, General Counsel and Class III Director. Mr. Robinson has been our Co-Chief Executive Officer and Class III Director since March 2009, our Executive Vice President, Business Development since June 2008, and General Counsel since May 2006. His term as a Class III Director will expire at the annual meeting of stockholders in 2011. 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 Pennsylvani a (magna cum laude) and a Juris Doctorate from Boston College Law School.

Peter Rust, Class I Director. Mr. Rust joined our board of directors in May 2006 and is currently Chairman of the Board and a member of the Audit and Nominating Committees.  His term will expire at the annual meeting of stockholders in 2009.  Mr. Rust has over 27 years of experience in the telecommunications, Internet and computer industries. He is currently CEO of Bank Street Consulting Group, a firm that helps companies accelerate their growth by designing and implementing best-in-class product, market and sales strategies as well as recruiting required talent.  Previously, Mr. Rust was CEO of FWD, a web-based multimedia communications business and President and CEO of Con Edison Communications.   He is also a former director of NEON Communications, is a current director for two non-profits and is a past member of the Communications Sector of the NYC Investment Fund. Mr. Rust h olds 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. 

Non-Director Executive Officer

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.

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 2008, 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.



39


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 six directors. The current board members include four independent directors and two current members of our senior management.

Independent Directors. Other than Messrs. Laezza and Robinson (our current executive officers), 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. 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 ar e 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. Peter Rust serves 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 in our Proxy Statement, and performing such other duties as the board of directors may prescribe from time to time.

Nominating Committee. We currently have a nominating committee consisting of Dean Hiltzik, Peter Rust and Bami Bastani. 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 committe e 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.

Item 11.  Executive Compensation

Glowpoint will file with the Commission a definitive proxy statement pursuant to Regulation 14A no later than 120 days after December 31, 2008.2009.  The information required by this Item will appear in that definitive proxy statement and is incorporated by reference herein.



40


Item 11.  Executive Compensation
Glowpoint will file with the Commission a definitive proxy statement pursuant to Regulation 14A no later than 120 days after December 31, 2009.  The information required by this Item will appear in that definitive proxy statement and is incorporated by reference herein.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Glowpoint will file with the Commission a definitive proxy statement pursuant to Regulation 14A no later than 120 days after December 31, 2008.2009.  The information required by this Item will appear in that definitive proxy statement and is incorporated by reference herein.

Item 13.  Certain Relationships and Related Transactions, and Director Independence

We receive financial and tax services from Marks, Paneth & Shron LLP, an accounting and consulting firm in which Dean Hiltzik, one of our directors, is a partner. In the last fiscal year, we incurred fees of approximately $62,000 for services received from this firm.

None

Item 14.14.  Principal Accounting Fees and Services

Audit Fees

Amper, Politziner & Mattia, P.C.LLP (“Amper”), our principal accountant, billed us approximately $292,000$255,000 for professional services for the audit of our annual consolidated financial statements for the 2009 fiscal year and the reviews of the consolidated financial statements included in our quarterly reports on Form 10-Q for the 2009 fiscal year and approximately $278,000 for the audit of our annual consolidated financial statements for the 2008 fiscal year and the reviews of the consolidated financial statements included in our quarterly reports on Form 10-Q for the 2008 fiscal year and approximately $282,000 for the audit of our annual consolidated financial statements for the 2007 fiscal year and the reviews of the consolidated financial statements included in our quarterly reports on Form 10-Q for the 2007 fiscal year.

Audit-Related Fees

In connection with services rendered for filing post-effective amendments to a registration statement in fiscal year 2008, Amper billed us approximately $10,000. In connection with filing a registration statement in 2007, Amper billed us approximately $29,800 in fiscal year 2007. Except for the foregoing and as reported in the paragraph immediately above, Amper did not bill us for any assurance and related services that are reasonably related to the performance of the audit and review of our consolidated financial statements that are not already.statements. All of these fees were billed in connection with our filings with the Securities and Exchange Commission and attendance at audit committee meetings.

Tax Fees

In connection with tax advice, Amper did not render any professional services to us for tax compliance, tax advice and tax planning in the 2009 fiscal year.   Amper billed us approximately $6,000 but did not render any professional services to us for tax compliance and tax planning in the 2008 fiscal year.  Amper did not render any professional services to us for tax compliance, tax advice and tax planning in the 2007 fiscal year.

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All Other Fees

Amper did not bill us in the 20082009 or 20072008 fiscal years for any services or products other than Audit Fees,Audit-Related Fees and Tax Fees, as listed above.

In accordance with audit committee policy and the requirements of law, all services provided by Amper 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.



41


PART IV

Item 15.  15.  Exhibits and Financial Statement Schedules

A.

The following documents are filed as part of this report:

1.  Consolidated Financial Statements:

A.  The following documents are filed as part of this report:
1.  Consolidated Financial Statements:
Page

Page

Report of Independent Registered Public Accounting Firm

F-1

Consolidated Balance Sheets at December 31, 20082009 and 2007

2008                  

F-2

Consolidated Statements of Operations for the years ended December 31, 20082009 and 2007

2008

F-3

Consolidated Statements of Stockholders’ DeficitEquity (Deficit) for the years ended December 31, 20082009 and 2007

2008

F-4

Consolidated Statements of Cash Flows for the years ended December 31, 20082009 and 2007

2008

F-5

Notes to Consolidated Financial Statements

F-7


2.  Financial Statement Schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.

3.

Exhibits:

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 52 of this Form 10-K, which immediately precedes such exhibits, and is incorporated by reference.
-50-



42


EXHIBIT INDEX

Exhibit
Number
Description

Exhibit

Number

3.1

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. (8)

(3)

3.3

Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Glowpoint, Inc. increasing its authorized common stock to 150,000,000 shares from 100,000,000 shares. (18)

(9)

3.4

Amended and Restated Bylaws. (8)

(3)

3.5

Amendment to Amended and Restated Bylaws (20)

(11)

4.1

Specimen Common Stock Certificate. (15)

(7)

4.2

Certificate of Designations, Preferences and Rights of Series C Preferred Stock. (18)

4.3

Certificate of Designations, Preferences and Rights of Series D Preferred Stock. (18)

(9)

4.4

4.3

Certificate Eliminating Series A Preferred Stock. (21)

4.5

Certificate Eliminating Series B Preferred Stock. (21)

4.6

Certificate of Designations, Preferences and Rights of Series A Preferred Stock of Glowpoint. (23)

(14)

4.7

4.4

Form of Series A-3 Warrant dated November 25, 2008. (23)

(14)

4.8

4.5

Form of Amendment to Warrants to Purchase Shares of Common Stock of Glowpoint, dated as of November 25, 2008. (23)

(14)

4.9

4.6

Certificate of Designations, Preferences and Rights of Series A-1 Preferred Stock of Glowpoint. (25)

(16)

4.10

4.7

Certificate of Designations, Preferences and Rights of Series A-2 Preferred Stock of Glowpoint. (18)

4.8Form of amendedAmendment to Series A-3 Warrant dated March 16, 2009. (25)

(16)

10.1

4.9

Form of Amendment to Series A-3 Warrant dated August 10, 2009. (18)

4.10Certificate of Designations, Preferences and Rights of Series B Preferred Stock of Glowpoint. (19)
10.1Glowpoint, Inc. 2000 Stock Incentive Plan. (2)

10.2

Form of Warrant to purchase Common Stock, dated January 10, 2002. (3)

10.3

Form of Warrant to Purchase Shares of common stock of Registrant. (4)

10.4

Registration Rights Agreement dated as of December 17, 2002, between Registrant and the Purchasers set forth therein. (4)

10.5

Note and Warrant Purchase Agreement dated as of December 17, 2002, between Registrant and the Purchasers set forth therein. (4)

10.6

Warrant to Purchase Shares of common stock of Glowpoint, Inc. (5)

10.7

Common Stock Purchase Agreement between Registrant and the Purchasers Listed on Exhibit A. (5)

10.8

Placement Agent Agreement, dated August 4, 2003, between Registrant and Burnham Hill Partners, as amended as of January 29, 2004. (8)

10.9

Form of Warrant to Purchase Common Stock, dated August 8, 2001. (6)

10.10

Form of Warrant to Purchase Common Stock, dated June 14, 2000. (7)

10.11

Employment Agreement with Joseph Laezza, dated as of March 11, 2004. (8)

(3)

10.12

10.3

Amended and Restated Employment Agreement with Michael Brandofino, dated July 1, 2004. (9)

10.13

Form of Common Stock Purchase Agreement, dated March 14, 2005. (10)

10.14

Form of Warrant to Purchase Common Stock, dated March 14, 2005. (10)

10.15

Placement Agent Agreement, dated March 19, 2005, between Registrant and Burnham Hill Partners. (15)

10.16

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. (11)

10.17

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. (11)

10.18

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. (11)

10.19

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. (11)





Exhibit

Number

Description

10.20

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. (11)

10.21

Form of Placement Agent Warrant, dated as of March 31, 2006, between Glowpoint and the parties set forth therein. (11)

10.22

Employment Agreement with David W. Robinson, dated May 1, 2006 (12)

(4)

10.23

10.4

Employment Agreement with Edwin F. Heinen, dated January 30, 2007. (13)

(5)

10.24

10.5

Employment Agreement Amendment with Edwin F. Heinen, dated April 24, 2007. (6)

10.6Employment Agreement Amendment with David W. Robinson, dated April 24, 2007. (14)

(6)

10.25

10.7

Employment Agreement Amendment with Edwin F. Heinen, dated April 24, 2007. (14)

10.26

Employment Agreement Amendment with Michael Brandofino, dated May 15, 2007 (14)

10.27

Employment Agreement Amendment with Joseph Laezza, dated May 15, 2007. (14)

(6)

10.28

10.8

Employment Agreement Amendment with Michael Brandofino, dated June 26, 2007 (16)

10.29

Glowpoint, Inc. 2007 Stock Incentive Plan. (17)

(8)

10.30

10.9

Employment Agreement Amendment with David W. Robinson, dated September 20, 2007. (18)

(9)

10.31

10.10

Form of Amendment No. 1 to Senior Secured Promissory Notes, dated September 21, 2007. (18)

10.32

Form of Amendment No. 1 to Series A Warrant, dated September 21, 2007. (18)

10.33

Amendment No. 1 to Registration Rights Agreement, dated as of September 21, 2007, between Glowpoint and the Purchasers set forth therein. (18)

10.34

Amendment No. 1 to Security Agreement, dated as of September 21, 2007, between Glowpoint and the Secured Parties set forth therein. (18)

10.35

Note and Warrant Purchase Agreement, dated as of September 21, 2007, between Glowpoint and the Purchasers set forth therein. (18)

10.36

Form of 10% Senior Secured Convertible Promissory Note, dated September 21, 2007. (18)

10.37

Form of Series A-2 Warrant, dated September 21, 2007. (18)

10.38

Exchange Agreement, dated September 21, 2007, between Glowpoint and the Holders  set forth therein. (18)

(9)

10.39

10.11

Form of Placement Agent Warrant, dated September 21, 2007. (18)

10.40

Letter Agreement, dated as of December 18, 2007, amending the amended Registration Rights Agreement, dated as of September 21, 2007, between Glowpoint and the Purchasers set forth therein. (19)

(10)

10.41

10.12

Lease Agreement for premises located at 225 Long Avenue, Hillside, New Jersey, dated as of December 31, 2007, between Glowpoint and Vitamin Realty Associates, L.L.C. (21)

(12)

10.42

10.13

Employment Agreement Amendment with David W. Robinson dated April 30, 2008. (22)

(13)

10.43

10.14

Form of Amendment No. 2 to Senior Secured Convertible Notes dated November 25, 2008. (23)

10.44

Form of Series A Convertible Stock Purchase Agreement, dated as of November 25, 2008, between Glowpoint and the purchasers set forth therein. (23)

(14)

10.45

10.15

Form of Registration Rights Agreement, dated as of November 25, 2008, between Glowpoint and the purchasers set forth therein. (23)

(14)

10.46

10.16

Form of Note Exchange Agreement, dated November 25, 2008, between Glowpoint and the holders set forth therein. (23)

(14)

10.47

10.17

Form of Series C Preferred Consent and Exchange Agreement, dated November 25, 2008, between Glowpoint and the holders set forth therein. (23)

(14)

10.48

10.18

Employment Agreement Amendment with Joseph Laezza, dated November 24, 2008. (23)

(14)
-51-

10.49

10.19

Employment Agreement Amendment with Edwin F. Heinen, dated November 24, 2008. (23)

(14)

10.50

10.20

Form of Note Exchange Agreement, dated December 31, 2008, between Glowpoint and the holders set for the therein. (24)

(15)

10.51

10.21

Form of Series A-1 Convertible Stock Purchase Agreement, dated as of March 16, 2009, between Glowpoint and the purchasers set forth therein. (25)

(16)

10.52

10.22

Amendment No. 1 to Registration Rights Agreement, dated February 19, 2009. (25)





(16)

Exhibit

Number

10.23

Description

10.53

Form of Note Exchange Agreement, dated March 16, 2009, between Glowpoint and the holders set forth therein. (25)

(16)

10.54

10.24

Form of Securities Purchase Agreement, dated March 16, 2009, between Glowpoint and the holder set forth therein. (25)

(16)

10.55

10.25

Form of Series A Preferred Consent and Exchange Agreement, dated March 16, 2009, between Glowpoint and the holders set forth therein. (25)

(16)

10.56

10.26

Employment Agreement Amendment with Michael Brandofino, dated March 12, 2009. (25)

10.57

Employment Agreement Amendment with Joseph Laezza, dated March 12, 2009. (25)

(16)

10.58

10.27

Employment Agreement Amendment with Edwin F. Heinen, dated March 12, 2009. (25)

(16)

10.59

10.28

Employment Agreement Amendment with David W. Robinson, dated March 12, 2009. (25)

(16)

10.60

10.29

SeparationForm of Series A-1 Preferred Consent and Exchange Agreement, with Michael Brandofino,dated August 11, 2009, between Glowpoint and the holders set forth therein. (18)

10.30Form of Warrant Exchange Agreement, dated August 11, 2009, between Glowpoint and the holders set forth therein. (18)
10.31Form of Registration Rights Agreement, dated August 11, 2009, between Glowpoint and the holders set forth therein. (18)
10.32Form of Series B Stock Purchase Agreement, dated as of March 29, 2010, between Glowpoint and the purchasers set forth therein. (19)
10.33Form of Series A-2 Preferred Exchange Agreement, dated March 12, 2009. (26)

29, 2010, between Glowpoint and the holders set forth therein. (19)

10.61

10.34

Form of Series A-2 Preferred Consent Agreement, dated March 29, 2010, between Glowpoint and the holders set forth therein. (19)

10.35Employment Agreement Amendment with Joseph Laezza, dated March 30, 2010. (21)
10.36Employment Agreement Amendment with David W. Robinson, dated March 30, 2010. (21)
10.37Employment Agreement Amendment with Edwin F. Heinen, dated March 30, 2010. (21)
10.38Master Subcontracting Agreement between Polycom, Inc. and Glowpoint, Inc., dated November 26, 2007. (21)
10.39Form of Restricted Stock Award Agreement (20) and Schedule of Recently Reported Restricted Stock Awards. (26)

(21)

21.1

17.1

Letter of Resignation from Aziz Ahmad, dated March 18, 2009. (16)

17.2Letter of Resignation from Richard Reiss, dated March 18, 2009. (16)
17.3Letter of Resignation from Bami Bastani, dated May 28, 2009. (17)
17.4Letter of Resignation from Dean Hiltzik, dated May 28, 2009. (17)
21.1Subsidiaries of Glowpoint, Inc. (21)

(12)

31.1

Rule 13a—14(a)/15d—14(a) Certification of the Chief Executive Officer. (26)

(21)

31.2

Rule 13a—14(a)/15d—14(a) Certification of the Chief Financial Officer. (26)

(21)

32.1

Section 1350 Certification of the Chief Executive Officer. (26)

(21)

32.2

Section 1350 Certification of the Chief Financial Officer. (26)

(21)

99.1

99.1

Press Release. (26)

(21)

———————

(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 Current Report on Form 8-K, dated December 23, 2002, and incorporated herein by reference.

(5)

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.

(6)

Filed as an exhibit to Registrant’s Registration Statement on Form S-3 (Registration No. 333-69432) and incorporated herein by reference.

(7)

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.

(8)

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.

(9)

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.

(10)

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.

(11)

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.

(12)

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.

(13)

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.

(14)

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.

(15)

Filed as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, 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 June 26, 2007, and incorporated herein by reference.

(17)

Filed as an exhibit to Registrant’s Definitive Proxy on Schedule 14A filed with the Securities and Exchange Commission on July 30, 2007, 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 September 24, 2007, and incorporated herein by reference.

(19)

Filed as an exhibit to Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 11, 2008, and incorporated herein by reference.

(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 Annual Report on Form 10-K for the fiscal year ended December 31, 2003, and incorporated herein by reference.
(4)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.
(5)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.
(6)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.
(7)Filed as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, and incorporated herein by reference.
(8)Filed as an exhibit to Registrant’s Definitive Proxy on Schedule 14A filed with the Securities and Exchange Commission on July 30, 2007, and incorporated herein by reference.
(9)Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 24, 2007, and incorporated herein by reference.
(10)Filed as an exhibit to Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 11, 2008, and incorporated herein by reference.
(11)Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 30, 2008, and incorporated herein by reference.
(12)Filed as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, and incorporated herein by reference.
(13)Filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2008, and incorporated herein by reference.
(14)Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 26, 2008, 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 January 5, 2009, 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 March 19, 2009, 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 June 3, 2009, 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 August 11, 2009, 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 March 30, 2010, and incorporated herein by reference.
(20)
(21)
Filed as an exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2008, and incorporated herein by reference.
Filed herewith.   


45

-53-

(20)

Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 30, 2008, and incorporated herein by reference.

(21)

Filed as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, and incorporated herein by reference.

(22)

Filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2008, and incorporated herein by reference.

(23)

Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 26, 2008, and incorporated herein by reference.

(24)

Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 5, 2009, and incorporated herein by reference.

(25)

Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 19, 2009, and incorporated herein by reference.

(26)

Filed herewith.



46


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.

March 31, 2009

2010
GLOWPOINT, INC.

GLOWPOINT, INC.

By:

/s/  Joseph Laezza

By:

/s/ JOSEPH LAEZZA

Joseph Laezza

Joseph Laezza

Co-Chief Executive Officer and President


POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Joseph Laezza, David W. Robinson 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 31st day of March 20092010 in the capacities indicated.

/s/  JOSEPH LAEZZA

Joseph Laezza

Co-Chief Executive Officer and President (Principal Executive Officer)

Joseph Laezza

/s/  EDWINEdwin F. HEINEN

Heinen

Chief Financial Officer (Principal Financial and Accounting Officer)

Edwin F. Heinen

/s/  BAMI BASTANI

Grant Dawson

Director

Bami Bastani

Grant Dawson

/s/  DEAN HILTZIK

James Lusk

Director

Dean Hiltzik

James Lusk

/s/  JAMES LUSK

David W. Robinson

Director

James Lusk

/s/ DAVID W. ROBINSON

Director and Co-Chief Executive Officer

David W. Robinson

/s/  PETER RUST

Peter Rust

Director

Peter Rust


-54-

47


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and Stockholders of Glowpoint, Inc.

Board of Directors and Stockholders of Glowpoint, Inc.
We have audited the accompanying consolidated balance sheets of Glowpoint, IncInc. and Subsidiaries (the “Company”) as of December 31, 20082009 and 2007,2008, and the related consolidated statements of operations, stockholders’ deficit,equity (deficit), and cash flows for the years 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 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates ma demade 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Glowpoint, IncInc. and Subsidiaries as of December 31, 20082009 and 2007,2008, and the results of their operations and their cash flows for the years ended December 31, 20082009 and 2007,2008, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated 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, LLP



March 31, 2009

30, 2010

Edison, New Jersey


F-1
GLOWPOINT, INC.
CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and shares)

  

 

December 31,

 

ASSETS

 

2008

 

 

2007

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,227

 

 

$

2,312

 

Accounts receivable, net of allowance for doubtful accounts of $301 and $132, respectively

 

 

3,090

 

 

 

2,546

 

Prepaid expenses and other current assets

 

 

294

 

 

 

348

 

Total current assets

 

 

4,611

 

 

 

5,206

 

Property and equipment, net

 

 

2,533

 

 

 

2,692

 

Other assets

 

 

33

 

 

 

664

 

Total assets

 

$

7,177

 

 

$

8,562

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,367

 

 

$

1,575

 

Accrued expenses

 

 

842

 

 

 

1,427

 

Accrued sales taxes and regulatory fees

 

 

4,535

 

 

 

4,011

 

Derivative financial instruments

 

 

—

 

 

 

6,117

 

Customer deposits

 

 

606

 

 

 

713

 

Deferred revenue

 

 

325

 

 

 

330

 

Current portion of capital lease

 

 

161

 

 

 

125

 

Total current liabilities

 

 

8,836

 

 

 

14,298

 

Long term liabilities:

 

 

 

 

 

 

 

 

Senior Secured Notes, net of discount of $240 and $3,912, respectively

 

 

1,482

 

 

 

6,647

 

Senior Secured Notes held by Insider Purchasers - related parties, net of discount
of $0 and $221, respectively

 

 

—

 

 

 

226

 

Capital lease, less current portion

 

 

72

 

 

 

233

 

Total long term liabilities

 

 

1,554

 

 

 

7,106

 

Total liabilities

 

 

10,390

 

 

 

21,404

 

Preferred stock:

 

 

 

 

 

 

 

 

Preferred stock, $10,000 par value; 0 and 1,500 shares authorized and redeemable;
0 and 475 Series C shares issued and outstanding recorded at fair value (liquidation value of $0 and $4,748), respectively

 

 

—

 

 

 

4,330

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Preferred stock, $.0001 par value; 7,500 shares authorized and convertible; 3,790 and 0 Series A shares issued and outstanding recorded at fair value (liquidation value of $28,423 and $0), respectively (see Note 10 for information related to  Insider Purchasers – related parties)

 

 

11,574

 

 

 

—

 

Common stock, $.0001 par value; 150,000,000 shares authorized; 48,374,954 and 47,629,564 shares issued; 46,810,063 and 46,064,673 shares outstanding, respectively

 

 

5

 

 

 

5

 

Additional paid-in capital

 

 

172,000

 

 

 

162,300

 

Accumulated deficit

 

 

(185,409

)

 

 

(178,094

)

  

 

 

(1,830

)

 

 

(15,789

)

Less: Treasury stock, 1,564,891 shares at cost

 

 

(1,383

)

 

 

(1,383

)

Total stockholders’ deficit

 

 

(3,213

)

 

 

(17,172

)

Total liabilities and stockholders’ deficit

 

$

7,177

 

 

$

8,562

 

  
December 31,
 
ASSETS 
2009
  
2008
 
Current assets:      
Cash
 $587  $1,227 
Accounts receivable, net of allowance for doubtful accounts of $262 and $301, respectively  3,323   3,090 
Prepaid expenses and other current assets
  291   294 
Total current assets
  4,201   4,611 
Property and equipment, net
  2,682   2,533 
Other assets
  31   33 
Total assets
 $6,914  $7,177 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)        
Current liabilities:        
Accounts payable
 $3,232  $2,367 
Accrued expenses
  879   842 
Accrued sales taxes and regulatory fees
  888   4,535 
Customer deposits
  308   606 
Deferred revenue
  259   325 
Current portion of capital lease
  —   161 
Total current liabilities
  5,566   8,836 
         
Long term liabilities:        
Accrued sales taxes and regulatory fees, less current portion  195   — 
Senior Secured Notes, net of discount of $240  —   1,482 
Capital lease, less current portion
  —   72 
Total long term liabilities
  195   1,554 
Total liabilities
  5,761   10,390 
         
Commitments and contingencies        
         
Stockholders’ equity (deficit):        
Preferred stock, $.0001 par value; 7,500 shares authorized and convertible; 4,509 and 3,790 shares issued and outstanding recorded at fair value (liquidation value of $33,815 and $28,423), respectively (see Note 12 for information related to Insider Purchasers – related parties)  14,275   11,574 
Common stock, $.0001 par value; 150,000,000 shares authorized; 66,531,087 and 48,374,954 shares issued; 64,966,196 and 46,810,063 shares outstanding, respectively  7   5 
Additional paid-in capital
  150,659   172,000 
Accumulated deficit
  (162,405)  (185,409)
   2,536   (1,830)
Less: Treasury stock, 1,564,891 shares at cost
  (1,383)  (1,383)
Total stockholders’ equity (deficit)
  1,153   (3,213)
Total liabilities and stockholders’ equity (deficit) $6,914  $7,177 
See accompanying notes to consolidated financial statements.

F-2


F-2


GLOWPOINT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

 (In thousands, except per share data)

  

 

Year Ended December 31,

 

  

 

2008

 

 

2007

 

Revenue

 

$

24,537

 

 

$

22,792

 

Cost of revenue

 

 

14,337

 

 

 

15,234

 

Gross margin

 

 

10,200

 

 

 

7,558

 

  

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

1,063

 

 

 

855

 

Sales and marketing

 

 

3,710

 

 

 

3,106

 

General and administrative

 

 

8,634

 

 

 

8,218

 

Total operating expenses

 

 

13,407

 

 

 

12,179

 

Loss from operations

 

 

(3,207

)

 

 

(4,621

)

  

 

 

 

 

 

 

 

 

Interest and other expense (income):

 

 

 

 

 

 

 

 

Interest expense, including $141 and $261, respectively, for Insider Purchasers

 

 

4,535

 

 

 

6,043

 

Amortization of deferred financing costs, including $46 and $14, respectively, for Insider Purchasers

 

 

448

 

 

 

531

 

Loss on extinguishment of debt, including $99 for Insider Purchasers

 

 

1,816

 

 

 

—

 

Decrease in fair value of derivative financial instruments’ liability, including $86 and $440, respectively, for Insider Purchasers

 

 

(2,673

)

 

 

(5,665

)

Interest income

 

 

(18

)

 

 

(59

)

Total interest and other expense, net

 

 

4,108

 

 

 

850

 

Net loss

 

 

(7,315

)

 

 

(5,471

)

Gain on redemption of preferred stock

 

 

2,419

 

 

 

799

 

Preferred stock dividends

 

 

—

 

 

 

(252

)

Net loss attributable to common stockholders

 

$

(4,896

)

 

$

(4,924

)

  

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders per share:

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.11

)

 

$

(0.11

)

  

 

 

 

 

 

 

 

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

Basic and diluted

 

 

46,477

 

 

 

46,735

 

  
Year Ended
December 31,
 
  
2009
  
2008
 
Revenue
 $26,540  $24,537 
         
Operating expenses:        
Network and infrastructure
  11,838   12,762 
Global managed services
  7,476   5,849 
Sales and marketing
  3,193   3,382 
General and administrative
  4,465   4,662 
Depreciation and amortization
  1,056   1,261 
Sales taxes and regulatory fees
  (2,500)  (172)
Total operating expenses
  25,528   27,744 
Income (loss) from operations
  1,012   (3,207)
         
Interest and other expense (income):        
Interest (income) expense, net, including $0 and $141 of expense, respectively, for Insider Purchasers  (543)  4,517 
Amortization of deferred financing costs, including $46 for Insider Purchasers  —   448 
Loss on extinguishment of debt, including $0 and $99, respectively, for Insider Purchasers  254   1,816 
Increase (decrease) in fair value of derivative financial instruments’ liability, including $0 and $86, respectively, for Insider Purchasers  1,848   (2,673)
Total interest and other expense, net
  1,559   4,108 
Net loss
  (547)  (7,315)
(Loss) gain on redemption of preferred stock
  (64)  2,419 
Net loss attributable to common stockholders $(611) $(4,896)
         
Net loss attributable to common stockholders per share:        
Basic and diluted
 $(0.01) $(0.11)
         
Weighted average number of common shares:        
Basic and diluted
  52,938   45,477 
See accompanying notes to consolidated financial statements.



F-3


GLOWPOINT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

EQUITY (DEFICIT)

Years Ended December 31, 20082009 and 2007

2008

(In thousands)


  

 

 

 

 

Additional

 

 

 

 

 

Series A

 

 

 

 

  

 

Common Stock

 

 

Paid In

 

 

Accumulated

 

 

Preferred Stock

 

 

Treasury Stock

 

 

 

 

  

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Total

 

Balance at January 1, 2007

 

 

46,390

 

 

$

5

 

 

$

161,267

 

 

$

(172,623

)

 

 

—

 

 

$

—

 

 

 

40

 

 

 

(240

)

 

$

(11,591

)

Net loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(5,471

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(5,471

)

Stock-based compensation  - restricted stock

 

 

1,240

 

 

 

—

 

 

 

391

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

391

 

Stock-based compensation  - options

 

 

—

 

 

 

—

 

 

 

480

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

480

 

Treasury stock received and costs incurred in connection with Series C  convertible preferred stock exchange

 

 

—

 

 

 

—

 

 

 

(89

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,525

 

 

 

(1,143

)

 

 

(1,232

)

Gain on redemption of Series B preferred stock

 

 

—

 

 

 

—

 

 

 

799

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

799

 

Reclassification of placement agent warrants – Senior Secured Notes

 

 

—

 

 

 

—

 

 

 

(296

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(296

)

Preferred stock dividends

 

 

—

 

 

 

—

 

 

 

(252

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(252

)

Balance at December 31, 2007

 

 

47,630

 

 

 

5

 

 

 

162,300

 

 

 

(178,094

)

 

 

—

 

 

 

—

 

 

 

1,565

 

 

 

(1,383

)

 

 

(17,172

)

Stock-based compensation  - restricted stock

 

 

745

 

 

—

 

 

 

394

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

394

 

Stock-based compensation  - options

 

 

—

 

 

 

—

 

 

 

353

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

353

 

Warrants issued in connection with the 2008 Private Placements

 

 

—

 

 

 

—

 

 

 

4,853

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,853

 

Series A Convertible Preferred Stock issued in connection with the 2008 Private Placements

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

3,790

 

 

 

11,574

 

 

 

—

 

 

 

—

 

 

 

11,574

 

Gain on redemption of Series C preferred stock

 

 

—

 

 

 

—

 

 

 

2,419

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,419

 

Costs related to 2008 private placements

 

 

—

 

 

 

—

 

 

 

(538

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(538

)

Gain on elimination of derivative liabilities

 

 

—

 

 

 

—

 

 

 

2,219

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,219

 

Net loss for the year

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(7,315

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(7,315

)

Balance at December 31, 2008

 

 

48,375

 

 

$

5

 

 

$

172,000

 

 

$

(185,409

)

 

 

3,790

 

 

$

11,574

 

 

 

1,565

 

 

$

(1,383

)

 

$

(3,213

)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          Series A-2    
    Additional  Accum-  (Note A)    
  
Common Stock
 Paid In  ulated  
Preferred Stock
  
Treasury Stock
    
  
Shares
 
Amount
 
Capital
  
Deficit
  
Shares
 
Amount
  
Shares
 
Amount
  
Total
 
Balance at January 1, 2008
  47,630 $5 $162,300  $(178,094)  — $—  1,565 $(1,383) $(17,172)
Stock-based compensation  - restricted stock  745 —  394   —   —  —  —  —   394 
Stock-based compensation  - stock options  —  —  353   —   —  —  —  —   353 
Warrants issued in connection with the 2008 Private Placements  —  —  4,853   —   —  —  —  —   4,853 
Series A Convertible Preferred Stock issued in connection with the 2008 Private Placements  —  —  —   —   4  11,574  —  —   11,574 
Gain on redemption of Series C preferred stock  —  —  2,419   —   —  —  —  —   2,419 
Costs related to 2008 private placements  —  —  (538)  —   —  —  —  —   (538)
Gain on elimination of derivative liabilities  —  —  2,219   —   —  —  —  —   2,219 
Net loss for the year
  —  —  —   (7,315)  —  —  —  —   (7,315)
Balance at December 31, 2008
  48,375 $5 $172,000  $(185,409)  4 $11,574  1,565 $(1,383) $(3,213)
Cumulative effect of reclassification of warrants (ASC Topic 815)  —  —  (26,173)  23,551   —  —  —  —   (2,622)
Balance at January 1, 2009, as adjusted  48,375  5  145,827   (161,858)  4  11,574  1,565  (1,383)  (5,835)
Stock-based compensation  - restricted stock  735 —  277   —   —  —  —  —   277 
Stock-based compensation  - stock options  —  —  279   —   —  —  —  —   279 
Loss on redemption of Series A  Preferred Stock  —  —  (1,999)  —   —  1,999  —  —   — 
August 2009 Warrant Exchange
  17,372  2  (2)  —   —  —  —  —   — 
Exercise of stock options
  49  —  17   —   —  —  —  —   17 
Series A-1 Preferred Stock issued in connection with the 2009 Private Placement  —  —  —   —   1  2,637  —  —   2,637 
Elimination of derivative liabilities
  —  —  4,751   —   —  —  —  —   4,751 
Gain on redemption of Series A-1  Preferred Stock  —  —  1,935   —   —  (1,935) —  —   — 
Costs related to 2009 Private Placement, warrant and Preferred Stock exchange  —  —  (426)  —   —  —  —  —   (426)
Net loss for the year
  —  —  —   (547)  —  —  —  —   (547)
Balance at December 31, 2009
  66,531 $7 $150,659  $(162,405)  5 $14,275  1,565 $(1,383) $1,153 

Note A – In March 2009 the shares of Series A Preferred Stock outstanding at December 31, 2008 were exchanged for an equal number of shares of newly-created Series A-1 Convertible Preferred Stock (“Series A-1 Preferred Stock”).  In August 2009 the shares of Series A-1 Preferred Stock then outstanding were exchanged for an equal number of shares of newly-created Series A-2 Convertible Preferred Stock (“Series A-2 Preferred Stock”).


See accompanying notes to consolidated financial statements.


F-4

F-4


GLOWPOINT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
  
Year Ended December 31,
 
  
2009
  
2008
 
Cash flows from operating activities:      
Net loss
 $(547) $(7,315)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization
  1,056   1,261 
Bad debt expense
  258   257 
Loss on extinguishment of debt
  254   1,816 
Amortization of deferred financing costs
  —   448 
Accretion of discount on Senior Secured Notes  23   2,732 
Loss on disposal of equipment
  8   77 
Expense recognized for the decrease in the estimated fair value of derivative financial instruments’ liability  1,848   (2,673)
Stock-based compensation
  556   568 
Increase (decrease) in cash attributable to changes in assets and liabilities:        
Accounts receivable .  (491)  (801)
Prepaid expenses and other current assets  3   54 
Other assets
  2   (5)
Accounts payable
  865   793 
Accrued expenses
  105   1,112 
Accrued sales taxes and regulatory fees .  (3,452)  524 
Customer deposits
  (298)  (107)
Deferred revenue
  (66)  (5)
Net cash provided by (used in) operating activities .  124   (1,264)
         
Cash flows from investing activities:        
Purchases of property and equipment
  (1,213)  (1,179)
Net cash used in investing activities
  (1,213)  (1,179)
         
Cash flows from financing activities:        
Proceeds from preferred stock offering, including $0 and $13 from Insider Purchaser, respectively  1,800   1,825 
Proceeds from exercise of stock options
  17   — 
Principal payments for capital lease
  (234)  (125)
Purchase of Senior Secured Notes
  (750)  — 
Costs related to private placements and preferred stock and warrant exchange  (384)  (342)
Net cash provided by financing activities
  449   1,358 
Decrease in cash
  (640)  (1,085)
Cash at beginning of year
  1,227   2,312 
Cash at end of year
 $587  $1,227 
         
Supplement disclosures of cash flow information:        
    Cash paid during the year for interest
 $80  $100 

  

 

Year Ended December 31,

 

  

 

2008

 

 

2007

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(7,315

)

 

$

(5,471

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,261

 

 

 

1,467

 

Bad debt expense

 

 

257

 

 

 

28

 

Loss on extinguishment of debt

 

 

1,816

 

 

 

—

 

Amortization of deferred financing costs

 

 

448

 

 

 

531

 

Beneficial conversion feature for Senior Secured Notes

 

 

—

 

 

 

1,977

 

Accretion of discount on Senior Secured Notes

 

 

2,732

 

 

 

2,881

 

Loss on disposal of equipment

 

 

77

 

 

 

14

 

Expense recognized for the decrease in the estimated fair value of derivative financial instruments’ liability

 

 

(2,673

)

 

 

(5,665

)

Stock-based compensation

 

 

568

 

 

 

871

 

Increase (decrease) in cash attributable to changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable .

 

 

(801

)

 

 

174

 

Prepaid expenses and other current assets

 

 

54

 

 

 

(21

)

Other assets

 

 

(5

)

 

 

41

 

Accounts payable

 

 

793

 

 

 

(382

)

Accrued expenses, sales taxes and regulatory fees

 

 

1,636

 

 

 

1,024

 

Customer deposits

 

 

(107

)

 

 

611

 

Deferred revenue

 

 

(5

)

 

 

42

 

Net cash used in operating activities

 

 

(1,264

)

 

 

(1,878

)

  

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,179

)

 

 

(1,053

)

Net cash used in investing activities

 

 

(1,179

)

 

 

(1,053

)

  

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from preferred stock offering, including $13 from Insider Purchaser

 

 

1,825

 

 

 

—

 

Capital Lease

 

 

(125

)

 

 

—

 

Proceeds from issuance of Senior Secured Notes, including $400 from Insider Purchasers and net of financing costs of $308

 

 

—

 

 

 

3,230

 

Costs related to private placements

 

 

(342

)

 

 

(140

)

Net cash provided by financing activities

 

 

1,358

 

 

 

3,090

 

(Decrease) increase in cash and cash equivalents

 

 

(1,085

)

 

 

159

 

Cash and cash equivalents at beginning of year

 

 

2,312

 

 

 

2,153

 

Cash and cash equivalents at end of year

 

$

1,227

 

 

$

2,312

 

  

 

 

 

 

 

 

 

 

Supplement disclosures of cash flow information:

 

 

 

 

 

 

 

 

    Cash paid during the year for interest

 

$

100

 

 

$

5

 


See accompanying notes to consolidated financial statements.



F-5

  

 

Year Ended December 31,

 

  

 

2008

 

 

2007

 

Non-cash investing and financing:

 

 

 

 

 

 

Exchange of Senior Secured Notes for Series A Preferred Stock

 

$

10,802

 

     

$

—

 

Redemption of Series C Preferred Stock

 

 

4,330

 

 

 

—

��

Gain on elimination of derivative liability

 

 

2,219

 

 

 

—

 

Additional Senior Secured Notes issued as payment for interest including $48 and $9, respectively, for Insider Purchasers

 

 

1,493

 

 

 

862

 

Costs related to private placements incurred by issuance of placement agent warrants

 

 

196

 

 

 

—

 

Deferred financing costs for Senior Secured Notes incurred by issuance of placement agent warrants

 

 

—

 

 

 

417

 

Preferred stock dividends

 

 

—

 

 

 

252

 

Capital lease used to acquire network equipment

 

 

—

 

 

 

358

 

  

 

 

 

 

 

 

 

 


�� 
Year Ended December 31,
 
  
2009
  
2008
 
Non-cash investing and financing:      
Exchange of Senior Secured Notes for Series A-1 Preferred Stock $1,076  $— 
Exchange of Senior Secured Notes for Series A Preferred Stock  —   10,802 
Redemption of Series C Preferred Stock
  —   4,330 
Gain on elimination of derivative liability
  —   2,219 
Additional Senior Secured Notes issued as payment for interest including $0 and $48 for Insider Purchasers, respectively  55   1,459 
Costs related to private placements incurred by issuance of placement agent warrants  42   196 
         
See accompanying notes to consolidated financial statements.


F-6

F-6


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20082009 and 2007

2008

Note 1 - The Business

       “Glowpoint's mission is to enable a global community where video communications is a part of everyday life.”

Glowpoint, Inc. ("Glowpoint" or "we" or "us" or the “Company”), a Delaware corporation, is a leadingcarrier-grade provider of advancedmanaged services for telepresence and video communications solutions.conferencing.  Our suite of advanced and robust telepresence and video communications solutions enablemanaged services empower organizations to seamlessly and consistently communicate via video over any network and with each other over disparate networks andany video technology platforms – empowering business, governmental agencies and educational institutionsplatform, enabling them to sharply boost the impact and productivity of their internal and external communications while at the same time reducingreduce their on-going operating costs.  We supportcosts and total cost of ownership.  Glowpoint supports thousands of video communications systemsendpoints in overmore than 35 countries withand our 24/7 managed video and global business-to-business (“B2B”) exchange services poweringare driving video collaboration for Fortune® 500 companies, major broadcasters,governmental and educational institutions, and media and entertainment broadcasters. Glowpoint also provides resale and wholesale programs, including private-labeled (branded) resale options for manufacturers, carriers, unified communications providers, and integrators seeking to offer this service as well as global carriersa value-add to their collaboration and communications offerings.
Glowpoint’s core service offerings include video equipment manufacturersoperations (“VNOC”) managed service, business-to-business exchange, video conferencing services, and their customers around the world.

We viewprofessional services.   A critical differentiator of Glowpoint is that our services as analogous to cellular service providers in the cellular telephone industry. Regardless of the cellular phone purchased, users must select a cellular service provider to make it work. Users make that service decision based on the features, reliabilitysolutions are hardware agnostic and price offered by the service provider. In our industry,network neutral, supporting all recognized video standards across any IP network. As such, regardless of the video conferencing or telepresence equipment purchased or the network connecting it, Glowpoint provides the managedGlowpoint’s services to make it work. In doing so, we offer a vast arraymay be applied.

Glowpoint’s core value proposition for customers includes driving wide adoption and usage of video communications, solutions, includingincreasing their return on investment, lower their total cost of ownership, and providing access to expertise and skills not available elsewhere.  Glowpoint provides an alternative to capital intensive, premise-based infrastructure, which customers typically have had to purchase for the video application services, video operations services (VNOC) for telepresence, managed network services, IPenvironment to function, as well as the tools and ISDN videoconferencing services, multi-point conferencing (bridging), technology hosting and management, and professional services. We provide these services to aenable wide variety of companies, from large enterprises and governmental entities to small and medium-sized bus inesses. Glowpoint is primarily focused on high quality two-way video communications. With the advent of HD (High Definition) and telepresence solutions, we combined various components of our features and services, and developed new ones, to create a comprehensive service offering for enterprises and their end users that can support anyadoption of the telepresence products on the market today. Glowpoint also wholesales these services and provides private-labeled branding for manufacturers, carriers, and integrators seeking to offer this service as a value-add to their offerings for their customer bases.

Glowpoint’s video communications solutions involve two major components,throughout their business.  Glowpoint has become the Glowpointrecognized leader of managed video applicationsand global video exchange services that provide businesses and the Glowpoint managed network services. Glowpoint has focused its salesservice providers a way to link together their “islands of video” across third party private networks and marketing efforts on the managed video application services, which are network agnostic and may be leveraged by customers on any QoS (Qualityenabling organizations to drive wide adoption.



Note 2 - Basis of Presentation, Liquidity and Summary of Significant Accounting Policies

Going concern

Our consolidated financial statements have been prepared assuming that

Liquidity
 For the year ended December 31, 2009, 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 $4,896,000$611,000 and negative operatingalthough we generated cash flowsfrom operations of $1,264,000$124,000 for the year ended December 31, 2008.  The Company performed an evaluation of its long-lived assets and determined that there is an excess of projected2009, we have had negative operating cash flow on an undiscounted basis over the long-lived carrying amount.  Therefore, the Company believes that no impairment losses were required.flows since our inception.  At December 31, 2008,2009, we had cash and cash equivalents of $1,227,000,$587,000, a working capital deficit of $4,225,000$1,365,000 and an accumulated deficit of $185,409,000.  Additionally, through December 31, 2008, $10,802,000 of the Senior Secured Notes and the accrued



F-7


interest thereon$162,405,000.   However, we have historically been exchanged for our Series A Convertible Preferred Stock (the “Series A Preferred Stock”) and in March 2009 the remaining $1,722,000 were either exchanged for Series A-1 convertible preferred stock or purchased and retired (see Note 19).  We raisedable to raise capital in private placements, but continuemost recently $3,000,000 in March 2010, amended the terms of our preferred stock to sustain losseseliminate any dividends until January 2013 and negative operating cash flows.  Additionally, current economic conditions may causehave reached settlements with a declinemajority of the taxing authorities in business and consumer spending which could adversely affect our business and financial performance.These factors raise substantial doubt as to our ability to continue as a going concern.  Assuming we are able to negotiate favorable terms with the authorities regarding ourhad accrued sales and use taxes and regulatory fees. Based primarily on our March 2010 financing (see also Note 5)24), along with our cash flow projection, the Company believes that it has, and we are not adversely affected by the current economic conditions, we believe that our available capital as of Decemberwill have, sufficient cash flow to fund its operations through at least March 31, 2008 will enable us to continue as a going concern through December 31, 2009.2011. There arecan be no assurancesassurances; however, that we will be able to raise additional capital as may be needed or upon acceptable terms, nor that the current economic conditions will not negatively impact us.  If the current economic conditions negatively impact us we are unable to negotiate favorable terms with authorities, orand we are unable to raise any additional capital asthat may be needed upon acceptable terms, it wouldcould have a material adverse effect on the Company. The accompanying consolidated 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-ownedwholly owned subsidiary, GP Communications, LLC.  All material inter-company balances and transactions have been eliminated in consolidation.

Reclassifications

Certain prior

Beginning with the filing of these financial statements, we have decided to report our operations using the following financial statement format, which we believe provides readers with a better understanding of our operating cost components.  Over the last year, Glowpoint has continued to see a shift in the market to our managed video service offering, which includes, among other things, VNOC, TEN exchange services, conferencing and event based services, technology hosting and management, and professional service.  As a result, we expect less network resales going forward.  The revenues for these managed video services increased to $2,888,000 in 2009 from $391,000 in 2008.   The primary cost component of the managed service offering is associated with systems, process and people, as opposed to underlying carrier network costs associated with our legacy billable subscriber line services.  In 2009, we increased the expenses associated with VNOC managed service in order to deliver upon contracts won, increase our Network Operations Center resource coverage to support 24x7 service coverage, and staff accordingly for delivery of pipeline business opportunities.  As we analyzed the repositioning of our business and the resulting operating cost changes, we concluded that these operating costs needed to be more identifiable to the reader and better match our current and future business operations.  We believe that this new financial statement format will provide greater visibility into our operations as we transform from the dependency on the resale of network and facilities to a managed video services provider and provider of hosted cloud based services for video applications.  Prior year amounts have also been reclassified to conform to the current year presentation.

presentation to help readers understand our business expenses. This new financial statement format had no impact on revenues, income (loss) from operations or net loss for any period presented.


F-8

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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from the estimates made. We continually evaluate estimates used in the preparation of the consolidated financial statements for reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. The significant areas of estimation include determining the allowance for doubtful accounts, deferred tax valuation allowance, accrued sales taxes, the estimated life of customer relationships and the estimated lives and recov erabilityrecoverability of property and equipment.

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.

Fair value of Financial Instruments
The Company considers its cash, accounts receivable, accounts payable and derivative instruments to meet the definition of financial instruments. The carrying amount of cash, accounts receivable and accounts payable approximated their fair value due to the short maturities of these instruments.  See Note 18 for additional discussion.
Accounting Standards Updates
In June 2009, the Financial Accounting Standards Board (“FASB”) issued its final Statement of Financial Accounting Standards (“SFAS)” No. 168 – “The FASB Accounting Standards ASC Topic and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162”. (“SFAS No. 168”).   SFAS No. 168 made the FASB Accounting Standards Codification (the “ASC”) the single source of U.S. Generally Accepted Accounting Policies (“U.S. GAAP”) used by nongovernmental entities in the preparation of financial statements, except for rules and interpretive releases of the SEC under authority of federal securities laws, which are sources of authoritative accounting guidance for SEC registrants. The ASC is meant to simplify user access to all authoritative accounting guidance by reorganizing U.S. GAAP pronouncements into roughly 90 accounting topics within a consistent structure; its purpose is not to create new accounting and reporting guidance. The ASC supersedes all existing non-SEC accounting and reporting standards and was effective for the Company beginning July 1, 2009. Following SFAS No. 168, the Board will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right; these updates will serve only to update the ASC topic, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the ASC. In the description of ASC and Accounting Standards Updates (“ASU”) that follows, references in “italics” relate to ASC or ASU topics, and their descriptive titles, as appropriate.

F-9

In April 2009, the FASB updated ASC topic 825, “Financial Instruments” (“ASC Topic 825”) which requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements.  The Company has adopted the amended provisions of ASC Topic 825 effective June 30, 2009 and has included the required disclosures in Note 9.
In May 2008, the FASB updated ASC topic 470, “Debt – Debt with Conversion and Other Options” (“ASC Topic 470”) which clarifies the accounting treatment of convertible debt instruments Additionally, ASC Topic 470 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. ASC Topic 470 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We adopted the amended sections of ASC Topic 470 beginning in the first quarter of 2009, and this standard must be applied on a retrospective basis. The adoption of ASC Topic 470 did not have a material impact on the Company’s consolidated results of operations and financial condition.
In September 2009, the FASB issued ASU 2009-14, “Certain Revenue Arrangements That Include Software Elements” (“ASU 2009-14”), which excludes tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of Subtopic 985-605, “Revenue Recognition.” ASU 2009-14 is effective for periods beginning after December 15, 2009 with earlier adoption permitted. The Company is currently evaluating the timing of its adoption of ASU 2009-14 and the impact that ASU 2009-14 will have on its consolidated financial statements.
In October 2009, the FASB issued ASU 2009-13 which supersedes certain guidance in ASC 605-25, “Revenue Recognition — Multiple Element Arrangements”.  This topic requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. This topic is effective for annual reporting periods beginning after June 15, 2010. The Company is currently evaluating the impact that this topic will have on its consolidated financial statements.
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 as required by ASC topic 815“Derivatives and Hedging” (“ASC Topic 815”).  The estimated fair value of the derivative liabilities is calculated using the Black-Scholes method where applicable and such estimates are revalued at each balance sheet date, with changes in value recorded as other income or expense in the consolidated statement of operations.  As a result of the Company’s adoption of ASC Topic 815, effective January 1, 2009 all warrants were accounted for as derivatives. See Note 11.
As part of the August 2009 Warrant and Preferred Stock Exchange (See Note 9), all 40,912,000 of the warrants to acquire shares of common stock with an exercise price of $0.40 (the “$0.40 Warrants”) were amended to require the consent of a majority of the warrant holders in order to consummate a financing at a price per share of common stock below $0.40, thereby eliminating the provisions that protect holders from a decline in the stock price (or “Down-round” provisions) and the need to account for a derivative liability for these warrants.   Concurrently 39,088,000 of the $0.40 Warrants were exchanged for common stock and the remaining 1,824,000 $0.40 Warrants are outstanding until November 2013.  The accrued derivative liability of $4,751,000, which was related to the $0.40 Warrants, was then transferred to Paid In Capital.    The 1,640,000 warrants which expire in March 2010 still have Down-round provisions but the derivative liability was immaterial at December 31, 2009.

F-10

Revenue Recognition

We recognize subscription revenue when the related services have been performed. Revenue billed in advance is 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 twelve to twenty-four month period estimated life of the customer relationship.  Revenue related to integration services is recognized at the time the services are performed, and presented in accordance with EITF 99-19 “Reporting



F-8


as required by ASC topic 605 “Revenue Gross as a Principal Versus Net as an Agent”Recognition”.    Revenues derived from other sources are recognized when services are provided or events occur.

Cash

Taxes Billed to Customers and Cash Equivalents

Remitted to Taxing Authorities

We consider all highly liquid debt instruments with an original maturityrecognize taxes billed to customers in revenues and taxes remitted to taxing authorities in our operating costs.   For the years ended December 31, 2009 and 2008 we included in revenues taxes billed to customers of three months or less$1,893,000 and $1,935,000, respectively.   For the years ended December 31, 2009 and 2008 we included in operating costs - network and infrastructure taxes paid to taxing authorities of $1,812,000 and $1,885,000, respectively.
Long-Lived Assets
We evaluate impairment losses on long-lived assets used in operations, primarily fixed assets, when purchasedevents and circumstances indicate that the carrying value of the assets might not be recoverable as required by ASC topic 360 “Property, Plant and Equipment”. For purposes of evaluating the recoverability of long-lived assets, the undiscounted cash flows estimated to be cash equivalents.

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. In the year ended December 31, 2009 and 2008, no impairment losses were recorded.

Capitalized Software Costs
The Company incurred 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 as required by ASC topic 985 “Software”.  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 did not capitalize any software development costs for the years ended December 31, 2009 and 2008.  Software development costs were being amortized over 24 months beginning in September 2007, when the product became available for general release to customers and the capitalization of software costs ceased.  As of December 31, 2008, the remaining $63,000 of unamortized capitalized software costs were written off since the net realizable value of the capitalized software was not realizable. For the year ended December 31, 2009, we did not amortize any capitalized software to cost of revenues.  For the year ended December 31, 2008, we amortized $94,000, to depreciation and amortization.
The Company capitalizes certain costs incurred in connection with developing or obtaining internal-use software. All software development costs have been appropriately accounted for as required by ASC topic 350.40 “Intangible – Goodwill and Other – Internal-Use Software”.  Capitalized software costs are included in “Property and Equipment” on our consolidated Balance Sheets and are amortized over three to four years.  Software costs that do not meet capitalization criteria are expensed immediately.  For the years ended December 31, 2009 and 2008 we capitalized internal-use software costs of $473,000 and $138,000, respectively. For the years ended December 31, 2009 and 2008 we recorded amortization of $65,000 and $12,000, respectively. For the years ending December 31, 2010 through 2013 we expect to amortize $171,000, $179,000, $158,000 and $26,000, respectively.

F-11

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, 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. In the 2008 and 2007 years, no impairment losses were indicated or recorded.

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 be 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.

Earnings (Loss)

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 2008the years ended December 31, 2009 and 20072008 is the same as basic loss per share. Potential shares of common stock associated with outstanding options and warrants of 45,890,000 and 27,188,000, respectively, shares issuable upon conversion of our Series A Convertible Preferred Stock of 37,898,000 and 0, respectively, shares issuable upon conversion of our Series C Convertible Preferred Stock of 0 and 4,748,000, respectively, and shares issuable upon conversion of the Senior Secured Notes of 3,463,000 and 22,012,000, respectively,convertible preferred stock have been excluded from the calculation of diluted loss per share because the effects, as a result of our net loss, would be anti-dilutive.



F-9


Stock-based Compensation

The Company accounts for stock

Stock based awards in accordance with Statement of Financial Standards (“SFAS”) No. 123 (R) (“SFAS 123R”have been appropriately accounted for as required by ASC topic 718 “Compensation – Stock Compensation” (“ASC topic 718”), Share Based Payments.  Under SFAS 123R,under ASC topic 718 share based awards are valued at fair value on the date of grant and that fair value is recognized over the requisite service period.  The Company values its stock based awards using the Black-Scholes option pricing model.

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.

The intrinsic value


F-12

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, 20082009 and 2007:

 

2008

 

2007

Risk free interest rate

 

2.9%

 

4.6%

Expected option lives

5 Years

 

5 Years

Expected volatility

97.0%

 

98.4%

Estimated forfeiture rate

10%

 

10%

Expected dividend yields

None

 

None

Weighted average grant date fair value of options

$0.31

 

$0.45

 

 

 

 

2008:

  
2009
  
2008
 
Risk free interest rate
  2.0%  2.9%
Expected option lives
 5 Years  5 Years 
Expected volatility
  113.3%  97.0%
Estimated forfeiture rate
  10%  10%
Expected dividend yields
 None  None 
Weighted average grant date fair value of options $0.33  $0.31 
         
The Company calculates expected volatility for a stock-based grant based on historic daily stock price observations of our common stock during the period immediately preceding the grant that is equal in length to the expected term of the grant.  The expected term of the options is estimated based on the Company’s historical exercise rate and forfeiture rates are estimated based on the Company’s exercise and 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.

Fair value of Financial Instruments

Financial instruments reported in our consolidated balance sheets consist of cash and cash equivalents, accounts receivable and accounts payable, the carrying value of which approximated fair value at December 31, 2008 and 2007 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 method where applicable and such estimates are revalued at each balance sheet date, with changes in value recorded as other income or expense in the consolidated statement of operations.



F-10


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 $0 and $139,000 of software development costs for the years ended December 31, 2008 and 2007, respectively.  Software development costs are being amortized over 24 months beginning in September 2007, when the product became available for general release to customers and the c apitalization of software costs ceased.  For the years ended December 31, 2008 and 2007, we amortized $94,000 and $31,000, respectively, to cost of revenues.  As of December 31, 2008, the remaining $63,000 of unamortized capitalized software costs were written off since the net realizable value of the capitalized software was not realizable.  

Deferred Financing Costs

The costs incurred when undertaking financing activities, excluding any internal costs, have been capitalized and are amortized using the effective interest method over the term of the financing.  Amortization of deferred financing costs was $448,000 and $531,000 for the years ended December 31, 2008 and 2007, respectively. At December 31, 2008 and 2007, included in other assets in the accompanying consolidated balance sheets are $0 and $635,000, respectively, of deferred financing costs.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 160, (“Noncontrolling Interests in Consolidated Financial Statements”), an amendment of ARB No. 51 (“SFAS No. 160”). SFAS 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary, in which the noncontrolling interest will be reclassified as equity; and the income, expense and comprehensive income from a noncontrolling interest will be fully consolidated. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, and therefore would be effective for the Company beginning January 1, 2009. The adoption of this Statement did not have an impact on the Company's consolidated results of operations and financial condition.

Effective January 1, 2008, the Company adopted SFAS No. 157, "Fair Value Measurements". In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, "Effective Date of FASB Statement No. 157", which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asse t or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.



F-11


The adoption of this Statement did not have a material impact on the Company's consolidated results of operations and financial condition.

In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles (“Statement No. 162”). The statement is intended to improve financial reporting by identifying a consistent hierarchy for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP. Prior to the issuance of Statement No. 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (“AICPA”) Statement on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Unlike SAS No. 69, Statement No. 162 is directed to the entity rather than the auditor. Statement No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Ac cepted Accounting Principles. Statement No. 162 is not expected to have any material impact on the Company’s results of operations, financial condition or liquidity.

In May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (FSP APB 14-1). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon either mandatory or optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants.”  Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those f iscal years. We will adopt FSP APB 14-1 beginning in the first quarter of 2009, and this standard must be applied on a retrospective basis. We are currently evaluating the impact the adoption of FSP APB 14-1 will have on our consolidated financial position and results of operations.

In June 2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). Equity-linked instruments (or embedded features) that otherwise meet the definition of a derivative as outlined in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” are not accounted for as derivatives if certain criteria are met, one of which is that the instrument (or embedded feature) must be indexed to the entity’s stock. EITF 07-5 provides guidance on determining if equity-linked instruments (or embedded features) such as warrants to purchase our stock are considered indexed to our stock. EITF 07-5 is effective for the financial statements issued for fiscal years and interim periods within those fiscal years, beginning after December 15, 2008 and will be applied to outstanding instruments as of the beginning of the fiscal year in which it is adopted. Upon adoption, a cumulative effect adjustment will be recorded, if necessary, based on amounts that would have been recognized if this guidance had been applied from the issuance date of the affected instruments. The Company is currently determining the impact, if any, that EITF 07-5 will have on its financial statements.

Note 3 - Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following at December 31, 20082009 and 20072008 (in thousands): 

  

 

2008

 

 

2007

 

Prepaid maintenance contracts

 

$

112

 

 

$

86

 

Prepaid insurance

 

 

40

 

 

 

69

 

Deferred installation costs

 

 

76

 

 

 

67

 

Due from vendors and tax authorities

 

 

4

 

 

 

5

 

Other prepaid expenses

 

 

62

 

 

 

121

 

  

 

$

294

 

 

$

348

 

  

 

 

 

 

 

 

 

 




F-12


  
2009
  
2008
 
Prepaid maintenance contracts
 $113  $112 
Deferred installation costs
  97   76 
Prepaid insurance
  40   40 
Other prepaid expenses
  41   66 
  $291  $294 
         

Note 4 - Property and Equipment

Property and equipment net consistconsists of the following at December 31, 20082009 and 20072008 (in thousands):

  

 

2008

 

 

2007

 

Estimated Useful Life

Network equipment and software

 

$

9,200

 

 

$

8,655

 

3 to 5 Years

Computer equipment and software

 

 

2,356

 

 

 

2,102

 

3 to 4 Years

Bridging equipment

 

 

2,008

 

 

 

1,977

 

5 Years

Leasehold improvements

 

 

255

 

 

 

235

 

Note A

Office furniture and equipment

 

 

258

 

 

 

222

 

5 Years

Videoconferencing equipment

 

 

66

 

 

 

66

 

3 Years

  

 

 

14,143

 

 

 

13,257

 

  

Accumulated depreciation and amortization

 

 

(11,610

)

 

 

(10,565

)

  

  

 

$

2,533

 

 

$

2,692

 

  

  

 

 

 

 

 

 

 

 

  

  
2009
  
2008
 
Estimated Useful Life
Network equipment and software
 $9,593  $9,200 3 to 5 Years
Computer equipment and software
  2,571   2,356 3 to 4 Years
Bridging equipment
  2,008   2,008 5 Years
Leasehold improvements
  296   255 Note A
Office furniture and equipment
  451   324 5 Years
   14,919   14,143  
Accumulated depreciation and amortization  (12,237)  (11,610) 
  $2,682  $2,533  
          
F-13

Note A – Depreciated over the shorter period of the estimated useful life (five years) or the lease term.

Depreciation and amortization expense is allocated as follows for the years ended December 31, 2008 and 2007 (in thousands):

  

 

2008

 

 

2007

 

Cost of revenue

 

$

923

 

 

$

1,134

 

Research and development

 

 

54

 

 

 

51

 

Sales and marketing

 

 

12

 

 

 

13

 

General and administrative

 

 

272

 

 

 

269

 

  

 

$

1,261

 

 

$

1,467

 

  

 

 

 

 

 

 

 

 

Note 5 - Accrued Sales Taxes and Regulatory Fees

Included in accrued sales taxes and regulatory fees 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)(ii) 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.  Prior to October 2006, we may not have been properly collecting and remitting all such taxes and regulatory fees and, as a result, havewe accrued a liability.liability based on what sales taxes and regulatory fees we thought would be applicable to our business.. 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.  & nbsp;While we believe all of our estimates and assumptions are reasonable and will be sustained upon audit, actual liabilities and credits may differ significantly.

Indiffer.

Beginning in 2007, we began proactively contacting various taxing authorities and voluntarily disclosing potential tax liabilities, a process that continues to date and have continually revised what sales taxes and regulatory fees are applicable to our business.  The settlement terms from this voluntarily disclosure program, all of which are subject to audit, have resulted in paying significantly less than the yeartotal amounts accrued due to, among other things, offsets allowed, the avoidance of penalties, and contracting for limited look-back periods.
A summary of accrued sales taxes and regulatory fees as of, and changes during the years ended December 31, 2009 and 2008 we increased our accrual by $310,000(in thousands):
  
Settlements to be remitted to taxing authorities
  
Accrued sales taxes and regulatory fees
  
Collected sales taxes and regulatory fees
  
Total
 
January 1, 2008
 $—  $3,611  $400  $4,011 
Collections, net of payments
  —   —   188   188 
Refunds
  —   525   —   525 
Payments
  —   (285)  —   (285)
Net Adjustments to accrual (Note A)
  —   96   —   96 
December 31, 2008
  —   3,947   588   4,535 
Collections, net of payments
  —   —   45   45 
Settlements with tax authorities
  926   (293)  (633)  — 
Payments
  —   (213)  —   (213)
Net Adjustments to accrual (Note A)
  —   (3,284)  —   (3,284)
December 31, 2009
 $926  $157  $—  $1,083 
Less amounts included in long term liabilities  (195)  —   —   (195)
December 31, 2009 – current portion
 $731  $157  $—  $888 
                 
F-14

Note A – Based on the results of the voluntary disclosure programs, expiration of certain statute of limitations for look back periods, settlements with taxing authorities, completion of successful audits, the passage of time and the Company’s historical experience in settlement of a specific audit, $274,000 for interest oncollecting and remitting these taxes, the Company has adjusted the accrued sales taxes and regulatory fees $248,000liability to amounts that reflect settlements with taxing authorities and amounts that we believe are probable and can be reasonably estimated.  Adjustments to the accrual consist of the following for the years ended December 31, 2009 and 2008 (in thousands):
  
2009
  
2008
 
Change in estimate
 $1,829  $(309)
Settlements from amnesty programs  812   — 
Expiration of statute of limitations
  529   213 
Settlements from audits
  114   — 
  $3,284  $(96)
         
The adjustment to the sales tax refundsand regulatory fee accrual for periods subject to auditthe years ended December 31, 2009 and $187,000 for collected taxes to be remitted to authorities.  These increases2008 were partially offset by a reductionallocated in the accrual for sales taxes and regulatory fees and penalties based on filingsstatement of voluntary disclosure agreements, correspondence with various states and our reassessments based on the passage of time, by $495,000 to reflect revised estimates.



F-13


Accrued sales taxes and regulatory feesoperations as of December 31, 2008 and 2007follows (in thousands):

  

 

2008

 

 

2007

 

Sales taxes and regulatory fees

 

$

2,336

 

 

$

2,284

 

Sales taxes and regulatory fees – penalties

 

 

562

 

 

 

533

 

Sales taxes and regulatory fees – interest

 

 

1,049

 

 

 

785

 

Tax obligations of a predecessor of Glowpoint

 

 

—

 

 

 

8

 

Collected sales taxes and regulatory fees to be remitted to authorities

 

 

588

 

 

 

401

 

  

 

$

4,535

 

 

$

4,011

 

  

 

 

 

 

 

 

 

 

  
2009
  
2008
 
Sales taxes and regulatory fees $(2,500) $(172)
Interest (income) expense
  (784)  268 
  $(3,284) $96 
         

Note 6 - Accrued Expenses

Accrued expenses consist of the following at December 31, 20082009 and 20072008 (in thousands):

  

 

2008

 

 

2007

 

Accrued compensation

 

$

502

 

 

$

784

 

Accrued communication costs

 

 

187

 

 

 

161

 

Accrued professional fees

 

 

71

 

 

 

120

 

Accrued interest

 

 

9

 

 

 

108

 

Other accrued expenses

 

 

73

 

 

 

254

 

  

 

$

842

 

 

$

1,427

 

  

 

 

 

 

 

 

 

 

  
2009
  
2008
 
Accrued compensation  $610  $502 
Accrued communication costs
  182   187 
Accrued professional fees
  30   71 
Accrued interest
  —   9 
Other accrued expenses
  57   73 
  $879  $842 
         
Note 7 – 2008 Private Placement Transactions

In November and December 2008, the Company entered into a series of transactions to recapitalize its balance sheet, raise funds, eliminate the derivative liabilities, extend the maturity date of the Senior Secured Notes and limit the related interest rate (the “2008 Private Placements”).   In March 2009 (see Note 19 Subsequent Events)8), the Company entered into a series of transactions to further recapitalize its balance sheet, raise funds and prepay or exchange all remaining Senior Secured Notes for shares of preferred stock.  The following is a summary of the components of the 2008 Private Placement transactions (in thousands except shares):

  

 

Sale of Series A Preferred Stock

 

 

Preferred Stock Exchange

 

 

Senior Secured Note Exchange

 

 

Elimination of Derivative Liability

 

 

Senior Secured Note Modification

 

 

Placement Agent

Warrant Fee

 

 

Total

 

Consideration received:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross proceeds – cash

 

$

1,825

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

1,825

 

Senior Secured Notes

 

$

—

 

 

$

—

 

 

$

(10,802

)

 

$

—

 

 

$

—

 

 

$

—

 

 

$

(10,802

)

Series C Preferred Stock – shares

 

 

—

 

 

 

(475

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(475

)

Series C Preferred Stock – carrying amount

 

$

—

 

 

$

(4,330

)

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

(4,330

)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consideration provided to holders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A-3 Warrants issued:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

2,281

 

 

 

—

 

 

 

12,377

 

 

 

—

 

 

 

2,384

 

 

 

1,000

 

 

 

18,042

 

Carrying amount

 

$

448

 

 

$

—

 

 

$

2,516

 

 

$

1,225

 

 

$

468

 

 

$

196

 

 

$

4,853

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A Preferred Stock issued:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

456

 

 

 

633

 

 

 

2,701

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

3,790

 

Carrying amount

 

$

1,377

 

 

$

1,911

 

 

$

8,286

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

11,574

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


F-15

  
Sale of Series A Preferred Stock
  
Preferred Stock Exchange
  
Senior Secured Note Exchange
  
Elimination
of Derivative Liability
  
Senior Secured Note Modification
  
Placement Agent
Warrant Fee
  
Total
 
Consideration received:                   
Gross proceeds – cash
 $1,825  $—  $—  $—  $—  $—  $1,825 
Senior Secured Notes
 $—  $—  $(10,802) $—  $—  $—  $(10,802)
Series C Preferred Stock surrendered:                         
Shares
  —   (475)  —   —   —   —   (475)
Carrying amount
 $—  $(4,330) $—  $—  $—  $—  $(4,330)
                             
Consideration provided to holders:                     
Series A-3 Warrants issued:                         
Shares
  2,281   —   12,377   —   2,384   1,000   18,042 
Carrying amount
 $448  $—  $2,516  $1,225  $468  $196  $4,853 
                             
Series A Preferred Stock issued:                         
Shares
  456   633   2,701   —   —   —   3,790 
Carrying amount
 $1,377  $1,911  $8,286  $—  $—  $—  $11,574 
                             

Sales of Series A Preferred Stock

In the 2008 Private Placements, the Company received $1,825,000 of gross proceeds in an initial closing (the “Initial Closing”) of 456 shares of its newly-created Series A Convertible Preferred Stock (“Series A Preferred



F-14


Stock”) and Series A-3 warrants having an exercise price of $0.40 per share (the “Series A-3 Warrants”) to acquire an aggregate of 2,281,000 shares of common stock pursuant to a Series A Convertible Preferred Stock Purchase Agreement (the “Purchase Agreement”). Pursuant to the Purchase Agreement, the Company may sell additional shares of Series A Preferred Stock and Series A-3 Warrants in one or more subsequent closings that may occur during the 90-day period following the Initial Closing, up to a maximum offering amount of $8,000,000. There can be no assurance, however, that the Company will raise any additional funds following the Initial Closing.

Agreement.

We accounted for the issuance of the Series A-3 Warrants to acquire 2,281,000 shares of common stock at $0.40 with an expiration date of November 25, 2013, which were issued to acquire the 456 shares Series A Preferred Stock, at fair value.   The $448,000 estimated fair value of these warrants, using the Black-Scholes method (see Note 13 for the weighted average assumptions used in the calculation)18) on the date of the sale and will bewas charged to the Series A Convertible Preferred Stock and credited to Paid in Capital.

The Series A Preferred Stock was recorded in the balance sheet at $1,377,000 which is the gross cash received less the $448,000 fair value of the Series A-3 warrants issued in the sale.

Preferred Stock Exchange

In the 2008 Private Placements, the holders of the Company’s Series C Convertible Preferred Stock (i) consented to the creation of the Series A Preferred Stock and (ii) were issued an aggregate of 633 shares of Series A Preferred Stock, having a Stated Value of $4,748,000, in exchange for an aggregate of 475 shares of the Company’s Series C Convertible Preferred Stock, which also had a Stated Value of $4,748,000.$4,748,000 (the “2008 Preferred Stock Exchange”).   The book value of the Series C Convertible Preferred Stock was $4,330,000.

The Series A Preferred Stock will bewas recorded in the balance sheet at $1,911,000 which was the fair value of the Series A Preferred Stock.


F-16
We accounted for the 2008 Preferred Stock Exchange as a redemption which requires that the excess of the carrying amount of the Series C Preferred Stock (the “Series C Carrying Amount”) over the fair value of the Series A Preferred Stock (see Note 10).

(the “Series A Fair Value”) be subtracted from net loss to arrive at net loss attributable to common stockholders.  The Series C Carrying Amount of $4,330,000 is based on the recorded fair value.  The Series A Carrying Amount of $1,911,000 is based on a fair value of $3,000 for each of the 633 shares of Series A Preferred Stock exchanged in the transaction.  The $2,419,000 excess of Series C Carrying Amount over the Series A Fair Value is recognized in our consolidated statement of operations as a “Gain on Redemption of Preferred Stock” and subtracted from our net loss to arrive at the net loss attributable to common shareholders.

Senior Secured Note Exchange

In the 2008 Private Placements, the Company exchanged 2,701 shares of Series A Preferred Stock and Series A-3 Warrants to acquire 12,377,000 shares of common stock were issued for $10,802,000 (including $24,000 of accrued interest) of the Company’s Senior Secured Notes.  Pursuant to an Amendment No. 2 to the Senior Secured Notes, the remaining notes were amended to, among other things, (i) extend the maturity date from March 31, 2009 to September 30, 2010, (ii) delete the provision providing that the Company achieve a certain Minimum Adjusted EBITDA level (as defined therein), (iii) fix the interest rate at 16% per annum, and (iv) provide that no cash bonuses will be awarded to Company management in 2008 or for 2008 performance and no future cash bonuses, options or restricted stock awards will be granted until (x) the Company has realized two quarters of positive operating income and (y) the Company has a reasonable expectation of realizing positive operating income in the quarter in which any such grant is made, all as determined in accordance with U.S. GAAP. Such amendment was executed by holders of the remaining notes who were issued Series A-3 Warrants to purchase 2,384,000 shares of common stock.

We accounted for the issuance of Series A-3 Warrants to acquire 12,377,000 shares of common stock at $0.40 with expiration dates of November 25 or December 31, 2013, which were issued to exchange the Senior Secured Notes into Series A Preferred Stock at fair value, using the Black-Scholes method.   The $2,516,000 estimated fair value of these warrants at the date of the exchange will bewas charged to the Series A Convertible Preferred Stock and credited to Paid in Capital.

The Series A Preferred Stock will bewas recorded in the balance sheet at $8,286,000 which is the value of the Senior Secured Notes exchanged less the $2,516,000 fair value of the Series A-3 Warrants issued in the exchange.

Elimination of Derivative Liability

In November 2008 we amended 19,525,000 Series A, Series A-2, Placement Agent and Advisory warrants to purchase shares of common stock of the Company to eliminate the provisions of the warrant agreements which



F-15


required the Company to account for a derivative liability.   In consideration for the elimination of the derivative liability we reduced the exercise price of those warrants to $0.40 from a weighted average price of $0.63, and we extended the expiration date of any such warrants to November 25, 2013 (5 years) from a weighted average expiration life of 2.8 years.

We accounted for the elimination of the derivative liability and reduction of the exercise price and the extension of the expiration date of 19,525,000 previously issued warrants at fair value, using the Black-Scholes method.   The gain on the elimination of the derivative liability of $2,338,000, along with the $1,196,000$1,106,000 gain on the elimination of the derivative liability related to the February 2004 capital raise andreduced by the $1,225,000 estimated fair value of this modification of these warrants at the date of the financings over the fair value of these warrants at their original terms was chargedresulted in a credit to Paid in Capital.

F-17

Senior Secured Note Modification

We accounted for the issuance of Series A-3 Warrants to acquire 2,384,000 shares of common stock at $0.40 with an expiration date of November 25, 2013, which were issued to amend the remaining notes at fair value.   The $468,000 estimated fair value, using the Black-Scholes method, is based on the fair value of these warrants at the date of the amendment.  The $468,000 fair value of this modification was treated as a discount of the remaining notes and will bewas expensed, using the effective interest method, over the 22 month period to the maturity date of September 30, 2010 remaining notes.

notes (see Note 9).

With the extension of the maturity date from March 31, 2009 to September 30, 2010, along with the other changes listed above to the remaining notes, there was a substantial modification of terms of the remaining notes.  Therefore, the remaining notes were accounted for as a debt extinguishment.   The $1,816,000 loss on extinguishment of debt, which is comprised of $187,000 of financing costs and $1,629,000 of unamortized discount on the Senior Secured Notes, was charged to loss on extinguishment of debt.

Placement Agent Warrant Fee

Burnham Hill Partners, acted as placement agent and financial advisor for the 2008 Private Placements and received fees of $128,000, which equaled seven (7%) percent of the gross proceeds received by the Company, and is entitled to a fee of $150,000 in cash, $75,000 of which has beenwas paid in 2008 and the remaining $75,000 will be payable upon closing a subsequent capital raise with gross proceeds to the Company of at least $1,000,000.

was paid in March 2009.

Glowpoint also issued advisory warrants to Burnham Hill Partners and/or its designees and assignees to purchase 1,000,000 shares of common stock at an exercise price of $0.40 per share and agreed to consolidate all prior warrant issuances to Burnham Hill Partners, its designees and assignees, into a single warrant per such holder with the same terms as the Series A-3 Warrants.

We accounted for the issuance of Series A-3 Warrants to Burnham Hill Partners to acquire 1,000,000 shares of common stock at $0.40 with an expiration date of November 25, 2013, at fair value, using the Black-Scholes method.   The $196,000 estimated fair value of these warrants at the date of the amendment will bewas charged to Paid in Capital.

The cash and non-cash costs for Burnham Hill Partners, legal and professional fees for the 2008 Private Placements, which were charged to Paid in Capital, are as follows (in thousands):

  
Total Costs
 
Cash financing costs:   
Burnham Hill Partners placement agent fees $203 
Legal and other professional fees
  139 
   342 
Non-cash financing costs:    
Burnham Hill Partners placement agent warrants  196 
  $538 

F-18

Note 8 – 2009 Private Placement Transactions
In March 2009 the Company entered into a series of transactions to further recapitalize its balance sheet, raise funds and prepay or exchange all remaining Senior Secured Notes for shares of preferred stock (the “2009 Private Placement”).  The following is a summary of the components of the 2009 Private Placement transactions (in thousands except shares):
  
Sale of Series A-1 Preferred Stock
  
Preferred Stock Exchange
  
Senior Secured Note Exchange
  
Senior Secured Note Purchase
  
Placement Agent
Warrant Fee
  
Total
 
Consideration received by Company:                
Cash:                  
Amount received
 $1,800  $—  $—  $(750) $—  $1,050 
Senior Secured Notes:                        
Carrying amount
 $—  $—  $(1,076) $(713) $—  $(1,789)
Series A Preferred Stock:                        
Shares
  —   (3,790)  —   —   —   (3,790)
Carrying amount
 $—  $(11,574) $—  $—  $—  $(11,574)
                         
Consideration provided to holders:                     
Series A-3 Warrants issued:                        
Shares
  2,250   —   594   —   500   3,344 
Carrying amount
 $189  $—  $50  $—  $42  $281 
                         
Series A-1 Preferred Stock issued:                        
Shares
  450   3,790   269   —   —   4,509 
Carrying amount
 $1,611  $13,573  $1,026  $—  $—  $16,210 
                         
Sales of Series A-1 Preferred Stock
In the 2009 Private Placement, the Company received $1,800,000 of gross proceeds in an initial closing (the “Initial Closing”) of 450 shares of its newly-created Series A-1 Preferred Stock and Series A-3 warrants having an exercise price of $0.40 per share (the “Series A-3 Warrants”) to acquire an aggregate of 2,250,000 shares of common stock pursuant to a Series A-1 Convertible Preferred Stock Purchase Agreement (the “Purchase Agreement”).
We accounted for the issuance of the Series A-3 Warrants to acquire 2,250,000 shares of common stock at $0.40 with an expiration date of March 2014, at fair value.   The $189,000 estimated fair value of these warrants, using the Black-Scholes method on the date of the sale was charged to the Series A-1 Preferred Stock and credited to Derivative Financial Instruments.
In the 2009 Private Placement, the estimated fair value of the issued warrants was determined using the Black-Scholes method with the following assumptions, a risk free interest rate of  0.95%, a term of 1.8 years, a common stock price of $0.17, which reflects a lack of marketability discount, expected volatility of 139.0% and no dividends.
The Series A-1 Preferred Stock was recorded in the balance sheet at $1,611,000 which is the gross cash received less the $189,000 fair value of the Series A-3 warrants issued in the sale.

F-19

F-16

March 2009 Preferred Stock Exchange
In the 2009 Private Placement, the holders of the Company’s Series A Convertible Preferred Stock (“Series A Preferred Stock”) (i) consented to the creation of the Series A-1 Preferred Stock and (ii) were issued an aggregate of 3,790 shares of Series A-1 Preferred Stock, having a Stated Value of $28,423,000, in exchange for an aggregate of 3,790 shares of the Company’s Series A Preferred Stock, which also had a Stated Value of $28,423,000 (“March 2009 Preferred Stock Exchange”).   The book value of the Series A Preferred Stock exchanged was $11,574,000. The Series A-1 Preferred Stock received in the transaction was recorded in the balance sheet at $13,573,000 which is the fair value of the Series A-1 Preferred Stock.
We accounted for the March 2009 Preferred Stock Exchange as a redemption that requires that the excess of the fair value of the Series A-1 Preferred Stock (the “Series A-1 Fair Value”) over the carrying amount of the Series A Preferred Stock (the “Series A Carrying Amount”) should be added to net loss to arrive at net loss attributable to common stockholders.  The Series A Carrying Amount of $11,574,000 is based on the recorded fair value.  The Series A-1 Carrying Amount of $13,572,000 is based on applying the $3,582 fair value of each share of Series A-1 Preferred Stock sold in the 2009 Private Placement to each share of Series A-1 Preferred Stock issued in the March 2009 Preferred Stock Exchange.  The $1,999,000 excess of Series A-1 Fair Value Series over the Series A Carrying Amount is recognized in our consolidated statements of operations as a “Loss on Redemption of Preferred Stock” and added to our net loss to arrive at the net loss attributable to common shareholders.
Senior Secured Note Exchange
In the 2009 Private Placement, the Company issued 269 shares of Series A-1 Preferred Stock and Series A-3 Warrants to acquire 594,000 shares of common stock in exchange for $1,076,000 (including $12,000 of accrued interest) of the Company’s Senior Secured Notes.  
We accounted for the issuance of Series A-3 Warrants to acquire 594,000 shares of common stock at $0.40 with an expiration dates of March 2014, which were issued to exchange the Senior Secured Notes into Series A-1 Preferred Stock at fair value, using the Black-Scholes method.   The $50,000 estimated fair value of these warrants at the date of the exchange was charged to the Series A-1 Preferred Stock and credited to Derivative Financial Instruments.
The Series A-1 Preferred Stock issued in exchange for the Senior Secured Notes was recorded in the balance sheet at $1,026,000 which is the value of the Senior Secured Notes exchanged less the $50,000 fair value of the Series A-3 Warrants issued in the exchange.
Senior Secured Note Purchase
In the 2009 Private Placement, the remaining $713,000 of Senior Secured Notes were purchased for $750,000 and retired by the Company pursuant to that certain Securities Purchase Agreement, dated March 16, 2009, which prepayment was funded from the sale of securities in the 2009 Private Placement. As a result, there are no Senior Secured Notes outstanding.    The $37,000 excess of the amount paid to purchase the remaining Senior Secured Notes and their book value along with $217,000 of unamortized discount that remained when the Senior Secured Notes were exchanged or purchased in the 2009 Private Placement resulted in a $254,000 loss on extinguishment of debt which was recorded in other income and expense.
F-20

Placement Agent Warrant Fee
Burnham Hill Partners acted as placement agent and financial advisor for the 2009 Private Placements and received fees of $126,000, which equaled seven (7%) percent of the gross proceeds received by the Company, and was entitled to the balance of a fee of $150,000, $75,000 of which has been paid in 2008 and the remaining $75,000 was paid upon closing this capital raise.
Glowpoint also issued advisory warrants to Burnham Hill Partners and/or its designees and assignees to purchase 500,000 shares of common stock at an exercise price of $0.40 per share.
We accounted for the issuance of Series A-3 Warrants to Burnham Hill Partners to acquire 500,000 shares of common stock at $0.40 with an expiration date of March 2014, at fair value, using the Black-Scholes method.   The $42,000 estimated fair value of these warrants was charged to Paid in Capital and credited to Derivative Financial Instruments.
The cash and non-cash financing costs for Burnham Hill Partners, legal and professional fees for the 2009 Private Placements, which were charged to Paid in Capital, are as follows (in thousands):
  
Total Costs
 
Cash financing costs:   
Burnham Hill Partners placement agent fees $201 
Legal and other professional fees
  85 
   286 
Non-cash financing costs:    
Burnham Hill Partners placement agent warrants  42 
  $328 
Note 9 – August 2009 Warrant and Preferred Stock Exchange
Elimination of Dividends until January 2013 and Warrant Exchange
On August 11, 2009, the Company entered into a transaction (the “August 2009 Exchange”) that resulted in the Company eliminating dividends on its convertible preferred stock until January 1, 2013 and issuing 17,372,000 shares of common stock in exchange for warrants to acquire 39,088,000 shares of common stock with an exercise price of $0.40 (the “Warrants”).
In order to eliminate dividends on its convertible preferred stock until January 1, 2013, the Series A-2 Preferred Stock was created and all of the outstanding shares the Company’s Series A-1 Preferred Stock were exchanged on a one-for-one basis (the “August 2009 Preferred Stock Exchange”).  The holders of the Company’s Series A-1 Preferred Stock (i) consented to the creation of the Series A-2 Preferred Stock and (ii) were issued an aggregate of 4,509 shares of Series A-2 Preferred Stock in exchange for an aggregate of 4,509 shares of the Company’s Series A-1 Preferred Stock (see Note 12).
F-21
  
Preferred Stock Exchange
  
Warrant Exchange
  
Total
 
Consideration received by Company:         
Series A-1 Preferred Stock:         
Shares
  (4,509)  —   (4,509)
Carrying amount
 $(16,210) $—  $(16,210)
Series A-3 Warrants:
 Shares
  —   39,088   39,088 
             
Consideration provided to holders:            
Common Stock :            
Shares
  —   17,372   17,372 
Carrying amount
 $—  $2  $2 
             
Series A-2 Preferred Stock issued:            
Shares
  4,509   —   4,509 
Carrying amount
 $14,275  $—  $14,275 
             
We accounted for the August 2009 Preferred Stock Exchange of 4,509 shares of Series A-1 Preferred Stock with an equal number of shares of Series A-2 Preferred Stock as a redemption that requires that the excess of the fair value of the Series A-2 Preferred Stock (the “Series A-2 Fair Value”) over the carrying amount of the Series A-1 Preferred Stock (the “Series A-1 Carrying Amount”) be added to net loss to arrive at net loss attributable to common stockholders.  The Series A-1 Carrying Amount of $16,210,000 is based on the recorded fair value.  The Series A-2 Fair Value of $14,275,000 was determined by the Company based on the net present value of the components of the Series A-2 Preferred Stock.  The $1,935,000 excess of Series A-1 Carrying Amount over the Series A-2 Fair Value is recognized in our consolidated statements of operations as a “Gain on Redemption of Preferred Stock” and subtracted from our net loss to arrive at the net loss attributable to common shareholders.
The holders of the Warrants were issued one share of common stock for warrants to acquire 2.25 shares of common stock, rounding to the nearest whole share. As a result, 17,372,000 shares of common stock were issued in exchange for warrants to acquire 39,088,000 shares of common stock.
As part of the August 2009 Warrant and Preferred Stock Exchange, all 40,912,000 of the $0.40 Warrants to acquire shares of common stock were amended to require the consent of a majority of the warrant holders in order to consummate a financing at a price per share of common stock below $0.40, thereby eliminating the Down-round provisions and the need to account for a derivative liability for these warrants.   Concurrently 39,088,000 of the $0.40 Warrants were exchanged for common stock and the remaining 1,824,000 $0.40 Warrants are outstanding until November 2013.  The accrued derivative liability of $4,751,000, which was related to the $0.40 Warrants, was then transferred to Paid In Capital.    The 1,640,000 warrants which expire in March 2010 still have Down-round provisions but the derivative liability was immaterial at December 31, 2009 (see Note 11)
The Company agreed to register the shares of common stock issued pursuant to the exchange of the Warrants or issued upon conversion of the Series A-2 Preferred Stock to the extent such shares of common stock could not be resold pursuant to Rule 144 promulgated pursuant the Securities Act of 1933, as amended.

F-22

Burnham Hill Partners LLC acted as financial advisor and was paid a fee of $75,000, $50,000 of which was paid at the closing and the balance to be paid on terms mutually acceptable to the parties.
The cash and non-cash financing costs for Burnham Hill Partners, legal and professional fees for the August 2009 Exchange, which were charged to Paid in Capital, are as follows (in thousands):
  
Total Costs
 
Cash financing costs:   
Burnham Hill Partners placement agent fees $75 
Legal and other professional fees
  23 
  $98 

Note 810 - Senior Secured Notes

Senior Secured Notes and Senior Secured Notes Discount

In theMarch and April 2006 Private Placements and September 2007, Private Placements, we issued our Senior Secured Notes.Notes in private placements to private investors. The September 2007 Private Placementprivate placement also included several officers and directors of the Company (“Insider Purchasers.Purchasers”).  In theNovember 2008, Private Placements,the holders of $10,777,000$10,802,000 of the Senior Secured Notes, and $25,000 of accrued interestincluding the Insider Purchasers, exchanged their holdings which totaled $10,802,000them for 2,701 shares of our Series A Convertible Preferred Stock.  Activity for the Senior Secured Notes and Senior Secured Notes discount during the yearsyear ended December 31, 2009 and as of December 31, 2008 and 2007December 31, 2009 was as follows (in thousands):

  

 

December 31, 2007

 

 

2008 Activity

 

 

2008 Private Placements Entries, Net

 

 

December 31, 2008

 

Principal of Senior Secured Notes:

 

 

 

 

 

 

 

 

 

 

 

 

2006 Private Placements

 

$

6,180

 

 

$

—

 

 

$

(4,680

)

 

$

1,500

 

2007 Private Placement

 

 

3,100

 

 

 

—

 

 

 

(3,100

)

 

 

—

 

2007 Private Placement, Insider Purchasers

 

 

438

 

 

 

—

 

 

 

(438

)

 

 

—

 

Senior Secured Notes issued as payment for interest

 

 

1,279

 

 

 

1,445

 

 

 

(2,502

)

 

 

222

 

Senior Secured Notes issued as payment for interest, Insider Purchasers

 

 

9

 

 

 

48

 

 

 

(57

)

 

 

—

 

  

 

 

11,006

 

 

 

1,493

 

 

 

(10,777

)

 

 

1,722

 

Discount:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instrument – Series A Warrants

 

 

(2,873

)

 

 

—

 

 

 

2,873

 

 

 

—

 

Derivative financial instrument – Series A-2 warrants

 

 

(4,484

)

 

 

—

 

 

 

4,484

 

 

 

—

 

Derivative financial instrument – Series A-2 warrants, Insider Purchasers

 

 

(250

)

 

 

—

 

 

 

250

 

 

 

—

 

Derivative financial instrument – Series A-3 warrants, net of write off of $208

 

 

—

 

 

 

(468

)

 

 

208

 

 

 

(260

)

Reduction of exercise price and extension of expiration dates of warrants

 

 

(766

)

 

 

—

 

 

 

766

 

 

 

—

 

  

 

 

(8,373

)

 

 

(468

)

 

 

8,581

 

 

 

(260

)

Accretion of discount

 

 

4,211

 

 

 

2,591

 

 

 

(6,782

)

 

 

20

 

Accretion of discount, Insider Purchasers

 

 

29

 

 

 

141

 

 

 

(170

)

 

 

—

 

  

 

 

(4,133

)

 

 

2,264

 

 

 

1,629

(1)

 

 

(240

)

Senior Secured Notes, including $0 and $226 at December 31, 2007 and 2008, respectively, held by Insider Purchasers, net of discount

 

$

6,873

 

 

$

3,757

 

 

$

(9,148

)

 

$

1,482

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


  
December 31, 2008
  
2009 Activity
  
2009 Private Placements Entries, Net
  
December 31, 2009
 
Principal of Senior Secured Notes:            
2006 Private Placements
 $1,500  $—  $(1,500) $— 
Senior Secured Notes issued as payment for interest  222   55   (277)  — 
   1,722   55   (1,777)  — 
Discount:                
Series A-3 warrants
  (260)  —   260   — 
   (260)  —   260   — 
Accretion of discount
  20   23   (43)  — 
   (240)  23   217   — 
Senior Secured Notes, net of discount
 $1,482  $78  $(1,560) $— 
                 
During the years ended December 31, 2009 and 2008, the accretion of discount was $23,000 and $2,732,000, respectively.

F-23

Note 1 – The $1,629,000 of unamortized discount along with $187,000 of unamortized financing costs were expensed and comprises the $1,816,000 loss on extinguishment of debt.

11 - Derivative Liabilities

In the February 2004, March 2006, Private Placements, we issued $6,180,000 of our Senior Secured NotesApril 2006 and Series A warrants (to purchase 6,180,000 shares of common stock at an exercise price of $0.65 per share.  The Series A warrants are exercisable for a period of five years and are subject to certain anti-dilution protection.  We also agreed to reduce the exercise price of 3,625,000 previously issued warrants held by the investors in theseSeptember 2007 private placements 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 became 3.5 years from March 2006 from a previous weighted average expiration date of 2.9 years.  In addition, we issued to the designees and assigns of 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 $5,585,000 net proceeds of the 2006 Private Placement were used to support our corporate restructuring program andincurred liabilities for working capital.  




F-17


We accounted for the reduction of the exercise price of 3,625,000 previously issued warrants held by the investors in the 2006 Private Placements 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 Senior Secured Notes issued in 2006 Private Placements were allocated to this transaction and charged to Paid in Capital.  The estimated fair value of this modification was 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 2006 Private Placements, $766,000 of the proceeds were attributed to the estimated fair value of the modification of price and term of these warrants. &nb sp;The $766,000 fair value of this modification was treated as a discount of the Senior Secured Notes and expensed, using the effective interest method, over the 18 month period to the original maturity date of September 30, 2007 of the Senior Secured Notes issued in the 2006 Private Placements.

In the 2007 Private Placement, we amended the terms of our then outstanding Senior Secured Notes to extend the maturity date to March 31, 2009 from September 30, 2007 (the “2007 Senior Secured Notes Extension”).   In consideration for the 2007 Senior Secured Notes Extension, we issued Series A-2 warrants to the note holders to purchase an aggregate of 4,773,000 shares of common stock (which represented thirty-three (33%) percent of the shares of common stock issuable upon conversion of the then outstanding Senior Secured Notes and accrued interest).  The Series A-2 warrants have an exercise price of $0.65 per share and are exercisable for a period of five years.   The warrants are subject to certain anti-dilution protection.  Burnham Hill Partners acted as financial advisor for the Preferred Stock Exchange (as defined in Note 10, Series C Convertible Preferred Stock below) and 2007 Senior Secured Notes Extension and received financial advisory warrants to purchase 250,000 shares of common stock at an exercise price of $0.65 per share.   The warrants were exercisable for a period of five years and are subject to certain anti-dilution protection.  The Company allocated 150,000 of the warrants, with a fair value of $86,000, to the Senior Secured Notes Extension and incurred professional fees related to the Senior Secured Notes Extension of $50,000.

The Senior Secured Notes originally bore interest at 10% per annum, increasing to 12% on the first anniversary following their issuance, and mature on March 31, 2009.  Beginning in January 2008 the per annum interest rate on the unpaid principal balance of the Senior Secured Notes then in effect shall increase if the Company fails to achieve a minimum adjusted quarterly earnings before interest, taxes, depreciation and amortization (the “Adjusted EBITDA”) as defined in the Senior Secured Notes.  The per annum interest rate shall increase by 200 basis points if the stated quarterly Adjusted EBITDA is not achieved, and such increase will be cumulative for each subsequent quarterly failure to achieve the stated Adjusted EBITDA; provided, however, that the per annum interest rate shall revert to the lower interest rate in the event the Company achieves or exceeds the stated or cumulative minimum Adjusted EBITDA in any subsequ ent quarterly period.  The Senior Secured Notes and other transaction documents provide that the Insider Purchasers will not be entitled to all of the rights and benefits available to the other purchasers upon the failure by the Company to achieve Adjusted EBITDA.   The Company achieved the minimum Adjusted EBITDA for the quarter ended March 31, 2008 but did not achieve the minimum Adjusted EBITDA for the six months ended June 30, 2008 and the nine months ended September 30, 2008.  Therefore, the interest rate on the unpaid principal balance of the Senior Secured Notes increased by 200 basis points to 14% beginning July 1, 2008 and an additional 200 basis points on October 1, 2008 to 16%.  

The Senior Secured Notes are convertible into common stock at a conversion rate of $0.50 per share (x) at any time at the holder’s election or (y) automatically if the closing bid price (as defined in the Senior Secured Notes) of the Company’s common stock exceeds $1.25 (as adjusted for stock splits, stock dividends, combinations and similar transactions) for twenty (20) consecutive trading days.  We have the option to pay the accrued interest for the Senior Secured Notes in cash or additional Senior Secured Notes.  To date, all required interest payments have been made by issuing additional Senior Secured Notes.

In the 2007 Private Placement, we issued $3,538,000 of our Senior Secured Notes and Series A-2 warrants to purchase 3,538,000 shares of common stock at an exercise price of $0.65 per share.  Insider Purchasers invested $438,000 in the private placement.  The Series A-2 warrants were exercisable for a period of five years and are subject to certain anti-dilution protection.  In addition, we issued to the designees and assignees of Burnham Hill Partners placement agent warrants to purchase 566,080 shares of our common stock at an exercise price of $0.55 per share.  The warrants were exercisable for a period of five years and are subject to certain anti-dilution protection.   



F-18


Burnham Hill Partners received a cash fee of $283,000, which equaled eight (8%) percent of the gross proceeds we received.  The $3,230,000 net proceeds of the September 2007 private placement are being used for working capital.

In the 2008 Private Placements, the Company entered into a series of transactions to recapitalize its balance sheet, raise funds, eliminate the derivative liabilities and extend the maturity date of the Senior Secured Notes and limit the related interest rate.  The 2008 Private Placements adjusted the exercise price and expiration date of the Series A, Series A-2, Placement Agent and Financial Advisory warrants to $0.40 per share, deleted the Adjusted EBITDA interest calculation and set the interest rate for the Senior Secured Notes at 16% per annum and the maturity date for the Senior Secured Notes was extended to September 30, 2010 among other things.   See Note 7 – 2008 Private Placement Transactions.

During the year ended December 31, 2008 and 2007, the accretion of discount on the Senior Secured Notes was $2,732,000 and $2,881,000, respectively.

Financing Costs

The financing costs, which were included in Other Assets in the accompanying consolidated balance sheets, and accumulated amortization as of December 31, 2008, is as follows (in thousands):

  

 

2006 Private Placements

 

 

2007 Private Placement and Senior Secured Notes Extension

 

 

 

2007 Private Placement, Insider Purchasers

 

 

2008 Private Placements

 

 

Extinguishment of Debt

 

 

Total

 

Cash financing costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Placement agent fees – Burnham Hill Partners

 

$

480

 

 

$

248

 

 

$

35

 

 

$

203

 

 

$

(966

)

 

$

—

 

Other financing costs

 

 

115

 

 

 

71

 

 

 

3

 

 

 

139

 

 

 

(328

)

 

 

—

 

  

 

 

595

 

 

 

319

 

 

 

38

 

 

 

342

 

 

 

(1,294

)

 

 

—

 

Non-cash financing costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Placement agent and financial advisory warrants – Burnham Hill Partners

 

 

296

 

 

 

376

 

 

 

41

 

 

 

196

 

 

 

(909

)

 

 

—

 

Financing costs charged to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid in Capital

 

 

(110

)

 

 

—

 

 

 

—

 

 

 

(538

)

 

 

648

 

 

 

—

 

Total financing costs

 

 

781

 

 

 

695

 

 

 

79

 

 

 

—

 

 

 

(1,555

)

 

 

—

 

Accumulated amortization

 

 

(781

)

 

 

(527

)

 

 

(60

)

 

 

—

 

 

 

1,368

 

 

 

—

 

  

 

 

—

 

 

 

168

 

 

 

19

 

 

 

—

 

 

 

(187

)

 

$

—

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization during year

 

$

—

 

 

$

402

 

 

$

46

 

 

$

—

 

 

$

—

 

 

$

448

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


The financing costs for the 2006 Private Placements were being amortized over the 18 month period through September 30, 2007, the maturity date of the originally issued Senior Secured Notes.  The financing costs for the 2007 Private Placement and extension of the maturity date of the 2006 Private Placement were being amortized over the 18 month period through March 31, 2009, the original maturity date of the Senior Secured Notes.   As a result of the 2008 Private Placements the remaining financing costs were charged to Paid in Capital.




F-19


The financing costs, which were included in Other Assets in the accompanying consolidated balance sheets, and accumulated amortization as of December 31, 2007, is as follows (in thousands):

  

 

2007

 

  

 

2006 Private Placements

 

 

2007 Private Placement and Senior Secured Notes Extension

 

 

2007 Private Placement, Insider Purchasers

 

 

Total

 

Cash financing costs:

 

 

 

 

 

 

 

 

 

 

 

 

Placement agent fees – Burnham Hill Partners

 

$

480

 

 

$

248

 

 

$

35

 

 

$

763

 

Other financing costs

 

 

115

 

 

 

71

 

 

 

3

 

 

 

189

 

  

 

 

595

 

 

 

319

 

 

 

38

 

 

 

952

 

Non-cash financing costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Placement agent and financial advisory warrants – Burnham Hill Partners

 

 

296

 

 

 

376

 

 

 

41

 

 

 

713

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing costs charged to Paid in Capital

 

 

(110

)

 

 

—

 

 

 

—

 

 

 

(110

)

Total financing costs

 

 

781

 

 

 

695

 

 

 

79

 

 

 

1,555

 

Accumulated amortization

 

 

(781

)

 

 

(125

)

 

 

(14

)

 

 

(920

)

  

 

$

0

 

 

$

570

 

 

$

65

 

 

$

635

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization during year

 

$

392

 

 

$

125

 

 

$

14

 

 

$

531

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Derivative Liabilities

Activity for derivative liabilities during the years ended and as of December 31, 2008 and 2007 was as follows (in thousands):

  

 

December 31, 2007

 

 

Increase (decrease) in Fair Value

 

 

Elimination of derivative liability

 

 

December 31, 2008

 

(i)   Derivative financial instrument – February 2004 capital raise

 

$

1,200

 

 

$

(94

)

 

$

(1,106

)

 

$

—

 

(iii) Derivative financial instrument – Placement agent and financial advisory warrants

 

 

457

 

 

 

(239

)

 

 

(218

)

 

 

—

 

(iv) Derivative financial instrument – Series A warrants

 

 

1,758

 

 

 

(946

)

 

 

(812

)

 

 

—

 

(v)  Derivative financial instrument – Series A-2 warrants, 2007 Private Placement

 

 

1,008

 

 

 

(520

)

 

 

(488

)

 

 

—

 

(v)  Derivative financial instrument – Series A-2 warrants, 2007 Private Placement, Insider Purchasers

 

 

142

 

 

 

(73

)

 

 

(69

)

 

 

—

 

(vi)  Derivative financial instrument – Series A-2 warrants, issued in connection with Senior Secured Notes Extension

 

 

1,552

 

 

 

(801

)

 

 

(751

)

 

 

—

 

  

 

$

6,117

 

 

$

(2,673

)

 

$

(3,444

)

 

$

—

 




F-20


The components of the increase or (decrease) in the fair value ofvarious derivative financial instruments’ liability with changes in value recorded as other (income) expense for the years ended December 31, 2008 and 2007 was as follows (in thousands):

  

 

2008

 

 

2007

 

(i)   Derivative financial instrument – February 2004 capital raise

 

$

(94

)

 

$

(36

)

(ii)  Derivative financial instrument – Beneficial conversion feature – Senior Secured Notes

 

 

—

 

 

 

(865

)

(ii)  Derivative financial instrument – Beneficial conversion feature – Senior Secured Notes

 

 

—

 

 

 

(2,666

)

(ii)  Derivative financial instrument – Beneficial conversion feature – Senior Secured Notes, Insider Purchasers

 

 

—

 

 

 

(112

)

(iii) Derivative financial instrument – Placement agent and financial advisory warrants

 

 

(239

)

 

 

(313

)

(iv) Derivative financial instrument – Series A warrants

 

 

(946

)

 

 

359

 

(v)  Derivative financial instrument – Series A-2 warrants, 2007 Private Placement

 

 

(520

)

 

 

(757

)

(v)  Derivative financial instrument – Series A-2 warrants, 2007 Private Placement, Insider Purchasers

 

 

(73

)

 

 

(108

)

(vi)  Derivative financial instrument – Series A-2 warrants, issued in connection with Senior Secured Notes Extension

 

 

(801

)

 

 

(1,167

)

  

 

$

(2,673

)

 

$

(5,665

)

  

 

 

 

 

 

 

 

 


The components of the gain on elimination of derivative financial liability for the year ended December 31, 2008 was as follows (in thousands):  


  

 

2008

 

(i)   Elimination of derivative financial instrument – February 2004 capital raise

 

$

(1,106

)

(iii) Elimination of derivative financial instrument – Placement agent and financial advisory warrants

 

 

(218

)

(iv) Elimination of derivative financial instrument – Series A warrants

 

 

(812

)

(v)  Elimination of derivative financial instrument – Series A-2 warrants, 2007 Private Placement

 

 

(488

)

(v)  Elimination of derivative financial instrument – Series A-2 warrants, 2007 Private Placement, Insider Purchasers

 

 

(69

)

(vi) Elimination of derivative financial instrument – Series A-2 warrants, issued in connection with Senior Secured Notes Extension

 

 

(751

)

  

 

 

(3,444

)

    Warrants issued to eliminate derivative financial instrument liability

 

 

1,225

 

  

 

 

(2,219

)

    Less amounts allocated to Paid in Capital

 

 

(2,219

)

  

 

$

—

 

  

 

 

 

 


(i)  We accounted for the registration rights agreement related to the February 2004 capital raise as a separate freestanding instrument and accounted for the liquidated damages provision as a derivative liability subject to SFAS No. 133.instruments.  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.  We estimated the fair value of the derivative liability as of December 31, 2007 to be $1,200,000.   

In the 2008 Private Placements we amended various warrants to eliminate the provisions of the warrant agreements which required the Company to account for the related derivative liability, exchanged shares of Series C Preferred Stock for Series A Preferred Stock and exchanged Senior Secured Notes for Series A Preferred Stock. With this recapitalization of the balance sheet and the elimination of the derivative liabilities related to the warrants the Company currently estimates that the fair value for the derivative liability for the 2004 capital raise is now nominal. Therefore, in November 2008, the Company eliminated the $1,106,000 derivative liability related to the February 2004 capital raise as an increase to additional paid-in capital.



F-21


(ii)  We initially accounted for the convertibility of the Senior Secured 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 certain 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 Notes, 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 Senior Secured Notes holder if payment is required.  The prepayment amount is the greater of (i) 125% of the value of the Senior Secured Notes and accrued interest and (ii) the value if the Senior Secured Notes an d accrued interest converted into common stock at $0.50 per share and then multiplied by the then current stock price.  Since the Senior Secured Notes are convertible at the issuance date, an expense related to the derivative liability is recognized on that date.  

In December 2007, in light of changes to Rule 144 of the Securities Act, we amended the Registration Rights Agreement to eliminate the requirement to register the shares issuable upon conversion of the Senior Secured Notes, thereby eliminating any requirement to deliver registered shares, which effectively eliminated the right of the holders of the Senior Secured Notes to demand that the Company pay such holders cash, calculated as defined in the Senior Secured Notes. Accordingly, the Company will no longer account for the beneficial conversion feature as a derivative liability.  Therefore, in December 2007, the Company eliminated the $2,778,000 derivative liability related to the beneficial conversion feature that had been accrued as of that date.

 (iii)  We accounted for the issuance of the placement agent and financial advisory warrants issued in connection with the March and April 2006 and September 2007 private placements of the Senior Secured Notes 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 and Series A-2 warrants, under certain circumstances. Accordingly the Company accounted for the placement agent and financial advisory warrants as a derivative liability.  The estimated fair value of the derivative liability isinstruments was calculated using the Black-Scholes method and such estimates are revalued at each balance sheet date with changes in value recorded as other income or expense. We estimated the fair value of the de rivative liability as of December 31, 2007 to be $457,000.   See also Note 18.

In the 2008 Private Placement we amended these placement agent and financial advisory warrants issued in connection with the 2006 Private Placements and 2007 Private Placement of the Senior Secured Notes to eliminate the provisions of the warrant agreements which required the Company to account for a derivative liability.   Therefore, in November 2008, the Company eliminated the $218,000 derivative liability related to the warrants that had been accrued as of that date.

 (iv)  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 certain 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 method and such estimates are revalued at each balance sheet date, with changes in value recorded as other income or expense. We estimated the fair value of the derivative liability as of December 31, 2007 to be $1,758,000.

In the 2008 Private Placement we amended these Series A warrants to eliminate the provisions of the warrant agreements which required the Company to account for a derivative liability.   Therefore, in November 2008, the Company eliminated the $812,000 derivative liability related to the warrants that had been accrued as of that date.

(v)  In connection with the 2007 Private Placement we accounted for the issuance of the Series A-2 warrants to purchase 3,538,000 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 certain 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-2 Warrant, under certain circumstances. Accordingly the Company accounted for the Series A-2 warrants as a derivative liability.  The estimated fair value of the



F-22


derivative liability is calculated using the Black-Scholes method and such estimates arewere revalued at each balance sheet date, with changes in value recorded as other income or expense.  In the 20072008 Private Placement, $2,015,000Placements these derivative liabilities were eliminated with the related gain credited to Additional Paid in Capital.

The Company adopted ASC Topic 815 effective January 1, 2009. The adoption of ASC Topic 815’s requirements can affect the accounting for warrants and many convertible instruments with Down-round provisions. For example, warrants with such provisions will no longer be recorded in equity. Down-round provisions reduce the exercise price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price. We evaluated whether our warrants or convertible preferred stock contain provisions that protect holders from declines in our stock price or otherwise could result in modification of the proceeds was attributedexercise price and/or shares to be issued under the respective warrant or preferred stock agreements based on a variable that is not an input to the estimatedfair value of a “fixed-for-fixed” option. The Company determined that all of the outstanding warrants contained such provisions thereby concluding they were not indexed to the Company’s own stock. The Company determined that ASC Topic 815 does not affect the accounting treatment of the convertible preferred stock. A contingent beneficial conversion amount is required to be calculated and recognized when and if the adjusted conversion price of the convertible preferred stock, currently $0.75, is adjusted to reflect a Down-round stock issuance that reduces the conversion price below the $0.29 fair value of the derivative liability.common stock on the issuance date of the convertible preferred stock.

In accordance with ASC Topic 815, the Company, beginning on January 1, 2009, recognized these warrants as liabilities at their respective fair values on each reporting date. The $2,015,000cumulative effect of the change in accounting for these instruments of $23,551,000 was recognized as an adjustment to the derivative liability will be treatedopening balance of accumulated deficit at January 1, 2009. The cumulative effect adjustment was the difference between the amounts recognized in the consolidated balance sheet before initial adoption of ASC Topic 815 and the amounts recognized in the consolidated balance sheet upon the initial application of ASC Topic 815. The amounts recognized in the consolidated balance sheet as a discountresult of the initial application of ASC Topic 815 on January 1, 2009 were determined based on the Senior Secured Notes and expensed, usingamounts that would have been recognized if ASC Topic 815 had been applied from the effective interest method, over the 18 month period to the maturityissuance date of the Senior Secured Notes. We estimatedinstruments. In the fair value ofAugust 2009 Exchange the derivative liability as of December 31, 2007 to be $1,150,000.

In 2008 Private Placements we amended these Series A-2 warrants to eliminate the provisions of the warrant agreements which required the Companyneed to account for a derivative liability.   Therefore, in November 2008,liability was eliminated.  On August 11, 2009, the date of the August 2009 Exchange, the Company eliminated the $557,000 derivative liability related to the warrants that had been accrued as of that date.

(vi)  In connection with the Senior Secured Notes Extension we accounted for the issuance of the Series A-2 warrants to purchase 4,773,000 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 certain 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-2 Warrant, under certain circumstances. Accordingly the Company accounted for the Series A-2 warrants as a derivative liability.  The estimated fair value of the derivative liability is calculated using the Black-Scholes method and such estimates are revalued at each balance sheet date, with changes in value recorded as other income or expense. In the Senior Secured Notes Extension, $2,719,000 was attributed to the estimated fair value of the derivative liability.  The $2,719,000 for the derivative liability will be treated as a discount on the Senior Secured Notes and expensed, using the effective interest method, over the 18 month period to the Senior Secured Notes’ maturity date. We estimatedmeasured the fair value of the derivative liability as of December 31, 2007 to be $1,552,000.

In the 2008 Private Placements we amended these Series A-2 warrants to eliminate the provisions of the warrant agreements which required the Company to account forinstruments, and recorded a derivative liability.   Therefore, in November 2008, the Company eliminated the $751,000 derivative liability related$1,157,000 charge to the warrants that had been accrued asstatement of that date.

Insider Purchasers Investment in September 2007 Private Placement

In the 2007 Private Placement, the Insider Purchasers invested an aggregate of $438,000 and were issued Senior Secured Notes and Series A-2 warrants to acquire 438,000 shares of common stock.  The Senior Secured Notes and other transaction documents provide that the Insider Purchasers will not be entitled to all of the rights and benefits available to the other purchasers upon the occurrence of certain events, including, but not limited to, an event of default, the failure by Glowpoint to achieve specified Adjusted EBITDA, and the failure to timely file the required registration statement.  

In the 2008 Private Placement, the Company exchanged 1,880 shares (126 for Insider Purchasers) of Series A Preferred Stock and Series A-3 Warrants to acquire 9,401,000 shares (631,000 for Insider Purchasers) of common stock were issued for $7,521,000 of the Company’s Senior Secured Notes.   The Series A Preferred Stock and other transaction documents provide that the Insider Purchasers will be entitled to all of the rights and benefits available to the other purchaser.  

Senior Secured Notes –Adjusted EBITDA Requirements

In the 2007 Private Placement the Company was required to achieve minimum Adjusted EBITDA, as defined, in 2008 or the per annum interest rate on the unpaid principal balance of the Senior Secured Notes then in effect would increase by 200 basis points.  In the 2008 Private Placement this was deleted and the interest rateoperations for the Senior Secured Notes was set at 16% per annum.

The Company achieved the minimum Adjusted EBITDA for the quarter ended March 31, 2008 but did not achieve the minimum Adjusted EBITDA for the six months ended June 30, 2008 and nine months ended September 30, 2008.  Therefore, the interest rate on the unpaid principal balance of the Senior Secured Notes increased by 200 basis points to 14% beginning July 1, 2008 and an additional 200 basis points on October 1, 2008 to 16%.  



F-23


Note 9 - Interest Expense

The components of interest expense for the yearsyear ended December 31, 2008 and 2007 are presented below (in thousands):

  

 

2008

 

 

2007

 

Accretion of discount on Senior Secured Notes

 

$

2,591

 

 

$

2,852

 

Accretion of discount on Senior Secured Notes, Insider Purchasers

 

 

141

 

 

 

29

 

Interest on Senior Secured Notes

 

 

1,376

 

 

 

900

 

Interest on Senior Secured Notes, Insider Purchasers

 

 

44

 

 

 

12

 

Beneficial conversion feature – Senior Secured Notes

 

 

—

 

 

 

1,757

 

Beneficial conversion feature – Senior Secured Notes, Insider Purchasers

 

 

—

 

 

 

220

 

Interest expense for sales and use taxes and regulatory fees

 

 

283

 

 

 

268

 

Interest expense for capital lease

 

 

78

 

 

 

—

 

Other interest expense

 

 

22

 

 

 

5

 

  

 

$

4,535

 

 

$

6,043

 

  

 

 

 

 

 

 

 

 


Note 10 - Stockholders’ Deficit

CommonStock

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 a private placement offering to purchase 1,830,000 shares of our common stock at an exercise price of $2.75 per share.2009. 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 estimatedCompany determined the fair valuevalues of these securities using a Black-Scholes valuation model.

During the der ivative liability as of December 31, 2007 to be $1,200,000.    For the yearsyear ended December 31, 2008 and 2007 we recognized other income2009, an increase of $94,000 and $36,000 for a decrease$1,848,000 in the fair value of the derivative liability.

Inliabilities was recorded in other income and expense.   During the year ended December 31, 2008, Private Placements we amended various warrants to eliminatea decrease of $2,673,000 in the provisions of the warrant agreements which required the Company to account for the related derivative liability, exchanged shares of Series C Preferred Stock for Series A Preferred Stock and exchanged Senior Secured Notes for Series A Preferred Stock. With this recapitalization of the balance sheet and the eliminationfair value of the derivative liabilities was recorded in other income and expense.

As part of the August 2009 Warrant and Preferred Stock Exchange, all 40,912,000 of the $0.40 Warrants to acquire shares of common stock were amended to require the consent of a majority of the warrant holders in order to consummate a financing at a price per share of common stock below $0.40, thereby eliminating the Down-round provisions and the need to account for a derivative liability for these warrants.   Concurrently 39,088,000 of the $0.40 Warrants were exchanged for common stock and the remaining 1,824,000 $0.40 Warrants are outstanding until November 2013.  The accrued derivative liability of $4,751,000, which was related to the $0.40 Warrants, was then transferred to Paid In Capital.   The 1,640,000 warrants the Company currently estimates that the fair value forwhich expire in March 2010 still have Down-round provisions but the derivative liability was immaterial at December 31, 2009.

F-24

Activity for derivative liabilities during the year ended December 31, 2009 and as of December 31, 2009 and 2008 was as follows (in thousands):
  
December 31, 2008
  
Cumulative Effect of Change in Accounting Principle
  
Activity during the period
  
Increase in Fair Value
  
Elimination
of Derivative Liability
  
December 31, 2009
 
Derivative financial instrument – warrants
 $—  $2,546  $281  $1,797  $(4,624) $— 
Derivative financial instrument – warrants – insider purchasers  —   76   —   51   (127)  — 
  $—  $2,622  $281  $1,848  $(4,751) $— 
                         
Note 12 - Interest (Income) Expense, Net
The components of interest (income) expense, net for the 2004 capital raise is now nominal. Therefore, in Novemberyears ended December 31, 2009 and 2008 the Company eliminated the $1,106,000 derivative liability related to the February 2004 capital raise as an increase to additional paid-in capital.





F-24


are presented below (in thousands):

  
2009
  
2008
 
Interest (Income) Expense:      
Accretion of discount on Senior Secured Notes $23  $2,591 
Accretion of discount on Senior Secured Notes, Insider Purchasers  —   141 
Interest on Senior Secured Notes  57   1,376 
Interest on Senior Secured Notes, Insider Purchasers  —   44 
Adjustment of interest accrual for sales and use taxes and regulatory fees  (784)  268 
Interest expense for capital lease  42   78 
Other interest (income) expense  119   19 
Interest (income) expense, net $(543) $4,517 
         
Note 13 – Preferred Stock

Our Certificate of Incorporation authorizes the issuance of up to 5,000,000 shares of preferred stock. Currently, we have 7,500 shares of Series AA-2 Preferred Stock authorized, of which 3,7904,509 shares are issued and outstanding as of December 31, 2008,2009, and 4,000 shares of Series D convertible preferred stock authorized, none of which are issued.  We still have 7,500 shares of Series A Preferred Stock currently authorized, none of which are outstanding, but we expect to file a Certificate of Elimination with the Delaware Secretary of State eliminating this class of stock.   We have no other classes of preferred stock.  Only the Series AA-2 Preferred Stock is outstanding as of December 31, 2008.

Series A Convertible Preferred Stock

In the 2008 Private Placement, the Company received $1,825,0002009.

F-25

Each share of Series AA-2 Preferred Stock par value $0.0001 per share, has a stated value of $7,500 per share (the “Stated Value”), a liquidation preference equal to the stated value,Stated Value, and is convertible at the holder’s election into common stock at a conversion price per share of $0.75.  Therefore, each share of Series AA-2 Preferred Stock is convertible into 10,000 shares of common stock. The Series AA-2 Preferred Stock is senior to all other classes of equity, has weighted average anti-dilution protection and, after the first anniversary of issuance (the “Dividend Grace Period”),commencing on January 1, 2013, is entitled to dividends at a rate of 5% per annum, payable quarterly, in cash, based on the Stated Value.  AfterOnce dividend payments commence, all dividends are payable at the Dividend Grace Period and so long as anyoption of the Company’s Senior Secured Notes remain outstanding, dividends shall accrue quarterly and will not be paid. Inholder in cash or through the eventissuance of a changenumber of control the Company, at its option, shall have the right to redeem all or a portionadditional shares of the outstanding Serie s ASeries A-2 Preferred Stock in cash at a price per share of Series A Preferred Stockwith an aggregate liquidation preference equal to 100%the dividend amount payable on the applicable dividend payment date. Except for when the payment of the liquidation preference amount plus all accrued and unpaid dividends. The Series A Preferred Stock and the Series A-3 Warrants also contain provisions providing weighted average anti-dilution protection.  The Series A-3 Warrants are exercisable for a period of five years and, in accordance withdividends commence, the terms of that certain Registration Rights Agreementthe Series A-2 Preferred Stock are materially the same as amended on February 19, 2009, we are obligated to file a registration statement within 90 days after requested by at least two thirdsthe terms of the Series A-3 Warrant holders to register for resale the shares of common stock issuable upon exercise of the Series A-3 Warrants. As of the date of this filing we have not received any such request.

Each share ofA-1 Preferred Stock created in March 2009 and the Series A Preferred Stock is valued at $3,000, which is based on gross proceeds of $4,000 received by the Company less $1,000, the Black-Scholes value for the Series A-3 Warrants issued with each Series A Preferred Stock share to acquire 5,000 shares of the Company’s common stock.



F-25


In the 2008 Private Placements, see Note 7, the Company exchanged 2,701 shares of Series A Preferred Stock and Series A-3 Warrants to acquire 12,377,000 shares of common stock were issued for $10,802,000 (including $24,000 of accrued interest) of the Company’s Exchanged Notes.   Insider Purchasers will receive the same rights as the other holders of the Series A Preferred Stock. created in November 2008.

The following is a summary of the exchangeactivity for the Company’s preferred stock during the year ended December 31, 2009 and as of December 31, 2008 and December 31, 2009 (in thousands except Seriespreferred stock shares):
  
Series A
as of December 31, 2008
Note A
  
2009 Private Placement
  
Series A
& A-1 Exchange
Note B
  
Series A-1 & A-2 Exchange Note C
  
Series A-2 as of December 31, 2009
 
Shares of Preferred Stock:               
Investors
  3,675   719   —   —   4,394 
Insider Purchasers
  115   —   —   —   115 
   3,790   719   —   —   4,509 
Book Value:                    
Investors
 $11,226  $2,637  $1,934  $(1,886) $13,911 
Insider Purchasers
  348   —   65   (49)  364 
  $11,574  $2,637  $1,999  $(1,935) $14,275 
                     
Liquidation Value:                    
Investors
 $27,560  $5,392  $—  $—  $32,952 
Insider Purchasers
  863   —   —   —   863 
  $28,423  $5,392  $—  $—  $33,815 
                     
Note A Preferred Stock shares):

  

 

Senior Secured Notes

 

 

Series A Preferred Stock Shares

 

 

Series A Preferred Stock Book Value

 

 

Series A Preferred Stock Liquidation Value

 

 

Series A-3 Warrants

 

Investors

 

$

10,297

 

 

 

2,575

 

 

$

7,905

 

 

$

19,307

 

 

 

11,746

 

Insider Purchasers

 

 

505

 

 

 

126

 

 

 

381

 

 

 

946

 

 

 

631

 

  

 

$

10,802

 

 

 

2,701

 

 

$

8,286

 

 

$

20,253

 

 

 

12,377

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


– Share, book value and liquidation value amounts for Mr. Brandofino have been reclassified into the Investors totals (see Note 23).

Note B – In 2008the 2009 Private Placements, we entered into a Series C Preferred Consent and Exchange Agreement (the “2008 Preferred Stock Exchange”), with the holders of the Company’s Series C Convertible Preferred Stock whereby they (i) consented to the creationPlacement all shares of the Series A Preferred Stock and (ii) were issuedexchanged for an aggregateequal amount of 633 shares of Series AA-1 Preferred Stock, having a Stated Value of $4,748,100, in exchange for an aggregate of 474.81 shares of the Company’s Series C Convertible Preferred Stock, which also had a Stated Value of $4,748,100.

We accounted for the 2008 Preferred Stock Exchange as a redemption and in accordance with Emerging Issues Task Force Topic No. D-42“Stock.  The Effectresulting $1,999,000 loss on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock”(“D- 42”).  In connection with the 2008 Preferred Stock Exchange, D-42 requires that the excess of the carrying amount of the Series C Preferred Stock (the “Series C Carrying Amount”) over the fair valueredemption of the Series A Preferred Stock (the “Series A Fair Value”) be subtracted from net losswas charged to arrive at net loss attributable to common stockholders.  The SeriesAdditional Paid in Capital.

Note C Carrying Amount of $4,330,000 is based on– In the recorded fair value.  The Series A Carrying Amount of $1,911,000 is based on a fair value of $3,000 for each of the 633August 2009 Exchange all shares of Series AA-1 Preferred Stock were exchanged in the transaction.  The $2,419,000 excessfor an equal amount of shares of Series C Carrying Am ount overA-2 Preferred Stock.  The resulting $1,935,000 gain on the Series A Fair Value is recognized in our consolidated statement of operations as a “Gain on Redemption of Preferred Stock” and subtracted from our net loss to arrive at the net loss attributable to common shareholders.

The following is a summaryredemption of the Series A Preferred Stock (in thousands except Series A Preferred Stock shares) as of December 31, 2008:

  

 

Series A Preferred Stock Shares

 

 

Series A Preferred Stock Book Value

 

 

Series A Preferred Stock Liquidation Value

 

Investors

 

 

3,661

 

 

$

11,183

 

 

$

27,453

 

Insider Purchasers

 

 

129

 

 

 

391

 

 

 

970

 

  

 

 

3,790

 

 

$

11,574

 

 

$

28,423

 

  

 

 

 

 

 

 

 

 

 

 

 

 


Series C Convertible Preferred Stock

In September 2007, we entered into an exchange agreement  with the holders of the Series B convertible preferred stock (the “Series B Holders”) and issued an aggregate of 474.8126 shares of a new Series C Preferred Stock in exchange for cancelling all of our issued and outstanding Series B convertible preferred stock, cancelling $1,098,000 of accrued but unpaid dividends due on the Series B convertible preferred stock, and 1,525,000 shares of common stock held by the Series B Holders (the “2007 Preferred Stock Exchange”). Each share of Series C Preferred Stock, par value $0.0001 per share, has a liquidation preference equal to its stated value, which is $10,000 per share, and is convertible at the holder’s election into 10,000 shares of common stock.  The Series C Preferred Stock has anti-dilution rights.  The Series C preferred stockholders are not entitled to receive dividends.  The Series



F-26


C Preferred Stock is only redeemable in the event of the Company’s liquidation, dissolution or winding up of affairs.  Upon a change of control, as defined therein, the holders of the Series C Preferred Stock or the Company can require that the Series C Preferred Stock be redeemed at the stated value per share as adjusted.  The Series C Preferred Stock must be converted into shares of common stock when the closing bid and ask price of the Company’s common stock exceeds $2.00 for a period of 10 consecutive trading days.  The Series C Preferred Stock is not classified in Stockholders’ Deficit.

Burnham Hill Partners acted as financial advisor for, among other things, the 2007 Preferred Stock Exchange and the extension of the maturity date of the Senior Secured Notes that were maturing in September 2007 and received warrants to purchase 250,000 shares of common stock at an exercise price of $0.65 per share. The financial advisory warrants are exercisable for a period of five years and are subject to certain anti-dilution protection. The Company allocated 100,000 of the financial advisory warrants, with a fair value of $57,000, to the 2007 Preferred Stock Exchange and incurred professional fees related to the 2007 Preferred Stock Exchange of $33,000.  These costs were charged to Paid in Capital.  See Note 8 for the allocation of the remaining financial advisory warrants.  

We accounted for the 2007 Preferred Stock Exchange as a redemption and in accordance with D- 42 which requires that the excess of the carrying amount of the Series B convertible preferred stock (the “Series B Carrying Amount”) over the fair value of the Series C Preferred Stock (the “Series C Fair Value”) be subtracted from net loss to arrive at net loss attributable to common stockholders.  The Series B Carrying Amount of $5,129,000 is comprised of the $2,888,000 stated value of the Series B convertible preferred stock, the $1,098,000 of accrued but unpaid dividends, and $1,143,000 for the 1,525,000 shares of common stock valued at the common stock price of $0.75 on the date the common stock shares were surrendered.  We computed the $4,330,000 Series C Fair Value using a valuation model utilized by the financial advisory and investment banking industries to determine the fair value of this type of financial ins trument. The $799,000 excess of Series B Carrying Amount over the Series C Fair Value is recognized in our consolidated statement of operations as a “Gain on Redemption of Preferred Stock” and subtracted from our net loss to arrive at the net loss attributable to common shareholders.

The Series CA-1 Preferred Stock was recordedcredited to Additional Paid in the accompanying consolidated balance sheet at its fair value on the dateCapital.


F-26

Series D Convertible Preferred Stock

The Series D convertible preferred stock does not have any voting rights, but is convertible into Glowpoint’s common stock and is entitled to any liquidating distribution to holders of common stock. All of the Senior Secured Notes, the Series A warrants, as amended, the Series A-2 warrants and the Series A Preferred Stock are convertible or exercisable, as the case may be, into our common stock, but provide that, unless specifically waived by such holder, in no event shall any holder of such securities own more than 4.99% or 9.99% of our outstanding common stock. In the event a holder would own more than either percentage upon conversion or exercise and does not waive such ownership cap, we will issue Series D convertible preferred stock for the amount above such limitation. The holder may then convert Series D convertible preferred stock into common stock in the future as permitted by the ownership limitations or upon waiver of such re striction.restriction.  The Series D convertible preferred stock is classified in Stockholders’ Deficit.  No shares of Series D convertible preferred stock have been issued as of December 31, 2008.

2009.

Note 1114 - Stock options

Glowpoint 2007 Stock Incentive Plan

Pursuant to

In our stock option plans the Glowpoint 2007 Stock Incentive Plan (the “2007 Plan”), 3,000,000 shares of common stock have been reserved for issuance thereunder. The 2007 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, 2008, options to purchase a total of 863,000 shares were outstanding and 1,341,000 shares remained available for future issuance under the 2007 Plan.



F-27


The exercise price of the awards isare 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 2007 Plan, including the vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment, payment contingencies and satisfaction of any performance criteria.

Glowpoint 2007 Stock Incentive Plan
Pursuant to the Glowpoint 2007 Stock Incentive Plan (the “2007 Plan”), 3,000,000 shares of common stock have been reserved for issuance thereunder. The 2007 Plan permits the grant of incentive stock options (“ISOs”) to employees.   Non-qualified stock options (“NQSOs”) may be granted to employees, directors and consultants.  As of December 31, 2009, options to purchase a total of 1,845,000 shares were outstanding and 438,000 shares remained available for future issuance under the 2007 Plan.
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, 2008,2009, options to purchase a total of 3,954,0002,833,000 shares were outstanding and 8,0001,091,000 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.

1996 Stock Option Plan

Under the 1996 Stock Option Plan (the “1996 Plan”), as amended and then terminated in December 2006, 2,475,000 shares of common stock had been reserved for issuance thereunder.  The 1996 Plan provided for the granting of options to officers, directors, employees and advisors.  No options were granted under the 1996 Plan in the years ended December 31, 20082009 and 2007.2008. As of December 31, 2008,2009, options to purchase a total of 8,000 shares were outstanding.

VTI Stock Option Plans

As part


F-27

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, 20082009 and 2007.2008. At December 31, 2008, the2009, options to purchase a total of these options outstanding was 50,000.



F-28


20,000 shares were outstanding.

Other Option Information

A summary of options granted, exercised, expired and forfeited under our plans and options outstanding as of December 31, 20082009 and 2007,2008, 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, 2007

 

 

5,100

 

 

$

2.26

 

 

 

3,664

 

 

$

2.86

 

Granted

 

 

1,284

 

 

 

0.59

 

 

 

 

 

 

 

 

 

Exercised

 

 

—

 

 

 

0.00

 

 

 

 

 

 

 

 

 

Expired

 

 

(1,380

)

 

 

2.94

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(791

)

 

 

2.58

 

 

 

 

 

 

 

 

 

Options outstanding, December 31, 2007

 

 

4,213

 

 

 

1.47

 

 

 

2,519

 

 

 

2.06

 

Granted

 

 

892

 

 

 

0.43

 

 

 

 

 

 

 

 

 

Exercised

 

 

—

 

 

 

0.00

 

 

 

 

 

 

 

 

 

Expired

 

 

—

 

 

 

0.00

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(132

)

 

 

0.58

 

 

 

 

 

 

 

 

 

Options outstanding, December 31, 2008

 

 

4,973

 

 

$

1.31

 

 

 

3,334

 

 

$

1.72

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares of common stock available for future grant under Company plans

 

 

1,349

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  
Outstanding
  
Exercisable
 
  
Number of Options
  
Weighted
Average
Exercise
Price
  
Number of Options
  
Weighted
Average
Exercise
Price
 
Options outstanding, January 1, 2008
  4,213  $1.47   2,519  $2.06 
Granted
  892   0.43         
Exercised
  —   0.00         
Expired
  —   0.00         
Forfeited
  (132)  0.58         
Options outstanding, December 31, 2008
  4,973   1.31   3,334   1.72 
Granted
  1,155   0.43         
Exercised
  (49)  0.42         
Expired
  (98)  3.50         
Forfeited
  (1,275)  2.12         
Options outstanding, December 31, 2009
  4,706  $0.84   2,910  $1.08 
                 
Shares of common stock available for future grant under Company plans  1,529             
                 
F-28

Additional information as of December 31, 20082009 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
 
$0.20 – 0.40   1,301   8.20  $0.36   550  $0.36 
 0.41 – 0.50   1,109   8.45   0.45   417   0.43 
 0.51 – 0.65   1,088   7.72   0.60   738   0.59 
 0.66 – 1.19   671   5.01   1.14   668   1.14 
 1.27 – 5.50   537   3.42   2.89   537   2.89 
$0.20 – 5.50   4,706   7.15  $0.84   2,910  $1.08 
                       
F-29

  

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

$ 0.20 – 0.49

1,379

8.30

$    0.37

601

$   0.39

0.50 – 0.70

1,549

8.68

0.58

688

0.57

0.86 – 1.48

935

5.80

1.21

935

1.21

1.58 – 3.50

506

4.15

3.02

506

3.02

3.90 – 5.50

604

2.07

4.03

604

4.03

$ 0.20 – 5.50

4,973

6.77

$   1.31

3,334

$  1.72

  

  

  

  

  

  




F-29


A summary of nonvested options as of, and changes during the years ended December 31, 20082009 and 2007,2008, is presented below (options in thousands):


  

 

Options

 

 

Weighted Average

Grant Date

Fair Value

 

Nonvested options outstanding, January 1, 2007

 

 

1,436

 

 

$

0.59

 

Granted

 

 

1,284

 

 

 

0.45

 

Vested

 

 

(917

)

 

 

0.65

 

Forfeited

 

 

(108

)

 

 

0.41

 

Nonvested options outstanding, December 31, 2007

 

 

1,695

 

 

 

0.46

 

Granted

 

 

892

 

 

 

0.31

 

Vested

 

 

(828

)

 

 

0.51

 

Forfeited

 

 

(120

)

 

 

0.42

 

Nonvested options outstanding, December 31, 2008

 

 

1,639

 

 

$

0.36

 

  

 

 

 

 

 

 

 

 

At December 31, 2008 and 2007 there was $0 and $26,000, respectively, of total unrecognized compensation costs related to non-vested options granted prior to January 1, 2007 that are expected to be recognized over a weighted-average period of 0.00 and 0.53 years, respectively.  

  
Options
  
Weighted Average
Grant Date
Fair Value
 
Nonvested options outstanding, January 1, 2008  1,695  $0.46 
Granted
  892   0.31 
Vested
  (828)  0.51 
Forfeited
  (120)  0.42 
Nonvested options outstanding, December 31, 2008  1,639   0.36 
Granted
  1,155   0.33 
Vested
  (793)  0.35 
Forfeited
  (205)  0.36 
Nonvested options outstanding, December 31, 2009  1,796  $0.34 
         
Stock option compensation expense is allocated as follows for the years ended December 31, 20082009 and 20072008 (in thousands):

  

 

2008

 

 

2007

 

Cost of revenue

 

$

21

 

 

$

22

 

Research and development

 

 

24

 

 

 

45

 

Sales and marketing

 

 

64

 

 

 

45

 

General and administrative

 

 

244

 

 

 

368

 

  

 

$

353

 

 

$

480

 

  

 

 

 

 

 

 

 

 

  
2009
  
2008
 
Global managed services
 $122  $115 
Sales and marketing
  38   64 
General and administrative
  119   174 
  $279  $353 
         
F-30

There was no income tax benefit recognized for stock-based compensation for the yearyears ended December 31, 20082009 and 2007.2008.  No compensation costs were capitalized as part of the cost of an asset.

The intrinsic value of nonvestedvested options at December 31, 2009 and 2008 was $361,000 and 2007$1,000, respectively.  The intrinsic value of unvested options at December 31, 2009 and 2008 was $585,000$430,000 and $776,000,$6,000, respectively.

The remaining unrecognized stock-based compensation expense at December 31, 2009 was $351,000 and will be amortized over a weighted average life of 1.51 years.

Note 1215 - Restricted Stock

A summary of restricted stock granted, vested, forfeited and unvested restricted stock outstanding during the years ended December 31, 20082009 and 2007,2008, is presented below (restricted shares in thousands):

  

 

Restricted Shares

 

 

Weighted 
Average

Exercise Price

 

Unvested restricted shares outstanding, January 1, 2007

 

 

317

 

 

$

0.71

 

Granted

 

 

1,240

 

 

 

0.58

 

Vested

 

 

(530

)

 

 

0.69

 

Forfeited

 

 

—

 

 

 

0.00

 

Unvested restricted shares outstanding, December 31, 2007

 

 

1,027

 

 

 

0.54

 

Granted

 

 

745

 

 

 

0.47

 

Vested

 

 

(552

)

 

 

0.55

 

Forfeited

 

 

—

 

 

 

0.00

 

Unvested restricted shares outstanding, December 31, 2008

 

 

1,220

 

 

$

0.49

 

  

 

 

 

 

 

 

 

 




  
Restricted Shares
  
Weighted Average
Exercise Price
 
Unvested restricted shares outstanding, January 1, 2008  1,027  $0.54 
Granted
  745   0.47 
Vested
  (552)  0.55 
Forfeited
  —   0.00 
Unvested restricted shares outstanding, December 31, 2008  1,220   0.49 
Granted
  1,225   0.34 
Vested
  (793)  0.42 
Forfeited
  (490)  0.50 
Unvested restricted shares outstanding, December 31, 2009  1,162  $0.38 
         
Restricted stock compensation costs are allocated as follows for the years ended December 31, 20082009 and 20072008 (in thousands):

  

 

2008

 

 

2007

 

General and administrative

 

$

207

 

 

$

391

 

Sales and marketing

 

 

8

 

 

 

—

 

Accrued expenses (1)

 

 

179

 

 

 

—

 

  

 

$

394

 

 

$

391

 

  

 

 

 

 

 

 

 

 

Note 1 – In 2007 the Company accrued $179,000, included in General and Administrative expenses in 2007, to pay management bonuses.  In 2008, the Company issued restricted shares, with a value of $179,000, to pay for the accrued management bonuses accrued in 2007.   

  
2009
  
2008
 
Global managed services
 $21  $14 
General and administrative
  249   372 
Sales and marketing
  7   8 
  $277  $394 
         
There was no income tax benefit recognized for stock-based compensation for the year ended December 31, 2008.2009.  No compensation costs were capitalized as part of the cost of an asset.


F-31

Note 1316 - Warrants

A summary of warrants granted, exercised, forfeited and outstanding as of December 31, 20082009 and 2007,2008, is presented below (warrants in thousands):

  

 

Warrants

 

 

Weighted 
Average

Exercise Price

 

Warrants outstanding, January 1, 2007

 

 

14,749

 

 

$

1.28

 

Granted

 

 

9,127

 

 

 

0.64

 

Exercised

 

 

—

 

 

 

—

 

Forfeited

 

 

(901

)

 

 

5.39

 

Warrants outstanding, December 31, 2007

 

 

22,975

 

 

 

0.86

 

Granted

 

 

18,042

 

 

 

0.40

 

Exercised

 

 

—

 

 

 

—

 

Forfeited

 

 

(100

)

 

 

0.50

 

Warrants outstanding, December 31, 2008

 

 

40,917

 

 

$

0.54

 

  

 

 

 

 

 

 

 

 


  
Warrants
  
Weighted Average
Exercise Price
 
Warrants outstanding, January 1, 2008
  22,975  $0.86 
Granted
  18,042   0.40 
Exercised
  —   — 
Forfeited
  (100)  0.50 
Warrants outstanding, December 31, 2008
  40,917   0.54 
Granted
  3,344   0.40 
Exercised
  —   — 
Exchanged – Note 9
  (39,088)  0.40 
Forfeited
  (1,709)  2.56 
Warrants outstanding, December 31, 2009
  3,464  $0.97 
         
Additional information as of December 31, 20082009 with respect to outstanding warrants, all of which are exercisable, is as follows (warrants in thousands):

Range of Price

 

 

Number

Outstanding

 

 

Weighted

Average

Remaining

Contractual

Life (In Years)

 

 

Weighted

Average

Exercise

Price

 

Subject to Anti-dilution Protection

$

0.40

 

 

 

37,567

 

 

 

4.90

 

 

$

0.40

 

Yes

 

1.61

 

 

 

1,640

 

 

 

1.20

 

 

 

1.61

 

No

 

2.60

 

 

 

1,710

 

 

 

0.63

 

 

 

2.56

 

No

$

0.40 – 2.60

 

 

 

40,917

 

 

 

4.58

 

 

$

0.54

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  




F-31


Exercise Price
  
Number
Outstanding
 
Expiration Date
 
Subject to Anti-dilution Protection
$0.40   1,824 11/25/2013 Yes
 1.61   1,640 3/14/2010 No
     3,464    
          
The fair value of each warrant 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, 20082009 and 2007:

  

 

2008

 

 

2007

 

Risk free interest rate

 

 

1.55

%

 

 

4.3

%

Warrant lives

 

5 Years

 

 

5 Years

 

Expected volatility

 

 

108.8

%

 

 

94.6

%

Expected dividend yields

 

None

 

 

None

 

  

 

 

 

 

 

 

 

 


2008:

  
2009
  
2008
 
Risk free interest rate
  2.69%  1.55%
Warrant lives
 5 Years  5 Years 
Expected volatility
  113.9%  108.8%
Expected dividend yields
 None  None 
         
The Company calculates expected volatility for a stock-based grant based on historic daily stock price observations of our common stock during the period immediately preceding the grant that is equal in length to the term of the grant. 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-32

Note 1417 – 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. For the years ending December 31, 2009 and 2008, the following potential shares of common stock that could have been issuable upon conversion have been excluded from the calculation of diluted loss per share because the effects, as a result of our net loss, would be anti-dilutive (000’s omitted):
  
December 31,
 
  
2009
  
2008
 
Series A-2 Preferred Stock   45,087   — 
Warrants   3,464   40,917 
Options
  4,706   4,973 
Unvested restricted stock
  1,162   1,220 
Senior Secured Notes
  —   3,463 
Series A Preferred Stock   —   37,898 
   54,419   88,471 
         
Note 18 – Fair Value Disclosures
The Company measures fair value as required by the ASC topic 820“Fair Value Measurements and Disclosures” (“ASC Topic 820”).  ASC Topic 820 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. ASC Topic 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, there exists a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 - unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.

Level 2 - inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.

Level 3 - unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

F-33

Recurring Fair Value Estimates

The Company’s recurring fair value measurements at December 31, 2009 were as follows (in thousands):

  
Fair Value as of December 31, 2009
  
Quoted Prices in Active Markets for Identical Assets (Level 1)
  
Significant other Observable Inputs (Level 2)
  
Significant Unobservable Inputs
(Level 3)
  
Increases (decreases) during the year ended December 31, 2009
 
Liabilities:               
Derivative financial instruments
 $—  $—  $—  $—  $1,848 
                     
Recurring Level 3 Activity, Reconciliation and Basis for Valuation

The table below provides a reconciliation of the beginning and ending balances for the major classes of assets and liabilities measured at fair value using significant unobservable inputs (Level 3). The table reflects gains and losses for the quarter for all financial liabilities categorized as Level 3 as of December 31, 2009.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (in thousands):

  
Increases (decreases) during the year ended December 31, 2009
 
Liabilities:   
Balance as of January 1, 2009
 $2,622 
Initial measurement of warrants issued in the period  281 
Elimination of derivative liability
  (4,751)
Increase in fair value of derivative liability of warrants  1,848 
Balance as of December 31, 2009
 $— 
     
F-34

The method for calculating the fair value of each warrant group is the Black-Scholes option pricing model with the following weighted average assumptions as of (number of warrants and fair value in thousands):
  
Original Value
  
November 2008
  
December 31, 2008
  
March
2009
  
August
2009
 
Number of warrants
  40,917   18,042   40,917   3,344   44,262 
Exercise price
 $0.97  $0.40  $0.54  $0.40  $0.53 
Risk free interest rate
  3.3%  2.1%  0.7%  1.0%  0.7%
Expected warrant lives in years
  5.0   5.0   1.9   1.8   1.3 
Expected volatility
  102.7%  105.7%  132.3%  139.0%  143.3%
Expected dividend yields
 None  None  None  None  None 
Fair value per share
 $0.64  $0.20  $0.06  $0.08  $0.11 
Common stock price
 $0.83  $0.27  $0.15  $0.17  $0.23 
Fair value of warrants $26,173  $448  $2,622  $281  $4,763 
                     
Due to the low average daily trading volume of our common stock, we have discounted the common stock price in the Black-Scholes valuation model to reflect the adverse impact on our share price which would result from a dramatic increase in the number of shares of our common stock outstanding upon the exercise of these warrants.
Non-recurring Fair Value Estimates

The Company’s non-recurring fair value measurements recorded during the year ended December 31, 2009 were as follows (in thousands):

  
Fair Value at Measurement Date
  
Quoted
Prices in Active Markets for Identical Assets (Level 1)
  
Significant other Observable Inputs (Level 2)
  
Significant Unobservable Inputs
(Level 3)
  
Gains
(losses)
 
Liabilities:               
Warrants issued in connection with:               
Sale of Series A-1 Preferred Stock
 $189  $—  $—  $189  $— 
Senior Secured Note Exchange  50   —   —   50   — 
Placement agent warrant fee  42   —   —   42   — 
  $281  $—  $—  $281  $— 
                     
Non-recurring Level 3 Basis for Valuation

The fair value of the warrants issued in conjunction with various transactions is determined using the Black-Scholes method with assumptions for risk free interest rate, term, common stock price, expected volatility and no dividends.
F-35

Note 19 - Income Taxes

We had no tax provision for the years ended December 31, 20082009 and 2007.2008.  Our effective tax rate differs from the statutory federal tax rate for the years ended December 31, 20082009 and 20072008 as shown in the following table (in thousands):

  

 

2008

 

 

2007

 

U.S. federal income taxes at the statutory rate

 

$

(2,487

)

 

$

(1,843

)

State taxes, net of federal effects

 

 

(439

)

 

 

(325

)

Nondeductible expenses

 

 

(625

)

 

 

417

 

Beneficial conversion feature

 

 

216

 

 

 

912

 

Change in valuation allowance

 

 

3,335

 

 

 

839

 

  

 

$

—

 

 

$

—

 

  

 

 

 

 

 

 

 

 


  
2009
  
2008
 
U.S. federal income taxes at the statutory rate $(186) $(2,487)
State taxes, net of federal effects
  (33)  (439)
Nondeductible expenses
  885   2,449 
Expired state operating loss carry forwards  1,333   — 
Non-recognizable income
  —   (3,074)
Beneficial conversion feature
  —   216 
Other
  (7)  — 
Change in valuation allowance
  (1,992)  3,335 
  $—  $— 
         
The tax effect of the temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 20082009 and 20072008 is presented below (in thousands):

Deferred tax assets:

 

2008

 

 

2007

 

Tax benefit of operating loss carry forward

 

$

48,739

 

 

$

47,706

 

Reserves and allowances

 

 

1,700

 

 

 

1,500

 

Accrued expenses

 

 

149

 

 

 

89

 

Goodwill

 

 

524

 

 

 

595

 

Warrants issued for services

 

 

742

 

 

 

605

 

Equity based compensation

 

 

704

 

 

 

562

 

Fixed assets

 

 

111

 

 

 

141

 

Restricted stock

 

 

292

 

 

 

217

 

Total deferred tax assets

 

 

52,961

 

 

 

51,415

 

  

 

 

 

 

 

 

 

 

Deferred tax liability:

 

 

 

 

 

 

 

 

Fair value adjustments to derivative financial instruments

 

 

-

 

 

 

( 1,789

)

Deferred tax assets and liability, net

 

 

52,961

 

 

 

49,626

 

Valuation allowance

 

 

(52,961

)

 

 

(49,626

)

Net deferred tax assets

 

$

—

 

 

$

—

 

  

 

 

 

 

 

 

 

 




F-32


Deferred tax assets: 
2009
  
2008
 
Tax benefit of operating loss carry forward
 $48,760  $48,739 
Reserves and allowances
  168   1,700 
Accrued expenses
  73   149 
Goodwill
  453   524 
Warrants issued for services
  457   742 
Equity based compensation
  994   996 
Fixed assets
  64   111 
Total deferred tax assets
  50,969   52,961 
         
Deferred tax liability:        
Fair value adjustments to derivative financial instruments  -   - 
Deferred tax assets and liability, net
  50,969   52,961 
Valuation allowance
  (50,969)  (52,961)
Net deferred tax assets
 $—  $— 
We and our subsidiaries file federal tax returns on a consolidated basis and separate state tax returns. At December 31, 2008,2009, we have net operating loss (“NOL”) carry-forwards of $123,819,000$127,579,000 for federal income tax purposes which expire in various amounts through 2028.2029. At December 31, 2008,2009, we have net NOL carry-forwards of $102,714,000$91,825,000 for state income tax purposes which expire in various amounts through 2028. The utilization of our NOL (the “Limited NOLs”) for federal income tax purposes sustained by Glowpoint may be substantially limited annually as a result of an "ownership change" (as defined by Section 382 of the Internal Revenue Code of 1986, as amended). If it is determined that there is a change in ownership or if the Company undergoes a change of ownership in the future, the utilization of the Company’s NOL carry-forwards may be materially constrained.


F-36

Effective January 1, 2007, the Company adopted FASB Interpretation No. 48 Accounting for Uncertainty in ASC topic 740 “Income Taxes (FIN No. 48)Taxes” (“ASC 740”), which clarifies the accounting for uncertainty in income taxes recognized in the financial statement in accordance with FASB Statement No. 109 Accounting for Income Taxes .statement. This interpretationtopic 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. There were no significant matters determined to be unrecognized tax benefits taken or expected to be taken in a tax return that have been recorded on the Company’s consolidated financial statements for the years ended December 31, 20082009 and 2007.

2008.

Additionally, FIN No. 48ASC 740 provides guidance on the recognition of interest and penalties related to income taxes. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the years ended December 31, 20082009 and 2007.

2008.

The federal and state tax returns for the years ending December 31, 2006, 2007 and 2008 are currently open and the tax returns for the year ended December 31, 20082009 will be filed in September 2009.  

2010.

Note 1520 - 401(k) Plan

We have adopted a 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.  Employer contributions to the 401(k) plan for the years ended December 31, 2009 and 2008 were $0 and 2007 were $54,000, and $69,000, respectively.

Note 1621 - Related Parties

Party Transactions

The Company provides video services to a company in which one of our directors is an officer (the “Video Services”).   The Company receives consulting and tax services from an accounting firm in which one of our prior directors, who resigned in May 2009, is a partner andpartner. The Company receives software development from a firm in which one of our otherprior directors, who resigned in March 2009, is the president. The Company provides video services to a company in which one of our directors is an officer.  Management believes that such transactions are at arm’s-length and for terms that would have been obtained from unaffiliated third parties. The fees incurred for consulting and tax services and software development (the “Consulting Services”) are only included for the period that the partner of the accounting firm and company’s president were directors of the Company.  The Company continues to utilize these firms for Consulting Services.
Consulting Services and Video Services are as follows for the year ended December 31, 2009 (in thousands):
  
December 31,
 
  
2009
  
2008
 
Consulting Services
 $26  $180 
         
Video Services
 $305  $293 
         
Note 22 – Major Customers
Major customers are those customers who account for more than 10% of revenues.  For the yearsyear ended December 31, 2009, 15.3% of revenues were derived from a major customer. For the year ended December 31, 2008 and 2007, we incurred aggregate fees for the consulting and tax servicesthere were no major customers. Accounts receivable from this major customer represented 22.8% of $180,000 and $230,000, respectively.   For the years endedtotal accounts receivable as of December 31, 2008 and 2007, we received aggregate fees for2009. The loss of this customer would have an adverse affect on the video servicesCompany’s operations.

F-37

Note 1723 - Commitments and Contingencies

Employment Agreements

Chief

Co –Chief Executive Officer, -WeExecutive Vice President, Business Development and General Counsel - In May 2006, we entered into an initial three-yeara two-year employment agreement commencingwith David W. Robinson, which was subsequently been amended several times with a current expiration date January 1, 2001, with Michael Brandofino when he was CTO.  This agreement has been subsequently amended numerous times to reflect agreed upon annual base salary, incentive compensation and other stock option grants. In May and June 2007, Mr. Brandofino’s agreement was further amended to (i) reflect his title as President and Chief Executive Officer, (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, (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, and (iv) provide for a July 1, 2009 expiration.31, 2012.   Under the amended agreement, Mr. BrandofinoRobinson is entitled to an annual base salary in each year, an abilityand, subject to earnthe sole discretion of our Compensation Committee, annual incentive bonus in an amount equivalent to forty percent (40%) of his then annualthen-annual base salary, subject to the sole discretion of our Compensation Committee, taking into consideration the achievement of goals and metrics established by the Board of Directors, with suchCompensation Committee, which goals and metrics beingshall be updated on an annual basis.  



F-33


Compensation expense of $277,000$267,000 and $360,000,$262,000, comprised of base salary and the incentive bonus, was recorded during the years ended December 31, 20082009 and 2007, respectively.  In addition, Mr. Brandofino’s original agreement stipulated that had we entered into a sale agreement during the term of the agreement and he 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.2008.  Either we or Mr. BrandofinoRobinson may terminate his employment at any time, for any reason or no reason at all; however, if Mr. BrandofinoRobinson is terminated without cause or resigns for good reason (as defined) or if he dies, he is entitled to one yeartwelve months of his then annualthen-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 options granted under the amended employment agreement. If Mr. Brandofino’sRobinson’s employment is terminated with c ausecause or if he voluntarily resigns, he is entitled to his base salary and other benefits through the last day actually worked.  In March 2009, Mr. Brandofino voluntarily resigned as an officer and directorRobinson was appointed Co-Chief Executive Officer, a member of the CompanyBoard and entered intowas granted 270,000 shares of restricted stock and options to acquire 180,000 shares of common stock all of which vest upon the earlier of a separation agreement withchange of control and the Company providing certain benefits (see Note 19 Subsequent Events).

third anniversary of grant.

Co –Chief Executive Officer, President and Chief Operating Officer – In March 2004, we entered into an employment agreement with Joseph Laezza under which he became the Vice President, Operations.Operations which was subsequently been amended several times with a current expiration date January 31, 2012.  Under that agreement, Mr. Laezza is entitled to an annual base salary and, subject to the sole discretion of our Compensation Committee, annual incentive bonus 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 CEO,Compensation Committee, which goals and metrics shall be updated on an annual basis.  In April 2006, he became Chief Operating Officer.   In May 2007, Mr. Laezza’s agreement was amended to (i) reflect his title as COO, (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, (iii) grant an option to purchase 250,000 shares of the Company’s c ommon 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, and (iv) provide for a January 1, 2009 expiration.  In November 2008, this agreement was amended to reflect his appointment as President and to extend the expiration date to January 31, 2011.  Compensation expense of $271,000$259,000 and $306,000,$256,000, comprised of base salary and the incentive bonus, was recorded during the years ended December 31, 20082009 and 2007.  The March 2004 agreement also provided 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.2008.  Either we or Mr. Laezza may terminate his employment at any time, for any reason or no reason at all; however, if Mr. Laezza is terminated without cause or resigns for good reason (as defined) 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 Mr. Laezza’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.   In March 2009, Mr. Laezza was appointed Co-Chief Executive Officer, and a member of the Board and was granted additional270,000 shares of restricted stock and options (see Note 19 Subsequent Events).

to acquire 180,000 shares of common stock all of which vest upon the earlier of a change of control and the third anniversary of grant.

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Chief Financial Officer - In January 2007, we entered into a two-year employment agreement with Edwin F. Heinen.  This agreement has been subsequently amended several times to extend the expiration date to January 31, 2011.2012.  Under the employment agreement, Mr. Heinen is entitled to a base salary of not less than $200,000 per calendar year and, subject to the sole discretion of our Compensation Committee, he is eligible to receive an annual incentive bonus of up to 40% of his base salary, taking into consideration the achievement of goals and metrics established by the President and CEO,Compensation Committee, which goals and metrics shall be updated on an annual basis. Compensation expense of $212,000 and $264,000,$212,000, comprised of base salary and the incentive bonus, was recorded during the years ended December 31, 2008 and 2007.  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.  Either we or Mr. Heinen may terminate his employment at any time, for any reason or no reason at all; however, if Mr. Heinen is terminated without cause or resigns for good reason (as defined) 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 Mr. Heinen’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.  In March 2009, Mr. Heinen was granted additional210,000 shares of restricted stock and options (see Note 19 Subsequent Events).




F-34


Executive Vice President, Business Development and General Counsel - In May 2006, we entered intoto acquire 140,000 shares of common stock all of which vest upon the earlier of a two-year employment agreement with David W. Robinson, which was subsequently been amended several times with a current expiration date January 31, 2011.   Under the agreement, Mr. Robinson is entitled to an annual base salary and, subject to the sole discretionchange of our Compensation Committee, annual incentive bonus 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 $262,000 and $312,000, comprised of base salarycontrol and the incentive bonus, was recorded during the years ended December 31, 2008 and 2007.  The agreement also provided for a grantthird anniversary of 200,000 shares of restricted common stock, wit h 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 Mr. Robinson may terminate his employment at any time, for any reason or no reason at all; however, if Mr. Robinson is terminated without cause or resigns for good reason (as defined) 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 Mr. Robinson’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.  In March 2009, Mr. Robinson was appointed Co-Chief Executive Officer and a member of the Board and granted additional restricted stock and options (see Note 19 Subsequent Events).

Operating Leases

We lease several facilities under operating leases expiring through 2012. 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, 2008, and 2007 were $312,000, and $292,000, respectively.

Future minimum rental commitments under all non-cancelable operating leases are as follows (in thousands):

Year Ending December 31

 

 

 

2009

 

$

278

 

2010

 

 

147

 

2011

 

 

96

 

2012

 

 

19

 

  

 

$

540

 

  

 

 

 

 

Capital Lease Obligation

We lease certain equipment under a non-cancelable lease agreement, which expires in 2009, at a fixed interest rate of 25%. The lease is accounted for as capital lease. The equipment under the capital lease as of December 31, 2008 had a cost of $383,000.  Depreciation expense on the equipment under capital lease was for the year ending December 31, 2008 and 2007 was $77,000 and $0, respectively.  Future minimum commitments under this capital lease is as follows (in thousands):

Total minimum lease obligation for year ending December 31, 2009

 

$

274

 

Less interest at 26%

 

 

(41

)

Present value of total minimum lease obligation

 

$

233

 

  

 

 

 

 

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.



F-35


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.

There are $1,242,000 of future minimum commercial commitments under carrier agreements which expire in the year ended December 31, 2009.

Note 18 – Adjustments Related to Prior Fiscal Periods

During the quarter ended December 31, 2007, the Company identified and recorded certain adjustments related to the year ended December 31, 2006 and to the period ended September 30, 2007.  The adjustments are related to recognizing a derivative liability related to the placement agent and financial advisory warrants issued in connection with the March and April 2006 and September 2007 private placements of the Senior Secured Notes.  Had these adjustments been reflected in the year ended December 31, 2006, the derivative liability in the balance sheet would have been increased by $147,000, Paid in Capital would have been reduced by $296,000 and other income from the decrease in the fair value of derivative financial instruments would have been $149,000 greater.  There was no impact on the loss from operations.  The effect of these adjustments, was to increase the net loss and net loss attributable to common stockholders fo r the year ended December 31, 2007 by $149,000.  The effect on the Company’s consolidated balance sheet and consolidated statements of operations as of September 30, 2007, June 30, 2007 and March 31, 2007 were not considered to be material.  The effect of recording the adjustment in the fourth quarter of 2007 was to reduce the Company’s net income by $32,000.   The Company’s consolidated financial statements for prior periods have not been restated since the amounts of the adjustments are not material either quantitatively or qualitatively to the consolidated balance sheet, consolidated statement of operations or consolidated statement of cash flows or the consolidated financial statements taken as a whole.

Note 19 – Subsequent Events

March 2009 Private Placements

grant.

In March 2009, the Company entered into a series of transactions that resulted in the Company raising additional working capital, exchanging or repaying all of its outstanding senior secured convertible promissory notes, and exchanging all of its Series A Convertible Preferred Stock for a newly-created Series A-1 Convertible Preferred Stock (the “2009 Private Placement”).  As a result, the Company is debt-free (other than normal course trade payables and existing capital lease obligations) and has a single class of preferred stock outstanding.

Pursuant to that certain Series A-1 Convertible Preferred Stock Purchase Agreement, dated March 16, 2009 (the “2009 Purchase Agreement”), the Company received $1,800,000 of gross proceeds on March 18, 2009 in an initial closing (the “Initial 2009 Closing”) of a private placement of 450 shares of its newly-created Series A-1 Convertible Preferred Stock (the “Series A-1 Preferred Stock”) and amended Series A-3 warrants to acquire 2,250,000 shares of common stock. Pursuant to the 2009 Purchase Agreement, the Company may sell additional shares of Series A-1 Preferred Stock and Series A-3 warrants in one or more subsequent closings that may occur during the 90-day period following the Initial 2009 Closing, up to a maximum offering amount of $4,000,000. There can be no assurance, however, that the Company will raise any additional funds following the Initial Closing.  

The Series A-3 warrants have an exercise price of $0.40 per share, contain provisions providing weighted average anti-dilution protection and are exercisable for a period of five years.  In accordance with the terms of that certain Registration Rights Agreement dated November 25, 2008 and amended on February 19, 2009, we are obligated to file a registration statement within 90 days after written request by at least two-thirds of the shares underlying the Series A-3 warrants, registering for resale the shares of common stock issuable upon exercise of the Series A-3 warrants.   As of the date of this filing we have not received any such request for registration.



F-36


Each share of Series A-1 Preferred Stock has a stated value of $7,500 per share (the “Stated Value”), a liquidation preference equal to the Stated Value, and is convertible at the holder’s election into common stock at a conversion price per share of $0.75.  Therefore, each share of Series A-1 Preferred Stock is convertible into 10,000 shares of common stock. The Series A-1 Preferred Stock is senior to all other classes of equity, has weighted average anti-dilution protection and, after the first anniversary of the Issuance Date (the “Dividend Grace Period”), is entitled to dividends at a rate of 5% per annum, payable quarterly, based on the Stated Value.  After the Dividend Grace Period, all dividends shall be payable (i) if on or before September 30, 2010, at the Company’s option in cash or through the issuance of a number of additional shares of Series A-1 Preferr ed Stock with an aggregate liquidation preference equal to the dividend amount payable on the applicable dividend payment date and (ii) if after September 30, 2010, at the option of the holder in cash or through the issuance of a number of additional shares of Series A-1 Preferred Stock with an aggregate liquidation preference equal to the dividend amount payable on the applicable dividend payment date.  The “Issuance Date” is defined as the original issuance date of the Series A-1 Preferred Stock, except for shares of Series A-1 Preferred Stock issued upon the exchange of Series A Preferred Stock pursuant to the Series A Preferred Consent and Exchange Agreement (see below), in which case the “Issuance Date” is the date of issuance of the Series A Convertible Preferred Stock (i.e., either November 25, 2008 or December 31, 2008). Except for when dividends are payable, the Series A-1 Preferred Stock is the same as the Series A Preferred Stock created in November 2008.

Pursuant to that certain Note Exchange Agreement, dated March 16, 2009, the Company issued 269 shares on March 18, 2009 of its Series A-1 Preferred Stock and Series A-3 warrants to acquire 595,000 shares of common stock in exchange for $1,076,000 of the Company’s Senior Secured Notes, which represented all but $713,000 of the Company’s then outstanding Senior Secured Notes (the “Remaining Notes”) ($594,000 net of discount as of December 31, 2008). The Remaining Notes were purchased on March 18, 2009 for $750,000 and retired by the Company pursuant to that certain Securities Purchase Agreement, dated March 16, 2009, which prepayment was funded from the sale of securities in the Initial 2009 Closing. As a result, there are no Senior Secured Notes outstanding.

Pursuant to that certain Series A Preferred Consent and Exchange Agreement, dated March 16, 2009, the holders of the Company’s Series A Preferred Stock (i) consented to the creation of the Series A-1 Preferred Stock and (ii) were issued an aggregate of 3,790 shares of Series A-1 Preferred Stock in exchange for an aggregate of 3,790 shares of the Company’s Series A Preferred Stock on March 18, 2009.

BHP, acted as placement agent for the 2009 Private Placement and acted as financial advisor for the other transactions disclosed herein and received a fee of $126,000, which equaled seven (7%) percent of the gross proceeds received by the Company in the Initial 2009 Closing.  Glowpoint also issued advisory warrants to BHP and/or its designees and assignees to purchase 500,000 shares of common stock at an exercise price of $0.40 per share. The advisory warrants are substantially similar to the amended Series A-3 Warrants.  The Company also paid BHP an additional $75,000 which was payable in connection with fees earned in an earlier transaction that were deferred until the 2009 Private Placement.  



F-37


The following summary of selected unaudited consolidated financial information (the “Unaudited Proforma Information”), with respect to the year ended December 31, 2008 should be read in conjunction with the audited consolidated financial statements and footnotes included elsewhere in this document.  The Unaudited Proforma Information reflects the estimated impact that the 2009 Private Placement would have had on the Company’s financial statements had the 2009 Private Placement occurred on December 31, 2008 (000’s omitted).


  

 

As Reported

 

 

Investment

 

 

Preferred Stock Exchange

 

 

Note Purchase

 

 

Note Exchange

 

 

Proforma 12/31/08

 

  

 

12/31/08

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,227

 

 

$

1,523

 

 

$

—

 

 

$

(750

)

 

$

—

 

 

$

2,000

 

Total current assets

 

 

4,611

 

 

 

1,523

 

 

 

—

 

 

 

(750

)

 

 

—

 

 

 

5,384

 

Total assets

 

 

7,177

 

 

 

1,523

 

 

 

—

 

 

 

(750

)

 

 

—

 

 

 

7,950

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Senior Secured Notes

 

 

1,482

 

 

 

—

 

 

 

—

 

 

 

(585

)

 

 

(897

)

 

 

—

 

Total liabilities

 

 

10,390

 

 

 

—

 

 

 

—

 

 

 

(594

)

 

 

(897

)

 

 

8,899

 

Total stockholders’ deficit

 

 

(3,213

)

 

 

1,523

 

 

 

—

 

 

 

(156

)

 

 

897

 

 

 

(949

)

Total liabilities and stockholders’ deficit

 

 

7,177

 

 

 

1,523

 

 

 

—

 

 

 

(750

)

 

 

—

 

 

 

7,950

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENT OF OPERATION

 

Loss on extinguishment of debt, including $99 for Insider Purchasers

 

 

1,816

 

 

 

—

 

 

 

—

 

 

 

156

 

 

 

144

 

 

 

2,116

 

Net loss attributable to common stockholders

 

 

(4,896

)

 

 

—

 

 

 

1,457

 

 

 

(156

)

 

 

(144

)

 

 

(3,739

)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

Employment Agreements


On March 19, 2009, the Company announced the voluntarilyvoluntary resignation of Michael Brandofino as Glowpoint’s Chief Executive Officer and a member of the Board of Directors.  Joseph Laezza and David W. Robinson were appointed Co-Chief Executive Officers.   The Company amended the employment agreements of Messrs. Brandofino, Laezza, and Robinson.  Mr. Brandofino’s employment agreement was amended to revise the covenant not to compete during the year following his resignation so as to prohibit working with or consulting for certain named entities, but otherwise lessening the non-compete previously provided.  The employment agreement of Mr. Robinson was amended to extend its term until January 31, 2011, so as to be co-terminus with the employment agreement of Messrs. Laezza and Heinen.  The employment agreements of Messrs. Brandofino, Laezza, Heinen and Robinson were also amended as of January 1, 2009 to make changes in connection with revisions to Internal Revenue Code Section 409A.  The Company also entered into a Separation Agreement with Mr. Brandofino that provided, among other things, salary continuation for a stated period and a grant of 400,000 shares of restricted stock (replacing the May 2007 grant of restricted stock) that vest upon the earlier of a change of control and the second anniversary of grant.  In connection with his voluntary resignation, Mr. Brandofino will bewas paid severance of between approximately $225,000 and $300,000 over the following nine months to one year and other benefits (e.g., grants of new restricted stock, extension of period to exercise vested options, etc.) valued at approximately $70,000.  On

The following is a summary of the activity for the year ending, and as of, December 31, 2009, for costs for Mr. Brandofino and two members of the Board of Directors who resigned in March 20, 2009 (i) Messrs. Laezza(in thousands):
    
Severance pay plus payroll taxes
 $300 
Restricted stock award and extension of exercise period for vested options  57 
Other benefits and costs
  36 
   393 
Less:    
Amounts paid or vested
  (318)
Reduction in severance amounts
  (75)
Accrual as of December 31, 2009
 $- 
     
F-39

Operating Leases
We lease several facilities under operating leases expiring through 2012. Certain leases require us to pay increases in real estate taxes, operating costs and Robinsonrepairs over certain base year amounts. Lease payments for the years ended December 31, 2009, and 2008 were each granted 270,000$312,000, and $312,000, respectively.
Future minimum rental commitments under all non-cancelable operating leases are as follows (in thousands):
Year Ending December 31   
2010
 $260 
2011
  96 
2012
  19 
  $375 
     
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.
There are $1,242,000 of future minimum commercial commitments under carrier agreements which expire in the year ended December 31, 2009.
Note 24 – Subsequent Event

March 2010 Private Placement

In March 2010, the Company entered into a series of transactions that resulted in the Company raising growth capital and exchanging shares of restricted stockits outstanding Series A-2 Convertible Preferred Stock with an aggregate liquidation preference of $22,589,000 for a newly-created Perpetual Series B Preferred Stock (“Series B Preferred Stock “) and Mr. Heinen was granted 210,000for shares of restricted stock, allcommon stock.
Pursuant to a Series B Preferred Stock Purchase Agreement, dated March 29, 2010 (the “Purchase Agreement”), the Company received approximately $3,000,000 of which vest upon the earliergross proceeds in a closing (the “Closing”) of a changeprivate placement of control30 shares of its Series B Preferred Stock.

F-40

Each share of Series B Preferred Stock has a stated value of $100,000 per share (the “Stated Value”) and a liquidation preference equal to the third anniversaryStated Value together with all accrued and unpaid dividends.  The Series B Preferred Stock is not convertible into common stock. The Series B Preferred Stock is senior to all other classes of grant,equity and, commencing on January 1, 2013, is entitled to cumulative dividends at a rate of 4% per annum, payable quarterly, based on the Stated Value.  Commencing January 1, 2014, the cumulative dividend rate increases to 12% per annum, payable quarterly, based on the Stated Value.  The Company may, at its option at any time, redeem all or a portion of the outstanding shares of Series B Preferred Stock by paying the Stated Value together with all accrued and unpaid dividends.
Pursuant to that certain Series A-2 Preferred Exchange Agreement, dated March 29, 2010 (the “Series A-2 Exchange Agreement”), (i) 50 shares of Series B Preferred Stock with a liquidation preference of $5,000,000 were issued in exchange for 1,333 shares of Series A-2 Preferred Stock with a liquidation preference of $10,000,000 and (ii) Messrs. Laezza and Robinson wer e each granted options to acquire 180,00015,452,000 shares of common stock were issued in exchange for 1,545 shares of Series A-2 Preferred Stock with a liquidation preference of $11,589,000 (reflecting the issuance of common stock at $0.75 per share).
Pursuant to that certain Series A-2 Preferred Consent Agreement, dated March 29, 2009, (the “Series A-2 Consent Agreement”) the holders of at least two-thirds (2/3) of the Company’s Series A-2 Preferred Stock (i) consented to the creation of the Series B Preferred Stock, (ii) repeal and Mr. Heinen was grantedeliminate the applicability of any adjustment to the Conversion Price (as defined in the Series A-2 Certificate of Designation) that may be authorized in the Series A-2 Certificate of Designation in certain circumstances, and (iii) amend and alter the provisions of Section 3(a) of the Series A-2 Certificate of Designation to replace $3,000,000 with $7,000,000 at the end thereof so as to read, “obtain and utilize any line of credit, factoring arrangement or other similar financing arrangement in connection with servicing the Company’s receivables in an optionaggregate amount up to acquire 140,000$7,000,000”.
Immediately following the closing of these transactions, the Company’s outstanding capital stock consisted of; 80,602,000 shares of common stock; 1630 shares of Series A-2 Convertible Preferred Stock, which have an aggregate liquidation preference of $12,226,000 and are convertible into 16,302,000 shares of common stock allat $0.75 per share; 80 shares of Series B Preferred Stock, which have an aggregate liquidation preference of $8,000,000 but are not convertible into common stock; options to employees; and warrants to acquire 1,703,000 shares at an exercise price of $0.40, which expire on November 25, 2013 and vest uponFinancial Advisory Warrants described below. 
Burnham Hill Partners LLC, acted as placement agent for the earliernew financing and acted as financial advisor for the other transactions disclosed herein and received a fee of a change of control and$210,000 at the third anniversary of grant.





F-38


Board Changes and Matters


Also on March 19, 2009, Richard Reiss, a director of Glowpoint since inception, and Aziz Ahmad, a director of Glowpoint since 2006, resigned from Glowpoint’s board of directors (the “Board”Closing, which equaled seven (7%) and all committees.  Messrs. Laezza and Robinson were elected to fill the vacancies on the Board created by such resignations.  Mr. Reiss served on no Board committees.  Mr. Ahmad was an alternate memberpercent of the audit, compensation and nominating committees.  There was no disagreement betweengross proceeds received by the Company in the Closing.  Glowpoint also issued advisory warrants to Burnham Hill Partners LLC and/or its designees and the resigning directors.   In connection with their resignations, the Company amended the option agreementsassignees to purchase shares of common stock equal to one and two-tenths (1.2%) percent of the resigning Board members to extenddiluted common shares outstanding immediately following the exercisabilityclosing of their options to 180the above-described transactions,  at an exercise price of $0.632 per share, which equals 110% of the volume weighted average trading price for the ten days following their resignation (from 90 days) and amended their restricted stock award agreements, if any, to accelerate the vesting of restricted stock awards by one year.  


Pursuantprior to the Purchase Agreement, the Company also agreed to take all steps necessary or advisable to eliminate the classificationClosing, and are exercisable for a period of its Board of Directors at the Company’s next annual meeting of shareholdersfive years (the “Annual Meeting”“Financial Advisory Warrants”).  In order to comply with this provision, it is expected that all directors will submit their resignations and some of them may not stand for re-election.  For those that do not stand for re-election, they will receive substantially the same option agreement amendment and restricted stock award amendment as described herein. The Board of Directors also agreed in the Purchase Agreement to amend and restate its director compensation policy, at the Annual Meeting, to provide, “Directors who are not our executive officers or employees receive an annual cash fee of $20,000, payable in equal quarterly installments on the first business day following the end of the calendar quarter, and an annual grant of 25,000 res tricted shares of our common stock, which shall be made at the annual meeting of our stockholders and shall vest at the next annual meeting of our stockholders. The chairperson of our board of directors, if any, and the chairperson of our audit committee will each receive an additional cash payment of $5,000 per year, payable in equal quarterly installments.”



F-39