Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date
of
Report (Date of earliest event reported) February 27, 2007
Glowpoint,
Inc.
(Exact
name of registrant as specified in its Charter)
Delaware
|
0-25940
|
77-0312442
|
(State
or other jurisdiction
|
(Commission
|
(I.R.S
Employer
|
of
incorporation)
|
File
Number)
|
Identification
No.)
|
225
Long Avenue, Hillside, NJ
|
07205
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant's
telephone number, including area code (312)
235-3888
Not
Applicable
(Former
name or former address, if changed since last report)
Item
2.02.
Results of Operations and Financial Condition
Glowpoint
is publishing its consolidated financial statements for the years ended December
31, 2005 and 2004 via this Report on Form 8-K. The consolidated financial
statements, attached hereto as Exhibit 99.1, are incorporated herein by
reference. Because we are currently unable to complete the restatement of our
consolidated financial statements for 2003, we are not able to file an amended
Report on Form 10-K. Accordingly, we are furnishing this information via Form
8-K.
Set
forth
below is the Management's Discussion and Analysis of Financial Condition and
Results of Operations for the years ended December 31, 2005 and 2004. We have
also issued a press release dated February 23, 2007 announcing the availability
of our consolidated financial statements for the years ended December 31, 2005
and 2004. A copy of the press release is furnished as Exhibit 99.2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with our consolidated
financial statements for the years ended December 31, 2005 and 2004 and the
notes attached hereto as an exhibit. All statements contained herein that are
not historical facts, including, but not limited to, statements regarding
anticipated future capital requirements, our future development plans, our
ability to obtain debt, equity or other financing, and our ability to generate
cash from operations, are based on current expectations. The discussion of
results, causes and trends should not be construed to imply any conclusion
that
such results or trends will necessarily continue in the future.
The
statements contained herein, other than historical information, are or may
be
deemed to be forward-looking statements within the meaning of Section 27A of
the
Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended, and involve factors, risks and uncertainties
that may cause our actual results in future periods to differ materially from
such statements. These factors, risks and uncertainties include market
acceptance and availability of new video communication services, the
nonexclusive and terminable at will nature of sales agent agreements, rapid
technological change affecting demand for our services, competition from other
video communication service providers, and the availability of sufficient
financial resources to enable us to expand our operations, as well as other
risks detailed from time to time in our filings with the Securities and Exchange
Commission.
Overview
Glowpoint,
Inc. ("Glowpoint" or "we" or "us"), a Delaware corporation, provides
comprehensive video communications services over its carrier-grade IP-based
subscriber network enabling users to connect across the United States, as well
as to business centers around the world. Prior to 2004, Glowpoint, then known
as
Wire One Technologies, Inc., sold substantially all of the assets of its video
solutions (VS) business to an affiliate of Gores Technology Group (“Gores”). See
Note 3 to the consolidated financial statements for further
information.
In
April
2004, we entered into an agreement with Tandberg, Inc. (“Tandberg”), a wholly
owned subsidiary of Tandberg ASA, a global provider of visual communications
solutions. As part of the agreement, we acquired for $1.00 certain assets and
the customer base of Tandberg-owned Network Systems LLC (successor to the
NuVision Companies). Network Systems customers, primarily ISDN-based video
users, obtained immediate access to our video bridging and webcasting services.
As part of the agreement, Tandberg's corporate use of IP video communications
and other telecommunications services, formerly purchased through Network
Systems, is being provided exclusively by us under a multi-year agreement.
In
addition, we assumed contractual commitments with AT&T, MCI and Sprint from
Network Systems LLC, which were subsequently consolidated into new agreements
with these carriers. For accounting purposes, such commitments did not result
in
any additional asset or liability recognition. Tandberg named the Glowpoint
Certified Program as a recognized external testing partner for its hardware
and
software products. The transaction was accounted for following purchase
accounting under Statement of Financial Accounting Standard (“SFAS”) No.
141,
“Business Combinations”.
In
applying SFAS No. 141, the fair value of tangible assets acquired and
liabilities assumed were nominal. Accordingly, we did not record any value
of
intangible assets acquired.
On
December 7, 2004, we entered into a strategic partnership with Integrated
Vision, an Australian video conferencing solution provider with a dedicated
IP-based network for global video communications. The agreement is our first
international interconnection agreement for “Glowpoint Enabling” an existing IP
communications network, i.e., delivering our patent-pending video communication
applications over a partner's existing IP bandwidth. Integrated Vision is
responsible for the sales, marketing, operations and customer support of the
Glowpoint branded service in Australia.
In
March
2005, we entered into a strategic alliance with Sony Electronics, Inc. (“Sony”)
to create and launch a complete, Sony-customized, user-friendly video
communication solution focused on broadening the use of IP-based video in and
out of traditional office environments. Initially, the relationship focused
on
creating a unique video experience for Sony customers by "private labeling"
Glowpoint's features and services for Sony. The two companies launched a number
of initiatives, including broadcast solutions and an Internet-Based video
service called IVE (an acronym for Instant Video Everywhere). We developed
and
own IVE, but branded it for Sony as part of this initiative. In March 2006,
Glowpoint and Sony modified and renewed their agreements to limit the focus
to
providing solutions for the broadcast market, which the parties believe has
the
most promise for near-term success.
In
February 2006, we signed a separate agreement with Sony of Canada Ltd. to
promote and resell our services, including the IVE video service. The IVE video
service is now branded "Glowpoint’s IVE”.
In
March
2005, we announced a settlement agreement with Gores, resolving the outstanding
disputes relating to the sale of the assets of our VS business to Gores in
September 2003. The agreement also covered Gores' acquisition of V-SPAN Inc.
in
November 2004. Pursuant to the terms of the settlement agreement, Gores paid
us
$2,750,000 and released to us the $335,000 that was escrowed at the closing
of
the asset sale. Also as part of the settlement, we dismissed our lawsuit against
Gores relating to the V-SPAN acquisition.
In
March
2005, 83.333 shares of our outstanding Series B convertible preferred stock
and
accrued dividends of $183,000 were exchanged for 1,333,328 shares of our common
stock and warrants to purchase 533,331 shares of our common stock with an excess
aggregate fair value of $1,167,000. We recognized deemed dividends of $1,167,000
during the 2005 period in connection with the warrants and a reduced conversion
price, which were offered as an inducement to convert.
In
March
2005, we entered into a common stock purchase agreement with several unrelated
institutional investors in connection with the offering of (i) an aggregate
of
6,766,667 shares of our common stock and (ii) warrants to purchase up to an
aggregate of 2,706,667 shares of our common stock. We received proceeds from
this offering of $10,150,000, less our expenses relating to the offering, which
were $774,000, a portion of which represents investment advisory fees totaling
$711,000 to Burnham Hill Partners, our financial advisor. The warrants are
exercisable for a five-year period, are subject to anti-dilution protection
(minimum price of $1.61) and have an initial exercise price of $2.40 per share.
The warrants may be exercised by cash payment of the exercise price or by
"cashless exercise”. As a result of the March and April 2006 financing, the
exercise price of the warrants have been adjusted to $1.79. The exercise price
of the warrants would be further adjusted to $1.64 if the Series B warrants
included in the March and April 2006 financing become exercisable.
In
May
2005, we engaged, for a six month period, Burnham Hill Partners to advise us
with respect to potential strategic transactions, which might have included
an
acquisition, partnership, strategic alliance merger or sale. As consideration
for the engagement, we agreed to issue warrants to Burnham Hill Partners to
purchase 100,000 shares of our common stock. The warrants are exercisable for
a
five-year period, have an exercise price of $1.50 per share and may be exercised
by cash payment of the exercise price or by "cashless exercise”. In addition, we
extended the expiration date of warrants held by Burnham Hill Partners to
purchase 130,500 shares of common stock from June 2005 and August 2006 to
December 2009. We accounted for the transaction using the fair value based
method, which resulted in an expense of $196,000. As part of the March and
April
2006 financing, the exercise price of the warrants with Burnham Hill Partners
have been adjusted to $0.65. There would be no further adjustment to the
exercise price of the warrants if the Series B warrants included in the March
and April 2006 financing become exercisable.
In
March
2006, we implemented a corporate restructuring plan designed to reduce certain
operating, sales and marketing and general and administrative costs. The costs
of this restructuring, approximately $1,200,000, will be recorded in the first
quarter of 2006. As part of the restructuring initiative, we implemented
management changes, including the departure of certain employees and the
promotion of Michael Brandofino to Chief Operating Officer with principal
responsibility for the implementation and management of the restructuring plan.
David Trachtenberg, President and Chief Executive Officer since October 2003,
and Gerard Dorsey, Executive Vice President and Chief Financial Officer since
December 2004, left Glowpoint in April 2006 to pursue other opportunities.
In
connection with their separation, Messrs. Trachtenberg and Dorsey will be paid
severance based upon their employment agreements of approximately $500,000
and
$155,000, respectively, over the following year and receive other benefits
(e.g., accelerated vesting of restricted stock or options) valued at
approximately $180,000 and $9,000, respectively. The amount to be paid to them
is a portion of the $1,200,000 of restructuring costs recorded in the first
quarter of 2006. In April 2006, Mr. Brandofino was appointed President and
Chief
Executive Officer and a member of the Board of Directors, Edwin Heinen was
appointed Chief Financial Officer, and Joseph Laezza was appointed Chief
Operating Officer.
In
March
and April 2006, we issued senior secured convertible notes and warrants in
a
private placement offering to private investors. In the transaction, we issued
$6,180,000 aggregate principal amount of our 10% Senior Secured Convertible
Notes (“Notes”), Series A warrants to purchase 6,180,000 shares of common stock
at an exercise price of $0.65 per share and Series B warrants to purchase
6,180,000 shares of common stock at an exercise price of $0.01 per share. Both
warrants are subject to certain anti-dilution protection. The Series B warrants
only become exercisable if we fail to achieve positive operating income,
determined in accordance with generally accepted accounting principles,
excluding restructuring and non-cash charges, in the fourth quarter of 2006.
In
addition, the Series B warrants will be cancelled if we consummate a strategic
transaction or repay the Notes prior to the date we make our consolidated
financial statements for the fourth quarter of 2006 available to the public.
We
also agreed to reduce the exercise price of 3,624,710 previously issued warrants
held by the investors in this offering to $0.65 from a weighted average price
of
$3.38, and to extend the expiration date of any such warrants to no earlier
than
three years after the offering date. The new weighted average expiration date
of
the warrants will be 3.5 years from a previous weighted average expiration
date
of 2.9 years. Our costs related to the issuance of the notes were approximately
$568,000, a portion of which
represents placement fees of $494,000 to Burnham Hill
Partners, our placement agent. In addition, we issued to Burnham Hill
Partners placement agent warrants to purchase 618,000 shares of our common
stock
at an exercise price of $0.55 per share. The warrants are subject to certain
anti-dilution protection. The $5,612,000 net proceeds of the offering will
be
used to support our corporate restructuring program and for working capital.
The
Notes
bear interest at 10% per annum, mature on September 30, 2007 and are convertible
into common stock at a conversion rate of $0.50 per share. The Series A and
Series B warrants are exercisable for a period of 5 years.
We
are
evaluating the accounting treatment of this transaction, including consideration
of applicable accounting standards for derivative instruments. We are also
evaluating the effect on the conversion price of our Series B convertible
preferred stock and the exercise price of outstanding warrants that are subject
to anti-dilution adjustments occasioned by this transaction.
Results
of Operations
The
following table sets forth, for the years ended December 31, 2005 and 2004,
the
percentages of revenues represented by selected items reflected in our
consolidated statements of operations. The comparisons of financial results
are
not necessarily indicative of future results:
|
|
2005
|
|
2004
|
|
Revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of revenue
|
|
|
84.5
|
|
|
101.0
|
|
Gross
margin (loss)
|
|
|
15.5
|
|
|
(1.0
|
)
|
Operating
expenses:
|
|
|
|
|
|
|
|
Research
and development
|
|
|
7.0
|
|
|
6.8
|
|
Sales
and marketing
|
|
|
22.7
|
|
|
20.6
|
|
General
and administrative
|
|
|
79.6
|
|
|
79.4
|
|
Total
operating expenses
|
|
|
109.3
|
|
|
106.8
|
|
Loss
from operations before other (income) expense
|
|
|
(93.8
|
)
|
|
(107.8
|
)
|
Other
(income) expense:
|
|
|
|
|
|
|
|
Gain
on settlement with Gores
|
|
|
(2.1
|
)
|
|
—
|
|
Interest
income, net
|
|
|
(0.6
|
)
|
|
(0.2
|
)
|
Increase
in fair value of derivative financial instrument
|
|
|
1.5
|
|
|
0.8
|
|
Other
income
|
|
|
—
|
|
|
(31.5
|
)
|
Gain
on marketable equity securities
|
|
|
—
|
|
|
(0.8
|
)
|
Amortization
of discount on subordinated debentures
|
|
|
—
|
|
|
16.7
|
|
Loss
on exchange of debt
|
|
|
—
|
|
|
4.7
|
|
Amortization
of deferred financing costs
|
|
|
—
|
|
|
2.8
|
|
Total
other income, net
|
|
|
(1.2
|
)
|
|
(7.5
|
)
|
Net
loss
|
|
|
(92.6
|
)
|
|
(100.3
|
)
|
Preferred
stock dividends
|
|
|
1.8
|
|
|
2.3
|
|
Preferred
stock deemed dividends
|
|
|
7.2
|
|
|
—
|
|
Net
loss attributable to common stockholders
|
|
|
(101.6
|
)%
|
|
(102.6
|
)%
|
Year
ended December 31, 2005 (the “2005 period”) compared to year ended December 31,
2004 (the “2004 period”)
Revenue
- Revenue
increased by $1,868,000, or 11.8%, to $17,735,000 in the 2005 period from
$15,867,000 in the 2004 period. Subscription and related revenue (which includes
contractual revenue related to the Network Services customer base, formerly
known as NuVision) increased $998,000, or 9.7%, to $11,245,000 in the 2005
period from $10,247,000 in the 2004 period. Contractual revenue related to
the
Network Services customer base was $287,000 in the 2005 period and $283,000
in
the 2004 period. We began receiving revenue from this customer base when we
acquired it from Tandberg in April 2004. Non-subscription revenue consisting
of
bridging, events and other one-time fees increased $870,000, or 15.5%, to
$6,490,000 in the 2005 period from $5,620,000 in the 2004 period. The growth
in
non-subscription revenue was the result of an increase of $602,000, or 24.4%,
to
$3,072,000 in the 2005 period in revenue from the Network Services customer
base
from $2,470,000 in the 2004 period.
Cost
of revenues
- Cost
of revenue decreased by $1,035,000, or 6.5%, to $14,984,000 in the 2005 period
from $16,019,000 in the 2004 period. The decline in costs as a percentage of
revenue in the 2005 period is the result of the renegotiation of rates and
the
migration of service to lower cost providers where possible. For the 2005
period, additional revenue associated with the Network Services customer base,
which began in the second quarter of 2004, resulted in increased gross margins.
This decline in cost of goods sold and the additional revenue caused our gross
margin to increase to 15.5% in the 2005 period from a negative 1.0% in the
2004
period. The rate of increase in our gross margin percentage is not indicative
of
results expected to be achieved in subsequent periods.
Research
and development
-
Research and development expenses, which include the costs of the personnel
in
this group, the equipment they use and their use of the network for development
projects, increased by $164,000, or 15.2%, to $1,242,000 in the 2005 period
from
$1,078,000 in the 2004 period. The increase was a result of increased staffing
levels and increased usage of outside contractors to meet the demand for
application development in conjunction with new product development for us
and
certain of our partners. Research and development expenses, as a percentage
of
revenue, were 7.0% for the 2005 period versus 6.8% for the 2004
period.
Sales
and marketing
- Sales
and marketing expenses, which include sales salaries, commissions, overhead
and
marketing costs, increased $763,000, or 23.4%, to $4,028,000 in the 2005 period
from $3,265,000 in the 2004 period. The primary causes of the increase in costs
for the 2005 period were a $315,000 increase in salaries, benefits and travel
costs resulting from the addition of a direct sales force of 11 employees and
an
increase of $277,000 in marketing expense associated with a sales lead
generation program and other initiatives. Sales and marketing expenses, as
a
percentage of revenue, were 22.7% for the 2005 period versus 20.6% for the
2004
period.
General
and administrative
-
General and administrative expenses, which includes direct corporate expenses
related to costs of personnel in the various corporate support categories,
including executive, finance, human resources and information technology
increased $1,522,000, or 12.1%, in the 2005 period to $14,120,000 from
$12,598,000 in the 2004 period. The primary components of the increase were
$1,227,000 for professional fees incurred in connection with the restatement
of
our consolidated financial statements and the related audit committee
investigation, $1,175,000 in salaries and benefits related to executive
management and increased staffing levels, $306,000 for increased equipment
rentals and communication costs and $196,000 of financial advisory fees. These
increases were partially offset by a reduction of $598,000 in consulting fees,
$283,000 in bad debt expense, $212,000 in travel costs and $180,000 in legal
fees (excluding those related to the restatement and audit committee
investigation). General and administrative expenses include (i) estimated sales
and use taxes, regulatory fees and related penalties and interest and (ii)
a tax
obligation of a predecessor of Glowpoint which totaled $1.1 million for each
period in 2005 and 2004. Sales taxes and regulatory fees are supposed to be,
or
are routinely, collected from customers and remitted to the applicable
authorities in certain circumstances. We have not been collecting and remitting
such taxes and regulatory fees and as a result our general and administrative
expenses include costs for such matters that would otherwise not have been
incurred. General and administrative expenses, as a percentage of revenue,
were
79.6% in the 2005 period versus 79.4% in the 2004 period.
Other
income
- Other
income of $333,000 in the 2005 period principally reflects a $379,000 gain
on
the settlement of an amount owed to Gores and $97,000 of net interest income
and
partially reduced by $271,000 for the increase in the fair value of derivative
financial instrument. Other income of $1,186,000 for the 2004 period principally
reflects a $5,000,000 gain recognized in connection with the acquisition by
Gores of V-SPAN, pursuant to our agreement with Gores and a $132,000 gain on
the
sale of marketable equity securities received in the settlement of an accounts
receivable, partially reduced by $2,650,000 amortization of discount on
subordinated debentures and $448,000 of related deferred financing costs, a
$743,000 loss on exchange of the debentures for Series B convertible preferred
stock, common stock and a modification to warrants and $134,000 for the increase
in the fair value of derivative financial instrument.
Preferred
stock dividends
- We
recognized dividends of $315,000 for the 2005 period and $369,000 for the 2004
period. The March 2005 exchange of 83.333 shares of our outstanding Series
B
convertible preferred stock for 1,333,328 shares of our common stock and
warrants to purchase 533,331 shares of our common stock caused the decrease
in
dividends in the 2005 period. In the 2004 period dividends were based on 203.667
outstanding shares of our Series B convertible preferred stock.
Preferred
stock deemed dividends
- We
recognized deemed dividends of $1,167,000 for the 2005 period in connection
with
warrants and a reduced conversion price, which were offered as an inducement
to
convert our Series B convertible preferred stock. In addition, we recognized
deemed dividends of $115,000 in the 2005 period in connection with an
anti-dilution adjustment to the conversion price of our Series B convertible
preferred stock resulting from our March 2005 financing. There were no deemed
dividends previously reported.
Income
taxes
- No
provision for income taxes was required in the 2005 and 2004
period.
Net
loss
- Net
loss attributable to common stockholders was $18,031,000 or $0.41 per basic
and
diluted share in the 2005 period. Before giving effect to the preferred stock
dividends on Series B convertible preferred stock and the deemed dividends,
we
reported a net loss of $16,434,000 for the 2005 period. For the 2004 period,
the
net loss attributable to common stockholders was $16,276,000, or $0.45 per
basic
and diluted share. Before giving effect to the preferred stock dividends on
Series B convertible preferred stock, we reported a net loss of $15,907,000
for
the 2004 period.
Liquidity
and Capital Resources
Our
primary liquidity requirements include capital expenditures and working capital
needs. See also, “Commitments and Contractual Obligations” below. We fund our
liquidity requirements primarily through existing cash and, to the extent
necessary and available, through issuing equity or debt. We believe that our
available capital as of December 31, 2005 and the proceeds of the March and
April 2006 financings, together with our restructured operating activities,
will
enable us to continue as a going concern through December 31, 2006.
Cash
flows
At
December 31, 2005, we had a working capital deficit of $3,526,000, compared
to a
positive working capital position of $2,158,000 at December 31, 2004, a
reduction of $5,684,000. We had $2,023,000 in cash and cash equivalents at
December 31, 2005, compared to $4,497,000 at December 31, 2004. The $2,474,000
decrease in cash and cash equivalents primarily resulted from $13,668,000 of
net
cash used in operating activities and the purchase of $1,308,000 of property,
equipment and leasehold improvements, which was partially offset by $9,376,000
of net proceeds from the March 2005 private placement offering of common stock
and $3,087,000 from the Gores settlement.
In
February 2004, we raised net proceeds of $12,480,000 in a private placement
offering of 6,100,000 shares of our common stock at $2.25 per share. We also
issued warrants to purchase 1,830,000 shares of our common stock at an exercise
price of $2.75 per share. The warrants expire on August 17, 2009. The warrants
are subject to certain anti-dilution protection (minimum price of $2.60) and
as
a result of the March 2005 financing, the exercise price was reduced to $2.60
(the incremental fair value was nominal). In addition, we issued to our
placement agent five and a half year warrants to purchase 427,000 shares of
common stock at an exercise price of $2.71 per share. The placement agent
warrants are subject to certain anti-dilution protection (minimum price of
$2.60) and as a result of the March 2005 financing, the exercise price was
reduced to $2.60.
In
March
2005, we entered into a common stock purchase agreement with several unrelated
institutional investors in connection with the offering of (i) an aggregate
of
6,766,667 shares of our common stock and (ii) warrants to purchase up to an
aggregate of 2,706,667 shares of our common stock. We received proceeds from
this offering of $10,150,000, less our expenses relating to the offering, which
were $774,000, a portion of which represents investment advisory fees totaling
$711,000 to Burnham Hill Partners, our financial advisor. The warrants are
exercisable for a five-year period, are subject to anti-dilution protection
(minimum price of $1.61) and have an initial exercise price of $2.40 per share.
The warrants may be exercised by cash payment of the exercise price or by
"cashless exercise”. As part of the March and April 2006 financing, the exercise
price of the warrants with Burnham Hill Partners have been adjusted to $1.79.
The exercise price of the warrants would be further adjusted to $1.64 if the
Series B warrants included in the March and April 2006 financing become
exercisable.
In
March
and April 2006, we issued senior secured convertible notes and warrants in
a
private placement offering to private investors. In the transaction, we issued
$6,180,000 aggregate principal amount of our 10% Senior Secured Convertible
Notes (“Notes”), Series A warrants to purchase 6,180,000 shares of common stock
at an exercise price of $0.65 per share and Series B warrants to purchase
6,180,000 shares of common stock at an exercise price of $0.01 per share. Both
warrants are subject to certain anti-dilution protection. The Series B warrants
only become exercisable if we fail to achieve positive operating income,
determined in accordance with generally accepted accounting principles,
excluding restructuring and non-cash charges, in the fourth quarter of 2006.
In
addition, the Series B warrants will be cancelled if we consummate a strategic
transaction or repay the Notes prior to the date we make our consolidated
financial statements for the fourth quarter of 2006 available to the public.
We
also agreed to reduce the exercise price of 3,624,710 previously issued warrants
held by the investors in this offering to $0.65 from a weighted average price
of
$3.38, and to extend the expiration date of any such warrants to no earlier
than
three years after the offering date. The new weighted average expiration date
of
the warrants will be 3.5 years from a previous weighted average expiration
date
of 2.9 years. Our costs related to the issuance of the notes were approximately
$568,000, a portion of which
represents placement fees of $494,000 to Burnham Hill
Partners, our placement agent. In addition, we issued to Burnham Hill
Partners placement agent warrants to purchase 618,000 shares of our common
stock
at an exercise price of $0.55 per share. The warrants are subject to certain
anti-dilution protection. The $5,612,000 net proceeds of the offering will
be
used to support our corporate restructuring program and for working capital.
The
Notes
bear interest at 10% per annum, mature on September 30, 2007 and are convertible
into common stock at a conversion rate of $0.50 per share. The Series A and
Series B warrants are exercisable for a period of 5 years.
Net
cash
used in operating activities was $13,668,000 for the 2005 period and $11,430,000
for the 2004 period. For the 2005 period, the primary components of the net
cash
usage were the net loss of $16,434,000 which was increased by a non-cash gain
on
the settlement with Gores of $379,000, a $299,000 increase in accounts
receivable and a $247,000 decrease in accounts payable and accrued expenses
and
reduced by depreciation and amortization expense of $2,294,000, equity-based
compensation of $930,000, a $271,000 increase in the estimated fair value of
the
derivative financial instrument and an increase in deferred revenue of $109,000.
For the 2004 period, the primary components of the net cash usage were the
net
loss of $15,907,000, an increase in the amount due from Gores of $5,539,000
and
an increase of $193,000 in other assets, partially reduced by amortization
of
discount on subordinated debentures of $2,650,000, depreciation and amortization
of $2,236,000, an increase of $2,196,000 in accounts payable and accrued
expenses, equity-based compensation of $880,000, a loss on exchange of debt
of
$743,000, a decrease of $496,000 in accounts receivable, amortization of
deferred financing costs of $448,000, a decrease of $415,000 in prepaid expenses
and other current assets and an increase in the estimated fair value of the
derivative financial instrument of $134,000.
Net
cash
provided by investing activities was $1,779,000 for the 2005 period and net
cash
used in investing activities was $1,097,000 for the 2004 period. For the 2005
period the receipt of $3,087,000 collected in March 2005 as a result of the
settlement with Gores (including $337,000 previously held in escrow) was
partially offset by the purchase of property, equipment and leasehold
improvements totaling $1,308,000. For the 2004 period the purchase of property,
equipment and leasehold improvements totaled $1,097,000. The Glowpoint network
is currently built out to handle the anticipated level of subscriptions without
significant expansion through at least 2007.
Cash
provided by financing activities for the 2005 and 2004 periods was $9,415,000
and $12,919,000, respectively. Financing activities for the 2005 period and
2004
period included receipt of the $9,376,000 and $11,316,000, respectively of
net
proceeds from the private placement offerings of common stock and warrants.
The
2004 period includes $1,164,000 of proceeds attributable to a derivative
financial instrument. For the 2005 and 2004 periods the exercise of stock
options netted proceeds of $74,000 and $570,000, respectively. Offsetting these
proceeds were payments in the 2005 period and 2004 period on capital lease
obligations of $35,000 and $131,000, respectively.
Commitments
and Contractual Obligations
The
following table summarizes our contractual cash obligations and commercial
commitments at December 31, 2005, and the effect such obligations are expected
to have on liquidity and cash flow in future periods (in
thousands).
Contractual
Obligations:
|
|
Total
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Purchase
obligations (1)
|
|
$
|
11,084
|
|
$
|
5,469
|
|
$
|
2,440
|
|
$
|
2,006
|
|
$
|
1,169
|
|
Operating
lease obligations
|
|
|
574
|
|
|
441
|
|
|
127
|
|
|
3
|
|
|
3
|
|
Total
|
|
$
|
11,658
|
|
$
|
5,910
|
|
$
|
2,567
|
|
$
|
2,009
|
|
$
|
1,172
|
|
(1)
Under
agreements with providers of infrastructure and access circuitry for our
network, we are obligated to make payments under commitments ranging from 0-5
years.
Critical
Accounting Policies
We
prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States. Preparing consolidated
financial statements in accordance with accounting principles generally accepted
in the United States requires us to make a number of estimates and assumptions
that affect the reported amounts of assets and liabilities and disclose
contingent assets and liabilities as of the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Our significant accounting policies are described in Note
2 to
our consolidated financial statements attached hereto. We believe the following
critical accounting policies involve the most significant judgments and
estimates used in the preparation of our consolidated financial
statements:
Revenue
Recognition
We
recognize service revenue, including amounts related to surcharges charged
by
our carriers, related to our network subscriber service and the multipoint
video
and audio bridging services as service is provided. Because 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 a twenty-four
month period (the estimated life of the customer relationship). At December
31,
2005 and 2004, we had deferred activation fees of $308,000 and $266,000,
respectively and related installation costs of $63,000 and $66,000,
respectively. Revenues derived from other sources are recognized when services
are provided or events occur.
Allowance
for Doubtful Accounts
We
record
an allowance for doubtful accounts based on specifically identified amounts
that
we believe to be uncollectible. We also record additional allowances based
on
certain percentages of our aged receivables, which are determined based on
historical experience and our assessment of the general financial conditions
affecting our customer base. If our actual collections experience changes,
revisions to our allowance may be required. After all attempts to collect a
receivable have failed, we write off the receivable against the
allowance.
Long-Lived
Assets
We
evaluate impairment losses on long-lived assets used in operations, primarily
fixed assets, when events and circumstances indicate that the carrying value
of
the assets might not be recoverable in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 144 “Accounting
for the Impairment or Disposal of Long-Lived Assets”.
For
purposes of evaluating the recoverability of long-lived assets, the undiscounted
cash flows estimated to be generated by those assets are compared to the
carrying amounts of those assets. If and when the carrying values of the assets
exceed their fair values, the related assets will be written down to fair
value.
Recent
Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No.
123R which addresses the accounting for transactions in which a company receives
employee services in exchange for (a) equity instruments of the company or
(b)
liabilities that are based on the fair value of the company's equity instruments
or that may be settled by the issuance of such equity instruments. It eliminates
the ability to account for share-based compensation transactions using APB
Opinion No. 25 and generally requires that such transactions be accounted for
using a fair-value-based method. As permitted by the current SFAS No. 123,
"Accounting
for Stock-Based Compensation",
we have
been accounting for share-based compensation to employees using APB Opinion
No.
25's intrinsic value method and, as such, we generally recognize no compensation
cost for employee stock options. We are required to adopt SFAS No. 123R
effective January 1, 2006. The impact of adopting SFAS No. 123R can not
currently be estimated since it will depend on future share based
awards.
In
December 2004, the FASB issued SFAS No. 153, "Exchange
of Nonmonetary Assets",
an
amendment of APB Opinion No. 29, "Accounting
for Nonmonetary Transactions".
SFAS
No. 153 is based on the principle that exchange of nonmonetary assets should
be
measured based on the fair market value of the assets exchanged. SFAS No. 153
eliminates the exception of nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. SFAS No. 153 is effective for nonmonetary
asset exchanges in fiscal periods beginning after June 15, 2005. We are
currently evaluating the provisions of SFAS No. 153 and do not believe that
the
adoption of SFAS No. 153 will have a material impact on our consolidated
financial statements.
In
May
2005, the FASB issued SFAS No. 154 “Accounting
Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB
Statement No. 3”.
This
Statement replaces APB Opinion No. 20, "Accounting
Changes",
and
FASB Statement No. 3, "Reporting
Accounting Changes in Interim Financial Statements",
and
changes the requirements for the accounting for and reporting of a change in
accounting principle. This statement is effective for fiscal periods beginning
after December 15, 2005 and is not expected to have a significant impact on
our
consolidated financial statements.
In
February 2006, the FASB issued SFAS No. 155, "Accounting
for Certain Hybrid Financial Instruments".
SFAS
No. 155 amends SFAS No. 133 and SFAS No. 140, and addresses issues raised in
SFAS No. 133 Implementation Issue No. D1, "Application
of Statement 133 to Beneficial Interests in Securitized Financial
Assets”.
SFAS No.
155 is effective for all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15,
2006.
The Company does not believe it will be materially affected by the adoption
of
SFAS No. 155.
In
June
2006, issued interpretation No. 48, "Accounting
for Uncertainty in Income Taxes—An interpretation of FASB Statement No.
109",
regarding accounting for, and disclosure of, uncertain tax positions. FIN No.
48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
"Accounting
for Income Taxes."
FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. FIN No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN No. 48 is effective for fiscal years beginning
after December 15, 2006. The Company is currently evaluating the impact FIN
No.
48 will have on its results of operations and financial position.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) No. 108, "Considering
the Effects on Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements".
SAB No.
108 requires registrants to quantify errors using both the income statement
method (i.e. iron curtain method) and the rollover method and requires
adjustment if either method indicates a material error. If a correction in
the
current year relating to prior year errors is material to the current year,
then
the prior year financial information needs to be corrected. A correction to
the
prior year results that are not material to those years would not require a
"restatement process" where prior financials would be amended. SAB No. 108
is
effective for fiscal years ending after November 15, 2006. We do not anticipate
that SAB No. 108 will have a material effect on our financial position, results
of operations or cash flows.
In
September 2006, the FASB issued SFAS No. 157, "Fair
Value Measurements",
to
define fair value, establish a framework for measuring fair value in accordance
with generally accepted accounting principles, and expand disclosures about
fair
value measurements. SFAS No. 157 will be effective for fiscal years beginning
after November 15, 2007, the beginning of the Company's 2008 fiscal year. The
Company is assessing the impact the adoption of SFAS No. 157 will have on the
Company's financial position and results of operations.
In
September 2006, FASB issued SFAS No. 158, “Employers'
Accounting for Defined Benefit Pension and Other Postretirement
Plans".
SFAS No.
158 requires the recognition of the funded status of a benefit plan in the
balance sheet; the recognition in other comprehensive income of gains or losses
and prior service costs or credits arising during the period but which are
not
included as components of periodic benefit cost; the measurement of defined
benefit plan assets and obligations as of the balance sheet date; and disclosure
of additional information about the effects on periodic benefit cost for the
following fiscal year arising from delayed recognition in the current period.
In
addition, SFAS No. 158 amends SFAS No. 87, "Employers'
Accounting for Pensions",
and
SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions",
to
include guidance regarding selection of assumed discount rates for use in
measuring the benefit obligation. SFAS No. 158 is effective for our year ending
December 31, 2006. The Company is not currently able to quantify the effects
of
the adoption of SFAS No. 158 since actual amounts will depend on year-end
calculations.
In
February, 2007, the FASB issued SFAS No. 159 “The
Fair Value Option for Financial Assets and Financial
Liabilities”.
SFAS
No. 159 permits entities to choose to measure many financial assets and
financial liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. SFAS
No.
159 is effective for fiscal years beginning after November 15, 2007. The
Company is currently assessing the impact of SFAS No. 159 on its financial
position and results of operations.
Inflation
We
do not
believe inflation had a material adverse effect on the consolidated financial
statements for the periods presented.
Quantitative
and qualitative disclosures about market risk
We
have
exposure to interest rate risk related to our cash equivalents portfolio. The
primary objective of our investment policy is to preserve principal while
maximizing yields. Our cash equivalents portfolio is short-term in nature;
therefore changes in interest rates will not materially impact our consolidated
financial condition. However, such interest rate changes can cause fluctuations
in our results of operations and cash flows. There are no other material
qualitative or quantitative market risks particular to us.
Controls
and Procedures
This
Form
8-K should be read in conjunction with our March 31, 2005, June 30, 2005 and
September 30, 2005 Quarterly Reports on Forms 10-Q/A, which were filed with
the
Securities and Exchange Commission on January 31, 2007. Those Quarterly Reports
disclosed that we lacked adequate internal controls and that we believe that
a
material weakness in our internal controls arose as the result of aggregating
several specified significant deficiencies. Additional significant deficiencies
which have come to our attention included (i) processes which were
insufficient to recognize obligations for sales and use taxes, certain
regulatory fees, predecessor entities and carrier credits and (ii)
recordkeeping controls which were insufficient regarding tracking the issuance
of options, the authorization of non-senior level bonuses, recording a
transaction entered into on behalf of the Company involving the issuance and
modification of warrants and maintaining supporting documentation for accounts
receivable customer files.
During
2006, our current management team has initiated improvements to the internal
accounting and recordkeeping controls, including the hiring our General Counsel
and the utilization of outside tax and regulatory professionals, to address
the
above mentioned deficiencies.
We
are
continuing to evaluate and improve our internal control procedures, where
applicable.
Item
9.01. Financial Statements and Exhibits
(a) |
Financial
Statements of Businesses Acquired.
|
Not
Applicable.
(b) |
Pro
Forma Financial Information.
|
Not
Applicable
Exhibit
No.
|
Description
|
|
|
Exhibit
99.1
|
Consolidated
financial statements for years ended December 31, 2005 and
2004.
|
|
|
Exhibit
99.2
|
Press
release dated February 27, 2007 announcing Glowpoint's consolidated
financial statements for years ended December 31, 2005 and
2004.
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
|
|
|
|
GLOWPOINT,
INC.
|
|
|
|
|
BY: |
/s/
Edwin F. Heinen |
|
Edwin
F. Heinen
Chief
Financial Officer
|
Date:
February 27, 2007