Boingo Wireless, Inc.
BOINGO WIRELESS INC (Form: 10-Q, Received: 08/08/2016 14:48:36)

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, 2016

 

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., 23rd Floor

 

 

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 July 29, 2016, there were 38,117,060 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 Statements of Comprehensive Income (Loss)

5

 

Condensed Consolidated Statement of Stockholders’ Equity

6

 

Condensed Consolidated Statements of Cash Flows

7

 

Notes to the Condensed Consolidated Financial Statements

8

Item 2.

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

17

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

29

Item 4.

Controls and Procedures

29

PART II — OTHER INFORMATION

 

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 6.

Exhibits

30

SIGNATURES

31

 

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,
2016

 

December 31,
2015

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

9,291

 

$

14,718

 

Accounts receivable, net

 

48,301

 

43,552

 

Prepaid expenses and other current assets

 

4,605

 

3,876

 

Total current assets

 

62,197

 

62,146

 

Property and equipment, net

 

236,680

 

214,500

 

Goodwill

 

42,403

 

42,403

 

Intangible assets, net

 

14,305

 

16,055

 

Other assets

 

5,577

 

5,908

 

Total assets

 

$

361,162

 

$

341,012

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

14,262

 

$

29,376

 

Accrued expenses and other liabilities

 

30,045

 

36,328

 

Deferred revenue

 

40,165

 

25,759

 

Current portion of long-term debt

 

875

 

875

 

Current portion of capital leases

 

1,751

 

1,610

 

Total current liabilities

 

87,098

 

93,948

 

Deferred revenue, net of current portion

 

136,972

 

106,825

 

Long-term debt

 

21,313

 

16,750

 

Long-term portion of capital leases

 

2,181

 

2,217

 

Deferred tax liabilities

 

3,221

 

2,965

 

Other liabilities

 

8,265

 

6,272

 

Total liabilities

 

259,050

 

228,977

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

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; 38,104 and 37,325 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively

 

4

 

4

 

Additional paid-in capital

 

205,025

 

197,612

 

Accumulated deficit

 

(102,520

)

(85,176

)

Accumulated other comprehensive loss

 

(854

)

(1,160

)

Total common stockholders’ equity

 

101,655

 

111,280

 

Non-controlling interests

 

457

 

755

 

Total stockholders’ equity

 

102,112

 

112,035

 

Total liabilities and stockholders’ equity

 

$

361,162

 

$

341,012

 

 

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

 

3



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,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

39,075

 

$

34,277

 

$

73,574

 

$

63,669

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

Network access

 

16,915

 

16,011

 

31,593

 

29,634

 

Network operations

 

10,418

 

7,902

 

20,868

 

15,941

 

Development and technology

 

5,267

 

4,786

 

10,620

 

8,977

 

Selling and marketing

 

4,882

 

4,781

 

9,550

 

9,197

 

General and administrative

 

7,700

 

5,689

 

15,852

 

11,522

 

Amortization of intangible assets

 

862

 

873

 

1,727

 

1,766

 

Total costs and operating expenses

 

46,044

 

40,042

 

90,210

 

77,037

 

Loss from operations

 

(6,969

)

(5,765

)

(16,636

)

(13,368

)

Interest and other (expense) income, net

 

(152

)

19

 

(182

)

(1

)

Loss before income taxes

 

(7,121

)

(5,746

)

(16,818

)

(13,369

)

Income tax expense

 

124

 

82

 

362

 

286

 

Net loss

 

(7,245

)

(5,828

)

(17,180

)

(13,655

)

Net income attributable to non-controlling interests

 

21

 

109

 

70

 

164

 

Net loss attributable to common stockholders

 

$

(7,266

)

$

(5,937

)

$

(17,250

)

$

(13,819

)

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.19

)

$

(0.16

)

$

(0.46

)

$

(0.38

)

Diluted

 

$

(0.19

)

$

(0.16

)

$

(0.46

)

$

(0.38

)

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

37,944

 

36,724

 

37,749

 

36,558

 

Diluted

 

37,944

 

36,724

 

37,749

 

36,558

 

 

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

 

4



Table of Contents

 

Boingo Wireless, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(In thousands)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(7,245

)

$

(5,828

)

$

(17,180

)

$

(13,655

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

131

 

52

 

224

 

(295

)

Comprehensive loss

 

(7,114

)

(5,776

)

(16,956

)

(13,950

)

Comprehensive (loss) income attributable to non-controlling interest

 

(26

)

102

 

(12

)

209

 

Comprehensive loss attributable to common stockholders

 

$

(7,088

)

$

(5,878

)

$

(16,944

)

$

(14,159

)

 

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

 

5



Table of Contents

 

Boingo Wireless, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common

 

Common

 

Additional

 

 

 

Other

 

Non-

 

Total

 

 

 

Stock

 

Stock

 

Paid-in

 

Accumulated

 

Comprehensive

 

controlling

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Loss

 

Interests

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

37,325

 

$

4

 

$

197,612

 

$

(85,176

)

$

(1,160

)

$

755

 

$

112,035

 

Issuance of common stock under stock incentive plans

 

779

 

 

1,784

 

 

 

 

1,784

 

Shares withheld for taxes

 

 

 

(1,520

)

 

 

 

(1,520

)

Stock-based compensation expense

 

 

 

7,055

 

 

 

 

7,055

 

Non-controlling interest distributions

 

 

 

 

 

 

(286

)

(286

)

Cumulative effect of a change in accounting principle

 

 

 

94

 

(94

)

 

 

 

Net loss

 

 

 

 

(17,250

)

 

70

 

(17,180

)

Other comprehensive income (loss)

 

 

 

 

 

306

 

(82

)

224

 

Balance at June 30, 2016

 

38,104

 

$

4

 

$

205,025

 

$

(102,520

)

$

(854

)

$

457

 

$

102,112

 

 

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

 

6



Table of Contents

 

Boingo Wireless, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2016

 

2015

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(17,180

)

$

(13,655

)

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

 

 

 

 

 

Depreciation and amortization of property and equipment

 

21,708

 

17,866

 

Amortization of intangible assets

 

1,727

 

1,766

 

Impairment loss

 

23

 

160

 

(Gain) loss on disposal of fixed assets

 

(4

)

5

 

Stock-based compensation

 

6,684

 

3,934

 

Change in fair value of contingent consideration

 

 

(114

)

Change in deferred income taxes

 

256

 

207

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(4,691

)

(12,600

)

Prepaid expenses and other assets

 

147

 

(1,275

)

Accounts payable

 

(1,199

)

2,237

 

Accrued expenses and other liabilities

 

3,642

 

911

 

Deferred revenue

 

44,554

 

35,395

 

Net cash provided by operating activities

 

55,667

 

34,837

 

Cash flows from investing activities

 

 

 

 

 

Proceeds from sales of marketable securities

 

 

1,614

 

Purchases of property and equipment

 

(64,257

)

(33,306

)

Proceeds from sale of property and equipment

 

 

8

 

Net cash used in investing activities

 

(64,257

)

(31,684

)

Cash flows from financing activities

 

 

 

 

 

Proceeds from credit facility

 

5,000

 

15,000

 

Proceeds from exercise of stock options

 

1,784

 

1,028

 

Principal payments on debt

 

(438

)

(5,438

)

Debt issuance costs

 

(124

)

 

Payments of capital leases and notes payable

 

(1,277

)

(188

)

Payment of other acquisition related consideration

 

 

(17

)

Payments of withholding tax on net issuance of restricted stock units

 

(1,520

)

(1,354

)

Payments to non-controlling interests

 

(286

)

(500

)

Net cash provided by financing activities

 

3,139

 

8,531

 

Effect of exchange rates on cash

 

24

 

(15

)

Net (decrease) increase in cash and cash equivalents

 

(5,427

)

11,669

 

Cash and cash equivalents at beginning of period

 

14,718

 

8,849

 

Cash and cash equivalents at end of period

 

$

9,291

 

$

20,518

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

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

 

$

22,011

 

$

33,202

 

Purchase of equipment and prepaid maintenance services under capital financing arrangements

 

$

3,067

 

$

3,099

 

 

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

 

7



Table of Contents

 

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 wireless connectivity solutions for smartphones, tablets, laptops, wearables, internet of things (“IoT”) and other wireless-enabled consumer devices. 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 wireless networks. Wholesale offerings include Wi-Fi roaming, value-added services, private label Wi-Fi, location based services, and distributed antenna systems (“DAS”) or femto-cells, which are cellular extension networks. Retail products include Wi-Fi subscriptions and day passes that provide access to more than one and a half million commercial hotspots worldwide, and broadband and TV services for troops living in Army, Air Force and Marines bases. 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, 2016 and 2015 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, these financial statements 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, 2015 contained in our annual report on Form 10-K filed with the SEC on March 11, 2016. 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, reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of our results of operations and cash flows for the three and six months ended June 30, 2016 and 2015, and our financial position as of June 30, 2016. 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.

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting , which simplifies several aspects of the accounting for share-based payments including the following: entities record all excess tax benefits and tax deficiencies as an income tax benefit or expense in the income statement; entities classify excess tax benefits as an operating activity in the statement of cash flows; entities elect an accounting policy to either estimate the number of forfeitures (current U.S. GAAP) or account for forfeitures when they occur; and entities can withhold up to the maximum individual statutory rate without classifying the awards as a liability with the cash paid to satisfy the statutory income tax withholding obligation classified as a financing activity in the statement of cash flows. The standard provides for prospective, retrospective, or modified retrospective adoption of each of the changes, and the standard is effective for public entities for interim and annual periods beginning after December 15, 2016. Early adoption is permitted and we elected to early adopt ASU 2016-09 as of January 1, 2016. As a result of this adoption, we recorded $6,933 and $589 of net deferred tax assets related to our federal and state net operating losses for excess windfall tax benefits, respectively, as of January 1, 2016. We established a full valuation allowance against those deferred tax assets as of January 1, 2016 based on the determination that it was more likely than not that those deferred tax assets would not be realized. We also elected to change our accounting policy to account for forfeitures when they occur on a modified retrospective basis. The change in our accounting policy resulted in a $94 increase to additional paid-in capital and accumulated deficit as of January 1, 2016.

 

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 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.

 

8



Table of Contents

 

Prior to August 4, 2015, we had a 70% ownership of Concourse Communications Detroit, LLC. On August 4, 2015, we purchased the remaining 30% ownership interest from the non-controlling interest owners and we accounted for this transaction as an acquisition of the remaining interest of an entity that had already been majority-owned by the Company. Prior to this purchase, we had a controlling interest in this subsidiary, and therefore, this subsidiary had been and will continue to be consolidated with the Company’s operations.

 

Segment and geographical information

 

We operate as one reportable segment; a service provider of wireless connectivity solutions across our managed and operated network and aggregated network for mobile devices such as laptops, smartphones, tablets 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.

 

All significant long-lived tangible assets are held in the United States of America. 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,

 

 

 

2016

 

2015

 

2016

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

DAS

 

$

13,892

 

$

12,125

 

$

24,998

 

$

21,721

 

Military

 

9,734

 

4,232

 

18,832

 

7,746

 

Retail

 

6,567

 

8,145

 

13,481

 

16,854

 

Wholesale—Wi-Fi

 

5,206

 

5,472

 

10,143

 

9,642

 

Advertising and other

 

3,676

 

4,303

 

6,120

 

7,706

 

Total revenue

 

$

39,075

 

$

34,277

 

$

73,574

 

$

63,669

 

 

Revenue recognition

 

We generate revenue from several sources including: (i) DAS customers that are telecom operators under long-term contracts for access to our DAS at our managed and operated locations, (ii) military and retail customers under subscription plans for month-to-month network access that automatically renew, and military and retail single-use access from sales of hourly, daily or other single-use access plans, (iii) arrangements with wholesale Wi-Fi customers that provide software licensing, network access, and/or professional services fees, 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. Revenue is presented net of any sales and value added taxes.

 

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. Periodically, we install and sell Wi-Fi and DAS networks to customers where we do not have service contracts or remaining obligations beyond the installation of those networks and we recognize build-out fees for such projects as revenue when the installation work is completed and the network has been accepted by the customer. 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 generally range from five to twenty years and the agreements generally contain renewal clauses. Revenue from DAS network access fees in excess of the monthly minimums is recognized when earned.

 

Subscription fees from military and retail customers are paid monthly in advance and revenue is deferred for the portions of monthly recurring subscription fees collected in advance. We provide refunds for our military and retail services 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 military and retail single-use access is recognized when access is provided.

 

9



Table of Contents

 

Services provided to wholesale Wi-Fi partners generally contain several elements including: (i) a term license to use our software to access our Wi-Fi network, (ii) access fees for Wi-Fi network usage, and/or (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 generally 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 service arrangement. The initial term of the license agreements is generally between one to five years and the agreements generally contain renewal clauses. Revenue for Wi-Fi network access fees in excess of the monthly minimum amounts is recognized when earned. All elements within existing service arrangements are generally delivered and earned concurrently throughout the term of the respective service arrangement.

 

In instances where the minimum monthly Wi-Fi and DAS 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 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 Wi-Fi platform service arrangements and the term of the estimated customer relationship period for DAS arrangements, as 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 if 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 Wi-Fi platform service arrangements and the term of the estimated customer relationship period for DAS arrangements.

 

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.

 

Foreign currency translation

 

Our Brazilian subsidiary uses the Brazilian Real as its functional currency. Assets and liabilities of our Brazilian subsidiary are translated to U.S. dollars at period-end rates of exchange, and revenues and expenses are translated at average exchange rates prevailing for each month. The resulting translation adjustments are made directly to a separate component of other comprehensive loss, which is reflected in stockholders’ equity in our condensed consolidated balance sheets. As of June 30, 2016 and December 31, 2015, the Company had $( 854) and $(1,160), respectively, of cumulative foreign currency translation adjustments, net of tax, which was $0 as of June 30, 2016 and December 31, 2015 due to the full valuation allowance established against our deferred tax assets, in accumulated other comprehensive loss.

 

Some of our subsidiaries also enter into transactions and have monetary assets and liabilities that are denominated in a currency other than the entities’ respective functional currencies. Gains and losses from the revaluation of foreign currency transactions and monetary assets and liabilities are included in the condensed consolidated statements of operations.

 

Fair value of financial instruments

 

Fair value is defined as the price that would be received from selling an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market in which it would transact, and we consider assumptions that market participants would use when pricing the asset or liability.

 

10



Table of Contents

 

The accounting guidance for fair value measurement also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:

 

·                   Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 

·                   Level 2—Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly.

 

·                   Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The carrying amount reflected in the accompanying condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other liabilities approximates fair value due to the short-term nature of these financial instruments.

 

Recent accounting pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , which requires lessees to recognize assets and liabilities for all leases with lease terms of more than 12 months on the balance sheet. Under the new guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. The standard is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted for all entities on a modified retrospective basis, with elective reliefs. We are currently evaluating the expected impact of this new standard.

 

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern , which explicitly requires management to assess an entity’s ability to continue as a going concern in connection with each annual and interim period. Management will assess if there is substantial doubt about an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. Disclosures will be required if conditions give rise to substantial doubt. The standard will be effective for the first annual period ending after December 15, 2016. Early adoption is permitted. We are currently evaluating the expected impact of this new standard.

 

In May 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. The standard establishes a five-step model and related application guidance, which will replace most existing revenue recognition guidance in U.S. GAAP. The FASB has subsequently issued several updates and proposals to clarify guidance to be applied. In August 2015, the FASB issued ASU 2015-14, Revenue From Contracts with Customers (Topic (606): Deferral of the Effective Date , to defer the effective date of the new revenue standard by one year. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which amends the principal versus agent guidance in the new revenue standard. ASU 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing , which amends the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients , which amends certain aspects of Topic 606. The standard, as amended, will be effective for annual and interim periods in fiscal years beginning after December 15, 2017. The FASB also agreed to allow entities to choose to adopt the new standard as of the original effective date. 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 have not yet selected an effective date or a transition method and are currently evaluating the expected impact of this new standard, including proposed amendments, on our reporting of revenue contracts in our consolidated financial statements and related disclosures.

 

3. Cash and cash equivalents

 

Cash and cash equivalents consisted of the following:

 

 

 

June 30,
2016

 

December 31,
2015

 

Cash and cash equivalents:

 

 

 

 

 

Cash

 

$

7,056

 

$

12,488

 

Money market accounts

 

2,235

 

2,230

 

Total cash and cash equivalents

 

$

9,291

 

$

14,718

 

 

Our money market account assets are measured at fair value on a recurring basis utilizing Level 1 inputs.

 

11



Table of Contents

 

4. Property and equipment

 

The following is a summary of property and equipment, at cost less accumulated depreciation and amortization:

 

 

 

June 30,
2016

 

December 31,
2015

 

Leasehold improvements

 

$

287,766

 

$

243,743

 

Construction in progress

 

53,765

 

57,692

 

Software

 

27,907

 

24,349

 

Computer equipment

 

10,678

 

10,366

 

Furniture, fixtures and office equipment

 

1,756

 

1,738

 

Total property and equipment

 

381,872

 

337,888

 

Less: accumulated depreciation and amortization

 

(145,192

)

(123,388

)

Total property and equipment, net

 

$

236,680

 

$

214,500

 

 

Depreciation and amortization expense, which includes depreciation and amortization for property and equipment under capital leases, is allocated as follows in the accompanying condensed consolidated statements of operations:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Network access

 

$

6,205

 

$

6,155

 

$

11,462

 

$

10,987

 

Network operations

 

3,255

 

1,843

 

6,450

 

3,829

 

Development and technology

 

1,689

 

1,336

 

3,291

 

2,510

 

General and administrative

 

251

 

478

 

505

 

540

 

Total depreciation and amortization of property and equipment

 

$

11,400

 

$

9,812

 

$

21,708

 

$

17,866

 

 

5. Accrued expenses and other liabilities

 

Accrued expenses and other liabilities consisted of the following:

 

 

 

June 30,
2016

 

December 31,
2015

 

Accrued construction in progress

 

$

11,711

 

$

21,696

 

Revenue share

 

4,460

 

4,560

 

Accrued customer liabilities

 

3,477

 

1,603

 

Salaries and wages

 

3,197

 

3,074

 

Accrued professional fees

 

1,722

 

651

 

Accrued partner network

 

1,044

 

969

 

Accrued taxes

 

711

 

916

 

Deferred rent

 

323

 

22

 

Other

 

3,400

 

2,837

 

Total accrued expenses and other liabilities

 

$

30,045

 

$

36,328

 

 

6. 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. As noted above, we early adopted ASU 2016-09 as of January 1, 2016. As a result of the adoption of ASU 2016-09, excess windfall tax benefits and tax deficiencies related to our stock option exercises and RSU vestings are recognized as an income tax benefit or expense in our condensed consolidated statements of operations in the period they are deducted on the income tax return. Excess windfall tax benefits and tax deficiencies are therefore not anticipated when determining the annual effective tax rate and are instead recognized in the interim period in which those items occur.

 

12



Table of Contents

 

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 of $ 124 and $82 reflects an effective tax rate of 1.7% and 1.4% for the three months ended June 30, 2016 and 2015, respectively. Income tax expense of $362 and $286 reflects an effective tax rate of 2.2% and 2.1% for the six months ended June 30, 2016 and 2015, respectively. Our effective tax rate differs from the statutory rate primarily due to our valuation allowance for the three and six months ended June 30, 2016 and 2015. The adoption of ASU 2016-09 did not have any impact on our income tax expense for the three and six months ended June 30, 2016 due to our valuation allowance. As of June 30, 2016 and December 31, 2015, we had $371 and $363 of uncertain tax positions, respectively, $84 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, 2016 and December 31, 2015, we have accrued $58 and $50 for related interest, net of federal income tax benefits, and penalties recorded in income tax expense on our condensed consolidated statements of operations, respectively. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate at June 30, 2016 was $229.

 

We operate within federal, state and international taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues which may require an extended period of time to resolve. We are subject to taxation in the United States and in various states. Our tax years 2012 and forward are subject to examination by the IRS and our tax years 2011 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 .

 

7. Credit Facility

 

We have entered into a Credit Agreement (the “Credit Agreement”) and related agreements, as amended, with Bank of America, N.A. acting as agent for lenders named therein, including Bank of America, N.A., Silicon Valley Bank, and Citizens Bank, N.A. (the “Lenders”), for a secured credit facility in the form of a revolving line of credit of up to $69,750, which was increased from $46,500 in February 2016, with an option to increase the available amount to $86,500 upon the satisfaction of certain conditions (the “Revolving Line of Credit”) and a term loan of $3,500 (the “Term Loan” and together with the Revolving Line of Credit, the “Credit Facility”). We may use borrowings under the credit facility for general working capital and corporate purposes. In general, amounts borrowed under the Credit Facility are secured by a lien against all of our assets, with certain exclusions.

 

As of June 30, 2016 and December 31, 2015, $20,000 and $15,000, respectively, was outstanding under the Revolving Line of Credit. Amounts outstanding under the Revolving Line of Credit are classified within long-term debt in our condensed consolidated balance sheet as of June 30, 2016 as we do not expect to repay the outstanding debt in the next twelve-month period. The Revolving Line of Credit requires quarterly payments of interest and matures on November 21, 2018, but may be prepaid in whole or part at any time. Amounts borrowed under the Revolving Line of Credit and Term Loan will bear, at our election, a variable interest at LIBOR plus 2.5% - 3.5% or Lender’s Prime Rate plus 1.5% - 2.5% per year and we will pay a fee of 0.375% - 0.5% per year on any unused portion of the Revolving Line of Credit. As of June 30, 2016 and December 31, 2015, $2,188 and $2,625, respectively, was outstanding under the Term Loan at a rate of 3.1%. The Term Loan requires quarterly payments of interest and principal, amortizing fully over the four-year-term such that it is repaid in full on the maturity date of November 21, 2018, but may be prepaid in whole or part at any time. Repayment of amounts borrowed under the Credit Facility may be accelerated in the event that we are in violation of the representations, warranties and covenants made in the Credit Agreement, including certain financial covenants set forth therein, and under other specified default events including, but not limited to, non-payment or inability to pay debt, breach of cross default provisions, insolvency provisions, and change of control.

 

Principal payments due under our Term Loan through 2018 are as follows:

 

Period

 

Principal
Payments

 

July 1, 2016 — December 31, 2016

 

$

438

 

January 1, 2017 — December 31, 2017

 

875

 

January 1, 2018 — December 31, 2018

 

875

 

 

 

$

2,188

 

 

13



Table of Contents

 

We are subject to customary financial and non-financial covenants, including a minimum quarterly consolidated leverage ratio, a maximum quarterly consolidated fixed charge coverage ratio, and monthly liquidity minimums. We were in compliance with all financial covenants as of June 30, 2016.

 

The Company incurred $124 of additional debt issuance costs in February 2016. Debt issuance costs are amortized on a straight-line basis over the term of the Credit Facility. Amortization expense related to debt issuance costs are included in interest and other (expense) income, net in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2016. Amortization and interest expense capitalized during the three and six months ended June 30, 2016 amounted to $207 and $483, respectively. Amortization and interest expense expensed during the three and six months ended June 30, 2016 amounted to $78 and $96, respectively. Amortization and interest expense capitalized during the three and six months ended June 30, 2015 amounted to $170 and $246, respectively. Interest rates for our Credit Facility for the six months ended June 30, 2016 ranged from 3.0% to 3.6%.

 

Amortization expense for our debt issuance costs through 2018 is as follows:

 

Period

 

Amortization
Expense

 

July 1, 2016 — December 31, 2016

 

$

120

 

January 1, 2017 — December 31, 2017

 

241

 

January 1, 2018 — December 31, 2018

 

215

 

 

 

$

576

 

 

As of June 30, 2016 and December 31, 2015, the carrying amounts reflected in the accompanying condensed consolidated balance sheets for the current portion of long-term debt, long-term debt, and notes payable approximate fair value (Level 2) based on the variable nature of the interest rates and lack of significant change to our credit risk.

 

8. Commitments and contingencies

 

Letters of credit

 

We have entered into Letter of Credit Authorization agreements (collectively, “Letters of Credit”), which are issued under our Credit Agreement. 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, 2016, we have Letters of Credit totaling $ 3,408 that are scheduled to expire or renew over the next year. There have been no drafts drawn under these Letters of Credit as of June 30, 2016.

 

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. Legal costs are expensed as incurred.

 

Other matters

 

We have received a claim from one of our venue partners with respect to contractual terms on our revenue share payments. The claim asserts that we have underpaid revenue share payments and related interest by approximately $4,600. We believe this claim to be without merit and plan to defend against such claim. As of June 30, 2016, we have accrued for the probable and estimable losses that have been incurred. We are not currently a party to any other claims that we believe could have a material adverse effect on our business, financial position, results of operations or cash flows.

 

9. 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 non-statutory stock options, stock appreciation rights, restricted shares of our common stock, stock units, and performance cash awards. As of January 1st of each year, the number of shares of common stock reserved for issuance under the 2011 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. The automatic “evergreen” share reserve increase feature will be terminated after January 2018, so that no additional automatic annual share increases will occur thereafter. As of June 30, 2016, 12,004,534 shares of common stock are reserved for issuance.

 

14



Table of Contents

 

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,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Network operations

 

$

531

 

$

412

 

$

1,177

 

$

759

 

Development and technology

 

251

 

129

 

563

 

227

 

Selling and marketing

 

458

 

642

 

1,007

 

1,169

 

General and administrative

 

1,839

 

916

 

3,937

 

1,779

 

Total stock-based compensation

 

$

3,079

 

$

2,099

 

$

6,684

 

$

3,934

 

 

During the three and six months ended June 30, 2016, we capitalized $ 189 and $371, respectively, of stock-based compensation expense. During the three and six months ended June 30, 2015, we capitalized $209 and $425, respectively, of stock-based compensation expense.

 

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 remaining 75% vesting monthly thereafter. 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, 2015

 

3,748

 

$

6.89

 

5.0

 

$

6,611

 

Exercised

 

(333

)

$

5.36

 

 

 

 

 

Canceled/forfeited

 

(50

)

$

7.52

 

 

 

 

 

Outstanding at June 30, 2016

 

3,365

 

$

7.03

 

4.4

 

$

10,909

 

Vested, exercisable and expected to vest at June 30, 2016

 

3,353

 

$

7.03

 

4.4

 

$

10,888

 

Exercisable at June 30, 2016

 

3,134

 

$

7.08

 

4.2

 

$

10,311

 

 

Restricted stock unit awards

 

We grant time-based restricted stock units (“RSUs”) 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 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.

 

We grant performance-based RSUs to executive personnel. These awards vest subject to certain performance objectives based on the Company’s revenue growth and, for awards granted during the six months ended June 30, 2016, EBITDA 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 and performance-based RSUs generally vest over a three-year period 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.

 

15



Table of Contents

 

In 2016, our Compensation Committee determined to adjust its practice of making annual long-term equity grants and instead adopted a compensation cycle whereby it granted equity awards to our Chief Executive Officer and Chief Financial Officer covering the number of shares it might otherwise have granted in 2016 through 2018, with “cliff” vesting dates in 2019. These grants were made to focus our Chief Executive Officer and Chief Financial Officer on the Company’s overall long-term corporate and strategic goals, eliminate intervening quarterly vesting dates that force them to sell shares in the market to cover taxes triggered upon vesting, and strengthen the Company’s ability to retain our senior management team over the next three years. As a result of these larger-than-usual RSU grants, the Compensation Committee does not intend to grant additional equity awards to our Chief Executive Officer and Chief Financial Officer until 2019. A summary of the non-vested RSU activity is as follows:

 

 

 

Number of Shares
(000’s)

 

Weighted Average
Grant-Date Fair
Value

 

Non-vested at December 31, 2015

 

1,819

 

$

6.39

 

Granted

 

3,070

 

$

6.26

 

Vested

 

(664

)

$

6.97

 

Canceled/forfeited

 

(102

)

$

6.97

 

Non-vested at June 30, 2016

 

4,123

 

$

6.45

 

 

During the six months ended June 30, 2016, 663,483 shares of RSUs vested. The Company issued 446,677 shares and the remaining shares were withheld to pay minimum statutory federal, state, and local employment payroll taxes on those vested awards.

 

10. 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,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders, basic and diluted

 

$

(7,266

)

$

(5,937

)

$

(17,250

)

$

(13,819

)

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common stock, basic and diluted

 

37,944

 

36,724

 

37,749

 

36,558

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.19

)

$

(0.16

)

$

(0.46

)

$

(0.38

)

 

For the three and six months ended June 30, 2016 and 2015, we excluded all assumed exercises of stock options and the assumed issuance of common stock under RSUs from the computation of diluted net loss per share as the effect would be anti-dilutive due to the net loss for the period.

 

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, 2016. As of June 30, 2016, the remaining approved amount for repurchases was approximately $5,180.

 

16



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, 2015, filed with the Securities Exchange Commission on March 11, 2016.

 

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, including our Annual Report on Form 10-K for the year ended December 31, 2015. 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.

 

17



Table of Contents

 

Overview

 

Boingo helps the world stay connected.

 

We have established a global footprint of wireless networks that provide high-speed, high-bandwidth wireless connectivity to smartphones, tablets, laptops, wearables, the Internet of Things (“IoT”), and other wireless-enabled devices. Wireless infrastructure systems include low-powered radio access nodes that operate in licensed and unlicensed spectrum, with a range of 10 meters to 1 to 2 kilometers. These wireless networks include distributed antenna system (“DAS”), femto-cell, and Wi-Fi locations that reach more than one billion consumers annually. With the proliferation of wireless devices, and the growth of mobile data from high-bandwidth activities like streaming media, cloud-based applications, online gaming and mobile apps, we expect these wireless networks to play a significant role in helping meet the ever-increasing data demands of on-the-go connected consumers.

 

Our wireless networks include DAS, femto-cell, 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, military bases, universities, big box retailers, convention centers, and office buildings. We install wireless network infrastructure in these locations, which generally have exclusive multi-year agreements, and then monetize these networks in a number of ways. Our roaming networks comprise more than 1.5 million commercial Wi-Fi hotspots in more than 100 countries around the world. We also sell advertising on other Wi-Fi networks that are not part of our network on behalf of the network owner.

 

We generate revenue primarily through DAS customers, military and retail customers, wholesale Wi-Fi customers, and display advertisements and sponsorships on our walled garden sign-in pages. We have direct customer relationships with users who have purchased our services, and we also provide wireless connectivity access solutions to enterprise customers, which include telecom operators, cable companies, technology companies, enterprise software and services companies, financial institutions, and communications service providers. Our wholesale solutions enable these companies to offer wireless connectivity access to their customers. 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, other service providers and other businesses.

 

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 or femto-cell networks at locations where we manage and operate the wireless network. For the three months ended June 30, 2016, DAS revenue accounted for approximately 36% of our revenue.

 

Military revenue, which is driven by military personnel who purchase broadband and Internet Protocol television (“IPTV”) services on military bases served by Boingo accounted for approximately 25% of our total revenue for the three months ended June 30, 2016. As of June 30, 2016, our military subscriber base was approximately 79,000 an increase of approximately 98% over the prior year. Retail revenue, which is driven by consumers who purchase one-time Wi-Fi access or a recurring monthly subscription plan, accounted for approximately 17% of our total revenue for the three months ended June 30, 2016. As of June 30, 2016, our retail subscriber base was approximately 184,000 a decrease of approximately 18% over the prior year.

 

Our wholesale customers pay us usage-based Wi-Fi network access and software licensing fees to allow their customers’ access to our footprint worldwide. Wholesale Wi-Fi revenue also includes financial institutions and other companies who provide Boingo as a value-added service for their customers. For the three months ended June 30, 2016, wholesale Wi-Fi revenue accounted for approximately 13% of our revenue.

 

We also generate revenue from advertisers that seek to reach consumers via sponsored Wi-Fi access, promotional programs and online display advertising. For the three months ended June 30, 2016, advertising and other revenue accounted for approximately 9% of our revenue.

 

Our advertising business is seasonal, with the highest percentage of advertising sales typically occurring in the fourth quarter of each year. Our customer agreements for certain DAS networks include both a fixed and variable fee structure with the highest percentage of sales typically occurring in the fourth quarter of each year and the lowest percentage of sales occurring in the first quarter of each year. We expect these trends to continue. Our other products have not experienced any significant seasonal impact.

 

We believe we are the leading global provider of neutral-host commercial mobile Wi-Fi Internet solutions and indoor DAS services for carriers and venues. Key elements of our strategy to extend that lead 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 sell-through for our inventory of advertising-enabled networks; and

 

·                        increase our brand awareness.

 

18



Table of Contents

 

Key Business Metrics

 

In addition to monitoring traditional financial measures, we also monitor our operating performance using key performance indicators. There are four key metrics that we use to monitor results and activity in the business as follows:

 

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.

 

Subscribers military and Subscribers retail.   These metrics represent the number of paying customers who are on a month-to-month subscription plan at a given period end.

 

Connects.   This metric shows how often individuals connect to our 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 promotion fees. We count each connect as a single connect regardless of how many times that individual accesses the network at a given venue during their 24 hour period. This measure is an indicator of paid activity throughout our network.

 

Revenue

 

We generate revenue primarily through DAS customers, military and retail customers, wholesale Wi-Fi customers, and display advertisements and sponsorships on our walled garden sign-in pages.

 

DAS.   We generate revenue from telecom operator partners that pay us network build-out fees, inclusive of network upgrades, and access fees for our DAS networks.

 

Military and retail.   We generate revenue from sales to military and retail individuals of month-to-month network access subscriptions that automatically renew, primarily through charge card transactions. We also generate revenue from sales of hourly, daily or other single-use access to military and retail individuals primarily through charge card transactions.

 

Wholesale— Wi-Fi.  We generate revenue from wholesale Wi-Fi partners that license our software and pay usage-based monthly network access fees to allow their customers to access our global Wi-Fi network. Usage-based network access fees may be measured in minutes, connects, megabytes or gigabytes, and in most cases are subject to minimum volume commitments. Other wholesale Wi-Fi partners pay us monthly fees to provide a Wi-Fi infrastructure that we install, manage and operate at their venues for their customers under a service provider arrangement.

 

Advertising and other.   We generate revenue from advertisers that seek to reach visitors to our landing pages at our managed and operated network locations with online advertising, promotional and sponsored programs and at locations where we solely provide authorized access to a partner’s Wi-Fi network through sponsored access and promotional programs. In addition, we receive revenue from partners in certain venues where we manage and operate the Wi-Fi network.

 

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,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(unaudited)

 

 

 

(in thousands)

 

Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

Revenue

 

$

39,075

 

$

34,277

 

$

73,574

 

$

63,669

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

Network access

 

16,915

 

16,011

 

31,593

 

29,634

 

Network operations

 

10,418

 

7,902

 

20,868

 

15,941

 

Development and technology

 

5,267

 

4,786

 

10,620

 

8,977

 

Selling and marketing

 

4,882

 

4,781

 

9,550

 

9,197

 

General and administrative

 

7,700

 

5,689

 

15,852

 

11,522

 

Amortization of intangible assets

 

862

 

873

 

1,727

 

1,766

 

Total costs and operating expenses

 

46,044

 

40,042

 

90,210

 

77,037

 

Loss from operations

 

(6,969

)

(5,765

)

(16,636

)

(13,368

)

Interest and other (expense) income, net

 

(152

)

19

 

(182

)

(1

)

Loss before income taxes

 

(7,121

)

(5,746

)

(16,818

)

(13,369

)

Income tax expense

 

124

 

82

 

362

 

286

 

Net loss

 

(7,245

)

(5,828

)

(17,180

)

(13,655

)

Net income attributable to non-controlling interests

 

21

 

109

 

70

 

164

 

Net loss attributable to common stockholders

 

$

(7,266

)

$

(5,937

)

$

(17,250

)

$

(13,819

)

 

19



Table of Contents

 

Depreciation and amortization expense included in costs and operating expenses:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(unaudited)

 

 

 

(in thousands)

 

Network access

 

$

6,205

 

$

6,155

 

$

11,462

 

$

10,987

 

Network operations

 

3,255

 

1,843

 

6,450

 

3,829

 

Development and technology

 

1,689

 

1,336

 

3,291

 

2,510

 

General and administrative

 

251

 

478

 

505

 

540

 

Total(1)

 

$

11,400

 

$

9,812

 

$

21,708

 

$

17,866

 

 


(1)          The $1.6 million and $3.8 million increase in depreciation and amortization of property and equipment for the three and six months ended June 30, 2016, respectively, as compared to the three and six months ended June 30, 2015, is primarily a result of our increased fixed assets from our DAS build-out projects, Wi-Fi networks, and software development in 2015 and 2016.

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(unaudited)

 

 

 

(in thousands)

 

Network operations

 

$

531

 

$

412

 

$

1,177

 

$

759

 

Development and technology

 

251

 

129

 

563

 

227

 

Selling and marketing

 

458

 

642

 

1,007

 

1,169

 

General and administrative

 

1,839

 

916

 

3,937

 

1,779

 

Total(2)

 

$

3,079

 

$

2,099

 

$

6,684

 

$

3,934

 

 


(2)          The $1.0 million and $2.8 million increase in stock-based compensation expense for the three and six months ended June 30, 2016, respectively, as compared to the three and six months ended June 30, 2015, is due primarily to additional stock-based compensation expense related to the RSUs granted in 2015 and 2016. Further, in 2016, our Compensation Committee determined to adjust its practice of making annual long-term equity grants and instead adopted a compensation cycle whereby it granted equity awards to our Chief Executive Officer and Chief Financial Officer covering the number of shares it might otherwise have granted in 2016 through 2018, with “cliff” vesting dates in 2019. These grants were made to focus our Chief Executive Officer and Chief Financial Officer on the Company’s overall long-term corporate and strategic goals, eliminate intervening quarterly vesting dates that force them to sell shares in the market to cover taxes triggered upon vesting, and strengthen the Company’s ability to retain our senior management team over the next three years. As a result of these larger-than-usual RSU grants, the Compensation Committee does not intend to grant additional equity awards to our Chief Executive Officer and Chief Financial Officer until 2019. During the three and six months ended June 30, 2016, we capitalized $0.2 million and $0.4 million, respectively, of stock-based compensation expense. We capitalized a similar amount of stock-based compensation expense during the three and six months ended June 30, 2015.

 

20



Table of Contents

 

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,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(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

 

43.3

 

46.7

 

42.9

 

46.5

 

Network operations

 

26.7

 

23.1

 

28.4

 

25.0

 

Development and technology

 

13.5

 

14.0

 

14.4

 

14.1

 

Selling and marketing

 

12.5

 

13.9

 

13.0

 

14.4

 

General and administrative

 

19.7

 

16.6

 

21.5

 

18.1

 

Amortization of intangible assets

 

2.2

 

2.5

 

2.3

 

2.8

 

Total costs and operating expenses

 

117.8

 

116.8

 

122.6

 

121.0

 

Loss from operations

 

(17.8

)

(16.8

)

(22.6

)

(21.0

)

Interest and other (expense) income, net

 

(0.4

)

(0.1

)

(0.2

)

0.0

 

Loss before income taxes

 

(18.2

)

(16.8

)

(22.9

)

(21.0

)

Income tax expense

 

0.3

 

0.2

 

0.5

 

0.4

 

Net loss

 

(18.5

)

(17.0

)

(23.4

)

(21.4

)

Net income attributable to non-controlling interests

 

0.1

 

0.3

 

0.1

 

0.3

 

Net loss attributable to common stockholders

 

(18.6

)%

(17.3

)%

(23.4

)%

(21.7

)%

 

Three Months ended June 30, 2016 and 2015

 

Revenue

 

 

 

Three Months Ended June 30,

 

 

 

2016

 

2015

 

Change

 

% Change

 

 

 

(unaudited)

 

 

 

(in thousands, except percentages)

 

Revenue:

 

 

 

 

 

 

 

 

 

DAS

 

$

13,892

 

$

12,125

 

$

1,767

 

14.6

%

Military

 

9,734

 

4,232

 

5,502

 

130.0

%

Retail

 

6,567

 

8,145

 

(1,578

)

(19.4

)%

Wholesale—Wi-Fi

 

5,206

 

5,472

 

(266

)

(4.9

)%

Advertising and other

 

3,676

 

4,303

 

(627

)

(14.6

)%

Total revenue

 

$

39,075

 

$

34,277

 

$

4,798

 

14.0

%

 

 

 

 

 

 

 

 

 

 

Key business metrics:

 

 

 

 

 

 

 

 

 

DAS nodes

 

13.5

 

9.5

 

4.0

 

42.1

%

Subscribers—military

 

79

 

40

 

39

 

97.5

%

Subscribers—retail

 

184

 

225

 

(41

)

(18.2

)%

Connects

 

31,899

 

25,806

 

6,093

 

23.6

%

 

DAS.   DAS revenue increased $1.8 million, or 14.6%, for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015, due to a $1.2 million increase from new build-out projects in our managed and operated locations and a $0.6 million increase in access fees from our telecom operators.

 

Military.   Military retail revenue increased $5.5 million, or 130.0%, for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015, due to a $4.3 million increase in military subscriber revenue, which was driven primarily by the increase in military subscribers and a 10.7% increase in the average monthly revenue per military subscriber in 2016 compared to 2015, and a $1.2 million increase in military single-use revenue.

 

21



Table of Contents

 

Retail.   Retail revenue decreased $1.6 million, or 19.4%, for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015, due to a $1.4 million decrease in retail subscriber revenue, which was driven primarily by the decrease in retail subscribers and a 1.7% decrease in the average monthly revenue per retail subscriber, and a $0.2 million decrease in retail single-use revenue.

 

Wholesale Wi-Fi.   Wholesale Wi-Fi revenue decreased $0.3 million, or 4.9% for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015, primarily due to a $0.2 million decrease in partner usage based fees.

 

Advertising and other.   Advertising and other revenue decreased $0.6 million, or 14.6%, for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015 primarily due to a $0.7 million decrease in advertising sales at our managed and operated locations.

 

Costs and Operating Expenses

 

 

 

Three Months Ended June 30,

 

 

 

2016

 

2015

 

Change

 

% Change

 

 

 

(unaudited)

 

 

 

(in thousands, except percentages)

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

Network access

 

$

16,915

 

$

16,011

 

$

904

 

5.6

%

Network operations

 

10,418

 

7,902

 

2,516

 

31.8

%

Development and technology

 

5,267

 

4,786

 

481

 

10.1

%

Selling and marketing

 

4,882

 

4,781

 

101

 

2.1

%

General and administrative

 

7,700

 

5,689

 

2,011

 

35.3

%

Amortization of intangible assets

 

862

 

873

 

(11

)

(1.3

)%

Total costs and operating expenses

 

$

46,044

 

$

40,042

 

$

6,002

 

15.0

%

 

Network access . Network access costs increased $0.9 million, or 5.6%, for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015. The increase is primarily due to a $0.7 million increase in revenue share paid to venues in our managed and operated locations and a $0.3 million increase in bandwidth and other direct costs.

 

Network operations. Network operations expenses increased $2.5 million, or 31.8%, for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015, primarily due to a $1.4 million increase in depreciation expense, a $0.6 million increase in personnel related expenses resulting primarily from increased headcount, and a $0.3 million increase in consulting expenses.

 

Development and technology. Development and technology expenses increased $0.5 million, or 10.1%, for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015, primarily due to a $0.4 million increase in depreciation expense.

 

Selling and marketing. Selling and marketing expenses remained relatively consistent for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015.

 

General and administrative.   General and administrative expenses increased $2.0 million, or 35.3%, for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015, due to a $1.3 million increase personnel related expenses, which is inclusive of a $0.9 million increase in stock-based compensation, resulting from increased headcount and the change in the structure and grant cycle of the RSUs granted to our Chief Executive Officer and Chief Financial Officer in 2016, and a $1.0 million increase in professional fees. The increases were partially offset by a $0.3 million decrease in consulting expenses. General and administrative expenses includes $0.9 million expended on our contested proxy election for the 2016 annual meeting of stockholders.

 

Amortization of intangible assets.   Amortization of intangible assets expense remained essentially unchanged for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015.

 

Interest and Other (Expense) Income, Net

 

Interest and other (expense) income, net, increased $0.2 million for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015, primarily due to interest expense incurred. During the three months ended June 30, 2016 and 2015, we incurred and capitalized $0.2 million, respectively, of amortization and interest expense.

 

22



Table of Contents

 

Income Tax Expense

 

We had income tax expense of $0.1 million for the three months ended June 30, 2016 and June 30, 2015, respectively. Our effective tax rate remained relatively consistent for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015.

 

Non-controlling Interests

 

Non-controlling interests remained relatively consistent for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015.

 

Net Loss Attributable to Common Stockholders

 

Our net loss for the three months ended June 30, 2016 increased as compared to the three months ended June 30, 2015, primarily as a result of the $6.0 million increase in costs and operating expenses, which was partially offset by the $4.8 million increase in revenues. Our diluted net loss per share increased primarily as a result of the increase in our net loss.

 

Six Months ended June 30, 2016 and 2015

 

Revenue

 

 

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

Change

 

% Change

 

 

 

(unaudited)

 

 

 

(in thousands, except percentages)

 

Revenue:

 

 

 

 

 

 

 

 

 

DAS

 

$

24,998

 

$

21,721

 

$

3,277

 

15.1

%

Military

 

18,832

 

7,746

 

11,086

 

143.1

%

Retail

 

13,481

 

16,854

 

(3,373

)

(20.0

)%

Wholesale—Wi-Fi

 

10,143

 

9,642

 

501

 

5.2

%

Advertising and other

 

6,120

 

7,706

 

(1,586

)

(20.6

)%

Total revenue

 

$

73,574

 

$

63,669

 

$

9,905

 

15.6

%

 

 

 

 

 

 

 

 

 

 

Key business metrics:

 

 

 

 

 

 

 

 

 

DAS nodes

 

13.5

 

9.5

 

4.0

 

42.1

%

Subscribers—military

 

79

 

40

 

39

 

97.5

%

Subscribers—retail

 

184

 

225

 

(41

)

(18.2

)%

Connects

 

62,252

 

48,624

 

13,628

 

28.0

%

 

DAS.   DAS revenue increased $3.3 million, or 15.1%, for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015, due to a $2.3 million increase from new build-out projects in our managed and operated locations and a $1.0 million increase in access fees from our telecom operators.

 

Military.   Military retail revenue increased $11.1 million, or 143.1%, for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015, due to an $8.4 million increase in military subscriber revenue, which was driven primarily by the increase in military subscribers and a 6.3% increase in the average monthly revenue per military subscriber in 2016 compared to 2015, and a $2.7 million increase in military single-use revenue.

 

Retail.   Retail revenue decreased $3.4 million, or 20.0%, for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015, due to a $2.8 million decrease in retail subscriber revenue, which was driven primarily by the decrease in retail subscribers and a 2.5% decrease in the average monthly revenue per retail subscriber, and a $0.6 million decrease in retail single-use revenue.

 

Wholesale Wi-Fi.   Wholesale Wi-Fi revenue increased $0.5 million, or 5.2% for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015, due to a $0.7 million increase in partner usage based fees, which was partially offset by a $0.2 million decrease in wholesale service provider revenues.

 

23



Table of Contents

 

Advertising and other.   Advertising and other revenue decreased $1.6 million, or 20.6%, for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015 primarily due to a $1.7 million decrease in advertising sales at our managed and operated locations.

 

Costs and Operating Expenses

 

 

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

Change

 

% Change

 

 

 

(unaudited)

 

 

 

(in thousands, except percentages)

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

Network access

 

$

31,593

 

$

29,634

 

$

1,959

 

6.6

%

Network operations

 

20,868

 

15,941

 

4,927

 

30.9

%

Development and technology

 

10,620

 

8,977

 

1,643

 

18.3

%

Selling and marketing

 

9,550

 

9,197

 

353

 

3.8

%

General and administrative

 

15,852

 

11,522

 

4,330

 

37.6

%

Amortization of intangible assets

 

1,727

 

1,766

 

(39

)

(2.2

)%

Total costs and operating expenses

 

$

90,210

 

$

77,037

 

$

13,173

 

17.1

%

 

Network access . Network access costs increased $2.0 million, or 6.6%, for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015. The increase is primarily due to a $1.0 million increase in revenue share paid to venues in our managed and operated locations, a $1.0 million increase in bandwidth and other direct costs, and a $0.5 million increase in depreciation expense. The increases were partially offset by a $0.5 million decrease from customer usage at partner venues.

 

Network operations. Network operations expenses increased $4.9 million, or 30.9%, for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015, due to a $2.6 million increase in depreciation expense, a $1.4 million increase in personnel related expenses resulting primarily from increased headcount, a $0.7 million increase in consulting expenses, and a $0.2 million increase in expenses for our call center.

 

Development and technology. Development and technology expenses increased $1.6 million, or 18.3%, for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015, due to a $0.8 million increase in depreciation expense, a $0.4 million increase in personnel related expenses, a $0.2 million increase in consulting expenses, and a $0.2 million increase in hardware and software maintenance expenses.

 

Selling and marketing. Selling and marketing expenses increased $0.4 million, or 3.8%, for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015, primarily due to a $0.3 million increase in personnel related expenses resulting from increased headcount.

 

General and administrative.   General and administrative expenses increased $4.3 million, or 37.6%, for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015, primarily due to a $3.0 million increase personnel related expenses, which is inclusive of a $2.2 million increase in stock-based compensation, resulting from increased headcount and the change in the structure and grant cycle of the RSUs granted to our Chief Executive Officer and Chief Financial Officer in 2016, and a $1.5 million increase in professional fees. General and administrative expenses includes $1.4 million expended on our contested proxy election for the 2016 annual meeting of stockholders.

 

Amortization of intangible assets.   Amortization of intangible assets expense remained essentially unchanged for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015.

 

Interest and Other Expense, Net

 

Interest and other expense, net, increased $0.2 million for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015, primarily due to interest expense incurred. During the six months ended June 30, 2016 and 2015, we incurred and capitalized $0.5 million and $0.2 million, respectively, of interest expense.

 

Income Tax Expense

 

We had income tax expense of $0.4 million and $0.3 million for the six months ended June 30, 2016 and June 30, 2015, respectively. Our effective tax rate remained relatively consistent for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015.

 

24



Table of Contents

 

Non-controlling Interests

 

Non-controlling interests remained relatively consistent for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015.

 

Net Loss Attributable to Common Stockholders

 

Our net loss for the six months ended June 30, 2016 increased as compared to the six months ended June 30, 2015, primarily as a result of the $13.2 million increase in costs and operating expenses, which was partially offset by the $9.9 million increase in revenues. Our diluted net loss per share increased primarily as a result of the increase in our net loss.

 

Reconciliation of Net Loss Attributable to Common Stockholders to Adjusted EBITDA

 

We define Adjusted EBITDA as net loss attributable to common stockholders plus depreciation and amortization of property and equipment, stock-based compensation expense, amortization of intangible assets, income tax expense, interest and other expense (income), net, non-controlling interests, and excludes charges or gains that are non-recurring, infrequent, or unusual.

 

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 (i) 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 and (ii) charges related to our contested proxy election for the 2016 annual meeting of stockholders because they represent non-recurring charges and are not indicative of the underlying performance of our business operations.

 

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.

 

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,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(unaudited)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(7,266

)

$

(5,937

)

$

(17,250

)

$

(13,819

)

Depreciation and amortization of property and equipment

 

11,400

 

9,812

 

21,708

 

17,866

 

Stock-based compensation expense

 

3,079

 

2,099

 

6,684

 

3,934

 

Amortization of intangible assets

 

862

 

873

 

1,727

 

1,766

 

Income tax expense

 

124

 

82

 

362

 

286

 

Interest and other expense (income), net

 

152

 

(19

)

182

 

1

 

Non-controlling interests

 

21

 

109

 

70

 

164

 

Contested proxy election expense

 

902

 

 

1,440

 

 

Adjusted EBITDA

 

$

9,274

 

$

7,019

 

$

14,923

 

$

10,198

 

 

25



Table of Contents

 

Adjusted EBITDA was $9.3 million for the three months ended June 30, 2016, an increase of 32.1% from $7.0 million recorded in the three months ended June 30, 2015. As a percent of revenue, Adjusted EBITDA was 23.7% for the three months ended June 30, 2016, up from 20.5% of revenue for the three months ended June 30, 2015. The Adjusted EBITDA increase was due primarily to the $1.6 million increase in depreciation and amortization expense and $1.0 million increase in stock-based compensation expenses. The increases were partially offset by the $1.3 million increase in our net loss attributable to common stockholders for the three months ended June 30, 2016 compared to the three months ended June 30, 2015. Our net loss attributable to common stockholders includes $0.9 million expended on our contested proxy election for the 2016 annual meeting of stockholders during the three months ended June 30, 2016, which have been excluded from Adjusted EBITDA.

 

Adjusted EBITDA was $14.9 million for the six months ended June 30, 2016, an increase of 46.3% from $10.2 million recorded in the six months ended June 30, 2015. As a percent of revenue, Adjusted EBITDA was 20.3% for the six months ended June 30, 2016, up from 16.0% of revenue for the six months ended June 30, 2015. The Adjusted EBITDA increase was due primarily to the $3.8 million increase in depreciation and amortization expense and the $2.8 million increase in stock-based compensation expenses. The increases were partially offset by the $3.4 million increase in our net loss attributable to common stockholders for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. Our net loss attributable to common stockholders includes $1.4 million expended on our contested proxy election for the 2016 annual meeting of stockholders during the six months ended June 30, 2016, which have been excluded from Adjusted EBITDA.

 

Our Adjusted EBITDA for the three months ended March 31, 2016 as presented in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 filed with the SEC on May 9, 2016 included $0.5 million expended on our contested proxy election for the 2016 annual meeting of stockholders as the amount expended as of March 31, 2016 was not considered material. The below recasts our Adjusted EBITDA for the three months ended March 31, 2016 to exclude such charges from Adjusted EBITDA:

 

 

 

Three Months Ended
March 31, 2016

 

 

 

Original

 

Adjustments

 

As Revised

 

 

 

(unaudited)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(9,984

)

$

 

$

(9,984

)

Depreciation and amortization of property and equipment

 

10,308

 

 

10,308

 

Stock-based compensation expense

 

3,605

 

 

3,605

 

Amortization of intangible assets

 

865

 

 

865

 

Income tax expense

 

238

 

 

238

 

Interest and other expense (income), net

 

30

 

 

30

 

Non-controlling interests

 

49

 

 

49

 

Contested proxy election expense

 

 

538

 

538

 

Adjusted EBITDA

 

$

5,111

 

$

538

 

$

5,649

 

 

Liquidity and Capital Resources

 

We have financed our operations primarily through cash provided by operating activities and borrowings under our credit facility. Our primary sources of liquidity as of June 30, 2016 consisted of $ 9.3 million of cash and cash equivalents and $49.8 million available for borrowing under our credit facility, $3.4 million of which is reserved for our outstanding Letter of Credit Authorization agreements.

 

Our principal uses of liquidity have been to fund our operations, working capital requirements, capital expenditures and acquisitions. We expect that these requirements will be our principal needs for liquidity over the near term. Our capital expenditures in the six months ended June 30, 2016 were $64.3 million, of which $47.4 million was reimbursed through revenue for DAS build-out projects from our telecom operators.

 

26



Table of Contents

 

We have entered into a Credit Agreement (the “Credit Agreement”) and related agreements, as amended, with Bank of America, N.A. acting as agent for lenders named therein, including Bank of America, N.A., Silicon Valley Bank, and Citizens Bank, N.A. (the “Lenders”), for a secured credit facility in the form of a revolving line of credit up to $69.8 million, which was increased from $46.5 million in February 2016, with an option to increase the available amount to $86.5 million upon the satisfaction of certain conditions (the “Revolving Line of Credit”) and a term loan of $3.5 million (the “Term Loan” and together with the Revolving Line of Credit, the “Credit Facility”). Both the Term Loan and Revolving Line of Credit mature on November 21, 2018. Amounts borrowed under the Revolving Line of Credit and Term Loan will bear, at our election, a variable interest at LIBOR plus 2.5% - 3.5% or Lender’s Prime Rate plus 1.5% - 2.5% per year and we will pay a fee of 0.375% - 0.5% per year on any unused portion of the Revolving Line of Credit. As of June 30, 2016, $2.2 million was outstanding under the Term Loan and $20.0 million was outstanding under the Revolving Line of Credit. The Term Loan requires quarterly payments of interest and principal, amortizing fully over the four-year-term such that it is repaid in full on the maturity date of November 21, 2018. Interest rates for our Credit Facility for the six months ended June 30, 2016 ranged from 3.0% to 3.6%. Repayment of amounts borrowed under the Credit Facility may be accelerated in the event that we are in violation of the representation, warranties and covenants made in the Credit Agreement, including certain financial covenants set forth therein, and under other specific default events including, but not limited to, non-payment or inability to pay debt, breach of cross default provisions, insolvency provisions, and change in control.

 

We are subject to customary covenants, including a minimum quarterly consolidated leverage ratio, a maximum quarterly consolidated fixed charge coverage ratio, and monthly liquidity minimums. We were in compliance with all such financial covenants as of June 30, 2016 and through the date of this report. We are subject to certain non-financial covenants, and we were also in compliance with all such non-financial covenants as of June 30, 2016 and through the date of this report. The Credit Facility provides us with significant additional flexibility and liquidity to pursue our strategic objectives for capital expenditures and acquisitions.

 

On September 11, 2015, we filed a shelf registration statement (the “Shelf Registration”) on Form S-3 with the SEC that was declared effective by the SEC on September 17, 2015, which permitted us to offer up to $125.0 million of common stock, preferred stock, debt securities and warrants in one or more offerings and in any combination, including in units from time to time. In February 2016, we filed a post-effective amendment to terminate the Shelf Registration and remove from registration the securities registered pursuant to the Shelf Registration. The Company’s Board of Directors determined that having the Shelf Registration on file was no longer necessary due to the Company increasing the Revolving Line of Credit (refer to Note 7 to the accompanying condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q).

 

We believe that our existing cash and cash equivalents, working capital, cash flow from operations and availability under the Credit Facility will be sufficient to fund our operations and planned capital expenditures for at least the next 12 months. There can be no assurance, however, that future industry-specific or other developments, general economic trends, or other matters will not adversely affect our operations or our ability to meet our future cash requirements. Our future capital requirements will depend on many factors, including our rate of revenue growth and corresponding timing of cash collections, the timing and size of our managed and operated location expansion efforts, the timing and extent of spending to support product development efforts, the timing of introductions of new solutions and enhancements to existing solutions and the continuing market acceptance of our solutions. We expect our capital expenditures for the remainder of 2016 will range from $18.1 million to $23.1 million, excluding capital expenditures for DAS build-out projects which are reimbursed through revenue from our telecom operator customers. The majority of our remaining 2016 capital expenditures will be used to build out residential broadband and IPTV networks for troops stationed on military bases pursuant to our contracts with the U.S. government and upgrading our Wi-Fi networks at our managed and operated venues. The investment of these resources will occur in advance of experiencing any direct benefit from them including generation of revenues. The U.S. government may modify, curtail or terminate its contracts with us, either at its convenience or for default based on performance. Any such modification, curtailment, or termination of one or more of our government contracts could have a material adverse effect on our earnings, cash flow and/or financial position. We may also enter into acquisitions of complementary businesses, applications or technologies which could require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us, or at all.

 

The following table sets forth cash flow data for the six months ended June 30:

 

 

 

2016

 

2015

 

 

 

(unaudited)

 

 

 

(in thousands)

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

55,667

 

$

34,837

 

Net cash used in investing activities

 

(64,257

)

(31,684

)

Net cash provided by financing activities

 

3,139

 

8,531

 

 

27



Table of Contents

 

Net Cash Provided by Operating Activities

 

For the six months ended June 30, 2016, we generated $55.7 million of net cash from operating activities, an increase of $20.8 million from the prior year comparative period. The increase is primarily due to a $17.8 million change in our operating assets and liabilities, a $3.8 million increase in depreciation and amortization expense, and a $2.8 million increase in stock-based compensation expenses. The increases were partially offset by the $3.5 million increase in our net loss.

 

Net Cash Used in Investing Activities

 

For the six months ended June 30, 2016, we used $64.3 million in investing activities, an increase of $32.6 million from the prior year comparative period. This increase is due to a $31.0 million increase in purchases of property and equipment and a $1.6 million decrease in cash provided by net proceeds from sales of marketable securities.

 

Net Cash Provided by Financing Activities

 

For the six months ended June 30, 2016, we received $3.1 million of cash from financing activities, a decrease of $5.4 million from the prior year comparative period. This decrease is primarily due to a $5.0 million decrease in net proceeds from our Credit Facility and a $1.1 million increase in cash paid for capital leases and notes payable. The decreases were partially offset by a $0.8 million increase in proceeds from exercise of stock options and a $0.2 million decrease in payments to our non-controlling interests.

 

Contractual Obligations and Commitments

 

The following table sets forth our contractual obligations and commitments as of June 30, 2016:

 

 

 

Payments Due By Period

 

 

 

 

 

Less than

 

 

 

 

 

More than

 

 

 

Total

 

1 Year

 

2 - 3 Years

 

4 - 5 Years

 

5 Years

 

 

 

(in thousands)

 

Venue revenue share minimums(1)

 

$

39,394

 

$

8,766

 

$

12,537

 

$