Boingo Wireless, Inc.
BOINGO WIRELESS INC (Form: 10-Q, Received: 08/11/2014 14:37:00)

Table of Contents

 

 

 

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, 2014

 

OR

 

o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to              

 

Commission file number: 001-35155

 

BOINGO WIRELESS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-4856877

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

10960 Wilshire Blvd., Suite 800

 

 

Los Angeles, California

 

90024

(Address of principal executive offices)

 

(Zip Code)

 

(310) 586-5180

(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 (§232.405 of this chapter) 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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller Reporting Company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of August 1, 2014, there were 35,808,861 shares of the registrant’s common stock outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

 

Page

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

3

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

 

 

 

Condensed Consolidated Statements of Operations

 

4

 

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity

 

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

6

 

 

 

 

 

Notes to the Condensed Consolidated Financial Statements

 

7

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

17

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

 

26

 

 

 

 

Item 4.

Controls and Procedures

 

27

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

27

 

 

 

 

Item 1A.

Risk Factors

 

27

 

 

 

 

Item 6.

Exhibits

 

27

 

 

 

 

SIGNATURES

 

28

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Boingo Wireless, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except per share amounts)

 

 

 

June 30,
2014

 

December 31,
2013

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

7,954

 

$

27,338

 

Restricted cash

 

545

 

545

 

Marketable securities

 

29,909

 

32,962

 

Accounts receivable, net

 

26,597

 

16,326

 

Prepaid expenses and other current assets

 

3,267

 

2,566

 

Deferred tax assets

 

1,192

 

1,192

 

Total current assets

 

69,464

 

80,929

 

Property and equipment, net

 

93,515

 

67,560

 

Goodwill

 

42,578

 

42,431

 

Intangible assets, net

 

21,549

 

23,413

 

Other assets

 

1,227

 

1,210

 

Total assets

 

$

228,333

 

$

215,543

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

15,392

 

$

11,642

 

Accrued expenses and other liabilities

 

20,091

 

16,908

 

Deferred revenue

 

26,467

 

19,292

 

Total current liabilities

 

 

61,950

 

47,842

 

Deferred revenue, net of current portion

 

27,646

 

21,591

 

Deferred tax liabilities

 

3,599

 

3,369

 

Other liabilities

 

 

1,264

 

2,133

 

Total liabilities

 

94,459

 

74,935

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.0001 par value; 5,000 shares authorized; no shares issued and outstanding

 

 

 

Common stock, $0.0001 par value; 100,000 shares authorized; 35,810 and 35,226 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively

 

4

 

4

 

Additional paid-in capital

 

185,643

 

182,927

 

Accumulated deficit

 

(52,370

)

(43,188

)

Total common stockholders’ equity

 

133,277

 

139,743

 

Non-controlling interests

 

597

 

865

 

Total stockholders’ equity

 

133,874

 

140,608

 

Total liabilities and stockholders’ equity

 

$

228,333

 

$

215,543

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

 

Boingo Wireless, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

28,396

 

$

26,239

 

$

54,848

 

$

49,373

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

Network access

 

13,247

 

11,035

 

26,172

 

20,705

 

Network operations

 

5,793

 

4,753

 

11,617

 

8,704

 

Development and technology

 

3,169

 

2,726

 

6,840

 

5,862

 

Selling and marketing

 

3,966

 

3,822

 

7,851

 

6,812

 

General and administrative

 

4,645

 

3,811

 

9,040

 

8,301

 

Amortization of intangible assets

 

928

 

516

 

1,853

 

915

 

Total costs and operating expenses

 

31,748

 

26,663

 

63,373

 

51,299

 

Loss from operations

 

(3,352

)

(424

)

(8,525

)

(1,926

)

Interest and other (expense) income, net

 

(18

)

25

 

1

 

72

 

Loss before income taxes

 

(3,370

)

(399

)

(8,524

)

(1,854

)

Income tax expense (benefit)

 

155

 

(173

)

303

 

(640

)

Net loss

 

(3,525

)

(226

)

(8,827

)

(1,214

)

Net income attributable to non-controlling interests

 

209

 

173

 

355

 

306

 

Net loss attributable to common stockholders

 

$

(3,734

)

$

(399

)

$

(9,182

)

$

(1,520

)

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.10

)

$

(0.01

)

$

(0.26

)

$

(0.04

)

Diluted

 

$

(0.10

)

$

(0.01

)

$

(0.26

)

$

(0.04

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

Basic

 

35,621

 

35,670

 

35,486

 

35,634

 

Diluted

 

35,621

 

35,670

 

35,486

 

35,634

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

 

Boingo Wireless, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(In thousands)

 

 

 

Common
Stock
Shares

 

Common
Stock
Amount

 

Additional
Paid-in
Capital

 

Accumulated
Deficit

 

Non-
controlling
Interests

 

Total
Stockholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

35,226

 

$

4

 

$

182,927

 

$

(43,188

)

$

865

 

$

140,608

 

Issuance of common stock under stock incentive plans

 

584

 

 

179

 

 

 

179

 

Shares withheld for taxes

 

 

 

(992

)

 

 

(992

)

Stock-based compensation expense

 

 

 

3,529

 

 

 

3,529

 

Non-controlling interests distributions

 

 

 

 

 

(623

)

(623

)

Net (loss) income

 

 

 

 

(9,182

)

355

 

(8,827

)

Balance at June 30, 2014

 

35,810

 

$

4

 

$

185,643

 

$

(52,370

)

$

597

 

$

133,874

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Boingo Wireless, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(8,827

)

$

(1,214

)

Adjustments to reconcile net loss including non-controlling interests to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization of property and equipment

 

12,315

 

8,867

 

Amortization of intangible assets

 

1,853

 

915

 

Stock-based compensation

 

3,368

 

1,847

 

Excess tax benefits from stock-based compensation

 

 

(3,138

)

Change in fair value of contingent consideration

 

(358

)

 

Change in deferred income taxes

 

230

 

 

Changes in operating assets and liabilities, net of effect of acquisition:

 

 

 

 

 

Accounts receivable

 

(10,271

)

(2,199

)

Prepaid expenses and other assets

 

(718

)

593

 

Accounts payable

 

5,531

 

(49

)

Accrued expenses and other liabilities

 

(845

)

673

 

Deferred revenue

 

13,230

 

2,970

 

Net cash provided by operating activities

 

15,508

 

9,265

 

Cash flows from investing activities

 

 

 

 

 

Purchases of marketable securities

 

(27,137

)

(27,539

)

Proceeds from sales of marketable securities

 

30,190

 

29,671

 

Purchases of property and equipment

 

(35,886

)

(12,220

)

Payments for business acquisition, net of cash acquired

 

 

(4,874

)

Net cash used in investing activities

 

(32,833

)

(14,962

)

Cash flows from financing activities

 

 

 

 

 

Excess tax benefits from stock-based compensation

 

 

3,138

 

Proceeds from exercise of stock options

 

179

 

291

 

Repurchase and retirement of common stock

 

 

(1,062

)

Payments of capital leases and notes payable

 

(348

)

(59

)

Payments of acquired notes payable and financed liabilities

 

 

(6,079

)

Payment of holdback consideration

 

(275

)

 

Payments of withholding tax on net issuance of restricted stock units

 

(992

)

 

Payments to non-controlling interests

 

(623

)

(578

)

Net cash used in financing activities

 

(2,059

)

(4,349

)

Net decrease in cash and cash equivalents

 

(19,384

)

(10,046

)

Cash and cash equivalents at beginning of period

 

27,338

 

58,138

 

Cash and cash equivalents at end of period

 

$

7,954

 

$

48,092

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

Property and equipment costs in accounts payable, accrued expenses and other liabilities

 

12,075

 

2,797

 

Assets acquired in business acquisition

 

 

17,317

 

Liabilities assumed in business acquisition

 

 

12,443

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Boingo Wireless, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except shares and per share amounts)

 

1. The business

 

Boingo Wireless, Inc. and its subsidiaries (collectively “we, “us”, “our” or “the Company”) is a leading global provider of mobile Internet solutions for smartphones, tablet computers, laptops, and other wireless-enabled consumer devices. The Company has more than a million small cell networks for cellular distributed antenna system (“DAS”) and Wi-Fi access that reach more than one billion consumers annually. Boingo Wireless, Inc. was incorporated on April 16, 2001 in the State of Delaware. We have a diverse monetization model that enables us to generate revenues from wholesale partnerships, retail sales, and advertising across these small cell networks. Wholesale offerings include Wi-Fi roaming, private label Wi-Fi, location based services, and DAS, which are cellular extension networks. Retail products include Wi-Fi subscriptions and day passes that provide access to more than 1,000,000 commercial hotspots worldwide, and Internet Protocol television (“IPTV”) services and residential broadband for military barracks. Advertising revenue is driven by Wi-Fi sponsorships at airports, hotels, cafes and restaurants, and public spaces. Our customers include some of the world’s largest carriers, telecommunications service providers and global consumer brands, as well as Internet savvy consumers on the go and troops stationed at military bases.

 

2. Summary of significant accounting policies

 

Basis of presentation

 

The accompanying interim unaudited condensed consolidated financial statements and related notes for the three and six months ended June 30, 2014 and 2013 are unaudited. The unaudited interim condensed consolidated financial information has been prepared in accordance with the rules and regulations of the SEC for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”) in the United States of America (“U.S.”) for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2013 contained in our annual report on Form 10-K filed with the SEC on March 17, 2014. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and in the opinion of management, reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our results of operations and cash flows for the three and six months ended June 30, 2014 and 2013, and our financial position as of June 30, 2014. The year-end balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. Interim results are not necessarily indicative of the results to be expected for an entire year or any other future year or interim period.

 

Principles of consolidation

 

The unaudited condensed consolidated financial statements include our accounts and the accounts of our majority owned subsidiaries. We consolidate our 70% ownership of Concourse Communications Detroit, LLC, our 70% ownership of Chicago Concourse Development Group, LLC and our 75% ownership of Boingo Holding Participacoes Ltda. in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation . Other parties’ interests in consolidated entities are reported as non-controlling interests. All intercompany balances and transactions have been eliminated in consolidation.

 

Business combinations

 

The results of businesses acquired in a business combination are included in the Company’s condensed consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities of an acquired business being recorded at their estimated fair values on the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill.

 

The Company performs valuations of assets acquired and liabilities assumed for a business acquisition and allocates the purchase price to its respective net tangible and intangible assets. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates including the selection of valuation methodologies, estimates of future revenues and cash flows, discount rates, royalty rates and selection of comparable companies. The Company engages the assistance of valuation specialists in concluding on fair values of assets and liabilities assumed in a business combination.

 

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Table of Contents

 

Transaction costs associated with business combinations are expensed as incurred, and are included in general and administrative expenses in the condensed consolidated statements of operations. There were no significant transaction costs associated with business combinations for the three and six months ended June 30, 2014. Transaction costs associated with business combinations were $34 and $192 for the three and six months ended June 30, 2013, respectively.

 

Segment and geographical information

 

We operate as one reportable segment; a service provider of mobile Internet solutions across our managed and operated network and aggregated network for mobile devices such as laptops, smartphones, tablet computers and other wireless-enabled consumer devices. This single segment is consistent with the internal organization structure and the manner in which operations are reviewed and managed by our Chief Executive Officer, the chief operating decision maker.

 

Revenue is predominately generated and all significant long-lived tangible assets are held in the U.S. We do not disclose sales by geographic area because to do so would be impracticable. The following is a summary of our revenue by primary revenue source:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenue:

 

 

 

 

 

 

 

 

 

Wholesale

 

$

12,872

 

$

12,339

 

$

23,995

 

$

23,894

 

Retail subscription

 

8,161

 

8,731

 

16,455

 

16,798

 

Retail single-use

 

2,830

 

2,830

 

5,366

 

5,416

 

Advertising and other

 

4,533

 

2,339

 

9,032

 

3,265

 

Total revenue

 

$

28,396

 

$

26,239

 

$

54,848

 

$

49,373

 

 

Marketable securities

 

Our marketable securities consist of available-for-sale securities with original maturities exceeding three months. In accordance with FASB ASC 320,  Investments—Debt and Equity Securities, we have classified securities, which have readily determinable fair values and are highly liquid, as short-term because such securities are expected to be realized within a one-year period. At June 30, 2014 and December 31, 2013, we had $29,909 and $32,962, respectively, in marketable securities.

 

Marketable securities are reported at fair value with the related unrealized gains and losses reported as other comprehensive income (loss) until realized or until a determination is made that an other-than-temporary decline in market value has occurred. No significant unrealized gains and losses have been reported during the periods presented. Factors considered by us in assessing whether an other-than-temporary impairment has occurred include the nature of the investment, whether the decline in fair value is attributable to specific adverse conditions affecting the investment, the financial condition of the investee, the severity and the duration of the impairment and whether we have the ability to hold the investment to maturity. When it is determined that an other-than-temporary impairment has occurred, the investment is written down to its market value at the end of the period in which it is determined that an other-than-temporary decline has occurred. The cost of marketable securities sold is based upon the specific identification method. Any realized gains or losses on the sale of investments are reflected as a component of interest and other (expense) income, net.

 

For the six months ended June 30, 2014, we had no significant realized or unrealized gains or losses from investments in marketable securities classified as available-for-sale.

 

Revenue recognition

 

We generate revenue from several sources including: (i) platform service arrangements with wholesale customers that provide software licensing, network access, and professional services fees, (ii) wholesale customers that are telecom operators under long-term contracts for access to our DAS at our managed and operated locations, (iii) retail customers under subscription plans for month-to-month network access that automatically renew, and retail single-use access from sales of hourly, daily or other single-use access plans, and (iv) display advertisements and sponsorships on our walled garden sign-in pages. Software licensed by our wholesale platform services customers can only be used during the term of the service arrangements and has no utility to them upon termination of the service arrangement.

 

We recognize revenue when an arrangement exists, services have been rendered, fees are fixed or determinable, no significant obligations remain related to the earned fees and collection of the related receivable is reasonably assured.

 

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Table of Contents

 

Services provided to wholesale partners under platform service arrangements generally contain several elements including: (i) a term license to use our software to access our Wi-Fi network, (ii) access fees for network usage, and (iii) professional services for software integration and customization and to maintain the Wi-Fi service. The term license, monthly minimum network access fees and professional services are billed on a monthly basis based upon predetermined fixed rates. Once the term license for integration and customization are delivered, the fees from the arrangement are recognized ratably over the remaining term of the platform service arrangement. The initial term of platform service license agreements is generally between one to five years and the agreements generally contain renewal clauses. Revenue for network access fees in excess of the monthly minimum amounts is recognized when earned. All elements within existing platform service arrangements are generally delivered and earned concurrently throughout the term of the respective service arrangement.

 

Revenue generated from access to our DAS networks consists of build-out fees and recurring access fees under certain long-term contracts with telecom operators. Build-out fees paid upfront are generally deferred and recognized ratably over the term of the estimated customer relationship period, once the build-out is complete. Minimum monthly access fees for usage of the DAS networks are non-cancellable and generally escalate on an annual basis. These minimum monthly access fees are recognized ratably over the term of the telecom operator agreement. The initial term of our contracts with telecom operators and wholesale partners generally range from three to fifteen years and the agreements generally contain renewal clauses. Revenue from network access fees in excess of the monthly minimums is recognized when earned.

 

In instances where the minimum monthly network access fees escalate over the term of the wholesale service arrangement, an unbilled receivable is recognized when performance is within our control and when we have reasonable assurance that the unbilled receivable balance will be collected.

 

We adopted the provisions of Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605)—Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”), on a prospective basis on January 1, 2011. For multiple-deliverable arrangements entered into prior to January 1, 2011 that are accounted for under ASC 605-25, Revenue Recognition—Multiple- Deliverable Revenue Arrangements , we defer recognition of revenue for the full arrangement and recognize all revenue ratably over the wholesale service period for platform service arrangements and the term of the estimated customer relationship period for DAS arrangements, because we do not have evidence of fair value for the undelivered elements in the arrangement. For multiple-deliverable arrangements entered into or materially modified after January 1, 2011 that are accounted for under ASC 605-25, we evaluate whether or not separate units of accounting exist and then allocate the arrangement consideration to all units of accounting based on the relative selling price method using estimated selling prices because vendor specific objective evidence and third party evidence is not available. We recognize the revenue associated with the separate units of accounting upon completion of such services or ratably over the wholesale service period for platform service arrangements and the term of the estimated customer relationship period for DAS arrangements.

 

Subscription fees from retail customers are paid monthly in advance and revenue is deferred for the portions of monthly recurring subscription fees collected in advance. We do not have a stated or published refund policy for our Wi-Fi service, although our customer service representatives will provide a refund on a case-by-case basis. These amounts are not significant and are recorded as contra-revenue in the period the refunds are made. Subscription fee revenue is recognized ratably over the subscription period. Revenue generated from retail single-use access is recognized when earned.

 

Advertising revenue is generated from advertisements on our managed and operated or partner networks. In determining whether an arrangement exists, we ensure that a binding arrangement is in place, such as a standard insertion order or a fully executed customer-specific agreement. Obligations pursuant to our advertising revenue arrangements typically include a minimum number of units or the satisfaction of certain performance criteria. Advertising and other revenue is recognized when the services are performed.

 

Recent accounting pronouncements

 

On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , which is intended to improve and converge the financial reporting requirements for revenue from contracts with customers between U.S. GAAP and International Accounting Standards. In accordance with this new standard, an entity would recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard establishes a five-step model and related application guidance, which will replace most existing revenue recognition guidance in U.S. GAAP. The standard will be effective for annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption is not permitted. An entity may choose to adopt the new standard either retrospectively or through a cumulative effect adjustment as of the start of the first period for which it applies the new standard. We are currently evaluating the expected impact of this new standard on our reporting of revenue contracts in our consolidated financial statements.

 

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Table of Contents

 

3. Acquisitions

 

Electronic Media Systems, Inc. and Advanced Wireless Group, LLC

 

On October 31, 2013, we acquired all outstanding stock of Electronic Media Systems, Inc. and all membership interests in its subsidiary, Advanced Wireless Group, LLC, not otherwise owned by Electronic Media Systems, Inc. such that we are now the beneficial owner of all membership interests of Advanced Wireless, Group, LLC (collectively, “AWG”). AWG operates public Wi-Fi in seventeen U.S. airports including Los Angeles International, Charlotte/Douglas International, Miami International, Minneapolis- St. Paul International, Detroit Metropolitan Airport, and Boston’s Logan International. We have included the operating results of AWG in our condensed consolidated financial statements since the date of acquisition.

 

The acquisition has been accounted for under the acquisition method of accounting in accordance with FASB ASC 805, Business Combinations . As such, the assets acquired and liabilities assumed are recorded at their acquisition-date fair values. The total purchase price was $17,527, which includes cash paid at closing, net equity adjustments, holdback consideration to be paid and the fair value of additional contingent consideration that would be due and payable upon the successful extension of a specified airport Wi-Fi contract. On July 29, 2014, we paid $147 to the previous AWG shareholders as settlement for the net equity adjustments that were not finalized as of the acquisition date.

 

The fair value of the contingent consideration is based on Level 3 inputs, which are discussed in Note 6. Further changes in the fair value of the contingent consideration are recorded through operating loss. On July 29, 2014, we paid the contingent consideration in the amount of $1,000 to the previous AWG shareholders. We allocated the excess of the purchase price over the fair value of assets acquired and liabilities assumed to goodwill, which is primarily not deductible for tax purposes. The goodwill arising from the AWG acquisition is attributable primarily to expected synergies and other benefits, including the acquired workforce, from combining AWG with us.

 

The deferred tax liabilities are provisional pending the filing of AWG’s final short period 2013 tax returns. The contingent consideration was valued at the date of acquisition using a discount rate of 3.1%. The identifiable intangible assets were primarily valued using the excess earnings, relief from royalty, with-and-without and replacement cost methods using discount rates ranging from 12.0% to 14.0% and royalty rates of 0.5%.

 

The amortizable intangible assets are being amortized straight-line over their estimated useful lives. The following summarizes the preliminary purchase price allocation:

 

 

 

Estimated Fair
Value

 

Weighted Average
Estimated Useful
Life (years)

 

Consideration:

 

 

 

 

 

Cash paid

 

$

14,800

 

 

 

Net equity adjustments

 

147

 

 

 

Holdback consideration

 

1,600

 

 

 

Contingent consideration

 

980

 

 

 

Total consideration

 

$

17,527

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed:

 

 

 

 

 

Cash

 

$

215

 

 

 

Restricted cash

 

515

 

 

 

Accounts receivable

 

988

 

 

 

Other current assets

 

609

 

 

 

Property and equipment

 

2,297

 

 

 

Accounts payable

 

(563

)

 

 

Accrued expenses

 

(515

)

 

 

Other current liabilities

 

(134

)

 

 

Capital lease obligations

 

(932

)

 

 

Other non-current liabilities

 

(130

)

 

 

Deferred tax liabilities

 

(3,561

)

 

 

Net tangible liabilities acquired

 

(1,211

)

 

 

Existing airport contracts and relationships

 

4,700

 

6.7

 

Technology

 

270

 

6.0

 

Trademark and tradename

 

120

 

3.0

 

Non-compete agreement

 

3,590

 

5.0

 

Goodwill

 

10,058

 

 

 

Total purchase price

 

$

17,527

 

 

 

 

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Table of Contents

 

Endeka Group, Inc.

 

On February 22, 2013, we acquired all outstanding stock of Endeka Group, Inc. (“Endeka”). Endeka is a provider of commercial wireless broadband and IPTV services at certain military bases, as well as Wi-Fi services to certain federal law enforcement training facilities. We acquired Endeka because Endeka’s portfolio of venues and management team are natural additions to our managed network business. We have included the operating results of Endeka in our condensed consolidated financial statements since the date of acquisition.

 

The acquisition has been accounted for under the acquisition method of accounting in accordance with FASB ASC 805. As such, the assets acquired and liabilities assumed are recorded at their acquisition-date fair values. The total purchase price was $6,498, which includes cash paid at closing, holdback consideration to be paid and the fair value of additional contingent consideration comprised of two components: (i) a payment (“Build Payment”) if the amount of the capital expenditures incurred for the substantial completion of a specified build project is less than a target; and (ii) a payment (“Milestone Payment”) based on revenue generated by certain contracts in fiscal year 2014. There is no maximum to the contingent consideration payments for the Milestone Payment. We do not expect to make any payments associated with the Build Payment. The Milestone Payment will be paid on February 28, 2015.

 

The fair value of the contingent consideration is based on Level 3 inputs. Further changes in the fair value of the contingent consideration are recorded through operating (loss) income. We allocated the excess of the purchase price over the fair value of assets acquired and liabilities assumed to goodwill, which is not deductible for tax purposes. The goodwill arising from the Endeka acquisition is attributable primarily to expected synergies and other benefits, including the acquired workforce, from combining Endeka with us.

 

The contingent consideration was valued at the date of acquisition using a discounted cash flow method with probability weighted cash flows and a discount rate of 50.5%. The identifiable intangible assets were primarily valued using the excess earnings, relief from royalty, and replacement cost methods using discount rates ranging from 40.0% to 50.0% and royalty rates ranging from 0.5% to 1.5%, where applicable.

 

The amortizable intangible assets are being amortized straight-line over their estimated useful lives. The following summarizes the final purchase price allocation:

 

 

 

Estimated Fair
Value

 

Estimated Useful
Life (years)

 

Consideration:

 

 

 

 

 

Cash paid

 

$

4,894

 

 

 

Holdback consideration

 

275

 

 

 

Contingent consideration

 

1,329

 

 

 

Total consideration

 

$

6,498

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed:

 

 

 

 

 

Cash

 

$

20

 

 

 

Other current assets

 

44

 

 

 

Property and equipment

 

4,617

 

 

 

Other assets

 

12

 

 

 

Accounts payable

 

(992

)

 

 

Other current liabilities

 

(211

)

 

 

Notes payable and financed liabilities

 

(6,476

)

 

 

Deferred tax liabilities

 

(2,637

)

 

 

Net tangible liabilities acquired

 

(5,623

)

 

 

Existing customer contracts and relationships

 

4,770

 

10.0

 

Technology

 

930

 

6.0

 

Trademark and tradename

 

300

 

10.0

 

Non-compete agreement

 

250

 

2.0

 

Other intangibles

 

95

 

10.0

 

Goodwill

 

5,776

 

 

 

Total purchase price

 

$

6,498

 

 

 

 

During the six months ended June 30, 2014, we paid the holdback consideration in the amount of $275 to the previous Endeka shareholders.

 

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Table of Contents

 

Pro forma results

 

The following table presents the unaudited pro forma results of the Company for the three and six months ended June 30, 2013 as if the acquisitions of AWG and Endeka had occurred on January 1, 2012. These results are not intended to reflect the actual operations of the Company had the acquisitions occurred on January 1, 2012. We did not record any incremental income taxes for pro forma net loss because we established a valuation allowance in 2013.

 

 

 

Three Months Ended
June 30, 2013

 

Six Months Ended
June 30, 2013

 

 

 

 

 

 

 

Revenue

 

$

28,694

 

$

54,191

 

Net loss

 

$

(341

)

$

(2,463

)

 

Goodwill

 

The following table sets forth the changes in our goodwill balance during the period:

 

Beginning balance, January 1, 2014

 

$

42,431

 

Additions

 

147

 

Balance, June 30, 2014

 

$

42,578

 

 

4. Cash and cash equivalents

 

Cash and cash equivalents consisted of the following:

 

 

 

June 30,
2014

 

December 31,
2013

 

Cash and cash equivalents:

 

 

 

 

 

Cash

 

$

3,659

 

$

3,655

 

Money market accounts

 

4,295

 

23,683

 

Total cash and cash equivalents

 

$

7,954

 

$

27,338

 

 

For the six months ended June 30, 2014 and 2013, interest income was $86 and $104, respectively, which is included in interest and other (expense) income, net in the accompanying condensed consolidated statements of operations.

 

5. Property and equipment

 

Property and equipment consisted of the following:

 

 

 

June 30,
2014

 

December 31,
2013

 

Leasehold improvements

 

$

119,261

 

$

97,462

 

Construction in progress

 

28,763

 

18,157

 

Computer equipment

 

7,611

 

7,372

 

Software

 

14,775

 

10,452

 

Office equipment

 

422

 

412

 

Total property and equipment

 

170,832

 

133,855

 

Less: accumulated depreciation and amortization

 

(77,317

)

(66,295

)

Total property and equipment, net

 

$

93,515

 

$

67,560

 

 

Depreciation and amortization of property and equipment is allocated as follows in the accompanying condensed consolidated statements of operations:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Network access

 

$

4,511

 

$

3,205

 

$

8,373

 

$

6,082

 

Network operations

 

1,182

 

1,008

 

2,369

 

1,816

 

Development and technology

 

782

 

472

 

1,479

 

888

 

General and administrative

 

56

 

49

 

94

 

81

 

Total depreciation and amortization of property and equipment

 

$

6,531

 

$

4,734

 

$

12,315

 

$

8,867

 

 

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Table of Contents

 

6. Fair value measurement

 

ASC 820 establishes a three-tiered hierarchy that draws a distinction between market participant assumptions based on (i) quoted prices (unadjusted) in active markets for identical assets and liabilities (Level 1); (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2); and (iii) unobservable inputs that require us to use present value and other valuation techniques in the determination of fair value (Level 3). The following table sets forth our financial assets and liabilities that are measured at fair value on a recurring basis:

 

At June 30, 2014

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

4,295

 

$

 

$

 

$

4,295

 

Marketable securities

 

 

29,909

 

 

29,909

 

Restricted cash

 

545

 

 

 

545

 

Total assets

 

$

4,840

 

$

29,909

 

$

 

$

34,749

 

Liabilities:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

$

 

$

1,584

 

$

1,584

 

Total liabilities

 

$

 

$

 

$

1,584

 

$

1,584

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2013

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

23,683

 

$

 

$

 

$

23,683

 

Marketable securities

 

 

32,962

 

 

32,962

 

Restricted cash

 

545

 

 

 

545

 

Total assets

 

$

24,228

 

$

32,962

 

$

 

$

57,190

 

Liabilities:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

$

 

$

1,942

 

$

1,942

 

Total liabilities

 

$

 

$

 

$

1,942

 

$

1,942

 

 

Our marketable securities utilize Level 2 inputs and consist primarily of corporate securities which include commercial paper and corporate debt instruments including notes issued by foreign or domestic corporations which pay in U.S. dollars and carry a rating of A or better. We have evaluated the various types of securities in our investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs.  Due to variations in trading volumes and the lack of quoted market prices in active markets, our fixed maturities are classified as Level 2 securities. The fair value of our fixed maturity marketable securities is derived through the use of a third party pricing source using recent reported trades for identical or similar securities, making adjustments through the reporting date based upon available market observable data.

 

The Company used the income approach to value the contingent consideration as of June 30, 2014. The contingent consideration used a discounted cash flow method with probability weighted cash flows for Endeka. The contingent consideration for AWG was paid out subsequent to June 30, 2014. The following table presents a reconciliation of the beginning and ending amounts related to the fair value of contingent consideration for the Endeka and AWG acquisitions, categorized as Level 3:

 

Beginning balance, January 1, 2014

 

$

1,942

 

Change in fair value

 

(358

)

Balance, June 30, 2014

 

$

1,584

 

 

7. Accrued expenses and other liabilities

 

Accrued expenses and other liabilities consisted of the following:

 

 

 

June 30,
2014

 

December 31,
2013

 

Revenue share

 

$

3,870

 

$

4,598

 

Salaries and wages

 

2,367

 

3,024

 

Accrued for construction-in-progress

 

6,261

 

2,717

 

Accrued partner network

 

749

 

736

 

Deferred rent

 

828

 

853

 

Holdback liabilities

 

1,600

 

1,875

 

Contingent consideration

 

1,584

 

980

 

Other

 

2,832

 

2,125

 

Total accrued expenses and other liabilities

 

$

20,091

 

$

16,908

 

 

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Table of Contents

 

8. Income taxes

 

We calculate our interim income tax provision in accordance with ASC 270,  Interim Reporting , and ASC 740, Accounting for Income Taxes . At the end of each interim period, we estimate the annual effective tax rate and apply that rate to our ordinary quarterly earnings. The tax expense or benefit related to significant, unusual, or extraordinary items is recognized in the interim period in which those items occur. In addition, the effect of changes in enacted tax laws, rates, or tax status is recognized in the interim period in which the change occurs.

 

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment, including the expected operating income (loss) for the year, projections of the proportion of income (loss) earned and taxed in various states, permanent and temporary differences as a result of differences between amounts measured and recognized in accordance with tax laws and financial accounting standards, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained, or as the tax environment changes.

 

Income tax expense (benefit) of $303 and $(640) reflects an effective tax rate of (3.6)% and 34.5% for the six months ended June 30, 2014 and 2013, respectively. Our effective tax rate differs from the statutory rate primarily due to our valuation allowance for the six months ended June 30, 2014. Our effective tax rate differs from the statutory rate primarily due to benefits from disqualifying dispositions of incentive stock options and non-tax deductible transaction costs related to the acquisition of Endeka for the six months ended June 30, 2013. At June 30, 2014, we have net deferred tax liabilities of $2,407, which include net operating loss carry-forwards. As of June 30, 2014 and December 31, 2013, we had $455 and $445, respectively, of uncertain tax positions, $106 of which is a reduction to deferred tax assets, which is presented net of uncertain tax positions, in the accompanying condensed consolidated balance sheets. We accrue interest and penalties related to unrecognized tax benefits as a component of income taxes. As of June 30, 2014 and December 31, 2013, we have accrued $63 and $53, respectively, for related interest, net of federal income tax benefits, and penalties. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of June 30, 2014 was $286.

 

We are subject to taxation in the United States and in various states. Our tax years 2010 and forward are subject to examination by the IRS and our tax years 2009 and forward are subject to examination by material state jurisdictions. However, due to prior year loss carryovers, the IRS and state tax authorities may examine any tax years for which the carryovers are used to offset future taxable income. We are currently subject to examination by the IRS for our 2011 tax year. Although the ultimate outcome is unknown, we believe that any adjustments that may result from the examination is not likely to have a material, adverse effect on our condensed consolidated results of operations, financial position or cash flows.

 

9. Commitments and contingencies

 

Letters of credit

 

We have entered into Letter of Credit Authorization agreements (collectively, “Letters of Credit”) with Silicon Valley Bank. The Letters of Credit are irrevocable and serve as performance guarantees that will allow our customers to draw upon the available funds if we are in default. As of June 30, 2014, we have Letters of Credit totaling $2,857 that are scheduled to expire over the next thirteen-month period. There have been no drafts drawn under these Letters of Credit as of June 30, 2014.

 

Legal proceedings

 

From time to time, we may be subject to claims, suits, investigations and proceedings arising out of the normal course of business. We are not currently a party to any litigation that we believe could have a material adverse effect on our business, financial position, results of operations or cash flows.

 

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Table of Contents

 

10. Stock incentive plans

 

In March 2011, our board of directors approved the 2011 Equity Incentive Plan (“2011 Plan”).  The 2011 Plan provides for the grant of incentive and nonstatutory stock options, stock appreciation rights, restricted shares of our common stock, stock units, and performance cash awards.  As of January 1 of each year, the number of shares of common stock reserved for issuance under our stock incentive plan shall automatically be increased by a number equal to the lesser of (a) 4.5% of the total number of shares of common stock then outstanding, (b) 3,000,000 shares of common stock and (c) as determined by our board of directors.  As of June 30, 2014, 8,693,162 shares of common stock are reserved for issuance.

 

No further awards will be made under our Amended and Restated 2001 Stock Incentive Plan (“2001 Plan”), and it will be terminated.  Options outstanding under the 2001 Plan will continue to be governed by their existing terms.

 

Stock-based compensation expense is allocated as follows on the accompanying condensed consolidated statements of operations:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Network operations

 

$

351

 

$

231

 

$

639

 

$

397

 

Development and technology

 

119

 

142

 

260

 

99

 

Selling and marketing

 

402

 

340

 

736

 

458

 

General and administrative

 

979

 

532

 

1,733

 

893

 

Total stock-based compensation

 

$

1,851

 

$

1,245

 

$

3,368

 

$

1,847

 

 

We capitalized $126 and $161 of stock-based compensation expense during the three and six months ended June 30, 2014, respectively.

 

Stock option awards

 

We grant stock option awards to both employees and non-employee directors. The grant date for these awards is the same as the measurement date. The stock option awards generally vest over a four year service period with 25% vesting when the individual completes 12 months of continuous service and the balance vesting monthly thereafter subject to continuous service on each vesting date. These awards are valued as of the measurement date and the stock-based compensation expense, net of estimated and actual forfeitures, is recognized on a straight-line basis over the requisite service period.

 

A summary of the stock option activity is as follows:

 

 

 

Number of
Options (000’s)

 

Weighted
Average
Exercise
Price

 

Weighted-
Average
Remaining
Contract
Life (years)

 

Aggregate
Intrinsic
Value

 

Outstanding at December 31, 2013

 

4,955

 

$

6.31

 

6.6

 

$

9,535

 

Granted

 

203

 

$

5.99

 

 

 

 

 

Exercised

 

(203

)

$

0.88

 

 

 

 

 

Canceled/forfeited

 

(176

)

$

8.28

 

 

 

 

 

Outstanding at June 30, 2014

 

4,779

 

$

6.46

 

6.3

 

$

9,567

 

Vested, exercisable and expected to vest at June 30, 2014

 

4,653

 

$

6.43

 

6.3

 

$

9,522

 

Exercisable at June 30, 2014

 

2,919

 

$

5.27

 

5.0

 

$

9,005

 

 

The significant assumptions used for newly-issued stock option grants for the six months ended June 30, 2014 were an expected term of 6.25 years, an expected volatility of 48.6%, a risk free interest rate of 1.8% and no expected dividends.  The weighted average grant date fair value for stock option grants for the six months ended June 30, 2014 was $2.92.

 

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Table of Contents

 

Restricted stock unit awards

 

During the six months ended June 30, 2014, we granted time-based restricted stock units (“RSU”) to executive and non-executive personnel and non-employee directors. The time-based RSUs granted to executive and non-executive personnel generally vest over a two to three year period subject to continuous service on each vesting date. The time-based RSUs for our non-employee directors generally vest over a one year period for existing members and 25% per year over a four-year period for new members subject to continuous service on each vesting date.

 

During the six months ended June 30, 2014, we granted performance-based RSUs to executive personnel. These awards vest subject to certain performance objectives based on the Company’s annual revenue growth achieved during the specified performance period and certain long-term service conditions. The maximum number of RSUs that may vest is determined based on actual Company achievement with one-third of the performance-based RSUs vesting when the individual completes 12 months of continuous service and the balance vesting over a series of eight successive equal quarterly installments thereafter subject to continuous service on each vesting date. We recognize stock-based compensation expense for performance-based RSUs when we believe that it is probable that the performance objectives will be met.

 

A summary of the nonvested RSU activity under the 2011 Plan is as follows:

 

 

 

Number of Shares
(000’s)

 

Weighted Average
Grant-Date Fair
Value

 

Nonvested at December 31, 2013

 

753

 

$

6.22

 

Granted

 

1,516

 

$

5.96

 

Vested

 

(540

)

$

6.24

 

Forfeited

 

(60

)

$

5.91

 

Nonvested at June 30, 2014

 

1,669

 

$

5.99

 

 

During the six months ended June 30, 2014, 539,773 shares of time-based RSUs vested. The Company issued 380,526 shares and the remaining shares were withheld to pay minimum statutory federal, state, and local employment payroll taxes on those vested awards.

 

11. Net loss per share attributable to common stockholders

 

The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(in thousands)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders, basic and diluted

 

$

(3,734

)

$

(399

)

$

(9,182

)

$

(1,520

)

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common stock, basic and diluted

 

35,621

 

35,670

 

35,486

 

35,634

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.10

)

$

(0.01

)

$

(0.26

)

$

(0.04

)

 

For the three and six months ended June 30, 2014 and 2013, we excluded all stock options and RSUs from the computation of diluted net loss per share due to the net loss for the quarter as the inclusion would be anti-dilutive.

 

On April 1, 2013, the Company approved a stock repurchase program to repurchase up to $10,000 of the Company’s common stock in the open market, exclusive of any commissions, markups or expenses. The stock repurchased will be retired and will resume the status of authorized but unissued shares of common stock. The Company did not repurchase any of our common stock during the six months ended June 30, 2014. During the six months ended June 30, 2013, we repurchased and retired 155,000 shares under this program for approximately $1,056, excluding commissions paid, or an average price per share of $6.81. As of June 30, 2014, the remaining approved amount for repurchases was approximately $5,180.

 

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Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in “Item 1. Financial Statements” of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and the section titled “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities Exchange Commission on March 17, 2014.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, as amended, based on our current expectations, estimates and projections about our operations, industry, financial condition, performance, results of operations, and liquidity. Statements containing words such as “may,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “project,” “projections,” “business outlook,” “estimate,” or similar expressions constitute forward-looking statements. These forward-looking statements include, but are not limited to, statements about future financial performance; revenues; metrics; operating expenses; market trends, including those in the markets in which we compete; operating and marketing efficiencies; liquidity; cash flows and uses of cash; dividends; capital expenditures; depreciation and amortization; tax payments; foreign currency exchange rates; hedging arrangements; our ability to repay indebtedness, pay dividends and invest in initiatives; our products and services; pricing; competition; strategies; and new business initiatives, products, services, and features. Potential factors that could affect the matters about which the forward-looking statements are made include, among others, the factors disclosed in the section entitled “Risk Factors” in this Quarterly Report on Form 10-Q and additional factors that accompany the related forward-looking statements in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as the date hereof. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that may cause actual performance and results to differ materially from those predicted. Reported results should not be considered an indication of future performance. Except as required by law, we undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

Overview

 

Boingo helps the world stay connected.

 

We have established a global footprint of small cell networks that provide high-speed, high-bandwidth wireless Internet service to smartphones, tablet computers, laptops, and other wireless-enabled devices. Small cells are low-powered radio access nodes that operate in licensed and unlicensed spectrum that have a range of 10 meters to 1 to 2 kilometers. These small cell networks cover more than a million distributed antenna system (“DAS”) and Wi-Fi locations and reach more than one billion consumers annually. With the proliferation of mobile Internet-enabled wireless devices, and growth of high-bandwidth usage from streaming media and smartphone apps, we expect these small cells to play a significant role in helping meet the ever-increasing data demands of connected consumers who are accustomed to the benefits of broadband performance at home and work and are seeking the same applications, performance and availability on-the-go.

 

Our small cell networks include DAS and Wi-Fi networks that we manage and operate ourselves, which we refer to as our “managed and operated” locations, as well as Wi-Fi networks managed and operated by third-parties with whom we contract for access, which we refer to as our “roaming” networks. Our managed and operated locations are typically located in large venues with big audiences, such as airports, stadiums, arenas, universities, convention centers, shopping malls, and military bases where we install a wireless network infrastructure and generally have exclusive multi-year agreements. Our roaming networks comprise more than 1,000,000 commercial Wi-Fi hotspots in over 100 countries around the world. We also sell advertising and sponsorships on other Wi-Fi networks that are not part of our network on behalf of the network owner.

 

We generate revenue through wholesale partnerships, retail sales, and advertising and sponsorships. We have direct customer relationships with users who have purchased our mobile Internet services, and we also provide mobile Internet access and solutions to our partners, which include telecom operators, cable companies, technology companies, enterprise software and services companies, and communications service providers to allow their millions of users to connect to the mobile Internet through hotspots in our network. Our software solution—which provides one-click access to our global footprint of hotspots—has been rebranded for wholesale partners, in addition to being marketed under the Boingo brand. In combination with our back-end system infrastructure, it creates a global roaming solution for operators, carriers and other service providers.

 

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Table of Contents

 

We generate wholesale revenue from telecom operators that pay us build-out fees and recurring access fees so that their cellular customers may use our DAS networks at locations where we manage and operate the wireless network. In addition, our partners pay us usage-based Wi-Fi network access and software licensing fees to allow their customers’ access to our footprint worldwide.

 

We generated revenue from individual users purchasing month-to-month retail subscription plans that automatically renew hotspot specific single-use access to our network, or residential broadband and Internet Protocol television (“IPTV”) services in military barracks. As of June 30, 2014 and 2013, we had approximately 300,000 and 313,000 subscribers, respectively.

 

We also generate revenue from advertisers that seek to reach our users with sponsored access, promotional programs and online display advertising at locations where we manage and operate the Wi-Fi network and locations where we solely provide authorized access to a partner’s Wi-Fi network through sponsored access and promotional programs.

 

We believe we are the leading global provider of commercial mobile Wi-Fi Internet solutions and indoor DAS services for carriers. Key elements of our strategy are to:

 

·                        expand our footprint of managed and operated and aggregated networks;

 

·                        leverage our neutral-host business model to accelerate wholesale roaming and carrier offload partnerships;

 

·                        maximize advertising and sponsorship sell-through for our inventory of advertising-enabled networks; and

 

·                        increase our brand awareness.

 

Reconciliation of Non-GAAP Financial Measures

 

We define Adjusted EBITDA as net loss attributable to common stockholders plus depreciation and amortization of property and equipment, income tax expense (benefit), amortization of intangible assets, stock-based compensation expense, non-controlling interests and interest and other expense (income), net.

 

We believe that Adjusted EBITDA is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods. We believe that:

 

·                        Adjusted EBITDA provides investors and other users of our financial information consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations and facilitates comparisons with other companies, many of which use similar non-generally accepted accounting principles in the United States (“GAAP”) financial measures to supplement their GAAP results; and

 

·                        it is useful to exclude non-cash charges, such as depreciation and amortization of property and equipment, amortization of intangible assets and stock-based compensation, from Adjusted EBITDA because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations, and these expenses can vary significantly between periods as a result of full amortization of previously acquired tangible and intangible assets or the timing of new stock-based awards.

 

We use Adjusted EBITDA in conjunction with traditional GAAP measures as part of our overall assessment of our performance, for planning purposes, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance.

 

We do not place undue reliance on Adjusted EBITDA as our only measure of operating performance. Adjusted EBITDA should not be considered as a substitute for other measures of financial performance reported in accordance with GAAP. There are limitations to using non-GAAP financial measures, including that other companies may calculate these measures differently than we do.

 

We compensate for the inherent limitations associated with using Adjusted EBITDA through disclosure of these limitations, presentation of our financial statements in accordance with GAAP and reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net loss attributable to common stockholders.

 

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Table of Contents

 

The following provides a reconciliation of net loss attributable to common stockholders to Adjusted EBITDA:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(3,734

)

$

(399

)

$

(9,182

)

$

(1,520

)

Depreciation and amortization of property and equipment

 

6,531

 

4,734

 

12,315

 

8,867

 

Income tax expense (benefit)

 

155

 

(173

)

303

 

(640

)

Amortization of intangible assets

 

928

 

516

 

1,853

 

915

 

Stock-based compensation expense

 

1,851

 

1,245

 

3,368

 

1,847

 

Non-controlling interests

 

209

 

173

 

355

 

306

 

Interest and other expense (income), net

 

18

 

(25

)

(1

)

(72

)

Adjusted EBITDA

 

$

5,958

 

$

6,071

 

$

9,011

 

$

9,703

 

 

Results of Operations

 

The following tables set forth our results of operations for the specified periods.

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

(in thousands)

 

Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

Revenue

 

$

28,396

 

$

26,239

 

$

54,848

 

$

49,373

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

Network access

 

13,247

 

11,035

 

26,172

 

20,705

 

Network operations

 

5,793

 

4,753

 

11,617

 

8,704

 

Development and technology

 

3,169

 

2,726

 

6,840

 

5,862

 

Selling and marketing

 

3,966

 

3,822

 

7,851

 

6,812

 

General and administrative

 

4,645

 

3,811

 

9,040

 

8,301

 

Amortization of intangible assets

 

928

 

516

 

1,853

 

915

 

Total costs and operating expenses

 

31,748

 

26,663

 

63,373

 

51,299

 

Loss from operations

 

(3,352

)

(424

)

(8,525

)

(1,926

)

Interest and other (expense) income, net

 

(18

)

25

 

1

 

72

 

Loss before income taxes

 

(3,370

)

(399

)

(8,524

)

(1,854

)

Income tax expense (benefit)

 

155

 

(173

)

303

 

(640

)

Net loss

 

(3,525

)

(226

)

(8,827

)

(1,214

)

Net income attributable to non-controlling interests

 

209

 

173

 

355

 

306

 

Net loss attributable to common stockholders

 

$

(3,734

)

$

(399

)

$

(9,182

)

$

(1,520

)

 

Depreciation and amortization expense included in costs and operating expenses:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

(in thousands)

 

Network access

 

$

4,511

 

$

3,205

 

$

8,373

 

$

6,082

 

Network operations

 

1,182

 

1,008

 

2,369

 

1,816

 

Development and technology

 

782

 

472

 

1,479

 

888

 

General and administrative

 

56

 

49

 

94

 

81

 

Total (1)

 

$

6,531

 

$

4,734

 

$

12,315

 

$

8,867

 

 


(1)          The $1.8 million and $3.4 million increase in depreciation and amortization expense of property and equipment for the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013, respectively, is primarily due to increased depreciation and amortization expense from our increased fixed assets from our DAS build-out projects, Wi-Fi networks, and software development in 2013 and 2014.

 

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Table of Contents

 

Stock-based compensation expense included in costs and operating expenses:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

(in thousands)

 

Network operations

 

$

351

 

$

231

 

$

639

 

$

397

 

Development and technology

 

119

 

142

 

260

 

99

 

Selling and marketing

 

402

 

340

 

736

 

458

 

General and administrative

 

979

 

532

 

1,733

 

893

 

Total (2)

 

$

1,851

 

$

1,245

 

$

3,368

 

$

1,847

 

 


(2)          The $0.6 million increase in stock-based compensation expense for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 is due primarily to $0.7 million of additional stock-based compensation expense related to the stock options and restricted stock units (“RSU”) issued in 2013 and 2014, which was partially offset by $0.1 million of additional reductions recorded in 2013 for employees who left the Company during 2013.

 

The $1.5 million increase in stock-based compensation expense for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 is due primarily to $2.0 million of additional stock-based compensation expense related to the stock options and restricted stock units (“RSU”) issued in 2013 and 2014, which was partially offset by $0.5 million of additional reductions recorded in 2013 for employees who left the Company during 2013.

 

The following table sets forth our results of operations for the specified periods as a percentage of our revenue for those periods.

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

(as a percentage of revenue)

 

Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

Revenue

 

100.0

%

100.0

%

100.0

%

100.0

%

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

Network access

 

46.7

 

42.1

 

47.7

 

41.9

 

Network operations

 

20.4

 

18.1

 

21.2

 

17.6

 

Development and technology

 

11.2

 

10.4

 

12.5

 

11.9

 

Selling and marketing

 

14.0

 

14.6

 

14.3

 

13.8

 

General and administrative

 

16.4

 

14.5

 

16.5

 

16.8

 

Amortization of intangible assets

 

3.3

 

2.0

 

3.4

 

1.9

 

Total costs and operating expenses

 

111.8

 

101.6

 

115.5

 

103.9

 

Loss from operations

 

(11.8

)

(1.6

)

(15.5

)

(3.9

)

Interest and other (expense) income, net

 

(0.1

)

0.1

 

0.0

 

0.1

 

Loss before income taxes

 

(11.9

)

(1.5

)

(15.5

)

(3.8

)

Income tax expense (benefit)

 

0.5

 

(0.7

)

0.6

 

(1.3

)

Net loss

 

(12.4

)

(0.9

)

(16.1

)

(2.5

)

Net income attributable to non-controlling interests

 

0.7

 

0.7

 

0.6

 

0.6

 

Net loss attributable to common stockholders

 

(13.1

)%

(1.5

)%

(16.7

)%

(3.1

)%

 

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Table of Contents

 

Three Months ended June 30, 2014 and 2013

 

Revenue

 

 

 

Three Months Ended June 30,

 

 

 

2014

 

2013

 

Change

 

% Change

 

 

 

(unaudited)

 

 

 

(in thousands, except churn data and percentages)

 

Revenue:

 

 

 

 

 

 

 

 

 

Wholesale

 

$

12,872

 

$

12,339

 

$

533

 

4.3

%

Retail subscription

 

8,161

 

8,731

 

(570

)

(6.5

)%

Retail single-use

 

2,830

 

2,830

 

 

0.0

%

Advertising and other

 

4,533

 

2,339

 

2,194

 

93.8

%

Total revenue

 

$

28,396

 

$

26,239

 

$

2,157

 

8.2

%

 

 

 

 

 

 

 

 

 

 

Key business metrics:

 

 

 

 

 

 

 

 

 

Subscribers

 

300

 

313

 

(13

)

(4.2

)%

Monthly churn

 

10.9

%

10.2

%

0.7

%

6.9

%

Connects

 

20,286

 

11,230

 

9,056

 

80.6

%

DAS nodes

 

7.6

 

5.6

 

2.0

 

35.7

%

 

There are four key metrics that we use to monitor results and activity in the business as follows:

 

Subscribers.   This metric represents the number of paying retail customers who are on a recurring month-to-month subscription plan at a given period end.

 

Monthly churn.   This metric shows the number of subscribers who canceled their subscriptions in a given month, expressed as a percentage of the average subscribers in that month. The churn in a given period is the average monthly churn in that period. This measure is one indicator of the longevity of our subscribers. Some of our customers who cancel subscriptions maintain accounts for single-use access.

 

Connects.   This metric shows how often individuals connect to our non-military global Wi-Fi network in a given period. The connects include retail and wholesale customers in both customer pay locations and customer free locations where we are a paid service provider or receive sponsorship or promotional fees. We count each connect as a single connect regardless of how many times the individual accesses the network at a given venue during their 24 hour period. This measure is an indicator of paid activity throughout our network.

 

DAS nodes.   This metric represents the number of active DAS nodes as of the end of the period. A DAS node is a single communications endpoint, typically an antenna, which transmits or receives radio frequency signals wirelessly. This measure is an indicator of the reach of our DAS network.

 

Total revenue. Total revenue increased $2.2 million or 8.2%, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013.

 

Wholesale.   Wholesale revenue increased $0.5 million, or 4.3%, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, due to a $1.7 million increase in revenues related to new DAS build-out projects in our managed and operated locations and a $0.5 million increase in DAS access fees from our telecom operators. The increase was partially offset by a $1.8 million decrease in partner usage-based fees.

 

Retail subscription. Retail subscription revenue decreased $0.6 million, or 6.5%, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013. The decrease is primarily due a decrease in our average monthly subscribers and a 2.3% decrease in our average monthly revenue per subscriber for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013.

 

Retail single-use.   Retail single-use revenue was unchanged for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013. Retail single-use revenue includes $0.6 million of revenues related to the venues acquired from Electronic Media Systems, Inc. and Advanced Wireless Group, LLC (collectively, “AWG”) in October 2013.

 

Advertising and other.  Advertising and other revenue increased $2.2 million, or 93.8%, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013 due to a $2.2 million increase in advertising sales at our managed and operated locations, which includes $1.8 million of advertising sales at the venues acquired from AWG in October 2013.

 

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Table of Contents

 

Costs and Operating Expenses

 

 

 

Three Months Ended June 30,

 

 

 

2014

 

2013

 

Change

 

% Change

 

 

 

(unaudited)

 

 

 

(in thousands, except percentages)

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

Network access

 

$

13,247

 

$

11,035

 

$

2,212

 

20.0

%

Network operations

 

5,793

 

4,753

 

1,040

 

21.9

%

Development and technology

 

3,169

 

2,726

 

443

 

16.3

%

Selling and marketing

 

3,966

 

3,822

 

144

 

3.8

%

General and administrative

 

4,645

 

3,811

 

834

 

21.9

%

Amortization of intangible assets

 

928

 

516

 

412

 

79.8

%

Total costs and operating expenses

 

$

31,748

 

$

26,663

 

$

5,085

 

19.1

%

 

Network access . Network access costs increased $2.2 million, or 20.0%, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013. The increase is primarily due to a $1.3 million increase in depreciation expense, a $1.2 million increase in revenue share paid to venues in our managed and operated locations resulting from our increased sales, and a $0.6 million increase in bandwidth and other direct costs. The increases were partially offset by a $0.9 million decrease from customer usage at partner venues.

 

Network operations. Network operations expenses increased $1.0 million, or 21.9%, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, due to a $0.8 million increase in personnel related expenses primarily resulting from increased headcount and a $0.2 million increase in depreciation expense.

 

Development and technology. Development and technology expenses increased $0.4 million, or 16.3% for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, due primarily to a $0.3 million increase in depreciation expense and a $0.3 million increase in hardware and software maintenance expenses. The increases were partially offset by a $0.4 million decrease in personnel related expenses.

 

Selling and marketing. Selling and marketing expenses increased $0.1 million, or 3.8%, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, due primarily to a $0.5 million increase in personnel related expenses primarily resulting from increased headcount. The increase was partially offset by a $0.3 million decrease in marketing related expenses.

 

General and administrative.   General and administrative expenses increased $0.8 million, or 21.9%, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, due to a $0.5 million increase in personnel related expenses, inclusive of a $0.4 million increase in stock-based compensation expenses, and a $0.2 million increase in professional fees.

 

Amortization of intangible assets.   Amortization of intangible assets expense increased $0.4 million, or 79.8%, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, due to our acquisition of AWG in October 2013.

 

Interest and Other (Expense) Income, Net

 

Interest and other (expense) income, net, remained essentially unchanged for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013.

 

Income Tax Expense (Benefit)

 

We had income tax expense of $0.2 million for the three months ended June 30, 2014 compared to income tax benefit of $0.2 million for the three months ended June 30, 2013. Our effective tax rate decreased to (4.6)% for the three months ended June 30, 2014 compared to 43.4% for the three months ended June 30, 2013 due primarily to the valuation allowance we established at year-end in 2013.

 

Non-controlling Interests

 

Non-controlling interests remained essentially unchanged for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013.

 

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Table of Contents

 

Net Loss Attributable to Common Stockholders

 

Our net loss for the three months ended June 30, 2014 increased as compared to the three months ended June 30, 2013, primarily as a result of the $5.1 million increase in costs and operating expenses and the $0.3 million decrease in income tax benefits, which was partially offset by the $2.2 million increase in revenues. Our diluted net loss per share increased primarily as a result of the increase in our net loss.

 

Adjusted EBITDA

 

Adjusted EBITDA was $6.0 million for the three months ended June 30, 2014, down 1.9% from the $6.1 million recorded in the three months ended June 30, 2013. As a percent of revenue, Adjusted EBITDA was 21.0% for the three months ended June 30, 2014, down from 23.1% of revenue for the three months ended June 30, 2013. The Adjusted EBITDA decrease was due primarily to the $3.3 million increase in our net loss attributable to common stockholders for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The decrease was partially offset by a $2.2 million increase in depreciation and amortization expense, a $0.6 million increase in stock-based compensation expenses, and a $0.3 million decrease in income tax benefits.

 

Six Months ended June 30, 2014 and 2013

 

Revenue

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

Change

 

% Change

 

 

 

(unaudited)

 

 

 

(in thousands, except churn data)

 

Revenue:

 

 

 

 

 

 

 

 

 

Wholesale

 

$

23,995

 

$

23,894

 

$

101

 

0.4

%

Retail subscription

 

16,455

 

16,798

 

(343

)

(2.0

)%

Retail single-use

 

5,366

 

5,416

 

(50

)

(0.9

)%

Advertising and other

 

9,032

 

3,265

 

5,767

 

176.6

%

Total revenue

 

$

54,848

 

$

49,373

 

$

5,475

 

11.1

%

 

 

 

 

 

 

 

 

 

 

Key business metrics:

 

 

 

 

 

 

 

 

 

Subscribers

 

300

 

313

 

(13

)

(4.2

)%

Monthly churn

 

11.6

%

10.0

%

1.6

%

16.0

%

Connects

 

37,793

 

17,496

 

20,297

 

116.0

%

DAS nodes

 

7.6

 

5.6

 

2.0

 

35.7

%

 

Total revenue. Total revenue increased $5.5 million or 11.1%, for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013.

 

Wholesale.   Wholesale revenue increased $0.1 million, or 0.4%, for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, due to a $2.9 million increase in revenues related to new DAS build-out projects in our managed and operated locations, a $0.6 million increase in DAS access fees from our telecom operators, and a $0.2 million increase in our wholesale service provider revenues. The increases were primarily offset by a $3.6 million decrease in partner usage-based fees.

 

Retail subscription. Retail subscription revenue decreased $0.3 million, or 2.0%, for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013. The decrease is primarily due to a 1.1% decrease in our average monthly revenue per subscriber for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013.

 

Retail single-use.   Retail single-use revenue remained essentially unchanged for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013. Retail single-use revenue includes $1.3 million of revenues related to the venues acquired from AWG in October 2013.

 

Advertising and other.   Advertising and other revenue increased $5.8 million, or 176.6%, for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013 due primarily to a $6.0 million increase in advertising sales at our managed and operated locations, which includes $3.5 million of advertising sales at the venues acquired from AWG in October 2013.

 

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Table of Contents

 

Costs and Operating Expenses

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

Change

 

% Change