XASE:GLOW Glowpoint Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2012.
or
¨
Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number: 0-25940
GLOWPOINT, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
77-0312442
(I.R.S. Employer Identification No.)

430 Mountain Avenue, Suite 301, Murray Hill, NJ, 07974
(Address of Principal Executive Offices, including Zip Code)
(973) 855-3411
(Registrant’s Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes o No x
The number of shares outstanding of the registrant’s common stock as of August 13, 2012 was 25,593,967.



GLOWPOINT, INC.
Index
 




- i-



GLOWPOINT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value, stated value and shares)
 
June 30,
2012
 
December 31,
2011
ASSETS
(Unaudited)
 
 
Current assets:
 
 
 
Cash
$
1,689

 
$
1,818

Accounts receivable, net of allowance for doubtful accounts of $149 and $147, respectively
3,041

 
2,520

Prepaid expenses and other current assets
382

 
330

Total current assets
5,112

 
4,668

Property and equipment, net
4,325

 
4,738

Other assets
68

 
59

Total assets
$
9,505

 
$
9,465

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Revolving loan facility
$
750

 
$
750

Current portion of capital lease
219

 
177

Accounts payable
1,369

 
1,382

Accrued expenses
405

 
1,024

Accrued sales taxes and regulatory fees
514

 
434

Customer deposits
167

 
139

Net current liabilities of discontinued operations

 
50

Deferred revenue
175

 
235

Total current liabilities
3,599

 
4,191

Long term liabilities:
 
 
 
Capital lease, less current portion
320

 
334

Total long term liabilities
320

 
334

 Total liabilities
3,919

 
4,525

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock Series B-1, non-convertible; $.0001 par value; $100,000 stated value; 100 shares authorized and 100 and 100 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively, liquidation value of $10,000
$
10,000

 
$
10,000

Preferred stock Series A-2, convertible; $.0001 par value; $7,500 stated value; 7,500 shares authorized and 53 and 94 shares issued and outstanding at June 30, 2012 and December 31, 2011 recorded at fair value, respectively, and liquidation value of $396 and $704, respectively.
167

 
297

Common stock, $.0001 par value;150,000,000 shares authorized; 25,713,407 and 25,180,000 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively
3

 
3

Additional paid-in capital
159,695

 
159,339

Accumulated deficit
(164,279
)
 
(164,699
)
Total stockholders’ equity
5,586

 
4,940

Total liabilities and stockholders’ equity
$
9,505

 
$
9,465



See accompanying notes to condensed consolidated financial statements.
-1-



GLOWPOINT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
Six Months Ended June 30
 
Three Months Ended June 30
 
2012
 
2011
 
2012
 
2011
Revenue
$
13,546

 
$
13,935

 
$
6,800

 
$
6,954

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Network and infrastructure
4,221

 
4,883

 
2,145

 
2,471

Global managed services
3,461

 
3,873

 
1,765

 
1,979

Sales and marketing
1,864

 
1,824

 
878

 
902

General and administrative
2,652

 
2,688

 
1,302

 
1,282

Depreciation and amortization
865

 
573

 
425

 
297

Total operating expenses
13,063

 
13,841

 
6,515

 
6,931

Income from operations
483

 
94

 
285

 
23

 
 
 
 
 
 
 
 
Interest and other expense:
 
 
 
 


 
 
Interest expense, net
29

 
32

 
18

 
14

Amortization of deferred financing costs
29

 
31

 
14

 
16

Total interest and other expense, net
58

 
63

 
32

 
30

Income (loss) from continuing operations
425

 
31

 
253

 
(7
)
Income from discontinued operations

 
18

 

 
24

Income before provision for income taxes
425

 
49

 
253

 
17

 
 
 
 
 
 
 
 
Provision for income taxes
5

 

 
5

 

Net income
$
420

 
$
49

 
$
248

 
$
17

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 


 


 
 
 
 
 


 


Continuing operations
$0.02
 
$0.00
 
$0.01
 
$0.00
Discontinued operations
$0.00
 
$0.00
 
$0.00
 
$0.00
Basic net income per share
$0.02
 
$0.00
 
$0.01
 
$0.00
 
 
 
 
 
 
 
 
Continuing operations
$0.02
 
$0.00
 
$0.01
 
$0.00
Discontinued operations
$0.00
 
$0.00
 
$0.00
 
$0.00
Diluted net income per share
$0.02
 
$0.00
 
$0.01
 
$0.00
 
 
 
 
 
 
 
 
Weighted average number of common shares:
 
 
 
 
 
 
 
Basic
24,440

 
20,714

 
24,525

 
20,753

Diluted
25,742

 
24,594

 
25,874

 
24,594



See accompanying notes to condensed consolidated financial statements.
-2-



GLOWPOINT, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Six Months Ended June 30, 2012
(In thousands, except shares of Series B-1 and A-2 Preferred Stock)
(Unaudited)

 
Series B-1 Preferred Stock
 
Series A-2 Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Additional Paid In Capital
 
Accumulated Deficit
 
Total
Balance at January 1, 2012
100

 
$
10,000

 
94

 
$
297

 
25,180

 
$
3

 
$
159,339

 
$
(164,699
)
 
$
4,940

Net income

 

 

 

 

 

 

 
420

 
420

Stock-based compensation

 

 

 

 

 

 
219

 

 
219

Issuance of restricted stock

 

 

 

 
536

 

 

 

 

Forfeiture of restricted stock

 

 

 

 
(110
)
 

 

 

 

Preferred stock conversion

 

 
(41
)
 
(130
)
 
102

 

 
130

 

 

Exercise of options

 

 

 

 
5

 

 
7

 

 
7

Balance at June 30, 2012
100

 
$
10,000

 
53

 
$
167

 
25,713

 
$
3

 
$
159,695

 
$
(164,279
)
 
$
5,586



See accompanying notes to condensed consolidated financial statements.
-3-


GLOWPOINT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


Six Months Ended June 30
 
2012
 
2011
Cash flows from Operating Activities:
 
 
 
Net income
$
420

 
$
49

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
865

 
573

Bad debt expense
52

 
(9
)
Amortization of deferred financing costs
29

 
31

Loss on disposal of equipment
10

 
(12
)
Stock-based compensation
219

 
147

Increase (decrease) attributable to changes in assets and liabilities:
 
 
 
Accounts receivable
(573
)
 
(151
)
Prepaid expenses and other current assets
(52
)
 
(100
)
Other assets
(38
)
 
(43
)
Accounts payable
(13
)
 
(444
)
Accrued expenses, sales taxes and regulatory fees
(539
)
 
(258
)
Customer deposits
28

 
(85
)
Deferred revenue
(61
)
 
39

Net cash provided by (used in) operating activities – continuing operations
347

 
(263
)
Net cash (used in) provided by operating activities - discontinued operations
(50
)
 
40

Net cash provided by (used in) operating activities
297

 
(223
)
 
 
 
 
Cash flows from Investing Activities:
 
 
 
Proceeds from sale of equipment
11

 

Purchases of property and equipment
(353
)
 
(554
)
Net cash used in investing activities
(342
)
 
(554
)
 
 
 
 
Cash flows from Financing Activities:
 
 
 
Proceeds from exercise of stock options
7

 

Principal payments for capital lease
(91
)
 

Net cash used in financing activities
(84
)
 

Decrease in cash and cash equivalents
(129
)
 
(777
)
Cash at beginning of period
1,818

 
2,035

Cash at end of period
$
1,689

 
$
1,258

 
 
 
 
Supplement disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
29

 
$
32

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Settlement of liabilities with restricted stock and stock options
$

 
$
48

Property and equipment purchased with common stock
$

 
$
1,581

Acquisition of network equipment under capital lease
$
120

 
$
512

Preferred stock conversion
$
130

 
$



See accompanying notes to condensed consolidated financial statements.
-4-


GLOWPOINT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)

Note 1 - Basis of Presentation

The Business

Glowpoint, Inc. (“Glowpoint” or “we” or “us” or the “Company”) is a provider of cloud managed video services. Our services, delivered via our cloud-based OpenVideo™ platform, are securely accessible via any network (private or public) and are technology-agnostic. The Company delivers services to more than 500 different enterprises in over 35 countries supporting thousands of video endpoints, immersive telepresence rooms, and infrastructure for business-quality, real-time, two-way visual communications.
Glowpoint, a Delaware corporation, was formed in May 2000. The Company operates in one segment and therefore segment information is not presented.
Glowpoint's services are categorized as follows:

Monitoring & Management Services and Collaboration Services (“Managed Services Combined”). We provide end-to-end cloud managed services for telepresence, conference room, desktop, mobile solutions, and video infrastructure. We have a team of video experts utilizing the latest in remote management technologies. These engineering and operational customer support resources operate out of our three Video Network Operations Centers (VNOCs) located in the United States, in California, Pennsylvania, and New Jersey. These VNOC facilities provide global 24/7 support to our network and managed service customers, including our wholesale branded partners customers.  The primary functions of these operational resources located in these centers are customer service, conference production, network operation monitoring and remediation, and help desk technical support.

The company also maintains Points-of Presence (POP's) that houses the technology and infrastructure along with the servers and database warehousing for the OpenVideo platform and support systems of the business. There are currently three Points-of-Presence (POPs) located in the United States (New Jersey and Chicago) and United Kingdom (London), with additional POPs planned as needed. These carrier-neutral data centers are co-location facilities where network equipment that serves our video infrastructure is housed and acts as shared or dedicated infrastructure for our business customers. The POPs provide power redundancy & UPS (uninterrupted Power Supply) systems, which are constantly monitored and maintained. They also have physical security, flood controls, fire detection and suppression systems and are structurally designed for earthquakes.

We offer a complete portfolio of remote monitoring and management services that can help make video more widely available, improve up-time, drive higher usage, off-load IT teams, or all of the above. Our service packages can be customized to suit the needs of the business, whether for a large enterprise, small or medium sized business.
Glowpoint provides wholesale programs and private-labeled resale options for hardware manufacturers, network operators and systems integrators seeking to offer video services as a value-added addition to their collaboration and communications offerings. All of Glowpoint's unique features and services have been designed so that the entire suite can be private labeled by other service providers or companies who want to integrate video communications into their existing products quickly and cost effectively. Glowpoint will provide all of the video infrastructure and support, including customer portals and billing applications, as a private label service for a third party. This means that our services are branded with the other company's name, logo and other information, our live operators answer calls using the other company's name, and the other company's end user customers view the service as provided by that other company even though it is actually “powered by Glowpoint.” Glowpoint has been involved in a number of private label opportunities and currently provides branding of its services to six strategic global partners whom serve 147 customers with these services and support from Glowpoint through their unique brands. These services account for approximately 37% of Glowpoint's total revenue for the six months ended June 30, 2012. Many strategic global companies in the unified communications industry have recognized Glowpoint's value to their own sales and marketing efforts. These strategic partnerships are core to the company's global sales strategy.
Glowpoint's collaboration services, hosted via the OpenVideo™ cloud, are designed to connect video users all over the world whether they are on immersive telepresence, conference room, desktop or mobile devices. Customers

-5-


that are registered to the OpenVideo™ cloud can connect to any other customer in the OpenVideo™ cloud and get access to Glowpoint's full suite of cloud managed video services, including the Virtual Video Room, video bridging, and webcasting services. Through our extensive partnerships, OpenVideo™ customers can also have business-to-business connectivity across other service providers platforms.

Network Services. In order to provide customers with access to the OpenVideo™ cloud, Glowpoint maintains a dedicated video overlay network. With our network services, we provide customers with the flexibility to either source the entire network from a single provider, maintain existing network and extend a logical connection to the OpenVideo™ cloud or bring bandwidth to OpenVideo™ datacenters. Although a declining component of our revenue stream, we believe that network services will continue to be an integral part of our revenue mix in the future, driven by new connectivity needs to connect and peer with Glowpoint's OpenVideo™ cloud.

Professional and other services. With the growing interest in convergence and the desire by some enterprises to add the transport of video to their enterprise networks, we have provided professional services and believe the market for such services is growing. Additionally, our extensive knowledge of all leading video conferencing vendors' equipment makes our video engineers a valuable resource for manufacturers, partners and end users on an outsourced basis. While our primary focus is generating monthly recurring revenue from our subscription services, our professional services have been a valuable lead for video communication opportunities leading to sales of our managed video services.
We have bundled certain components of our managed services to offer video communication solutions for broadcast/media content acquisition and event services. Customers have used our managed video services during events to cost-effectively acquire video content for broadcasters, cable companies and other media enterprises, especially in the sports, news and entertainment industries. While it includes our core managed video services, IP-based broadcasting and event services require more project management and dedicated operational and engineering personnel than our standard subscription services. Rather than using an expensive satellite feed, companies can acquire broadcast-quality standard or high definition footage at a fraction of the cost from Glowpoint over a dedicated IP connection. Since 2002, we have provided this service to ESPN during the professional football and basketball drafts. ESPN has used our service for interviews from team locations with coaches, players and analysts during their coverage. In 2007, we launched a High Definition (HD) content acquisition solution that we branded TeamCamHD and RemoteCamHD. This offering provides two-way HD video communication for content acquisition from remote locations. Glowpoint now provides a full suite of HD solutions for the broadcast, entertainment and media industry and is considered a high-quality alternative to the traditional means of acquiring content in many applications, including interviews and even full motion video.
Liquidity
For the six months ended June 30, 2012, we had net income of $420,000 and a positive cash flow from operations of $297,000. As of June 30, 2012, we had $1,689,000 of cash, positive working capital of $1,513,000 and an accumulated deficit of $164,279,000. In June 2012, the Company renewed its Revolving Loan Facility (as discussed in Note 10) pursuant to which the Company may borrow up to $5,000,000 for working capital purposes and under which we had unused borrowing availability of approximately $2,662,000 as of June 30, 2012. The Revolving Loan Facility matures in June 2014. Pursuant to the terms of our Series A-2 Preferred Stock and Series B-1 Preferred Stock, the Company will be obligated to pay dividends commencing on January 1, 2013. Based primarily on our efforts to manage costs and our Revolving Loan Facility, along with our cash flow projection, the Company believes that it has, and will have, sufficient cash flow to fund its operations through at least August 31, 2013. We have historically been able to raise capital in private placements as needed to fund operations and provide growth capital. There can be no assurances, however, that we will be able to raise additional capital as may be needed or upon acceptable terms, or that current economic conditions will not negatively impact us. If the current economic conditions negatively impact us and we are unable to raise additional capital that may be needed on terms acceptable to us, it could have a material adverse effect on the Company.
Quarterly Financial Information and Results of Operations
The condensed consolidated financial statements as of June 30, 2012 and for the six and three months ended June 30, 2012 and 2011 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 June 30, 2012, and the results of operations for the six and three months ended June 30, 2012 and 2011, the statement of stockholders’ equity for the six months ended June 30, 2012 and the statement of cash flows for the six months ended June 30,

-6-


2012 and 2011. The results for the six and three months ended June 30, 2012 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 condensed 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, 2011 as filed with the Securities and Exchange Commission with our Form 10-K on March 8, 2012 (the “Audited 2011 Financial Statements”).

Note 2 – Summary of Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Glowpoint and our wholly-owned subsidiary, GP Communications, LLC, whose business function is to provide interstate telecommunications services for regulatory purposes. All material inter-company balances and transactions have been eliminated in consolidation.

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 condensed consolidated financial statements for reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. The significant areas of estimation include determining the allowance for doubtful accounts, deferred tax valuation allowance, accrued sales taxes, the estimated life of customer relationships and the estimated lives and recoverability of property and equipment.
See “Summary of Significant Accounting Policies” in the Company’s Audited 2011 Financial Statements for a discussion on the estimates and judgments necessary in the Company’s accounting for the allowance for doubtful accounts, financial instruments, concentration of credit risk, property and equipment, income taxes, stock-based compensation, and accrued sales taxes and regulatory fees.
Accounting Standards Updates
There have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended June 30, 2012, as compared to the recent accounting pronouncements described in the Company’s Audited 2011 Financial Statements, that are of material significance, or have potential material significance to the Company.
Revenue Recognition
Revenue billed in advance for monitoring and management services is deferred until the revenue has been earned, which is when the related services have been performed. Other service revenue, including amounts passed through based on surcharges from our telecom carriers, related to the network services and collaboration services are recognized as service is provided. As the non-refundable, upfront installation and activation fees charged to the subscribers do not meet the criteria as a separate unit of accounting, they are deferred and recognized over the 12 to 24 month period estimated life of the customer relationship. Revenue related to professional services is recognized at the time the services are performed, and presented as required by ASC Topic 605 “Revenue Recognition.” Revenues derived from other sources are recognized when services are provided or events occur.
Taxes Billed to Customers and Remitted to Taxing Authorities
We recognize taxes billed to customers in revenues and taxes remitted to taxing authorities in our operating costs, network and infrastructure. For the six and three months ended June 30, 2012, we included taxes of $796,000 and $393,000, respectively, in revenues and we included taxes of $764,000 and $372,000, respectively, in network

-7-


and infrastructure costs. For the six and three months ended June 30, 2011, we included taxes of $846,000 and $415,000, respectively, in revenue and we included taxes of $801,000 and $392,000, respectively, in network and infrastructure costs.
Long-Lived Assets
We evaluate impairment losses on long-lived assets used in operations, primarily fixed assets, when events and circumstances indicate that the carrying value of the assets might not be recoverable as required by ASC topic 360 “Property, Plant and Equipment.” 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, then the related assets will be written down to fair value. In the six and three months ended June 30, 2012 and 2011, no impairment losses were recorded.
Capitalized Software Costs
The Company capitalizes certain costs incurred in connection with developing or obtaining internal-use software. All software development costs have been appropriately accounted for as required by ASC Topic 350.40 “Intangible – Goodwill and Other – Internal-Use Software.” Capitalized software costs are included in “Property and Equipment” on our consolidated balance sheets and are amortized over three to four years. Software costs that do not meet capitalization criteria are expensed as incurred. For the six and three months ended June 30, 2012, we capitalized internal use software costs of $161,000 and $77,000, respectively, and we amortized $279,000 and $139,000, respectively, of total software costs. For the six and three months ended June 30, 2011, we capitalized internal use software costs of $197,000 and $72,000, respectively, and we amortized $127,000 and $66,000, respectively, of these costs. During the six and three months ended June 30, 2012 and 2011, no impairment losses were recorded.

Note 3 – Stock Options

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 or above the closing market price of the common stock on the date of grant. The intrinsic value of options outstanding and exercisable at June 30, 2012 and 2011 was $143,000 and $108,000, respectively. Options exercised during the six and three months ended June 30, 2012 were 5,000 and 0, respectively. Options exercised during the six and three months ended June 30, 2011 were 124,000 and 64,000, respectively.
The weighted average fair value of each option granted is estimated on the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions during the six and three months ended June 30, 2012 and 2011:
 
Six Months Ended
June 30,
 
Three Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Risk free interest rate
0.9%
 
2.1%
 
0.7%
 
N/A
Expected option lives
5 Years
 
5 Years
 
5 Years
 
N/A
Expected volatility
111.2%
 
117.4%
 
109.7%
 
N/A
Estimated forfeiture rate
10%
 
10%
 
10%
 
N/A
Expected dividend yields
 
 
 
Weighted average grant date fair value of options
$2.37
 
$1.87
 
$1.66
 
N/A

The Company calculates expected volatility for a stock-based grant based on historic daily stock price observations of its common stock during the period immediately preceding the grant that is equal in length to the expected term of the grant. The expected term of the options and forfeiture rates are estimated based on the Company’s exercise and employment termination experience. The risk free interest rate is based on U.S. Treasury yields for securities in effect at the time of grants with terms approximating the expected life of the grants. The assumptions used in the Black-Scholes option valuation model are highly subjective and can materially affect the resulting valuations.

-8-


A summary of options granted, exercised, expired and forfeited under our plans and options outstanding as of, and changes made during, the six months ended June 30, 2012 (in thousands):
 
Outstanding
 
Exercisable
 
Number of Options
 
Weighted
Average
Exercise
Price
 
Number of Options
 
Weighted
Average
Exercise
Price
Options outstanding, January 1, 2012
750
 
$
2.90

 
570
 
$
3.12

Granted
1,110

 
3.20

 
 
 
 
Exercised
(5
)
 
1.70

 
 
 
 
Expired
(3
)
 
16.01

 
 
 
 
Forfeited
(22
)
 
1.95

 
 
 
 
Options outstanding, June 30, 2012
1,830

 
$
3.07

 
594
 
$
2.98


Stock option compensation expense is allocated as follows for the six and three months ended June 30, 2012 and 2011 (in thousands):
 
Six Months Ended June 30,
 
Three Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Global managed services
$
6

 
$
38

 
$
3

 
$
19

Sales and marketing
4

 
10

 
3

 
4

General and administrative
80

 
16

 
62

 
8

 
$
90

 
$
64

 
$
68

 
$
31


The remaining unrecognized stock-based compensation expense for options at June 30, 2012 was $2,748,000, of which $2,339,000, representing 1,000,000 options, will only be expensed upon a “change in control” and the remaining $409,000 will be amortized over a weighted average period of approximately 1.9 years.
The tax benefit recognized for stock-based compensation for the six and three months ended June 30, 2012 was diminimus. There was no tax benefit recognized for stock-based compensation for the six and three months ended June 30, 2011. No compensation costs were capitalized as part of the cost of an asset.

Note 4 - Restricted Stock    
A summary of restricted stock granted, vested, forfeited and unvested outstanding as of, and changes made during, the six months ended June 30, 2012, is presented below (in thousands):
 
Restricted Shares
 
Weighted Average
Grant Price
Unvested restricted shares outstanding, January 1, 2012
836

 
$
2.15

Granted
536

 
2.95

Vested
(100
)
 
2.11

Forfeited
(110
)
 
2.55

Unvested restricted shares outstanding, June 30, 2012
1,162

 
$
2.49


Restricted stock compensation expense is allocated as follows for the six and three months ended June 30, 2012 and 2011 (in thousands):

-9-


 
Six Months Ended June 30,
 
Three Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Global managed services
$
16

 
$
18

 
$
10

 
$
8

Sales and marketing
30

 
9

 
16

 
7

General and administrative
83

 
56

 
46

 
24

 
$
129

 
$
83

 
$
72

 
$
39


The remaining unrecognized stock-based compensation expense for restricted stock at June 30, 2012 was $2,639,000, of which $330,000, representing 130,000 shares, will only be expensed upon a “change in control” and the remaining $2,309,000 will be amortized over a weighted average period of 8.8 years .
The tax benefit recognized for stock-based compensation for the six and three months ended June 30, 2012 was diminimus. There was no tax benefit recognized for stock-based compensation for the six and three months ended June 30, 2011. No compensation costs were capitalized as part of the cost of an asset.
Note 5 – Warrants
There were no warrants granted, exercised, exchanged or forfeited during the six months ended June 30, 2012. There were 33,000 warrants outstanding as of June 30, 2012 with an exercise price of $1.60 and an expiration date of November 25, 2013.
Note 6 – Earnings Per Share
Earnings per share is calculated by dividing net income by the weighted average number of shares of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution from the conversion or exercise into common stock of securities such as stock options and warrants. For the six and three months ended June 30, 2012, diluted earnings per share included 140,000 and 106,000, respectively, shares of common stock associated with outstanding options and warrants, 133,000 shares issuable upon conversion of our convertible preferred stock calculated using the treasury stock method, and 1,163,000 shares of unvested restricted stock.
For the six and three months ended June 30, 2011, diluted earnings per share included 500,000 and 469,000, respectively, shares of common stock associated with outstanding options and warrants, 2,648,000 shares issuable upon conversion of our convertible preferred stock calculated using the treasury stock method, and 728,000 shares of unvested restricted stock.

Note 7 – Preferred Stock
Our Certificate of Incorporation authorizes the issuance of up to 5,000,000 shares of preferred stock. As of June 30, 2012, there were: 100 shares of Series B-1 Preferred Stock authorized, issued and outstanding; 7,500 shares of Series A-2 Preferred Stock authorized and 53 shares issued and outstanding; and 4,000 shares of Series D Preferred Stock authorized and no shares issued or outstanding.

Each share of Series B-1 Preferred Stock has a stated value of $100,000 per share (the “Series B-1 Stated Value”), and a liquidation preference equal to the Series B-1 Stated Value plus all accrued and unpaid dividends (the “Series B-1 Liquidation Preference”). The Series B-1 Preferred Stock is not convertible into common stock. The Series B-1 Preferred Stock is senior to all other classes of equity and, commencing on January 1, 2013, is entitled to cumulative dividends from January 1, 2013, at a rate of 4% per annum, payable quarterly, based on the Series B-1 Stated Value. Commencing January 1, 2014, the cumulative dividend rate increases to 6% per annum, payable quarterly, based on the Series B-1 Stated Value. The Company may, at its option at any time, redeem all or a portion of the outstanding shares of Series B-1 Preferred Stock by paying the Series B-1 Liquidation Preference.

Each share of Series A-2 Preferred Stock has a stated value of $7,500 per share (the “A-2 Stated Value”), a liquidation preference equal to the Series A-2 Stated Value, and is convertible at the holder’s election into common stock at a conversion price per share of $3.00. Therefore, each share of Series A-2 Preferred Stock is convertible into 2,500 shares of common stock. The Series A-2 Preferred Stock is subordinate to the Series B-1 Preferred Stock

-10-


but senior to all other classes of equity, has weighted average anti-dilution protection and, commencing on January 1, 2013, is entitled to cumulative dividends at a rate of 5% per annum, payable quarterly, based on the Series A-2 Stated Value. Once dividend payments commence, all dividends are payable at the option of the holder in cash or through the issuance of a number of additional shares of Series A-2 Preferred Stock with an aggregate liquidation preference equal to the dividend amount payable on the applicable dividend payment date.

In April 2012, a holder of the Company's Series A-2 Preferred Stock elected to convert 41 shares of Series A-2 Preferred Stock into 103,000 shares of common stock of the Company at the original conversion price. Each of the Series A-2 Preferred Stock shares was exchanged for 2,500 shares of common stock, pursuant to the terms of the Series A-2 Preferred Stock Certificate of Designation.

In accordance with ASC Topic 815, we evaluated whether our convertible preferred stock contains provisions that protect holders from declines in our stock price or otherwise could result in modification of the exercise price and/or shares to be issued under the respective preferred stock agreements based on a variable that is not an input to the fair value of a “fixed-for-fixed” option and require a derivative liability. The Company determined no derivative liability is required under ASC Topic 815 with respect to our convertible preferred stock. A contingent beneficial conversion amount is required to be calculated and recognized when and if the adjusted $3.00 conversion price of the convertible preferred stock is adjusted to reflect a down round stock issuance that reduces the conversion price below the $1.16 fair value of the common stock on the issuance date of the convertible preferred stock.

Note 8 - Commitments and Contingencies
Operating Leases
We lease several facilities under operating leases expiring through 2017. Certain leases require us to pay increases in real estate taxes, operating costs and repairs over certain base year amounts. Lease payments for the six and three months ended June 30, 2012 were $264,000 and $136,000, respectively. Lease payments for the six and three months ended June 30, 2011 were $247,000 and $123,000, respectively.
Future minimum rental commitments under all non-cancelable operating leases are as follows (in thousands):
Year Ending December 31,
 
2012 remaining
$
241

2013
496

2014
167

2015
140

2016
145

2017
87

 
$
1,276

  
Capital Lease Obligation
In 2012, the Company entered into two non-cancelable lease agreements for $90,000 and $30,000 with interest rates of 9% and 3%, respectively. In 2011, the Company entered into two non-cancelable lease agreements for $512,000 and $40,000 with interest rates of 6% and 0%, respectively. These leases are accounted for as capital leases. Depreciation expense on the equipment under the capital leases for the six and three months ended June 30, 2012 was $59,000 and $30,000, respectively. There were no depreciation expenses on the equipment under the capital leases for the six and three months ended June 30, 2011. Future minimum commitments under all non-cancelable capital leases are as follows (in thousands):

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Total
 
Interest
 
Principal
2012 remaining
126

 
14

 
112

2013
243

 
19

 
224

2014
194

 
6

 
188

2015
15

 

 
15

 
$
578

 
$
39

 
$
539


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 to be 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 agreements 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 condensed consolidated financial statements because it is not probable, from the information available and from prior experience, that Glowpoint has incurred a liability.
Letter of Credit
In November 2010, the Company entered into an irrevocable standby letter of credit (the “LOC”) for $115,000 to secure our security deposit for the sublease of our corporate headquarters. The LOC was obtained from Silicon Valley Bank (“SVB”) and will be renewed yearly until January 2014, the expiration date of our sublease.

Note 9 – Major Customers
Major customers are those customers / wholesale partners that account for more than 10% of revenues. For the six and three months ended June 30, 2012, approximately 37% and 36% of revenues, respectively, were derived from three major wholesale partners and the accounts receivable from these major partners represented approximately 49% of total accounts receivable as of June 30, 2012. For the six and three months ended June 30, 2011, approximately 26% and 22% of revenues, respectively, were derived from two major wholesale partners. The loss of any one of these partners would have a material adverse affect on the Company’s operations.

Note 10 – Revolving Loan Facility
On June 12, 2012, the Company entered into the Second Loan Modification Agreement (as amended, the “Revolving Loan Facility”) which amends its existing Loan and Security Agreement with SVB pursuant to which the Company may borrow up to $5,000,000 for working capital purposes. The Revolving Loan Facility matures June 2014. The amounts that can be borrowed at any given time are equal to the lesser of $5,000,000 or 80% of the eligible accounts receivable, as defined. As of June 30, 2012, we had unused borrowing availability of $2,662,000. Outstanding principal amounts under the Revolving Loan Facility were modified to bear interest at a floating Prime rate per annum equal to Prime Rate as announced by Wall Street Journal ("WSJ") plus one and a quarter percent (1.25%), payable monthly in arrears. The Company is no longer obligated to pay a minimum monthly interest but a fee equal to 0.35% of the unused borrowing amount each year. The WSJ Prime Rate was 3.25% as of June 30, 2012. The Revolving Loan Facility is secured by a first priority security interest in all the Company’s assets, including, without limitation, its intellectual property. The Revolving Loan Facility contains a number of financial covenants, including, but not limited to, covenants relating to minimum unrestricted cash balances and minimum monthly Adjusted EBITDA, as defined, in the Revolving Loan Facility. At June 30, 2012, we were in compliance with the covenants, as defined and set forth in the Revolving Loan Facility and there was $750,000 outstanding under the Revolving Loan Facility.


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The Revolving Loan Facility financing costs, net of accumulated amortization, which are included in other assets in the accompanying consolidated balance sheets, were $33,000 as of June 30, 2012. The financing costs for the Revolving Loan Facility are being amortized over the 12- to 24-month period through the maturity date of the Revolving Loan Facility. During the quarters ended June 30, 2012 and 2011, the amortization of financing costs was $14,000 and $16,000 was included as “Amortization of Deferred Financing Costs” in the consolidated statement of operations in Interest and Other Expense.

Note 11 – Discontinued Operations
As our ISDN resale services no longer fit into our overall strategic plan, in September 2010, we entered into an agreement with an independent telecommunications service provider to transfer these services and the related customers, and the Company receives a 15% monthly recurring referral fee for those revenues for as long as the customers maintain service. Such amounts were de minimis for the six and three months ended June 30, 2012 and were $12,000 for the six and three months ended June 30, 2011. The transfer of the customers was completed in the third quarter of 2011, and the Company will have no continuing involvement with the ISDN product line.
The Company accordingly classified these ISDN related revenues and expenses as discontinued operations in accordance with ASC 205.20 “Discontinued Operations.” The accompanying condensed consolidated financial statements reflect the operating results and balance sheet items of the discontinued operations separately from continuing operations. Prior year financial statements have been restated in conformity with generally accepted accounting principles to present the operations of the ISDN resale services as a discontinued operation.
Revenues from the ISDN resale services, reported as discontinued operations, for the six and three months ended June 30, 2011 were $81,000 and $30,000, respectively. Net income from the ISDN resale services, reported as discontinued operations for the six and three months ended June 30, 2011 were $18,000 and $24,000, respectively. The assets and liabilities from the ISDN resale services, reported as net current liabilities of discontinued operations, as of June 30, 2011 were $25,000. No income tax provision was required to be recognized by the Company against income from the ISDN resale services over the related periods.


Note 12 – Related Party Transactions
The Company provides cloud-managed video services (the “Video Services”) to a company in which one of our directors is an officer. Management believes that such transactions contain terms that would have been obtained from unaffiliated third parties. Related party Video Services revenue for the six months ended June 30, 2012 and 2011 were $125,000 and $161,000, respectively, and for the three months ended June 30, 2012 and 2011 were $59,000 and $81,000, respectively. The accounts receivable for this company was $31,000 as of June 30, 2012.
One of our directors currently provides general corporate strategy and management consulting services to the Company under a Consulting Agreement entered into as of September 1, 2010 (the “Consulting Agreement”). The Company pays this individual director $12,500 per month, plus any pre-authorized expenses incurred in providing services, under the Consulting Agreement. The term of the engagement is month-to-month.
In addition, the Company receives financial advisory services from a firm in which one of the principals is a shareholder of Glowpoint. Management believes that such transactions contain terms that would have been obtained from unaffiliated third parties. Related party financial advisory fees for the six months ended June 30, 2012 and 2011 were $72,000 and $72,000, respectively and for the three months ended June 30, 2012 and 2011 were $36,000 and $36,000, respectively. As of June 30, 2012, there was no accounts payable for this firm.
Note 13 – Asset Purchase Agreement
On June 30, 2011, the Company issued 769,000 shares of common stock as consideration for the purchase of assets pursuant to the terms of a purchase agreement. The assets acquired are equipment primarily used in the delivery and management of hosted video bridging and help desk and concierge services and are classified as property and equipment on the accompanying consolidated balance sheet. The total number of shares was based on consideration equal to $1,581,000 using the common stock’s 30-day trailing volume-weighted average price for the period ended June 28, 2011 of $2.05 (the “VWAP”). This transaction did not meet the requirements of a business

-13-


combination and therefore was accounted for as an asset purchase with the fair value of the assets purchased equal to the consideration given. The equipment will be depreciated on a straight line basis over five years.
Pursuant to the agreement, if at any time between the first anniversary of the closing date and the date that is 18 months following the closing date (the “repurchase period”) the closing price of the Company’s common stock shall fall below the VWAP, then the seller has the right to demand that the Company repurchase from it, in a single transaction, not more than 50% of the shares delivered to such seller at closing at a price equal to the VWAP. This will result in a derivative liability and will be accounted for with changes in fair value during the repurchase period recorded in earnings. As of June 30, 2012, there was no derivative liability.

Note 14 – Subsequent Events
Management Changes

In July 2012, Michael S. Hubner, the Company’s General Counsel and Corporate Secretary, notified the Company that he was resigning effective August 2, 2012 in order to pursue other business opportunities outside of the video conferencing industry. His resignation was not the result of any disagreement relating to the Company’s business practices or legal matters. In accordance with the terms of the employment agreement entered into on March 12, 2012 by Mr. Hubner and the Company, Mr. Hubner is not entitled to receive any severance payments and all restricted stock and stock options previously granted to Mr. Hubner will be forfeited to the Company.

Affinity Acquisition

On August 12, 2012, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Affinity VideoNet, Inc., a privately held Delaware corporation ("Affinity"), and GPAV Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company ("Merger Sub"). Pursuant to the Merger Agreement and subject to customary closing conditions, Merger Sub will merge with and into Affinity, and Affinity will become a wholly-owned subsidiary of the Company. The Merger is anticipated to close in the third quarter of 2012 and is expected to be funded with $7,750,000 cash sourced through debt financing, the issuance of $2,750,000 note, and the issuance of 2,650,000 shares of common stock.

The consummation of the Merger is subject to various conditions, including, but not limited to, (i) the accuracy of the representations and warranties with respect to certain matters, and (ii) the consummation of certain debt financing relating to the transaction. The Merger Agreement also contains customary representations, warranties and indemnification provisions.

The Merger will be treated by the Company under the acquisition method of accounting, as prescribed in Accounting Standards Codification 805, “Business Combinations,” for business combinations under GAAP. The Company will be deemed to have acquired the assets and liabilities of Affinity and the results of operations will be consolidated into the results of operations of the Company as of the completion of the Merger. Financial statements in quarterly and annual filings of the new Company issued after the Merger will reflect only the operations of the Company's business after the Merger and will not be restated retroactively to reflect the historical financial position or results of operations of the Company.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Certain statements in this Quarterly Report on Form 10-Q (the “Report”) are “forward-looking statements.” These forward-looking statements include, but are not limited to, statements about the plans, objectives, expectations and intentions of Glowpoint, Inc. (“Glowpoint” or “we” or “us” or the “Company”), a Delaware corporation, and other statements contained in this Report that are not historical facts. Forward-looking statements in this Report or hereafter included in other publicly available documents filed with the Securities and Exchange Commission (the “Commission”) reports to our stockholders and other publicly available statements issued or released by us involve known and unknown risks, uncertainties and other factors that could cause our actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Such future results are based upon management's best estimates based upon current conditions and the most recent results of operations. When used in this Report, the words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and similar

-14-


expressions are generally intended to identify forward-looking statements, because these forward-looking statements involve risks and uncertainties. There are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors that are discussed under the section entitled “Risk Factors,” as well as our consolidated financial statements and the footnotes thereto, for the fiscal year ended December 31, 2011 as filed with the Commission with our Annual Report on Form 10-K filed on March 8, 2012.
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Report.
Overview
Glowpoint, Inc. (“Glowpoint” or “we” or “us” or the “Company”) is a provider of cloud managed video services. Our services, delivered via our cloud-based OpenVideo™ platform (as discussed in further detail below), are securely accessible via any network (private or public) and are technology-agnostic. The Company delivers services to more than 500 different enterprises in over 35 countries supporting thousands of video endpoints, immersive telepresence rooms, and infrastructure for business-quality, real-time, two-way visual communications. Glowpoint's managed services solve the challenges associated with achieving consistent high-quality video experiences and controlling the total cost of ownership related to technology and support, while increasing the return on investment (ROI) of its end users' video equipment by providing seamless access to video equipment outside of their immediate enterprise network.
Glowpoint's solutions are hardware-agnostic, meaning the video equipment may be manufactured by Cisco, Polycom, Logitech, Sony or others and network-neutral, in that connectivity may be via native Internet or network provided by AT&T, Verizon, TATA Communications, British Telecom or others, supporting all recognized video standards across any IP network.
With its carrier-grade, multi-tenant OpenVideo™ platform built in-house, Glowpoint provides a range of remote monitoring and management services that increase the utilization of the video deployment by ensuring all systems are on, all the time, and calls start on time with the highest possible quality.
Glowpoint's core value proposition for customers includes the enablement of integration of their video deployment into the unified communications environment, allowing wide adoption and usage of video communications, increasing ROI and lowering the total cost of ownership. With its multi-tenant infrastructure in the cloud, Glowpoint provides an alternative to capital-intensive, premise-based infrastructure, which customers traditionally have had to purchase for the video environment to function, as well as the tools and services to enable wide adoption of video communications throughout their business. Glowpoint is a leader in managed video and global video exchange services that provide businesses and service providers a way to link together their “islands of video” across third party private networks and enable organizations to drive adoption.
The Company has been recognized in the industry for focusing on providing an innovative customer experience through our use of IP-based video functionality and innovation. Industry awards and recognition over the last few years include: Excellence in Globalization Award (Frost and Sullivan); Top Ten Managed Service Provider (MSP mentor); Best US Managed Conferencing Services Provider (Telepresence and Videoconferencing Insight Newsletter); PACE Award for contributions to the advancement of video communications (Telespan); and Growth Company of the Year, Finalist (New Jersey Technology Council).  We are also widely followed and discussed in market research by the leading industry and research analyst firms, including Gartner, Forrester, Frost and Sullivan, and Wainhouse Research.
Glowpoint, a Delaware corporation, was formed in May 2000. The Company operates in one segment and therefore segment information is not presented

Glowpoint Services and Features
Today's telepresence and video conferencing environments have become a key part of a complete unified business communications strategy. For organizations that are already using video, and for those exploring its benefits for the first time, OpenVideo™ is a unique platform that can help them achieve a successful video collaboration program.
Traditionally, video has presented challenges by presenting a complex maze of systems and networks that must be navigated through and closely managed - and although most of the business-quality video systems today are

-15-


“standards-based,” there are inherent interoperability problems between different vendors' video equipment, resulting in communication islands. Glowpoint's suite of cloud managed video services can be accessed and utilized by customers regardless of the technology and network they are using. Customers who purchase a Cisco, Polycom, LifeSize (Logitech) or use any other third-party video communications software, may all take advantage of the Glowpoint OpenVideo™ cloud regardless of their choice of network. Glowpoint's core services are offered as part of OpenVideo™ to generate monthly recurring revenue for the Company.
OpenVideo™ is a cloud platform that offers telepresence, video and unified communications and collaboration users a way to meet and communicate across the varying hardware/software platforms and carrier networks in a secure and seamless fashion. OpenVideo™ combines years of best practices, experience and technology development into video collaboration platform that provides instant connectivity, self-serve and managed help desk resources, and the ease of use that makes video collaboration seamless and effortless. Beyond the technology and applications, OpenVideo™ is built around security protocols to ensure that enterprises and organizations of any size can communicate to any other desired video users in a secure, high-quality and reliable fashion.
Glowpoint's services are categorized as follows:
Monitoring & Management Services and Collaboration Services (“Managed Services Combined”)
We provide end-to-end cloud managed services for telepresence, conference room, desktop, mobile solutions, and video infrastructure. We have a team of video experts utilizing the latest in remote management technologies. These engineering and operational customer support resources operate out of our three Video Network Operations Centers (VNOCs) located in the United States, in California, Pennsylvania, and New Jersey. These VNOC facilities provide global 24/7 support to our network and managed service customers, including our wholesale branded partners customers.  The primary functions of these operational resources located in these centers are customer service, conference production, network operation monitoring and remediation, and help desk technical support.

The company also maintains Points-of Presence (POP's) that houses the technology and infrastructure along with the servers and database warehousing for the OpenVideo platform and support systems of the business. There are currently three Points-of-Presence (POPs) located in the United States (New Jersey and Chicago) and United Kingdom (London), with additional POPs planned as needed. These carrier-neutral data centers are co-location facilities where network equipment that serves our video infrastructure is housed and acts as shared or dedicated infrastructure for our business customers. The POPs provide power redundancy & UPS (uninterrupted Power Supply) systems, which are constantly monitored and maintained. They also have physical security, flood controls, fire detection and suppression systems and are structurally designed for earthquakes.

We offer a complete portfolio of remote monitoring & management services that can help make video more widely available, improve up-time, drive higher usage, off-load IT teams, or all of the above. Our service packages can be customized to suit the needs of the business, whether for a large enterprise, small or medium sized business.
Glowpoint provides wholesale programs and private-labeled resale options for hardware manufacturers, network operators and systems integrators seeking to offer video services as a value-added addition to their collaboration and communications offerings. All of Glowpoint's unique features and services have been designed so that the entire suite can be private labeled by other service providers or companies who want to integrate video communications into their existing products quickly and cost effectively. Glowpoint will provide all of the video infrastructure and support, including customer portals and billing applications, as a private label service for a third party. This means that our services are branded with the other company's name, logo and other information, our live operators answer calls using the other company's name, and the other company's end user customers view the service as provided by that other company even though it is actually “powered by Glowpoint.” Glowpoint has been involved in a number of private label opportunities and currently provides branding of its services to six strategic global partners whom serve 147 customers with these services and support from Glowpoint through their unique brands. These services account for approximately 37% of Glowpoint's total revenue for the six months ended June 30, 2012. Many strategic global companies in the unified communications industry have recognized Glowpoint's value to their own sales and marketing efforts. These strategic partnerships are core to the company's global sales strategy.
Glowpoint's collaboration services, hosted via the OpenVideo™ cloud, are designed to connect video users all over the world whether they are on immersive telepresence, conference room, desktop or mobile devices. Customers that are registered to the OpenVideo™ cloud can connect to any other customer in the OpenVideo™ cloud and get access to Glowpoint's full suite of cloud managed video services, including the Virtual Video Room, video bridging, and webcasting services. Through our extensive partnerships, OpenVideo™ customers can also have business-to-business connectivity across other service providers platforms.

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Network Services

In order to provide customers with access to the OpenVideo™ cloud, Glowpoint maintains a dedicated video overlay network. We have partnered with Tier 1 MPLS providers, including Global Crossing, Masergy, XO, Qwest, TATA, PCCW and Verizon Business, to provide a global access footprint with flexible options to consume our suite of OpenVideo™ services. Our OpenVideo™ cloud is also connected to the Equnix Ethernet Carrier Exchange to provide native Layer 2 Ethernet services to enterprise customers.

Glowpoint leverages the last mile and network connectivity of carriers and provides an option for businesses to purchase a full overlay network for their video only needs. The network bandwidth that we provide for these dedicated overlay networks ranges from 1.5Mbps to 1Gbps. As a result of this, our network services business carries variable costs associated with the purchasing and reselling of this connectivity.

With our network services, we provide customers with the flexibility to either source the entire network from a single provider, maintain existing network and extend a logical connection to the OpenVideo™ cloud or bring bandwidth to OpenVideo™ datacenters. Although a declining component of our revenue stream, we believe that network services will continue to be an integral part of our revenue mix in the future, driven by new connectivity needs to connect and peer with Glowpoint's OpenVideo™ cloud. However, Glowpoint does not consider this a core driver or measurement of its market share in the cloud managed video service industry.

Professional and other services
With the growing interest in convergence and the desire by some enterprises to add the transport of video to their enterprise networks, we have provided professional services and believe the market for such services is growing. Additionally, our extensive knowledge of all leading video conferencing vendors' equipment makes our video engineers a valuable resource for manufacturers, partners and end users on an outsourced basis. While our primary focus is generating monthly recurring revenue from our subscription services, our professional services have been a valuable lead for video communication opportunities leading to sales of our managed video services. Glowpoint provides professional services to its partners and customers for custom solutions but does not consider this a core driver or measurement of its market share in the cloud managed video service industry.
We have bundled certain components of our managed services to offer video communication solutions for broadcast/media content acquisition and event services. Customers have used our managed video services during events to cost-effectively acquire video content for broadcasters, cable companies and other media enterprises, especially in the sports, news and entertainment industries. While it includes our core managed video services, IP-based broadcasting and event services require more project management and dedicated operational and engineering personnel than our standard subscription services. Rather than using an expensive satellite feed, companies can acquire broadcast-quality standard or high definition footage at a fraction of the cost from Glowpoint over a dedicated IP connection. Since 2002, we have provided this service to ESPN during the professional football and basketball drafts. ESPN has used our service for interviews from team locations with coaches, players and analysts during their coverage. In 2007, we launched a High Definition (HD) content acquisition solution that we branded TeamCamHD and RemoteCamHD. This offering provides two-way HD video communication for content acquisition from remote locations. Glowpoint now provides a full suite of HD solutions for the broadcast, entertainment and media industry and is considered a high-quality alternative to the traditional means of acquiring content in many applications, including interviews and even full motion video.

Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies in the three months ended June 30, 2012. Critical accounting policies and the significant estimates made in accordance with them are regularly discussed with our audit committee. Those policies are discussed under “Critical Accounting Policies” in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7, as well as in our consolidated financial statements and the footnotes thereto for the fiscal year ended December 31, 2011, as filed with the Commission with our Annual Report on Form 10-K filed on March 8, 2012.

Results of Operations
Six and Three Months Ended June 30, 2012 (“2012 Period” and the "2012 Quarter," respectively) compared to Six and Three Months Ended June 30, 2011 (“2011 Period” and the "2011 Quarter," respectively)

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Revenue. Total revenue decreased $389,000, or 2.8%, in the 2012 Period to $13,546,000 from $13,935,000 in the 2011 Period. Total revenue decreased $154,000 or 2.2% in the 2012 Quarter to $6,800,000 from $6,954,000 in the 2011 Quarter. The following are the changes in the components of our revenue:
Revenue for Managed Services Combined, which represents subscription (monitoring and management) services generally tied to contracts of 12 months or more and usage based collaboration services, increased 5.2% to $6,501,000 and 5.2% to $3,204,000 in the 2012 Period and 2012 Quarter, respectively. Revenue for Managed Services Combined accounted for 48.0% of our total revenue in the 2012 Period compared to 44.3% for the 2011 Period. The increase in revenue for Managed Services Combined was primarily attributable to new customer acquisitions.
Revenue for network services, which represents network sales and related services generally tied to contracts of 12 months or more, decreased 10.3% to $6,170,000 and 10.0% to $3,030,000 in the 2012 Period and 2012 Quarter, respectively. Revenue for network services accounted for 45.5% of total revenue in the 2012 Period compared to 49.4% for the 2011 Period. The decrease in revenue for network services was primarily attributable to customers' disconnecting or reducing their portfolio of Glowpoint services. The trends in the economy, the commoditization of IP networking, along with the availability of converged networking services such that end users can purchase one network and use for all their unified communications applications to include video, have all contributed to the decline in these revenues for Glowpoint. We believe our network service revenue will continue to decline in the current year, although at a slower pace than the previous year.
Revenue for professional and other services, which represent non-recurring services, decreased 0.1% to $875,000 and increased 4.4% to $566,000 in the 2012 Period and 2012 Quarter, respectively. Revenue for professional and other services accounted for 6.5% of revenue in the 2012 Period compared to 6.3% for the 2011 Period. The increase in revenue for professional and other services in the 2012 Quarter was primarily attributable to special projects we performed for one of our wholesale partners.
 
Six Months Ended June 30,
(in thousands)
 
Three Months Ended June 30,
(in thousands)
 
2012
 
2011
 
Increase (Decrease)
 
% Change
 
2012
 
2011
 
Increase (Decrease)
 
% Change
Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Managed Services Combined
$
6,501

 
$
6,180

 
$
321

 
5.2
 %
 
$
3,204

 
$
3,046

 
$
158

 
5.2
 %
Network services
6,170

 
6,879

 
(709
)
 
(10.3
)
 
3,030

 
3,366

 
(336
)
 
(10.0
)
Professional and other services
875

 
876

 
(1
)
 
(0.1
)
 
566

 
542

 
24

 
4.4

Total revenue
$
13,546

 
$
13,935

 
$
(389
)
 
(2.8
)%
 
$
6,800

 
$
6,954

 
$
(154
)
 
(2.2
)%

Network and Infrastructure Expenses. Network and infrastructure expenses decreased 13.6% to $4,221,000 in the 2012 Period and 13.2% to $2,145,000 in the 2012 Quarter. Network and infrastructure expenses include all external costs, exclusive of depreciation and amortization, related to the Glowpoint network and hosting facilities for our cloud-based infrastructure. This operating expense category also includes the cost for taxes which have been billed to customers. The decrease was primarily attributed to customers' disconnecting or reducing their portfolio of Glowpoint services and the achievement of cost efficiencies exclusive of the lost customers.
Global Managed Services Expenses. Global managed services expenses decreased 10.6% to $3,461,000 in the 2012 Period and 10.8% to $1,765,000 in the 2012 Quarter. Global managed services expenses include all costs for delivering and servicing our managed services, such as delivering customer service operations, internal costs of maintaining the network and infrastructure, and the development and implementation of operating support systems and associated hardware enhancements. The decrease was primarily attributed to automation and efficiencies in use of capacity of platform.

-18-


Sales and Marketing Expenses. Sales and marketing expenses increased 2.2% to $1,864,000 in the 2012 Period and decreased 2.7% to $878,000 in the 2012 Quarter. The increase in the 2012 Period was primarily attributed to investments in expanding the sales force. The decrease in the 2012 Quarter was primarily due to fewer trade shows and sponsorships.
General and Administrative Expenses. General and administrative expenses, which include direct corporate expenses related to costs of personnel in the various corporate support categories, including executive, finance, human resources and information technology, decreased 1.3% to $2,652,000 in the 2012 Period and increased 1.6% to $1,302,000 in the 2012 Quarter. The decrease in the 2012 Period was primarily due to expenses related to the relocation of our new headquarters during the first and second quarters of 2011 as well as a reduction in expenses due to efficiencies. The increase in the 2012 Quarter was primarily due to consulting related expenses.
Depreciation and Amortization Expenses. Depreciation and amortization expenses increased 51.0% to $865,000 in the 2012 Period and 43.1% to $425,000 in the 2012 Quarter, due to purchases of property and equipment (as discussed in Note 13 to our consolidated financial statements attached hereto) exceeding the retirement of these assets.
Income from Operations. Income from operations increased by $389,000 in the 2012 Period to $483,000 and $262,000 in the 2012 Quarter to $285,000. The primary drivers of the increase were due to a shift in revenue to higher margin managed service revenues and efficiencies.
Interest and Other Expense. Interest and other expense in the 2012 Period was $58,000, which principally reflected $29,000 of interest charges from vendors and $29,000 of the amortization of financing charges related to our Revolving Loan Facility. Interest and other expense in the 2011 Period was $63,000, which principally reflected $32,000 of interest charges from vendors and $31,000 of the amortization of financing charges related to our Revolving Loan Facility. 
Interest and other expense in the 2012 Quarter was $32,000, which principally reflected $18,000 of interest charges from vendors and $14,000 of the amortization of financing charges related to our Revolving Loan Facility. Interest and other expenses in the 2011 Quarter was $30,000, which principally reflected $14,000 of interest charges from vendors and $16,000 of the amortization of financing charges related to our Revolving Loan Facility.
Income Taxes. As a result of our current income, we recorded a $5,000 provision for incomes taxes for certain minimum taxes in the 2012 Period and 2012 Quarter. There was no provision recorded in the 2011 Period and 2011 Quarter. Any deferred tax asset that would be related to our losses has been fully reserved under a valuation allowance, reflecting the uncertainties as to realization evidenced by our historical results and restrictions on the usage of the net operating loss carry forwards.
Income from Continuing Operations. Income from continuing operations increased by $394,000 to $425,000 in the 2012 Period, and by $260,000 to $253,000 in the 2012 Quarter. This increase was due to reduced operating expenses noted above.
Income from Discontinued Operations. Income from discontinued operations decreased by $18,000 to $0 in the 2012 Period and $24,000 to $0 in the 2012 Quarter. This decrease was a result of the transfer of our ISDN resale business completed in the third quarter of 2011.
Net Income. Net Income increased by $371,000 to $420,000, or $0.02 per basic and diluted share, in the 2012 Period. Net Income increased by $231,000 to $248,000, or $0.01 per basic and diluted share, in the 2012 Quarter. The increases in income have been driven by a number of factors. Primarily, the shift in revenue make up to higher margin managed service revenues, which is represented by the decline in network service and increase in managed services. In addition, as the network service is eliminated, there is a cost that is also eliminated which is directly related to the last mile connection and associated cost that Glowpoint incurs for delivering network service. Finally, the company has and will continue to invest in automation and development of operational tools, which permits the business to grow its managed services without taking on additional costs. This efficiency has permitted the company to also make certain cost cuts in previous periods as well as add revenues without add costs.
Liquidity and Capital Resources

-19-


For the six months ended June 30, 2012, we had net income of $420,000 and a positive cash flow from operations of $297,000. As of June 30, 2012, we had $1,689,000 of cash, positive working capital of $1,513,000 and an accumulated deficit of $164,279,000. In June 2012, the Company renewed its Revolving Loan Facility (as discussed in Note 10 to our consolidated financial statements attached hereto) pursuant to which the Company may borrow up to $5,000,000 for working capital purposes and under which we had unused borrowing availability of approximately $2,662,000 as of June 30, 2012. The Revolving Loan Facility matures in June 2014. Pursuant to the terms of our Series A-2 Preferred Stock and Series B-1 Preferred Stock, the Company will be obligated to pay dividends commencing on January 1, 2013.

In August 2012, the Company entered into a definitive agreement to acquire privately held Affinity VideoNet (as discussed in Note 14 to our consolidated financial statements attached hereto) which will be funded with $7,750,000 cash sourced through debt financing, the issuance of $2,750,000 note, and the issuance of 2,650,000 shares of common stock. The Company has been in negotiations with various lenders and the Merger is anticipated to close in the third quarter of 2012 subject to various conditions, including, but not limited to, (i) the accuracy of the representations and warranties with respect to certain matters, and (ii) the consummation of certain debt financing relating to the transaction.

Based primarily on our efforts to manage costs and our Revolving Loan Facility, along with our cash flow projection and expected debt financing arrangement, the Company believes that it has, and will have, sufficient cash flow to fund its operations through at least August 31, 2013. We have historically been able to raise capital in private placements as needed to fund operations and provide growth capital. There can be no assurances, however, that we will be able to raise additional capital as may be needed or upon acceptable terms, or that current economic conditions will not negatively impact us. If the current economic conditions negatively impact us and we are unable to raise additional capital that may be needed on terms acceptable to us, it could have a material adverse effect on the Company.
 
Off-Balance Sheet Arrangements
As of June 30, 2012, we had no off-balance sheet arrangements.
Adjusted EBITDA
Adjusted EBITDA is defined as income from continuing operations before depreciation, amortization, interest expense, interest income, taxes, severance and stock-based compensation. Adjusted EBITDA is not intended to replace operating income (loss), net income (loss), cash flow or other measures of financial performance reported in accordance with generally accepted accounting principles. Rather, Adjusted EBITDA is an important measure used by management to assess the operating performance of the Company. Adjusted EBITDA as defined here may not be comparable to similarly titled measures reported by other companies due to differences in accounting policies. A reconciliation of Adjusted EBITDA to net income from continuing operations is shown below:
 
Six Months Ended
June 30,
 
Three Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Income (loss) from continuing operations
$
425

 
$
31

 
$
253

 
$
(7
)
Depreciation and amortization
865

 
573

 
425

 
297

Amortization of financing costs
29

 
31

 
14

 
16

Interest expense
29

 
32

 
18

 
14

EBITDA
1,348

 
667

 
710

 
320

Stock-based compensation
219

 
147

 
140

 
70

Severance

 
11

 

 
11

Adjusted EBITDA
$
1,567

 
$
825

 
$
850

 
$
401


Inflation
Management does not believe inflation had a significant effect on the condensed consolidated financial statements for the periods presented.

-20-



Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.

Item 4. Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by Glowpoint in the reports it files or submits under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized, and reported within the time periods specified by the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by Glowpoint in the reports it files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of management, including the Chief Executive Officer and Interim Chief Financial Officer, Glowpoint has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2012, and, based upon this evaluation, the Chief Executive Officer and Interim Chief Financial Officer have concluded that these controls and procedures are effective in providing reasonable assurance of compliance.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during the three months ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.    Legal Proceedings

None.

Item 1A. Risk Factors
A description of the risks associated with our business, financial conditions and results of operations is set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and filed with the Commission on March 8, 2012. There have been no material changes to these risks during the three months ended June 30, 2012.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
On April 4, 2012, the Company issued 102,657 shares of common stock upon the conversion of 41 outstanding shares of Series A-2 Preferred Stock, at the original conversion price. The Company did not receive any proceeds upon the conversion of the Series A-2 Preferred Stock. Issuance of the shares of common stock was exempt from registration pursuant to the to the provisions of Section 3(a)(9) of the Securities Act of 1933. 

In addition, the Company issued 25,000 shares of unregistered common stock to Monarch Capital Group, LLC ("MCG") in consideration of services rendered under the Consulting Agreement dated as of May 22, 2012 between the Company and MCG. The shares of common stock were issued in reliance on the exemption from registration set forth in Section 4(2) of the Securities Act of 1933. Other than the foregoing, there have been no unregistered sales of securities during the period covered by this Report that have not been previously reported in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.

Item 3.    Defaults upon Senior Securities
    
None.

-21-



Item 4.    Mine Safety Disclosures
Not Applicable.

Item 5.    Other Information
None.


-22-


Item 6.    Exhibits
10.1
Second Loan Modification Agreement dated as of June 12, 2012 between Glowpoint, Inc. and Silicon Valley Bank (filed as an exhibit to Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 14, 2012, and incorporated herein by reference)
31.1*
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2*
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1*
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**
XBRL Instance Document
101.SCH**
XBRL Taxonomy Extension Schema
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase
101.DEF**
XBRL Taxonomy Extension Definition Linkbase
101.LAB**
XBRL Taxonomy Extension Label Linkbase
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase

* Filed herewith.
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.


-23-


SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
GLOWPOINT, INC.
Date: August 14, 2012
By:    /s/ Joseph Laezza    
 
Joseph Laezza, Chief Executive Officer
(principal executive officer)
Date: August 14, 2012
By:    /s/ Tolga Sakman    
 
Tolga Sakman, Interim Chief Financial Officer
(principal financial and accounting officer)


-24-

XASE:GLOW Glowpoint Inc Quarterly Report 10-Q Filling

Glowpoint Inc XASE:GLOW Stock - Get Quarterly Report SEC Filing of Glowpoint Inc XASE:GLOW stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XASE:GLOW Glowpoint Inc Quarterly Report 10-Q Filing - 6/30/2012
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