Affinity Acquisition

12 Months Ended

Dec. 31, 2012

Business Combinations [Abstract]

Affinity Acquisition

Affinity Acquisition

On October 1, 2012, the Company completed the acquisition 100% of the stock of of Affinity, accounted for as a business combination, and paid an aggregate purchase price of $15,901,000. The purchase price consisted of (i) approximately $8.0 million in cash (obtained through debt financing as discussed in Note 6), (ii) a $2.33 million promissory note payable to the Affinity shareholders (as discussed in Note 6), subject to adjustment, and (iii), 2,650,000 shares of the Company's common stock valued at approximately $5,512,000 based on the closing price of the Company's stock on October 1, 2012, subject to adjustment.

Glowpoint is a provider of managed video services to the enterprise with a focus on multi-tiered help desk support for mixed manufacturer video environments, which complements Affinity's standing as a specialized service provider of tailored, business-class meetings for professional service organizations across the world. The resultant company of approximately 130 employees will be able to provide clients with a wide range of products and services across the entire video spectrum, from proprietary technology to design, implementation, 24x7 monitoring and mission critical support.

In connection with the 2,650,000 shares of common stock issued to the prior stockholders of Affinity, the Company entered into a registration rights agreement (the "Registration Rights Agreement") with a representative of the prior stockholders of Affinity (the "Stockholder Representative") requiring the Company to file a Registration Statement on Form S-3 with respect to the resale of such shares as soon as practicable, but in no event more than 90 days after the Closing Date, and to have such resale registration statement declared effective as soon as practicable.

The Company and the Stockholder Representative also entered into an Escrow Agreement on the Closing Date with a third-party escrow agent (the "Escrow Agreement"), whereby the Company made a deposit of $360,000, a portion of the purchase price, with the escrow agent for the purpose of securing the payment obligations of Affinity, if any, with respect to certain retention bonus agreements entered into with its employees on or before the Closing Date. If any employee does not satisfy the conditions of receipt of the retention bonus, the Company and the Stockholder Representative will jointly direct that such funds on deposit be released to the Stockholder Representative on behalf of the prior stockholders of Affinity. The prefunded retention bonuses are considered post combination expense even though it is funded by the acquired company and the expense will be recognized for these bonuses in the post combination period. On October 1, 2012, the Company issued 100,000 shares of unregistered common stock and paid $250,000 cash to Burnham Hill Partners, LLC ("BHP") in consideration of services rendered under the Consulting Agreement dated as of September 28, 2012 between the Company and BHP. The cash and stock was divided equally between financing costs (which are included in Other Assets in the accompanying balance sheet as of December 31, 2012) and acquisition costs. The allocation was based on the amount of effort being evenly distributed between acquisition and financing related matters. A total of $857,000 of acquisition costs were expensed and is included in General and Administrative expenses in the accompanying Statement of Operations for the year ended December 31, 2012.

The fair value of the assets acquired and liabilities assumed were based on management estimates and values derived from an outside independent appraisal.

Based on the purchase price allocation, the following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

Cash and cash equivalents, including escrow	$	504
Accounts receivable	1,201
Property, plant, and equipment	410
Other assets and liabilities, net	320
Customer relationships	5,100
Affiliate network	1,710
Trademarks	760
Total assets acquired at fair value	10,005
Accounts payable	(972		)
Accrued expenses	(811		)
Deferred tax liability	(2,221		)
Total liabilities assumed	(4,004		)
Net assets acquired	$	6,001

The purchase price exceeded the fair value of the net assets acquired by $9,900,000, which was recorded as goodwill. Acquisition costs amounting to $857,000 were expensed through December 31, 2012.

The accompanying consolidated financial statements do not include any revenues or expenses related to the Affinity business on or prior to October 1, 2012, the closing date of the acquisition. The consolidated statement of operations for the year ended December 31, 2012 includes $2,244,000 of revenues and net income of $119,000 related to Affinity for the period from October 2, 2012 through December 31, 2012. The Company's unaudited pro-forma results for the years ended December 31, 2012 and 2011 are summarized in the following table, assuming the acquisition had occurred on January 1, 2011 (in thousands):

	Year Ended December 31,
	2012			2011
Revenue	$	37,096		$	39,202
Net income (loss)	(2,312		)	787
Earnings (loss) per share:
Basic	$	(0.08	)	$	0.03
Diluted	$	(0.08	)	$	0.03
Weighted average number of common shares:
Basic	28,295			25,327
Diluted	28,295			26,404

These unaudited pro-forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually resulted had the acquisition occurred on January 1, 2011, nor to be indicative of future results of operations.