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) March 17, 2006
Glowpoint, Inc.
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(Exact name of registrant as specified in its Charter)
Delaware 0-25940 77-0312442
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(State or other jurisdiction (Commission (I.R.S Employer
of incorporation) File Number) Identification No.)
225 Long Avenue, Hillside, NJ 07205
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 282-2000
Not Applicable
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(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. The restated financial
statements, attached hereto as Exhibit 99.1, are incorporated herein by
reference. Because we have not yet completed the restatement of our financial
statements for 2002 or 2003, we are not yet 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 March 17, 2006 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.
2
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.
3
RESTATEMENT AND RELATED MATTERS
On June 2, 2005, we dismissed our independent accounting firm, BDO
Seidman LLP, for geographic reasons, and retained the independent accounting
firm of Eisner LLP. In the course of its initial assessment of our December 31,
2004 balance sheet, Eisner raised certain issues relating to property and
equipment. Our internal accounting team looked into the matter and subsequently
concluded, on a preliminary basis, that the costs associated with certain
purchases of videoconferencing equipment for resale and certain other operating
costs that represented cost of revenue had erroneously been capitalized as
property and equipment.
These preliminary conclusions were discussed at a meeting of our board of
directors on July 21, 2005. At that meeting, our Audit Committee determined to
undertake an independent investigation of the matter. Following that meeting,
our internal accounting team conducted a further review of the audited financial
statements for 2002 through 2004 and held several discussions with our former
CFO. Based on these discussions, on August 2, 2005, we concluded that our
financial statements for fiscal years 2002 through 2004 (and the related
quarters) and the quarter ended March 31, 2005 needed to be restated and should
no longer be relied upon.
We requested that BDO Seidman audit our restated consolidated financial
statements for fiscal years 2002 through 2004 and review our condensed
consolidated financial statements for the applicable inclusive interim periods
and the the quarter ended March 31, 2005, which BDO Seidman declined. We have
restated our consolidated financial statements as of December 31, 2004 and for
the year then ended. We have also restated our unaudited condensed consolidated
financial statements for the interim periods within 2004. We have described the
specific impact of the restatement in the more detailed discussion below.
Our internal accounting team is working diligently to complete our fiscal
2005 results. Restating financial statements for fiscal years 2002 and 2003 will
require significant additional time and resources, primarily because of the
following reasons:
o During 2003, we completed the sale of our video solutions (VS) business
to Gores. As part of the sale, we transferred four data communication
servers which contained various documents and audit support workpapers
associated with the books and records of the VS business for all periods
prior to the sale. We did not retain backups of the information on those
servers and we just recently received data downloads from such servers.
Gores was only able to locate three of the four servers transferred.
o We may not be able to quantify inventory in periods prior to 2004.
Effective with the sale to Gores, we no longer owned any inventory and
BDO Seidman was the only auditor who observed the physical inventory
counts that affect those periods. To date, we have not begun to verify
such inventory amounts, which will be necessary in order to complete a
restatement of our consolidated financial statements for the years ended
December 31, 2002 and 2003. We will take all available actions to gain
access to the BDO Seidman workpapers.
At this time, we cannot determine whether the resolution of the above
items will enable us to restate fiscal years 2002 and 2003 in a reasonable
amount of time or at all.
4
AUDIT COMMITTEE INVESTIGATION. The Audit Committee commenced its
independent investigation following the July 21, 2005 board meeting. The Audit
Committee hired independent counsel, the law firm of Kronish Lieb Weiner &
Hellman LLP, to conduct the investigation. Kronish Lieb retained a forensic
audit firm, Alix Partners LLP, to assist in the investigation. The investigation
was concluded in late September 2005 and found that expenses associated with
services provided to and equipment purchased by customers during 2001 through
2003 were improperly capitalized as additions to our fixed assets, and that such
practices affected our 2001 through 2004 financial statements. The Audit
Committee investigation also found that, during the same period, some of the
amounts associated with practices described in the preceding sentence were
written off in subsequent accounting journal entries that were themselves
improper, and that similarly improper additions to our fixed assets continued
even after such write-offs had occurred. Our prior CFO, who participated in
these practices and under whose supervision they occurred, left Glowpoint in
April 2005 after the planned relocation of the finance department from New
Hampshire to our headquarters in New Jersey. In addition to issues affecting
fixed assets, the investigation found that during the relevant period we lacked
adequate internal accounting controls. Finally, the investigation identified
certain areas that warrant further review, including past revenue recognition
practices when we were a reseller of videoconferencing equipment, costs
allocated to the accounting associated with the Gores transaction and internal
reallocation of communication costs.
As noted above, the Audit Committee investigation found that during the
relevant periods being restated, we lacked adequate internal controls. A
material weakness in internal controls is a significant deficiency, or a
combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will be not be prevented or detected. We believe that the material
weakness arose as the result of aggregating several significant deficiencies,
including: inadequate review and approval of journal entries in the financial
statement preparation process and a lack of supporting documentation and
assumptions used therein, an insufficient number of technical accounting and
public company reporting personnel in the finance department, the absence of a
formal monthly closing process and subsequent formal reporting of monthly
financial statements and account variance analysis. Additionally, our finance
office was located in New Hampshire and our headquarters was located in New
Jersey.
The Audit Committee investigation further found that our current
management has instituted improved internal accounting controls, including the
hiring of the current CFO based in New Jersey and the subsequent relocation and
restaffing of the finance organization to our headquarters in April 2005. Our
restaffing included a corporate Controller who has over twenty years experience
in public company reporting, has earned his CPA and will become our acting CFO
in April 2006. We also instituted a formal monthly closing process, including
account analysis, oversight of all closing processes, formal monthly review of
the financial statements and the implementation of monthly written reports to
the Board of Directors. We are continuing to evaluate and improve our internal
control procedures, where applicable.
SEC INQUIRY. On August 2, 2005, we contacted the Securities and Exchange
Commission to notify it of our determination to restate our financial
statements. On August 3, 2005, the SEC notified us that it was conducting an
informal inquiry into our reported accounting issues. The SEC has met with our
outside counsel as well as counsel to the Audit Committee. The SEC also sent us
a document production request on October 27, 2005, and we responded to the
request on November 14, 2005. The SEC has also recently contacted our former CFO
and BDO Seidman LLP, our former independent accounting firm.
5
DELISTING. On August 16, 2005, we received a letter from the Nasdaq
National Market indicating that our common stock would be delisted from Nasdaq
because of our failure to timely file our Form 10-Q for the quarter ended June
30, 2005. We requested and were granted a hearing to seek a conditional listing
exception. The hearing occurred on September 15, 2005. On October 3, 2005, the
Nasdaq Listing Qualifications Panel notified us that our common stock would be
delisted from the Nasdaq National Market effective with the open of business on
October 5, 2005. Our common stock now trades over the counter in the pink sheets
under the symbol "GLOW.PK".
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
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Gross margin (loss) ........................................... (1.0)
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Operating expenses:
Research and development ................................... 6.8
Sales and marketing ........................................ 20.6
General and administrative ................................. 74.2
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Total operating expenses ...................................... 101.6
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Loss from operations .......................................... (102.6)
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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
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Total other (income) expense, net ............................. (7.5)
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Net loss ...................................................... (95.1)
Preferred stock dividends ..................................... (2.3)
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Net loss attributable to common stockholders .................. (97.4)%
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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.
Restatement Impact: Revenue for the year ended December 31, 2004 was
reduced by $128,000. We have deferred the recognition of revenue associated with
installations services from 2002 and 2003 over a 24 month period (the estimated
average life of a subscription based customer). Previously, we recognized
installation revenue at the time such services were completed. This change had
the impact of increasing 2004 revenue by $160,000. This increase was offset by a
reduction in revenue of $94,000 associated with sales tax charged to customers
that was erroneously classified as revenue; a reduction of $128,000 related to
billing errors that were subsequently corrected, but erroneously reclassified
from previously reported revenue and charged to the allowance for doubtful
accounts and a reduction of $45,000 related to an insurance claim payment to us
that was erroneously classified as revenue.
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.
Restatement Impact: Cost of revenue was increased by $3,177,000. For the
year ended December 31, 2004, approximately $2,216,000 was erroneously
capitalized as property and equipment rather than being charged to cost of
revenue. In addition, we recomputed the amount of our network costs allocated to
cost of revenue, research and development, sales and marketing and general and
administrative expenses to properly reflect costs associated with the various
departments that used the internal network, which resulted in an increase to
cost of revenue of $297,000 Cost of revenue has been increased by $160,000 for
costs associated with the increase in installation revenue and adjustments to
the deferral of 2004 installation fees. Depreciation expense of $343,000
previously allocated to sales and marketing and general and administrative
expenses has been reclassified to cost of revenues associated with bridging
services. Additionally, we recomputed the amount of certain circuit costs that
were allocated to Gores and previously charged to the sale of the VS equipment
business and have decreased the amount allocated during 2004 by $373,000 and
increased cost of revenue. Cost of revenue was decreased by $173,000 to apply
credits from telecommunication carriers to the appropriate period.
7
RESEARCH AND DEVELOPMENT. Research and development expense, 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%.
Restatement Impact: Research and development expenses were decreased by
$355,000, principally due to a reclassification of $408,000 to general and
administrative expenses.
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.
Restatement Impact: Sales and marketing expenses, previously referred to
as selling, were reduced by $4,784,000 for the year ended December 31, 2004. The
Company has reclassified to general and administrative expenses $3,656,000 that
was previously classified as selling expenses, which relate principally to
customer service, engineering and certain other operating expenses. In addition,
the Company had previously allocated $1,055,000 of network costs to selling
expenses during 2004. We have determined that only $238,000 of such costs are
attributable to sales and marketing expenses and $817,000 has been reclassified
principally to costs of revenue and general and administrative expenses. Sales
commission expense has been reduced for $124,000 that should have been expensed
prior to 2004 has been reclassified to 2003. Such expenses should have been
recognized in the period incurred. Additionally, sales and marketing expense has
been reduced by $204,000 relating to an improper accrual of sales commissions.
GENERAL AND ADMINISTRATIVE. General and administrative expense was $11.8
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 74.2%.
Restatement Impact: General and administrative expenses were increased by
$3,303,000. The Company has reclassified to general and administrative expenses
$4,064,000 that was previously classified as selling ($3,656,000) and research
and development ($408,000), which relate principally to customer service,
engineering and certain other operating expenses. Depreciation expense was
reduced by $1,938,000 reflecting the previously discussed reduction of fixed
assets and a reclassification of depreciation expense related to bridging
revenue. The re-allocation of network costs from sales and marketing expenses
resulted in an increase in general and administrative expenses of $472,000. An
accrual for severance expense in 2004 for $133,000 has been eliminated since the
individual had not been terminated. General and administrative expense was
increased by $388,000 to reflect arbitration expenses of $180,000 and additional
legal expense of $208,000 incurred with regard to such arbitration, which had
previously been charged to the loss on the sale of the VS equipment business to
Gores. We recognized $300,000 of expense related to sales tax. Additionally, bad
debt expense was decreased by $107,000, including $128,000 that was reclassified
as a reduction in revenue. Various additional adjustments resulted in an
aggregate increase to general and administrative expenses of $257,000.
8
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.
Restatement Impact: Other income was increased by $678,000. As a result
of correcting the accounting for the issuance of the subordinated convertible
debentures we reduced the amortization of the related discount by $500,000 and
recognized amortization of deferred financing costs of $448,000. The Company had
previously overstated the discount by $1,489,000, which was partially offset by
overstating amortization by $989,000 as of January 1, 2004, due to the
overstatement of the discount and by following the straight line method of
amortizing the discount rather than the effective yield method. As a result of
correcting the accounting for the exchange of the subordinated convertible
debentures for Series B convertible preferred stock, warrants and a modification
to warrants, we reduced the loss on the exchange of debt by $611,000. The
Company had previously recognized a loss on the exchange of $1,354,000, which
included the excess of the fair value of the common stock underlying the Series
B convertible preferred stock ($5,499,000) over the face amount of the
subordinated convertible debentures ($4,888,000) in the loss on exchange.
However the subordinated convertible debentures were convertible into the same
number of common shares as the Series B convertible preferred stock and,
accordingly, had the same fair value. The loss on the exchange has been reduced
to $743,000, representing the fair value of the common shares and the
incremental fair value from the warrant modification, which were included in the
exchange. Additionally, we recorded other expense of $134,000 associated with
the increase in the estimated fair value of the derivative liability associated
with registration rights.
NET LOSS. Net loss attributable to common stockholders was $15.5 million,
or $0.42 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 $15.1 million for
the 2004 period.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, we had working capital of $3.6 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 $9.2 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.
9
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 $2,266,000 $ 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...................................... --
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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
$0.8 million increase in accrued expenses and the $0.4 million decrease in
prepaid expenses and other current assets. Significant uses of cash included the
$15.1 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.
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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 (see Note
7).
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.
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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
(c) Exhibits
Exhibit No. Description
----------- -----------
Exhibit 99.1 Restated consolidated financial statements for year
ended 2004.
Exhibit 99.2 Press release dated March 15, 2006 announcing
Glowpoint's restated consolidated financial
statements for year ended 2004.
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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/ Gerard E. Dorsey
---------------------------------------
Gerard E. Dorsey
Chief Financial Officer and Executive
Vice President, Finance
Date: March 17, 2006
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