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 |
For the year ended December 31, 20092010
OR
| | ¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to __________
Commission file number: 0-25940
GLOWPOINT, INC.
(Exact name of registrant as specified in its Charter)
| Delaware | | 77-0312442 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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225 Long430 Mountain Avenue, Hillside,Suite 301, Murray Hill, NJ | | 0720507974 |
| (Address of principal executive offices) | | (Zip Code) |
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Registrant's telephone number, including area code: (312) 235-3888(973) 855-3411 |
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Securities registered under Section 12(b) of the Exchange Act: None |
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| 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). ¨Yes ý No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of June 30, 2009,2010, the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $15,078,000.$26,661,000.
The number of shares of the Registrant’s common stock outstanding as of March 26, 201014, 2011 was approximately 65,150,232.21,453,604.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 20102011 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2009,2010, are incorporated by reference into Part III of this Annual Report on Form 10-K.
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.Act. Forward-looking statements give Glowpoint's current expectations and forecasts of future events. All statements other than statements of current or historical fact contained in this annual report, including statements regarding Glowpoint's future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. The words "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," and similar expressions, as they relate to Glowpoint, are intended to identify forward-looking statements. These statements are based on Glowpoint's current plans, and Glowpoint's actual future activities and results of operations may be materially different from those set forth in the forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made. Any or all of the forward-looking statements in this annual report may turn out to be inaccurate. Glowpoint has based these forward-looking statements largely on its current expectations and projections about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy and financial needs. The forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and assumptions. Glowpoint undertakes no obligation to publicly revise these forward-looking statements to reflect events occurring after the date hereof. All subsequent written and oral forward-looking statements attributable to Glowpoint or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements contained in this annual report on Form 10-K.
OverviewItem 1. Business
“Glowpoint's mission is to enable a global community where video communications is a part of everyday life.”Overview
Glowpoint, Inc. ("Glowpoint" or "we" or "us" or the “Company”), a Delaware corporation, is a carrier-gradeleading provider of cloud-based managed video services for the global business community. We are the only “pure play” service provider in the video space and our hosted services are securely accessible via any network (private or public) and are technology agnostic. We provide IT managed services for telepresence and video conferencing. Our suite of robust managed services empower organizations to seamlesslyhosted infrastructure delivered through unique user applications and consistently communicate via video over any network and with any video technology platform, enabling them to sharply boost the impact and productivity of their internal and external communications while at the same time reduce their on-going operating costs and total cost of ownership. Glowpoint supportsworld class experiences. The Company pursues its recurring revenue business model by currently supporting thousands of video endpoints inand telepresence systems and delivering service to more than 500 different enterprises in over 35 countries around the globe. Glowpoint’s managed services enable the integration of video into any unified communications environment and ourthe Company has become a recognized leader in the rapidly growing market for global managed video and global business-to-business (B2B) exchange(“B2B”) services are driving video collaboration for Fortune® 500 companies, governmental and educational institutions, and media and entertainment broadcasters. solutions.
Glowpoint also provides resale and wholesale programs includingand private-labeled (branded) resale options for hardware manufacturers, carriers, unified communications providers,network operators, and system integrators seeking to offer this servicevideo services as a value-addvalue-added addition to their collaboration and communications offerings. Today, the Company maintains multiple strategic partnerships that are core to its global sales strategy.
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.
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· | 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 a 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 may be manufactured by Cisco, Polycom, Tandberg,Life Size or Life Size)Avaya) and network neutral (i.e., connectivity may be via native Internet or network provided by 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’s services may be applied.
Glowpoint’s core value proposition for customers includes drivingthe enablement of integration into the unified communications environment allowing wide adoption and usage of video communications, increasing their return on investment and lowering their total cost of ownership, and providing access to expertise and skills not available elsewhere.ownership. Glowpoint provides an alternative to capital intensive, premise-based infrastructure, which customers typically have had to purchase for the video environment to function, as well as the tools and services to enable wide adoption of the video communications throughout their business. Glowpoint has become the recognized leader of managed video and global video exchange services that provide businesses and service providers a way to link together their “islands of video” across third party private networks and enablingenable 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). These access POPs are all connected with the Glowpoint network, which is a multiple protocol layer switching (MPLS) QoS network dedicated to high-quality two-way video transport. The Glowpoint network, which was built and managed internally, is exclusively dedicated to IP-based video communications. It was designed to optimize the performance and routing of video and audio packets in order to ensure 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 would be required by today’s high-bandwidth telepresence uses, we have de-emphasized our managed network service offering to focus more on the managed services and B2B exchange offerings. Our previously referenced managed network service is now principally a means for clients to access our service cloud and TEN. Customers can access the Glowpoint service cloud and TEN exchange in one 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 Glowpoint. A unique feature of TEN is its sophisticated call control infrastructure and configuration, along with its patent-pending call control capabilities (see “Intellectual Property” below). This design enables customers to seamlessly connect to nearly any video communications user in the world, whether on ISDN, the Internet, or their own private network, virtually eliminating the historical challenge where videoconferencing users traditionally could only communicate to others on the same hardware and network service.
Glowpoint’s services have been in production and commercially available since late 2000 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 a respected leading managed service provider. OurThe Company launched as an independent pure play provider in 2004, well ahead of the market, and our track record and quality-of-service 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 and innovation. Our industryIndustry awards and recognition over the last few years 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 discussed in market research by the leading industry and research analysts, such as Gartner, IDC,Forrester, Frost and Sullivan, and Wainhouse Research.
As the video conferencing, telepresence, and unified communications industries continue to mature, Glowpoint believes it has established itself as the “go-to” provider for organizations and other service providers to support their unified communication needs.
The company operates in one segment and therefore segment information is not presented.
Industry Overview. The video communications industry continues to transform and mature.transform. When Glowpoint was initially launched, videoconferencingvideo conferencing 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 technology. “Telepresence” provides an experience that represents what Glowpoint has been providingdelivering 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 others, and the consolidation of some traditional videoconferencingvideo conferencing equipment manufacturers (e.g., Cisco’s announced acquisition of Tandberg and Logitech’s acquisition of Life Size Communications) have, we believe, validated our business plan and brought new lifeenergy 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:
| · | VideoconferencingVideo conferencing, Telepresence, and TelepresenceUnified Communications Equipment Manufacturers; |
| · | Carriers (Network Providers);Network operators and Service providers; |
| · | Managed Service/Conferencing Services Providers (Multi-Point Conference Services);Providers; and |
| · | System Integrators and Video and Telepresence Equipment Resellers.Resellers and Systems Integrators. |
VideoconferencingVideo conferencing, Telepresence, and TelepresenceUnified Communications Equipment Manufacturers. Manufacturers of videoconferencingvideo conferencing and telepresence equipment 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 customers for themservices to also provide managednot only enable adoption, but to expand the use and applications beyond internal use. Additionally, alternatives to purchasing your own infrastructure and using a cloud based hosted model are becoming increasingly popular among businesses that are interested in managing total cost of ownership and allowing the services so video usage programs inside enterprises may be successful.provider to deal with interoperability and technology advancements for them. As such, they recognize the need to partner with experienced service providers like Glowpoint, who make it seamless for customers to buy and use the manufacturer’s products.products and address their full complement of needs. Glowpoint’s managed services and cloud based open video platform provide purchasers of this equipment especially expensive telepresence systems, the knowledge that their video conferences and telepresence rooms will be managed reliably, maximizing the customer’s use (and return on investment) of the expensive equipment.these critical options.
Carriers (Network Providers).Network operators and Service providers. Carriers, or networkNetwork operators and service 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 use ISDN. With the emergence of more robust, scalable, and sophisticated IP network capabilities for videoconferencingvideo conferencing and telepresence, the network providersoperators are now aggressively offering services that include intelligent 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"."convergence." Recently, more IP-based video communications applications and managed services have emerged as an integral part of converged network offerings. Although in its infancy, we believe that trend will continue as the demand and requirements for video communications continue to grow. Glowpoint services and hosted cloud infrastructure are accessible across any provider’s network. So, carriers can be a trusted and comprehensive provider for their video communications 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 videoconferencingvideo conferencing services almost exclusively focused on multi-point conferencing (bringing(i.e., bringing multiple locations into one video call). These service providers are heavily dependent on the legacy ISDNIntegrated Services Digital Network (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 videoconferencingvideo conferencing 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 videoconferencingvideo conferencing equipment resellers have chosen to attempt competingcompete with the GlowpointGlowpoint’s 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, 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 part of their core business practices. These same enterprises have difficulty and(and incur considerable costcost) in effectively maintaining and managing their existing video communication deployments because of the shortage of experienced information technology and network personnel. Many enterprises also recognize that supporting video communications inside their organization distracts their core support organization from other critical business applications and requires a different skill set than normal business IT support. As a result, businesses are increasingly seeking out managed services and hosted, cloud-based infrastructure to support and power their user community and their video technologies. In fact, isolating and extending the video applications from other business applications and existing communications infrastructure has become an increasingly important capability for larger organizations. With the rapid advancements in video technologies, it has become increasingly expensive and difficult for enterprises to maintain the infrastructure required to power these technologies. We believe that many customers cannot fully support quality video communications on their existing 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. We view the network, however, as a means to access video applications and infrastructure. Therefore, we believe there is a greater market need is to provide access 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 deployments.
The surge in deployment of Voice over IP (VoIP) is an example of a technology that had been technically feasible for years, but did not gain popularity until it was easy to use. Because most companies did not accomplish this on their own, VoIP service providers developed features and services to make VoIP simple to adopt and use. Now companies can simply “plug” their VoIP networks into the Cloudcloud for these services.
Glowpoint isprovides enterprises with the service providerability to simplify the video experience with services and features enabling wide adoptiona full suite of open 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. 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, on demand virtual video rooms, video mailboxes, seamless video calling to off-net locations anywhere in the world and other video application services, are available to customers by simply “plugging” their video systems or rooms into the Glowpoint service cloud.
Market Size.According to many industry analysts, the video communications industry is anticipated to grow to billions of dollars annually in the coming years. Gartner Research, for example, predicts the videoconferencingvideo conferencing products and services market worldwide – which includes equipment, network and managed services – will reach $8.6 billion by 2013, with the market for services totaling approximately $3.8 billion.* We believe In 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 whatsame report, the services business (where Glowpoint competes) has been growing at a 38% CAGR, while our market share will bemanaged services have realized in the comingexcess of 50% growth over that past two 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
Today's telepresence and video conferencing environments have become a key part of a complete unified business communications strategy. For organizations that are already using video, and for those exploring its benefits for the first time, Open Video™ is a unique platform that can help them achieve a successful video collaboration program.
Glowpoint offersTraditionally, video has presented challenges by presenting a vast arraycomplex maze of systems and networks that must be navigated through and closely managed - and most of the systems today are proprietary in nature, which makes them closed off to the rest of the world. Glowpoint’s managed services can be accessed and solutions specifically designed to support two-wayutilized by customers regardless of the technology and network they are using. Customers who purchase a Cisco, Polycom, LifeSize or any other HD video communications. Our managedsolution, for example, may all take advantage of the Glowpoint VNOC solution regardless of their choice of network. Glowpoint’s core services are deliveredoffered as part of our Open Video technology platform to generate monthly recurring revenue for the Company.
Open Video is the world’s first and supported via our hosted infrastructureonly environment that offers telepresence, video and unified collaboration users a way to meet and communicate across the varying hardware/software platforms and carrier networks in a secure, open fashion. Open Video combines years of best practices, experience and technology development into video collaboration platform that provides instant connectivity, self-serve and proprietarymanaged help desk resources, and the ease of use that makes video collaboration seamless and effortless. Beyond the technology and applications, systems,Open Video is built around security protocols to ensure that enterprises and processes, along with our expert operations, engineering, and development resources that make up the service teams. Our services can support any of the telepresence and HD solutions on the market today, and are designed to enable enterprisesorganizations of any size can communicate to connect as an extension of their ownany other desired video environment or as an alternative to building one. We believe our experience, expertise, superior support, video-centric focus, unique featuresusers in a secure, high-quality 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.reliable fashion.
TEN OV Connect
Glowpoint’s Telepresence interExchange Network (TEN) resides inside Glowpoint’s service cloud Open Video enables customers to connect to the Open Video Platform for managed services, collaboration and is made upB2B services via a myriad of infrastructure housed in several global carrier-neutral hardenedaccess technologies. The “Open Video Cloud” has peering arrangements with MPLS carriers, Ethernet exchanges, the public Internet, and redundant facilities that are all connected bycross connects at co-location facilities. Glowpoint supports convergence of voice, data and video using the customer’s existing network connection or 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) viadedicated private network 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:
· | 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.
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if required.
· | Carrier Connect (via existing IP network carrier) OV Collaborate
OV Collaborate is designed to offer scalable, pre-scheduled and “ad-hoc” conferencing resources using Glowpoint’s cloud-based infrastructure or a client’s own infrastructure. OV Collaborate offers a way to connect any device to a call with dedicated conference producers available to manage video event based services as needed. – 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·Managed (Scheduled) Video Conferencing
·Automated (Reservation-less) Video Conferencing ·Event Management ·Web Streaming Events – 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 (Premier and Select) OV Manage
Glowpoint is recognized as a video communications expert and industry leader in delivering high quality managed services for any video environment. We continue to be well positioned to support high-touch, fully managed environments (VNOC Premier offering) as well as self-use support environments (VNOC Select offering).environments. Our global VNOCmanaged service offering includes the following:
· | Room Certification;·Room Certification, Proactive Monitoring and “Room Sweeps“
·Single Point of Contact for all video needs and user community ·Scheduling Portal, Applications, and Services ·Conference Production and Monitoring ·Help Desk Support ·Training, Stewardship Reporting and Service Reviews ·Advanced Network 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. |
· | Single Point of Contact: Professional Services 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.
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· | 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.
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· | 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.
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Glowpoint’s VNOC services can be accessed and utilized by customers regardless of the technology and network they are 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 purchasing Glowpoint’s managed services also gain access to our service cloud (hosted infrastructure and services), such as on-demand B2B telepresence calls and virtual meeting rooms.
Award-winning Applications for Video
Once connected to the Glowpoint service cloud, or interconnected by virtue of being a VNOC customer, customers gain access to Glowpoint’s award-winning video applications, which continue to offer some of the most unique features available 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.
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· | 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.
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· | 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.
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· | “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.
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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.
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· | 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.
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· | 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.
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· | 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.
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These proprietary features and 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. Glowpoint customers also have access to video communications support and expertise that is unmatched in experience and skills. Our VNOC provides solutions and support for the physical network as well as the video experience and unique programs that businesses may support with video. 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 scheduled and on-demand multi-point video conferencing, event management and web streaming.
· | 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 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.
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· | 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.
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· | 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.
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Professional Services
As with technology hosting and management services, we sought new revenue sources using what we believe are our unrivaledsuperior 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 intolead for video communication opportunities and have ledleading 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 Solution: Bundled Offering for Broadcast and Event Services. Services
We have bundled certain components of our managed services to offer video communication solutions for broadcast/media content acquisition and event services. OurCustomers have used 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 itour service for interviews from team locations with coaches, players and analysts during their coverage. Our managed services for IP-broadcast solutions are currently used by many well-known media companies, including ESPN and NFL Network. 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. Glowpoint now provides a full suite of HD solutions for the broadcast, entertainment and media industry and is considered a high-quality alternative to the traditional means of acquiring content in many applications, including interviews and even full motion video.
Wholesale 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 effectively. 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 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. Global network provider TATA Communications private labels Glowpoint managed services to support their global Cisco Telepresence clients. And 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.
Intellectual Property
Supporting theseAt the core of Glowpoint’s service offerings is our unique services and features is Glowpoint’s patenteddifferentiating intellectual property. Glowpoint has heavily invested in R&D, engineering, and patent-pending proprietary technology developed specifically for two-way video communications. Since Glowpoint’s inception, we have spent millionsapplication development in the process of dollars and tens of thousands of engineering hours designing, building and perfecting our managed video servicesservice and spent millionscloud platforms. Some of additional dollars building the Glowpoint network. Our research andthis development has led to twoawarded patents and a number of patent applications, (seeas described below,) along with ongoing recognition in the industry and various solutions.enterprise communities as having the most unique tools and applications to enable their video applications. We know of no competitor that offersbelieve any service with comparable features, performance, reliability, and scalability, and we believe there arecompetition faces significant barriers to create one.building and providing such services, making our intellectual property a key differentiator in the competitive landscape.
Video Applications and Telephony FeaturesCloud Architecture
WeGlowpoint's Video Cloud is based on a Service Oriented Architecture (“SOA”) that enables us to quickly create unique and differentiated unified communication services by integrating best of breed technology available in the market. The SOA architecture is a foundation framework that abstracts the physical layer from the service application to enable the virtualization of resources to leverage cost efficient hardware and deliver innovative services to customers. This allows Glowpoint to enable the consumption of services using purpose built mobile applications, web, and traditional methods. Glowpoint's video cloud services can be delivered as a software and infrastructure service in a pure hosted environment or can support a hybrid with a mix of public and private cloud. Our SOA architecture implementation provides our customers and partners the freedom to choose exactly how they consume our services.
Applications and Development
Built on top of our core cloud SOA architecture, Glowpoint has a portfolio of proven applications that provide customers and partners access to services with business logic that represents years of industry experience. These include conference scheduling, customer care, B2B directory, and even billing. Our internal applications also rely on this infrastructure to provide services that are positioned to scale well into the future. Glowpoint has built our open video cloud to be technically simple to access from anywhere on the globe and to support (Session Initiated Protocol) SIP, H.323 and ISDN technologies using infrastructure from ACME Packet, Polycom, Cisco, Radvision, etc. – and service peering with content delivery (such as Akamai) and network peering partners (such as Equinix). Glowpoint has developed integration to Microsoft Exchange and offerIBM Same time to enable the use of native scheduling and a full arraynumber of pioneeringupcoming releases for mobile applications developed from Apple IOS and features targetedAndroid support the ability for “click to the specific demandscall.”
Diverse and unmatched expertise
On top of two-wayour cloud architecture and robust application suite sits a group of dedicated and experienced video communications, making it as easyservice professionals. Our people are experts in providing world class production, management, remediation and spontaneous asprofessional services. And by using the telephone but withsame tools and applications available directly to our customers, they represent a simple solution often referred to as the power of face-to-face communications. In April 2007, we were awarded a U.S. Patent“easy button” 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 or exceed what we believe are 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, 99.99% Quality of Service (“QoS”) commitment, and a fully redundant and secure backbone design.
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. It is a ring with mesh points to provide full redundancy on the backbone. Utilizing carrier grade switching 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 TEN exchange traffic and video sessions utilizing our infrastructure can scale with modest investment.customers.
We maintain staffed command
Patents 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 24x7x365 basis. The NOC’s primary functions are to monitor the network, manage and support all backbone equipment, and provide proactive and on-demand support for our customers. Video traffic does not pass through our NOC, nor does usage information or authentication packets. We designed our network to handle those functions at our POPs, which was done for improved video performance and, more importantly, to address security and disaster recovery/business continuity matters.Patents-Pending
Our access and exchange POPs include Glowpoint-owned equipment installed at carrier neutral collocation centers across the globe, connected by multiple dedicated high-speed circuits that make the fabric of our Telepresence interExchange Network (TEN). These 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 purchase network from various providers, including our primary vendors Covad Communications, Easynet, Masergy, PCCW, Qwest, Sprint, TATA Communications, XO Communications, and Verizon Business/MCI.
Our TEN architecture was specially designed for the efficient and cost-effective delivery of feature-rich two-way video content. The exchange 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 a patented IP-based call detail record (CDR) feature that allows for detailed tracking on a call-by-call basis for point-to-point, gateway and multi-point calls. Competitive providers of network, such as telecommunications carriers (see “Competition” below), would have to install video-specific gatekeeper technology throughout their networks to provide the additional functionality necessary to create similar service capability. The challenge facing these carriers to replicate our network features is two-fold: (i) the sheer volume of data traffic carried by their networks would make such a project enormously expensive and, most likely, cost prohibitive and (ii) the gatekeepers alone do not route calls and track usage, it is our other proprietary technology that augments the gatekeeper functionality. We have also developed a specialized configuration of software, hardware and global positioning technology that enables us to accurately monitor jitter, packet loss and latency to maximize overall network performance.
With our origins in videoconferencing equipment sales and service, we have a broad understanding of the unique demands placed on a network by a video communication application. Telecommunication carrier networks were simply not designed for two-way video communications. Unlike a standard data application, video applications immediately expose network performance limitations. It was this need for quality and reliability that prompted us to develop our own network dedicated exclusively to two-way video communications, but designed using standard (and proven) network concepts and methodologies. We also 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.
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 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 relationships with all of the leading video equipment manufacturers, such as Polycom, Tandberg, Sony, Cisco, HaiVision, LifeSize (a division of Logitech), and Radvision, and provide each of them with information about their products’ performance.
Patents and Patents-Pending
The development of our “video as a service” applications and network architecture have resulted in a significant amount of intellectual property – from real-time metering and billing for video calls to intelligent call 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 include some rejections to which we have responded in due course. We have also abandoned onecertain patent application,applications, 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 our 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, equipment manufacturers, resellers and other companies focused on integrating innovative and high-quality video solutions into their product mix.
As mentioned above, we were awarded U.S. Patent No. 7,200,213 in April 2007 for our live video operator assistance feature and awarded U.S. Patent No. 7,664,098 in February 20092010 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. In addition, U.S. Patent No. 7,916,717 will issue on March 29, 2011 for our Systems and Method for Automated Routing of Incoming and Outgoing Video Calls between IP and ISDN networks. This technology ensures the simple and seamless migration from ISDN to IP for the purpose of connecting IP users with ISDN systems around the world. This 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. We believe these patents help solidify our position as the leader in developing solutions that make video communications a critical business application for our customers and help drive wider adoption and acceptance.
We also 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 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:
| · | 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. |
| · | 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. |
· | 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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· | 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. |
· | 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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Sales and Marketing
We market and sell our services to a broad range ofof businesses in many industries through both direct and indirect sales channels. As noted above (see “Overview - Industry Overview”),Our strategic relationships with videoconferencingvideo conferencing equipment manufacturers, unified communication providers, global integration service providers, equipment resellers, and network providersoperators have expanded our indirect sales channels. The global demand for videovisual 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 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. Regardless of the sales or distribution channel, our goal is to provide a world-class service, sales and collateral materials, training, and management tools to reduce barriers to buying, and increase our return on sales, marketing and promotional investments.
Historically, one of our main sales challenges was that videovisual communications was not generally perceived as a critical application for most companies, which resulted in moderate growth opportunities and results.companies. Technology developments in the videovisual communications industry, improvements in network offerings, and changes in human behavior, driven by such global conditions as the recent economic downturn, security concerns and health concerns, have positioned videovisual communications to play a mission critical role in business practices. These changes, we believe, will result in increased demand for hosted and managed video services. Recognizing this, Glowpoint has and will continue to adapt its service offerings and strategic relationships to address the unique needs of today’s and tomorrow’s video communications solutions,our customers, especially 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 the technology is reliable and functions properly in order to maximize their investment, while increasingly seeking B2B video callingcollaboration capabilities. Glowpoint markets and sells its VNOCOV Managed services and TEN directly to these purchasersenterprise customers and to equipment manufacturers and integrators, who purchase our VNOCOV Managed services on a wholesale basis and resell them as a turnkey bundled offering.basis. We will continue to focus more of ourinvest in sales and marketing efforts on these strategic relationships and business development opportunities due to increased interest and because the value of VNOC service sales tend to be of a larger magnitude than our historical sales opportunities of managed video services. This strategy applies to all video applications, from telepresence to desktop video and is even expected to apply in consumer applications as our service cloud model is adopted by business users for their personal video communications needs. Since the second quarter of 2008, we have sold our VNOC services to support more than 200 telepresence roomsour direct and to more than 500 standard room systems, with more than 30,000 video endpoint devices now certified to use our services.indirect business models.
We continue to market and sell to new markets and markets that we’ve created, where video communications can play a critical role in business practices. An example of a market we created for our services is the broadcast/media sector, where we recognized a match between the need for cost effective content acquisition and the capability of video communications technology combined with Glowpoint’sand managed services and TEN.services. To support this market opportunity, we introduced a highly managed service that is 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 managed 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 interviews from team locations with coaches, players and analysts during their coverage of the drafts every year since 2002. In 2007, we launched a High Definition (HD) content acquisition solution that we branded TeamCamHD and RemoteCamHD, which has been used to acquire HD content that is then be distributed to key media outlets. In early 2010, we announced the availability of our professional event services for the broadcast industry in high definitionHD as well.
In the buying process, the decision for network and managed service is generally made at the same time a customer purchases, launches, or implements video equipment or programs. PartGlowpoint continues to focus on its indirect sales channel to foster greater growth, which has resulted in the indirect sales channel contributing the highest amount of new sales on average through 2009.in 2010. Approximately 70% of new sales were realized through these channels in 2009, up from over 60% on average through 2008. Our global indirect wholesale relationships,2010, which include the “white label” branding of services, continue their increased productivity in 2009.services. 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 more than 650500 customers ranging from Fortune 100 companies and federal, state, and municipal governmental entities to businesses and service professionals (e.g., accountants and lawyers) and non-profit organizations. Our top ten current market segments at the end of 2009,2010, listed in order of approximate contribution to revenue, are:were: consulting, 13%; broadcast/media, 14% of revenue; electronics, 11%; legalbanking and law enforcement,finance, 9%; engineering and construction, 8%; manufacturing, 7%; governmental entities (local, state and federal), 9%; consulting, 7%; financial services, 7%; banking and finance, 6%; engineeringlegal and construction,law enforcement, 6%; manufacturing, 5%; and education and teaching, 5%. One major customer represents approximately 15%19.5% of our revenue.
Employees
As of December 31, 2009,2010, we had approximately 100109 full-time employees. Of these employees, 1714 are involved in network and service engineering and development, 5461 in customer service and operations, 1617 in sales and marketing, and 1317 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 services, we mainly compete against select telecommunications carriers who have begun to offer a managed service forand video as part of their core network offerings, and videoconferencingconferencing 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. These carrier competitors, which include AT&T, Verizon Business/MCI, Global Crossing, British Telecom (BT)/BT Conferencing, AT&T, Verizon and some of the regional Bell operating companies,Global Crossing, mainly compete on the basis of offering network and a converged solution of data, voice and video. Glowpoint differentiates itself from these competitors based on its singular video expertise, flexibility, and responsiveness to customer demands. Other competitors have evolved from the audio/visual integration industry or videoconferencingvideo conferencing equipment resale industry, including York Telecom, Iformata Communications and BCS Global, and compete directly with their own flavor of managed video services.Global. Glowpoint differentiates itself from these competitors based on its carrier gradefull suite of superior video managed services providingand cloud based hosted infrastructure, combined with a primary focus on video and resulting superior expertise, flexibility, and responsiveness to customer demands. These services are unique based on our intellectual property, user interfaces, quality, and capabilities that Glowpoint has built over the service levels and 24x7x365 global support enterprises demand for mission critical communications.years. Glowpoint has partnered with a number of would-be competitors with the intent of selling our managed video application services to be delivered over their 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.competition. We do not believe that the competitive offerings currently available in the market offer the full range and scope of the carrier grade managed services that Glowpoint offers.
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 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 the 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, audio/visual integrators, and unified communications providers. |
Glowpoint has established itself as a leading provider of the managed services that are driving adoption and enabling video to become an integral, mission critical tool for business communications. In addition to designing a platform 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 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, access to real-time billing, and call/usage details for a customer’s video environment. Our managed services offer customers substantially superior video communications quality, remote monitoring and management of all registered video endpoint locations, VNOC supported rooms and other video endpoints/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.regulations (the “Exchange Act”). The Securities Exchange Act requires us to file periodic reports, proxy statements and other information with the Securities and Exchange Commission.Commission (the “SEC”). Copies of these periodic reports, proxy statements and other information can be inspected and copied at:
| | SEC Public Reference Room |
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:
| | Securities and Exchange Commission |
You may obtain these materials electronically by accessing the SEC’s website on the Internet at www.sec.gov.
In addition, we make available, free of charge, on our Internet website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file this material with, or furnish it to, the SEC. You may review these documents on our website at www.glowpoint.comwww.glowpoint.com..
Item 1A.1A. Risk Factors.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 may 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, orif not, it may restrict our ability to operate our business.
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 and September 2010 (the “2010 Private Placements” as discussed in Note 17) and March and August 2009 and November/December 2008 (collectively, the “Private(the “2009 Private Placements”) as discussed in Note 16). The proceeds from our private placements, however,If additional working capital is required, it may not be sufficient to fund our future operations. If additional working capital is required, itoperations and may dilute our existing stockholders or restrict our ability to run our business.
We may need to raise additional capital to fund our operations.
For the year ended December 31, 2009,2010, we incurred a net loss attributable to common stockholders of $611,000$3,597,000, of which $934,000 was related to a non-cash loss on redemption of preferred stock incurred in connection with the 2010 Private Placements, and although we generatedhad a negative cash flow from operations of $124,000 for the year ended December 31, 2009, we have had negative operating cash flows since our inception.$1,444,000. At December 31, 2009,2010, we had $2,035,000 of cash, of $587,000, anegative working capital deficit of $1,365,000$526,000 and an accumulated deficit of $162,405,000. However, we have historically been able to raise capital in private placements most recently $3,000,000 in March$165,068,000. Based on the Company’s October 2010 amendedcost reduction plan, the terms2010 Private Placements, our new Revolving Loan Facility, the elimination of our Preferred Stock to eliminate any dividends until January 2013, and have reached settlements with a majority of the taxing authorities in which we had accrued sales and use taxes and regulatory fees. Based primarily on our March 2010 financing (see also Note 24), along with our cash flow projection, the Company believes that it has, and will have, sufficient cash flow to fund its operations through at least March 31, 2011.2012. There can be no assurances;assurances, however, that we will be able to raise additional capital as may be needed or upon acceptable terms, nor that current economic conditions will not negatively impact us. If the current economic conditions negatively impact us and we are unable to raise any additional capital that may be needed uponon terms acceptable terms,to us, it could have a material adverse effect on the CompanyCompany.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders may not be confident in our financial reporting, which would harm our business and the price of our common stock.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed.
We may be required to issue more shares of common stock upon adjustment of the conversion price of our outstanding preferred stock or the exercise price of our outstanding warrants, resulting in dilution of our existing stockholders.
The conversion or exercise of any of our outstanding 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-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 likely be re-invested in our business.
We expect our futureFuture operating results tomay 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 preferred stock commencing in January 2013 until such 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.OB”.“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, or other national securities exchange, 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 or other national securities exchange trading, such as standards having to do with a minimum share price, the minimum number of public shareholders or the aggregate market value of publicly held shares. Any holder of our securities should regard them as a long-term investment and should be prepared to bear the economic risk of an investment in our securities for an indefinite period.
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 securities class action litigation in the future. Such litigation often results in substantial costs and a diversion of management’s attention and resources and could have a negative effect on our business and results of operation.
Penny stock regulations may impose certain restrictions on the marketability of our securities.
The Securities and Exchange Commission (the “Commission”)SEC 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 CommissionSEC 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”.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.future. 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 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 purchase our suite of managed video services. If we are unable to react quickly to changes in the market, if the market fails to develop, or develops more slowly than expected, or if our services do not achieve market acceptance, then we are unlikely to become or remain profitable. Additionally, current economic conditions may cause a decline in business and consumer spending which could adversely affect our business and financial performance.
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, 2009, approximately 34% of our resold ISDN revenues, or approximately $423,000, were from Tandberg, which was approximately 1.6% of our total gross revenues. Tandberg has been transitioning its business from Glowpoint and intends to cease buying these services from Glowpoint, which may occur at any time.
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. If so, it may impact our financial condition, negatively if we underestimated our liability or positively if we overestimated our liability.
Our failure to obtain or maintain the right to use certain intellectual property may negatively affect our business.
Our future success and competitive position depends in part upon our ability to obtain or maintain certain proprietary intellectual property to be used in connection with our services. This may be achieved in part by prosecuting claims against others who we believe are infringing on our rights and by defending claims of intellectual property infringement by our competitors. While we are not currently engaged in any intellectual property litigation, we could become subject to lawsuits in which it is alleged that we have infringed the intellectual property rights of others or we could commence lawsuits against others who we believe are infringing upon our rights. Our involvement in intellectual property litigation could result in significant expense to us, adversely affecting the development of sales of the challenged product or intellectual property and diverting the efforts of our technical and management personnel, whether or not such litigation is resolved in our favor.
In the event of an adverse outcome as a defendant in any such litigation, we may, among other things, be required to: pay substantial damages; cease the development, use or sale of services that infringe upon other patented intellectual property; expend significant resources to develop or acquire non-infringing intellectual property; discontinue the use or incorporation of infringing technology; or obtain licenses to the infringing intellectual property. We cannot assure youensure 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 propertyproperty.
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 youensure that these agreements will not be breached, that we will have adequate remedies for any breach or that such persons will not assert rights to intellectual property arising out of these relationships.
We depend upon our network providers and facilities infrastructure.
Our success depends upon our ability to implement, expand and adapt our national network infrastructure and support services to accommodate an increasing amount of video traffic and evolving customer requirements at an acceptable cost. This has required and will continue to require that we enter into agreements with providers of infrastructure capacity, equipment, facilities and support services on an ongoing basis. We cannot assure youensure 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 equipment that make up the backbone of our service offering and hosted infrastructure, or at one or more of our partners’ data centers, could substantially and adversely impact our business. We cannot assure youensure that we will not experience failures or shutdowns relating to individual facilities or even catastrophic failure of the entire 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, British Telecom/BT 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.
OurThere is limited market awareness of our Glowpoint managed video services have limited market awareness.services.
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 equipment 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 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 services, any system failures or interruptions may cause loss of customers.
Our success depends, in part, on the seamless, uninterrupted operation of our Glowpoint managed service offering. As we continue to expand these services, and as the complexity and volume continue 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 necessary to upgrade our managed video services as improvements in video communication technologies are introduced. In the event that other companies develop more advanced 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 issuesWe rely on a limited number of customers for a significant portion of our revenue, and uncertainties may include:the loss of any one of those customers, or several of our smaller customers, could materially harm our business.
· | New accounting pronouncements or changes in accounting policies; and |
A significant portion of our revenue is generated from a limited number of customers. For the year ended December 31, 2010, one major customer represented approximately 19.5% of our revenue. Although the composition of our significant customers will vary from period to period, we expect that most of our revenue will continue, for the foreseeable future, to come from a relatively small number of customers. Consequently, our financial results may fluctuate significantly from period-to-period based on the actions of one or more significant customers. A customer may take actions that affect us for reasons that we cannot anticipate or control, such as reasons related to the customer's financial condition, changes in the customer's business strategy or operations, the introduction of alternative competing products, or as the result of the perceived quality or cost-effectiveness of our products. Our agreements with these customers may be cancelled if we materially breach the agreement or for other reasons outside of our control. In addition, our customers may seek to renegotiate the terms of current agreements or renewals. The loss of or a reduction in sales or anticipated sales to our most significant or several of our smaller customers could have a material adverse effect on our business, financial condition and results of operations.
· | Legislation or other governmental action that detrimentally impacts our expenses or reduces sales by adversely affecting our customers. |
Our failure to properly manage the distribution of our services could result in a loss of revenues.
We currently sell our services both directly to customers and through channel partners. Successfully managing the interaction of our direct and indirect sales channels to reach various potential customers for our services is a complex process. In addition, our reliance upon indirect selling methods may reduce visibility of demand and pricing issues. Each sales channel has distinct risks and costs, and therefore, our failure to implement the most advantageous balance in the sales model for our services could adversely affect our revenue and profitability.
Item 1B.1B. Unresolved Staff Comments
None.
Our headquarters are located at 225 Long430 Mountain Avenue, Hillside,Murray Hill, New Jersey 07205.07974. These premises consist of approximately 17,40022,000 square feet of leased office space and 3,000 square feet of leased warehouse facilities.space. Our lease currently expires on the earlier of DecemberJanuary 31, 2010 and six months following notice that we intend to vacate the premises.2014. The base rent for the premises is currently approximately $226,000$344,000 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 HillsideMurray Hill premises house our corporate functions and our network operations center. In addition to our headquarters, we lease a technical facilityfacilities (i) in Ventura, California that houses our Bridging Services group, help desk and technical personnel in approximately 3,500 square feet, the base rent of which is approximately $58,000 per annum, and (ii) in Conshohocken, Pennsylvania that houses our Dedicated Support Services Group in approximately 3,600 square feet, the base rent of which is approximately $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.Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders(Removed and Reserved)
None.
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters| Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities |
Glowpoint’s securities are traded on the Over-The-Counter Bulletin Board (“OTCBB”) under the symbol “GLOW.OB”.“GLOW.OB.” In the future, if we satisfy the listing criteria, we may apply for listing on either the NASDAQ or the NYSE Amex,a national exchange, 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.
On January 10, 2011, the Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment to its Amended and Restated Certificate of Incorporation (the "Certificate of Amendment"), effecting a reverse stock split of the Company's common stock, par value $0.0001 per share, at a ratio of one-for-four. The reverse stock split was effective on January 14, 2011. The Company's stockholders approved the Certificate of Amendment on June 17, 2010, and the Company's Board of Directors authorized the implementation of the reverse stock split on December 17, 2010.
As a result of the reverse stock split, every four shares of the Company's issued and outstanding common stock were combined into one share of common stock. Any fractional shares that resulted from the reverse stock split were paid in cash to the stockholder. The reverse stock split reduced the number of the Company's outstanding shares of common stock from 85,414,000 to approximately 21,354,000, on the date of effectiveness of such split.
The share amounts of common and treasury stock, warrants and options shown in the accompanying consolidated financial statements have been adjusted to reflect the reverse stock split, at a ratio of one-for-four. The exercise price for all options and warrants and the conversion price for preferred stock in the accompanying consolidated financial statements have been adjusted to reflect the reverse stock split by multiplying the original exercise or conversion price by four.
The following table sets forth high and low closing sale prices per share for our common stock for each quarter of 20082009 and 2009,2010, based upon information obtained from the 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 | | | Glowpoint | |
| | Common Stock | | | 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 | | |
| | | | | | | | High | | | Low | |
| Year Ended December 31, 2009 | | | | | | | | | | | |
| First Quarter | $ | 0.45 | | $ | 0.26 | | | $ | 1.80 | | | $ | 1.04 | |
| Second Quarter | | 0.45 | | 0.28 | | | | 1.80 | | | | 1.12 | |
| Third Quarter | | 0.63 | | 0.32 | | | | 2.52 | | | | 1.28 | |
| Fourth Quarter | | 0.69 | | 0.48 | | | | 2.76 | | | | 1.92 | |
| | | | | | | | | | | | | | |
| Year Ended December 31, 2010 | | | | | | | | | |
| First Quarter | | | $ | 3.08 | | | $ | 2.24 | |
| Second Quarter | | | | 2.80 | | | | 1.92 | |
| Third Quarter | | | | 2.32 | | | | 1.60 | |
| Fourth Quarter | | | | 2.80 | | | | 1.80 | |
| | | | | | | | | | |
On March 29, 2010,14, 2011, the closing sale price of our common stock was $0.64$2.20 per share as reported on the OTCBB, and 65,150,23221,453,604 shares of our common stock were held by approximately 2212,621 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 2009.2010.
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, 2009.2010. 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)) | | 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 | | | | 1,254,644 | | | $ | 3.14 | | | | 433,095 | |
| Equity compensation plans not approved by security holders | | | 20,000 | | | | 3.94 | | | | — | | | | 5,000 | | | | 15.76 | | | | — | |
| Total | | | 4,706,051 | | | $ | 0.84 | | | | 1,529,219 | | | | 1,259,644 | | | $ | 3.19 | | | | 433,095 | |
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, 20092010 and 20082009 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 years 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), except per share amounts.
| Consolidated Statement of Operations Information: | | | |
| Revenue: | | | | | | |
Managed services combined | | $ | 10,480 | | | $ | 7,433 | |
OV Connect and other services | | | 17,070 | | | | 17,822 | |
Total revenue | | | 27,550 | | | | 25,255 | |
| | | | | | | | | |
| Operating expenses: | | | | | | | | |
Network and infrastructure | | | 11,389 | | | | 11,005 | |
Global managed services | | | 8,226 | | | | 7,476 | |
Sales and marketing | | | 4,142 | | | | 3,193 | |
General and administrative | | | 5,330 | | | | 4,392 | |
Depreciation and amortization | | | 1,078 | | | | 1,056 | |
Sales taxes and regulatory fees | | | — | | | | (2,500 | ) |
Total operating expenses | | | 30,165 | | | | 24,622 | |
Income (loss) from continuing operations | | | (2,615 | ) | | | 633 | |
| | | | | | | | | |
| Interest and other expense: | | | | | | | | |
Interest (income) expense, net | | | 126 | | | | (543 | ) |
Amortization of deferred financing costs | | | 34 | | | | — | |
Loss on extinguishment of debt | | | — | | | | 254 | |
| Expense for increase in estimated fair value of derivative financial instruments | | | — | | | | 1,848 | |
Total interest and other expense, net | | | 160 | | | | 1,559 | |
Net loss from continuing operations | | | (2,775 | ) | | | (926 | ) |
Income from discontinued operations | | | 112 | | | | 379 | |
Net loss | | | (2,663 | ) | | | (547 | ) |
Loss on redemption of preferred stock | | | (934 | ) | | | (64 | ) |
Net loss attributable to common stockholders | | $ | (3,597 | ) | | $ | (611 | ) |
| | | | | | | | | |
| Net loss attributable to common stockholders per share: | | | | | | | | |
Continuing operations | | $ | (0.20 | ) | | $ | (0.08 | ) |
Discontinued operations | | $ | 0.01 | | | $ | 0.03 | |
Basic and diluted | | $ | (0.19 | ) | | $ | (0.05 | ) |
| | | | | | | | | |
| Weighted average number of common shares: | | | | | | | | |
Basic and diluted | | | 19,127 | | | | 13,235 | |
| Balance Sheet Information: | | | |
| | | | | | | |
| Cash | | $ | 2,035 | | | $ | 587 | |
| Working capital deficit | | | 526 | | | | 1,365 | |
| Total assets | | | 8,364 | | | | 6,911 | |
| Long-term debt | | | — | | | | — | |
| Total stockholders’ equity | | $ | 2,705 | | | $ | 1,153 | |
| Consolidated Statement of Operations Information: | | Years Ended December 31, | |
| | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance Sheet Information: | | as of December 31, | |
| | | | | | | | | | | | | | | | |
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 | ) |
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, 20092010 and 20082009 and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the years ended December 31, 20092010 and 20082009 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 and the availability of sufficient financial resources to enable us to pay our existing obligations and expand our operations, as well as other risks detailed from time to time in our filings with the Securities and Exchange Commission.
Overview
“Glowpoint'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 carrier-gradeleading provider of cloud-based managed video services for the global business community. We are the only “pure play” service provider in the video space. Our hosted services are securely accessible via any network (private or public) and are technology agnostic IT managed services for telepresence and video conferencing. Our suite of robust managed services empower organizations to seamlesslyhosted infrastructure delivered with world class user applications and consistently communicate via video over any network and with any video technology platform, enabling them to sharply boost the impact and productivity of their internal and external communications while at the same time reduce their on-going operating costs and total cost of ownership. Glowpoint supportsexperiences. The Company pursues its recurring revenue business model by currently supporting thousands of video endpoints inand telepresence systems and delivering service to more than 500 different enterprises in over 35 countries around the globe. Glowpoint’s managed services enable the integration of video into any unified communications environment and ourthe company has become a recognized leader in the rapidly growing market for global managed video and global business-to-business (“B2B”) exchange(B2B) services are driving video collaboration for Fortune® 500 companies, governmental and educational institutions, and media and entertainment broadcasters. solutions.
Glowpoint also provides resale and wholesale programs includingand private-labeled (branded) resale options for hardware manufacturers, carriers, unified communications providers,network operators, and system integrators seeking to offer this servicevideo services as a value-addvalue-added addition to their collaboration and communications offerings. Today, the Company maintains multiple strategic partnerships that are core to its global sales strategy.
Glowpoint’s services, which are accessible globally, 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 a service” industry or other cloud-based services.
Glowpoint’s core service offerings are designed to enable integration of video into enterprise Unified Communications environments by delivery through Glowpoint’s Open Video™ cloud-based, shared infrastructure model, which offers conferencing scalability and security for large enterprises and small and medium sized businesses around the world. Open Video is the world’s first and only environment that offers telepresence, video and unified collaboration users a way to meet and communicate across various hardware/software platforms and carrier networks in a secure, open fashion – removing all barriers to video collaboration and communications. Open Video includes three service categories:
| · | OV Connect - enables customers to connect to other video users through peering arrangements with MPLS carriers, Ethernet exchanges, the public Internet, and cross connects at co-location facilities. Glowpoint supports the convergence of voice, data and video using the customer’s existing network connection or a dedicated private network if required. |
| ● | OV Collaborate - offers comprehensive conferencing services, including scalable, pre-scheduled and "ad-hoc" confer-encing resources, using hosted infrastructure in the cloud or a client's infrastructure. In addition to connecting virtually any device to a call, our conference producers can manage, record, and stream video events to the Internet. |
| · | OV Manage - includes the video operations (VNOC) management system that provides a complete solution for end-to-end management of immersive and non-immersive telepresence rooms. OV Manage offers flexible options, including a complete cloud-based infrastructure that offers customers the opportunity to purchase only the endpoints themselves, as well as packages that cater to customers who elect to purchase their own video infrastructure. |
Glowpoint’s core service offerings include video operations (“VNOC”) managed service, business-to-business exchange, video conferencingOther services and professional services. A critical differentiator ofprovided by Glowpoint isinclude:
| · | Professional Services - provides a complement 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 TATA Communications, a global telecommunications carrier, and for a host of others who offer Glowpoint’s managed services to their client base. |
| · | Broadcast Solutions - provides IP-based broadcast solutions for leading sports broadcasters, sports leagues, news outlets, cable stations, and collegiate conferences. Glowpoint's "always-on," managed service and exclusive video-network exchange service reduces transport costs and program operations by up to 80 percent as compared to traditional satellite feeds and associated operations. Glowpoint enables ultra-clean HD- and SD-interactive broadcasts, provides real-time communications and two-up capability for live-to-air and live-to-web broadcasts, all delivered through proactively maintained flexible solutions. |
After a strategic review we determined that our solutions are hardware agnosticIntegrated Services Digital Network (“ISDN”) resale services no longer fit into our strategic plan. In September 2010, we entered into an agreement with an independent telecommunications service provider to transfer our customers receiving this service to them, and network neutral, supporting all recognized video standards across any IP network. As such, regardlessprospectively we will receive a 15% recurring referral fee for those revenues. The transfer will be completed in the second quarter of the video conferencing or telepresence equipment purchased or the network connecting it, Glowpoint’s services may be applied.2011 (see Note 8).
Glowpoint’s core value proposition for customers includes driving wide adoption and usage of video communications, increasing 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 environment to function, as well as the tools and services to enable wide adoption of the video communications throughout their business. Glowpoint has become the recognized leader of managed video and global video exchange services that provide businesses and service providers a way to link together their “islands of video” across third party private networks and enabling organizations to drive wide adoption.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States.States of America. 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 applicablerelated services have been performed. RevenuesRevenue billed in advance areis 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, isconferencing 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 twelve12 to twenty-four24 month period estimated life of the customer relationship. At December 31, 2009 and 2008, we had deferred activation fees of $259,000 and $325,000, respectively, and related deferred installation costs of $97,000 and $76,000, respectively. Revenue related to integration services is recognized at the time the services are performed, and presented as required by ASC topicTopic 605 ““Revenue Recognition”Recognition..” Revenues derived from other sources are recognized when services are provided or events occur.
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 we believeare believed to be uncollectible. We also record additional allowances based on our aged receivables, which are determined based on historical experience and ouran assessment of the currentgeneral 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 is written off against the allowance. We do not obtain collateral from our customers to secure accounts receivable.
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 as required by ASC topic 360 “Property, Plant and Equipment”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 noNo impairment losses were required in any of the periods presented.recorded through December 31, 2010.
Results of OperationsCapitalized Software Costs
BeginningThe 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 as incurred.
Reverse Stock Split – Reclassifications
On January 10, 2011, the Company filed with the filingSecretary of these financial statements, we have decidedState of the State of Delaware a Certificate of Amendment to report our operations usingits Amended and Restated Certificate of Incorporation (the "Certificate of Amendment"), effecting a reverse stock split of the following financial statement format, which we believe provides readers withCompany's common stock, par value $0.0001 per share, at a better understandingratio of our operating cost components. Overone-for-four. The reverse stock split was effective on January 14, 2011. The Company's stockholders approved the last year, Glowpoint has continued see a shift inCertificate of Amendment on June 17, 2010, and 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. Company's Board of Directors authorized the implementation of the reverse stock split on December 17, 2010.
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, processreverse stock split, every four shares of the Company's issued and people,outstanding common stock were combined into one share of common stock. Any fractional shares resulting from the reverse stock split were paid in cash to the stockholder. The reverse stock split reduced the number of the Company's shares of common stock as opposedshown in the consolidated balance sheets as follows:
| | | | | | | |
| | | Adjusted to reflect reverse stock split | | | | | | Adjusted to reflect reverse stock split | | | | |
| Authorized shares | | | 150,000,000 | | | | 150,000,000 | | | | 150,000,000 | | | | 150,000,000 | |
| Shares issued | | | 21,353,604 | | | | 85,414,416 | | | | 16,632,772 | | | | 66,531,087 | |
| Shares outstanding | | | 21,353,604 | | | | 85,414,416 | | | | 16,241,549 | | | | 64,966,196 | |
| | | | | | | | | | | | | | | | | |
The share amounts of common and treasury stock, warrants and options shown in the accompanying consolidated financial statements have been adjusted to underlying carrier network costs associated with our legacy billable subscriber line services. In 2009, we increasedreflect 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,reverse stock split, at a ratio of one-for-four for all periods presented. The exercise price for all options and staff accordingly for delivery of pipeline business opportunities. As we analyzed the repositioning of our businesswarrants and the resulting operating cost changes, we concluded that these operating costs neededconversion price for preferred stock in the accompanying consolidated financial statements have been adjusted to be more identifiable toreflect 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 fromreverse stock split by multiplying 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 operationsoriginal exercise or net loss for any period presented.conversion price by four.
The following table sets forth, for the two years in the period ended December 31, 2009, the percentagesResults 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:
| | | | | | | | | | | | | | | | |
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 | )% |
| | | | | | | | | | | | | | | | | | | | | |
Year ended December 31, 2009 (the “2009 year”) compared to year ended December 31, 2008 (the “2008 year”)Operations
Revenue - Revenue increased $2,003,000,$2,295,000, or 8.2%9.1%, in the 2009 periodyear ended December 31, 2010 (the “2010 Year”) to $26,540,000$27,550,000 from $24,537,000$25,255,000 in the 2008 period. We have separated our revenue into Core Revenue and Non-core Revenue. Core Revenue is revenue derived fromyear ended December 31, 2009 (the “2009 Year”). The following are the products and services that meet our overall strategic goals from a growth, margin and core competency perspective. In Core Revenueschanges in the primary componentcomponents 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.revenue:
Our “Core Revenue” includes:
| · | Subscription network and relatedManaged services represent about 65% of our total current revenue and iscombined, which represents subscription OV Managed video services generally tied to contracts of 12 months or more; |
· | Subscription managed videomore and OV Collaborate usage based bridging 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 enableenables customers to have video meetings with multiple locations on the screen at one time;time, are 38.0% of total current revenue and increased 41% in the 2010 Year. |
| · | EventsOV Connect, which represents network sales and Professional Services,related services generally tied to contracts of 12 months or more, and other 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 5%solutions, accounts for 62.0% 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. |
| | Year Ended December 31, |
| Revenue | 2010 | | 2009 | | | Increase (Decrease) | | | % Change |
| Managed services combined | | $ | 10,480 | | | $ | 7,433 | | | $ | 3,047 | | | | 41.0 | | % |
| OV Connect and other services | | | 17,070 | | | | 17,822 | | | | (752 | ) | | | (4.2 | ) | |
| Total revenue | | $ | 27,550 | | | $ | 25,255 | | | $ | 2,295 | | | | 9.1 | | % |
| | | Year Ended December 31, (in thousands) | |
| Revenue | | | | | | | | | | | | |
| 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 started in the 4th 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 managed services customer.
(4) In the 2008 year the Company provided integration services on equipment required by a managed video services customer and a broadcast 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, 2009, 35% of our resold ISDN revenues, or $452,000, were from Tandberg, which was 1.7% of our total gross revenues. Tandberg has been transitioning its business from Glowpoint and intends to cease buying these services from Glowpoint, which we expect to occur in the coming months.
Network and Infrastructure – Network and infrastructure expenses whichincreased by 3.5% in the 2010 Year. Network and infrastructure expenses include all external costs, exclusive of depreciation and amortization, related to the Glowpoint network aand hosting facilities for our cloud-based infrastructure. The network is for high-quality, two-way video transport built and managed by Glowpoint which is exclusively and dedicated to IP-based video communications.communications globally. This operating expense category also includes the cost for taxes which have been billed to customers. Network
Although the expenses for network and infrastructure expenses decreased by $924,000, or 7.2%,increased this period as a result of costs incurred in consolidating our network, we continue to $11,838,000 in the 2009 year from $12,762,000 in the 2008 year. We realized savings from the continuing efforts to eliminate costs inre-engineer our network and our on-going activity involving the renegotiation of ratesinfrastructure for increased optimization and the migration of service to lower cost providers where possible and a reduction of $263,000 in costs for integration services on equipment required by broadcast customers. These savings were partially offset by the costs of new customers. The network and infrastructureefficiency. We expect these efforts will reduce these expenses should go down as a %percentage of total revenues as cloud-based and managed video revenues grow and customers do not require Glowpoint connectivity to use our services.over time.
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):
| | | | | | | | | | | | | | | | | | | |
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 increased 10.0% in the 2010 Year. Global managed services expenses include all costs for delivering and servicing our managed services. These includeservices, such as delivering customer service, internal costs of maintaining the network and infrastructure, and the development and implementation of operating support systems and associated 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, representing 85.2% of the increase in the 2010 Year, were salaries, benefits and other costs related to the enhancement of our services to encompass global 24/7 staffing and the establishment of a new support center in Conshohocken, PA.
Sales and Marketing - Sales and marketing expenses increased 29.7% in the 2010 Year as Glowpoint continues to focus on its indirect sales channel to foster greater growth. Approximately 70% of new sales continue to be realized through these channels in 2010. The primary components of the increases, representing 79.8% of the increase in the 2010 Year, were increased salaries, benefits and other costs related to hiring additional sales related employees and consultants. Several advertising and marketing programs, representing 17.1% of the expansion ofincrease in the 2010 Year, were initiated to increase our services to encompass 24/7 staffing andvisibility in the opening of a new Network Operation Center in Philadelphia.marketplace.
The components of global managed services expenses and their percentage of revenues for the years ended December 31, 2009 and 2008 are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | |
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 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Sales and marketing - Sales and marketing expenses, which include sales personnel salaries, commissions, overhead and marketing costs, decreased $189,000, or 5.6%, to $3,193,000 in the 2009 year from $3,382,000 in the 2008 year.
The components of sales and marketing expenses and their percentage of revenues for the years ended December 31, 2009 and 2008 are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | |
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 administrativeAdministrative - General and administrative expenses, which includesinclude direct corporate expenses related to costs of personnel in the various corporate support categories, including executive, finance, human resources and information technology, decreased $197,000, or 4.2%,increased 21.4% in the 2009 year to $4,465,000 from $4,662,0002010 Year. Severance costs represented 70.9% or $665,000 of the increase in the 2008 year.2010 Year.
The components of general and administrative expenses and their percentage of revenues for the years ended December 31, 2009 and 2008 are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | |
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 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortizationAmortization – Depreciation and amortization expenses decreased $205,000, or 16.3%,increased 2.1% in the 2009 year2010 Year due to $1,056,000 from $1,261,000 inpurchases of property and equipment exceeding the 2008 year. Over the last few years the Company has been decreasing the sizeretirements of our network which has resulted in fewer assets employed in this area and a reduction of $164,000 in deprecation and amortization in 2009. Depreciation and amortization expenses, as a percentage of revenue, were 4.0% for the 2009 year versus 5.1% for the 2008 year.these assets.
Sales taxesTaxes and regulatory feesRegulatory 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–Based on these results and the Company’sour historical experience in collecting and remitting thesesales taxes the Company hasand regulatory fees, we adjusted the accrued sales taxes and regulatory fees liability at December 31, 2009 to amounts that reflect settlements with taxing authorities and amounts that we believe are probable and can be reasonably estimated. This resulted in $2,500,000 of income of $2,500,000 in the 2009 Year. There were no sales taxes and $172,000regulatory fee adjustments in 2008.the 2010 Year.
Income (loss)Loss from operationsContinuing Operations – NetLoss from continuing operations increased by $3,248,000 in the 2010 Year. The primary drivers of the loss decreased by $4,219,000, or 131.6%, to aincrease were the $2,500,000 of income from operations of $1,012,000the change in estimates for accrued sales taxes and regulatory fees in the 2009 year from loss from operationsYear and $665,000 of $3,207,000severance costs in the 2008 year.2010 Year. Increases in costs for managed services associated with 24/7 global support, increases in sales and marketing costs from hiring new professionals, and charges associated with network and infrastructure consolidation costs were partially offset by increases in higher margin managed services revenues.
Interest and other expense (income)Other Expense (Income) – Interest and other expense (income) in the 2010 Year principally reflected $126,000 of interest charges from vendors and $34,000 of the amortization of financing charges related to the 2010 Private Placements. Other expense in the 2009 periodYear of $1,559,000 principally reflectsconsisted of $1,848,000 for an increase in the fair value of derivative financial instruments, which did not exist in the 2010 Year, $254,000 for the loss on the extinguishment of the remaining Senior Secured Notes and $241,000interest expense of $241,000. These costs were partially offset by $784,000 of interest expenses. These expenses were partially reduced by $784,000income from the change in estimates for reductions in the interest accrual foraccrued sales taxes and regulatory fees.fees partially offset by interest from vendors and the Senior Secured Notes.
Interest and other expense (income) in 2008 of $4,108,000 principally reflects interest expense of $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 $268,000 of increases in the interest accrual related to the sales and use taxes and regulatory fees, $78,000 of interest related to capital leases and $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.
Income taxesTaxes - As a result of our losses, we recorded no provision for incomes taxes in the years ended December 31,2010 Year and 2009 and 2008.Year. 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’sour historical results and restrictions on the usage of the net operating loss carryforwards.carry forwards.
Net lossLoss from Continuing Operations – Loss from continuing operations increased by 199.7% in the 2010 Year due to the reasons noted above.
Income from Discontinued Operations – Income from discontinued operations declined by 70.4% in the 2010 Year. The transfer of our ISDN resale business is anticipated to be completed in the 2nd quarter of 2011.
Net Loss - Net loss decreasedincreased by $6,768,000,$2,116,000, or 92.5%386.8%, to $547,000$2,663,000 in the 2009 year from $7,315,000 in the 2008 year.2010 Year.
GainLoss on redemptionRedemption of preferred stockPreferred Stock – Our loss in 2009 of $64,000 inon the redemption of Preferred Stock is comprisedresulted from the 2010 Private Placements and was $934,000 in the 2010 Year. In connection with the 2009 Private Placements we had a loss on the redemption 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$64,000 in the 2009 period. In additionYear. For loss per share calculations this loss, though charged to Additional Paid in Capital, increases the net loss attributable to common stockholders.
Net Loss Attributable to Common Stockholders - Net loss attributable to common stockholders was $3,597,000 or $0.19 per basic and diluted share 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 in2010 Year. For the 2009 period.Year, the net loss attributable to common stockholders was $611,000, or $0.05 per basic and diluted share.
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. For earnings per share calculations this gain, though credited to Paid in Capital, reduces 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.
Liquidity and Capital Resources
For the year ended December 31, 2009,2010, we incurred a net loss attributable to common stockholders of $611,000$3,597,000, of which $934,000 was related to a non-cash loss on redemption of preferred stock incurred in connection with the 2010 Private Placements (as discussed in Note 17), and although we generatedhad a negative cash flow from operationsoperating activities of $124,000 for the year ended December 31, 2009, we have had negative operating cash flows since our inception.$1,444,000. At December 31, 2009,2010, we had $2,035,000 of cash, of $587,000, anegative working capital deficit of $1,365,000$526,000 and an accumulated deficit of $162,405,000. However,$165,068,000. In October 2010, we implemented a plan to reduce operating costs. We have historically been able to raise capital in private placements, most recently $3,000,000 in March 2010 and $1,000,000 in September 2010, as needed to fund operations and provide growth capital. In June 2010, the Company entered into a Revolving Loan Facility (as discussed in Note 7) pursuant to which the Company may borrow up to $5,000,000 for working capital purposes and under which we had unused borrowing availability of $1,600,000 as of December 31, 2010. The Revolving Loan Facility matures in June 2012. In addition to our financing activity, we also recently amended the terms of our preferred stockSeries A-2 Preferred Stock and Series B Preferred Stock to eliminate any dividends until January 2013 and have reached settlements withregarding a majority of the taxing authorities inliability for which we had accrued sales and use taxes and regulatory fees. Based primarily on the October 2010 cost reduction plan, the 2010 Private Placements, our March 2010 financing (see also Note 24),new Revolving Loan Facility, the elimination of dividends until January 2013, along with our cash flow projection, the Company believes that it has, and will have, sufficient cash flow to fund its operations through at least March 31, 2011.2012. There can be no assurances;assurances, however, that we will be able to raise additional capital as may be needed or upon acceptable terms, nor that current economic conditions will not negatively impact us. If the current economic conditions negatively impact us and we are unable to raise any additional capital that may be needed uponon terms acceptable terms,to us, it could have a material adverse effect on the Company.
Private Placement Transactions
Capital Raises
Over the last threetwo years, with the most recent transaction occurring in MarchSeptember 2010, the Company has entered into several private placement transactions raising (i) gross proceeds of $3,000,000$4,000,000 by selling shares of the Company’s newly-created Perpetualperpetual Series B preferred stock (“Series B Preferred Stock”), and (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 convertible preferred stock and (iii) gross proceeds of $3,625,000$1,800,000 by selling additional shares of convertible preferred stock which ultimately became shares of the Company’s Series A-2 convertible preferred stock (“Series A-2 Preferred Stock”). In connection with those transactions the Company also exchanged shares of its previously issued preferred stock for ultimately, shares of Series A-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.
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 closingeffect of these transactions over the Company’s outstanding capitaltwo-year period was to raise $5,800,000 for the Company while reducing our common stock consisted of; 80,602,000and common stock equivalents by 7,933,000 shares of common stock; 1,630 shares of Series A-2 Convertible Preferred Stock, which have an aggregateor 23.4% and our 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.by $10,478,000 or 36.9%.
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 these transactions consists of (i) common stock, (ii) Series B Preferred Stock which is not convertible into common stock, (iii) Series A-2 Preferred Stock, which is convertible into common stock, (iv) options to acquire common stock, and (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 and liquidation preference as of January 1, 2009 and December 31, 20092010 and March 29,the two years ended December 31, 2010 (000’s omitted)(in thousands):
| | | | | | 2010 Private Placement – Conversion of Series A-2 Preferred Stock | | | 2010 Private Placement - Series B Preferred Stock Exchange | | | | | | Other Transactions (Note 1) | | | | | | | | | | | | | | | Cancellation of Treasury Stock | | | | | | | |
| Fully Diluted Common Shares | | | | | | | | | | | | | | | | | | | |
Common Shares Outstanding | | | 64,966 | | | | 15,452 | | | | — | | | | — | | | | 184 | | | | 80,602 | | | | 12,094 | | | | 4,343 | | | | 4,624 | | | | (391 | ) | | | 684 | | | | 21,354 | |
Series B Preferred Stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Senior Secured Notes | | | | 866 | | | | (866 | ) | | | — | | | | — | | | | — | | | | — | |
Options | | | 4,706 | | | | — | | | | — | | | | — | | | | 4 | | | | 4,710 | | | | 1,243 | | | | — | | | | — | | | | — | | | | 17 | | | | 1,260 | |
Warrants | | | 3,464 | | | | — | | | | — | | | | (1,640 | ) | | | (121 | ) | | | 1,703 | | | | 10,229 | | | | (8,936 | ) | | | 295 | | | | — | | | | (876 | ) | | | 712 | |
Series A-2 Preferred Stock | | | 45,087 | | | | (15,452 | ) | | | (13,333 | ) | | | — | | | | — | | | | 16,302 | | | | 9,475 | | | | 1,797 | | | | (8,624 | ) | | | — | | | | — | | | | 2,648 | |
Total | | | 118,223 | | | | — | | | | (13,333 | ) | | | (1,640 | ) | | | 67 | | | | 103,317 | | | | 33,907 | | | | (3,662 | ) | | | (3,705 | ) | | | (391 | ) | | | (175 | ) | | | 25,974 | |
| Liquidation Preference | | | | | | | | | | | | | | | | | | | | | | | | |
Series B Preferred Stock | | $ | — | | | $ | — | | | $ | 10,000 | | | $ | — | | | $ | — | | | $ | 10,000 | |
Series A-2 Preferred Stock | | | 28,423 | | | | 5,392 | | | | (25,870 | ) | | | — | | | | — | | | | 7,945 | |
Total | | $ | 28,423 | | | $ | 5,392 | | | $ | (15,870 | ) | | $ | — | | | $ | — | | | $ | 17,945 | |
Note 1 – Includes issuances of restricted stock and options to employees and consultants, expiration of warrants and cashless exercise of warrants. Does not include Advisory Warrants to be issued in the 2010 Private Placement.
The following is a summary of the activity of the Company’s liquidation preference for the shares of Series A-2 Preferred Stock and Series B Preferred Stock as of December 31, 2009 and March 29, 2010 (000’s omitted):
| | | | | | 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 | | | | |
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
At December 31, 2009,2010, we had a working capital deficit of $1,365,000,$526,000, compared to a working capital deficit of $4,225,000$1,365,000 at December 31, 2008,2009, a decrease of $2,860,000.$839,000. We had $587,000$2,035,000 in cash at December 31, 2009,2010, compared to $1,227,000$587,000 at December 31, 2008, a decrease2009, an increase of $640,000.$1,448,000.
Net cash provided byused in operating activities was $124,000$1,444,000 for the 2009 year.2010 Year. The primary components of the generationuse of funds were $3,456,000$732,000 from the net loss excluding non-cash charges, and an increasepayments of $970,000 in$767,000 to reduce accounts payable, and accrued expenses partially offset by a $3,452,000 decrease inand sales taxes and regulatory fees, a $491,000$105,000 increase in accounts receivable and other assets and a $364,000$82,000 decrease in customer deposits and deferred revenue.revenue partially offset by a $242,000 decrease in the assets of the discontinued operations.
Cash used in investing activities in the 2009 year2010 Year for the purchase of property, equipment and leasehold improvements was $1,213,000.$1,620,000 partially reduced by the proceeds from the sale of equipment for $61,000. The capital expenditures were focused on improvement to the Glowpoint infrastructure and the leasehold improvements to our new facility in Murray Hill, NJ.
Cash provided by financing activities in the 2009 year2010 Year was comprised of $1,800,000$4,000,000 received from the sale of our preferred stock, $750,000 of proceeds from our Revolving Loan Facility and $17,000$8,000 received from the exercise of stock options, partially offset by our purchase of $750,000 of our Senior Secured Notes, $384,000$307,000 of costs related to the 20092010 Private Placement and August 2009 Exchange and $234,000 of principal payments for a capital lease.Placements.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of December 31, 2009.2010.
Recent Accounting Pronouncements
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.
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 12.
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.
Recent Accounting Pronouncements
In October 2009, the FASBFinancial Standards Accounting Board (“FASB”) issued Accounting Standards Update 2009-13 (“ASU 2009-132009-13”) which supersedes certain guidance in ASCAccounting Standards Codification (“ASC”) 605-25, “Revenue Recognition — Multiple Element ArrangementsArrangements.”. 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 evaluatingadoption of ASU 2009-13 did not have a material impact on the impact that this topic will have on itsCompany’s condensed consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market RiskCurrent economic conditions may cause a decline in business and consumer spending which could adversely affect our businessresults of operations 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.
Additionally, we may experience difficulties in scaling our operations to react to economic pressures in the United States.
There are no other material qualitative or quantitative market risks particular to us.condition.
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’sSEC’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-ChiefChief Executive OfficersOfficer 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-ChiefChief Executive OfficersOfficer 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, 2009,2010, and, based upon this evaluation, the Co-ChiefChief Executive OfficersOfficer 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-ChiefChief Executive OfficersOfficer 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 quarteryear ended December 31, 20092010 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-ChiefChief Executive OfficersOfficer and Chief Financial Officer, has conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 20092010 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, 2009.2010.
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, LLP, Glowpoint’s independentour registered public accounting firm regarding internal control over financial reporting. Management’s reportManagement was not subject to attestation by Amper, Politziner & Mattia, LLP pursuant to temporary rules of the SEC that permit Glowpoint to provide only management’s report in this annual report.our registered public accounting firm.
Item 9B. Other Information
None.
PART III
Item 10. Directors,, Executive Officers and Corporate Governance 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.
Glowpoint will file with the Commission a definitive proxy statement pursuant to Regulation 14A no later than 120 days after December 31, 2009.2010. The information required by this Item will appear in that definitive proxy statement and is incorporated by reference herein.
| Item 11. Executive Compensation |
Glowpoint will file with the SEC a definitive proxy statement pursuant to Regulation 14A no later than 120 days after December 31, 2010. 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 |
Glowpoint will file with the CommissionSEC a definitive proxy statement pursuant to Regulation 14A no later than 120 days after December 31, 2009.2010. 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
None
Glowpoint will file with the SEC a definitive proxy statement pursuant to Regulation 14A no later than 120 days after December 31, 2010. The information required by this Item 14.will appear in that definitive proxy statement and is incorporated by reference herein. Item 14. Principal Accounting Fees and Services
Audit Fees
Amper, Politziner & Mattia, LLP (“Amper”), our principal accountant, billed us approximately $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.
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. 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. All of these fees were billed in connection with our filingsGlowpoint will file with the SecuritiesSEC a definitive proxy statement pursuant to Regulation 14A no later than 120 days after December 31, 2010. The information required by this Item will appear in that definitive proxy statement 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.is incorporated by reference herein.
Amper did not bill us in the 2009 or 2008 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.
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: |
| | | Page |
ReportReports of Independent Registered Public Accounting FirmFirms | | F-1 |
Consolidated Balance Sheets at December 31, 20092010 and 2008 2009 | | F-2F-3 |
Consolidated Statements of Operations for the years ended December 31, 20092010 and 2008 2009 | | F-3F-4 |
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 20092010 and 20082009 | | F-4F-5 |
Consolidated Statements of Cash Flows for the years ended December 31, 20092010 and 2008 2009 | | F-5F-6 |
| Notes to Consolidated Financial Statements | | F-7F-8 |
| | 2. | Financial Statement Schedules have been omitted since they are either not required, not applicable, or the information is otherwise included. |
| | | Exhibits: A list of exhibits required to be filed as part of this report is set forth in the Exhibit Index on page 52
|
A list of exhibits required to be filed as part of this report is set forth in the Exhibit Index on page 31 of this Form 10-K, which immediately precedes such exhibits, and is incorporated by reference.
Exhibit Number | | Description |
| 3.1 | | Amended and Restated Certificate of Incorporation. (1) |
| 3.2 | | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Wire One Technologies, Inc. changing its name to Glowpoint, Inc. (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. (9) |
3.4 | | Amended and Restated Bylaws. (3) Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Glowpoint, Inc. effecting a one-for-four reverse stock split of the common stock of Glowpoint, Inc. (26) |
| 3.5 | | Amendment to Amended and Restated BylawsBylaws. (11) |
| 4.1 | | Specimen Common Stock Certificate. (7) |
| 4.2 | | Certificate of Designations, Preferences and Rights of Series D Preferred Stock. (9) |
| 4.3 | | Certificate of Designations, Preferences and Rights of Series A Preferred Stock of Glowpoint. (14) |
| 4.4 | | Form of Series A-3 Warrant dated November 25, 2008. (14) |
| 4.5 | | Form of Amendment to Warrants to Purchase Shares of Common Stock of Glowpoint, dated as of November 25, 2008. (14) |
| 4.6 | | Certificate of Designations, Preferences and Rights of Series A-1 Preferred Stock of Glowpoint. (16) |
| 4.7 | | Certificate of Designations, Preferences and Rights of Series A-2 Preferred Stock of Glowpoint. (18) |
| 4.8 | | Form of Amendment to Series A-3 Warrant dated March 16, 2009. (16) |
| 4.9 | | Form of Amendment to Series A-3 Warrant dated August 10, 2009. (18) |
| 4.10 | | Certificate of Designations, Preferences and Rights of Series B Preferred Stock of Glowpoint. (19) |
| 10.1 | | Glowpoint, Inc. 2000 Stock Incentive Plan. (2) |
| 10.2 | | Employment Agreement with Joseph Laezza, dated as of March 11, 2004. (3) |
| 10.3 | | Employment Agreement with David W. Robinson, dated May 1, 2006 (4) |
| 10.4 | | Employment Agreement with Edwin F. Heinen, dated January 30, 2007. (5) |
| 10.5 | | Employment Agreement Amendment with Edwin F. Heinen, dated April 24, 2007. (6) |
| 10.6 | | Employment Agreement Amendment with David W. Robinson, dated April 24, 2007. (6) |
| 10.7 | | Employment Agreement Amendment with Joseph Laezza, dated May 15, 2007. (6) |
| 10.8 | | Glowpoint, Inc. 2007 Stock Incentive Plan. (8) |
| 10.9 | | Employment Agreement Amendment with David W. Robinson, dated September 20, 2007. (9) |
| 10.10 | | Exchange Agreement, dated September 21, 2007, between Glowpoint and the Holders set forth therein. (9) |
| 10.11 | | 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. (10) |
| 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. (12) |
| 10.13 | | Employment Agreement Amendment with David W. Robinson dated April 30, 2008. (13) |
| 10.14 | | Form of Series A Convertible Stock Purchase Agreement, dated as of November 25, 2008, between Glowpoint and the purchasers set forth therein. (14) |
| 10.15 | | Form of Registration Rights Agreement, dated as of November 25, 2008, between Glowpoint and the purchasers set forth therein. (14) |
| 10.16 | | Form of Note Exchange Agreement, dated November 25, 2008, between Glowpoint and the holders set forth therein. (14) |
| 10.17 | | Form of Series C Preferred Consent and Exchange Agreement, dated November 25, 2008, between Glowpoint and the holders set forth therein. (14) |
| 10.18 | | Employment Agreement Amendment with Joseph Laezza, dated November 24, 2008. (14) |
| 10.19 | | Employment Agreement Amendment with Edwin F. Heinen, dated November 24, 2008. (14) |
| 10.20 | | Form of Note Exchange Agreement, dated December 31, 2008, between Glowpoint and the holders set for the therein. (15) |
| 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. (16) |
| 10.22 | | Amendment No. 1 to Registration Rights Agreement, dated February 19, 2009. (16) |
| 10.23 | | Form of Note Exchange Agreement, dated March 16, 2009, between Glowpoint and the holders set forth therein. (16) |
| 10.24 | | Form of Securities Purchase Agreement, dated March 16, 2009, between Glowpoint and the holder set forth therein. (16) |
| 10.25 | | Form of Series A Preferred Consent and Exchange Agreement, dated March 16, 2009, between Glowpoint and the holders set forth therein. (16) |
| 10.26 | | Employment Agreement Amendment with Joseph Laezza, dated March 12, 2009. (16) |
| 10.27 | | Employment Agreement Amendment with Edwin F. Heinen, dated March 12, 2009. (16) |
| 10.28 | | Employment Agreement Amendment with David W. Robinson, dated March 12, 2009. (16) |
| 10.29 | | Form of Series A-1 Preferred Consent and Exchange Agreement, dated August 11, 2009, between Glowpoint and the holders set forth therein. (18) |
| 10.30 | | Form of Warrant Exchange Agreement, dated August 11, 2009, between Glowpoint and the holders set forth therein. (18) |
| 10.31 | | Form of Registration Rights Agreement, dated August 11, 2009, between Glowpoint and the holders set forth therein. (18) |
| 10.32 | | Form of Series B Stock Purchase Agreement, dated as of March 29, 2010, between Glowpoint and the purchasers set forth therein. (19) |
| 10.33 | | Form of Series A-2 Preferred Exchange Agreement, dated March 29, 2010, between Glowpoint and the holders set forth therein. (19) |
| 10.34 | | Form of Series A-2 Preferred Consent Agreement, dated March 29, 2010, between Glowpoint and the holders set forth therein. (19) |
| 10.35 | | Employment Agreement Amendment with Joseph Laezza, dated March 30, 2010. (21)(7) |
| 10.36 | | Employment Agreement Amendment with David W. Robinson, dated March 30, 2010. (21)(7) |
| 10.37 | | Employment Agreement Amendment with Edwin F. Heinen, dated March 30, 2010. (21)(7) |
| 10.38 | | Master Subcontracting Agreement between Polycom, Inc. and Glowpoint, Inc., dated November 26, 2007. (21)(7) |
| 10.39 | | Form of Restricted Stock Award Agreement (20)(21) and Schedule of Recently Reported Restricted Stock Awards. (21)(7) |
| 10.40 | | Loan and Security Agreement, dated as of June 16, 2010, between Glowpoint and Silicon Valley Bank. (22) |
| 10.41 | | Separation Agreement between Glowpoint and David W. Robinson effective as of August 6, 2010. (23) |
| 10.42 | | Restricted Stock Award Agreement between Glowpoint and David W. Robinson effective as of August 6, 2010. (23) |
| 10.43 | | Stock Option Award Agreement between Glowpoint and David W. Robinson effective as of August 6, 2010. (23) |
| 10.44 | | Amendment to Stock Option Awards between Glowpoint and David W. Robinson effective as of August 6, 2010. (23) |
| 10.45 | | Amended and Restated Employment Agreement dated August 30, 2010 between Glowpoint, Inc. and Joseph Laezza. (24) |
| 10.46 | | Amended and Restated Employment Agreement dated August 30, 2010 between Glowpoint, Inc. and Edwin F. Heinen. (24) |
| 10.47 | | Form of Series B Stock Purchase Agreement, dated as of September 30, 2010, between Glowpoint and the purchasers set forth therein. (25) |
| 10.48 | | Form of Series A-2 Preferred Exchange Agreement, dated September 30, 2010, between Glowpoint and the holders set forth therein. (25) |
| 10.49 | | Form of Series A-2 Preferred Consent Agreement, dated September 30, 2010, between Glowpoint and the holders set forth therein. (25) |
| 10.50 | | Employment Agreement between Glowpoint and John R. McGovern, dated as of December 23, 2010. (26) |
| 10.51 | | Separation Agreement between Glowpoint and Edwin F. Heinen, dated as of December 27, 2010. (26) |
| 17.1 | | Letter of Resignation from Aziz Ahmad, dated March 18, 2009. (16) |
| 17.2 | | Letter of Resignation from Richard Reiss, dated March 18, 2009. (16) |
| 17.3 | | Letter of Resignation from Bami Bastani, dated May 28, 2009. (17) |
| 17.4 | | Letter of Resignation from Dean Hiltzik, dated May 28, 2009. (17) |
| 21.1 | | Subsidiaries of Glowpoint, Inc. (12) |
| 23.1 | | Consent of Accountants—EisnerAmper LLP. (26) |
| 23.2 | | Consent of Accountants—Amper, Politziner & Mattia, LLP. (26) |
| 31.1 | | Rule 13a—14(a)/15d—14(a) Certification of the Chief Executive Officer. (21)(26) |
| 31.2 | | Rule 13a—14(a)/15d—14(a) Certification of the Chief Financial Officer. (21)(26) |
| 32.1 | | Section 1350 Certification of the Chief Executive Officer. (21)(26) |
| 32.2 | | Section 1350 Certification of the Chief Financial Officer. (21) |
99.1
| | Press Release. (21)(26) |
| (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'sRegistrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, and incorporated herein by reference. Filed herewith.
|
| (21) | Filed as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and incorporated herein by reference. |
| (22) | Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 18, 2010, 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 August 6, 2010, 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 September 3, 2010, 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 October 4, 2010, and incorporated herein by reference. |
Pursuant to the requirement of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrantregistrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 31, 2010
16, 2011
| | GLOWPOINT, INC. |
| | | |
| | By: | /s/ Joseph Laezza |
| | | Joseph Laezza |
| | | Co-ChiefChief 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. HeinenJohn R. McGovern 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 Registrantregistrant as of this 3116stth day of March 20102011 in the capacities indicated.
| /s/ Joseph Laezza | | Co-ChiefChief Executive Officer and President (Principal Executive Officer) |
| Joseph Laezza | | |
| | | |
/s/ Edwin F. HeinenJohn R. McGovern | | Chief Financial Officer (Principal Financial and Accounting Officer) |
Edwin F. HeinenJohn R. McGovern | | |
| | | |
| /s/ Grant Dawson | | Director |
| Grant Dawson | | |
| | | |
| /s/ James Lusk | | Director |
| James Lusk | | |
| | | |
/s/ David W. Robinson | | Director and Co-Chief Executive Officer |
David W. Robinson | | |
| | |
/s/ Peter RustKenneth Archer | | Director |
Peter RustKenneth Archer | | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
| | Board of Directors and Stockholders of |
We have audited the accompanying consolidated balance sheetssheet of Glowpoint, Inc.Inc and Subsidiaries (the “Company”) as of December 31, 2009 and 2008,2010, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the yearsyear 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.audit.
We conducted our auditsaudit 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 made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provideaudit provides 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, Inc. and Subsidiaries as of December 31, 2009 and 2008,2010, and the results of their operations and their cash flows for the yearsyear then ended December 31, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America.
We also have audited the adjustments to the 2009 consolidated financial statements to retroactively apply the change in accounting for the reverse stock split and discontinued operations, as described in Notes 2 and 8, respectively. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2009 consolidated financial statements of the Company other than with respect to these adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2009 consolidated financial statements taken as a whole.
/s/ EisnerAmper LLP
March 16, 2011
Edison, New Jersey
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
| Board of Directors and Stockholders of |
We have audited, before the effects of the adjustments to retroactively apply the change in accounting for the reverse stock split and discontinued operations as described in Notes 2 and 8, the accompanying consolidated balance sheet of Glowpoint, Inc and Subsidiaries (the “Company”) as of December 31, 2009, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the year then ended. The 2009 consolidated financial statements before the effects of the adjustments discussed in Notes 2 and 8 are not presented herein. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of 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 made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, before the effects of the adjustments to retroactively apply the change in accounting for the reverse stock split and discontinued operations as described in Notes 2 and 8, present fairly, in all material respects, the financial position of Glowpoint, Inc. and Subsidiaries as of December 31, 2009, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to audit, review, or apply any procedures to the adjustments for the reverse stock split and discontinued operations as described in Notes 2 and 8 and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by EisnerAmper LLP.
/s/ Amper, Politziner & MATTIA,Mattia, LLP
March 30, 2010
Edison, New Jersey
GLOWPOINT, INC.
(In thousands, except par value and shares)
| | | | |
| ASSETS | | | | | | |
| 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.
GLOWPOINT, INC.
(In thousands, except per share data)
| | | | |
| | | | | | | |
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 | |
| | | | |
| ASSETS | | | | | | |
| Current assets: | | | | | | |
Cash | | $ | 2,035 | | | $ | 587 | |
| Accounts receivable, net of allowance for doubtful accounts of $250 and $227, respectively | | | 2,706 | | | | 3,063 | |
Net current assets of discontinued operations | | | 15 | | | | 257 | |
Prepaid expenses and other current assets | | | 377 | | | | 291 | |
Total current assets | | | 5,133 | | | | 4,198 | |
Property and equipment, net | | | 3,148 | | | | 2,682 | |
Other assets | | | 83 | | | | 31 | |
Total assets | | $ | 8,364 | | | $ | 6,911 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| Current liabilities: | | | | | | | | |
Revolving loan facility | | $ | 750 | | | $ | — | |
Accounts payable | | | 2,333 | | | | 3,207 | |
Accrued expenses | | | 1,352 | | | | 901 | |
Accrued sales taxes and regulatory fees | | | 739 | | | | 888 | |
Customer deposits | | | 243 | | | | 308 | |
Deferred revenue | | | 242 | | | | 259 | |
Total current liabilities | | | 5,659 | | | | 5,563 | |
| | | | | | | | | |
| Long term liabilities: | | | | | | | | |
| Accrued sales taxes and regulatory fees, less current portion | | | — | | �� | | 195 | |
Total long term liabilities | | | — | | | | 195 | |
Total liabilities | | | 5,659 | | | | 5,758 | |
| | | | | | | | | |
| Commitments and contingencies | | | | | | | | |
| | | | | | | | | |
| Stockholders’ equity: | | | | | | | | |
| Preferred stock Series B, non-convertible; $.0001 par value; $100,000 stated value; 100 shares authorized and 100 and 0 shares issued and outstanding at December 31, 2010 and 2009, respectively, liquidation value of $10,000 | | | 10,000 | | | | — | |
| Preferred stock Series A-2, convertible; $.0001 par value; $7,500 stated value; 7,500 shares authorized and 1,059 and 4,509 shares issued and outstanding at December 31, 2010 and 2009 recorded at fair value, respectively (liquidation value of $7,945 and $33,815, respectively) (see Note 12 for information related to Insider Purchasers) | | | 3,354 | | | | 14,275 | |
| Common stock, $.0001 par value;150,000,000 shares authorized; 21,353,604 and 16,632,772 shares issued at December 31, 2010 and December 31, 2009, respectively; 21,353,604 and 16,241,549 shares outstanding, at December 31, 2010 and 2009, respectively, after adjustments to reflect the reverse stock split of 1 for 4 effective January 14, 2011 | | | 9 | | | | 7 | |
Additional paid-in capital | | | 154,410 | | | | 150,659 | |
Accumulated deficit | | | (165,068 | ) | | | (162,405 | ) |
| | | | 2,705 | | | | 2,536 | |
Less: Treasury stock, 0 and 391,223 shares at cost, after adjustments to reflect the reverse stock split of 1 for 4 effective January 14, 2011 | | | — | | | | (1,383 | ) |
Total stockholders’ equity | | | 2,705 | | | | 1,153 | |
Total liabilities and stockholders’ equity | | $ | 8,364 | | | $ | 6,911 | |
See accompanying notes to consolidated financial statements.
GLOWPOINT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)OPERATIONS Years Ended December 31, 2009 and 2008 (In thousands, except per share data)
(In thousands)
| | | | | | | | | | | Series A-2 | | | | |
| | | | | Additional | | | Accum- | | | (Note A) | | | | |
| | | | | Paid In | | | ulated | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | |
| | | | | | | |
Revenue | | $ | 27,550 | | | $ | 25,255 | |
| | | | | | | | | |
| Operating expenses: | | | | | | | | |
Network and infrastructure | | | 11,389 | | | | 11,005 | |
Global managed services | | | 8,226 | | | | 7,476 | |
Sales and marketing | | | 4,142 | | | | 3,193 | |
General and administrative | | | 5,330 | | | | 4,392 | |
Depreciation and amortization | | | 1,078 | | | | 1,056 | |
Sales taxes and regulatory fees | | | — | | | | (2,500 | ) |
Total operating expenses | | | 30,165 | | | | 24,622 | |
Income (loss) from continuing operations | | | (2,615 | ) | | | 633 | |
| | | | | | | | | |
| Interest and other expense: | | | | | | | | |
Interest (income) expense, net | | | 126 | | | | (543 | ) |
Amortization of deferred financing costs | | | 34 | | | | — | |
Loss on extinguishment of debt | | | — | | | | 254 | |
| Expense for increase in estimated fair value of derivative financial instruments | | | — | | | | 1,848 | |
Total interest and other expense, net | | | 160 | | | | 1,559 | |
Net loss from continuing operations | | | (2,775 | ) | | | (926 | ) |
Income from discontinued operations | | | 112 | | | | 379 | |
Net loss | | | (2,663 | ) | | | (547 | ) |
Loss on redemption of preferred stock | | | (934 | ) | | | (64 | ) |
Net loss attributable to common stockholders | | $ | (3,597 | ) | | $ | (611 | ) |
| | | | | | | | | |
| Net loss attributable to common stockholders per share (Note 2): | | | | | | | | |
Continuing operations | | $ | (0.20 | ) | | $ | (0.08 | ) |
Discontinued operations | | $ | 0.01 | | | $ | 0.03 | |
Basic and diluted | | $ | (0.19 | ) | | $ | (0.05 | ) |
| | | | | | | | | |
| Weighted average number of common shares (Note 2): | | | | | | | | |
Basic and diluted | | | 19,127 | | | | 13,235 | |
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.
GLOWPOINT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY Years Ended December 31, 2010 and 2009
(In thousands)
| | | | |
| | | | | | | |
| 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 | |
| | | | | | Series A-2 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Additional Paid In | | | Accum-ulated | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2008 | | | — | | | $ | — | | | | 4 | | | $ | 11,574 | | | | 12,094 | | | $ | 5 | | | $ | 172,000 | | | $ | (185,409 | ) | | | 391 | | | $ | (1,383 | ) | | $ | (3,213 | ) |
| Cumulative effect of reclassifica-tion of warrants (ASC Topic 815) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (26,173 | ) | | | 23,551 | | | | — | | | | — | | | | (2,622 | ) |
| Balance at January 1, 2009, as adjusted | | | — | | | | — | | | | 4 | | | | 11,574 | | | | 12,094 | | | | 5 | | | | 145,827 | | | | (161,858 | ) | | | 391 | | | | (1,383 | ) | | | (5,835 | ) |
| Stock-based compensation - restricted stock | | | — | | | | — | | | | — | | | | — | | | | 184 | | | | — | | | | 277 | | | | — | | | | — | | | | — | | | | 277 | |
| Stock-based compensation - stock options | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 279 | | | | — | | | | — | | | | — | | | | 279 | |
| Loss on redemption of Preferred Stock | | | — | | | | — | | | | — | | | | 64 | | | | — | | | | — | | | | (64 | ) | | | — | | | | — | | | | — | | | | — | |
| August 2009 Warrant Exchange | | | — | | | | — | | | | — | | | | — | | | | 4,343 | | | | 2 | | | | (2 | ) | | | — | | | | — | | | | — | | | | — | |
| Exercise of stock options | | | — | | | | — | | | | — | | | | — | | | | 12 | | | | — | | | | 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 | |
Costs related to 2009 Private Placements | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (426 | ) | | | — | | | | — | | | | — | | | | (426 | ) |
Net loss for the year | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (547 | ) | | | — | | | | — | | | | (547 | ) |
Balance at January 1, 2010 | | | — | | | $ | — | | | | 5 | | | $ | 14,275 | | | | 16,633 | | | $ | 7 | | | $ | 150,659 | | | $ | (162,405 | ) | | | 391 | | | $ | (1,383 | ) | | $ | 1,153 | |
| Stock-based compensation - restricted stock | | | — | | | | — | | | | — | | | | — | | | | 465 | | | | — | | | | 298 | | | | — | | | | — | | | | — | | | | 298 | |
| Stock-based compensation - stock options | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 216 | | | | — | | | | — | | | | — | | | | 216 | |
2010 Preferred Stock Exchange | | | 60 | | | | 6,000 | | | | (2 | ) | | | (5,066 | ) | | | — | | | | — | | | | (934 | ) | | | — | | | | — | | | | — | | | | — | |
| Warrants issued in connection with 2010 Private Placements | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 443 | | | | — | | | | — | | | | — | | | | 443 | |
| Conversion of Preferred Stock | | | — | | | | — | | | | (2 | ) | | | (5,855 | ) | | | 4,624 | | | | 2 | | | | 5,853 | | | | — | | | | — | | | | — | | | | — | |
Cashless exercise of warrants | | | — | | | | — | | | | — | | | | — | | | | 17 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Exercise of stock options | | | — | | | | — | | | | — | | | | — | | | | 6 | | | | — | | | | 8 | | | | — | | | | — | | | | — | | | | 8 | |
| Sale of Series B Preferred Stock | | | 40 | | | | 4,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4,000 | |
| Cancellation of treasury stock | | | — | | | | — | | | | — | | | | — | | | | (391 | ) | | | — | | | | (1,383 | ) | | | — | | | | (391 | ) | | | 1,383 | | | | — | |
Costs related to 2010 Private Placements | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (750 | ) | | | — | | | | — | | | | — | | | | (750 | ) |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2,663 | ) | | | — | | | | — | | | | (2,663 | ) |
Balance at December 31, 2010 | | | 100 | | | $ | 10,000 | | | | 1 | | | $ | 3,354 | | | | 21,354 | | | $ | 9 | | | $ | 154,410 | | | $ | (165,068 | ) | | | — | | | $ | — | | | $ | 2,705 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Note A – Adjusted to retroactively reflect the reverse stock split of 1 for 4 effective on January 14, 2011 | |
Note B – 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.
GLOWPOINT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| �� | | | |
| | | | | | | |
| 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 | |
| | | | | | | | | |
| | | | |
| | | | | | | |
| Cash flows from operating activities: | | | | | | |
| Net loss | | $ | (2,663 | ) | | $ | (547 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Depreciation and amortization | | | 1,078 | | | | 1,056 | |
| Bad debt expense | | | 290 | | | | 250 | |
| Loss on extinguishment of debt | | | — | | | | 254 | |
| Amortization of deferred financing costs | | | 34 | | | | — | |
| Accretion of discount on Senior Secured Notes | | | — | | | | 23 | |
| Loss on disposal of equipment | | | 15 | | | | 8 | |
| Other expense recognized for the increase in the estimated fair value of the derivative financial instruments | | | — | | | | 1,848 | |
| Stock-based compensation | | | 514 | | | | 556 | |
| Increase (decrease) in cash attributable to changes in assets and liabilities: | | | | | | | | |
| Accounts receivable . | | | 67 | | | | (585 | ) |
| Prepaid expenses and other current assets | | | (86 | ) | | | 3 | |
| Other assets | | | (86 | ) | | | 2 | |
| Accounts payable | | | (874 | ) | | | 903 | |
| Accrued sales taxes and regulatory fees . | | | (344 | ) | | | (3,452 | ) |
| Accrued expenses | | | 451 | | | | 127 | |
| Customer deposits | | | (65 | ) | | | (298 | ) |
| Deferred revenue | | | (17 | ) | | | (66 | ) |
| Net cash (used in) provided by operating activities – continuing operations | | | (1,686 | ) | | | 82 | |
| Net cash provided by operating activities - discontinued operations | | | 242 | | | | 42 | |
| Net cash (used in) provided by operating activities | | | (1,444 | ) | | | 124 | |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Proceeds from sale of equipment | | | 61 | | | | — | |
| Purchases of property and equipment | | | (1,620 | ) | | | (1,213 | ) |
| Net cash used in investing activities | | | (1,559 | ) | | | (1,213 | ) |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Proceeds from preferred stock offerings | | | 4,000 | | | | 1,800 | |
| Proceeds from exercise of stock options | | | 8 | | | | 17 | |
| Principal payments for capital lease | | | — | | | | (234 | ) |
| Proceeds from revolving loan facility | | | 750 | | | | — | |
| Purchase of Senior Secured Notes | | | — | | | | (750 | ) |
Costs related to private placements | | | (307 | ) | | | (384 | ) |
| Net cash provided by financing activities | | | 4,451 | | | | 449 | |
| Increase (decrease) in cash | | | 1,448 | | | | (640 | ) |
| Cash at beginning of year | | | 587 | | | | 1,227 | |
| Cash at end of year | | $ | 2,035 | | | $ | 587 | |
| | | | | | | | | |
| Supplement disclosures of cash flow information: | | | | | | | | |
| Cash paid during the year for interest | | $ | 126 | | | $ | 161 | |
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS| | | | |
| | | | | | | |
| Non-cash investing and financing: | | | | | | |
| Costs related to private placements incurred by issuance of placement agent warrants | | $ | 443 | | | $ | 42 | |
| Additional Senior Secured Notes issued as payment for interest | | | — | | | | 55 | |
| Exchange of Senior Secured Notes for Series A-1 Preferred Stock | | | — | | | | 1,076 | |
| | | | | | | | | |
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20092010 and 2008
2009
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 carrier-grade provider of cloud-based managed video services for telepresence and video conferencing. Our suite of robust managed services empower organizations to seamlessly and consistently communicate via video over any network and with any video technology platform, enabling them to sharply boost the impact and productivity of their internal and external communications while at the same time reduce their on-going operating costs and total cost of ownership. Glowpoint supportsglobal business community. The Company pursues its recurring revenue business model by currently supporting thousands of video endpoints inand telepresence systems and delivering service to more than 500 different enterprises in over 35 countries and ouraround the globe. Glowpoint’s managed services enable the integration of video into any unified communications in the market for global managed video and global business-to-business (“B2B”) exchange(B2B) services are driving video collaboration for Fortune® 500 companies, governmental and educational institutions, and media and entertainment broadcasters. solutions. Glowpoint operates in one reporting segment.
Glowpoint also provides resale and wholesale programs includingand private-labeled (branded) resale options for hardware manufacturers, carriers, unified communications providers,network operators, and system integrators seeking to offer this servicevideo services as a value-addvalue-added addition to their collaboration and communications offerings. Today, the Company maintains multiple strategic partnerships that are core to its global sales strategy.
Glowpoint’s services, which are accessible globally, 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 a service” industry or other cloud-based services.
Glowpoint’s core service offerings include video operations (“VNOC”) managed service, business-to-business exchange, video conferencing services, and professional services. A critical differentiator of Glowpoint is that our solutions are hardware agnostic and 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’s services may be applied.
Glowpoint’s core value proposition for customers includes driving wide adoption and usagedesigned to enable integration of video communications, increasing their return on investment, lower their total cost of ownership,into enterprise Unified Communications environments by delivery through Glowpoint’s Open Video™ cloud-based, shared infrastructure model, which offers conferencing scalability and providing access to expertisesecurity for large enterprises and skills not available elsewhere. Glowpoint provides an alternative to capital intensive, premise-based infrastructure, which customers typically have had to purchase forsmall and medium sized businesses around the video environment to function, as well as the tools and services to enable wide adoption of the video communications throughout their business. Glowpoint has become the recognized leader of managedworld. Open Video offers telepresence, video and global video exchange services that provide businesses and service providersunified collaboration users a way to link together their “islands of video”meet and communicate across third party privatevarious hardware/software platforms and carrier networks in a secure, open fashion – removing all barriers to video collaboration and enabling organizations to drive wide adoption.communications. Open Video includes three service categories:
| · | OV Connect - enables customers to connect to other video users through peering arrangements with MPLS carriers, Ethernet exchanges, the public Internet, and cross connects at co-location facilities. Glowpoint supports the convergence of voice, data and video using the customer’s existing network connection or a dedicated private network if required. |
| · | OV Collaborate - offers comprehensive conferencing services, including scalable, pre-scheduled and “ad-hoc” confer-encing resources, using hosted infrastructure in the cloud or a client’s infrastructure. In addition to connecting virtually any device to a call, our conference producers can manage, record, and stream video events to the Internet. |
| · | OV Manage - includes the video operations (VNOC) management system that provides a complete solution for end-to-end management of immersive and non-immersive telepresence rooms. OV Manage offers flexible options, including a complete cloud-based infrastructure that offers customers the opportunity to purchase only the endpoints themselves, as well as packages that cater to customers who elect to purchase their own video infrastructure. |
Other services provided by Glowpoint include:
| · | Professional Services - provides a complement 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, AVI-SPL, TATA Commincations, a global telecommunications carrier, and for a host of others who offer Glowpoint’s managed services to their client base. |
| · | Broadcast Solutions - provides IP-based broadcast solutions for leading sports broadcasters, sports leagues, news outlets, cable stations, and collegiate conferences. Glowpoint's "always-on," managed service and exclusive video-network exchange service reduces transport costs and program operations by up to 80 percent as compared to traditional satellite feeds and associated operations. Glowpoint enables ultra-clean HD- and SD-interactive broadcasts, provides real-time communications and two-up capability for live-to-air and live-to-web broadcasts, all delivered through proactively maintained flexible solutions. |
After a strategic review we determined that our Integrated Services Digital Network (“ISDN”) resale services no longer fit into our strategic plan. In September 2010, we entered into an agreement with an independent telecommunications service provider to transfer our customers receiving this service to them, and prospectively we will receive a 15% recurring referral fee for those revenues. The transfer will be completed in the second quarter of 2011 (see Note 8).
Note 2 - Basis of Presentation, Liquidity and Summary of Significant Accounting Policies
Liquidity
For the year ended December 31, 2009,2010, we incurred a net loss attributable to common stockholders of $611,000$3,597,000, of which $934,000 was related to a non-cash loss on redemption of preferred stock incurred in connection with the 2010 Private Placements (as discussed in Note 17), and although we generatedhad a negative cash flow from operationsoperating activities of $124,000 for the year ended December 31, 2009, we have had negative operating cash flows since our inception.$1,444,000. At December 31, 2009,2010, we had $2,035,000 of cash, of $587,000, anegative working capital deficit of $1,365,000$526,000 and an accumulated deficit of $162,405,000. However,$165,068,000. In October 2010, we implemented a plan to reduce operating costs. We have historically been able to raise capital in private placements, most recently $3,000,000 in March 2010 and $1,000,000 in September 2010, as needed to fund operations and provide growth capital. In June 2010, the Company entered into a Revolving Loan Facility (as discussed in Note 7) pursuant to which the Company may borrow up to $5,000,000 for working capital purposes and under which we had unused borrowing availability of approximately $1,600,000 as of December 31, 2010 . The Revolving Loan Facility matures in June 2012. In addition to our financing activity, we also recently amended the terms of our preferred stockSeries A-2 Preferred Stock and Series B Preferred Stock to eliminate any dividends until January 2013 and have reached settlements withregarding a majority of the taxing authorities inliability for which we had accrued sales and use taxes and regulatory fees. Based primarily on the October 2010 cost reduction plan, the 2010 Private Placements, our March 2010 financing (see also Note 24),new Revolving Loan Facility, the elimination of dividends until January 2013, along with our cash flow projection, the Company believes that it has, and will have, sufficient cash flow to fund its operations through at least March 31, 2011.2012. There can be no assurances;assurances, however, that we will be able to raise additional capital as may be needed or upon acceptable terms, nor that current economic conditions will not negatively impact us. If the current economic conditions negatively impact us and we are unable to raise any additional capital that may be needed uponon terms acceptable terms,to us, it could have a material adverse effect on the Company.
Principles of Consolidation
The consolidated financial statements include the accounts of Glowpoint and our wholly owned subsidiary, GP Communications, LLC. All material inter-company balances and transactions have been eliminated in consolidation.
Reclassifications
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 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.
Reverse Stock Split - Reclassifications
On January 10, 2011, the Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment to its Amended and Restated Certificate of Incorporation (the "Certificate of Amendment"), effecting a reverse stock split of the Company's common stock, par value $0.0001 per share, at a ratio of one-for-four. The reverse stock split was effective on January 14, 2011. The Company's stockholders approved the Certificate of Amendment on June 17, 2010, and the Company's Board of Directors authorized the implementation of the reverse stock split on December 17, 2010.
As a result of the reverse stock split, every four shares of the Company's issued and outstanding common stock were combined into one share of common stock. Any fractional shares resulting from the reverse stock split were paid in cash to the stockholder. The reverse stock split reduced the number of the Company's shares of common stock as shown in the consolidated balance sheets as follows:
| | | | | | | |
| | | Adjusted to reflect reverse stock split | | | | | | Adjusted to reflect reverse stock split | | | | |
| Authorized shares | | | 150,000,000 | | | | 150,000,000 | | | | 150,000,000 | | | | 150,000,000 | |
| Shares issued | | | 21,353,604 | | | | 85,414,416 | | | | 16,632,772 | | | | 66,531,087 | |
| Shares outstanding | | | 21,353,604 | | | | 85,414,416 | | | | 16,241,549 | | | | 64,966,196 | |
| | | | | | | | | | | | | | | | | |
The share amounts of common and treasury stock, warrants and options shown in the accompanying consolidated financial statements have been adjusted to reflect the reverse stock split, at a ratio of one-for-four for all periods presented. The exercise price for all options and warrants and the conversion price for preferred stock in the accompanying consolidated financial statements have been adjusted to reflect the reverse stock split, by multiplying the original exercise or conversion price by four.
Reclassifications
The accompanying consolidated financial statements reflect the operating results and balance sheet items of the discontinued operations separately from continuing operations. Prior year financial statements have been restated in conformity with generally accepted accounting principles to present the operations of the ISDN resale services as a discontinued operation.
Certain other prior year amounts have been reclassified to conform to the current period presentation and the impact of the reverse stock split as discussed above.
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 recoverability 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 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 valueValue of Financial Instruments
The Company considers its cash, accounts receivable and 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 18The carrying value of our Revolving Loan Facility approximates fair value due to its short term maturities and variable interest rates.
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 additional discussion.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. The Company did not have any unobservable inputs during the year ended, and as of, December 31, 2010. The Company did not have any unobservable inputs as of December 31, 2009.
Accounting Standards Updates
In JuneOctober 2009, the Financial Standards 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.
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”Update 2009-13 (“ASU 2009-14”2009-13”), 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 ASCAccounting Standards Codification (“ASC”) 605-25, “Revenue Recognition — Multiple Element ArrangementsArrangements.”. 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 evaluatingadoption of ASU 2009-13 did not have a material impact on the impact that this topic will have on itsCompany’s consolidated results of operations and financial statements.condition.
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 topicTopic 815“Derivatives and Hedging” (“ASC Topic 815”). The estimated fair value of the derivative liabilities is calculated using the Black-Scholes methodoption valuation model where applicable and such estimates are revalued at each balance sheet date, with changes in value recorded as other incomerecognized in our consolidated statements of operations in “Increase or expense“decrease” in the consolidated statementFair Value of operations.Derivative Financial Instruments.” As a result of the Company’s adoption of ASC Topic 815, effective January 1, 2009, all of the then-outstanding warrants were accounted for as derivatives. See Note 11.
As partIn the 2009 Private Placements (see Note 16), all 10,228,000 of the August 2009 Warrant and Preferred Stock Exchange (See Note 9), all 40,912,000 of thethen-outstanding warrants to acquire shares of common stock with an exercise price of $0.40 (the “$0.40 Warrants”)$1.60 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,$1.60, 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 39,088,0009,772,000 of the $0.40 Warrantsthose warrants were exchanged for common stock.
All of our currently outstanding warrants require the consent of a majority of the warrant holders in order to consummate a financing at a price per share of common stock andbelow such warrants’ exercise price, thereby eliminating the remaining 1,824,000 $0.40 Warrants are outstanding until November 2013. The accruedprovisions that protect holders from a decline in the stock price, as well as the need to account for a derivative liability for such warrants. As of $4,751,000, which wasDecember 31, 2010, the Company did not have any derivative liabilities 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 theits derivative liability was immaterial at December 31, 2009.financial instruments.
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 bridgingconferencing 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 twelve12 to twenty-four24 month period estimated life of the customer relationship. Revenue related to integration services is recognized at the time the services are performed, and presented as required by ASC topicTopic 605 “Revenue Recognition”Recognition.”. Revenues derived from other sources are recognized when services are provided or events occur.
Taxes Billed to Customers and Remitted to Taxing Authorities
We recognize taxes billed to customers in revenues and taxes remitted to taxing authorities in our operating costs.costs, network and infrastructure. For the years ended December 31, 20092010 and 20082009 we included taxes of $1,912,000 and $1,717,000, respectively, in revenues taxes billed to customers of $1,893,000 and $1,935,000, respectively. For the years ended December 31, 2009 and 2008 we included taxes of $1,791,000 and $1,613,000, respectively, in operating costs - network and infrastructure taxes paid to taxing authorities of $1,812,000 and $1,885,000, respectively.costs.
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 as required by ASC topic 360 “Property, Plant and Equipment”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. In the year ended December 31, 2009 and 2008, noNo impairment losses were recorded.recorded through December 31, 2010.
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”. Capitalized 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.Costs
The Company capitalizes certain costs incurred in connection with developing or obtaining internal-use software. All software development costs have been appropriately accounted for as required by ASC topicTopic 350.40 “Intangible – Goodwill and Other – Internal-Use Software”.Software.” Capitalized software costs are included in “Property and Equipment” on our consolidated Balance Sheetsbalance sheets and are amortized over three to four years. Software costs that do not meet capitalization criteria are expensed immediately.as incurred. For the years ended December 31, 20092010 and 20082009, we capitalized internal-use software costs of $473,000$390,000 and $138,000,$473,000, respectively. For the years ended December 31, 20092010 and 20082009 we recorded related amortization of $65,000$239,000 and $12,000,$142,000, respectively. For the years ending December 31, 20102011 through 20132014 we expect to amortize $171,000, $179,000, $158,000$235,000, $204,000, $62,000 and $26,000,$3,000, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash, and trade accounts receivable. We place our cash primarily in commercial checking accounts and money market funds.accounts. Commercial bank balances may from time to time exceed federal insurance limits; money market funds are uninsured.limits.
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.
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.
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 the years ended December 31, 2010 and 2009 and 2008 iswas the same as basic loss per share. Potential shares of common stock associated with outstanding options and warrants and shares issuable upon conversion of our 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.
Stock-based Compensation
Stock based awards have been appropriately accounted for as required by ASC topic 718 “Compensation – Stock Compensation” (“ASC topic 718”), under. 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 pricingvaluation 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 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, 2009 and 2008:Treasury Stock
| | | | | | | |
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 | |
| | | | | | | | | |
TheIn March 2010, the Company calculates expected volatility for a stock-based grant based on historic daily stock price observationscancelled 391,000 shares of our common stock duringthat had been acquired by the period immediately preceding the grant that is equalCompany primarily in length to the expected term of the grant. The expected term of the options2007 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 usedsuch cancellation has been recorded in the Black-Scholes option valuation model are highly subjective, and can materially affect the resulting valuation.consolidated balance sheet at $1,383,000.
Note 3 - Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consistconsisted of the following at December 31, 20092010 and 20082009 (in thousands):
| | | | | | | | | | | | | |
Prepaid maintenance contracts | | $ | 113 | | | $ | 112 | | | $ | 164 | | | $ | 113 | |
Deferred installation costs | | | 97 | | | | 76 | | | | 55 | | | | 97 | |
Prepaid insurance | | | 40 | | | | 40 | | | | 45 | | | | 40 | |
Prepaid rent | | | | 29 | | | | — | |
Other prepaid expenses | | | 41 | | | | 66 | | | | 84 | | | | 41 | |
| | | $ | 291 | | | $ | 294 | | | $ | 377 | | | $ | 291 | |
| | | | | | | | | | |
Note 4 - Property and Equipment
Property and equipment consistsconsisted of the following at December 31, 20092010 and 20082009 (in thousands):
| | | | | | | | | | | | | | | |
Network equipment and software | | $ | 9,593 | | | $ | 9,200 | | 3 to 5 Years | | $ | 8,982 | | | $ | 9,593 | | 3 to 5 Years |
Computer equipment and software | | | 2,571 | | | | 2,356 | | 3 to 4 Years | | | 2,619 | | | | 2,571 | | 3 to 4 Years |
Bridging equipment | | | 2,008 | | | | 2,008 | | 5 Years | | | 1,517 | | | | 2,008 | | 5 Years |
Leasehold improvements | | | 296 | | | | 255 | | Note A | | | 237 | | | | 296 | | Note A |
Office furniture and equipment | | | 451 | | | | 324 | | 5 Years | | | 554 | | | | 451 | | 5 Years |
| | | | 14,919 | | | | 14,143 | | | | | 13,909 | | | | 14,919 | | |
| Accumulated depreciation and amortization | | | (12,237 | ) | | | (11,610 | ) | | | | (10,761 | ) | | | (12,237 | ) | |
| | | $ | 2,682 | | | $ | 2,533 | | | | $ | 3,148 | | | $ | 2,682 | | |
| | | | | | | | | | | |
Note A – Depreciated over the shorter period of the estimated useful life (five years) or the lease term.
Related depreciation and amortization expense was $1,078,000 and $1,056,000 for the years ended December 31, 2010 and 2009, respectively.
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 and (ii) sales taxes and regulatory fees collected from customers andthat are 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.. 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. While we believe all of our estimates and assumptions are reasonable and will be sustained upon audit, actual liabilities and credits may differ.
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 total 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, 20092010 and 20082009 (in thousands):
| | | Settlements to be remitted to taxing authorities | | | Accrued sales taxes and regulatory fees | | | Collected sales taxes and regulatory fees | | | | |
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 | |
| | | | | | | | | | | | | | | | | |
| | | Settlements to be remitted to taxing authorities | | | Accrued sales taxes and regulatory fees | | | | |
January 1, 2009 | | $ | — | | | $ | 3,947 | | | $ | 3,947 | |
Settlements with tax authorities | | | 926 | | | | (293 | ) | | | 633 | |
Payments | | | — | | | | (213 | ) | | | (213 | ) |
Net Adjustments to accrual (Note B) | | | — | | | | (3,284 | ) | | | (3,284 | ) |
December 31, 2009 (Note A) | | | 926 | | | | 157 | | | | 1,083 | |
Collections, net of payments | | | 270 | | | | — | | | | 270 | |
Payments | | | (614 | ) | | | — | | | | (614 | ) |
December 31, 2010 | | $ | 582 | | | $ | 157 | | | $ | 739 | |
Note A – In 2009, $195,000 which was paid in 2010, was classified as a long term liability and the balance as a current liability in the consolidated balance sheets.
Note AB – 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 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. Adjustments to the accrual consistand the allocation to the statements of operations consisted of the following for the yearsyear ended December 31, 2009 and 2008 (in thousands):
| | | | | | | | | | | | Sales Taxes and Regulatory Fees | | | | |
Change in estimate | | $ | 1,829 | | | $ | (309 | ) | | $ | 1,829 | | | $ | 1,392 | | | $ | 437 | |
| Settlements from amnesty programs | | | 812 | | | | — | | | | 812 | | | | 618 | | | | 194 | |
Expiration of statute of limitations | | | 529 | | | | 213 | | | | 529 | | | | 403 | | | | 126 | |
Settlements from audits | | | 114 | | | | — | | | | 114 | | | | 87 | | | | 27 | |
| | | $ | 3,284 | | | $ | (96 | ) | | $ | 3,284 | | | $ | 2,500 | | | $ | 784 | |
| | | | | | | | | | | | | | | | | | | | | |
The adjustment to the sales tax and regulatory fee accrual for the years ended December 31, 2009 and 2008 were allocated in the statement of operations as follows (in thousands):
| | | | | | | |
| Sales taxes and regulatory fees | | $ | (2,500 | ) | | $ | (172 | ) |
Interest (income) expense | | | (784 | ) | | | 268 | |
| | | $ | (3,284 | ) | | $ | 96 | |
| | | | | | | | | |
Note 6 - Accrued Expenses
Accrued expenses consistconsisted of the following at December 31, 20092010 and 20082009 (in thousands):
| | | | | | | | | | | | | |
| Accrued compensation | | $ | 610 | | | $ | 502 | | | $ | 511 | | | $ | 610 | |
Accrued severance costs (Note 22) | | | | 470 | | | | — | |
Accrued communication costs | | | 182 | | | | 187 | | | | 299 | | | | 204 | |
Accrued professional fees | | | 30 | | | | 71 | | | | 21 | | | | 30 | |
Accrued interest | | | — | | | | 9 | | |
Other accrued expenses | | | 57 | | | | 73 | | | | 51 | | | | 57 | |
| | | $ | 879 | | | $ | 842 | | | $ | 1,352 | | | $ | 901 | |
| | | | | | | | | | |
Note 7 – 2008 Private Placement TransactionsRevolving Loan Facility
In November and December 2008,On June 16, 2010, the Company entered into a seriesLoan and Security Agreement (the “Revolving Loan Facility”) with Silicon Valley Bank (“SVB”) pursuant to which the Company may borrow up to $5,000,000 for working capital purposes. The Revolving Loan Facility matures on June 15, 2012. The amounts that can be borrowed at any given time are equal to the lesser of transactions$5,000,000 or 80% of the eligible accounts receivable, as defined. As of December 31, 2010, we had unused borrowing availability of $1,600,000. Outstanding principal amounts under the Revolving Loan Facility bear interest at a floating rate per annum equal to recapitalizePrime Rate as announced by SVB plus two percent (2%), payable monthly in arrears, subject to a minimum interest rate of 6%. The Company is also obligated to pay minimum monthly interest of $3,750 regardless of the amount borrowed. The SVB Prime Rate was 4% as of December 31, 2010. The Revolving Loan Facility is secured by a first priority security interest in all the Company’s assets, including, without limitation, its intellectual property. The Revolving Loan Facility contains a number of financial covenants, including without its limitation, covenants relating to minimum unrestricted cash balances and minimum monthly Adjusted EBITDA, as defined in the Revolving Loan Facility. At December 31, 2010, we were in compliance with the covenants, as defined, of the Revolving Loan Facility and there was $750,000 outstanding.
The Revolving Loan Facility financing costs, net of accumulated amortization, which are included in other assets in the accompanying consolidated balance sheet, raise funds, eliminatesheets, were $52,000 as of December 31, 2010. The financing costs for the derivative liabilities, extendRevolving Loan Facility are being amortized over the 12 to 24 month period through the maturity date of the Senior Secured NotesRevolving Loan Facility. During the year ended December 31, 2010, the amortization of financing costs was $34,000 and limitwas included as “Amortization of Deferred Financing Costs” in the consolidated statement of operations in Interest and Other Expense.
Note 8 – Discontinued Operations
Our ISDN resale services no longer fit into our overall strategic plan. In September 2010, we entered into an agreement with an independent telecommunications service provider to transfer these services and the related interest rate (the “2008 Private Placements”). In March 2009 (see Note 8),customers, and going forward the Company entered intowill receive a series15% monthly recurring referral fee for those revenues. The only remaining assets of transactionsthe ISDN resale services are the receivables for services provided prior to further recapitalize itsthe transfer for which the Company will retain and collect these accounts. It is anticipated that the transfer will be completed in the second quarter of 2011 and the Company will have no continuing involvement with the ISDN product line.
The Company accordingly classified these ISDN related revenues and expenses as discontinued operations in accordance with ASC 205.20 “Discontinued Operations.” The accompanying consolidated financial statements reflect the operating results and balance sheet raise funds and prepay or exchange all remaining Senior Secured Notes for shares of preferred stock. The following is a summaryitems of the componentsdiscontinued operations separately from continuing operations. Prior year financial statements have been restated in conformity with generally accepted accounting principles to present the operations of the 2008 Private Placement transactions (in thousands except shares):ISDN resale services as a discontinued operation.
Revenues from the ISDN resale services, reported as discontinued operations, for the years ended December 31, 2010 and 2009 were $620,000 and $1,284,000, respectively. Net income from the ISDN resale services, reported as discontinued operations, for the years ended December 31, 2010 and 2009 were $112,000 and $379,000, respectively. The assets and liabilities from the ISDN resale services, reported as net current assets of discontinued operations, for the years ended December 31, 2010 and 2009 were $15,000 and $257,000, respectively. No income tax provision was required to be recognized by the Company against income from the ISDN resale services over the related periods.
| | | Sale of Series A Preferred Stock | | | | | | Senior Secured Note Exchange | | | Elimination of Derivative Liability | | | Senior Secured Note Modification | | | Placement Agent Warrant Fee | | | | |
| 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 of 456 shares of its newly-created Series A Convertible Preferred Stock (“Series A Preferred Stock”) and Series A-3 warrants having an exercise price of $0.40Basic loss 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.
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 18) on the date of the sale and was 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 (the “2008 Preferred Stock Exchange”). The book value of the Series C Convertible Preferred Stock was $4,330,000. The Series A Preferred Stock was recorded in the balance sheet at $1,911,000 which was the fair value of the Series A Preferred Stock.
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 (the “Series A Fair Value”) be subtracted from net loss to arrive atcalculated by dividing 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 was 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 $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 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 $1,106,000 gain on the elimination of the derivative liability related to the February 2004 capital raise reducedstockholders 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 resulted in a credit to Paid in Capital.
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 was expensed, using the effective interest method, over the 22 month period to the maturity date of September 30, 2010 remaining 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 was paid in 2008 and the remaining $75,000 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 was 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):
| | | | |
| 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 | |
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 | | | | | | Senior Secured Note Exchange | | | Senior Secured Note Purchase | | | Placement Agent Warrant Fee | | | | |
| 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.
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.
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):
| | | | |
| 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).
| | | | | | | | | | |
| 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 equalweighted average 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.
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):
| | | | |
| Cash financing costs: | | | |
| Burnham Hill Partners placement agent fees | | $ | 75 | |
Legal and other professional fees | | | 23 | |
| | | $ | 98 | |
Note 10 - Senior Secured Notes
Senior Secured Notes and Senior Secured Notes Discount
In March and April 2006 and September 2007, we issued our Senior Secured Notes in private placements to private investors. The September 2007 private placement also included several officers and directors of the Company (“Insider Purchasers”). In November 2008, the holders of $10,802,000 of the Senior Secured Notes, including the Insider Purchasers, exchanged them for 2,701 shares of Series A Preferred Stock. Activity for the Senior Secured Notes and Senior Secured Notes discount during the year ended December 31, 2009 and as of December 31, 2008 and December 31, 2009 was as follows (in thousands):
| | | | | | | | | 2009 Private Placements Entries, Net | | | | |
| 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 | ) | | $ | — | |
| | | | | | | | | | | | | | | | | |
Duringperiod. For the years ended December 31, 2010 and 2009, and 2008, the accretionfollowing potential shares of discount was $23,000 and $2,732,000, respectively.
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 (in thousands): F-23| | | | |
| | | | | | | |
| Series A-2 Preferred Stock | | | 2,648 | | | | 11,272 | |
| Warrants | | | 712 | | | | 866 | |
Options | | | 1,260 | | | | 1,177 | |
Unvested restricted stock | | | 689 | | | | 290 | |
| | | | 5,309 | | | | 13,605 | |
| | | | | | | | | |
Note 11 -10 – Derivative Liabilities
InThe Company did not have any derivative liabilities as of, and during, the February 2004, March 2006, April 2006year ended December 31, 2010, and September 2007 private placements we incurred liabilities for thetherefore did not need to recognize any changes in estimated fair value of various derivative financial instruments. The estimated fair value of the derivative financial instruments was calculated usingin the Black-Scholes method and such estimates were revalued at each balance sheet date, with changes in value recorded as other income or expense. In the 2008 Private Placements these derivative liabilities were eliminated with the related gain credited to Additional Paid in Capital.accompanying consolidated financial statements for 2010.
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-rounddown-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 exercise 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 fair value of a “fixed-for-fixed” option. The Company determined that all of the then 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,$3.00, is adjusted to reflect a Down-rounddown-round stock issuance that reduces the conversion price below the $0.29$1.16 fair value of the 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 cumulative effect of the change in accounting for these instruments of $23,551,000 was recognized as an adjustment to the opening 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 result of the initial application of ASC Topic 815 on January 1, 2009 were determined based on the amounts that would have been recognized if ASC Topic 815 had been applied from the issuance date of the instruments. In the August 2009 Warrant Exchange (see Note 16), the need to account for a derivative liability was eliminated.
On August 11, 2009, the date of the August 2009 Warrant Exchange, when the Company measuredeliminated the fair value of these instruments,down-round provisions and recordedthe need to account for a $1,157,000 charge toderivative liability, the statement of operations for the year ended December 31, 2009. The Company determined the fair values of these securities using athe Black-Scholes option valuation model.model using the assumptions shown in Note 14. The accrued derivative liability of $4,751,000, which was related to those warrants, was then transferred to Additional Paid in Capital.
DuringThrough the year ended December 31,date of the 2009 Warrant Exchange we recorded an increase of $1,848,000 in the fair value of the derivative liabilities which was recordedincluded in other income and expense. Duringthe consolidated statements of operations in “Expense for increase in estimated fair value of Derivative Financial Instruments” for the year ended December 31, 2008, a decrease of $2,673,000 in the fair value of the derivative liabilities was recorded in other income and expense.2009.
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.
Activity for derivative liabilities during the year ended December 31, 2009, and as of December 31, 2009 and 2008 was as follows (in thousands):
| | | | | | Cumulative Effect of Change in Accounting Principle | | | Activity during the period | | | | | | Elimination of Derivative Liability | | | | | | | | | Cumulative Effect of Change in Accounting Principle | | | Activity during the period | | | | | | Elimination of Derivative Liability | | | | |
Derivative financial instrument – warrants | | $ | — | | | $ | 2,546 | | | $ | 281 | | | $ | 1,797 | | | $ | (4,624 | ) | | $ | — | | | $ | — | | | $ | 2,546 | | | $ | 281 | | | $ | 1,797 | | | $ | (4,624 | ) | | $ | — | |
| Derivative financial instrument – warrants – insider purchasers | | | — | | | | 76 | | | | — | | | | 51 | | | | (127 | ) | | | — | | | | — | | | | 76 | | | | — | | | | 51 | | | | (127 | ) | | | — | |
| | | $ | — | | | $ | 2,622 | | | $ | 281 | | | $ | 1,848 | | | $ | (4,751 | ) | | $ | — | | | $ | — | | | $ | 2,622 | | | $ | 281 | | | $ | 1,848 | | | $ | (4,751 | ) | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Note 1211 - Interest (Income) Expense, Net
The components of interest (income) expense, net for the years ended December 31, 20092010 and 20082009 are presented below (in thousands):
| | | | | | | | | | | | | |
| Interest (Income) Expense: | | | | | | | |
| Interest (income) expense: | | | | | | | |
| Revolving Loan Facility | | | $ | 24 | | | $ | — | |
| Accretion of discount on Senior Secured Notes | | $ | 23 | | | $ | 2,591 | | | | — | | | | 23 | |
| Accretion of discount on Senior Secured Notes, Insider Purchasers | | | — | | | | 141 | | |
| Interest on Senior Secured Notes | | | 57 | | | | 1,376 | | | | — | | | | 57 | |
| Interest on Senior Secured Notes, Insider Purchasers | | | — | | | | 44 | | |
| Adjustment of interest accrual for sales and use taxes and regulatory fees | | | (784 | ) | | | 268 | | | | — | | | | (784 | ) |
| Interest expense for capital lease | | | 42 | | | | 78 | | | | — | | | | 42 | |
| Other interest (income) expense | | | 119 | | | | 19 | | |
| Other interest expense | | | | 102 | | | | 119 | |
| Interest (income) expense, net | | $ | (543 | ) | | $ | 4,517 | | | $ | 126 | | | $ | (543 | ) |
| | | | | | | | | | | | | | | | | |
Note 1312 – Preferred Stock
Our Certificate of Incorporation authorizes the issuance of up to 5,000,000 shares of preferred stock. Currently, we haveAs of December 31, 2010, there are: 100 shares of Series B Preferred Stock authorized, issued and outstanding; 7,500 shares of Series A-2 Preferred Stock authorized of which 4,509and 1,059 shares are issued and outstanding as of December 31, 2009,outstanding; 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 haveand no other classes of preferred stock. Only the Series A-2 Preferred Stock is outstanding as of December 31, 2009.shares issued or outstanding.
Over the last three years, with the most recent transaction occurring in September 2010, the Company has entered into several private placement transactions raising (i) gross proceeds of $4,000,000 by selling shares of the Series B Preferred Stock, (ii) gross proceeds of $9,718,000 by issuing Senior Secured Notes to certain investors (including several officers and directors of the Company (“Insider Purchasers”)), which in the 2009 Private Placement were ultimately exchanged for shares of the Company’s convertible preferred stock, and (iii) gross proceeds of $3,625,000 by selling additional shares of convertible preferred stock, which ultimately converted into shares of the Series A-2 Preferred Stock. In connection with those transactions, the Company also exchanged shares of its previously issued preferred stock for, ultimately, shares of Series A-2 Preferred Stock and shares of Series B Preferred Stock.
Each share of Series B Preferred Stock has a stated value of $100,000 per share (the “Series B Stated Value”), and a liquidation preference equal to the Series B Stated Value plus all accrued and unpaid dividends (the “Series B Liquidation Preference”). 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 from January 1, 2013, at a rate of 4% per annum, payable quarterly, based on the Series B Stated Value. Commencing January 1, 2014, the cumulative dividend rate increases to 12% per annum, payable quarterly, based on the Series B 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 Series B Liquidation Preference.
Each share of Series A-2 Preferred Stock has a stated value of $7,500 per share (the “Stated“Series A-2 Stated Value”), a liquidation preference equal to the Series A-2 Stated Value, and is convertible at the holder’s election into common stock at a conversion price per share of $0.75.$3.00. Therefore, each share of Series A-2 Preferred Stock is convertible into 10,0002,500 shares of common stock. The Series A-2 Preferred Stock is subordinate to the Series B Preferred Stock but is senior to all other classes of equity, has weighted average anti-dilution protection and, commencing on January 1, 2013, is entitled to cumulative dividends at a rate of 5% per annum, payable quarterly, based on the Series A-2 Stated Value. Once dividend payments commence, all dividends are payable at the option of the holder in cash or through the issuance of a number of additional shares of Series A-2 Preferred Stock with an aggregate liquidation preference equal to the dividend amount payable on the applicable dividend payment date. Except for when the payment of dividends commence, the terms of the Series A-2 Preferred Stock are materially the same as the terms of the Series A-1 Preferred Stock created in March 2009 and the Series A Preferred Stock created in November 2008.
The following is a summary of the activity for the Company’s preferred stock during the year ended December 31, 20092010 and as of December 31, 20082010 and December 31, 2009 (in thousands, except preferred stock shares):
| | | Series A as of December 31, 2008 Note A | | | | | | 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 – Share, book value and liquidation value amounts for Mr. Brandofino have been reclassified into the Investors totals (see Note 23).
Note B – In the 2009 Private Placement all shares of the Series A Preferred Stock were exchanged for an equal amount of shares of Series A-1 Preferred Stock. The resulting $1,999,000 loss on the redemption of the Series A Preferred Stock was charged to Additional Paid in Capital.
Note C – In the August 2009 Exchange all shares of Series A-1 Preferred Stock were exchanged for an equal amount of shares of Series A-2 and Series B Preferred Stock. The resulting $1,935,000 gain on the redemption of the Series A-1 Preferred Stock was credited to Additional Paid in Capital.Stock):
| | | | | | 2010 Series B Preferred Stock Sales | | | 2010 Series B Preferred Stock Exchanges | | | 2010 Common Stock Conversion | | | | |
| Shares of Preferred Stock: | | | | | | | | | | | | | | | |
| Series B Preferred Stock: | | | | | | | | | | | | | | | |
Investors | | | — | | | | 40 | | | | 60 | | | | — | | | | 100 | |
| | | | | | | | | | | | | | | | | | | | | |
| Series A-2 Preferred Stock: | | | | | | | | | | | | | | | | | | | | |
Investors | | | 4,461 | | | | — | | | | (1,600 | ) | | | (1,850 | ) | | | 1,011 | |
Insider Purchasers | | | 48 | | | | — | | | | — | | | | — | | | | 48 | |
| | | | 4,509 | | | | — | | | | (1,600 | ) | | | (1,850 | ) | | | 1,059 | |
| | | | | | | | | | | | | | | | | | | | | |
| Book Value: | | | | | | | | | | | | | | | | | | | | |
| Series B Preferred Stock: | | | | | | | | | | | | | | | | | | | | |
Investors | | $ | — | | | $ | 4,000 | | | $ | 6,000 | | | $ | — | | | $ | 10,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| Series A-2 Preferred Stock: | | | | | | | | | | | | | | | | | | | | |
Investors | | $ | 14,122 | | | $ | — | | | $ | (5,066 | ) | | $ | (5,855 | ) | | $ | 3,201 | |
Insider Purchasers | | | 153 | | | | — | | | | — | | | | — | | | | 153 | |
| | | $ | 14,275 | | | $ | — | | | $ | (5,066 | ) | | $ | (5,855 | ) | | $ | 3,354 | |
Total book value | | $ | 14,275 | | | $ | 4,000 | | | $ | 934 | | | $ | (5,855 | ) | | $ | 13,354 | |
| | | | | | | | | | | | | | | | | | | | | |
| Liquidation Value: | | | | | | | | | | | | | | | | | | | | |
| Series B Preferred Stock: | | | | | | | | | | | | | | | | | | | | |
Investors | | $ | — | | | $ | 4,000 | | | $ | 6,000 | | | $ | — | | | $ | 10,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| Series A-2 Preferred Stock: | | | | | | | | | | | | | | | | | | | | |
Investors | | $ | 33,453 | | | $ | — | | | $ | (12,000 | ) | | $ | (13,870 | ) | | $ | 7,583 | |
Insider Purchasers | | | 362 | | | | — | | | | — | | | | — | | | | 362 | |
| | | $ | 33,815 | | | $ | — | | | $ | (12,000 | ) | | $ | (13,870 | ) | | $ | 7,945 | |
Total liquidation value | | $ | 33,815 | | | $ | 4,000 | | | $ | (6,000 | ) | | $ | (13,870 | ) | | $ | 17,945 | |
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 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, 2009.
Note 14 - Stock options
In our stock option plans the exercise price of the awards are 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, 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, 2009, options to purchase a total of 2,833,000 shares were outstanding and 1,091,000 shares remained available for future issuance under the 2000 Plan.
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, 2009 and 2008. As of December 31, 2009, options to purchase a total of 8,000 shares were outstanding.
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, 2009 and 2008. At December 31, 2009, options to purchase a total of 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, 2009 and 2008, is presented below (options in thousands):
| | | | | | | |
| | | | | | Weighted Average Exercise Price | | | | | | 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 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Additional information as of December 31, 2009 with respect to all outstanding options is as follows (options in thousands):
| | | | | | | | |
| | | | | | Weighted Average Remaining Contractual Life (In Years) | | | Weighted Average Exercise Price | | | | | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
A summary of nonvested options as of, and changes during the years ended December 31, 2009 and 2008, is presented below (options in thousands):
| | | | | | 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, 2009 and 2008 (in thousands):
| | | | | | | |
Global managed services | | $ | 122 | | | $ | 115 | |
Sales and marketing | | | 38 | | | | 64 | |
General and administrative | | | 119 | | | | 174 | |
| | | $ | 279 | | | $ | 353 | |
| | | | | | | | | |
There was no income tax benefit recognized for stock-based compensation for the years ended December 31, 2009 and 2008. No compensation costs were capitalized as part of the cost of an asset.
The intrinsic value of vested options at December 31, 2009 and 2008 was $361,000 and $1,000, respectively. The intrinsic value of unvested options at December 31, 2009 and 2008 was $430,000 and $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 1513 - Restricted Stock
A summary of restricted stock granted, vested, forfeited and unvested restricted stock outstanding during the years ended December 31, 20092010 and 2008,2009, is presented below (restricted shares in thousands):
| | | | | | Weighted Average Exercise Price | | | | | | 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 | | |
| Unvested restricted shares outstanding, January 1, 2009 | | | | 305 | | | $ | 1.96 | |
Granted | | | 1,225 | | | | 0.34 | | | | 306 | | | | 1.38 | |
Vested | | | (793 | ) | | | 0.42 | | | | (199 | ) | | | 1.69 | |
Forfeited | | | (490 | ) | | | 0.50 | | | | (122 | ) | | | 1.99 | |
| Unvested restricted shares outstanding, December 31, 2009 | | | 1,162 | | | $ | 0.38 | | | | 290 | | | | 1.52 | |
Granted | | | | 631 | | | | 2.36 | |
Vested | | | | (66 | ) | | | 1.92 | |
Forfeited | | | | (166 | ) | | | 2.02 | |
| Unvested restricted shares outstanding, December 31, 2010 | | | | 689 | | | $ | 2.13 | |
| | | | | | | | | | | | | | | | | |
Restricted stock compensation costs are allocated as follows for the years ended December 31, 20092010 and 20082009 (in thousands):
| | | | | | | | | | | | | |
Global managed services | | $ | 21 | | | $ | 14 | | | $ | 21 | | | $ | 21 | |
General and administrative | | | 249 | | | | 372 | | | | 264 | | | | 249 | |
Sales and marketing | | | 7 | | | | 8 | | | | 13 | | | | 7 | |
| | | $ | 277 | | | $ | 394 | | | $ | 298 | | | $ | 277 | |
| | | | | | | | | | |
There was no income tax benefit recognized for stock-based compensation for the yearyears ended December 31, 2010 and 2009. No compensation costs were capitalized as part of the cost of an asset.
The remaining unrecognized stock-based compensation expense for restricted stock at December 31, 2010 was $1,148,000, of which $557,000, representing 220,000 shares, will only be expensed upon a “change in control” and the remaining $591,000 will be amortized over a weighted average period of 3.3 years.
Note 1614 - Warrants
A summary of warrants granted, exercised, forfeited and outstanding as of December 31, 20092010 and 2008,2009, is presented below (warrants in thousands):
| | | | | | Weighted Average Exercise Price | | | | | | Weighted Average Exercise Price | |
Warrants outstanding, January 1, 2008 | | | 22,975 | | | $ | 0.86 | | |
Warrants outstanding, January 1, 2009 | | | | 10,229 | | | $ | 2.16 | |
Granted | | | 18,042 | | | | 0.40 | | | | 836 | | | | 1.60 | |
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 | | |
Exchanged – (Note 16) | | | | (9,772 | ) | | | 1.60 | |
Forfeited | | | (1,709 | ) | | | 2.56 | | | | (427 | ) | | | 10.24 | |
Warrants outstanding, December 31, 2009 | | | 3,464 | | | $ | 0.97 | | | | 866 | | | | 3.88 | |
Granted | | | | 295 | | | | 2.53 | |
Exercised (Note A) | | | | (39 | ) | | | 1.60 | |
Forfeited | | | | (410 | ) | | | 6.44 | |
Warrants outstanding, December 31, 2010 | | | | 712 | | | $ | 1.98 | |
| | | | | | | | | | | | | | | | | |
| Note A - 17,000 common shares were received in a cashless exercise of 39,000 warrants. | | Note A - 17,000 common shares were received in a cashless exercise of 39,000 warrants. | |
| | | | | | | | | | |
Additional information asAll of December 31, 2009 with respect to outstandingour warrants allare exercisable. 417,000 have an exercise price of which are exercisable, is as follows (warrants in thousands):$1.60 and an expiration date of November 25, 2013, and 295,000 have an exercise price of $2.53 and an expiration date of March 29, 2015.
| | | | | | | 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, 2009 and 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.
Note 17 – 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):
| | | | |
| | | | | | | |
| 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.
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 | | $ | — | |
| | | | | |
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 dates shown below (number of warrants and fair value in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Number of warrants | | | 40,917 | | | | 18,042 | | | | 40,917 | | | | 3,344 | | | | 44,262 | | | | 10,229 | | | | 836 | | | | 11,066 | | | | 295 | |
Exercise price | | $ | 0.97 | | | $ | 0.40 | | | $ | 0.54 | | | $ | 0.40 | | | $ | 0.53 | | | $ | 3.88 | | | $ | 1.60 | | | $ | 2.12 | | | $ | 2.53 | |
Risk free interest rate | | | 3.3 | % | | | 2.1 | % | | | 0.7 | % | | | 1.0 | % | | | 0.7 | % | | | 3.3 | % | | | 1.0 | % | | | 0.7 | % | | | 2.6 | % |
Expected warrant lives in years | | | 5.0 | | | | 5.0 | | | | 1.9 | | | | 1.8 | | | | 1.3 | | | | 5.0 | | | | 1.8 | | | | 1.3 | | | | 5.0 | |
Expected volatility | | | 102.7 | % | | | 105.7 | % | | | 132.3 | % | | | 139.0 | % | | | 143.3 | % | | | 102.7 | % | | | 139.0 | % | | | 143.3 | % | | | 113.6 | % |
Expected dividend yields | | None | | | None | | | None | | | None | | | None | | | None | | | None | | | None | | | None | |
Fair value per share | | $ | 0.64 | | | $ | 0.20 | | | $ | 0.06 | | | $ | 0.08 | | | $ | 0.11 | | | $ | 2.56 | | | $ | 0.34 | | | $ | 0.46 | | | $ | 1.50 | |
Common stock price | | $ | 0.83 | | | $ | 0.27 | | | $ | 0.15 | | | $ | 0.17 | | | $ | 0.23 | | | $ | 3.32 | | | $ | 0.68 | | | $ | 0.92 | | | $ | 1.92 | |
| Fair value of warrants | | $ | 26,173 | | | $ | 448 | | | $ | 2,622 | | | $ | 281 | | | $ | 4,763 | | | $ | 26,173 | | | $ | 281 | | | $ | 4,763 | | | $ | 443 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Due to the low average daily trading volume of our common stock, we have discounted the common stock price in the Black-Scholes option 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) | | | | |
| 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.
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 risk free interest rate is based on U.S. Treasury yields for securities in effect at the time of grants with terms approximating the expected term of the grants. The assumptions used in the Black-Scholes option valuation model are highly subjective, and can materially affect the resulting valuation.
Note 1915 - Stock options
In our stock option plans, the exercise price of the awards are established by the administrator of the plan and, in the case of incentive stock options (“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, including the vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment, payment contingencies and satisfaction of any performance criteria.
The weighted average fair value of each option granted is estimated on the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions during the years ended December 31, 2010 and 2009:
| | | | | | | |
Risk free interest rate | | | 2.3 | % | | | 2.0 | % |
Expected option lives | | 5 Years | | | 5 Years | |
Expected volatility | | | 112.3 | % | | | 113.3 | % |
Estimated forfeiture rate | | | 10 | % | | | 10 | % |
Expected dividend yields | | None | | | None | |
Weighted average exercise price | | $ | 2.42 | | | $ | 1.73 | |
Weighted average grant date fair value of options | | $ | 1.91 | | | $ | 1.32 | |
| | | | | | | | | |
The Company calculates expected volatility for a stock-based grant based on historic daily stock price observations of its common stock during the period immediately preceding the grant that is equal in length to the expected term of the grant. The expected term of the options 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 expected life of the grants. The assumptions used in the Black-Scholes option valuation model are highly subjective and can materially affect the resulting valuations.
Glowpoint 2007 Stock Incentive Plan
Pursuant to the Glowpoint 2007 Stock Incentive Plan (as amended the “2007 Plan”), 1,375,000 shares of common stock have been reserved for issuance thereunder. The 2007 Plan permits the grant of ISOs to employees. Non-qualified stock options (“NQSOs”) may be granted to employees, directors and consultants. As of December 31, 2010, options to purchase a total of 452,000 shares of common stock were outstanding and 433,000 shares of common stock remained available for future issuance under the 2007 Plan.
Glowpoint 2000 Stock Incentive Plan
Pursuant to the Glowpoint 2000 Stock Incentive Plan (as amended the “2000 Plan”), that was terminated in June 2010, 1,100,000 shares of common stock had been reserved for issuance thereunder. The 2000 Plan provided for the grant of ISOs to employees or employees of our subsidiaries. NQSOs could have been granted to employees, directors and consultants. As of December 31, 2010, options to purchase a total of 803,000 shares of common stock were outstanding under the 2000 Plan.
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, 2010 and 2009. At December 31, 2010, options to purchase a total of 5,000 shares of common stock that were granted outside of our plans were outstanding.
Other Option Information
A summary of options granted, exercised, expired and forfeited under our plans and options outstanding as of December 31, 2010 and 2009, is presented below (options in thousands):
| | | | | | | |
| | | | | | Weighted Average Exercise Price | | | | | | Weighted Average Exercise Price | |
Options outstanding, January 1, 2009 | | | 1,243 | | | $ | 5.24 | | | | 834 | | | $ | 6.88 | |
Granted | | | 289 | | | | 1.73 | | | | | | | | | |
Exercised | | | (12 | ) | | | 1.48 | | | | | | | | | |
Expired | | | (24 | ) | | | 14.00 | | | | | | | | | |
Forfeited | | | (319 | ) | | | 8.47 | | | | | | | | | |
Options outstanding, December 31, 2009 | | | 1,177 | | | | 3.36 | | | | 728 | | | $ | 4.32 | |
Granted | | | 303 | | | | 2.42 | | | | | | | | | |
Exercised (Note A) | | | (11 | ) | | | 1.52 | | | | | | | | | |
Expired | | | (4 | ) | | | 22.00 | | | | | | | | | |
Forfeited | | | (205 | ) | | | 2.68 | | | | | | | | | |
Options outstanding, December 31, 2010 | | | 1,260 | | | $ | 3.19 | | | | 848 | | | $ | 3.72 | |
| | | | | | | | | | | | | | | | | |
| Shares of common stock available for future grant under Company plans | | | 433 | | | | | | | | | | | | | |
Note A – Due to regular and cashless exercises, 6,000 common shares were received from the exercise of 11,000 options.
Additional information as of December 31, 2010 was as follows (options in thousands):
| | | | | | | | |
| | | | | | Weighted Average Remaining Contractual Life (In Years) | | | Weighted Average Exercise Price | | | | | | Weighted Average Exercise Price | |
| $ | 0.80 – 1.60 | | | | 279 | | | | 6.3 | | | $ | 1.48 | | | | 177 | | | $ | 1.45 | |
| | 1.64 – 2.00 | | | | 259 | | | | 7.4 | | | | 1.81 | | | | 161 | | | | 1.77 | |
| | 2.04 – 2.60 | | | | 417 | | | | 7.8 | | | | 2.41 | | | | 231 | | | | 2.37 | |
| | 2.64 – 4.76 | | | | 191 | | | | 4.7 | | | | 4.33 | | | | 165 | | | | 4.57 | |
| | 5.08 – 22.00 | | | | 114 | | | | 2.4 | | | | 11.48 | | | | 114 | | | | 11.48 | |
| $ | 0.80 – 22.00 | | | | 1,260 | | | | 6.4 | | | $ | 3.19 | | | | 848 | | | $ | 3.72 | |
| | | | | | | | | | | | | | | | | | | | | | | |
A summary of nonvested options as of, and changes during the years ended December 31, 2010 and 2009, is presented below (options in thousands):
| | | | | | Weighted Average Grant Date Fair Value | |
Nonvested options outstanding, January 1, 2009 | | | 409 | | | $ | 1.43 | |
Granted | | | 289 | | | | 1.30 | |
Vested | | | (198 | ) | | | 1.41 | |
Forfeited | | | (51 | ) | | | 1.45 | |
Nonvested options outstanding, December 31, 2009 | | | 449 | | | | 1.35 | |
Granted | | | 303 | | | | 1.91 | |
Vested | | | (186 | ) | | | 1.42 | |
Forfeited | | | (154 | ) | | | 1.56 | |
Nonvested options outstanding, December 31, 2010 | | | 412 | | | $ | 1.63 | |
| | | | | | | | | |
Stock option compensation expense was allocated as follows for the years ended December 31, 2010 and 2009 (in thousands):
| | | | | | | |
Global managed services | | $ | 103 | | | $ | 122 | |
Sales and marketing | | | 41 | | | | 38 | |
General and administrative | | | 72 | | | | 119 | |
| | | $ | 216 | | | $ | 279 | |
| | | | | | | | | |
There was no income tax benefit recognized for stock-based compensation for the years ended December 31, 2010 and 2009. No compensation costs were capitalized as part of the cost of an asset.
The intrinsic value of vested options at December 31, 2010 and 2009 was $350,000 and $361,000, respectively. The intrinsic value of unvested options at December 31, 2010 and 2009 was $176,000 and $430,000, respectively.
The remaining unrecognized stock-based compensation expense for options at December 31, 2010 was $478,000, of which $319,000, representing 155,000 shares, will only be expensed upon a “change in control” and the remaining $159,000 will be amortized over a weighted average period of 1.0 years.
Note 16 – 2009 Private Placement Transactions
In 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 Placements”). The following is a summary of the components of the 2009 Private Placements (in thousands except shares of preferred stock):
| | | 2009 Preferred Stock Sale | | | 2009 Senior Secured Note Exchange | | | 2009 Senior Secured Note Purchase | | | 2009 Preferred Stock Exchanges | | | | | | | | | | |
| Consideration received by Company: | | | | | | | | | | | | | | | | | | | | | |
| Cash: | | | | | | | | | | | | | | | | | | | | | |
| Gross proceeds (paid) | | $ | 1,800 | | | $ | — | | | $ | (750 | ) | | $ | — | | | $ | — | | | $ | — | | | $ | 1,050 | |
| Series A-1 Preferred Stock: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares | | | — | | | | — | | | | — | | | | 4,509 | | | | — | | | | — | | | | 4,509 | |
Carrying amount | | $ | — | | | $ | — | | | $ | — | | | $ | 14,211 | | | $ | — | | | $ | — | | | $ | 14,211 | |
| Senior Secured Notes: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Carrying amount | | $ | — | | | $ | (1,076 | ) | | $ | (713 | ) | | $ | — | | | $ | — | | | $ | — | | | $ | 1,789 | |
| Warrants: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares | | | — | | | | — | | | | — | | | | — | | | | 9,772 | | | | — | | | | 9,772 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consideration provided to holders: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Warrants issued : | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | | 562 | | | | 149 | | | | — | | | | — | | | | — | | | | 125 | | | | 836 | |
| Carrying amount | | $ | 189 | | | $ | 50 | | | $ | — | | | $ | — | | | $ | — | | | $ | 42 | | | $ | 281 | |
| Common Stock : | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | | — | | | | — | | | | — | | | | — | | | | 4,343 | | | | — | | | | 4,343 | |
| Carrying amount | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 2 | | | $ | — | | | $ | 2 | |
| Series A-1 Preferred Stock issued: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | | 450 | | | | 269 | | | | — | | | | — | | | | — | | | | — | | | | 719 | |
| Carrying amount | | $ | 1,611 | | | $ | 1,026 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,637 | |
| Series A-2 Preferred Stock issued: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | | — | | | | — | | | | — | | | | 4,509 | | | | — | | | | — | | | | 4,509 | |
| Carrying amount $ | | $ | — | | | $ | — | | | $ | — | | | $ | 14,275 | | | $ | — | | | $ | — | | | $ | 14,275 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loss on Redemption of Preferred Stock | | $ | — | | | $ | — | | | $ | — | | | $ | (64 | ) | | $ | — | | | $ | — | | | $ | (64 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sale of Series Preferred Stock
In the 2009 Private Placements, the Company received $1,800,000 of gross proceeds for 450 shares of its Series A-1 Preferred Stock and warrants having an exercise price of $1.60 per share to acquire an aggregate of 562,000 shares of common stock (the “2009 Preferred Stock Sale”).
We accounted for the issuance of the warrants to acquire 562,000 shares of common stock with an expiration date of March 2014, at fair value. The $189,000 estimated fair value of these warrants, determined using the Black-Scholes option valuation model using the assumptions shown in Note 14, was charged to the Series A-1 Preferred Stock and credited to Derivative Financial Instruments.
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 warrants issued in the sale.
Senior Secured Note Exchange
In the 2009 Private Placements, the Company issued 269 shares of Series A-1 Preferred Stock and warrants having an exercise price of $1.60 per share to acquire 149,000 shares of common stock in exchange for $1,076,000 (including $12,000 of accrued interest) of the Company’s Senior Secured Notes (the “2009 Senior Secured Note Exchange”).
We accounted for the issuance of the warrants to acquire 149,000 shares of common stock with an expiration date of March 2014, at fair value. The $50,000 estimated fair value of these warrants, determined using the Black-Scholes option valuation model using the assumptions shown in Note 14, 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 warrants issued in the exchange.
Senior Secured Note Purchase
In the 2009 Private Placements, the remaining $713,000 of Senior Secured Notes were purchased for $750,000 and retired by the Company (the “2009 Senior Secured Note Purchase”). The prepayment was funded from the sale of securities in the 2009 Private Placements. 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 Placements resulted in a $254,000 “Loss on Extinguishment of Debt,” which was recorded in our consolidated statements of operations in Interest and Other Expense.
Preferred Stock Exchanges
In a series of transactions in the 2009 Private Placements, the holders of the Company’s Series A Convertible Preferred Stock exchanged those shares into Series A-1 Preferred Stock, and then (i) consented to the creation of the Series A-2 Preferred Stock which does not pay dividends until January 1, 2013 and (ii) were issued an aggregate of 4,509 shares of Series A-2 Preferred Stock, having a Stated Value of $33,815,000, in exchange for an aggregate of 4,509 shares of the Company’s Series A-1 Preferred Stock, which also had a Stated Value of $33,815,000 (“2009 Preferred Stock Exchanges”). The book value of the Series A-1 Preferred Stock exchanged was $14,211,000. The Series A-2 Preferred Stock received in the transaction was recorded in the balance sheet at $14,275,000 which is the fair value of the Series A-2 Preferred Stock.
We accounted for the 2009 Preferred Stock Exchanges 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”) should be added to net loss to arrive at net loss attributable to common stockholders. The Series A-1 Carrying Amount of $14,211,000 was recorded at the then fair value. The Series A-2 Fair Value of $14,275,000 is based on the net present value of the components of the Series A-2 Preferred Stock. As required by ASC topic 260 “Earnings Per Share,” the $64,000 excess of Series A-2 Fair Value over the Series A-1 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 stockholders.
Warrant Exchange
In the 2009 Private Placements, all 10,228,000 of the warrants to acquire shares of common stock at $1.60 per share 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 $1.60, thereby eliminating the down-round provisions and the need to account for a derivative liability for these warrants. Concurrently, the holders of 9,772,000 of such warrants were issued one share of common stock for warrants to acquire 2.25 shares of common stock (the “2009 Warrant Exchange”) and as a result, 4,343,000 shares of common stock were issued. The remaining 456,000 warrants remain outstanding until November 2013. The accrued derivative liability of $4,751,000, which was related to the remaining outstanding warrants, was then transferred to Additional Paid in Capital.
Financial Advisor and Legal Fees
In connection with the 2009 Private Placements, we paid legal fees of $108,000, paid our financial advisor a placement agent fee of $276,000 and issued warrants to our financial advisor and/or its designees and assignees to purchase 125,000 shares of common stock. We accounted for the issuance of the warrants to acquire 125,000 shares of common stock having an exercise price of $1.60 per share with an expiration date of March 2014 (the “2009 Financial Advisor Warrants”) at fair value. The $42,000 estimated fair value of the 2009 Financial Advisor Warrants, determined using the Black-Scholes option valuation model using the assumptions shown in Note 14, was charged to Additional Paid in Capital and credited to Derivative Financial Instruments.
Note 17 – 2010 Private Placements
In 2010, the Company entered into transactions that, in the aggregate, resulted in the Company’s raising $4,000,000 of growth capital and exchanging 3,450 shares of its outstanding Series A-2 convertible preferred stock (the “Series A-2 Preferred Stock”) for (i) 100 shares of our newly-created non-convertible Series B preferred stock (the “Series B Preferred Stock”) and (ii) 4,624,000 shares of common stock (the “2010 Private Placements”).
The following are the amounts of cash, number of the shares of Series A-2 Preferred Stock, Series B Preferred Stock, common stock and warrants issued or exchanged in each component of the 2010 Private Placements (in thousands except for shares of preferred stock ):
| | | 2010 Series B Preferred Stock Sales | | | 2010 Series B | | | 2010 | | | 2010 Financial Advisor Warrants | | | | |
| Consideration received by Company: | | | | | | | | | | |
| Cash: | | | | | | | | | | | | | | | |
Gross proceeds | | $ | 4,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,000 | |
| Series A-2 Preferred Stock received: | | | | | | | | | | | | | |
| Shares | | | — | | | | 1,600 | | | | 1,850 | | | | — | | | | 3,450 | |
| Book value | | $ | — | | | $ | 5,066 | | | $ | 5,855 | | | $ | — | | | $ | 10,921 | |
| | | | | | | | | | | | | | | | | | | | | |
| Consideration provided to holders: | | | | | | | | | | | | | |
| Warrants issued: | | | | | | | | | | | | | |
Shares | | | — | | | | — | | | | — | | | | 295 | | | | 295 | |
Book value | | $ | — | | | $ | — | | | $ | — | | | $ | 443 | | | $ | 443 | |
| Series B Preferred Stock issued: | | | | | | | | | | | | | |
Shares | | | 40 | | | | 60 | | | | — | | | | — | | | | 100 | |
Book value | | $ | 4,000 | | | $ | 6,000 | | | $ | — | | | $ | — | | | $ | 10,000 | |
| Common Stock issued: | | | | | | | | | | | | | |
Shares | | | — | | | | — | | | | 4,624 | | | | — | | | | 4,624 | |
Book value | | $ | — | | | $ | — | | | $ | 2 | | | $ | — | | | $ | 2 | |
Additional Paid in Capital | | $ | — | | | $ | — | | | $ | 5,853 | | | $ | — | | | $ | 5,853 | |
| | | | | | | | | | | | | | | | | | | | | |
Loss on Redemption of Preferred Stock | | $ | — | | | $ | (934 | ) | | $ | — | | | $ | — | | | $ | (934 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Sale of Series B Preferred Stock
In the 2010 Private Placements, the Company received $4,000,000 of gross proceeds for the issuance of 40 shares of its newly-created Series B Preferred Stock (the “2010 Series B Preferred Stock Sales”). The Series B Preferred Stock was recorded in the balance sheet at $4,000,000, which is the gross cash received in the sale and is also its liquidation value.
Exchange of Series A-2 Preferred Stock for Series B Preferred Stock
In the 2010 Private Placements, 60 shares of Series B Preferred Stock with a liquidation preference of $6,000,000 were issued in exchange for 1,600 shares of Series A-2 Preferred Stock with a liquidation preference of $12,000,000 (the “2010 Series B Preferred Stock Exchanges”).
We accounted for the 2010 Series B Preferred Stock Exchanges as a redemption that requires that the excess of the fair value of the Series B Preferred Stock (the “Series B Fair Value”) over the carrying amount of the Series A-2 Preferred Stock (the “Series A-2 Carrying Amount”) be added to net loss to arrive at net loss attributable to common stockholders. The Series A-2 Carrying Amount of $5,066,000 is based on the recorded book value. The Series B Fair Value of $6,000,000 is based on applying the $100,000 sale price of each share of Series B Preferred Stock sold in the 2010 Private Placements to each share of Series B Preferred Stock issued in the 2010 Series B Preferred Stock Exchanges. As required by ASC topic 260 “Earnings Per Share,” the $934,000 excess of Series B Fair Value over the Series A-2 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 stockholders.
Conversion of Series A-2 Preferred Stock for Common Stock
In the 2010 Private Placements, 1,850 shares of Series A-2 Preferred Stock were converted into 4,624,000 shares of common stock (the “2010 Common Stock Conversions”). Each of the Series A-2 Preferred Stock shares was converted into 2,500 shares of common stock, which is consistent with the Series A-2 Preferred Stock Certificate of Designation.
We accounted for the 2010 Common Stock Conversions by taking the Series A-2 carrying amount of $5,855,000 and allocating $2,000 to the par value of common stock and the balance of $5,853,000 to Additional Paid in Capital.
Financial Advisor and Legal Fees
In connection with the 2010 Private Placements, we paid legal fees of $27,000 and incurred and paid financial advisory fees of $280,000. We issued financial advisory warrants to purchase 295,000 shares of common stock at an exercise price of $2.53 per share and exercisable for a period of five years (the "2010 Financial Advisor Warrants"). We accounted for the issuance of the 2010 Financial Advisor Warrants at fair value. The $443,000 estimated fair value of the 2010 Financial Advisor Warrants, determined using the Black-Scholes option valuation model using the assumptions shown in Note 14, was charged to Additional Paid in Capital "Costs related to 2010 Private Placements" and credited to Additional Paid in Capital "Warrants issued in connection with 2010 Private Placements."
Note 18 - Income Taxes
We had no tax provision for the years ended December 31, 20092010 and 2008.2009. Our effective tax rate differs from the statutory federal tax rate for the years ended December 31, 20092010 and 20082009 as shown in the following table (in thousands):
| | | | | | | | | | | | | |
| U.S. federal income taxes at the statutory rate | | $ | (186 | ) | | $ | (2,487 | ) | | $ | (905 | ) | | $ | (186 | ) |
State taxes, net of federal effects | | | (33 | ) | | | (439 | ) | | | (133 | ) | | | (33 | ) |
Nondeductible expenses | | | 885 | | | | 2,449 | | | | 12 | | | | 885 | |
| Expired state operating loss carry forwards | | | 1,333 | | | | — | | |
Non-recognizable income | | | — | | | | (3,074 | ) | |
Beneficial conversion feature | | | — | | | | 216 | | |
| Stock-based compensation | | | | 600 | | | | — | |
| Expired net operating loss carry-forwards | | | | 536 | | | | — | |
Other | | | (7 | ) | | | — | | | | 31 | | | | (7 | ) |
Change in valuation allowance | | | (1,992 | ) | | | 3,335 | | | | (141 | ) | | | (659 | ) |
| | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | |
The tax effect of the temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 20092010 and 20082009 is presented below (in thousands):
| Deferred tax assets: | | | | | | | | | | | | |
Tax benefit of operating loss carry forward | | $ | 48,760 | | | $ | 48,739 | | | $ | 49,072 | | | $ | 48,760 | |
Reserves and allowances | | | 168 | | | | 1,700 | | | | 156 | | | | 168 | |
Accrued expenses | | | 73 | | | | 149 | | | | 217 | | | | 73 | |
Goodwill | | | 453 | | | | 524 | | | | 373 | | | | 453 | |
Warrants issued for services | | | 457 | | | | 742 | | | | 445 | | | | 457 | |
Equity based compensation | | | 994 | | | | 996 | | | | 469 | | | | 994 | |
Fixed assets | | | 64 | | | | 111 | | | | 94 | | | | 64 | |
Total deferred tax assets | | | 50,969 | | | | 52,961 | | | | 50,826 | | | | 50,969 | |
| | | | | | | | | | | | | | | | | |
| Deferred tax liability: | | | | | | | | | |
| Fair value adjustments to derivative financial instruments | | | - | | | | - | | |
Deferred tax liability | | | | — | | | | — | |
Deferred tax assets and liability, net | | | 50,969 | | | | 52,961 | | | | 50,826 | | | | 50,969 | |
Valuation allowance | | | (50,969 | ) | | | (52,961 | ) | | | (50,826 | ) | | | (50,969 | ) |
Net deferred tax assets | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
The ending balances of the deferred tax asset have been fully reserved, reflecting the uncertainties as to realizability evidenced by the Company’s historical results.
We and our subsidiariessubsidiary file federal tax returns on a consolidated basis and separate state tax returns. At December 31, 2009,2010, we havehad net operating loss (“NOL”) carry-forwards of $127,579,000$127,765,000 for federal income tax purposes which expire in various amounts from 2011 through 2029.2030. At December 31, 2009,2010, we havehad net NOL carry-forwards of $91,825,000$93,740,000 for state income tax purposes which expire in various amounts from 2011 through 2028.2030. 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.limited. This would result in a reduction in equal amounts to the deferred tax assets and the related valuation reserves.
Effective January 1, 2007, the Company adopted ASC topicThere were no significant matters determined to be unrecognized tax benefits taken or expected to be taken in a tax return, in accordance with 740 “Income Taxes” (“ASC 740”), which clarifies the accounting for uncertainty in income taxes recognized in the financial statement. This topic 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, 20092010 and 2008.2009.
Additionally, ASC 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, 20092010 and 2008.2009.
The federal and state tax returns for the years ending December 31, 2006,2009, 2008 and 2007 and 2008 are currently open and the tax returnsreturn for the year ended December 31, 20092010 will be filed in September 2010.2011.
Note 2019 - 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 metmeet minimum age and service requirements. The plan wasis currently non-contributory on our part. Employer contributions to the 401(k) plan for the years ended December 31, 2010 and 2009 were $38,000 and 2008 were $0, and $54,000, respectively.
Note 2120 - Related Party Transactions
The Company provides managed video services (the “Video Services”) to a company in which one of our directors is an officer (the “Video Services”).officer. The Company receivesreceived consulting and tax services (the “Consulting Services”) from an accounting firm in which one of our prior directors, who resigned in May 2009, iswas a partner. The Company receives software development from a firm in which one of our prior directors, who resigned in March 2009, is the president. Management believes that such transactions are at arm’s-lengthin the normal course of business and for terms that would have been obtained from unaffiliated third parties. We provided Video Services for the years ended December 31, 2010 and 2009 of $317,000 and $305,000, respectively. The $26,000 of fees incurred for consulting and tax services and software development (the “Consulting Services”) arethe Consulting Services for the year ended December 31, 2009, were only included for the period that the partner of the accounting firm and company’s president were directorswas a director 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):
| | | | |
| | | | | | | |
Consulting Services | | $ | 26 | | | $ | 180 | |
| | | | | | | | | |
Video Services | | $ | 305 | | | $ | 293 | |
| | | | | | | | | |
Note 2221 – Major Customers
Major customers are those customers who account for more than 10% of revenues. ForThe revenues derived from our only major customer for the yearyears ended December 31, 2010 and 2009 15.3% of revenues were derived from a major customer. For the year ended December 31, 2008 there were no major customers.19.5% and 16.5%, respectively. Accounts receivable from this major customer represented 22.8% of total accounts receivable as of December 31, 2009.2010 and 2009 were 22.3% and 24.5%, respectively, of total accounts receivable. The loss of this customer would have an adverse affect on the Company’s operations.
Note 22 – Management Changes
In July 2010, the Board of Directors (the “Board”) of the Company effected a termination without cause of David W. Robinson, its Co-Chief Executive Officer, General Counsel and Executive Vice President of Business Development.
Effective July 29, 2010, Mr. Robinson voluntarily resigned as a member of the Board. Mr. Robinson did not resign because of any disagreement with the Company, nor was he removed for cause from the Board. Pursuant to the terms of the Employment Agreement between Glowpoint and Mr. Robinson dated May 1, 2006 (as amended, the “Employment Agreement”) and the Separation Agreement between the Company and Mr. Robinson effective as of August 6, 2010, Mr. Robinson is entitled to receive cash payments totaling approximately $265,000 and other severance benefits (e.g., grants of new restricted stock, reimbursement of medical insurance premiums and an extension to exercise vested options) valued at approximately $152,000. These costs were included in general and administrative costs. As of December 31, 2010, $185,000 of unpaid severance related expenses were included as accrued expenses in the consolidated balance sheets.
On November 30, 2010, John McGovern was appointed as the Company’s Executive Vice President and Chief Financial Officer replacing Mr. Heinen, the Company’s previous Chief Financial Officer. Pursuant to the terms of the Separation Agreement between the Company and Mr. Heinen effective as of December 27, 2010, Mr. Heinen is entitled to receive cash payments totaling approximately $216,000 and other severance benefits (e.g., accelerated vesting of restricted stock and options and reimbursement of medical insurance premiums) valued at approximately $49,000. These costs were included in general and administrative costs. As of December 31, 2010, $265,000 of unpaid severance related expenses were included as accrued expenses in the consolidated balance sheets.
Note 23 - Commitments and Contingencies
Employment Agreements
Co –Chief Executive Officer, Executive Vice President, Business Development and General Counsel - In May 2006, we entered into a two-year employment agreement with David W. Robinson, which was subsequently been amended several times with a current expiration date January 31, 2012. Under the agreement, Mr. Robinson 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 Compensation Committee, which goals and metrics shall be updated on an annual basis. Compensation expense of $267,000 and $262,000, comprised of base salary and the incentive bonus, was recorded during the years ended December 31, 2009 and 2008. 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, a member of the Board and was 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 change of control and the 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 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 Compensation Committee, which goals and metrics shall be updated on an annual basis. Compensation expense of $259,000 and $256,000, comprised of base salary and the incentive bonus, was recorded during the years ended December 31, 2009 and 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, a member of the Board and was 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 change of control and the third anniversary of grant.
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, 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 Compensation Committee, which goals and metrics shall be updated on an annual basis. Compensation expense of $212,000 and $212,000, comprised of base salary and the incentive bonus, was recorded during the years ended December 31, 2008 and 2007. 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 210,000 shares of restricted stock and options to acquire 140,000 shares of common stock all of which vest upon the earlier of a change of control and the third anniversary of grant.
In March 2009, the Company announced the voluntary 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 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 was paid severance of approximately $225,000 over the following nine months and other benefits (e.g., grants of new restricted stock, extension of period to exercise vested options, etc.) valued at approximately $70,000.
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 2009 (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 | | $ | - | |
| | | | | |
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, 2010, and 2009 were $412,000 and 2008 were $312,000, and $312,000,$380,000, respectively.
Future minimum rental commitments under all non-cancelable operating leases are as follows (in thousands):
| Year Ending December 31 | | | | |
2010 | | $ | 260 | | |
| Year Ending December 31, | | | | |
2011 | | | 96 | | | $ | 388 | |
2012 | | | 19 | | | | 370 | |
| 2013 | | | | 366 | |
| 2014 | | | | 31 | |
| | | $ | 375 | | | $ | 1,155 | |
| | | | | | | | | |
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 agreementagreements 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 consolidated financial statements because it is not probable, from the information available and from prior experience, that Glowpoint has incurred a liability.
There are $1,242,000Letter of future minimum commercial commitments under carrier agreements which expire in the year ended December 31, 2009.Credit
In November 2010, the Company entered into an irrevocable standby letter of credit (“LOC”) for $115,000 to secure our security deposit for the sublease of our corporate headquarters. The LOC was obtained from SVB and will be renewed yearly until January 2014, the expiration date of our lease.
Note 24 – Subsequent Event
March 2010 Private Placement
In March 2010,On January 10, 2011, the Company entered intofiled with the Secretary of State of the State of Delaware a seriesCertificate of transactions that resulted inAmendment to its Amended and Restated Certificate of Incorporation (the "Certificate of Amendment"), effecting a reverse stock split of the Company raising growth capitalCompany's common stock, par value $0.0001 per share, at a ratio of one-for-four. The reverse stock split was effective on January 14, 2011. The Company's stockholders approved the Certificate of Amendment on June 17, 2010, and exchangingthe Company's Board of Directors authorized the implementation of the reverse stock split on December 17, 2010.
As a result of the reverse stock split, every four shares of itsthe Company's issued and 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 for sharescommon stock will be combined into one share of common stock.
Pursuant to a Series B Preferred Stock Purchase Agreement, dated March 29, 2010 (the “Purchase Agreement”), Any fractional shares resulting from the Company received approximately $3,000,000 of gross proceedsreverse stock split will be paid 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 equalcash to the Stated Value together with all accrued and unpaid dividends.stockholder. 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 onreverse stock split will reduce 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 portionnumber of the Company's 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).from 85,416,000 to approximately 21,354,000.
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; 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 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”).