This summary highlights information contained elsewhere in this prospectus.  Because this is a summary, it is not complete and does not contain all of the information that may be important to you.  For a more complete understanding of us and this offering of our common stock, we encourage you to read this prospectus in its entirety, especially the risks of investing in our common stock discussed under “Risk Factors” and our consolidated financial statements, including the notes thereto, appearing elsewhere in this prospectus.

 

Our Company

Glowpoint, Inc. ("Glowpoint" or "we" or "us" or “the Company”), a Delaware corporation, is a premiere broadcast-quality, IP (Internet Protocol)-based managed video services provider. Our mission is to improve the ease-of-use, cost-effectiveness, functionality, and quality of existing video communications in order to make it an integral and ubiquitous part of everyday business and personal communications. We believe video communications should be as easy and spontaneous to use as your telephone, but with the power of face-to-face communication.

We view our services as analogous to cellular service providers in the cellular telephone industry. Regardless of the cellular phone purchased, users must select a cellular service provider to make it work. Users make that service decision based on the features, reliability and price offered by the service provider.  In our industry, regardless of the video conferencing equipment purchased, Glowpoint provides the managed video services to make it work. In doing so, we offer a vast array of managed video services, including video application services, managed network services, IP and ISDN videoconferencing services, multi-point conferencing (bridging), technology hosting and management, and professional services. We provide these services to a wide variety of companies, from large enterprises and governmental entities to small and medium-sized businesses. Glowpoint is exclusively focused on high quality two-way video communications and has been supporting millions of video calls since its launch in 2000. We have bundled some of our managed services to offer video communication solutions for broadcast/media content acquisition and for video call center applications. With the advent of HD (High Definition) Telepresence solutions, we have combined various components of our features and services into a comprehensive “white glove” service offering that can support virtually any of the telepresence solutions on the market today.

 

Glowpoint’s managed video services are hardware agnostic, supporting all recognized video standards. As a result, we have become the global video interconnection point, linking together “islands of video” across third party networks (e.g., AT&T, SBC, Qwest and others), protocols (e.g., H320, H323, IP, SIP, and VoIP), and devices (e.g., desktop, laptop, and mobile phone). Glowpoint’s services provide users with a consistent experience - regardless of how they are connecting or where they are connecting from.

 

Glowpoint’s managed video services involve two major components, the Glowpoint video applications services and the Glowpoint network services. The video application services are network agnostic and may be leveraged by customers on any QOS (Quality of Service) network that supports two-way video transport. The Glowpoint network services leverage the Glowpoint network, a multiple protocol layer switching (MPLS) QOS network that is dedicated to high-quality two-way video transport built and managed by Glowpoint. The Glowpoint network is exclusively dedicated to IP-based video communications, which allows us to optimize performance and routing of video and audio packets so as to offer broadcast quality images with telephony-like reliability, features and ease-of-use. The Glowpoint network spans 11 points of presence (POPs), with POPs in the United States, Canada, the United Kingdom and Australia. A unique feature of the Glowpoint network is its sophisticated gatekeeper infrastructure and configuration along with its patent-pending call control capabilities, which enable customers to seamlessly connect to nearly any standards-based video communications user, whether they are still using ISDN or the Internet, across the United States as well as to virtually any major city around the world. Since videoconferencing users typically can only communicate to others on the same service, Glowpoint is bridging these isolated islands of video and making video communications more ubiquitous.

1

---

 

The Offering

 

This prospectus relates to the resale of up to an aggregate of up to 15,924,902 shares of our common stock, par value $0.0001 per share, that may be offered from time to time by the selling stockholders identified on page 67 of this prospectus.  Based on the December 12, 2007 closing sale price of our common stock of $0.46 per share as reported on the OTC Bulletin Board, these registered shares would have a total value of approximately $7,325,500. The shares of common stock being offered by this prospectus may be acquired by the selling stockholders as follows:

 

Ø

up to 14,490,822 shares of common stock are issuable to various selling stockholders upon the exercise of the Series A Warrants and the Series A-2 Warrants issued by us in connection with the Private Placements and issued in connection with amending the terms of the notes and transaction documents from the March 2006 and April 2006 private placements (the “Amendment”), all of which have an exercise price of $0.65 per share.

 

Ø

up to 1,434,080 shares of common stock are issuable upon the exercise of the placement agent warrants and advisory warrants issued by us to the designees and assigns of Burnham Hill Partners in connection with the Private Placements and the Amendment, which includes 1,184,080 warrants with an exercise price of $0.55 per share and 250,000 warrants with an exercise price of $0.65 per share.

 

We will not receive any proceeds from the sale of the shares of common stock offered by the selling stockholders. We may, however, receive proceeds from the selling stockholders in connection with the exercise of the warrants, if they are exercised. Any proceeds we receive from the selling stockholders upon their exercise of the warrants to purchase the shares of common stock included in the shares that are being offered by them hereunder will be used by the Company for general working capital.

 

The timing and amount of any sale are within the sole discretion of the selling shareholders. The selling stockholders may sell this common stock through ordinary brokerage transactions, directly to market makers of our shares or through any other means described in the section entitled “Plan of Distribution” beginning on page 77.

 

In the Private Placements, we issued Senior Secured Convertible Notes Due March 31, 2009 (“Senior Secured Notes”) with an initial aggregate principal of $9,718,000, bear interest at 10% per annum (12% after the first anniversary of issuance), and are convertible into such number of shares of our common stock as is determined by dividing the outstanding principal balance of such notes by the conversion price of the notes, which is currently $0.50. See “DESCRIPTION OF REGISTERED STOCK; OUR CAPITAL STOCK AND SECURITIES—Senior Secured Notes.” Also in the September 2007 private placement, we issued 474.8126 shares of Series C Convertible Preferred Stock (the “Series C Preferred Stock”) in exchange for all of our outstanding Series B preferred stock, the interest accrued thereon, and shares of common stock owned by the holders of our Series B preferred stock. The Series C Preferred Stock has a liquidation preference equal to its stated value, which is $10,000 per share, and is convertible at the holder’s election into that number of shares of common stock resulting from dividing the liquidation preference by the conversion price, which is currently $1.00. Therefore, the Series C Preferred Stock effectively converts into common stock at a rate of 1 to 10,000 shares. Presently there are 474.8126 shares of Series C Preferred Stock outstanding, which are convertible into 4,748,126 shares of common stock. See “DESCRIPTION OF REGISTERED STOCK; OUR CAPITAL STOCK AND SECURITIES—Preferred Stock.

 

The above-described notes, preferred stock and warrants contain anti-dilution provisions that may result in a reduction of the conversion and exercise prices if we issue shares in the future for consideration below the existing conversion or exercise prices.  Such anti-dilution provisions may cause a decrease in the voting power and value of your investment in our shares.  See “DESCRIPTION OF REGISTERED STOCK; OUR CAPITAL STOCK AND SECURITIES—Anti-Dilution Provisions in Senior Secured Notes, Preferred Stock and Warrants.”  In connection with the Private Placements, we filed a registration statement with the Securities and Exchange Commission on October 22, 2007 and agreed to use commercially reasonable efforts to cause it to become effective on within 90 days of filing and remain effective thereafter. In the event the registration statement is not effective by January 22, 2008, the Company is obligated to pay an amount as liquidated damages to each selling stockholder in cash equal to (1) two percent (2.0%) for the first calendar month (prorated for a shorter period) and (2) one percent (1.0%) for each calendar month after the first calendar month (prorated for shorter periods) of the selling stockholder’s initial investment in the Senior Secured Notes or Series C Preferred Stock until the date of effectiveness.

2

---

 

On December 12, 2007, there were 46,014,673 shares of our common stock issued and outstanding, of which approximately 73.4% are held by persons other than the selling stockholders, affiliates of the Company, or affiliates of the selling stockholders. The 15,924,902 shares being offered represent approximately 34.6% of the shares outstanding. Assuming all of the 15,924,902 shares offered in this Offering were issued and outstanding, they would represent approximately 25.7% of our resulting shares outstanding. Assuming no other change in current share ownership percentages, persons other than the selling stockholders, affiliates of the Company, or affiliates of the selling stockholders would own approximately 54.5% of the resulting shares issued and outstanding.

 

RISK FACTORS AND UNCERTAINTIES

 

Glowpoint’s business faces numerous risks, including those set forth below or those described elsewhere in this prospectus or in our other filings with the Securities and Exchange Commission. The risks described below are not the only risks that we face, nor are they necessarily listed in order of significance. Other risks and uncertainties may also affect our business. Any of these risks may have a material adverse effect on Glowpoint’s business, financial condition, results of operations and cash flow.

Risks Relating To Our Securities

We need future capital to refinance our existing obligations and for working capital. If we are able to raise additional capital, it may dilute our existing stockholders or restrict our ability to operate our business. If we are unable to refinance our existing obligations, it would have a material adverse effect on the Company.

Our working capital requirements continue to be significant. To date, we have been dependent primarily on the net proceeds of private placements of convertible debt and equity securities. Our Senior Secured Notes issued in the Private Placements in aggregate principal amount of $9,718,000, together with additional notes issued to satisfy the quarterly interest payments (“Senior Secured Interest Notes”), mature in March 2009. We may not be able to repay such notes at that time and may have to evaluate our options, which include renegotiating the terms and maturity date and issuing new debt or equity to repay the Senior Secured Notes and Senior Secured Interest Notes. If we are unable to renegotiate the maturity of the Senior Secured Notes and Senior Secured Interest Notes or issue new securities on favorable terms to repay them, it would have a material adverse effect on the Company and we would not have sufficient funds to continue as a going concern.

Furthermore, our working capital requirements depend and will continue to depend on numerous factors, including the timing of revenues, the expense involved in development of our products, realizing cost reductions on our technology, capital improvements and the cost involved in protecting our proprietary rights. Accordingly, the proceeds from our recent financing and our other existing capital resources may not be sufficient to fund our future operations. We currently have no committed sources of, or other arrangements with respect to, additional financing. If additional working capital is required, it may dilute our existing stockholders or restrict our ability to run our business.

 

3

---

 

Our financial statements are prepared assuming we are a going concern.  The accompanying financial statements do not include any adjustments that might result from being unable to raise the necessary additional capital, renegotiate or refinance the Senior Secured Notes, and realize projected operational savings.

Our consolidated financial statements have been prepared assuming that we will continue as a going concern.  Since inception, we have incurred recurring operating losses and negative operating cash flows, including a net loss attributable to common shareholders of $11,137,000 and negative operating cash flows of $4,694,000 for the year ended December 31, 2006.  At December 31, 2006, we had cash and cash equivalents of $2,153,000, a working capital deficit of $11,868,000, and an accumulated deficit of $172,623,000.  The foregoing factors, among others, raise substantial doubt as to our ability to continue as a going concern. In 2006, we implemented a corporate restructuring plan designed to reduce certain operating, sales and marketing and general and administrative costs (see Note 18 to the consolidated financial statements for further information).  We raised capital in the Private Placements, but continue to sustain losses and negative operating cash flows.  Assuming we realize all of the savings from our restructured operating activities and assuming we are able to negotiate favorable terms with the authorities regarding our sales and use taxes and regulatory fees (see Note 6 to the consolidated financial statements for further information), we believe that our available capital as of September 30, 2007 will enable us to continue as a going concern through September 30, 2008.  There are no assurances, however, that those assumptions will be realized.  The accompanying financial statements do not include any adjustments that might result from this uncertainty.  The potential adjustments that might result include: 

 

·

Substantial disposition of assets outside the ordinary course of business;

 

·

Externally forced revisions of our operations or similar actions; and

 

·

Restructuring of our debt or a reorganization of our business.

We have reported weaknesses in our internal controls for financial reporting. If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders may not be confident in our financial reporting, which would harm our business and the price of our common stock.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed.

We may be required to issue more shares of common stock upon adjustment of the conversion price of our outstanding Series C Preferred Stock, the Senior Secured Notes and the Senior Secured Interest Notes or the exercise price of our outstanding warrants, resulting in dilution of our existing stockholders. 

The conversion or exercise of any of our outstanding preferred stock, Senior Secured Notes, Senior Secured Interest Notes, options and warrants will dilute the ownership interests of our stockholders. If we sell common stock or common stock equivalents at a price per share that is below the then-applicable conversion price of our outstanding Series C Preferred Stock, the Senior Secured Notes and the Senior Secured Interest Notes and/or below the then-applicable exercise price of certain of our outstanding warrants, then the conversion price or exercise price, as the case may be, of such securities may adjust downward and, as a result, the amount of shares of common stock issuable upon conversion or exercise of such securities would increase. As a result of the foregoing, we may be required to issue more shares of common stock than previously anticipated which would result in further dilution of our existing stockholders.

Sales of substantial amounts of common stock in the public market could reduce the market price of our common stock and make it more difficult for us and our stockholders to sell our equity securities in the future. 

Under the terms of the prior financings, including the terms of the Private Placements and the terms of a private placement in February 2004 (the “2004 Financing”), a substantial number of shares of our common stock were to be registered for resale. Resale of a significant number of these shares into the public market, once registered, could depress the trading price of our common stock and make it more difficult for our stockholders to sell equity securities in the future. In addition, to the extent other restricted shares become freely available for sale, whether through an effective registration statement or under Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”), or if we issue additional shares that might be or become freely available for sale, our stock price could decrease.

Although the sale of these additional shares to the public might increase the liquidity of our stockholders’ investments, the increase in the number of shares available for public sale could drive the price of our common stock down, thus reducing the value of your investment and perhaps hindering our ability to raise additional funds in the future.

4

---

We do not believe the Series B warrants are exercisable. If our position is challenged and we do not prevail, there will be significant dilution.

In connection with our March 2006 and April 2006 financing, we issued Series B warrants to purchase 6,180,000 shares of common stock at an exercise price of $0.01 per share. The Series B warrants would only become exercisable if we failed to achieve positive operating income in the fourth quarter of 2006, excluding certain restructuring and non-cash charges identified in such warrant. While we reported positive operating income, excluding those restructuring and non-cash charges identified on Schedule A to the Series B warrants, as amended, for the fourth quarter of 2006 and do not believe the Series B warrants are exercisable, there can be no assurance that the Series B warrant holders will not challenge our results. While there has been no challenge to date, in the event of such a challenge and an adverse outcome against us, 6,180,000 shares of common stock may be issued for one cent per share and there will be significant dilution.

We do not intend to pay any dividends on our common stock. 

We have not declared and paid any dividends on our common stock and we do not intend to declare and pay any dividends on our common stock. Earnings, if any, will be re-invested in our business.

We expect our future operating results to vary from quarter to quarter, and increase the likelihood that we may fail to meet the expectations of securities analysts and investors at any given time. 

We expect our revenues and operating results to vary significantly from quarter to quarter. In addition, the Company will be required to incur interest expense until conversion of the Senior Secured Notes and the Senior Secured Interest Notes into common stock. We also expect that our operating results could vary significantly from quarter to quarter based on changes to the estimated fair value of the derivative liabilities related to the Series A warrants and the Series A-2 warrants, the conversion feature of the Senior Secured Notes and the 2004 Financing. The estimated fair value of the derivative liabilities are calculated using the Black-Scholes formula and such estimates are revalued at each balance sheet date, with changes in value recorded as other income or other expense. As a result of each of the foregoing, quarter-to-quarter comparisons of our revenues, interest expense and operating results may not be meaningful. In addition, due to our stage of development, we cannot predict our future revenues or results of operations accurately. It is possible that in one or more future quarters our operating results will fall below the expectations of securities analysts and investors. If this happens, the trading price of our common stock may decline.

Our common stock is thinly traded and subject to volatile price fluctuations.

 

Amper, Politziner & Mattia, P.C. (“Amper”) has been our independent accounting firm since March 1, 2007, when we dismissed our former independent accounting firm, Eisner LLP (“Eisner”), in order to bring a fresh perspective following our restructuring and restatement efforts. Amper completed our audit for the fiscal year ended December 31, 2006 and reviewed the quarterly periods therein. On June 6, 2007, we filed our 2006 audited financials statements with our Annual Report on Form 10-K and filed quarterly statements on Forms 10-Q for each quarter in 2006. On June 26, 2007, we filed our quarterly results on Form 10-Q for the quarter ended March 31, 2007. On August 14, 2007, we filed our quarterly results on Form 10-Q for the quarter ended June 30, 2007. On November 14, 2007, we filed our quarterly results on Form 10-Q for the quarter ended September 30, 2007.

The reports of Eisner on the financial statements for the fiscal years ended December 31, 2004 and December 31, 2005 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. There were no disagreements with Eisner for the fiscal years ended 2004 and 2005 on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Eisner, would have caused them to make reference thereto in their reports on the financial statements for such periods.

Eisner had been our independent accounting firm since June 2, 2005, when we dismissed our former independent accounting firm, BDO Seidman LLP (“BDO Seidman”), for geographic reasons. The reports of BDO Seidman on the financial statements for the fiscal years ended 2003 and 2004 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. There were no disagreement with BDO Seidman for the fiscal years ended 2003 and 2004, or for the interim periods subsequent to December 31, 2004, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of BDO Seidman, would have caused them to make reference thereto in their reports on the financial statements for such periods. 

Each decision to change audit firms was recommended by the audit committee, which is composed entirely of independent, non-employee members of the board of directors, and approved by our board of directors.

 

 

The consolidated financial statements as of and for the year ended December 31, 2006 included in this prospectus have been audited by Amper, Politziner and Mattia, P.C., our current independent registered public accounting firm, as stated in their report appearing herein and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

 

The consolidated financial statements as of December 31, 2005 and for the years ended December 31, 2005 and December 31, 2004 included in this prospectus have been audited by Eisner LLP, our former independent registered public accounting firm, as stated in their report appearing herein and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

 

80

---

 

LEGAL MATTERS

 

The law firm of Gibbons, P.C. has acted as our counsel and will be providing an opinion on the validity of the securities.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the Securities and Exchange Commission a registration statement on Form S-1 (including the exhibits, schedules and amendments to the registration statement) under the Securities Act and the common stock offered by this prospectus.  This prospectus does not contain all the information included in the registration statement.  For further information with respect to us and the common stock offered by this prospectus, please refer to the registration statement.  Statements contained in this prospectus as to the contents of any contracts or other document referred to in this prospectus are not necessarily complete and, where the contract or agreement or other document is an exhibit to the registration statement, each statement is qualified in all respects by the provisions of the exhibit, to which reference is now made.

 We have not authorized anyone to provide you with information different from that contained in this prospectus.  If anyone provides you with different information you should not rely on it as being authorized by us.  We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted.  The information contained in this prospectus is accurate only as of the date of this prospectus regardless of the time of delivery of this prospectus or of any sale of common stock.  Our business, financial condition, results of operations, and prospects may have changed since that date.  We will amend or supplement this prospectus as required by law.

We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and its rules and regulations. The Securities Exchange Act requires us to file periodic reports, proxy statements and other information with the SEC. Copies of these periodic reports, proxy statements and other information can be inspected and copied at:

 

SEC Public Reference Room

100 F Street, N.E.

Washington, D.C. 20549

 

You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also obtain copies of any material we have filed with the SEC by mail at prescribed rates from:

 

Public Reference Section

Securities and Exchange Commission

100 F Street N.E.

Washington, D.C. 20549

 

You may obtain these materials electronically by accessing the SEC’s website on the Internet at www.sec.gov.

 

In addition, we make available, free of charge, on our internet website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file this material with, or furnish it to, the SEC. You may review these documents on our website at www.glowpoint.com 

 

81

---

 

INDEX TO FINANCIAL STATEMENTS

 

		Page
Audited Consolidated Financial Statements for the Years Ended December 31, 2006 and 2005
Report of Independent Registered Public Accounting Firm, Amper, Politziner and Mattia, P.C.		F-2
Report of Independent Registered Public Accounting Firm, Eisner LLP		F-3
Consolidated Balance Sheets at December 31, 2006 and 2005		F-4
Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004		F-5
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2006, 2005 and 2004		F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004		F-7
Notes to Consolidated Financial Statements		F-9
Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2007 (unaudited) and December 31, 2006*		F-31
Unaudited Condensed Consolidated Statements of Operations for the Nine and Three Months ended September 30, 2007 and 2006		F-32
Unaudited Condensed Consolidated Statements of Stockholders’ Deficit for the Nine Months ended September 30, 2007		F-33
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2007 and 2006		F-34
Notes to Condensed Consolidated Financial Statements		F-35

 

*	The Condensed Consolidated Balance Sheet at December 31, 2006 has been derived from the audited consolidated financial statements filed as an exhibit hereto.

 

F-1

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of
Glowpoint, Inc.

 

We have audited the accompanying consolidated balance sheet of Glowpoint, Inc and Subsidiaries (the ”Company”) as of December 31, 2006, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Glowpoint, Inc. and Subsidiaries as of December 31, 2006, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for stock-based compensation upon the adoption of Statement of Financial Accounting Standard No. 123 (R), “Share-Based Payment”.

 

The accompanying financial statements have been prepared assuming Glowpoint, Inc. and Subsidiaries will continue as a going concern. As more fully described in Note 2, the Company has a working capital deficiency and recurring net losses, and is in the process of seeking additional capital. The Company has not yet secured sufficient capital to fund its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that may result from the outcome of this uncertainty.

 

AMPER, POLITZINER & MATTIA, P.C.

May 30, 2007

Edison, New Jersey

 

F-2

---

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Glowpoint, Inc.

 

We have audited the accompanying consolidated balance sheets of Glowpoint, Inc. and subsidiaries as of December 31, 2005 and the related consolidated statements of operations, stockholders’ equity (capital deficit), and cash flows for the years ended December 31, 2005 and 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements enumerated above present fairly, in all material respects, the consolidated financial position of Glowpoint, Inc. and subsidiaries as of December 31, 2005 and the consolidated results of their operations and their consolidated cash flows for the years ended December 31, 2005 and 2004 in conformity with accounting principles generally accepted in the United States of America.

 

Eisner LLP

 

Florham Park, New Jersey

February 23, 2007

 

F-3

---

GLOWPOINT, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2006 and 2005

(In thousands, except par value)

 

		Year Ended December 31,
		2006			2005
ASSETS
Current assets:
Cash and cash equivalents		$	2,153		$	2,023
Accounts receivable, net of allowance for doubtful accounts of $121 and $145; respectively			2,748			2,171
Prepaid expenses and other current assets			327			510
Total current assets			5,228			4,704
Property and equipment, net			2,762			4,117
Other assets			403			216
Total assets		$	8,393		$	9,037
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	1,957		$	1,586
Accrued expenses			2,008			1,961
Accrued sales taxes and regulatory fees			4,216			3,063
Current portion of derivative financial instruments			4,301			1,246
10% Convertible notes, net of discount of $2,280			4,326			—
Deferred revenue			288			374
Total current liabilities			17,096			8,230
Long term liabilities:
Derivative financial instruments, less current portion			—			324
Total liabilities			17,096			8,554
Preferred stock, $.0001 par value; 5,000 shares authorized and redeemable; 0.120 Series B shares issued and outstanding, (stated value of $2,888; liquidation value of $3,735 and $3,388), respectively			2,888			2,888
Commitments and contingencies
Stockholders’ deficit:
Common stock, $.0001 par value; 100,000 shares authorized; 46,390 shares issued and 46,086 shares issued and issuable; 46,350 and 46,046 shares outstanding, respectively			5			5
Additional paid-in capital			161,267			160,219
Accumulated deficit			(172,623	)		(161,833	)
Deferred compensation			—			(556	)
			(11,351	)		(2,165	)
Less: Treasury stock, 40 common shares at cost			(240	)		(240	)
Total stockholders’ deficit			(11,591	)		(2,405	)
Total liabilities and stockholders’ deficit		$	8,393		$	9,037

 

See accompanying notes to consolidated financial statements.

 

F-4

---

GLOWPOINT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2006, 2005 and 2004

(In thousands, except per share data)

		Year ended December 31,
		2006			2005			2004
Revenue		$	19,511		$	17,735		$	15,867
Cost of revenue			13,583			14,984			16,019
Gross margin (loss)			5,928			2,751			(152	)
Operating expenses:
Research and development			816			1,242			1,078
Sales and marketing			2,570			4,028			3,265
General and administrative			11,049			14,120			12,598
Total operating expenses			14,435			19,390			16,941
Loss from operations			(8,507	)		(16,639	)		(17,093	)
Other expense (income):
Interest expense			3,969			3			63
Amortization of deferred financing costs			389			—			448
(Decrease) increase in fair value of derivative financial instruments			(1,992	)		271			134
Interest income			(83	)		(100	)		(92	)
Gain on settlement with Gores			—			(379	)		—
Other income			—			—			(5,000	)
Amortization of discount on subordinated debentures			—			—			2,650
Gain on marketable equity securities			—			—			(132	)
Loss on exchange of debt			—			—			743
Total other expense (income), net			2,283			(205	)		(1,186	)
Net loss			(10,790	)		(16,434	)		(15,907	)
Preferred stock dividends			(347	)		(315	)		( 369	)
Preferred stock deemed dividends			—			(1,282	)		—
Net loss attributable to common stockholders		$	(11,137	)	$	(18,031	)	$	(16,276	)
Net loss attributable to common stockholders per share:
Basic and diluted		$	(0.24	)	$	(0.41	)	$	(0.45	)
Weighted average number of common shares:
Basic and diluted			46,242			44,348			36,416

 

See accompanying notes to consolidated financial statements.

F-5

---

 

GLOWPOINT, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

Years Ended December 31, 2006, 2005 and 2004

(In thousands)

 

									Additional
			Common Stock						Paid In			Accumulated			Comprehensive			Deferred			Treasury Stock
			Shares			Amount			Capital			Deficit			Income			Comp.			Shares			Amount			Total
Balance at January 1, 2004			30,555		$	3		$	135,730		$	(129,492	)	$	78		$	(1,498	)		40		$	(240	)	$	4,581
Net loss			—			—			—			(15,907	)		—			—			—			—			(15,907	)
Reversal of unrealized loss upon sale of marketable securities			—			—			—			—			(78	)		—			—			—			(78	)
Comprehensive loss			—			—			—			—			—			—			—			—			(15,985	)
Deferred compensation related to the issuance of restricted stock (including 80 shares issuable which were issued in 2005)			270			—			511			—			—			(511	)		—			—			—
Amortization of deferred compensation from the issuance of restricted stock			—			—			—			—			—			699			—			—			699
Forfeiture of deferred stock compensation			(40	)		—			(134	)		—			—			134			—			—			—
Extension of expiration date of stock options services			—			—			67			—			—			—			—			—			67
Issuance of stock options for consulting services			—			—			32			—			—			—			—			—			32
Exercise of stock options			782			—			570			—			—			—			—			—			570
Exchange of subordinated debentures for preferred stock, common stock and modification of warrants			250			—			743			—			—			—			—			—			743
Issuance of common stock and warrants in connection with private placement			6,100			1			11,315			—			—			—			—			—			11,316
Issuance of shares in lieu of interest on subordinated debentures			18			—			45			—			—			—			—			—			45
Preferred stock dividends			—			—			(369	)		—			—			—			—			—			(369	)
Balance at December 31, 2004			37,935			4			148,510			(145,399	)		—			(1,176	)		40			(240	)		1,699
Net loss			—			—			—			(16,434	)		—			—			—			—			(16,434	)
Comprehensive loss			—			—			—			—			—			—			—			—			(16,434	)
Amortization of deferred compensation from the issuance of restricted stock			—			—			—			—			—			620			—			—			620
Compensation from extension of stock options			—			—			48			—			—			—			—			—			48
Issuance and extension of warrants for consulting services			—			—			196			—			—			—			—			—			196
Issuance of stock options for consulting services			—			—			148			—			—			—			—			—			148
Exercise of stock options			50			—			74			—			—			—			—			—			74
Exchange of subordinated debentures for preferred stock, common stock and modification of warrants			1,334			—			2,000			—			—			—			—			—			2,000
Issuance of common stock and warrants in connection with private placement			6,767			1			9,375			—			—			—			—			—			9,376
Fair value of inducement to convert preferred stock and accrued dividends of $183			—			—			1,350			—			—			—			—			—			1,350
Deemed dividend for inducement to convert preferred stock			—			—			(1,167	)		—			—			—			—			—			(1,167	)
Preferred stock dividends			—			—			(315	)		—			—			—			—			—			(315	)
Balance at December 31, 2005			46,086			5			160,219			(161,833	)		—			(556	)		40			(240	)		(2,405	)
Net loss			—			—			—			(10,790	)		—			—			—			—			(10,790	)
Comprehensive loss			—			—			—			—			—			—			—			—			(10,790	)
Reclassification of deferred compensation			—			—			(556	)		—			—			556			—			—			—
Issuance of restricted stock			364			—			354			—			—			—			—			—			354
Stock-based compensation			—			—			473			—			—			—			—			—			473
Restricted stock compensation and modification of option terms related to restructuring			—			—			217			—			—			—			—			—			217
Forfeiture of restricted stock			(60	)		—			(45	)		—			—			—			—			—			(45	)
Placement agent warrants - 10% Notes			—			—			296			—			—			—			—			—			296
Warrant price and term modification - 10% Notes, net of financing costs of $110			—			—			656			—			—			—			—			—			656
Preferred stock dividends			—			—			(347	)		—			—			—			—			—			(347	)
Balance at December 31, 2006			46,390		$	5		$	161,267		$	(172,623	)	$	—		$	—			40		$	(240	)	$	(11,591	)

 

See accompanying notes to consolidated financial statements.

 

F-6

---

 

GLOWPOINT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2006, 2005 and 2004

(In thousands)

		Year Ended December 31,
		2006			2005			2004
Cash flows from Operating Activities:
Net loss		$	(10,790	)	$	(16,434	)	$	(15,907	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			1,947			2,294			2,236
Amortization of deferred financing costs			389			—			448
Accretion of discount on subordinated debentures			—			—			2,650
Beneficial conversion feature for 10% Notes			1,850			—			—
Accretion of discount on 10% Notes			1,359			—			—
Loss on exchange of debt			—			—			743
Loss on disposal of equipment			169			—			—
Other expense recognized for the (decrease) increase in the estimated fair value of derivative financial instruments			(1,992	)		271			134
Common stock issued for interest on convertible debentures			—			—			45
Gain on settlement with Gores			—			(379	)		—
Stock-based compensation			781			1,012			798
Other			—			—			(78	)
Increase (decrease) in cash attributable to changes in assets and liabilities, net of effects of acquisition:
Accounts receivable.			(577	)		(299	)		496
Prepaid expenses and other current assets			183			44			415
Other assets			205			42			(195	)
Accounts payable			371			(1,398	)		616
Accrued expenses, sales taxes and regulatory fees.			1,497			1,152			1,580
Deferred revenue			(86	)		109			46
Receivable from Gores Technology Group			—			—			(5,539	)
Accrued stock-based compensation.			—			(82	)		82
Net cash used in operating activities.			(4,694	)		(13,668	)		(11,430	)
Cash flows from Investing Activities:
Proceeds from discontinued operations, including escrowed cash			—			3,087			—
Purchases of property, equipment and leasehold improvements			(761	)		(1,308	)		(1,097	)
Net cash (used in) provided by investing activities			(761	)		1,779			(1,097	)
Cash flows from Financing Activities:
Proceeds from issuance of 10% Notes, net of financing costs of $595			5,585			—			—
Proceeds from issuance of common stock and warrants			—			9,376			11,316
Proceeds attributed to derivative financial instruments			—			—			1,164
Proceeds from exercise of stock options			—			74			570
Payments on capital lease obligations			—			(35	)		(131	)
Net cash provided by financing activities			5,585			9,415			12,919
Increase (decrease) in cash and cash equivalents			130			(2,474	)		392
Cash and cash equivalents at beginning of year			2,023			4,497			4,105
Cash and cash equivalents at end of year		$	2,153		$	2,023		$	4,497

 

F-7

---

		Year Ended December 31,
		2006			2005			2004
Supplement disclosures of cash flow information:
Cash paid during the period for interest		$	0		$	3		$	63
Non-cash investing and financing:
Preferred stock dividends		$	347		$	315		$	369
Additional 10% Notes issued as payment for interest			483			—			—
Deferred financing costs for 10% Notes incurred by issuance of placement agent warrants			296			—			—
Preferred stock deemed dividends			—			1,282			—
Conversion of Series B convertible preferred stock to common stock			—			2,000			—
Equity issued as consideration for accrued preferred stock dividends			—			183			—
Issuance of Series B convertible preferred stock in exchange for convertible debentures			—			—			4,888
Deferred compensation and additional paid-in capital recorded for the issuance of restricted common stock			—			—			511
Reduction in deferred compensation and additional paid-in capital for the forfeiture of restricted common stock			—			—			134

 

See accompanying notes to consolidated financial statements.

 

F-8

---

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2006, 2005 and 2004

 

Note 1 - The Business

 

Glowpoint, Inc. ("Glowpoint" or "we" or "us"), a Delaware corporation, is a premiere broadcast-quality, IP (Internet Protocol)-based managed video services provider. We offer a vast array of managed video services, including video application services, managed network services, IP and ISDN videoconferencing services, multi-point conferencing (bridging), technology hosting and management, and professional services. We provide these services to a wide variety of companies, from large enterprises and governmental entities to small and medium-sized businesses. Glowpoint is exclusively focused on high quality two-way video communications and has been supporting millions of video calls since its launch in 2000. We have bundled some of our managed services to offer video communication solutions for broadcast/media content acquisition and for video call center applications. Recently, with the advent of HD (High Definition) Telepresence solutions, we have combined various components of our features and services into a comprehensive “white glove” service offering that can support any of the telepresence solutions on the market today. Prior to 2004, Glowpoint, then known as Wire One Technologies, Inc., sold substantially all of the assets of its video solutions (VS) equipment sales business to an affiliate of Gores Technology Group (“Gores”) and accordingly, the accompanying consolidated financial statements do not include such operations (see Note 3). Our services include IP-based and ISDN-based videoconferencing services, which are provided principally on a subscription basis, and managed bridging conferencing services for multi-point video and audio communications among three or more participants. We also provide hosting, IP-based broadcasting and event services.

 

In April 2004, we entered into an agreement with Tandberg, Inc., 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, 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. The purchase price for this transaction was $1.00 and was accounted for following purchase accounting under Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”. The fair value of tangible assets acquired and liabilities assumed were nominal. Accordingly, we did not record any value of intangible assets acquired. Results of operations of the acquired business are included in the accompanying consolidated financial statements from April 20, 2004, the date of acquisition. The following unaudited proforma information for the year ended December 31, 2004 gives effect to the acquisition as if it had occurred on January 1, 2004 (in thousands, except per share amounts):

 

Revenue		$	16,857
Gross margin			361
Net loss			(15,602	)
Net loss attributable to common stockholders			(15,971	)
Net loss attributable to common stockholders per share		$	(0.44	)

 

F-9

---

 

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

 

Going concern

 

Our consolidated financial statements have been prepared assuming that we will continue as a going concern. We have incurred recurring operating losses and negative operating cash flows since our inception including a net loss attributable to common stockholders of $11,137,000 and negative operating cash flows of $4,694,000 for the year ended December 31, 2006. At December 31, 2006 we had cash and cash equivalents of $2,153,000, a working capital deficit of $11,868,000 and an accumulated deficit of $172,623,000. These factors raise substantial doubt as to our ability to continue as a going concern. In 2006 we commenced a restructuring of the current business (see Note 18). We raised capital in March and April 2006, but continue to sustain losses and negative operating cash flows. Assuming we realize all of the savings from our restructured operating activities, assuming we are able to negotiate favorable terms with the authorities regarding our sales and use taxes and regulatory fees and assuming we are able to renegotiate or refinance the 10% Notes and the 10% Interest Notes (see Note 9 to the consolidated financial statements for further information), we believe that our available capital as of December 31, 2006 will enable us to continue as a going concern during 2007.  There are no assurances, however, that those assumptions will be realized.  The accompanying financial statements do not include any adjustments that might result from this uncertainty.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Glowpoint and our wholly-owned subsidiaries, GP Communications LLC, AllComm Products Corporation, and VTC Resources, Inc. All material inter-company balances and transactions have been eliminated in consolidation.

 

Reclassifications

 

Certain amounts from 2005 and 2004 have been reclassified to conform to the 2006 presentation.

 

Use of Estimates

 

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

 

Allowance for Doubtful Accounts

 

We perform ongoing credit evaluations of our customers. We record an allowance for doubtful accounts based on specifically identified amounts that are believed to be uncollectible. We also record additional allowances based on certain percentages of our aged receivables, which are determined based on historical experience and an assessment of the general financial conditions affecting our customer base. If our actual collections experience changes, revisions to our allowance may be required. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. We do not obtain collateral from our customers to secure accounts receivable.

 

F-10

---

 

Changes to our allowance for doubtful accounts during the three years ended December 31, 2006 are summarized as follows (in thousands):

 

		2006			2005			2004
Balance at beginning of year		$	145		$	305		$	190
Charged to expense			34			129			412
Deductions			(58	)		(289	)		(297	)
Balance at end of year		$	121		$	145		$	305

 

Revenue Recognition

 

We recognize subscription revenue when the related services have been performed. Revenues billed in advance are deferred until the revenue has been earned. Other service revenue, including amounts related to surcharges charged by our carriers, related to the Glowpoint managed network service and the multi-point video and audio bridging services are recognized as service is provided. As the non-refundable, upfront activation fees charged to the subscribers do not meet the criteria as a separate unit of accounting, they are deferred and recognized over the twenty-four month period estimated life of the customer relationship. Revenues derived from other sources are recognized when services are provided or events occur.

 

Cash and Cash Equivalents

 

We consider all highly liquid debt instruments with an original maturity of three months or less when purchased to be cash equivalents.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents, and trade accounts receivable. We place our cash and cash equivalents primarily in commercial checking accounts and money market funds. Commercial bank balances may from time to time exceed federal insurance limits; money market funds are uninsured.

 

Property and Equipment

 

Property and equipment are stated at cost and are depreciated over the estimated useful lives of the related assets, which range from three to five years. Leasehold improvements are amortized over the shorter of either the asset's useful life or the related lease term. Depreciation is computed on the straight-line method for financial reporting purposes. Property and equipment include fixed assets subject to capital leases which are depreciated over the life of the respective asset.

 

Long-Lived Assets

 

We evaluate impairment losses on long-lived assets used in operations, primarily fixed assets, whenever events and circumstances indicate that the carrying value of an asset may not be recoverable in accordance with 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 would be 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.

 

Income Taxes

 

We use the asset and liability method to determine our income tax expense or benefit. Deferred tax assets and liabilities are computed based on temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that are expected to be in effect when the differences are expected to recovered or settled. Any resulting net deferred tax assets are evaluated for recoverability and, accordingly, a valuation allowance is provided when it is more likely than not that all or some portion of the deferred tax asset will not be realized.

 

F-11

---

 

Earnings (Loss) per Share

 

Basic loss per share is calculated by dividing net loss attributable to common stockholders by the weighted average number of shares of common shares outstanding during the period. Diluted loss per share for 2006, 2005 and 2004 is the same as basic loss per share. Potential shares of common stock associated with 19,849,000, 14,752,000 and 12,566,000, respectively, outstanding options and warrants, 1,875,000, 1,301,000 and 2,080,000, respectively, shares issuable upon conversion of our Series B convertible preferred stock and 13,214,000, 0 and 0, respectively, shares issuable upon conversion of the March and April 2006 10% Senior Secured Convertible Notes have been excluded from the calculation of diluted loss per share because the effects would be anti-dilutive.

 

 Stock-based Compensation

 

We periodically grant stock options to employees and directors in accordance with the provisions of our stock option plans, with the exercise price of the stock options being set at the closing market price of the common stock on the date of grant. Effective January 1, 2006, the Company adopted Statement of Financial Standards No. 123R, Share-Based Payment (“SFAS No. 123R”) which requires that compensation cost relating to share-based payment transactions be recognized as an expense in the financial statements and that measurement of that cost be based on the estimated fair value of the equity or liability instrument issued. Under SFAS No. 123R, the pro forma disclosures previously permitted under SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”) are no longer an alternative to financial statement recognition. SFAS No. 123R also requires that forfeitures be estimated and recorded over the vesting period of the instrument.

 

Prior to January 1, 2006, as permitted by SFAS No. 123, the Company accounted for share-based payments to employees using the intrinsic value method under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations. Under this method, compensation cost is measured as the amount by which the market price of the underlying stock exceeds the exercise price of the stock option at the date at which both the number of options granted and the exercise price are known. As previously permitted by SFAS No. 123, the Company had elected to apply the intrinsic-value-based method of accounting under APB No. 25 described above, and adopted only the disclosure requirements of SFAS No. 123 which were similar in most respects to SFAS No. 123R, with the exception of option forfeitures, which, under SFAS No. 123, had been accounted for as they occurred.

 

The Company has adopted SFAS No. 123R using the modified prospective method which requires that share-based expense recognized includes: (a) earned share-based expense for all awards granted prior to, but not yet vested, as of the adoption date and (b) earned share-based expense for all awards granted subsequent to the adoption date. Since the modified prospective application method is being used, there is no cumulative effect adjustment upon the adoption of SFAS No. 123R, and the Company’s December 31, 2005 financial statements do not reflect any restated amounts. No modifications were made to outstanding options prior to the adoption of SFAS No. 123R, and the Company did not change the quantity, type or payment arrangements of any share-based payments programs.

 

Since the market price exceeded the exercise price for options outstanding and exercisable at December 31, 2006 there is no intrinsic value. The total intrinsic value of options exercised during the year ended December 31, 2006 was $0.

 

The remaining unrecognized stock-based compensation expense at December 31, 2006 was $358,000.

 

The Company uses the same valuation methodologies and assumptions in estimating the fair value of options under both SFAS No. 123R and the pro forma disclosures under SFAS No. 123.

 

F-12

---

 

Stock options or warrants issued in return for services rendered by non-employees are accounted for using the fair value based method. The following table illustrates the effect on net loss attributable to common shareholders and net loss per share for the years ended December 31, 2005 and 2004 if the fair value based method using the Black-Scholes model at the grant date had been applied to all awards: (in thousands except per share data):

 

		2005			2004
Net loss attributable to common stockholders, as reported		$	(18,031	)	$	(16,276	)
Add: stock-based employee compensation expense included in reported net loss.			668			766
Deduct: total stock-based employee compensation expense determined under the fair value based method			(1,412	)		(2,010	)
Pro forma net loss attributable to common stockholders		$	(18,775	)	$	( 17,520	)
Net loss attributable to common stockholders per share:
Basic and diluted - as reported herein		$	(0.41	)	$	(0.44	)
Basic and diluted - pro forma		$	(0.42	)	$	(0.48	)

The pro forma effect of applying SFAS No. 123R may not be representative of the effect on reported net income in future years because options vest over several years and varying amounts are generally made each year. See Note 13 for more information on the Company’s stock-based compensation.

 

Fair value of Financial Instruments

 

Financial instruments reported in our consolidated balance sheet consist of cash and cash equivalents, March and April 2006 10% senior secured convertible notes, accounts receivable and accounts payable, the carrying value of which approximated fair value at December 31, 2006 and 2005 due to the short-term nature of these instruments.

 

Derivative Financial Instruments

 

The Company’s objectives in using debt related derivative financial instruments are to obtain the lowest cash cost source of funds within a targeted range of variable to fixed-rate debt obligations. Derivatives are recognized in the consolidated balance sheets at fair value based on the criteria specified in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. The estimated fair value of the derivative liabilities is calculated using the Black-Scholes formula where applicable and such estimates are revalued at each balance sheet date with changes in value recorded as other income or expense.

 

Software Development Costs

 

The company incurs costs for the development of its “Customer Connect” software that is to be sold, leased or licensed to third parties in the future. All software development costs have been appropriately accounted for in accordance with SFAS 86 “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”. Software development costs are required to be capitalized when a product’s technological feasibility has been established by completion of a detailed program design or working model of the product, and ending when a product is available for release to customers. The Company capitalized $49,000, $0, and $0 of software development costs for the years ended December 31, 2006, 2005 and 2004, respectively. The Company did not capitalize any costs related to the purchase of software and related technologies and content.

 

Deferred Financing Costs

 

The costs incurred when undertaking financing activities, excluding any internal costs, have been capitalized and are amortized on a straight-line basis over the term of the financing. Amortization of deferred financing costs was $389,000, $0 and $448,000 for the years ended December 31, 2006, 2005 and 2004. At December 31, 2006 and 2005, included in other assets in the accompanying consolidated balance sheets are $392,000 and $0, respectively, of deferred financing costs.

 

Recent Accounting Pronouncements

 

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.

 

F-13

---

 

In June 2006, the FASB issued FASB Interpretation Number (“FIN”) 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 does not believe its results of operations and financial position will be materially affected by the adoption of FIN No. 48.

 

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 have adopted SAB No. 108 and it did not 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 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.

 

Note 3 - Sale of VS Business

 

In September 2003, we completed the sale of all of the assets of our VS business to Gores pursuant to the terms of the asset purchase agreement dated as of June 10, 2003. The total consideration payable to us under the agreement was up to $24,000,000, consisting of $21,000,000 in cash, of which $19,000,000 was payable as of closing ($335,000 was placed in an escrow account) and $2,000,000 was held back by Gores to cover potential purchase price adjustments, an unsecured $1,000,000 promissory note maturing on December 31, 2004 (bearing interest at 5% per annum) and up to $2,000,000 in earn-out payments based on performance of the assets over the two years following the closing. As partial consideration for the purchase of assets, Gores also assumed certain liabilities related to the VS business, including (1) all liabilities to be paid or performed after the closing date that arose from or out of the performance or non-performance by Gores after the closing date of any contracts included in the assets or entered into after June 10, 2003 and (2) our accounts payable, customer deposits, deferred revenue and accrued liabilities related to the VS business.

 

Pursuant to the agreement, Gores agreed that, for a period of three years commencing on the closing date, it would not, directly or indirectly, acquire or own any equity interest in certain of our competitors identified in the agreement. The agreement further provided that Gores could acquire an identified competitor upon payment to us of a one-time fee of $5,000,000. In November 2004, Gores acquired V-SPAN, Inc., which was one of the identified competitors.

 

Following the closing of the sale to Gores, we were unable to reach agreement with Gores on the amount, if any, of the adjustment to be made to the purchase price, which was based on the net assets, as defined, of the VS business sold to Gores as of June 30, 2003. Consequently, we entered into arbitration with Gores in July 2004, with PriceWaterhouseCoopers as the arbitrator. In January 2005, the arbitrator concluded that the net assets of the VS business sold to Gores should be reduced by $4,340,000.

 

In March 2005, we entered into a settlement agreement with Gores, resolving the outstanding disputes between the companies relating to the sale of the VS business, various payables between the companies and Gores’ acquisition of V-SPAN. Pursuant to the agreement, Gores paid us $2,750,000 and released the $335,000, including interest thereon that was escrowed at the closing of the asset sale. We dismissed our lawsuit against Gores relating to the V-SPAN acquisition. We will not receive any payments under the earn-out provision in the agreement.

 

F-14

---

 

The ultimate settlement of amounts due to/from Gores that arose subsequent to the transaction closing date and unrelated to the sale transaction, including $363,000 of revenues that we recognized during the year ended December 31, 2004 have been excluded from the sale transaction, and a gain from the settlement of these items of $379,000 has been recognized during the year ended December 31, 2005, when the settlement was reached with Gores.

 

The arbitrator’s adjustment of $4,340,000 related to the correction of specific financial reporting errors. Accordingly, the accompanying consolidated financial statements reflect these items prior to 2004 and the gain or loss on the transaction has been accounted for upon the closing in 2003. Pursuant to the settlement agreement with Gores in 2005, each party was released from amounts due to the other beyond the payment by Gores of $2,750,000 and the release of the escrowed cash to us. Accordingly, we recognized the gain on settlement in the quarter ended March 31, 2005.

 

Note 4 - Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consist of the following at December 31, 2006 and 2005 (in thousands): 

 

		2006			2005
Prepaid maintenance contracts		$	135		$	136
Prepaid insurance			—			95
Deferred installation costs			53			63
Due from vendors and tax authorities$			34			134
Other prepaid expenses			105			82
		$	327		$	510

 

Note 5 - Property and Equipment

 

Property and equipment, net consist of the following at December 31, 2006 and 2005 (in thousands):

 

		2006			2005			Estimated Useful Life
Network equipment and software		$	7,695		$	7,849			3 to 5 Years
Computer equipment and software			1,995			1,906			3 to 4 Years
Bridging equipment			1,828			1,828			5 Years
Leasehold improvements			214			214			5 Years
Office furniture and equipment			166			359			5 Years
Videoconferencing equipment			74			74			3 Years
			11,972			12,230
Accumulated depreciation and amortization			( 9,210	)		( 8,113	)
		$	2,762		$	4,117

 

Depreciation and amortization expense was $1,947,000, $2,294,000 and $2,236,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

 

Note 6 - Accrued Sales Taxes and Regulatory Fees

 

Accrued sales taxes and regulatory fees are $4,216,000 and $3,063,000 as of December 31, 2006 and 2005, respectively. Included in this accrual are (i) certain estimated sales and use taxes, regulatory fees and related penalties and interest, (ii) a tax obligation of a predecessor of Glowpoint and (iii) sales taxes and regulatory fees collected from customers and to be remitted to taxing authorities. Sales and use taxes and regulatory fees are supposed to be, or are routinely, collected from customers and remitted to the applicable authorities in certain circumstances. Historically, we were not properly collecting and remitting all such taxes and regulatory fees and, as a result, have accrued a liability. We used estimates when accruing our sales and use tax and regulatory fee liability, including interest and penalties, and assumed, among other things, various credits we expect to receive from taxing authorities and/or our underlying service providers. All of our tax positions are subject to audit and a number of taxing authorities have already scheduled audits to commence in 2007. While we believe all of our estimates and assumptions are reasonable and will be sustained upon audit, actual liabilities and credits may differ significantly.

 

F-15

---

 

Note 7 - Accrued Expenses

 

Accrued expenses consist of the following at December 31, 2006 and 2005 (in thousands):

 

		2006			2005
Accrued dividends		$	847		$	501
Accrued compensation			417			787
Restructuring costs			212			—
Other accrued expenses			532			673
		$	2,008		$	1,961

 

Note 8 - Bank Loan Payable

 

In February 2004, we terminated a working capital credit facility with JPMorgan Chase. As a result of the termination of this credit facility, we wrote off $85,000 of unamortized deferred financing costs to expense in the year ended December 31, 2004.

 

Note 9 - 10% Senior Secured Convertible Notes

 

10% Senior Secured Convertible Notes and 10% Note Discount

 

In March and April 2006, we issued our 10% Senior Secured Convertible Notes (“10% Notes”) in a private placement to private investors. Activity for the 10% Notes and the related discount during the year ended, and as of December 31, 2006, was as follows (in thousands):

 

					Total
Principal of 10% Notes:
March 2006 financing		$	5,665
April 2006 financing			515
Additional 10% Notes			426
					$	6,606
Discount:
Derivative financial instrument - Series A Warrants			(2,873	)
Reduction of exercise price and extension of expiration dates of warrants			(766	)
			(3,639	)
Accretion of discount			1,359
						(2,280	)
10% Notes, net of discount					$	4,326

 

In the March and April 2006 transactions, we issued $5,665,000 and $515,000, respectively, with a total aggregate principal amount of $6,180,000 of our 10% 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 after we make available to the public our financial statements for the fourth quarter of 2006 if we fail to achieve positive operating income excluding restructuring and non-cash charges, as identified on Schedule A of the Series B warrants, as amended. In addition, the Series B warrants will be cancelled if we consummate a strategic transaction or repay the 10% Notes prior to the date we make our consolidated financial statements for the fourth quarter of 2006 available to the public. Management has determined that the Series B warrants are not exercisable because we achieved positive operating income, excluding the restructuring and non-cash charges, as identified on Schedule A of the Series B warrants, as amended, in the fourth quarter of 2006. We also agreed to reduce the exercise price of 3,625,000 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. 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 $5,123,000 and $462,000 net proceeds of the March and April 2006 financings, respectively, are being used to support our corporate restructuring program and for working capital.

 

F-16

---

 

The 10% Notes bear interest at 10% per annum and mature on September 30, 2007. They are convertible into common stock at a conversion rate of $0.50 per share. We have the option to pay the accrued interest for the 10% Notes in cash or additional 10% Notes. In the period ended December 31, 2006 we issued an additional $426,000 of 10% Notes to pay accrued and unpaid interest. As of December 31, 2006 the 10% Notes and accrued and unpaid interest was $6,606,000 and $57,000, respectively. The Series A warrants are exercisable for a period of 5 years. The Series B warrants would have been exercisable for a period of 5 years.

 

We accounted for the reduction of the exercise price of 3,625,000 previously issued warrants held by the investors in this offering to $0.65 from a weighted average price of $3.38, and the extension of the expiration date of any such warrants to no earlier than three years after the offering date at fair value as a debt discount with an offsetting credit to paid in capital. A portion of the finance costs of the 10% Notes in March and April 2006 will be allocated to this transaction and charged to paid in capital. The estimated fair value of this modification is based on the excess of the fair value of these warrants at the date of the financings over the fair value of these warrants at their original terms. In the March and April 2006 financings $716,000 and $50,000, respectively, of the proceeds was attributed to the estimated fair value of the modification of price and term of these warrants. The $766,000 fair value of this modification will be treated as a discount of the Note and expensed, using the imputed interest method, over the 18 month period to the Note’s maturity date.

 

Financing Costs

 

The financing costs, which are included in other assets in the accompanying consolidated balance sheets, and accumulated amortization as of December 31, 2006, are as follows (in thousands):

 

		March 2006			April 2006			2006
Cash financing costs:
Placement agent fees - Burnham Hill Partners		$	440		$	40		$	480
Other financing costs			105			10			115
			545			50			595
Non-cash financing costs:
Placement agent warrants - Burnham Hill Partners			279			17			296
Financing costs charged to additional paid in capital			(101	)		(9	)		(110	)
Total financing costs		$	723		$	58			781
Accumulated amortization									(389	)
								$	392

 

The financing costs are being amortized over the 18 month period through September 30, 2007, the maturity date of the 10% Notes.

 

Our financing costs related to the 10% Notes were comprised of cash and non-cash charges. Our cash financing costs related to the issuance of the 10% Notes in March and April 2006 were $545,000, and $50,000, respectively, for a total of $595,000, a portion of which represents placement fees of $480,000 to Burnham Hill Partners, our placement agent. Our non-cash financing costs were based on the fair value of various components of the transactions. These included the convertibility of the 10% Notes, the issuance of the Series A warrants, modifications to previously issued warrants held by investors in the financing and the issuance to the placement agent of warrants. A portion of the finance costs of the 10% Notes in March and April 2006, $101,000 and $9,000, respectively, were allocated to the $766,000 fair value of the modification of warrant exercise prices and extension of expirations dates for 3,625,000 previously issued warrants held by the investors in this offering.

 

The issuance to Burnham Hill Partners of placement agent warrants to purchase 618,000 shares of our common stock at an exercise price of $0.55 per share was valued at $279,000 and $17,000 for the March and April 2006 financings, respectively. As a result of the issuance of the placement agent warrants we recognized Additional Paid in Capital of $296,000.

 

F-17

---

 

Accounting for Conversion Feature and Series A Warrants Derivative Liabilities

 

Activity for derivative liabilities during the year ended, and as of December 31, 2006 and 2005, was as follows (in thousands):

 

		Dec. 31, 2005			2006 Activity			Decrease in Fair Value			Dec. 31, 2006
Derivative financial instrument - February 2004 capital raise (See Note 12)		$	1,570		$	—		$	(334	)	$	1,236
Derivative financial instrument - Beneficial conversion feature - 10% notes			—			1,850			(184	)		1,666
Derivative financial instrument - Series A Warrants			—			2,873			(1,474	)		1,399
			1,570		$	4,723		$	(1,992	)		4,301
Current portion			(1,246	)								(4,301	)
		$	324								$	—

 

We accounted for the convertibility of the 10% Notes into common stock at a conversion rate of $0.50 per share as a derivative liability subject to SFAS No. 133. Management determined that the events or actions necessary to deliver registered shares are not controlled by the Company and that the holders have the right to demand that the Company pay the holders in cash, calculated as defined in the Senior Secured Convertible Promissory Note, under certain circumstances. Accordingly the Company accounted for the beneficial conversion feature as a derivative liability. The estimated fair value of the derivative liability is based on the prepayment amount that would be owed to a 10% Notes holder if payment is required. The prepayment amount is the greater of 125% of the value of the 10% Notes and accrued interest or the value if the 10% Notes and accrued interest are converted at $0.50 per share and then multiplied by the then current stock price. Since the 10% Notes are convertible at the issuance date an expense related to the derivative liability is recognized on that date. In the March and April 2006 financings $1,586,000 and $129,000, respectively, of the proceeds was attributed to the estimated fair value of the derivative liability and an expense of $1,715,000 was recognized. During the year unpaid interest on the 10% Notes was paid in additional 10% Notes and the estimated fair value of the derivative liability and an expense of $135,000 was recognized. We estimated the fair value of the derivative liability as of December 31, 2006 to be $1,666,000. During the year ended December 31, 2006 we recognized income of $184,000 for the decrease in the derivative liability.

 

We accounted for the issuance of the Series A warrants to purchase 6,180,000 shares of common stock at an exercise price of $0.65 per share as a derivative liability subject to SFAS No. 133. Management determined that the events or actions necessary to deliver registered shares are not controlled by the Company and that the holders have the right to demand that the Company pay the holders in cash, calculated as defined in the Series A warrant, under certain circumstances. Accordingly the Company accounted for the Series A warrants as a derivative liability. The estimated fair value of the derivative liability is calculated using the Black-Scholes formula and such estimates are revalued at each balance sheet date with changes in value recorded as other income or expense. In the March and April 2006 financings $2,708,000 and $165,000, respectively, of the proceeds was attributed to the estimated fair value of the derivative liability. The $2,873,000 expense for the derivative liability will be treated as a discount on the 10% Notes and expensed, using the imputed interest method, over the 18 month period to the 10% Notes’ maturity date. We estimated the fair value of the derivative liability as of December 31, 2006 to be $1,399,000. During the year ended December 31, 2006 we recognized income of $1,474,000 for the decrease in the derivative liability.

 

As management has determined that the Series B warrants are not exercisable because we achieved positive operating income, excluding the restructuring and non-cash charges identified in the Series B warrant, in the fourth quarter of 2006 there is no fair value charge for these warrants.

 

F-18

---

Note 10 - Interest Expense

 

The components of interest expense for the year ended December 31, 2006 are presented below (in thousands):

 

		2006
Beneficial conversion feature for 10% Notes		$	1,850
Accretion of discount on 10% Notes			1,359
Interest on 10% Notes			483
Interest expense for sales and use taxes and regulatory fees			277
		$	3,969

 

Note 11 - Subordinated Debentures

 

In December 2002, we raised net proceeds of $4,233,000 in a private placement offering of $4,888,000 principal amount of 8% convertible debentures. The debentures were convertible into 2,036,677 shares of common stock at $2.40 per share. The debentures were to mature in February 2004, or 90 days following the expiration (in May 2005) or earlier termination of the credit facility, whichever was later. We had the option of paying interest quarterly on the debentures in the form of either cash or shares of our common stock. Investors in the private placement offering also received five-year warrants to purchase 814,668 shares of common stock at an exercise price of $3.25 per share. The warrants are subject to certain anti-dilution adjustments. We also issued to our placement agent warrants to purchase 40,733 shares of common stock at an exercise price of $0.001 per share with an expiration date of January 31, 2003.

 

We allocated the proceeds received to the debentures and the related warrants based on the relative fair value method. The fair value of the debentures was determined based on the market value of the 2,036,677 common shares into which the debentures were convertible and the fair value of the warrants was determined using the Black Scholes pricing model. Of the proceeds, $1,292,000 was allocated to the warrants and was recorded as debt discount and additional paid-in capital and $3,596,000 was allocated to the debentures. Based on the market value of the common shares issuable upon conversion, as compared to the proceeds allocated to the debentures, further debt discount and additional paid-in capital of $2,107,000 was recorded for the beneficial conversion feature. The aggregate discount of $3,399,000 has been amortized over the term to maturity following the effective yield method.

 

In January 2004, in exchange for the cancellation and termination of 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 agreed to give the holders of the debentures: (i) an aggregate of 203.667 shares of Series B convertible preferred stock with a face value of $4,888,000; (ii) an aggregate of 250,000 shares of restricted common stock with a fair value of $675,000; and (iii) a reduction of the exercise price of the warrants issued pursuant to the original purchase agreement from $3.25 to $2.75 which had an incremental fair value of $68,000. As a result of the subsequent financings, the exercise price was reduced to $1.85.

 

The Company incurred costs of $609,000 in connection with the financing, which were allocated to the warrants and the convertible debentures based on their relative fair values. The portion allocated to the warrants was recorded as a reduction to additional paid-in capital and the portion allocated to the convertible debentures was recorded as deferred financing costs, which have been amortized consistently with the debt discount.

 

There are no subordinated debentures outstanding as of December 31, 2006 and 2005.

 

F-19

---

 

Note 12 - Stockholders’ Deficit

 

Common Stock

 

In February 2004, we raised net proceeds of $12,480,000 in a private placement offering of 6,100,000 shares of our common stock at $2.25 per share. We also issued warrants to the investors in the private placement offering to purchase 1,830,000 shares of our common stock at an exercise price of $2.75 per share. The warrants expire five and a half years after the closing date. The warrants are subject to certain anti-dilution protection (minimum price of $2.60) and as a result of the March 2005 financing, the exercise price was reduced to $2.60 (the incremental fair value was nominal). In addition, we issued to our placement agent five and a half year warrants to purchase 427,000 shares of common stock at an exercise price of $2.71 per share with an estimated fair value of $895,000. The placement agent warrants are subject to anti-dilution protection (minimum price of $2.60) and as a result of the March 2005 financing, the exercise price was reduced to $2.60 (the incremental fair value was nominal).

 

The registration rights agreement for the February 2004 financing provides for liquidated damages of 3% of the aggregate purchase price for the first month and 1.5% for each subsequent month if we failed to register the common stock and the shares of common stock underlying the warrants or maintain the effectiveness of such registration. We accounted for the registration rights agreement as a separate freestanding instrument and accounted for the liquidated damages provision as a derivative liability subject to SFAS No. 133. The estimated fair value of the derivative liability is based on estimates of the probability and costs expected to be incurred and such estimates are revalued at each balance sheet date with changes in value recorded as other income or expense. $1,164,000 of the proceeds of the financing was attributed to the estimated fair value of the derivative liability. We estimated the fair value of the derivative liability as of December 31, 2006, 2005 and 2004 to be $1,236,000, $1,570,000 and $1,299,000, respectively. For the year ended December 31, 2006 we recognized other income of $334,000 for a decrease in the fair value of the derivative liability and for the years ended December 31, 2005 and 2004 we recognized an expense of $271,000 and $134,000, respectively, respectively, for increases in the estimated fair value of the derivative liability.

 

In March 2005, we raised net proceeds of $9,376,000 in a private placement offering of 6,766,667 shares of our common stock at $1.50 per share. Investors in the private placement offering were also issued warrants to purchase 2,706,667 shares of common stock at an exercise price of $2.40 per share. The warrants expire five years after the closing date. The warrants are subject to certain anti-dilution protection (minimum price of $1.61). The warrants may be exercised by cash payment of the exercise price or by "cashless exercise”. As a result of subsequent financings, the conversion price of these warrants has been adjusted to $1.79 as of December 31, 2006.

 

Preferred Stock

 

Our Certificate of Incorporation authorizes the issuance of up to 5,000,000 shares of preferred stock. Except for the 2,450 shares of Series A preferred stock issued prior to 2004 (all of which were converted into common stock prior to 2004) and the 203.667 shares of Series B convertible preferred stock issued in January 2004, the rights and privileges of the preferred stock have not yet been designated.

 

The Series B convertible preferred stock ranks senior to our common stock and subordinate to any indebtedness we may have outstanding. The Series B convertible preferred stockholders are entitled to receive dividends at the rate of eight percent (8%) of the stated value per share of $24,000 per year through July 21, 2005, increasing to twelve percent (12%) on July 22, 2005, payable annually at our option in cash or shares of common stock. We must obtain the affirmative vote of the holders of at least 75% of the outstanding shares of Series B convertible preferred stock in order to issue any securities ranking senior to or on parity with the Series B convertible preferred stock. Other than as described in the preceding sentence or as required by Delaware law, the Series B convertible preferred stock has no voting rights. If we liquidate, dissolve or wind up our affairs, the holders of the Series B convertible preferred stock are entitled to receive a liquidation preference equal to the stated value per share plus accrued and unpaid dividends. The Series B convertible preferred stock is convertible into our common stock at the conversion price of $2.40 per share of common stock and has anti-dilution rights. Upon a change of control, the holders of the Series B convertible preferred stock can require that we redeem their shares at the stated value per share plus accrued and unpaid dividends. Accordingly, the Series B convertible preferred stock is not classified in Stockholders’ Deficit. We also have the option to redeem the outstanding shares of Series B convertible preferred stock at a price per share equal to 110% of the stated value plus accrued and unpaid dividends. Accordingly the Series B Convertible Preferred Stock is presented outside of Stockholders’ Deficit.

 

As described in Note 11, in January 2004, in exchange for the cancellation and termination of convertible 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 agreed to give the holders of the debentures: (i) an aggregate of 203.667 shares of Series B convertible preferred stock; (ii) an aggregate of 250,000 shares of restricted common stock; and (iii) a reduction of the exercise price of the warrants issued pursuant to the original purchase agreement from $3.25 to $2.75.

 

F-20

---

 

As a result of this exchange, the unamortized discount on subordinated debentures and deferred financing costs were written off to expense, resulting in accretion of discount of $2,650,000 and amortization of deferred financing costs of $363,000 for the year ended December 31, 2004. Additionally, we recognized a $743,000 loss on the exchange in 2004. The investors have anti-dilution rights. As a result of the February 2004 and March 2005 financings the conversion price of the Series B convertible preferred stock and the exercise price of the 814,668 warrants have been adjusted as of December 31, 2005 to $2.22 and $2.47, respectively. We recognized deemed dividends of $115,000 for the year ended December 31, 2005. The corresponding amount in the 2004 period was nominal. Accordingly, as of December 31, 2005, the Series B convertible preferred shares outstanding were convertible into 1,301,000 shares of common stock. As a result of the March 2006 and April 2006 financings, the conversion price of the Series B convertible preferred stock and the exercise price of the warrants have been further adjusted to $1.67 and $1.85, respectively.

 

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. 

 

Note 13 - Stock options and warrants

 

Glowpoint 2000 Stock Incentive Plan

 

Pursuant to the Glowpoint 2000 Stock Incentive Plan (the “2000 Plan”), as amended, 4,400,000 shares of common stock have been reserved for issuance thereunder. The 2000 Plan permits the grant of incentive stock options (“ISOs”) to employees or employees of our subsidiaries. Non-qualified stock options (“NQSOs”) may be granted to employees, directors and consultants. As of December 31, 2006, options to purchase a total of 3,440,000 shares were outstanding and 522,000 shares remained available for future issuance under the 2000 Plan.

 

The exercise price of the awards is established by the administrator of the plan and, in the case of ISOs issued to employees who are less than 10% stockholders, the per share exercise price must be equal to at least 100% of the fair market value of a share of the common stock on the date of grant or not less than 110% of the fair market value of the shares in the case of an employee who is a 10% stockholder. The administrator of the plan determines the terms and provisions of each award granted under the 2000 Plan, including the vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment, payment contingencies and satisfaction of any performance criteria.

 

F-21

---

1996 Stock Option Plan

 

Under the 1996 Stock Option Plan (the “1996 Plan”), as amended, 2,475,000 shares of common stock have been reserved for issuance thereunder. The 1996 Plan provides for the granting of options to officers, directors, employees and advisors. The exercise price of incentive stock options (“ISOs”) issued to employees who are less than 10% stockholders shall not be less than the fair market value of the underlying shares on the date of grant or not less than 110% of the fair market value of the shares in the case of an employee who is a 10% stockholder. The exercise price of restricted stock options shall not be less than the par value of the shares to which the option relates. Options are not exercisable for a period of one year from the date of grant. Under the 1996 Plan, no individual will be granted ISOs corresponding to shares with an aggregate exercise price in excess of $100,000 in any calendar year less the aggregate exercise price of shares under other stock options granted to that individual that vest in such calendar year. No options were granted under the 1996 Plan in years ended December 31, 2006, 2005 and 2004. As of December 31, 2006, options to purchase a total of 28,000 shares were outstanding and no shares remained available for future issuance under the 1996 Plan.

 

VTI Stock Option Plans

 

As part of the merger with View Tech, Inc. (“VTI”) in May 2000, we assumed the outstanding options of the four stock option plans maintained by VTI. These plans generally require the exercise price of options to be not less than the estimated fair market value of the stock at the date of grant. Options vest over a maximum period of four years and may be exercised in varying amounts over their respective terms. In accordance with the provisions of such plans, all outstanding options become immediately exercisable upon a change of control, as defined, of VTI. The plans will terminate in 2009. Options assumed as part of the merger with VTI totaled 361,605. No options were granted under these Plans in years ended December 31, 2006, 2005 and 2004. As of December 31, 2006, options to purchase a total of 223,000 shares of Glowpoint’s common stock were outstanding and no shares remained available for future issuance.

 

Options outside our Qualified Plans

 

We have also issued stock options outside of our qualified plans in prior years though none in the years ended December 31, 2006, 2005 and 2004. At December 31, 2006, the total of these options outstanding was 1,410,000.

 

Other Option Information

 

The weighted average fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions during the years ended December 31, 2006, 2005 and 2004:

 

		2006			2005			2004
Risk free interest rate			4.8	%		4.1	%		3.5	%
Expected option lives			5 Years			5 Years			5 Years
Expected volatility			95.4	%		108.2	%		113.2	%
Estimated forfeiture rate			20	%		20	%		20	%
Expected dividend yields			None			None			None
Weighted average grant date fair value of options		$	0.30		$	1.12		$	1.05

 

Expected volatility was calculated using the historical volatility of the appropriate industry sector index. The expected term of the options is estimated based on the Company’s historical exercise rate and forfeiture rates are estimated based on employment termination experience. The risk free interest rate is based on U.S. Treasury yields for securities in effect at the time of grants with terms approximating the term of the grants. The assumptions used in the Black-Scholes option valuation model are highly subjective, and can materially affect the resulting valuation.

 

F-22

---

A summary of options granted, exercised, expired and forfeited under our plans and options outstanding as of December 31, 2006, 2005 and 2004, is presented below (options in thousands):

		Outstanding						Exercisable
		Number of Options			Weighted Average Exercise Price			Number of Options			Weighted Average Exercise Price
Options outstanding, January 1, 2004			5,793		$	3.12
Granted			1,626			1.31
Exercised			(782	)		0.73
Forfeited			(1,539	)		3.90
Options outstanding, December 31, 2004			5,098			2.68
Granted			943			1.35
Exercised			(50	)		1.46
Forfeited			(995	)		2.35
Options outstanding, December 31, 2005			4,996			2.51			3,614		$	2.92
Granted			1,134			0.41
Exercised			—			0.00
Expired			(11	)		5.41
Forfeited			(1,019	)		1.36
Options outstanding, December 31, 2006			5,100		$	2.26			3,664		$	2.86
Shares of common stock available for future grant under company plans			522

Additional information as of December 31, 2006 with respect to all outstanding options is as follows (options in thousands):

 

		Outstanding									Exercisable
Range of price		Number of Options			Weighted Average Remaining Contractual Life (In Years)			Weighted Average Exercise Price			Number of Options			Weighted Average Exercise Price
$ 0.36 – 1.10			1,145			9.38		$	0.47			94		$	0.78
1.13 – 2.15			1,345			6.80			1.45			997			1.48
2.20 – 3.10			1,345			0.67			3.01			1,343			3.01
3.39 – 4.13			1,107			4.54			3.78			1,072			3.79
4.40 – 6.00			158			3.82			5.26			158			5.26
$ 0.36 – 6.00			5,100			5.18		$	2.26			3,664		$	2.86

F-23

---

A summary of nonvested options at December 31, 2006 and changes during the year ended December 31, 2006, is presented below (options in thousands):

 

		Options			Weighted Average Grant Date Fair Value
Nonvested options outstanding, January 1, 2006			1,380		$	1.16
Granted			1,134			0.30
Vested			(416	)		1.15
Forfeited			(662	)		0.95
Nonvested options outstanding, December 31, 2006			1,436		$	0.59

 

At January 1 and December 31, 2006, there was $873,000 and $161,000, respectively, of total unrecognized compensation costs related to non-vested options granted prior to January 1, 2006 that are expected to be recognized over a weighted-average period of 1.34 and 0.90 years, respectively. The Company has recorded $781,000 related to its stock-based expenses in general and administrative expenses for the year ended December 31, 2006. There was no income tax benefit recognized for stock-based compensation for the year ended December 31, 2006. No compensation costs were capitalized as part of the cost of an asset.

 

The fair value of nonvested options at January 1 and December 31, 2006 was $1,601,000 and $844,000, respectively.

 

Restricted Stock

 

A summary of restricted stock granted, vested, forfeited and unvested restricted stock outstanding during the year ended December 31, 2006, is presented below (restricted shares in thousands):

		Restricted Shares			Weighted Average Exercise Price
Unvested restricted shares outstanding, January 1, 2006			313		$	2.44
Granted			363			0.43
Vested			(299	)		1.89
Forfeited			(60	)		2.20
Unvested restricted shares outstanding, December 31, 2006			317		$	0.71

F-24

---

Warrants

 

The exercise price of 12,496,000 warrants at December 31, 2006 are subject to further anti-dilution protection. A summary of warrants granted, exercised and forfeited and warrants outstanding as of December 31, 2006, 2005 and 2004, is presented below (warrants in thousands):

		Warrants			Weighted Average Exercise Price
Warrants outstanding, January 1, 2004			5,211		$	6.09
Granted			2,257			2.74
Exercised			—			—
Forfeited			—			—
Warrants outstanding, December 31, 2004			7,468			4.64
Granted			3,340			2.37
Exercised			—			—
Forfeited			(1,052	)		6.53
Warrants outstanding, December 31, 2005			9,756			3.42
Granted			6,798			0.64
Exercised			—			—
Forfeited			(1,805	)		3.15
Warrants outstanding, December 31, 2006			14,749		$	1.28

 

Additional information as of December 31, 2006 with respect to all outstanding warrants is as follows (warrants in thousands):

Range of Price		Number Outstanding			Weighted Average Remaining Contractual Life (In Years)			Weighted Average Exercise Price
$ 0.001			103			0.87		$	.001
0.50 – 1.00			10,573			3.70			0.64
1.79 – 2.60			3,653			2.73			2.17
10.00			420			0.03			10.00
$ 0.001 – 10.00			14,749			3.34			1.28

Note 14 -Income Taxes

 

We had no tax provision for the years ended December 31, 2006, 2005 and 2004. Our effective tax rate differs from the statutory federal tax rate for the years ended December 31, 2006, 2005 and 2004 as shown in the following table (in thousands):

F-25

---

		2006			2005			2004
U.S. federal income taxes at the statutory rate		$	(3,782	)	$	(5,587	)	$	(5,401	)
State taxes, net of federal effects			(667	)		(986	)		(953	)
Nondeductible expenses			722			311			—
Beneficial conversion feature			618			—			1,060
Nondeductible loss on extinguishment of debt			—			—			297
Change in valuation allowance			2,888			6,243			4,401
Adjustments to prior years’ options and other charges			221			—			419
Other			—			19			177
		$	—		$	—		$	—

 

The tax effect of the temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2006 and 2005 is presented below (in thousands):

		2006			2005
Deferred tax assets:
Tax benefit of operating loss carry forward		$	44,392		$	42,586
Reserves and allowances			1,620			1,261
Accrued expenses			72			252
Goodwill			665			736
Warrants issued for services			575			—
Equity based compensation			369			807
Fixed assets			285			118
Fair value adjustments to derivative financial instruments			703			162
Restricted stock			106			—
Total deferred tax assets			48,787			45,922
Valuation allowance			( 48,787	)		( 45,922	)
Net deferred tax assets		$	—		$	—

 

We and our subsidiaries file federal returns on a consolidated basis and separate state tax returns. At December 31, 2006, we have net operating loss (“NOL”) carry-forwards of $113,864,000 for federal income tax purposes which expire in various amounts through 2026. The utilization of a portion of our NOL is limited each year as a result of an "ownership change" (as defined by Section 382 of the Internal Revenue Code of 1986, as amended). Our NOL's may be subject to further limitation due to past and future issuances of stock. We provide a full valuation allowance, which increased by $2,888,000 and by $6,243,000 during 2006 and 2005, respectively, against our deferred tax assets due to the uncertainly about the realization of such assets.

 

Note 15 - 401(k) Plan

 

We have adopted a 401(k) retirement plan under Section 401(k) of the Internal Revenue Code. The 401(k) plan covers substantially all employees who met minimum age and service requirements. The plan was non-contributory on our part. Effective with the merger with VTI, we assumed the 401(k) Plan of VTI, combined its assets with those of the existing plan and began making contributions to the new plan. Employer contributions to the 401(k) plan for the years ended December 31, 2006, 2005 and 2004 were $38,000, $43,000 and $26,000, respectively.

F-26

---

Note 16 - Related Parties

 

We receive consulting and tax services from an accounting firm in which one of our directors is a partner. Management believes that such transactions are at arm’s-length and for terms that would have been obtained from unaffiliated third parties. For the years ended December 31, 2006, 2005 and 2004, we incurred fees for these services of $32,000, $10,000 and $23,000, respectively.

 

Note 17 - Quarterly Financial Data (Unaudited) - See Note 1

 

The following is a summary of our unaudited quarterly results of operations for the years ended December 31, 2006, 2005 and 2004 (in thousands, except per share amounts):

		2006			2005			2004
1st Quarter
Revenue		$	4,721		$	4,202		$	3,186
Gross margin (loss)			1,235			516			(353	)
Loss from operations			(4,418	)		(3,934	)		(3,759	)
Net loss			(6,029	)		(3,594	)		(7,653	)
Net loss attributable to common stockholders			(6,114	)		(4,965	)		(7,727	)
Net loss per share - basic and diluted		$	(0.13	)	$	(0.13	)	$	(0.24	)
Weighted average number of common shares - basic and diluted			46,046			39,100			32,363
2nd Quarter
Revenue		$	4,981		$	4,397		$	4,179
Gross margin			1,631			391			107
Loss from operations			(2,022	)		(4,553	)		(3,803	)
Net loss			(3,493	)		(4,562	)		(3,814	)
Net loss attributable to common stockholders			(3,580	)		(4,620	)		(3,911	)
Net loss per share - basic and diluted		$	(0.08	)	$	(0.10	)	$	(0.10	)
Weighted average number of common shares - basic and diluted			46,207			46,046			37,390
3rd Quarter
Revenue		$	4,850		$	4,558		$	4,383
Gross margin			1,558			883			143
Loss from operations			(1,570	)		(4,394	)		(4,219	)
Net loss			(7	)		(4,384	)		(4,106	)
Net loss attributable to common stockholders			(94	)		(4,442	)		(4,205	)
Net loss per share - basic and diluted		$	(0.00	)	$	(0.10	)	$	(0.11	)
Weighted average number of common shares - basic and diluted			46,361			46,046			37,921
4th Quarter
Revenue		$	4,959		$	4,578		$	4,119
Gross margin (loss)			1,504			961			(49	)
Loss from operations			(497	)		(3,758	)		(5,312	)
Net loss			(1,261	)		(3,894	)		(334	)
Net loss attributable to common stockholders			(1,349	)		(4,004	)		(433	)
Net loss per share - basic and diluted		$	(0.03	)	$	(0.09	)	$	(0.01	)
Weighted average number of common shares - basic and diluted			46,350			46,046			37,916

 

F-27

---

 

Net loss per share is computed independently for each of the quarters presented. The sum of the quarterly net loss per share figures in the years ended December 31, 2005 and 2004 does not equal the total computed for that year.

 

Note 18 - March 2006 Restructuring

 

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, consisting of severance payments, acceleration of vesting of stock options and benefit reimbursements, were recorded in the first quarter of 2006 and will be paid through April 2007. As part of the restructuring initiative, we implemented management changes, including the departure of twenty-one employees and the promotion of Michael Brandofino to Chief Operating Officer. David Trachtenberg, President and Chief Executive Officer since October 2003, and Gerard Dorsey, Executive Vice President and Chief Financial Officer since December 2004 had left Glowpoint. In connection with their separation, Messrs. Trachtenberg and Dorsey were 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 $7,000, respectively. The amount paid to them is a portion of the $1,200,000 of restructuring costs recorded in 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. The following is a summary of our March 2006 restructuring activity during the year ended December 31, 2006 (in thousands):

 

Accrual as of December 31, 2005		$	0
Provision for severance			1,200
Less: amounts paid			(988	)
Accrual as of December 31, 2006		$	212

Note 19 - Commitments and Contingencies

 

Employment Agreements

 

We had employment agreements with our prior President and Chief Executive Officer ("CEO") and our prior Executive Vice President and Chief Financial Officer ("CFO"), both of whom left Glowpoint in April 2006. We also have agreements with our Executive Vice President and Chief Technology Officer ("CTO"), who became Chief Operating Officer in March 2006 and then President and Chief Executive Officer in April 2006, our Chief Operating Officer (“COO”) and our Executive Vice President and General Counsel (“GC”) such employment agreements provide for:

 

President and Chief Executive Officer -We entered into an agreement with the then CTO Michael Brandofino having a three-year term commencing January 1, 2001, which has been subsequently amended numerous times to reflect agreed upon annual base salary, incentive compensation and other stock option grants. Under the amended three year agreement, dated July 1, 2004, the CTO is entitled to an annual base salary in each year, an ability to earn annual incentive compensation in an amount equivalent to forty percent (40%) of his then annual base salary, subject to the achievement of goals and metrics established by the CEO, with such goals and metrics being updated on an annual basis. Compensation expense of $267,000, 253,000 and $249,000 was recorded during the years ended December 31, 2006, 2005 and 2004, respectively. In addition, the CTO's agreement stipulates that if we enter into a sale agreement during the term of the agreement and the CTO realizes less than $200,000 from the exercise of all outstanding options, then he is entitled to a bonus in an amount equal to the difference between $200,000 and the amount realized. The agreement also provides for a grant of an option to purchase 100,000 shares of common stock under the 2000 Plan, with 25% vesting immediately and the remaining options vesting in three equal annual installments at the anniversary date of the agreement. Either we or the CTO may terminate his employment at any time, for any reason or no reason at all; however, if the CTO is terminated without cause or resigns for good reason or if he dies, he is entitled to one year of his then annual base salary and one year of accelerated vesting of the stock options granted under the amended employment agreement. If the CTO's employment is terminated with cause or if he voluntarily resigns, he is entitled to his base salary and other benefits through the last day actually worked (see Note 20 - Subsequent Events).

 

Chief Operating Officer – In March 2004, we entered into an employment agreement with Joseph Laezza under which he became the Vice President, Operations (“VPO”). Under the agreement, the VPO is entitled to an annual base salary and, subject to the sole discretion of our Compensation Committee, annual incentive compensation in an amount equivalent to forty percent (40%) of his then-annual base salary, taking into consideration the achievement of goals and metrics established by the President and CEO, which goals and metrics shall be updated on an annual basis. In March 2006 he became Chief Operating Officer. Compensation expense of $228,000 was recorded during the year ended December 31, 2006. The agreement also provides for a grant to Mr. Laezza of 55,000 restricted shares of the Company’s common stock, with one-third of such restricted shares of common stock vesting on March 11 of each of the following years. Either we or the VPO may terminate his employment at any time, for any reason or no reason at all; however, if the VPO is terminated without cause or resigns for good reason or if he dies, he is entitled to twelve months of his then-annual base salary, as well as the pro-rated amount of incentive compensation due as of the effective date of termination and one year of accelerated vesting of the restricted stock under the employment agreement. If the VPO’s employment is terminated with cause or if he voluntarily resigns, he is entitled to his base salary and other benefits through the last day actually worked (see Note 20 - Subsequent Events).

 

F-28

---

 

Executive Vice President and General Counsel - In May 2006, we entered into a two-year employment agreement with David Robinson. Under the agreement, the GC is entitled to an annual base salary and, subject to the sole discretion of our Compensation Committee, annual incentive compensation in an amount equivalent to forty percent (40%) of his then-annual base salary, taking into consideration the achievement of goals and metrics established by the President and CEO, which goals and metrics shall be updated on an annual basis. Compensation expense of $154,000, was recorded during the year ended December 31, 2006 The agreement also provided for a grant of 200,000 shares of restricted common stock, with 60,000 shares vesting upon commencement of employment and one-third of the remaining restricted shares (or 46,666 shares) vesting annually thereafter. Either we or the GC may terminate his employment at any time, for any reason or no reason at all; however, if the GC is terminated without cause or resigns for good reason or if he dies, he is entitled to six months of his then-annual base salary, as well as the pro-rated amount of incentive compensation due as of the effective date of termination and one year of accelerated vesting of the restricted stock under the employment agreement. If the GC’s employment is terminated with cause or if he voluntarily resigns, he is entitled to his base salary and other benefits through the last day actually worked.

 

Chief Financial Officer - In January 2007 we entered into a two-year employment agreement with Edwin Heinen (see Note 20 – Subsequent Events).

 

Operating Leases

 

We lease several facilities under operating leases expiring through 2007. Certain leases require us to pay increases in real estate taxes, operating costs and repairs over certain base year amounts. Lease payments for the years ended December 31, 2006, 2005 and 2004 were $288,000, $299,000 and $304,000, respectively.

 

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

Year Ending December 31
2007		$	287
2008			3
2009			3
		$	293

 

Capital Lease Obligations

 

We lease certain equipment under non-cancelable lease agreements. These leases are accounted for as capital leases. Future minimum lease payments under capital lease obligations at December 31, 2004 of $35,000 were paid during 2005.

 

Commercial Commitments

 

We have entered into a number of agreements with telecommunications companies to purchase communications services. Some of the agreements require a minimum amount of services purchased over the life of the agreement, or during a specified period of time.

 

Glowpoint believes that it will meet its commercial commitments. In certain instances where Glowpoint did not meet the minimum commitments no such penalties for minimum commitments have been assessed and the Company has entered into new agreements. It has been our experience that the prices and terms of successor agreement are similar to those offered by other carriers.

 

Glowpoint does not believe that any loss contingency related to a potential shortfall should be recorded in the financial statements because it is not probable, from the information available and from prior experience, that Glowpoint has incurred a liability.

 

F-29

---

 

Future minimum commercial commitments under carrier agreements are as follows (in thousands):    

Year Ending December 31
2007		$	3,811
2008			2,131
2009			1,194
		$	7,136

 

Note 20 – Subsequent Events

 

In January 2007, we entered into a two-year employment agreement with Edwin F. Heinen, our Chief Financial Officer. Under the employment agreement, Mr. Heinen is entitled to a base salary of not less than $200,000 per calendar year and, at the discretion of the Board of Directors and based on meeting certain corporate and personal goals, he is eligible to receive an annual incentive bonus of up to 40% of his base salary. The agreement also provides for a grant to Mr. Heinen of 200,000 restricted shares of the Company’s common stock, with one-third of such restricted shares of common stock vesting on January 30 of each of the following three years.

 

In May 2007, we amended the employment agreements of Michael Brandofino, our Chief Executive Officer and President, and Joseph Laezza, our Chief Operating Officer. Mr. Brandofino’s agreement was amended to (i) reflect his title as Chief Executive Officer and President, (ii) grant 400,000 restricted shares of the Company’s common stock, with one-half of such restricted shares vesting on each of May 15, 2009 and May 15, 2011, and (iii) grant an option to purchase 200,000 shares of the Company’s common stock, with one-half of such options vesting immediately and the remaining 100,000 options vesting in equal installments on May 15, 2008, May 15, 2009, and May 15, 2010.

 

Mr. Laezza’s agreement was amended to (i) reflect his title as Chief Operating Officer, (ii) grant 100,000 restricted shares of the Company’s common stock, with one-half of such restricted shares vesting on each of May 15, 2009 and May 15, 2011, and (iii) grant an option to purchase 250,000 shares of the Company’s common stock, with one-half of such options vesting immediately and the remaining 125,000 options vesting in equal installments on May 15, 2008, May 15, 2009, and May 15, 2010.

F-30

---

GLOWPOINT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

		September 30, 2007			December 31, 2006 *
ASSETS			(Unaudited	)
Current assets:
Cash and cash equivalents		$	3,029		$	2,153
Accounts receivable, net of allowance for doubtful accounts of $135 and $121, respectively			2,924			2,748
Prepaid expenses and other current assets			390			327
Total current assets			6,343			5,228
Property and equipment, net			2,537			2,762
Other assets			775			403
Total assets		$	9,655		$	8,393
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	1,820		$	1,957
Accrued expenses			1,140			1,906
Customer deposits			721			102
Accrued sales taxes and regulatory fees			4,162			4,216
Current portion of derivative financial instruments, including $250 and $0, respectively, for Insider Purchasers			9,125			4,301
Senior Secured Convertible Notes, net of discount of $2,280			—			4,326
Deferred revenue			351			288
Total current liabilities			17,319			17,096
Long term liabilities:
Derivative financial instruments, less current portion, including $220 for Insider Purchasers			5,400			—
Senior Secured Convertible Notes, net of discount of $4,435			5,846			—
Senior Secured Convertible Notes held by Insider Purchasers - related parties, net of discount of $247			191			—
Total long term liabilities			11,437			—
Preferred stock:
Preferred stock, $.0001 par value; 5 shares authorized and redeemable; 0 and 0.120 Series B shares issued and outstanding, (stated value of $0 and $2,888; liquidation value of $0 and $3,735), respectively			—			2,888
Preferred stock, $.0001 par value; 1.5 and 0 shares authorized and redeemable; 0.475 and 0 Series C shares issued and outstanding recorded at fair value (stated value and liquidation value of $4,748 and 0), respectively			4,330			—
Commitments and contingencies
Stockholders’ deficit:
Preferred stock, $.0001 par value; 4 shares authorized; no Series D shares issued			—			—
Common stock, $.0001 par value; 150,000 and 100,000 shares authorized; 47,580 and 46,390 shares issued and issuable; 46,015 and 46,350 shares outstanding, respectively			5			5
Additional paid-in capital			162,913			161,267
Accumulated deficit			(184,966	)		(172,623	)
			(22,048	)		(11,351	)
Less: Treasury stock, 1,565 and 40 shares at cost, respectively			(1,383	)		(240	)
Total stockholders’ deficit			(23,431	)		(11,591	)
Total liabilities and stockholders’ deficit		$	9,655		$	8,393

 

* The Condensed Consolidated Balance Sheet at December 31, 2006 has been derived from the audited consolidation financial statements filed as an exhibit to our Report on Form 10-K on June 6, 2007.

 

See accompanying notes to condensed consolidated financial statements.

F-31

---

GLOWPOINT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

		Nine Months Ended September 30,						Three Months Ended September 30,
		2007			2006			2007			2006
Revenue		$	17,311		$	14,552		$	5,803		$	4,850
Cost of revenue			11,735			10,128			3,929			3,292
Gross margin			5,576			4,424			1,874			1,558
Operating expenses:
Research and development			534			658			209			184
Sales and marketing			2,194			1,989			717			615
General and administrative			6,170			9,787			1,831			2,329
Total operating expense			8,898			12,434			2,757			3,128
Loss from operations			(3,322	)		(8,010	)		(883	)		(1,570	)
Interest and other expense (income):
Interest expense, including $4, $0, $4 and $0, respectively, for Insider Purchasers			5,139			3,140			3,135			725
Interest income			(35	)		(68	)		(7	)		(27	)
Increase (decrease) in fair value of derivative financial instruments, including $0, $0, $0 and $0, respectively, for Insider Purchasers			3,513			(1,812	)		2,507			(2,391	)
Amortization of deferred financing costs, including $1, $0, $1 and $0, respectively, for Insider Purchasers			404			259			143			130
Total interest and other expense (income), net			9,021			1,519			5,778			(1,563	)
Net loss			(12,343	)		(9,529	)		(6,661	)		(7	)
Gain on redemption of preferred stock			799			—			799			—
Preferred stock dividends			(252	)		(259	)		(80	)		(87	)
Net loss attributable to common stockholders		$	(11,796	)	$	(9,788	)	$	(5,942	)	$	(94	)
Net loss attributable to common stockholders per share:
Basic and diluted		$	(0.25	)	$	(0.21	)	$	(0.13	)	$	(0.00	)
Weighted average number of common shares:
Basic and diluted			46,968			46,206			47,369			46,361

 

See accompanying notes to condensed consolidated financial statements.

 

F-32

---

GLOWPOINT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

Nine Months Ended September 30, 2007

(In thousands)

(Unaudited)

		Common Stock						Paid In			Accumulated			Treasury Stock
		Shares			Amount			Capital			Deficit			Shares			Amount			Total
Balance at January 1, 2007			46,390		$	5		$	161,267		$	(172,623	)		40		$	(240	)	$	(11,591	)
Net loss			—			—			—			(12,343	)		—			—			(12,343	)
Comprehensive loss			—			—			—			—			—			—			(12,343	)
Stock-based compensation - options			—			—			376			—			—			—			376
Gain on redemption of preferred stock			—			—			799			—			—			—			799
Treasury stock received in connection with Series C Preferred Stock exchange			—			—			—			—			1,525			(1,143	)		(1,143	)
Issuance of restricted stock for consulting services			30			—			20			—			—			—			20
Placement agent warrants - issued in connection with Senior Secured Convertible Notes issued in September 2007			—			—			332			—			—			—			332
Financial advisory warrants - issued in connection with Series C Preferred Stock exchange and extension of maturity date of Senior Secured Convertible Notes			—			—			143			—			—			—			143
Cost related to Series C Preferred Stock exchange			—			—			(90	)		—			—			—			(90	)
Stock-based compensation - restricted stock			1,160			—			318			—			—			—			318
Preferred stock dividends			—			—			(252	)		—			—			—			(252	)
Balance at September 30, 2007			47,580		$	5		$	162,913		$	(184,966	)		1,565		$	(1,383	)	$	(23,431	)

 See accompanying notes to consolidated financial statements.

F-33

---

GLOWPOINT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2007			2006
Cash flows from Operating Activities:
Net loss		$	(12,343	)	$	(9,529	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			1,121			1,490
Expense (income) recognized for the increase (decrease) in the estimated fair value of the derivative financial instruments			3,513			(1,812	)
Amortization of deferred financing costs			404			259
Accretion of discount on Senior Secured Convertible Notes			2,332			819
Beneficial conversion feature for Senior Secured Convertible Notes			1,976			1,808
Loss on disposal of equipment			10			169
Stock-based compensation			714			656
Increase (decrease) in cash attributable to changes in assets and liabilities:
Accounts receivable			(176	)		(228	)
Prepaid expenses and other current assets			(63	)		121
Other assets			—			205
Accounts payable			(137	)		213
Customer deposits			619			—
Accrued expenses, sales taxes and regulatory fees			602			1,605
Deferred revenue			63			(85	)
Net cash used in operating activities			(1,365	)		(4,309	)
Cash flows from Investing Activities:
Purchases of property and equipment			(906	)		(662	)
Net cash used in investing activities			(906	)		(662	)
Cash flows from Financing Activities:
Proceeds from issuance of Senior Secured Convertible Notes, including $400 from Insider Purchasers, net of financing costs of $308			3,230			—
Costs incurred in extension of maturity date of Senior Secured Convertible Notes and Series C Convertible Preferred Stock exchange			(83	)		—
Proceeds from issuance of Convertible Notes, net of financing costs of $595			—			5,585
Net cash provided by financing activities			3,147			5,585
Increase in cash and cash equivalents			876			614
Cash and cash equivalents at beginning of period			2,153			2,023
Cash and cash equivalents at end of period		$	3,029		$	2,637
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest		$	3		$	—
Non-cash investing and financing activities:
Preferred stock dividends		$	252		$	259
Gain on redemption of preferred stock			799			—
Additional Convertible Notes issued as payment for interest			575			264
Deferred financing costs for Senior Secured Convertible Notes incurred by issuance of placement agent warrants			332			296
Deferred financing costs for extension of maturity date of Senior Secured Convertible Notes incurred by issuance of financial advisory warrants			86			—
Treasury stock received in connection with Series C Convertible Preferred Stock exchange			1,143			—

 

See accompanying notes to condensed consolidated financial statements.

F-34

---

GLOWPOINT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007

 

(Unaudited)

 

Note 1 - Basis of Presentation

 

The Business

 

Glowpoint, Inc. ("Glowpoint" or "we" or "us" or “the Company”), a Delaware corporation, is a premiere broadcast-quality, IP (Internet Protocol)-based managed video services provider. Our mission is to improve the ease-of-use, cost-effectiveness, functionality, and quality of existing video communications in order to make it an integral and ubiquitous part of everyday business and personal communications. The Company operates in one segment and therefore segment information is not presented. We believe video communications should be as easy and spontaneous to use as your telephone, but with the power of face-to-face communication. We view our services as analogous to cellular service providers in the cellular telephone industry. Regardless of the cellular phone purchased, users must select a cellular service provider to make it work. Users make that service decision based on the features, reliability and price offered by the service provider. In our industry, regardless of the video conferencing equipment purchased, Glowpoint provides the managed video services to make it work. In doing so, we offer a vast array of managed video services, including video application services, managed network services, IP and ISDN videoconferencing services, multi-point conferencing (bridging), technology hosting and management, and professional services. We provide these services to a wide variety of companies, from large enterprises and governmental entities to small and medium-sized businesses. Glowpoint is exclusively focused on high quality two-way video communications and has been supporting millions of video calls since its launch in 2000. We have bundled some of our managed services to offer video communication solutions for broadcast/media content acquisition and for video call center applications. With the advent of HD (High Definition) Telepresence solutions, we have combined various components of our features and services into a comprehensive “white glove” service offering that can support virtually any of the telepresence solutions on the market today.

 

Liquidity and Going Concern

 

Our condensed consolidated financial statements have been prepared assuming we will continue as a going concern. We have incurred recurring operating losses and negative operating cash flows since our inception including a net loss attributable to common stockholders of $11,796,000 for the nine months ended September 30, 2007. At September 30, 2007, we had a working capital deficit of $10,976,000. We had $3,029,000 in cash and cash equivalents at September 30, 2007 and cash used in operating activities of $1,365,000 for the nine months ended September 30, 2007. Additionally, the Senior Secured Convertible Notes and the Senior Secured Convertible Notes issued as payment for interest (the “Convertible Notes”) have been renegotiated to mature in March 2009. We raised capital in the March and April 2006 and September 2007 private placements, but continue to sustain losses and negative operating cash flows. These factors raise substantial doubt as to our ability to continue as a going concern. We believe that our available capital as of September 30, 2007, together with our restructured operating activities, the amended maturity date of the Convertible Notes, and assuming we are able to negotiate favorable terms with the authorities regarding our sales and use taxes and regulatory fees, will enable us to continue as a going concern through September 30, 2008. There are no assurances, however, that we will be able to negotiate favorable terms with the authorities regarding our sales and use taxes and regulatory fees. If we are unable to negotiate favorable terms with the authorities regarding our sales and use taxes and regulatory fees, it would have a material adverse effect on the Company. The accompanying financial statements do not include any adjustments that might result from these uncertainties.

 

Summary of Significant Accounting Policies

 

Quarterly Financial Information and Results of Operations

 

The financial statements as of September 30, 2007 and for the nine and three months ended September 30, 2007 and 2006 are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2007, the results of operations for the nine and three months ended September 30, 2007 and 2006 and cash flows for the nine months ended September 30, 2007. The results for the nine and three months ended September 30, 2007 are not necessarily indicative of the results to be expected for the entire year. While management of the Company believes that the disclosures presented are adequate to make the information not misleading, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the footnotes thereto for the fiscal year ended December 31, 2006 as filed with the Securities and Exchange Commission as an exhibit to our Form 10-K on June 6, 2007 (the “Audited 2006 Financials”).

 

F-35

---

 

See “Note 2 - Basis of Presentation, Liquidity and Summary of Significant Accounting Policies” in the 2006 Audited Financials for a discussion of the estimates and judgments necessary in the Company’s accounting for sales and use taxes and regulatory fees, concentration of credit risk, lives of property and equipment, income taxes and fair value of derivative financial instruments. There have been no changes to our critical accounting policies in the nine and three months ended September 30, 2007. Critical accounting policies and the significant estimates made in accordance with them are regularly discussed with our Audit Committee.

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of Glowpoint and our wholly-owned subsidiary, GP Communications LLC. All material inter-company balances and transactions have been eliminated in consolidation.

 

Reclassifications

 

Certain amounts from 2006 have been reclassified to conform to the 2007 presentation.

 

Use of Estimates

 

Preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from the estimates made. We continually evaluate estimates used in the preparation of the consolidated financial statements for reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. The significant areas of estimation include determining the allowance for doubtful accounts, deferred tax valuation allowance, sales and use tax obligations, regulatory fees and related penalties and interest, the estimated life of customer relationships, the estimated lives of property and equipment, the fair value of derivative financial instruments and the valuation of our Series C convertible preferred stock.

 

Revenue Recognition

 

We recognize subscription revenue when the related services have been performed. Revenue billed in advance is deferred until the revenue has been earned. Other service revenue, including amounts related to surcharges charged by our carriers, related to the Glowpoint managed network service and the multi-point video and audio bridging services are recognized as service is provided. As the non-refundable, upfront activation fees charged to the subscribers do not meet the criteria as a separate unit of accounting, they are deferred and recognized over the twenty-four month period estimated life of the customer relationship. Revenues derived from other sources are recognized when services are provided or events occur.

 

Long-Lived Assets

 

We evaluate impairment losses on long-lived assets used in operations, primarily fixed assets, when events and circumstances indicate that the carrying value of the assets might not be recoverable in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. For purposes of evaluating the recoverability of long-lived assets, the undiscounted cash flows estimated to be generated by those assets are compared to the carrying amounts of those assets. If and when the carrying values of the assets exceed their fair values, the related assets will be written down to fair value. In the 2007 and 2006 periods, no impairment losses were indicated or recorded.

 

F-36

---

Derivative Financial Instruments

 

The Company’s objectives in using debt-related derivative financial instruments are to obtain the lowest cash cost source of funds within a targeted range of variable-to fixed-rate debt obligations. Derivatives are recognized in the consolidated balance sheets at fair value based on the criteria specified in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. The estimated fair value of the derivative liabilities is calculated using the Black-Scholes method where applicable and such estimates are revalued at each balance sheet date with changes in value recorded as other income or expense in the statement of operations.

 

Related Party Transactions

 

The Company receives consulting and tax services from an accounting firm in which one of our directors is a partner. Management believes that such transactions are at arm’s-length and for terms that would have been obtained from unaffiliated third parties. For the nine and three months ended September 30, 2007 we incurred fees for these services of $73,000 and $22,000, respectively. For the nine and three months ended September 30, 2006 we incurred fees for these services of $30,000 and $11,000, respectively.

 

In September 2007, we issued $3,538,000 of additional Convertible Notes and warrants in a private placement, the investors of which included (but are not limited to) some of the holders of our then outstanding Convertible Notes and participating Glowpoint officers and directors, which included Michael Brandofino, Aziz Ahmad, Bami Bastani, Edwin F. Heinen, Joseph Laezza and David W. Robinson (the “Insider Purchasers”). The Insider Purchasers invested $438,000 in the aggregate. See Notes 5 and 6 for additional information related to the Insider Purchasers participation in this private placement.

 

Software Development Costs

 

The Company incurs costs for the development of its “Customer Connect” software that is to be sold, leased or licensed to third parties. All software development costs have been accounted for in accordance with SFAS No. 86 “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”. Software development costs are required to be capitalized when a product’s technological feasibility has been established by completion of a detailed program design or working model of the product and until a product is available for release to customers. The Company capitalized $139,000 and $14,000 of software development costs for the nine and three months ended September 30, 2007, respectively and no costs in the 2006 periods. Software development costs will be amortized over 24 months beginning in September 2007, when the product was available for general release to customers and the capitalization of software costs ceased. For the nine and three months ended September 30, 2007 we amortized $8,000 to cost of revenues. As of September 30, 2007, there was $181,000 of unamortized capitalized software costs.

 

Uncertainty in Income Taxes

 

In June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 sets forth a recognition threshold and measurement attribute for financial statement recognition of positions taken or expected to be taken in income tax returns. FIN 48 is effective for fiscal years beginning after December 15, 2006. The tax returns for the years ending December 31, 2003, 2004 and 2005 are currently open and the tax return for the year ended December 31, 2006 will be filed in November 2007. There are no unrecognized tax benefits as of September 30, 2007. The adoption of FIN 48 in the first quarter of 2007 had no material impact on the Company’s consolidated financial statements.

 

Recent Accounting Pronouncements

 

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 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.

 

F-38

---

 

Note 2 - Stock-Based Compensation

 

We periodically grant stock options to employees and directors in accordance with the provisions of our stock option plans, with the exercise price of the stock options being set at the closing market price of the common stock on the date of grant. Effective January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”) which requires that compensation cost relating to share-based payment transactions be recognized as an expense in the financial statements and that measurement of that cost be based on the estimated fair value of the equity or liability instrument issued. Under SFAS No. 123R, the pro forma disclosures previously permitted under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) are no longer an alternative to financial statement recognition. SFAS No. 123R also requires that forfeitures be estimated and recorded over the vesting period of the instrument.

 

The Company has adopted SFAS No. 123R using the modified prospective method which requires that share-based expense recognized includes (a) earned share-based expense for all awards granted prior to, but not yet vested, as of the adoption date and (b) earned share-based expense for all awards granted subsequent to the adoption date. Since the modified prospective application method is being used, there was no cumulative effect adjustment upon the adoption of SFAS No. 123R, and the Company’s Audited 2006 Financials do not reflect any restated amounts. No modifications were made to outstanding options prior to the adoption of SFAS No. 123R and the Company did not change the quantity, type or payment arrangements of any share-based payments programs.

 

The weighted average fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions during the nine and three months ended September 30, 2007 and 2006:

 

		Nine Months Ended September 30,						Three Months Ended September 30,
		2007			2006			2007			2006
Risk free interest rate			4.7	%		4.8	%		4.4	%		4.6	%
Expected option lives			5 Years			5 Years			5 Years			5 Years
Expected volatility			99.5	%		95.4	%		99.5	%		96.6	%
Estimated forfeiture rate			10	%		23	%		10	%		10	%
Expected dividend yields			None			None			None			None
Weighted average grant date fair value of options		$	0.43		$	0.30		$	0.44		$	0.34

 

Expected volatility was calculated using the historical volatility of the Company for the comparable period. The expected term of the options is estimated based on the Company’s historical exercise and forfeiture rates. The forfeiture rates are estimated based on employment termination experience. The risk free interest rate is based on U.S. Treasury yields for securities in effect at the time of grants with terms equaling the expected option lives. The assumptions used in the Black-Scholes option valuation model are highly subjective, and can materially affect the resulting valuation.

 

A summary of options granted, exercised, expired and forfeited under our plans and options outstanding during the nine months ended, and as of September 30, 2007, with respect to all outstanding options is as follows (options in thousands):

 

		Outstanding						Exercisable
		Number of Options			Weighted Average Exercise Price			Number of Options			Weighted Average Exercise Price
Options outstanding, January 1, 2007			5,100		$	2.26			3,664		$	2.86
Granted			981			0.57
Exercised			—			—
Expired			(1,360	)		2.95
Forfeited			(743	)		2.71
Options outstanding, September 30, 2007			3,978		$	1.53			2,555		$	2.06

 

At September 30, 2007, there was $39,000 of total unrecognized compensation costs related to non-vested options granted prior to January 1, 2006 that are expected to be recognized over a weighted-average period of 0.83 years.

 

F-39

---

 

The Company has recorded $376,000 and $102,000 related to its stock option compensation in general and administrative expenses for the nine and three months ended September 30, 2007, respectively. The Company has recorded $379,000 and $122,000 for the nine and three months ended September 30, 2006, respectively. There was no income tax benefit recognized for stock-based compensation for the nine and three months ended September 30, 2007 and 2006. No compensation costs were capitalized as part of the cost of an asset. The intrinsic value of stock options granted in the nine months ended September 30, 2007 and 2006 was $180,000 and $0, respectively.

 

Restricted Stock

 

A summary of restricted stock granted, vested, forfeited and unvested restricted stock outstanding during the nine months ended, and as of September 30, 2007, is presented below (restricted shares in thousands):

 

		Restricted Shares			Weighted Average Exercise Price
Unvested restricted shares outstanding, January 1, 2007			317		$	0.71
Granted			1,190			0.57
Vested			(514	)		0.69
Forfeited			—			—
Unvested restricted shares outstanding, September 30, 2007			993		$	0.53

 

The Company has recorded $338,000 and $62,000 related to its restricted stock compensation in general and administrative expenses for the nine and three months ended September 30, 2007, respectively. Included in the restricted stock compensation for the nine and three months ended September 30, 2007 is $20,000 of consulting fees paid to an unrelated party. The Company has recorded $277,000 and $4,000 for the nine and three months ended September 30, 2006, respectively. There was no income tax benefit recognized for stock-based compensation for the nine and three months ended September 30, 2007 and 2006, respectively. No compensation costs were capitalized as part of the cost of an asset.

 

Note 3 - Loss Per Share

 

Basic loss per share is calculated by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share for the nine and three months ended September 30, 2007 and 2006 is the same as basic loss per share. Potential shares of common stock associated with 27,389,000 and 20,114,000 outstanding options and warrants, 4,748,000 and 0 shares issuable upon the conversion of our Series C convertible preferred stock, 0 and 1,729,000 shares issuable upon the conversion of our Series B convertible preferred stock and 21,438,000 and 13,214,000 shares issuable upon conversion of the Convertible Notes as of September 30, 2007 and 2006, respectively, have been excluded from the calculation of diluted loss per share because the effects would be anti-dilutive.

 

Note 4 - Stockholders’ Deficit

 

In February 2004, we raised net proceeds of $12,480,000 in a private placement of 6,100,000 shares of our common stock at $2.25 per share. The registration rights agreement for the February 2004 financing provides for liquidated damages of 3% of the aggregate purchase price for the first month and 1.5% for each subsequent month if we failed to register the common stock and the shares of common stock underlying the warrants or maintain the effectiveness of such registration. We account for the registration rights agreement as a separate freestanding instrument and account for the liquidated damages provision as a derivative liability subject to SFAS No. 133. The estimated fair value of the derivative liability is based on estimates of the probability and costs expected to be incurred and such estimates are revalued at each balance sheet date with changes in value recorded as other income or expense. Approximately $1,164,000 of the proceeds of the financing was attributed to the estimated fair value of the derivative liability. We estimated the fair value of the derivative liability to be $1,206,000 and $1,236,000 as of September 30, 2007 and December 31, 2006, respectively. We recognized other income of $30,000 and $17,000 for the nine and three months ended September 30, 2007, respectively. We recognized other income of $334,000 and $308,000 for the nine and three months ended September 30, 2006, respectively.

 

F-40

---

 

Preferred Stock

 

Our Certificate of Incorporation authorizes the issuance of up to 5,000,000 shares of preferred stock. Currently, we have 1,500 shares of Series C convertible preferred stock authorized, of which approximately 474.8126 shares are issued and outstanding and 4,000 shares of Series D convertible preferred stock authorized, none of which are issued. We also have Series A convertible preferred stock and Series B convertible preferred stock, but there are currently no shares of such preferred stock outstanding and we expect to cancel the certificates of designations, preferences and rights establishing such classes of preferred stock at which time those classes of preferred stock will no longer exist. Only the Series C convertible preferred stock is outstanding as of September 30, 2007.

 

Series C Convertible Preferred Stock

 

In September 2007, we entered into an Exchange Agreement with the holders of the Series B convertible preferred stock (the “Series B Holders”) and issued an aggregate of 474.8126 shares of a new Series C convertible preferred stock in exchange for cancelling all of our issued and outstanding Series B convertible preferred stock, cancelling approximately $1,098,000 of accrued but unpaid dividends due on the Series B convertible preferred stock, and 1,525,000 shares of common stock held by the Series B Holders (the “Preferred Stock Exchange”). Each share of Series C convertible preferred stock, par value $0.0001 per share, has a liquidation preference equal to its stated value, which is $10,000 per share, and is convertible at the holder’s election into 10,000 shares of common stock. The Series C convertible preferred stock has anti-dilution rights. The Series C convertible preferred stockholders are not entitled to receive dividends. The Series C convertible preferred stock is only redeemable in the event of the Company’s liquidation, dissolution or winding up of affairs. Upon a change of control, as defined therein, the holders of the Series C convertible preferred stock or the Company can require that the Series C convertible preferred stock be redeemed at the stated value per share as adjusted. The Series C convertible preferred stock must be converted into shares of common stock when the closing bid and ask price of the Company’s common stock exceeds $2.00 for a period of 10 consecutive trading days. The Series C convertible preferred stock is not classified in Stockholders’ Deficit. The brief descriptions of the Exchange Agreement and Series C convertible preferred stock are qualified by reference to the provisions of the applicable exhibits to the Company's Form 8-K filed with the Securities and Exchange Commission on September 24, 2007.

 

Burnham Hill Partners acted as financial advisor for the Preferred Stock Exchange and, among other things, extension of the maturity date of the Convertible Notes which were maturing in September 2007 and received warrants to purchase 250,000 shares of common stock at an exercise price of $0.65 per share. The financial advisory warrants are exercisable for a period of five years and are subject to certain anti-dilution protection. The Company allocated 100,000 of the financial advisory warrants, with a fair value of $57,000, to the Preferred Stock Exchange and incurred professional fees related to the Preferred Stock Exchange of $33,000. These costs were charged to additional paid in capital. See Note 5 for the allocation of the remaining financial advisory warrants.

 

We accounted for the Preferred Stock Exchange as a redemption and in accordance with Emerging Issues Task Force Topic No. D-42 “The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock” (“D- 42”). In connection with the Preferred Stock Exchange D-42 requires that the excess of the carrying amount of the Series B convertible preferred stock (the “Series B Carrying Amount”) over the fair value of the Series C convertible preferred stock (the “Series C Fair Value”) should be subtracted from net loss to arrive at net loss attributable to common stockholders The Series B Carrying Amount of $5,130,000 is comprised of the $2,888,000 stated value of the Series B convertible preferred stock, the $1,098,000 of accrued but unpaid dividends and $1,143,000 for the 1,525,000 shares of common stock valued at the common stock price of $0.75 on the date the common stock shares were surrendered. We computed the $4,330,000 Series C Fair Value using a valuation model utilized by the financial advisory and investment banking industries to determine the fair value of this type of financial instrument. The $799,000 excess of Series B Carrying Amount over the Series C Fair Value is recognized in our statement of operations as a “Gain on Redemption of Preferred Stock” and subtracted from our net loss to arrive at the net loss attributable to common shareholders

 

The transaction is summarized as follows:

 

$	2,888,000			Series B convertible preferred stock – carrying value
	1,143,000			Common stock – fair value
	1,098,000			Accrued and unpaid dividends – carrying value
	5,129,000			The Series B Carrying Amount
	4,330,000			The Series C Fair Value
$	799,000			Gain on Redemption of Preferred Stock

 

The Series C convertible preferred stock is recorded in the accompanying balance sheet at its fair value on the date of the transaction of $4,330,000.

 

F-41

---

 

Series D Convertible Preferred Stock

 

The Series D convertible preferred stock does not have any voting rights, but is convertible into Glowpoint’s common stock and is entitled to any liquidating distribution to holders of common stock. All of the Convertible Notes, the Series A Warrants, as amended, the Series A-2 Warrants and the Series C convertible preferred stock are convertible or exercisable, as the case may be, into our common stock, but provide that, unless specifically waived by such holder, in no event shall any holder of such securities own more than 4.99% or 9.99% of our outstanding common stock. In the event a holder would own more than either percentage upon conversion or exercise and does not waive such ownership cap, we will issue Series D convertible preferred stock for the amount above such limitation. The holder may then convert Series D convertible preferred stock into common stock in the future as permitted by the ownership limitations or upon waiver of such restriction. The Series D convertible preferred stock is classified in Stockholders’ Deficit. No Series D convertible preferred stock has been issued as of September 30, 2007.

 

Note 5 - Senior Secured Convertible Notes

 

Convertible Notes and Convertible Notes Discount

 

In March and April 2006 and September 2007, we issued our Convertible Notes in private placements to private investors. The September 2007 private placement also included Insider Purchasers. Activity for the Convertible Notes and Convertible Notes discount during the nine months ended, and as of September 30, 2007, was as follows (in thousands):

 

		Dec. 31, 2006			Activity			Insider Purchasers Activity			September 30, 2007
Principal of Convertible Notes:
March 2006 private placement		$	5,665		$	—		$	—		$	5,665
April 2006 private placement			515			—			—			515
September 2007 private placement			—			3,100			438			3,538
Convertible Notes issued as payment for interest			426			575			—			1,001
			6,606			3,675			438			10,719
Discount:
Derivative financial instrument – Series A Warrants			(2,873	)		—			—			(2,873	)
Derivative financial instrument – Series A-2 Warrants			—			(4,484	)		(250	)		(4,734	)
Reduction of exercise price and extension of expiration dates of warrants			(766	)		—			—			(766	)
			(3,639	)		(4,484	)		(250	)		(8,373	)
Accretion of discount			1,359			2,329			3			3,691
			(2,280	)		(2,155	)		(247	)		(4,682	)
Convertible Notes, net of discount		$	4,326		$	1,520		$	191		$	6,037

 

In the March and April 2006 private placement, we issued $5,665,000 and $515,000, respectively, with a total aggregate principal amount of $6,180,000 of our Convertible Notes and Series A warrants to purchase 6,180,000 shares of common stock at an exercise price of $0.65 per share. The Series A warrants are exercisable for a period of five years and are subject to certain anti-dilution protection. As a result of the September 2007 private placement the exercise price of the Series A warrants has been adjusted to $0.63 per share as of September 30, 2007. We also agreed to reduce the exercise price of 3,625,000 previously issued warrants held by the investors in these private placements to $0.65 from a weighted average price of $3.38, and to extend the expiration date of any such warrants to no earlier than three years after the offering date. As a result of the September 2007 private placement the exercise price of the Series A warrants has been adjusted to $0.63 per share as of September 30, 2007. The new weighted average expiration date of the warrants is 3.5 years from a previous weighted average expiration date of 2.9 years. In addition, we issued to the designees and assigns of Burnham Hill Partners placement agent warrants to purchase 618,000 shares of our common stock at an exercise price of $0.55 per share. The warrants are subject to certain anti-dilution protection. The $5,585,000 net proceeds of the March and April 2006 private placement were used to support our corporate restructuring program and for working capital.

 

F-42

---

 

We accounted for the reduction of the exercise price of 3,625,000 previously issued warrants held by the investors in the March and April 2006 private placement to $0.65 from a weighted average price of $3.38, and the extension of the expiration date of any such warrants to no earlier than three years after the offering date at fair value as a debt discount with an offsetting credit to paid in capital. A portion of the finance costs of the Convertible Notes issued in March and April 2006 were allocated to this transaction and charged to paid in capital. The estimated fair value of this modification is based on the excess of the fair value of these warrants at the date of the financings over the fair value of these warrants at their original terms. In the March and April 2006 private placement, $766,000 of the proceeds were attributed to the estimated fair value of the modification of price and term of these warrants. The $766,000 fair value of this modification was treated as a discount of the Convertible Notes and expensed, using the effective interest method, over the 18 month period to the original maturity date of the Convertible Notes.

 

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

 

The Convertible Notes bear interest at 10% per annum, increasing to 12% on the first anniversary following their issuance, and mature on March 31, 2009. Beginning in January 2008 the per annum interest rate on the unpaid principal balance of the Convertible Notes then in effect shall increase if the Company fails to achieve a minimum adjusted quarterly earnings before interest, taxes, depreciation and amortization (the “Adjusted EBITDA”) as defined in the Convertible Notes. The per annum interest rate shall increase by 200 basis points if the stated quarterly Adjusted EBITDA is not achieved, and such increase will be cumulative for each subsequent quarterly failure to achieve the stated Adjusted EBITDA; provided, however, that the per annum interest rate shall revert to the lower interest rate in the event the Company achieves or exceeds the stated or cumulative minimum Adjusted EBITDA in any subsequent quarterly period. The Convertible Notes and other transaction documents provide that the Insider Purchasers will not be entitled to all of the rights and benefits available to the other purchasers upon the failure by the Company to achieve Adjusted EBITDA.

 

The Convertible Notes are convertible into common stock at a conversion rate of $0.50 per share. We have the option to pay the accrued interest for the Convertible Notes in cash or additional Convertible Notes. To date, all required interest payments have been made by issuing additional Convertible Notes.

 

In the September 2007 private placement, we issued $3,538,000 of our Convertible Notes and Series A-2 warrants to purchase 3,538,000 shares of common stock at an exercise price of $0.65 per share. Insider Purchasers invested $438,000 in the private placement. The Series A-2 warrants are exercisable for a period of five years and are subject to certain anti-dilution protection. In addition, we issued to the designees and assigns of Burnham Hill Partners placement agent warrants to purchase 566,080 shares of our common stock at an exercise price of $0.55 per share. The warrants are exercisable for a period of five years and are subject to certain anti-dilution protection. Burnham Hill Partners received a cash fee of $283,000, which equaled eight (8%) percent of the gross proceeds we received. The $3,230,000 net proceeds of the September 2007 private placement is being used for working capital.

 

During the nine and three months ended September 30, 2007 the accretion of discount on the Convertible Notes was $2,332,000 and $952,000, respectively. During the nine and three months ended September 30, 2006 the accretion of discount was $819,000 and $450,000, respectively.

 

F-43

---

 

Financing Costs

 

The financing costs, which were included in Other Assets in the accompanying consolidated balance sheets, and accumulated amortization as of September 30, 2007, are as follows (in thousands):

 

		2006 Private placement			2007 Private placement and Convertible Notes Extension			2007 Private placement, Insider Purchasers			Total
Cash financing costs:
Placement agent fees – Burnham Hill Partners		$	480		$	248		$	35		$	763
Other financing costs			115			72			3			190
			595			320			38			953
Non-cash financing costs:
Placement agent and financial advisory warrants - Burnham Hill Partners			296			377			41			714
Financing costs charged to additional paid in capital			(110	)		-			-			(110	)
Total financing costs			781			697			79			1,557
Accumulated amortization			(781	)		(11	)		(1	)		(793	)
		$	0		$	686		$	78		$	764

 

The financing costs for the March and April 2006 private placement were being amortized over the 18 month period through September 30, 2007, the maturity date of the originally issued Convertible Notes. The financing costs for the September 2007 private placement and extension of the maturity date of the March and April 2006 private placement are being amortized over the 18 month period through March 31, 2009, the current maturity date of the Convertible Notes. During the nine and three months ended September 30, 2007 the amortization of financing costs was $404,000 and $143,000, respectively. During the nine and three months ended September 30, 2006 the amortization of financing costs was $259,000 and $130,000, respectively.

 

F-44

---

 

Accounting for Conversion Feature and Series A and A-2 Warrants Derivative Liabilities

 

Activity for derivative liabilities during the nine months ended September 30, 2007 and as of December 31, 2006 was as follows (in thousands):

 

		Dec. 31, 2006			Additions			Increase (decrease) in Fair Value			September 30, 2007
(i)    Derivative financial instrument – February 2004 capital raise		$	1,236		$	—		$	(30	)	$	1,206
(ii)   Derivative financial instrument – Beneficial conversion feature - Convertible Notes			1,666			1,757			1,757			5,180
(ii)   Derivative financial instrument – Beneficial conversion feature - Convertible Notes, Insider Purchasers			—			220			—			220
(iii)  Derivative financial instrument – Series A Warrants			1,399			—			1,780			3,179
(iv)  Derivative financial instrument – Series A-2 Warrants, September 2007 private placement			—			1,765			3			1,768
(iv)  Derivative financial instrument – Series A-2 Warrants, September 2007 private placement, Insider Purchasers			—			250			—			250
(v)   Derivative financial instrument – Series A-2 Warrants, issued in connection with Convertible Notes Extension			—			2,719			3			2,722
			4,301		$	6,711		$	3,513			14,525
Current portion			4,301									9,125
		$	0								$	5,400

 

The components of the increase or (decrease) in the fair value of derivative financial instruments with changes in value recorded as other (income) expense for the nine and three months ended September 30, 2007 and 2006 was as follows (in thousands):

 

		Nine Months Ended September 30,						Three Months Ended September 30,
		2007			2006			2007			2006
(i)    Derivative financial instrument – February 2004 capital raise		$	(30	)	$	(334	)	$	(17	)	$	(308	)
(ii)   Derivative financial instrument – Beneficial conversion feature - Convertible Notes			1,757			(184	)		1,757			(570	)
(ii)   Derivative financial instrument – Beneficial conversion feature - Convertible Notes, Insider Purchasers			—			—			—			—
(iii)  Derivative financial instrument – Series A Warrants			1,780			(1,294	)		761			(1,513	)
(iv)  Derivative financial instrument – Series A-2 Warrants, September private placement			3			—			3			—
(iv)  Derivative financial instrument – Series A-2 Warrants, September 2007 private placement, Insider Purchasers			—			—			—			—
(v)   Derivative financial instrument – Series A-2 Warrants, issued in connection with Convertible Notes Extension			3			—			3			—
		$	3,513		$	(1,812	)	$	2,507		$	(2,391	)

 

F-45

---

 

(i) We accounted for the registration rights agreement related to the February 2004 capital raise as a separate freestanding instrument and accounted for the liquidated damages provision as a derivative liability subject to SFAS No. 133. The estimated fair value of the derivative liability is based on estimates of the probability and costs expected to be incurred and such estimates are revalued at each balance sheet date with changes in value recorded as other income or expense. We estimated the fair value of the derivative liability as of September 30, 2007 and December 31, 2006 to be $1,206,000 and $1,236,000, respectively.

 

(ii) We accounted for the convertibility of the Convertible Notes into common stock at a conversion rate of $0.50 per share as a derivative liability subject to SFAS No. 133. Management determined that the events or actions necessary to deliver registered shares are not controlled by the Company and that the holders have the right to demand that the Company pay the holders in cash, calculated as defined in the Convertible Notes, under certain circumstances. Accordingly, the Company accounted for the beneficial conversion feature as a derivative liability. The estimated fair value of the derivative liability is based on the prepayment amount that would be owed to a Convertible Notes holder if payment is required. The prepayment amount is the greater of (i) 125% of the value of the Convertible Notes and accrued interest and (ii) the value if the Convertible Notes and accrued interest converted into common stock at $0.50 per share and then multiplied by the then current stock price. Since the Convertible Notes are convertible at the issuance date an expense related to the derivative liability is recognized on that date. We estimated the fair value of the derivative liability as of September 30, 2007 and December 31, 2006 to be $5,400,000 and $1,666,000, respectively. During the nine and three months ended September 30, 2007 we recognized $1, 977,000 and $1,882,000, respectively, for the estimated fair value of the derivative liability of the Convertible Notes when they were issued. During the nine and three months ended September 30, 2006 we recognized $1,808,000 and $40,000, respectively, for the estimated fair value of the derivative liability of the original Convertible Notes when they were issued.

 

(iii) We accounted for the issuance of the Series A warrants to purchase 6,180,000 shares of common stock at an exercise price of $0.65 per share as a derivative liability subject to SFAS No. 133. Management determined that the events or actions necessary to deliver registered shares are not controlled by the Company and that the holders have the right to demand that the Company pay the holders in cash, calculated as defined in the Series A warrant, under certain circumstances. Accordingly the Company accounted for the Series A warrants as a derivative liability. The estimated fair value of the derivative liability is calculated using the Black-Scholes method and such estimates are revalued at each balance sheet date with changes in value recorded as other income or expense. We estimated the fair value of the derivative liability as of September 30, 2007 and December 31, 2006 to be $3,179,000 and $1,399,000, respectively.

 

(iv) In connection with the September 2007 private placement we accounted for the issuance of the Series A-2 warrants to purchase 3,538,000 shares of common stock at an exercise price of $0.65 per share as a derivative liability subject to SFAS No. 133. Management determined that the events or actions necessary to deliver registered shares are not controlled by the Company and that the holders have the right to demand that the Company pay the holders in cash, calculated as defined in the Series A-2 warrant, under certain circumstances. Accordingly the Company accounted for the Series A-2 warrants as a derivative liability. The estimated fair value of the derivative liability is calculated using the Black-Scholes method and such estimates are revalued at each balance sheet date with changes in value recorded as other income or expense. In the September 2007 private placement, $2,015, 000 of the proceeds was attributed to the estimated fair value of the derivative liability. The $2,015, 000 for the derivative liability will be treated as a discount on the Convertible Notes and expensed, using the effective interest method, over the 18 month period to the maturity of the Convertible Notes. We estimated the fair value of the derivative liability as of September 30, 2007 to be $2,018,000.

 

(v) In connection with the Convertible Notes Extension we accounted for the issuance of the Series A-2 warrants to purchase 4,773,000 shares of common stock at an exercise price of $0.65 per share as a derivative liability subject to SFAS No. 133. Management determined that the events or actions necessary to deliver registered shares are not controlled by the Company and that the holders have the right to demand that the Company pay the holders in cash, calculated as defined in the Series A-2 warrant, under certain circumstances. Accordingly the Company accounted for the Series A warrants as a derivative liability. The estimated fair value of the derivative liability is calculated using the Black-Scholes method and such estimates are revalued at each balance sheet date with changes in value recorded as other income or expense. In the Convertible Notes Extension $2,719,000 was attributed to the estimated fair value of the derivative liability. The $2,719,000 for the derivative liability will be treated as a discount on the Convertible Notes and expensed, using the effective interest method, over the 18 month period to the Convertible Notes’ maturity date. We estimated the fair value of the derivative liability as of September 30, 2007 to be $2,722,000.

 

Insider Purchasers investment in September 2007 Private Placement

 

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

 

F-46

---

 

Convertible Notes – Adjusted EBITDA Requirements

 

If the Company does not achieve the following minimum Adjusted EBITDA the per annum interest rate on the unpaid principal balance of the Convertible Notes then in effect shall increase by 200 basis points, and such increase will be cumulative for each subsequent period; provided, however, that the per annum interest rate shall revert to the lower interest rate in the event the Company achieves or exceeds the cumulative minimum Adjusted EBITDA for any subsequent determination date. Failure to maintain the minimum Adjusted EBITDA, however, shall not constitute an Event of Default as defined in the Convertible Notes agreements. The Adjusted EBITDA (as defined below) targets for the determination dates are as follows:

 

Determination Date		Adjusted EBITDA
As of March 31, 2008		$0 for the quarter ending March 31, 2008
As of June 30, 2008		$1,000,000 for the period commencing on January 1, 2008 and ending on June 30, 2008.
As of September 30, 2008		$1,500,000 for the quarter ending September 30, 2008, or $2,500,000 for the period commencing on January 1, 2008 and ending on September 30, 2008.
As of December 31, 2008		$2,000,000 for the quarter ending December 31, 2008 or $4,500,000 for the year ended December 31, 2008.

 

“Adjusted EBITDA” is defined as the sum of the amounts for such period of (i) net income or loss before dividends, plus (ii) charges for foreign, federal, state and local taxes as computed on our income tax returns, plus (iii) interest expense, plus (iv) depreciation, plus (v) amortization expense, including, without limitation, amortization of goodwill and other intangible assets and amortization of stock based compensation expense, plus (vi) extraordinary losses, plus (vii) charges related to any financing consummated on or prior to the September 2007 private placement, plus (viii) the cost of any beneficial conversion feature of any outstanding security, plus (ix) the cost of any accretion of discounts minus (x) interest income, minus (xi) extraordinary gains, and (xii) such other adjustments to eliminate the impact of any derivative financial instruments.

 

Note 6 - Interest Expense

 

The components of interest expense for the nine and three months ended September 30, 2007 and 2006 are presented below (in thousands):

 

		Nine Months Ended September 30,						Three Months Ended September 30,
		2007			2006			2007			2006
Accretion of discount on Convertible Notes		$	2,329		$	819		$	949		$	450
Accretion of discount on Convertible Notes, Insider Purchasers			3			—			3			—
Interest on Convertible Notes			599			317			225			162
Interest on Convertible Notes, Insider Purchasers			1			—			1			—
Beneficial conversion feature – Convertible Notes			1,755			1,808			1,661			40
Beneficial conversion feature – Convertible Notes, Insider Purchasers			220			—			220			—
Interest expense for sales and use taxes and regulatory fees			229			196			75			73
Other interest expense			3			—			1			—
		$	5,139		$	3,140		$	3,135		$	725

 

F-47

---

 

Note 7- March 2006 Restructuring

 

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, which totaled approximately $1,200,000 and consisting of severance payments, acceleration of vesting of stock options and benefit reimbursements, were recorded in the first quarter of 2006 and were paid through April 2007. As part of the restructuring initiative, we implemented management changes, including the departure of twenty-one employees and the promotion of Michael Brandofino to Chief Operating Officer. 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 connection with their separation, Messrs. Trachtenberg and Dorsey were paid severance based upon their employment agreements of approximately $500,000 and $155,000, respectively, over the following year and received other benefits (e.g., accelerated vesting of restricted stock or options) valued at approximately $180,000 and $7,000, respectively. The amount paid to them is a portion of the $1,200,000 of restructuring costs recorded in the first quarter of 2006. There is no outstanding liability at September 30, 2007.

 

Note 8 - Commitments and Contingencies

 

We have entered into a number of agreements with telecommunications companies to purchase communications services. Some of the agreements require a minimum amount of services purchased over the life of the agreement, or during a specified period of time.

 

Glowpoint believes that it will meet its commercial commitments. In certain instances where Glowpoint did not meet the minimum commitments no penalties for minimum commitments have been assessed and the Company has entered into new agreements. It has been our experience that the prices and terms of successor agreement are similar to those offered by other carriers. Glowpoint is in discussion with one carrier where the Company’s computation differs from that of the carrier. Glowpoint believes that it will ultimately complete negotiations with the carrier that will result in no penalty under the current arrangement. Glowpoint does not believe that any loss contingency related to a potential shortfall should be recorded in the financial statements because it is not probable, from the information available and from prior experience, that Glowpoint has incurred a liability.

 

F-48

---

 

PART II    INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution.

 

The following table sets forth the various expenses (other than underwriting discounts and commissions), we expect to incur in connection with the offering described in this registration statement.

 

SEC Registration Fee		$	891.36
Listing or Quotation Fees			*
Printing and Engraving Expenses			*
Legal Fees and Expenses			*
Accounting Fees and Expenses			*
Blue Sky Fees and Expenses			*
Transfer Agent Fees and Expenses			*
Miscellaneous			*
Total		$	*

 

---

*

To be completed by amendment

 

Item 14. Indemnification of Directors and Officers.

 

Section 102 of the Delaware General Corporation Law permits a corporation to eliminate the personal liability of directors of a corporation to the corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director, except where the director breached his duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit.

  Section 145 of the Delaware General Corporation Law provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with the action, suit or proceeding, provided the person acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation’s best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. A similar standard of care is applicable in the case of actions by or in the right of the corporation, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action was brought determines that, despite the adjudication of liability but in view of all of the circumstances of the case, the person is fairly and reasonably entitled to indemnity for expenses that the Delaware Court of Chancery or other court shall deem proper.

 

Our amended and restated certificate of incorporation provides that no director shall be personally liable to us or any of our stockholders for monetary damages for a breach of fiduciary duty as a director, except for liability:

 

•

for any breach of the director’s duty of loyalty to us or our shareholders;

 

•

for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;

 

II-1

---

 

•

pursuant to Section 174 of the Delaware General Corporation Law, which related to unlawful payments or dividends or unlawful stock repurchases or redemptions; or

 

•

for any transaction from which the director derived an improper personal benefit.

Our bylaws provide that officers and directors shall be indemnified if any such person is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director or officer, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with the action, suit or proceeding, provided the person acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation’s best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. Our bylaws also provide that we must advance expenses to our directors and officers in connection with their defense.

 

We maintain a directors’ and officers’ liability insurance policy to insure our directors and officers against liability for actions or omissions occurring in their capacity as a director or officer, subject to certain exclusions and limitations.

Insofar as limitation of, or indemnification for, liabilities arising under the Securities Act may be permitted to directors, officers, or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission, such limitation or indemnification is against public policy as expressed in the Securities Act, and therefore, is unenforceable.

 

Item 15. Recent Sales of Unregistered Securities.

 

The following sets forth all securities sold by Glowpoint within the past three years which were not registered under the Securities Act. No underwriters were used in any such transactions. All sales of securities described below were made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act (and/or Regulation D promulgated thereunder) for transactions by an issuer not involving a public offering. None of the transactions was effected using any form of general advertising or general solicitation as such terms are used in Regulation D under the Securities Act. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the restricted securities issued in such transactions.

 

March 2005

 

In March 2005, we raised net proceeds of $9,376,000 in a private placement offering of 6,766,667 shares of our common stock at $1.50 per share. Investors in the private placement offering were also issued warrants to purchase 2,706,667 shares of common stock at an exercise price of $2.40 per share. The warrants expire five years after the closing date. The warrants are subject to certain anti-dilution protection (minimum price of $1.61).  The warrants may be exercised by cash payment of the exercise price or by "cashless exercise”.  As a result of subsequent financings, the conversion price of these warrants has been adjusted to $1.79 as of December 31, 2006. 

 

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. 

 

II-2

---

 

March 31, 2006 and April 12, 2006

 

In March and April 2006, we issued senior secured convertible notes and warrants to purchase common stock in a private placement to accredited investors. In the March and April 2006 financing, we issued $5,665,000 and $515,000, respectively, with a total aggregate principal amount of $6,180,000 of our Senior Secured 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. These warrants expire five years after issuance and are subject to certain anti-dilution protection. The Series B warrants only become exercisable (i) after we make available to the public our financial statements for the fourth quarter of 2006 and (ii) if we fail to achieve positive operating income, excluding certain restructuring and non-cash charges, identified on Schedule A of the Series B warrants, as amended, in the fourth quarter of 2006. We determined that the Series B warrants are not exercisable because we achieved positive operating income, excluding the restructuring and non-cash charges listed on Schedule A of the Series B warrants, as amended, in the fourth quarter of 2006.

 

The Senior Secured Notes bear interest at 10% per annum (which increases to 12% commencing one (1) year following the issuance date), originally provided for a maturity on September 30, 2007 and, at the election of the holder, are convertible into common stock at a conversion price of $0.50 per share. We have the option to pay the accrued interest for the Senior Secured Notes in cash or additional Senior Secured Notes. To date, all interest payments have been made by issuing additional Senior Secured Notes (the “Senior Secured Interest Notes”). As of September 21, 2007, the principal amount of the then outstanding Senior Secured Interest Notes totalled approximately $1,001,277. On September 21, 2007, we extended the maturity date of the then outstanding Senior Secured Notes to March 31, 2009.

 

We also agreed to reduce the exercise price of previously issued warrants to purchase 3,625,000 shares of common stock held by the investors in this 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. In addition, we issued to the designees and assigns of Burnham Hill Partners placement agent warrants to purchase 618,000 shares of our common stock at an exercise price of $0.55 per share. All of the warrants issued are subject to certain anti-dilution protection.

 

September 21, 2007

On September 21, 2007, we issued $3,538,000 aggregate principal amount of our Senior Secured Notes and Series A-2 Warrants to purchase 3,538,000 shares of common stock at an exercise price of $0.65 per share. The Senior Secured Notes bear interest at 10% per annum (which increases to 12% commencing one (1) year following the issuance date), mature on March 31, 2009 and are convertible into common stock at a conversion price of $0.50 per share. The Series A-2 Warrants are exercisable for a period of five years.

Pursuant to an Exchange Agreement, dated September 21, 2007, we issued an aggregate of approximately 474.8126 shares of a new Series C Preferred Stock in exchange for cancelling all of our issued and outstanding Series B Preferred Stock, cancelling approximately $1,097,614 of accrued but unpaid dividends due on the Series B Preferred Stock, and surrendering 1,525,000 shares of common stock held by North Sound Capital LLC entities. Each share of Series C Preferred Stock, par value $0.0001 per share, has a liquidation preference equal to its stated value, which is $10,000 per share, and is convertible at the holder’s election into 10,000 shares of common stock, subject to adjustment.

Also on September 21, 2007, we issued Series A-2 Warrants to purchase an aggregate of approximately 4,772,822 shares of common stock in consideration for amending our then outstanding Senior Secured Notes to, among other things, extend the maturity date to March 31, 2009 from September 30, 2007, and amending certain terms of the transaction documents from our March and April 2006 private placement. The Series A-2 Warrants have an exercise price of $0.65 per share and are exercisable for a period of five years.

We issued warrants to the designees and assigns of Burnham Hill Partners to purchase (i) approximately 566,080 shares of common stock at an exercise price of $0.55 per share and (ii) 250,000 shares of common stock at an exercise price of $0.65 per share. All of such issued warrants are exercisable for five years.

Securities Granted to Employees, Officers and Directors

Since October 1, 2004, we have routinely granted options to purchase common stock to our employees, directors and consultants and granted shares of restricted stock to our executive officers and directors. These grants and the issuances of common stock upon exercise of the options were exempt either pursuant to Section 4(2), as a transaction by an issuer not involving a public offering or pursuant to Rule 701, as a transaction pursuant to a compensatory benefit plan. Until registered, the common stock issued upon exercise of the options is deemed to constitute restricted securities for the purposes of the Securities Act.

 

II-3

---

 

Item 16. Exhibits and Financial Statement Schedules.

(a)

A list of exhibits required to be filed as part of this filing is set forth in the Exhibit Index on page II-6 of this Form S-1, which immediately precedes such exhibits, and is incorporated by reference

(b)

Financial Statement Schedules

 

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

 

Item 17.

Undertakings.

 

(a) The undersigned Registrant undertakes that:

 

(1)	File, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to:

 

(i)

include any Prospectus required by Section 10(a)(3) of the Securities Act;

(ii)

reflect in the Prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of Prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.

(iii)

include any additional or changed material information on the plan of distribution.

 

(2)	For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering.

 

(3)	File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.

 

(4)

For determining liability of the undersigned registrant under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

 

(i)

any preliminary Prospectus or Prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

(ii)

any free writing Prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

(iii)

the portion of any other free writing Prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

 

II-4

---

 

(iv)

any other communication in the offering made by the undersigned registrant to the purchaser.

 

(5)

That, for the purpose of determining liability under the Securities Act to any purchaser, if the registrant is subject to Rule 430C, each Prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than Prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date that it is first used after effectiveness. Provided, however, that no statement made in a registration statement or Prospectus that is part of a registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or Prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or a Prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

 

(6)

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been informed that in the opinion of the Securities And Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Township of Hillside, State of New Jersey, on December 18, 2007.

 

Glowpoint, Inc.
By:	/s/ Michael Brandofino
	Name: Michael Brandofino
	Title: Chief Executive Officer

 

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on December 18, 2007.

/s/ Michael Brandofino		Chief Executive Officer (Principal Executive Officer) and Director
Michael Brandofino
/s/ Edwin F. Heinen		Chief Financial Officer (Principal Financial and Accounting Officer)
Edwin F. Heinen
/s/ Aziz Ahmad		Director
Aziz Ahmad

 

II-5

---

 

		Director
Bami Bastani
/s/ Dean Hiltzik		Director
Dean Hiltzik
		Director
James Lusk
/s/ Richard Reiss		Director
Richard Reiss
/s/ Peter Rust		Director
Peter Rust

 

II-6

---

 

EXHIBIT INDEX

 

Exhibit Number		Description
3.1		Amended and Restated Certificate of Incorporation. (1)
3.2		Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Wire One Technologies, Inc. changing its name to Glowpoint, Inc. (11)
3.3		Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Glowpoint, Inc. increasing its authorized common stock to 150,000,000 shares from 100,000,000 shares (24)
3.4		Certificate of Designations, Preferences and Rights of Series C Preferred Stock. (24)
3.5		Certificate of Designations, Preferences and Rights of Series D Preferred Stock. (24)
3.6		Amended and Restated Bylaws. (11)
4.1		Specimen Common Stock Certificate. (20)
5.1		Opinion of Gibbons P.C. (*)
10.1		Glowpoint, Inc. 2000 Stock Incentive Plan. (2)
10.2		Form of Warrant to purchase Common Stock, dated January 10, 2002. (3)
10.3		Lease Agreement for premises located at 225 Long Avenue, Hillside, New Jersey, dated March 20, 1997, between Registrant and Vitamin Realty Associates, L.L.C. (4)
10.4		First Amendment to Lease Agreement, dated as of December 1997, between Registrant and Vitamin Realty Associates, L.L.C. (1)
10.5		Second Amendment to Lease Agreement, dated as of December 20,1999, between Registrant and Vitamin Realty Associates, L.L.C. (1)
10.6		Third Amendment to Lease Agreement, dated as of June 1, 2000, between Registrant and Vitamin Realty Associates, L.L.C. (7)
10.7		Fourth Amendment to Lease Agreement, dated as of August 29, 2000, between Registrant and Vitamin Realty Associates, L.L.C. (2)
10.8		Fifth Amendment to Lease Agreement, dated as of May 1, 2001, between Registrant and Vitamin Realty Associates, L.L.C. (7)
10.9		Sixth Amendment to Lease Agreement, dated as of May 1, 2002, between Registrant and Vitamin Realty Associates, L.L.C. (7)
10.10		Seventh Amendment to Lease Agreement, dated as of April 22, 2005, between Registrant and Vitamin Realty Associates, L.L.C. (20)
10.11		Form of Warrant to Purchase Shares of common stock of Registrant. (5)
10.12		Registration Rights Agreement dated as of December 17, 2002, between Registrant and the Purchasers set forth therein. (5)
10.13		Note and Warrant Purchase Agreement dated as of December 17, 2002, between Registrant and the Purchasers set forth therein. (5)
10.14		Warrant to Purchase Shares of common stock of Glowpoint, Inc. (6)
10.15		Common Stock Purchase Agreement between Registrant and the Purchasers Listed on Exhibit A. (6)
10.16		Placement Agent Agreement, dated August 4, 2003, between Registrant and Burnham Hill Partners, as amended as of January 29, 2004. (11)
10.17		Form of Class A Warrant to Purchase common stock of Registrant. (8)
10.18		Form of Class B Warrant to Purchase common stock of Registrant. (8)
10.19		Form of Warrant to Purchase Common Stock, dated August 8, 2001. (9)
10.20		Form of Warrant to Purchase Common Stock, dated August 8, 2001. (9)
10.21		Form of Warrant to Purchase Common Stock, dated June 14, 2000. (10)
10.22		Warrant to Purchase common stock issued to JPMorgan Chase on March 6, 2003. (7)
10.23		Employment Agreement with Joseph Laezza, dated as of March 11, 2004. (11)
10.24		Amended and Restated Employment Agreement with Michael Brandofino, dated July 1, 2004. (12)
10.25		Form of Common Stock Purchase Agreement, dated March 14, 2005. (13)
10.26		Form of Warrant to Purchase Common Stock, dated March 14, 2005. (13)
10.27		Form of Exchange Agreement, dated March 14, 2005. (14)

 

II-7

---

 

10.28		Placement Agent Agreement, dated March 19, 2005, between Registrant and Burnham Hill Partners. (20)
10.29		Settlement and Release Agreement between Glowpoint, Inc. and Gores Technology Group, dated March 4, 2005. (14)
10.30		Third Amended and Restated Employment Agreement with Richard Reiss, dated December 31, 2005. (15)
10.31		Separation Agreement with Rod Dorsey, dated March 28, 2006. (20)
10.32		Separation Agreement with Stuart Gold, dated as of April 5, 2006. (20)
10.33		Separation Agreement with David C. Trachtenberg dated as of April 6, 2006. (20)
10.34		Note and Warrant Purchase Agreement, dated as of March 31, 2006, between Glowpoint and the purchasers set forth therein, which reflects the same terms as the Note and Warrant Purchase Agreement, dated April 12, 2006. (16)
10.35		10% Senior Secured Convertible Promissory Note, dated as of March 31, 2006, which reflects the same terms as the 10% Senior Secured Convertible Promissory Note, dated April 12, 2006. (16)
10.36		Form of Series A Warrant to Purchase Common Stock dated as of March 31, 2006, which reflects the same terms as the Series A Warrant to Purchase Common Stock, dated April 12, 2006. (16)
10.37		Form of Series B Warrant to Purchase Common Stock dated as of March 31, 2006, which reflects the same terms as the Series B Warrant to Purchase Common Stock, dated April 12, 2006. (16)
10.38		Registration Rights Agreement, dated as of March 31, 2006, between Glowpoint and the purchasers set forth therein, which reflects the same terms as the Registration Rights Agreement, dated April 12, 2006. (16)
10.39		Security Agreement, dated as of March 31, 2006, between Glowpoint and the secured parties set forth therein, to which a joinder agreement was executed on April 12, 2006. (16)
10.40		Form of Placement Agent Warrant, dated as of March 31, 2006, between Glowpoint and the parties set forth therein. (16)
10.41		Employment Agreement with David W. Robinson, dated May 1, 2006 (17)
10.42		Form of Restricted Stock Award Agreement with Schedule of Recently Reported Restricted Stock Awards. (20)
10.43		Employment Agreement with Edwin F. Heinen, dated January 30, 2007. (18)
10.44		Employment Agreement Amendment with David W. Robinson, dated April 24, 2007. (19)
10.45		Employment Agreement Amendment with Edwin F. Heinen, dated April 24, 2007. (19)
10.46		Employment Agreement Amendment with Michael Brandofino, dated May 15, 2007 (19)
10.47		Employment Agreement Amendment with Joseph Laezza, dated May 15, 2007. (19)
10.48		Employment Agreement Amendment with Michael Brandofino, dated June 26, 2007 (22)
10.49		Glowpoint, Inc. 2007 Stock Incentive Plan. (23)
10.50		Employment Agreement Amendment with David W. Robinson, dated September 20, 2007. (24)
10.51		Form of Amendment No. 1 to Senior Secured Promissory Notes, dated September 21, 2007. (24)
10.52		Form of Amendment No. 1 to Series A Warrant, dated September 21, 2007. (24)
10.53		Amendment No. 1 to Registration Rights Agreement, dated as of September 21, 2007, between Glowpoint and the Purchasers set forth therein. (24)
10.54		Amendment No. 1 to Security Agreement, dated as of September 21, 2007, between Glowpoint and the Secured Parties set forth therein. (24)
10.55		Note and Warrant Purchase Agreement, dated as of September 21, 2007, between Glowpoint and the Purchasers set forth therein. (24)
10.56		Form of 10% Senior Secured Convertible Promissory Note, dated September 21, 2007. (24)
10.57		Form of Series A-2 Warrant, dated September 21, 2007. (24)
10.58		Exchange Agreement, dated September 21, 2007, between Glowpoint and the Holders set forth therein. (24)
10.59		Form of Placement Agent Warrant, dated September 21, 2007. (24)
16.1		Letter from Eisner LLP re change in certifying accountant. (21)
21.1		Subsidiaries of Glowpoint, Inc. (20)
23.1		Consent of Registered Independent Public Accounting Firm, Amper, Politziner & Mattia, P.C. (26)
23.2		Consent of Registered Independent Public Accounting Firm, Eisner LLP. (26)
23.3		Consent of Gibbons P.C. (filed as part of Exhibit (5.1))

 

(1)	Filed as an appendix to View Tech, Inc.’s Registration Statement on Form S-4 (File No. 333-95145) and incorporated herein by reference.
(2)	Filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2000, and incorporated herein by reference.

 

II-8

---

 

(3)	Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2002, and incorporated herein by reference.
(4)	Filed as an exhibit to Registrant’s Registration Statement on Form SB-2 (Registration No. 333-21069), and incorporated herein by reference.
(5)	Filed as an exhibit to Registrant’s Current Report on Form 8-K, dated December 23, 2002, and incorporated herein by reference.
(6)	Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 26, 2004, and incorporated herein by reference.
(7)	Filed as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, and incorporated herein by reference.
(8)	Filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2001, and incorporated herein by reference.
(9)	Filed as an exhibit to Registrant’s Registration Statement on Form S-3 (Registration No. 333-69432) and incorporated herein by reference.
(10)	Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 10, 2000, and incorporated herein by reference.
(11)	Filed as an Exhibit to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, and incorporated herein by reference.
(12)	Filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2004, and incorporated herein by reference.
(13)	Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 14, 2005, and incorporated herein by reference.
(14)	Filed as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, and incorporated herein by reference.
(15)	Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 21, 2005, and incorporated herein by reference.
(16)	Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 4, 2006, and incorporated herein by reference.
(17)	Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 2006, and incorporated herein by reference.
(18)	Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 2, 2007, and incorporated herein by reference.
(19)	Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 21, 2007, and incorporated herein by reference.
(20)	Filed as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, and incorporated herein by reference.
(21)	Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 5, 2007, and incorporated herein by reference.
(22)	Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 26, 2007, and incorporated herein by reference.
(23)	Filed as an exhibit to Registrant’s Definitive Proxy on Schedule 14A filed with the Securities and Exchange Commission on July 30, 2007, and incorporated herein by reference.
(24)	Filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 24, 2007, and incorporated herein by reference.

(25)	Filed as an exhibit to Registrant’s registration statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2007, and incorporated herein by reference.

(26)	Filed herewith.
(*)	To be filed by amendment

II-9

---