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) January 18, 2007
Glowpoint,
Inc.
(Exact
name of registrant as specified in its Charter)
|
Delaware
|
|
0-25940
|
|
77-0312442
|
|
(State
or other jurisdiction of incorporation)
|
|
(Commission
File Number)
|
|
(I.R.S
Employer Identification No.)
|
|
225
Long Avenue, Hillside, NJ
|
|
07205
|
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrant's
telephone number, including area code (312)
235-3888
|
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 restated financial statements for the year ended December
31,
2004 via this Report on Form 8-K. These financial statements restate the
financial statements filed with the Securities and Exchange Commission as an
exhibit to Form 8-K on March 17, 2006. The restated financial statements,
attached hereto as Exhibit 99.1, are incorporated herein by reference. Because
we are currently unable to complete the restatement of our financial statements
for 2002 or 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 restated consolidated financial statements for
the
year ended 2004. We have also issued a press release dated January 18, 2007
announcing the availability of our restated financial statements for the year
ended December 31, 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 restated
consolidated financial statements for the year ended December 31, 2004 and
the
notes thereto filed as an exhibit to this Report on Form 8-K. 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 4 to the consolidated financial statements for further
information.
On
April
20, 2004, we entered into an agreement with Tandberg, Inc., a wholly owned
subsidiary of Tandberg ASA (OSLO:TAA.OL), a global provider of visual
communications solutions. As part of the agreement, we acquired for $1.00
certain assets and the customer base of Tandberg-owned Network Systems LLC
(successor to the NuVision Companies). Network Systems customers, primarily
ISDN-based video users, obtained immediate access to our video bridging and
webcasting services. As part of the agreement, Tandberg’s corporate use of IP
video communications and other telecommunications services, formerly purchased
through Network Systems, is being provided exclusively by us under a multi-year
agreement. In addition, we assumed contractual commitments with AT&T, MCI
and Sprint from Network Systems, which have been consolidated into new
agreements with these carriers. 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
2005,
we entered into a strategic alliance with Sony Electronics, Inc. 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. The Sony service, powered by Glowpoint, is designed to bring
together Sony’s state-of-the-art line of video conferencing systems with our
patent-pending advanced IP-based video applications and network services. The
two companies are also developing joint initiatives to support the growing
use
of IP-based video for more diverse and innovative applications, including the
broadcasting production segment where Sony is a recognized leader in providing
customers with advanced audio and video equipment and systems. Through a
“private label” arrangement, the two companies plan on delivering a customized
Sony experience that will allow subscribers to see and talk to anyone, anywhere
around the world regardless of network technology and device. Additionally,
as
part of the alliance and to support development of the new service, Sony will
install the Glowpoint powered solution into a number of their office locations
in the U. S.
On
March
14 2005, we announced the closing of a private placement that raised gross
proceeds of $10.15 million from several unrelated institutional investors,
including existing and new shareholders. Under the terms of the financing,
we
issued approximately 6,766,667 common shares. Additionally, we issued to the
investors approximately 2,706,667 common stock purchase warrants at an exercise
price of $2.40 per share. The proceeds of the financing will be used for working
capital requirements. We issued shares and warrants directly to the purchasers
under an effective universal shelf registration statement.
Restatement
Glowpoint
has reviewed its accruals relating to sales and use taxes, regulatory fees
and
related penalties and interest. This analysis caused Glowpoint to revise certain
assumptions and determinations and, on September 20, 2006, Glowpoint’s Board of
Directors concluded that the restatement of previously issued financial
statements was appropriate.
Additionally,
on October 26, 2006, Glowpoint announced a potential tax owed by All
Communications Corp. (“AllComm”), a predecessor of Glowpoint, to New York State
Department of Taxation and Finance (the “AllComm Tax Liability”). Our
representatives then met with New York State officials and presented the
supporting documentation in an attempt to have this matter resolved on the
merits of the case. On or about December 12, 2006, we and New York State agreed
on the amount of $269,000 owed to settle the AllComm Tax Liability.
Accordingly,
we have restated our consolidated financial statements as of December 31, 2004
and for the year then ended and our unaudited condensed consolidated financial
statements for the interim periods within 2004.
We
have
described the specific impact of the restatement in the discussion below.
Results
of Operations
The
following table sets forth, for the year ended December 31, 2004 (the “2004
period”), information derived from our restated consolidated financial
statements expressed as a percentage of our revenues:
|
Revenue
|
|
|
100.0
|
%
|
|
Cost
of revenue
|
|
|
101.0
|
|
|
Gross
margin (loss)
|
|
|
(1.0
|
)
|
|
Operating
expenses:
|
|
|
|
|
|
Research
and development
|
|
|
6.8
|
|
|
Sales
and marketing
|
|
|
20.6
|
|
|
General
and administrative
|
|
|
79.4
|
|
|
Total
operating expenses
|
|
|
106.8
|
|
|
Loss
from operations
|
|
|
(107.8
|
)
|
|
Other
(income) expense:
|
|
|
|
|
|
Amortization
of deferred financing costs
|
|
|
2.8
|
|
|
Interest
income
|
|
|
(0.6
|
)
|
|
Interest
expense
|
|
|
0.4
|
|
|
Gain
on marketable securities
|
|
|
(0.8
|
)
|
|
Other
income
|
|
|
(31.5
|
)
|
|
Amortization
of discount on subordinated debentures
|
|
|
16.7
|
|
|
Increase
in derivative liability
|
|
|
0.8
|
|
|
Loss
on exchange of debt
|
|
|
4.7
|
|
|
Total
other (income) expense, net
|
|
|
(7.5
|
)
|
|
Net
loss
|
|
|
(100.3
|
)
|
|
Preferred
stock dividends
|
|
|
(2.3
|
)
|
|
Net
loss attributable to common stockholders
|
|
|
(102.6
|
)%
|
Year
Ended December 31, 2004
Revenue
- Revenue
was $15.9 million for the 2004 period. Contractual revenue was $12.0 million.
Contractual revenue, which includes subscription and related revenue as reported
previously plus NuVision revenue directly related to those customers that are
under contract, is a new sub-category resulting from the NuVision acquisition
completed in the June 2004 quarter. The most significant component of this
category, Glowpoint subscription revenue, was $10.3 million. The second category
of contractual revenue is from the NuVision customer base and totaled $1.7
million for the 2004 period. Non-contractual revenue was $3.9 million for the
2004 period. Non-contractual revenue includes Glowpoint non-subscription revenue
(our event-driven category of revenue), including bridging revenue and NuVision
revenue of $1.1 million generated by customers that were not under contract.
Cost
of revenue - Cost
of
revenue was $16.0 million for the 2004 period. Infrastructure costs (defined
as
backbone-related costs of network) were $4.1 million in the 2004 period. Access
costs (defined as costs of connecting subscriber locations to the network)
were
$6.5 million. Other additional costs of revenue of $5.4 million include costs
associated with the NuVision revenue, depreciation, ISDN network costs and
costs
of personnel and other expenses associated with bridging services.
Research
and development - Research
and development costs, which include the costs of the personnel in this group,
the equipment they use (including depreciation expense) and their use of the
network for development projects was $1.1 million for 2004. Research and
development expense as a percentage of revenue was 6.8%.
Sales
and marketing - Sales
and
marketing expense of $3.3 million for the 2004 period includes the salaries
of
our direct sales force and marketing personnel and sales engineers. In addition,
this expense category includes sales commissions, costs of equipment used
(including depreciation) and the use of our network by personnel in this
category; travel costs and costs associated with various marketing programs
and
trade show participations. Sales and marketing expense, as a percentage of
revenues, was 20.6% for the 2004 period.
General
and administrative - General
and administrative expense was $12.6 million for the 2004 period. General and
administrative expense includes $6.0 million of direct corporate expenses
related to costs of personnel in the various corporate support categories,
including executive, finance, human resources and information technology. We
also include in this category the costs associated with being a publicly traded
company, such as legal and accounting fees and various filing and listing fees,
as well as bad debt expense related to potential uncollectible trade accounts
receivable and applicable equity-based compensation charges. General and
administrative expense as a percentage of revenue was 79.4%.
Restatement
impact - general and administrative - General
and administrative expenses were increased by $0.8 million.
Other
income - Other
income was $1.2 million in the 2004 period and includes $5 million recognized
in
connection with the acquisition by Gores of V-SPAN, pursuant to our agreement
with Gores. Offsetting this fee was accelerated amortization of the discount
on
our subordinated debentures and related deferred financing costs totaling $3.1
million resulting from the exchange of subordinated debentures for preferred
stock, common stock and a modification to related warrants. In addition, we
recognized a $0.7 million loss on the exchange.
Net
loss - Net
loss
attributable to common stockholders was $16.3 million or $0.45 per basic and
diluted share in the 2004 period. Before giving effect to the aggregate $0.4
million in preferred stock dividends on series B convertible preferred stock
in
the 2004 period, we reported a net loss of $15.9 million for the 2004 period.
Liquidity
and Capital Resources
At
December 31, 2004, we had working capital of $2.2 million. We had $4.5 million
in cash and cash equivalents at December 31, 2004. We received $12.4 million
of
net proceeds from the February 2004 private placement of common stock and net
proceeds from the exercise of stock options and warrants of $0.6 million offset
by the funding of the $11.4 million usage of cash in operations in the 2004
period and the purchase of $1.1 million of network, equipment and leasehold
improvements.
In
January 2004, in exchange for the cancellation and termination of our
outstanding subordinated debentures with an aggregate face value of $4,888,000
and forfeiture of any and all rights of collection, claim or demand under the
debentures, we issued to the holders of the debentures (i) an aggregate of
203.667 shares of Series B convertible preferred stock and (ii) an aggregate
of
250,000 shares of restricted common stock; and reduced the exercise price of
the
warrants to purchase shares of our common stock issued pursuant to the original
purchase agreement from $3.25 to $2.75. As a result of this exchange, the $2.7
million of discount on subordinated debentures as of December 31, 2003 was
written off to expense in the first quarter of 2004.
In
February 2004, we raised net proceeds of $12.4 million in a private placement
of
6,100,000 shares of our common stock at $2.25 per share. We also issued
1,830,000 warrants to purchase 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. In addition, we issued to our
placement agent five-year warrants to purchase 427,000 shares of common stock
at
an exercise price of $2.71 per share.
In
March
2005, we entered into a common stock purchase agreement with several unrelated
institutional investors in connection with the offering and sale 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 approximately $10.15 million, less our expenses relating
to the offering, which were approximately $760,500, a portion of which
represents investment advisory fees totaling $710,500 to Burnham Hill Partners,
our financial advisor. The warrants are exercisable for a five-year term and
have an exercise price of $2.40 per share. The warrants may be exercised by
cash
payment of the exercise price or by “cashless exercise.”
The
following summarizes our contractual cash obligations and commercial commitments
at December 31, 2004, and the effect such obligations are expected to have
on
liquidity and cash flow in future periods.
|
Contractual
Obligations:
|
|
Total
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Purchase
obligations (1)
|
|
$
|
13,826,667
|
|
$
|
4,713,200
|
|
$
|
3,680,000
|
|
$
|
2,266,800
|
|
$
|
2,000,000
|
|
$
|
1,166,667
|
|
Operating
lease obligations
|
|
|
242,711
|
|
|
242,711
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Capital
lease obligations
|
|
|
35,373
|
|
|
35,373
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
14,104,751
|
|
$
|
4,991,284
|
|
$
|
3,680,000
|
|
$
|
2,266.800
|
|
$
|
2,000,000
|
|
$
|
1,166,667
|
| (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.
|
Future
minimum rental commitments under all non-cancelable operating leases are as
follows:
|
Year
Ending December 31
|
|
|
2005
|
|
|
242,711
|
|
Future
minimum lease payments under capital lease obligations at December 31, 2004
are
as follows:
|
Total
minimum payments in 2005
|
|
$
|
35,373
|
|
|
Less
amount representing interest
|
|
|
(401
|
)
|
|
Total
principal
|
|
|
34,972
|
|
|
Less
portion due within one year
|
|
|
(34,972
|
)
|
|
Long-term
portion
|
|
|
—
|
|
Net
cash
used by operating activities for the 2004 period was $11.4 million. The primary
sources of operating cash in 2004 were the $0.5 million decrease in accounts
receivable, $0.6 million increase in accounts payable, and $1.6 million increase
in accrued expenses and the $0.4 million decrease in prepaid expenses and other
current assets. Significant uses of cash included the $15.9 million net loss,
adjusted for $2.2 million of depreciation and amortization, $2.7 million of
amortization of discount on subordinated debentures, $0.8 million of equity
based compensation, the $0.7 million loss on exchange of debt and $0.4 million
of amortization of deferred financing costs, the $5.5 million increase in
receivable due from Gores and the $0.2 million decrease in other assets. In
an
effort to further develop our Glowpoint network, we employ a staff of ten
software and hardware engineers who evaluate, test and develop proprietary
applications. Research and development expense, which includes the cost of
the
personnel in this group, the equipment that they use and their use of the
network, totaled $1.1 million in the 2004 period. It is expected that research
and development costs will remain flat in coming quarters as we design and
develop new service offerings to meet customer demand, test new products and
technologies across the network and develop and enhance on-line tools to make
the customer/partner experience a satisfying and productive one.
Investing
activities for the 2004 period included purchases of $1.1 million for network,
computer and videoconferencing equipment and leasehold improvements. Our network
is currently built out to handle the anticipated level of subscriptions for
2005. Although we anticipate current expansion of the network, we have no
significant commitments to make capital expenditures in 2005.
Financing
activities in the 2004 period included receipt of the $12.5 million of net
proceeds from the February 2004 private placement of common stock and the $0.6
million of exercise proceeds related to stock options.
We
believe that our available capital as of December 31, 2004, together with our
operating activities, will enable us to continue as a going concern through
March 31, 2006.
Critical
Accounting Policies
We
prepare our financial statements in accordance with accounting principles
generally accepted in the United States. Preparing financial statements in
accordance with generally accepted accounting principles requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclose contingent assets and liabilities as of the date of
the
financial statements and the reported amounts of revenues and expenses during
the reporting period. The following paragraphs include a discussion of some
critical areas in which critical accounting policies apply:
Revenue
Recognition
We
recognize service revenue related to our network subscriber service and the
multipoint video and audio bridging services as service is provided. In
February, 2004, we began billing subscription fees in advance and at December
31, 2004, we had deferred approximately $811,000 of this revenue. 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, 2004, we had deferred approximately $207,000
of
activation fees and approximately $175,000 of related installation costs.
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.
Goodwill
and Other Intangible Assets
We
follow
SFAS No. 142, “Goodwill
and Other Intangible Assets”
in
accounting for goodwill and other intangible assets. SFAS No. 142 requires,
among other things, that companies no longer amortize goodwill, but instead
test
goodwill for impairment at least annually. In addition, SFAS 142 requires that
we identify reporting units for the purposes of assessing potential future
impairments of goodwill, reassess the useful lives of other existing recognized
intangible assets, and cease amortization of intangible assets with indefinite
useful lives. An intangible asset with an indefinite useful life should be
tested for impairment in accordance with the guidance in SFAS No.
142.
Recent
Accounting Pronouncements
In
December 2004, the 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 for
the
interim period beginning after June 15, 2005. Based on the current
outstanding unvested number of stock options, we expect to record compensation
charges totaling $2.0 million over the vesting period of the options. The
adoption of this statement will have no impact on our cash flows.
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 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
February 2006, the FASB issued SFAS 155, “Accounting
for Certain Hybrid Financial Instruments”.
SFAS
155 amends SFAS 133 and SFAS 140, and addresses issues raised in SFAS 133
Implementation Issue No. D1, “Application
of Statement 133 to Beneficial Interests in Securitized Financial
Assets.”
SFAS 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. We are currently evaluating the implications of SFAS 155 on our financial
statements.
Inflation
We
do not
believe inflation had a material adverse effect on the 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.
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 |
|
Restated consolidated financial statements
for year ended 2004. |
| |
|
|
| Exhibit 99.2 |
|
Press
release dated January 18, 2007 announcing Glowpoint’s restated
consolidated financial statements for year ended
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: January 18,
2007 |
|