Note 16. Subsequent Events
On July 5, 2016, the Company filed a certificate of amendment (the “Amendment”) to its Certificate of Incorporation with the Secretary of State of the State of Delaware in order to effectuate a reverse stock split of the Company’s issued and outstanding common stock, par value $0.001 per share, on a one for twenty basis (the “Reverse Stock Split”). As a result of the Reverse Stock Split, every twenty shares of the Company’s pre-reverse split common stock will be combined and reclassified into one share of the Company’s common stock. No fractional shares of common stock will be issued. Stockholders who otherwise would be entitled to a fractional share shall receive the next higher number of whole shares. The par value and other terms of Company’s common stock were not affected by the Reverse Stock Split. The Reverse Stock Split was effective July 7, 2016.
On July 6, 2016, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with an accredited investor pursuant to which the Company raised $1,250,000 in a private placement offering 892,857 units of the Company’s securities (the “Units”) at a price of $1.40 per Unit. As adjusted for the Reverse Stock Split, each Unit consists of (i) one share of Series B Convertible Preferred Stock, par value $0.001 per share (the “Preferred Stock”), with each share of Preferred Stock convertible into one half of a share of common stock, and (ii) one fourth of a warrant (a “Warrant”), with each Warrant exercisable into common stock at an exercise price equal to $3.00 per share of common stock. The transaction closed on July 7, 2016. On July 21 and 26, 2016, the holder converted all of the shares of the preferred stock into 446,429 shares of common stock.
Also on July 7, 2016, the Company entered into a First Amendment (the “Amendment”) to those certain Securities Purchase Agreements, dated June 17, 2016 (the “June Purchase Agreements”), pursuant to which the Company agreed to amend the June Purchase Agreements entered into by and between certain investors and the Company. Pursuant to the terms of the Amendment and as adjusted for the Reverse Stock Split, the June Warrants were amended and restated to change the exercise price of the warrants to $3.80 from $5.00 and to include a mandatory exercise right of the Company to force exercise of the June Warrants if the Company’s common stock trades at or above $7.60 for any ten consecutive trading days out of a thirty consecutive trading day period (subject to certain equity conditions, a 9.99% beneficial ownership limitation and applicable NASDAQ shareholder approval rules, if any). All other terms of the June Warrants, including cash exercise if registered for resale within 90 days of closing, remain unchanged.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis summarizes the significant factors affecting our condensed consolidated results of operations, financial condition and liquidity position for the six months ended June 30, 2016. This discussion and analysis should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015 and the condensed consolidated unaudited financial statements and related notes included elsewhere in this filing. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.
Forward-Looking Statements
Forward-looking statements in this Quarterly Report on Form 10-Q, including without limitation, statements related to our plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) our plans, strategies, objectives, expectations and intentions are subject to change at any time at our discretion; (ii) our plans and results of operations will be affected by our ability to manage growth and competition; and (iii) other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission.
In some cases, you can identify forward-looking statements by terminology such as ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘could,’’ ‘‘expects,’’ ‘‘plans,’’ ‘‘intends,’’ ‘‘anticipates,’’ ‘‘believes,’’ ‘‘estimates,’’ ‘‘predicts,’’ ‘‘potential,’’ or ‘‘continue’’ or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Readers are cautioned not to place too much reliance on these forward-looking statements which speak only as of the date hereof. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q.
Non-GAAP Measures and Reconciliations to GAAP Measures
We prepare our financial statements in accordance with generally accepted accounting principles (“GAAP”). We use certain Non-GAAP measures to monitor our business performance. These Non-GAAP measures are not recognized under GAAP. Accordingly, investors are cautioned about using or relying on these measures as alternatives to recognized GAAP measures. Our methods of calculating these measures may not be comparable to similar measures presented by other companies.
Characteristics of Revenues and Expenses
Infrastructure and access expenses relate directly to maintaining our network and providing connectivity to our customers. Infrastructure primarily relates to our Points-of-Presence ("PoPs") where we install a substantial amount of equipment, mostly on the roof, which we utilize to connect numerous customers to the internet. We enter into long term lease agreements to maintain our equipment on these PoPs and these rent payments comprise the majority of our infrastructure and access costs. Access expenses primarily consist of bandwidth connectivity agreements that we enter into with national service providers.
Network operations costs relate to the daily operations of our network and ensuring that our customers have connectivity within the terms of our service level agreement. We have employees based in our largest markets who are dedicated to ensuring that our network operates effectively on a daily basis. Other employees monitor network operations from our network operating center which is located at our corporate headquarters. Payroll comprises approximately 55 to 60% of network operations costs. Information technology systems and support comprises approximately 20 to 25% of network operations costs.
Customer support costs relate to our continuing communications with customers regarding their service level agreement. Payroll comprises approximately 75 to 80% of customer support costs. Other costs include travel expenses to service customer locations, shipping, troubleshooting, and facilities related expenses.
Sales and marketing expenses primarily consist of the salaries, benefits, travel and other costs of our sales and marketing teams, as well as marketing initiatives and business development expenses.
General and administrative expenses include costs attributable to corporate overhead and the overall support of our operations. Salaries and other related payroll costs for executive management and finance personnel are included in this category. Other costs include accounting, legal and other professional services, and other general operating expenses.
Overview – Fixed Wireless
We provide fixed wireless broadband services to commercial customers and deliver access over a wireless network transmitting over both regulated and unregulated radio spectrum. Our service supports bandwidth on demand, wireless redundancy, virtual private networks, disaster recovery, bundled data and video services. We currently provide service to business customers in twelve metropolitan markets.
As of June 30, 2016, we operated in twelve metropolitan markets consisting of New York, Boston, Los Angeles, Chicago, San Francisco, Miami, Seattle, Dallas-Fort Worth, Houston, Philadelphia, Las Vegas-Reno and Providence-Newport. Although we provide services in multiple markets, these operations have been aggregated into one reportable segment based on the similar economic characteristics among all markets, including the nature of the services provided and the type of customers purchasing such services. The markets were launched at different times, and as a result, may have different operating metrics based on their size and stage of maturation. We incur significant up-front costs in order to establish a network presence in a new market. These costs include building PoPs and network costs. Other material costs include hiring and training sales and marketing personnel who will be dedicated to securing customers in that market. Once we have established a network presence in a new market, we are capable of servicing a significant number of customers. The rate of customer additions varies from market to market, and we are unable to predict how many customers will be added in a market during any specific period.
Overview - Shared Wireless Infrastructure
In January 2013, the Company incorporated a wholly-owned subsidiary, Hetnets Tower Corporation (“Hetnets”), to operate a new business designed to leverage its fixed wireless network in urban markets to provide other wireless technology solutions and services. Hetnets built a carrier-class network which offered a shared wireless infrastructure platform, primarily for (i) co-location of customer owned antenna and related equipment and (ii) Wi-Fi access and offloading. The Company referred to this as its “Shared Wireless Infrastructure” or “Shared Wireless” business. During the fourth quarter of 2015, the Company determined to exit this business and curtailed activities in its smaller markets. The remaining network, located in New York City (or “NYC”), was the largest and had a lease access contract with a major cable company. As a result, the Company explored opportunities during the fourth quarter of 2015 and continuing into the first quarter of 2016 to sell the New York City network. On March 9, 2016, the Company completed a sale and transfer of certain assets pursuant to an Asset Purchase Agreement (the "Agreement") with a large cable company (the "Buyer"). Under the terms of the Agreement, the Buyer assumed certain rooftop leases and acquired ownership of and the right to operate the Wi-Fi access point and related equipment associated with such leases. The Company retained ownership of all backhaul and related equipment, and the parties entered into an agreement under which the Company provides backhaul services to the Buyer. The agreement is for a three-year period with two one-year renewals and is cancellable by the Buyer on sixty days notice. During the first quarter of 2016, the Company determined that it would not be able to sell the remainder of the New York City network, and accordingly, all remaining assets are being redeployed into the fixed wireless network or written off. The operating results and cash flows for Hetnets have been reclassified and presented as discontinued operating results for all periods presented in these condensed consolidated financial statements.
Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015
Continuing Operations – Fixed Wireless
Revenues.
Revenues totaled $6,872,342 during the three months ended June 30, 2016 compared to $7,030,907 during the three months ended June 30, 2015 representing a decrease of $158,565, or 2%. The decrease principally related to a 5% decrease in the base of customers billed on a monthly recurring basis.
Customer churn totaled 1.59% during the three months ended June 30, 2016 compared to 1.76% during the three months ended June 30, 2015. Churn represents the percent of revenue lost on a monthly basis from customers who have cancelled their contract. Effective January 1, 2016, we have modified our methodology to conform to common practice in the telecommunications industry. Revenue adjustments associated with customers who are modifying the (i) amount of their bandwidth or (ii) the pricing terms of their contract will no longer be included in the calculation of customer churn. Customer churn calculated under the previous methodology would have totaled 1.98% and 1.84% for the three months ended June 30, 2016 and 2015, respectively.
Our goal is to maintain churn levels below industry averages of approximately 2.00%. Churn levels can fluctuate from period to period depending upon whether customers move to a location not serviced by the Company, go out of business, or a myriad of other reasons.
Infrastructure and
A
ccess
. Infrastructure and access totaled $2,631,114 during the three months ended June 30, 2016 compared to $2,490,508 during the three months ended June 30, 2015 representing an increase of $140,606, or 6%. The increase primarily relates to our tower rental expense.
Depreciation and Amortization.
Depreciation and amortization totaled $3,044,132 during the three months ended June 30, 2016 compared to $2,393,254 during the three months ended June 30, 2015 representing an increase of $650,878 or 27%. Depreciation expense totaled $2,626,249 during the three months ended June 30, 2016 compared to $2,295,186 during the three months ended June 30, 2015 representing an increase of $331,063, or 14%. The increase primarily related to the transfer of certain assets during the first quarter of 2016 from discontinued operations to continuing operations.
Amortization expense totaled $417,883 during the three months ended June 30, 2016 compared to $98,068 during the three months ended June 30, 2015 representing an increase of $319,815, or more than 100%. Amortization expense relates to intangible assets recorded in connection with acquisitions and other transactions, and can fluctuate significantly from period to period depending upon the timing of acquisitions and other transactions, the relative amounts of intangible assets recorded, and the amortization periods. The increase related entirely to amortization associated with a transaction with a large cable company which closed in March 2016.
Network
O
perations
. Network operations totaled $1,298,590 during the three months ended June 30, 2016 compared to $1,370,126 during the three months ended June 30, 2015 representing a decrease of $71,536, or 5%. Payroll costs totaled $785,513 in the 2016 period compared to $745,374 in the 2015 period representing an increase of $40,139, or 5%. Information technology support expenses totaled $231,031 in the 2016 period compared to $267,126 in the 2015 period representing a decrease of $36,095 or 14%, as the Company internally absorbed certain functions that were previously provided by third parties which resulted in a slight increase in headcount. Network support costs totaled $145,743 during the three months ended June 30, 2016 compared to $218,591 during the three months ended June 30, 2015 representing a decrease of $72,848, or 33%. These costs can fluctuate from period to period and the dollar change is not meaningful.
Customer Support
.
Customer support totaled $484,664 during the three months ended June 30, 2016 compared to $653,534 during the three months ended June 30, 2015 representing a decrease of $168,870, or 26%. Payroll expense totaled $429,073 during the 2016 period compared to $528,692 during the 2015 period representing a decrease of $99,619, or 19%. Average headcount was lower in the 2016 period as the Company consolidated departments and improved efficiencies. Other customer support costs totaled $55,591 during the three months ended June 30, 2016 compared to $124,842 during the 2015 period representing a decrease of $69,251 or 55%. This decrease was principally attributable to lower customer troubleshooting costs which can fluctuate from period to period.
Sales and Marketing.
Sales and marketing expenses totaled $883,961 during the three months ended June 30, 2016 compared to $1,545,366 during the three months ended June 30, 2015 representing a decrease of $661,405, or 43%. Payroll costs totaled $574,571 during the 2016 period compared to $1,060,490 during the 2015 period representing a decrease of $485,919, or 46%. The decrease related to lower headcount in connection with the closing of our sales office in Florida as well as additional sales reductions made at our corporate headquarters in the first quarter of 2016. Advertising expenses totaled $59,562 during the three months ended June 30, 2016 compared to $252,971 during the three months ended June 30, 2015 representing a decrease of $193,409, or 76%. The Company has significantly reduced its Internet marketing initiatives in connection with its current marketing focus on specific businesses in certain connected buildings rather than marketing broadly to all businesses in a market. Outside commissions totaled $190,165 in the 2016 period compared to $145,995 in the 2015 period representing an increase of $44,170, or 30%. The increase relates almost exclusively to the Company’s residual program which pays continuing commissions as long as the referred business is a customer. Other costs totaled $59,663 during the three months ended June 30, 2016 compared to $85,910 during the three months ended June 30, 2015 representing a decrease of $26,247, or 31%. The decrease primarily relates to the reduction in our sales force.
General and Administrative.
General and administrative expenses totaled $1,604,542 for the three months ended June 30, 2016 compared to $1,561,775 for the three months ended June 30, 2015 representing an increase of $42,767, or 3%. Stock based compensation decreased to $141,805 during the three months ended June 30, 2016 compared to $210,923 during the three months ended June 30, 2015 representing a decrease of $69,118, or 33%. Stock-based compensation can fluctuate significantly from period to period depending on the timing, quantity and valuation of stock option grants. Professional services fees totaled $428,944 during the three months ended June 30, 2016 compared to $257,050 during the three months ended June 30, 2015 representing an increase of $171,894, or 67%. This increase related primarily to the restructuring of the business during 2016. Corporate travel expenses totaled $14,854 in the 2016 period compared to $87,458 in the 2015 period representing a decrease of $72,604, or 83%. The decrease related to the cancellation of the President’s club trip for top performers and lower travel expenses at the executive level. Non-recurring expenses totaled $167,486 during the three months ended June 30, 2016 compared to $52,500 during the three months ended June 30, 2015 representing an increase of $114,986, or greater than 100%. This increase related primarily to the restructuring of the business during 2016. Non-recurring expenses can vary from period to period depending on the level of activity during a period. Customer related expenses decreased by approximately $69,251 in the 2016 period due to lower bad debt expense and office expenses also decreased by approximately $32,522 compared to the 2015 period due to the closing of our Florida sales office and other staff reductions.
Interest Expense, Net.
Interest expense, net totaled $1,588,291 during the three months ended June 30, 2016 compared to $1,670,428 during the three months ended June 30, 2015 representing a decrease of $82,137, or 5%. Interest expense relates to the $35 million secured term loan which closed in October 2014.
Discontinued Operations – Shared Wireless
Revenues
. Revenues for the Shared Wireless business totaled zero during the three months ended June 30, 2016 compared to $826,226 during the three months ended June 30, 2015 representing a decrease of $826,226 or 100%. The decrease related to our decision to exit the business conducted by Hetnets.
Infrastructure and Access.
Infrastructure and access totaled zero during the three months ended June 30, 2016 compared to $3,662,021 during the three months ended June 30, 2015 representing a decrease of $3,662,021, or 100%. The reduction reflects the termination of lease agreements associated with our shared wireless business.
Depreciation.
Depreciation totaled zero during the three months ended June 30, 2016 compared to $1,015,859 during the three months ended June 30, 2015 representing a decrease of $1,015,859 or 100%. We have terminated business activities associated with our shared wireless business.
Network Operations.
Network operations totaled $9,364 during the three months ended June 30, 2016 compared to $195,640 during the three months ended June 30, 2015 representing a decrease of $186,276, or 95%. Certain costs were incurred in the 2016 period related to the termination of the business. The 2015 period primarily related to payroll expenses.
Customer Support Services.
Customer support services totaled zero during the three months ended June 30, 2016 compared to $106,134 during the three months ended June 30, 2015 representing a decrease of $106,134 or 100%. The business was terminated in early March 2016.
Sales and Marketing.
Sales and marketing expenses totaled zero during the three months ended June 30, 2016 compared to $43,299 during the three months ended June 30, 2015 representing a decrease of $43,299, or 100%. The business was terminated in early March 2016.
General and Administrative.
General and administrative expenses totaled $58,212 during the three months ended June 30, 2016 compared to zero during the three months ended June 30, 2015. The increase reflects professional services fees incurred in the 2016 period for terminating the business.
Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015
Continuing Operations – Fixed Wireless
Revenues.
Revenues totaled $13,606,432 during the six months ended June 30, 2016 compared to $14,203,374 during the six months ended June 30, 2015 representing a decrease of $596,942, or 4%. The decrease principally related to a 5% decrease in the base of customers billed on a monthly recurring basis.
Infrastructure and
A
ccess
. Infrastructure and access totaled $5,182,841 during the six months ended June 30, 2016 compared to $5,049,484 during the six months ended June 30, 2015 representing an increase of $133,357, or 3%. The increase primarily relates to our tower rental expense.
Depreciation and Amortization.
Depreciation and amortization totaled $5,571,778 during the six months ended June 30, 2016 compared to $4,741,127 during the six months ended June 30, 2015 representing an increase of $830,651 or 18%. Depreciation expense totaled $4,949,222 during the six months ended June 30, 2016 compared to $4,544,991 during the six months ended June 30, 2015 representing an increase of $404,231, or 9%. The increase primarily related to the transfer of certain assets during the first quarter of 2016 from discontinued operations to continuing operations.
Amortization expense totaled $622,556 during the six months ended June 30, 2016 compared to $196,136 during the six months ended June 30, 2015 representing an increase of $426,420, or more than 100%. Amortization expense relates to intangible assets recorded in connection with acquisitions and other transactions, and can fluctuate significantly from period to period depending upon the timing of acquisitions and other transactions, the relative amounts of intangible assets recorded, and the amortization periods. The increase related entirely to amortization associated with the TWC transaction which closed in March 2016.
Network
O
perations
. Network operations totaled $2,589,778 during the six months ended June 30, 2016 compared to $2,704,558 during the six months ended June 30, 2015 representing a decrease of $114,780, or 4%. Payroll costs totaled $1,557,352 in the 2016 period compared to $1,480,384 in the 2015 period representing an increase of $76,968, or 5%. Average headcount was slightly higher in the 2016 period. Information technology support expenses totaled $485,115 in the 2016 period compared to $589,280 in the 2015 period representing a decrease of $104,165, or 18%, as the Company internally absorbed certain functions that were previously provided by third parties. Network support costs totaled $265,150 during the six months ended June 30, 2016 compared to $353,202 during the six months ended June 30, 2015 representing a decrease of $88,052, or 25%. These costs can fluctuate from period to period and the dollar change is not meaningful.
Customer Support
.
Customer support totaled $1,027,855 during the six months ended June 30, 2016 compared to $1,326,417 during the six months ended June 30, 2015 representing a decrease of $298,562, or 23%. Payroll expense totaled $845,171 during the 2016 period compared to $1,046,302 during the 2015 period representing a decrease of $201,131 or 19%. Average headcount was lower in the 2016 period as the Company consolidated departments and improved efficiencies. Other customer support costs totaled $182,684 during the six months ended June 30, 2016 compared to $280,115 during the 2015 period representing a decrease of $97,431 or 35%. This decrease was principally attributable to lower customer troubleshooting costs which can fluctuate from period to period.
Sales and Marketing.
Sales and marketing expenses totaled $2,378,881 during the six months ended June 30, 2016 compared to $2,876,048 during the six months ended June 30, 2015 representing a decrease of $497,167, or 17%. Payroll costs totaled $1,541,426 during the 2016 period compared to $1,889,607 during the 2015 period representing a decrease of $348,181, or 18%. The decrease related to lower headcount in connection with the closing of our sales office in Florida as well as additional sales reductions made at our corporate headquarters in the first quarter of 2016. Advertising expenses totaled $242,639 during the six months ended June 30, 2016 compared to $532,011 during the six months ended June 30, 2015 representing a decrease of $289,372 or 54%. The Company has significantly reduced its Internet marketing initiatives in connection with its current marketing focus on specific businesses in certain connected buildings rather than marketing broadly to all businesses in a market. Outside commissions totaled $396,094 in the 2016 period compared to $273,000 in the 2015 period representing an increase of $123,094, or 45%. The increase relates almost exclusively to the Company’s residual program which pays continuing commissions as long as the referred business is a customer. Other costs totaled $198,722 during the six months ended June 30, 2016 compared to $181,430 during the six months ended June 30, 2015 representing an increase of $17,292, or 10%. The increase primarily relates to a decision to close the sales office in Florida.
General and Administrative.
General and administrative expenses totaled $3,584,334 for the six months ended June 30, 2016 compared to $3,485,842 for the six months ended June 30, 2015 representing an increase of $98,492, or 3%. Payroll costs increased to $1,264,753 in the 2016 period compared to $1,066,080 in the 2015 period representing an increase of $198,673, or 19%. The increase related to severance payments to our former Chief Executive Officer. Professional services fees totaled $839,324 during the six months ended June 30, 2016 compared to $656,699 during the six months ended June 30, 2015 representing an increase of $182,625, or 28%. This increase related primarily to the restructuring of the business during 2016. Corporate travel expenses totaled $63,707 in the 2016 period compared to $253,689 in the 2015 period representing a decrease of $189,982, or 75%. The decrease related to the cancellation of the President’s club trip for top performers and lower travel expenses at the executive level. Customer related expenses decreased by approximately $94,084 in the 2016 period due to lower bad debt expense compared to the 2015 period.
Interest Expense, Net.
Interest expense, net totaled $3,195,411 during the six months ended June 30, 2016 compared to $3,334,692 during the six months ended June 30, 2015 representing a decrease of $139,281, or 4%. Interest expense relates to the $35 million secured term loan which closed in October 2014.
Loss from Continuing Operations
. Loss from continuing operations totaled $9,924,447 during the six months ended June 30, 2016 compared to $9,314,794 during the six months ended June 30, 2015 representing an increase of $609,653, or 7%. Revenues decreased by $596,942 in the 2016 period which represented 98% of the increased loss.
Discontinued Operations – Shared Wireless
Revenues
. Revenues for the Shared Wireless business totaled $553,302 during the six months ended June 30, 2016 compared to $1,613,854 during the six months ended June 30, 2015 representing a decrease of $1,060,552 or 66%. The decrease primarily related to our contract with a major cable company which was terminated in March 2016 resulting in only two months of revenue in the 2016 period compared to six months of revenue in the 2015 period.
Infrastructure and Access.
Infrastructure and access totaled $2,523,222 during the six months ended June 30, 2016 compared to $7,359,177 during the six months ended June 30, 2015 representing a decrease of $4,835,955, or 66%. Rent expense for rooftop locations totaled $1,994,858 in the 2016 period compared to $7,182,900 in the 2015 period representing a decrease of $5,188,042, or 72%. The reduction reflects the termination of lease agreements associated with our shared wireless business. Loss on fixed assets totaled $528,364 during the six months ended June 30, 2016 compared to zero during the six months ended June 30, 2015. During the first quarter of 2016, the Company sold certain network infrastructure assets to a major cable company. The Company determined to shut down the remaining network locations and recognized a loss of $528,364 which represented the net book value of capitalized installation costs as well as equipment which could not be redeployed into the fixed wireless network.
Depreciation.
Depreciation totaled $638,681 during the six months ended June 30, 2016 compared to $2,047,369 during the six months ended June 30, 2015 representing a decrease of $1,408,688 or 69%. All business activities associated with the shared wireless business were terminated during the first quarter of 2016.
Network Operations.
Network operations totaled $192,947 during the six months ended June 30, 2016 compared to $391,034 during the six months ended June 30, 2015 representing a decrease of $198,087, or 51%. Certain costs were incurred in the 2016 period related to the termination of the business. The 2015 period primarily related to payroll expenses.
Customer Support Services.
Customer support services totaled $69,804 during the six months ended June 30, 2016 compared to $188,446 during the six months ended June 30, 2015 representing a decrease of $118,642 or 63%. The business was terminated in early March 2016.
Sales and Marketing.
Sales and marketing expenses totaled $246 during the six months ended June 30, 2016 compared to $86,911 during the six months ended June 30, 2015 representing a decrease of $86,665, or 100%. The decrease reflects a lack of sales and marketing efforts prior to terminating the business in March 2016.
General and Administrative.
General and administrative expenses totaled $105,545 during the six months ended June 30, 2016 compared to zero during the six months ended June 30, 2015. The increase reflects professional services fees incurred in the 2016 period for terminating the business.
Loss from Discontinued Operations.
Loss from discontinued operations for the six months ended June 30, 2016 totaled $1,799,401 compared to $8,459,083 for the six months ended June 30, 2015 representing a decrease of $6,659,682, or 79%. Infrastructure and access costs decreased by $4,835,955 and depreciation decreased by $1,408,688 representing 94% of the decrease. Gain on sale of assets increased by $1,177,742 representing 18% of the decrease.
Liquidity and Capital Resources
Changes in capital resources during the six months ended June 30, 2016 and 2015 are described below.
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of June 30, 2016, the Company had cash and cash equivalents of approximately $10.0 million and working capital of approximately $4.5 million. The Company has incurred significant operating losses since inception and continues to generate losses from operations and as of June 30, 2016, the Company has an accumulated deficit of $167.9 million. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Historically, the Company has financed its operation through private and public placement of equity securities, as well as debt financing and capital leases. The Company’s ability to fund its longer term cash requirements is subject to multiple risks, many of which are beyond its control. The Company intends to raise additional capital, either through debt or equity financings or through the potential sale of the Company’s assets in order to achieve its business plan objectives. Management believes that it can be successful in obtaining additional capital; however, no assurance can be provided that the Company will be able to do so. There is no assurance that any funds raised will be sufficient to enable the Company to attain profitable operations or continue as a going concern. To the extent that the Company is unsuccessful, the Company may need to curtail or cease its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.
On July 7, 2016 and as more fully described in the financial statement Note 16 "Subsequent Events", the Company raised $1,250,000 in a private placement offering of convertible preferred stock and warrants. On August 8, 2016, the Company filed a preliminary Form S-1 with the Securities and Exchange Commission to register shares of its common stock which would allow the Company to raise up to $20 million.
Continuing Operations
Net Cash Used In Operating Activities.
Net cash used in operating activities for the six months ended June 30, 2016 totaled $3,861,319 compared to $1,410,283 for the six months ended June 30, 2015 representing an increase of $2,451,036. Revenues generated from continuing operations were $596,942 lower in the 2016 period which adversely impacted cash flows available to support operating activities. Cash operating expenses incurred from continuing operations were $485,450 lower in the 2016 period which positively impacted cash flows available to support operating activities.
Net Cash Used in Investing Activities.
Net cash used in investing activities for the six months ended June 30, 2016 totaled $1,160,400 compared to $3,835,233 for the six months ended June 30, 2015 representing a decrease of $2,674,833. Cash capital expenditures totaled $1,160,400 in the 2016 period compared to $3,827,552 in the 2015 period representing a decrease of $2,667,152. The Company was able to redeploy certain equipment from its discontinued operations to support its continuing operations, thereby lowering capital expenditures in the 2016 period. Capital expenditures can fluctuate from period to period depending upon the number of customer additions and upgrades, network construction activity related to increasing capacity or coverage, and other related reasons.
Net Cash Provided by
(Used in)
Financing Activities
. Net cash provided by financing activities for the six months ended June 30, 2016 totaled $1,754,706 compared to net cash used in financing activities of $477,819 for the six months ended June 30, 2015, representing an increase of $2,232,346. During the 2016 period, we completed an equity offering which resulted in net proceeds of $2,230,000.
Discontinued Operations
Net Cash Used In Operating Activities.
Net cash used in operating activities for the six months ended June 30, 2016 totaled $1,872,023 compared to $6,015,462 for the six months ended June 30, 2015 representing a decrease of $4,143,439. Operating activities for the discontinued business were terminated in March 2016 which resulted in lower cash requirements for the 2016 period.
Net Cash Used in Investing Activities.
Net cash provided by investing activities for the six months ended June 30, 2016 totaled zero compared to net cash used of $174,693 for the six months ended June 30, 2015 representing a change of $174,693. Cash capital expenditures totaled $174,693 in the 2015 period compared to zero in the 2016 period which reflected the Company’s decision to exit the shared wireless infrastructure business.
Net Cash Provided by
(Used in)
Financing Activities
. There were no financing activities during either period.
In January 2013, the Company incorporated a wholly-owned subsidiary, Hetnets Tower Corporation (“Hetnets”), to operate a new business designed to leverage its fixed wireless network in urban markets to provide other wireless technology solutions and services. Hetnets built a carrier-class network which offered a shared wireless infrastructure platform, primarily for (i) co-location of customer owned antenna and related equipment and (ii) Wi-Fi access and offloading. The Company referred to this as its “Shared Wireless Infrastructure” or “Shared Wireless” business. During the fourth quarter of 2015, the Company determined to exit this business and curtailed activities in its smaller markets. The remaining network, located in New York City (or “NYC”), was the largest and had a lease access contract with a major cable company. As a result, the Company explored opportunities during the fourth quarter of 2015 and continuing into the first quarter of 2016 to sell the New York City network. On March 9, 2016, the Company completed a sale and transfer of certain assets to a major cable company (the “Buyer”). The Asset Purchase Agreement provided that the Buyer would assume certain rooftop leases in NYC and acquire ownership of the Wi-Fi access points and related equipment associated with operating the network. The Company retained ownership of all backhaul and related equipment and the parties entered into a backhaul services agreement under which the Company provides internet bandwidth to the Buyer at the locations governed by the leases. The agreement is for a three-year period with two, one year renewals and is cancellable by the Buyer on sixty days’ notice. The net effect of the Buyer (i) assuming certain rooftop leases, (ii) entering into a backhaul services agreement, and (iii) terminating the access agreement is projected to result in a net reduction in cash requirements of approximately $6 million annually. During the first quarter of 2016, the Company determined that it would not be able to sell the remainder of the New York City network, and accordingly, all remaining assets are being redeployed into the fixed wireless network or written off. The operating results and cash flows for Hetnets have been reclassified and presented as discontinued operating results for all periods presented in these condensed consolidated financial statements.
Other Considerations
Debt Financing
. In October 2014, we entered into a loan agreement (the “Loan Agreement”) with Melody Business Finance, LLC (the “Lender”). The Lender provided us with a five-year $35 million secured term loan (the “Financing”). The Financing was issued at a 3% discount and the Company incurred $2,893,739 in debt issuance costs. Net proceeds were $31,056,260.
The loan bears interest at a rate equal to the greater of (i) the sum of the most recently effective one month LIBOR as in effect on each payment date plus 7% or (ii) 8% per annum, and additional paid in kind (“PIK”), or deferred, interest that accrues at 4% per annum.
The aggregate principal amount outstanding plus all accrued and unpaid interest is due in October 2019. The Company has the option of making principal payments (i) on or before October 16, 2016 (the “Second Anniversary”) but only for the full amount outstanding and (ii) after the Second Anniversary in minimum amount(s) of $5 million.
In connection with the Loan Agreement and pursuant to a Warrant and Registration Rights Agreement, we issued warrants (the “Warrants”) to purchase 3.6 million shares of common stock of which two-thirds have an exercise price of $1.26 and one-third have an exercise price of $0.01, subject to standard anti-dilution provisions. The Warrants have a term of seven and a half years. We have agreed to include the shares of common stock underlying the Warrants in a registration statement that must be filed no later than December 31, 2016.
Equity
Offering.
In the second quarter of 2016, we entered into securities purchase agreements with certain accredited investors in which we sold in a registered direct offering a total of 750,000 shares of common stock at a purchase price of $3.04 per Unit, with each Unit consisting of one share of common stock and an unregistered warrant to purchase one share of common stock. Expenses associated with this direct offering totaled $50,000.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations and other commitments as of June 30, 2016:
|
|
Payments due by period
|
|
|
|
Total
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
Thereafter
|
|
Operating leases
|
|
$
|
24,109,095
|
|
|
$
|
7,450,265
|
|
|
$
|
8,829,245
|
|
|
$
|
4,389,155
|
|
|
$
|
2,721,992
|
|
|
$
|
623,067
|
|
|
$
|
95,371
|
|
Long-term debt
|
|
|
37,495,804
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,495,804
|
|
|
|
-
|
|
|
|
-
|
|
Capital leases
|
|
|
1,532,174
|
|
|
|
550,567
|
|
|
|
837,811
|
|
|
|
143,796
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
63,137,073
|
|
|
$
|
8,000,832
|
|
|
$
|
9,667,056
|
|
|
$
|
4,532,951
|
|
|
$
|
40,217,796
|
|
|
$
|
623,067
|
|
|
$
|
95,371
|
|
Operating Leases.
We have entered into operating leases related to roof rights, cellular towers, office space, and equipment leases under various non-cancelable agreements expiring through April 2025. Certain of these operating leases include extensions, at our option, for additional terms ranging from one to twenty-five years. Amounts associated with the extension periods have not been included in the table above as it is not presently determinable which options, if any, we will elect to exercise.
Long-Term Debt
. We have entered into a loan agreement with Melody Business Finance, LLC. The $35 million term loan becomes due in October 2019. Accrued PIK interest totaled $2,495,804 as of June 30, 2016.
Capital Lease.
We have entered into capital leases to acquire property and equipment expiring through June 2018.
Critical Accounting Policies
The preparation of 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, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, we utilize available information, including our past history, industry standards and the current economic environment, among other factors, in forming our estimates and judgments, giving appropriate consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates which may impact the comparability of our results of operations to other companies in our industry. We believe that of our significant accounting policies, the following may involve a higher degree of judgment and estimation, or are fundamentally important to our business.
Revenue Recognition.
We normally enter into contractual agreements with our customers for periods ranging between one to three years. We recognize the total revenue provided under a contract ratably over the contract period including any periods under which we have agreed to provide services at no cost. Deferred revenues are recognized as a liability when billings are issued in advance of the date when revenues are earned. We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery or installation has been completed, (iii) the customer accepts and verifies receipt, and (iv) collectability is reasonably assured.
Long-Lived Assets
. Long-lived assets with definite lives consist primarily of property and equipment, and intangible assets such as acquired customer relationships. Long-lived assets are evaluated periodically for impairment or whenever events or circumstances indicate their carrying value may not be recoverable. Conditions that would result in an impairment charge include a significant decline in the fair value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. When such events or circumstances arise, an estimate of the future undiscounted cash flows produced by the asset, or the appropriate grouping of assets, is compared to the asset’s carrying value to determine if impairment exists. If the asset is determined to be impaired, the impairment loss is measured based on the excess of its carrying value over its fair value. Assets to be disposed of are reported at the lower of their carrying value or net realizable value.
Off-Balance Sheet Arrangements.
We have no off-balance sheet arrangements, financings, or other relationships with unconsolidated entities known as ‘‘Special Purposes Entities.’’