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 DECEMBER 31, 2011

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM _________ TO _____

 

COMMISSION FILE NUMBER 000-25147

 

INTERNET AMERICA, INC.

(Exact name of registrant as specified in its charter)

 

TEXAS	86-0778979
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)
10930 W. Sam Houston Pkwy., N., Suite 200	77064
(Address of principal executive offices)	(Zip Code)

 

(713) 968-2500

(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 ¨

 

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 ¨

 

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.

 

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨    No x

 

As of February10, 2012, registrant had 16,729,562 shares of Common Stock at $0.01 par value, outstanding.

 

 

INTERNET AMERICA, INC.

 

TABLE OF CONTENTS

 

FORM 10-Q

 

QUARTERLY PERIOD ENDED DECEMBER 31, 2011

 

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4.	Controls and Procedures	18
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securitites and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	19
Item 4.	(Removed and reserved)	19
Item 5.	Other Information	19
Item 6.	Exhibits	19

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1 - FINANCIAL STATEMENTS

 

INTERNET AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		December 31,				June 30,
		2011				2011
		(unaudited)				(audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	1,645,798			$	1,512,690
Restricted cash			6,432				6,432
Accounts receivable, net of allowance for uncollectible accounts of $7,939 and $3,967 as of December 31, 2011 and June 30, 2011, respectively			67,211				54,482
Inventory			317,878				328,881
Prepaid expenses and other current assets			174,069				227,034
Total current assets			2,211,388				2,129,519
Property and equipment—net			1,305,787				1,406,075
Goodwill—net			2,037,127				2,037,127
Subscriber acquisition costs—net			191,684				204,096
Other assets			23,142				17,325
TOTAL ASSETS		$	5,769,128			$	5,794,142
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable		$	168,116			$	162,836
Accrued liabilities			299,406				309,346
Deferred revenue			746,572				764,597
Current portion of long-term debt			356,475				486,241
Total current liabilities			1,570,569				1,723,020
Long-term debt, net of current portion			429,241				534,843
Total liabilities			1,999,810				2,257,863
COMMITMENTS AND CONTINGENCIES			-				-
SHAREHOLDERS' EQUITY:
Preferred stock $0.01 par value: 5,000,000 shares authorized, 2,718,428 issued and outstanding as of December 31, 2011 and June 30, 2011			27,185				27,185
Common stock, $0.01 par value: 40,000,000 shares authorized, 16,729,562 issued and outstanding as of  December 31, 2011 and June 30, 2011			167,296				167,296
Additional paid-in capital			63,030,865				63,022,804
Accumulated deficit			(59,456,028	)			(59,681,006	)
Total shareholders' equity			3,769,318				3,536,279
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	5,769,128			$	5,794,142

 

See accompanying notes to condensed consolidated financial statements.

 

 

INTERNET AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2011				2010				2011				2010
REVENUES:
Internet services		$	1,786,294			$	1,722,104			$	3,622,876			$	3,500,880
TOTAL REVENUES			1,786,294				1,722,104				3,622,876				3,500,880
OPERATING  EXPENSES:
Connectivity and operations			1,009,531				1,049,748				2,079,450				2,144,702
Sales and marketing			92,119				45,554				188,386				101,366
General and administrative			361,523				298,826				720,684				613,489
Provision for (recovery of) bad debt			3,913				711				3,972				(91	)
Depreciation and amortization			196,961				253,822				387,312				502,797
Loss on transfer of assets			-				-				-				26,004
TOTAL OPERATING EXPENSES			1,664,047				1,648,661				3,379,804				3,388,267
INCOME FROM OPERATIONS			122,247				73,443				243,072				112,613
INTEREST INCOME			(1,017	)			(1,755	)			(2,003	)			(3,415	)
INTEREST EXPENSE			9,298				14,208				20,097				29,972
NET INCOME		$	113,966			$	60,990			$	224,978			$	86,056
NET INCOME PER COMMON SHARE:
BASIC		$	0.01			$	0.00			$	0.01			$	0.01
DILUTED		$	0.01			$	0.00			$	0.01			$	0.00
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC			16,729,562				16,718,433				16,729,562				16,638,673
DILUTED			19,447,990				19,447,990				19,447,990				19,447,990

 

See accompanying notes to condensed consolidated financial statements.

 

 

INTERNET AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended
		December 31,
		2011				2010
OPERATING ACTIVITIES:
Net income		$	224,978			$	86,056
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			387,312				502,797
Loss (gain) on transfer of assets			-				26,004
Loss on disposal of fixed assets			7,710				(1,548	)
Provision for (recovery of) bad debt			3,972				(91	)
Non-cash stock compensation expense			8,061				4,254
Changes in operating assets and liabilities:
Accounts receivable			(16,701	)			29,769
Inventory			15,977				11,915
Prepaid expenses and other current assets			52,965				76,278
Other assets			(5,817	)			10,447
Accounts payable and accrued liabilities			(4,660	)			(82,006	)
Deferred revenue			(18,025	)			(82,907	)
Net cash provided by operating activities			655,772				580,968
INVESTING ACTIVITIES:
Purchases of property and equipment			(251,456	)			(150,481	)
Proceeds from sale of property and equipment			-				3,900
Cash paid for subscriber acquisitions			(17,250	)			-
Net cash used in investing activities			(268,706	)			(146,581	)
FINANCING ACTIVITIES:
Principal payments of long-term debt			(253,958	)			(192,421	)
Principal payments of capital leases			-				(13,511	)
Net cash used in financing activities			(253,958	)			(205,932	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			133,108				228,455
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			1,512,690				1,209,915
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	1,645,798			$	1,438,370
SUPPLEMENTAL INFORMATION:
Cash paid for interest		$	19,777			$	30,178
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Debt issued for acquisition of subscribers and fixed assets, net of discount		$	13,616			$	-
Increase to note payable issued for inventory		$	4,974			$	-

 

See accompanying notes to condensed consolidated financial statements.

 

 

INTERNET AMERICA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.

Basis of Presentation

 

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”). The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary to achieve a fair presentation of the consolidated financial position and results of operations of Internet America, Inc. (the “Company” or “Internet America” or “we”) for the interim periods presented. All such adjustments are of a normal and recurring nature. These condensed financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for its fiscal year ended June 30, 2011.

 

2.

Principals of Consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiary, TeleShare Communication Services, Inc. ("TeleShare"). All material intercompany accounts and transactions have been eliminated.

 

3.

Basic and Diluted Net Income Per Share

 

For the three months ended December 31, 2011, the six months ended December 31, 2011, the three months ended December 31, 2010 and the six months ended December 31, 2010, common stock equivalent shares totaling 2,718,428, 2,718,428, 2,809,317, and 2,729,557, respectively, have been added to the diluted weighted average common shares outstanding assuming the shares of preferred stock were converted into shares of common stock as of the first day of each respective period, for the purpose of computing dilute earnings per share (“EPS”). Options and warrants to purchase shares of common stock were not included in the computation of diluted EPS because the options and warrants were not "in the money" during these periods. At December 31, 2011 and December 31, 2010, options to purchase 1,480,944 and 1,023,444 shares of the Company’s common stock, respectively, and warrants to acquire 394,922 and 394,922 shares of common stock, respectively, were outstanding.

 

There are no adjustments required to be made to net income for the purpose of computing basic and diluted EPS for the three and six months ended December 31, 2011.

 

4.

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from these estimates.

 

 

5.

Goodwill and Subscriber Acquisition Costs

 

Pursuant to Financial Accounting Standards Board (“FASB”) guidance on goodwill and other intangibles, the Company performs an impairment test annually during the fourth quarter of its fiscal year or when events and circumstances indicate goodwill might be permanently impaired. The Company concluded that no impairment of goodwill occurred during the six months ended December 31, 2011.

 

The Company allocates the purchase price for acquisitions to acquired subscriber bases and goodwill based on fair value at the time of acquisition. The weighted average amortization period for subscriber acquisition costs is 48 months for both dial-up and wireless broadband Internet customers. At December 31, 2011, unrecognized amortization expense for the remainder of fiscal year ended June 30, 2012 was expected to be $30,000 and unrecognized amortization expense for fiscal years ended June 30, 2013, 2014, 2015, and 2016 was expected to be $60,000, $60,000, $40,000 and $2,000, respectively.

 

6.

Long-Term Debt

 

As of December 31, 2011 and June 30, 2011, the Company’s long-term debt consisted of:

		December 31,				June 30,
		2011				2011
Note payable due June 20, 2012, payable in monthly installments of $2,088 with interest imputed at 9% (net of unamortized discount of $322 and $1,180, respectively) (1)		$	12,205			$	23,874
Note payable due  February 15, 2015, payable in monthly installments of $4,346 with fixed interest of 4.5%			153,661				175,987
Note payable due  February 15, 2015, payable in monthly payments of $11,189 with interest imputed at 3.25% (net of unamortized discount of $21,666 and $28,794, respectively)			403,521				463,529
Loan and Security Agreement with United States Department of Agriculture Rural Utilities Service due June 8, 2012, payable in variable monthly installments, with interest based on the cost of borrowing of the Department of Treasury for 7 year obligations (1)			107,458				239,136
Note payable due February 10, 2014, payable in monthly installments of $417 with interest of 8.5%			9,115				10,992
Note payable due May 3, 2013, payable in monthly installments of $5,085 with interest imputed at 8.5% (net of unamortized discount of $5,272 and $9,380, respectively)			86,140				107,566
Note payable due January 1, 2014, payable in monthly installments of $615 with interest imputed at 8.5% (net of unamortized discount of $1,134 and $0, respectively) (2)			13,616				-
			785,716				1,021,084
Less current portion			(356,475	)			(486,241	)
Total long-term debt, less current portion		$	429,241			$	534,843

 

(1) As of December 31, 2011, the Company’s long-term debt which is secured by certain inventory, equipment and certificates of deposit totaled approximately $120,000.

 

(2) In November 2011, the Company acquired subscribers and equipment from a third party internet service provider for a total acquisition price of $32,000 consisting of $17,250 in cash and $14,750 in a note payable to the seller due January 1, 2014, payable in monthly installments of $615. As the note payable does not bear interest, the Company imputed interest at 8.5%, which was recorded as a debt discount of $1,134 that will be amortized as interest expense over the term of the note. In conjunction with this acquisition, the Company recognized subscriber acquisition costs of $20,186 and equipment of $10,680.

 

 

7.

Transfer of Assets

 

In July 2010, the former owners of TeleShare exercised their right to exchange their noncontrolling interest in TeleShare for certain assets of TeleShare and the assumption of certain liabilities of TeleShare, with a net book value of $25,203. The Company recognized a loss of $26,004 on the transfer of these assets. As a result of this transaction, TeleShare became a wholly owned subsidiary of the Company. The surrender of the noncontrolling interest resulted in an increase to additional paid in capital and elimination of the noncontrolling interest.

 

8.

Stock Options and Warrants

 

As of December 31, 2011, 1,480,944 options were outstanding under the Company's 2007 Stock Option Plan (the "2007 Plan") and 519,056 stock options were available for future issuance under the 2007 Plan. During the six months ended December 31, 2011, the Company did not grant any stock options.

 

As of December 31, 2011, the Company had a total of 394,922 warrants issued and outstanding, previously issued in equal amounts to Mr. Mihaylo and Ambassador Palmer, both non-employee directors of the Company. No warrants were granted during the six months ended December 31, 2011.

 

9.

Income Taxes

 

During the three and six months ended December 31, 2011, the Company generated net income of $113,966 and $224,978, respectively. During the three and six months ended December 31, 2010, the Company generated net income of $60,990 and $86,056, respectively. No provision for income taxes has been recorded for the six months ended December 31, 2011 or December 31, 2010 as the net income generated in the current periods will be offset by net operating loss carryovers. As of December 31, 2011, the Company continues to maintain a full valuation allowance for its net deferred tax assets. Given its limited history of generating net income, the Company has concluded that it is not more likely than not that the net deferred tax assets will be realized.

 

The preparation of various tax returns requires the use of estimates for federal and state income tax purposes. Those estimates may be subject to review by respective taxing authorities. A revision, if any, to an estimate may result in assessment of additional taxes, penalties and interest. The 2007, 2008, 2009 and 2010 tax periods remain subject to examination by various federal and state tax jurisdictions. The Company performed an assessment of its various income tax positions for all periods subject to examination and concluded that no accrual of uncertain tax positions was necessary at December 31, 2011 and June 30, 2011. The Company will account for interest and penalties related to uncertain tax positions in the current period statement of operations, as necessary.

 

10.

Related Parties

 

During the three months ended December 31, 2011 and December 31, 2010, a total of $15,500 and $15,000, respectively, was paid to four non-employee directors for serving on the Company's board of directors. During the six months ended December 31, 2011 and December 31, 2010, a total of $30,500 and $31,000, respectively, was paid to four non-employee directors for serving on the Company’s board of directors and $0 and $5,090, respectively, was paid to a former owner of TeleShare for contract services.

 

11.

Recent Accounting Pronouncements

 

The Company has reviewed recently issued accounting standards, none of which are expected to have a material impact on the Company’s financial position or results of operations.

 

 

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Certain statements contained in this Quarterly Report on Form 10-Q constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements, identified by words such as "anticipate," "believe," "estimate," "should," "expect" and similar expressions include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements reflect the current views of management with respect to future events and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those described in the forward-looking statements. We do not intend to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. Our Annual Report on Form 10-K for the fiscal year ended June 30, 2011 and other publicly filed reports discuss some additional important factors that could cause our actual results to differ materially from those in any forward-looking statements. Some of these factors are also discussed in this Quarterly Report under the heading “Safe Harbor Statement and Risk Factors” later in this Item 2.

 

Overview

 

As expected, the quarter ended December 31, 2011 showed similar Adjusted EBITDA (as defined below) and a slightly improved level of net income as compared to the prior year and prior quarter periods.  During the quarter ended December 31, 2011, we focused more and invested more of our surplus cash on infrastructure upgrades; installation of higher throughput licensed wireless backhauls; and improvements to our system monitoring and service to our existing customers. During the foreseeable future we anticipate using even more of our excess cash for technology improvements and acquisitions while continuing to focus on top line revenue growth and profitability.  We continue to believe that we are well positioned to withstand a prolonged sluggish economy and/or to capitalize on growth possibilities through internal growth and acquisitions.

 

We have begun to see more potential acquisitions that utilize both licensed and unlicensed spectrum at more attractive prices than in previous years. On January 31, 2012, we closed the purchase of wireless radios (access points) on three leased towers in Joplin, Missouri and control hardware and software for these radios for a total consideration of $104,000. Although the Company has not had adequate time to quantify the estimated fair value of the acquired assets as of this filing date, management believes that the estimated value of the acquired assets will exceed the purchase consideration. This asset acquisition is the first time in more than five years that the Company has entered into operations outside the state of Texas and it is the first time that we have utilized 2.5 GHz spectrum.

 

 

Statement of Operations

 

Internet services revenue is derived from dial-up Internet access, including analog and ISDN access, DSL access, dedicated connectivity, wireless access, bulk dial-up access, web hosting services, and value-added services, such as multiple e-mail boxes, personalized e-mail addresses and Fax-2-Email services.

 

A brief description of each element of our operating expenses follows:

 

Connectivity and operations expenses consist primarily of setup costs for new subscribers, telecommunication costs, merchant processing fees, and wages of network operations and customer support personnel. Connectivity costs include fees paid to telephone companies for subscribers' dial-up connections to our network, fees paid to backbone providers for connections from our network to the Internet, and equipment and tower lease costs for our new wireless networks.

 

Sales and marketing expenses consist primarily of creative and production costs, costs of media placement, management salaries and call center wages. Advertising costs are expensed as incurred.

 

General and administrative expenses consist primarily of administrative salaries, professional services, rent and other general office and business expenses.

 

Bad debt expenses (recoveries) consist primarily of customer accounts that have been deemed uncollectible and will potentially be written off in future periods, net of recoveries. Historically, the expense has been based on the aging of customer accounts whereby all customer accounts that are 90 days or older have been provided for as a bad debt expense.

 

Depreciation expense is computed using the straight-line or double declining method over the estimated useful lives of the assets or the capital lease term, as appropriate. Data communications equipment, computers, data servers and office equipment are depreciated over five years. Furniture, fixtures and leasehold improvements are depreciated over five years or the lease term. Buildings are depreciated over fifteen years. Amortization expense consists of the amortization of subscriber acquisition costs, which are amortized over four years.

 

Our business is not subject to any significant seasonal influences.

 

 

Results of Operations

 

Three Months Ended December 31, 2011 Compared to Three Months Ended December 31, 2010

 

The following table sets forth certain unaudited financial data for the three months ended December 31, 2011 and December 31, 2010. Operating results for any period are not indicative of results for any future period. Amounts are shown in thousands (except share, per share and subscriber count data).

 

		Three Months Ended December 31,
		2011				% of Revenues				2010				% of Revenues
STATEMENT OF OPERATIONS DATA:
REVENUES:
Internet services		$	1,786				100.0	%		$	1,722				100.0	%
TOTAL REVENUES			1,786				100.0	%			1,722				100.0	%
OPERATING EXPENSES:
Connectivity and operations			1,010				56.6	%			1,050				61.0	%
Sales and marketing			92				5.2	%			45				2.6	%
General and administrative			361				20.2	%			299				17.4	%
Recovery of bad debt expense			4				0.2	%			1				0.1	%
Depreciation and amortization			197				11.0	%			254				14.7	%
TOTAL OPERATING EXPENSES			1,664				93.2	%			1,649				95.8	%
OPERATING INCOME			122				6.8	%			73				4.2	%
INTEREST INCOME			(1	)			(0.1	)%			(2	)			(0.1	)%
INTEREST EXPENSE			9				0.5	%			14				0.8	%
NET INCOME		$	114				6.4	%		$	61				3.5	%
NET INCOME PER COMMON SHARE:
BASIC		$	0.01							$	0.00
DILUTED		$	0.01							$	0.00
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
BASIC			16,729,562								16,718,433
DILUTED			19,447,990								19,447,990
OTHER DATA:
Subscribers at end of period (1)			25,000								25,100
Adjusted EBITDA(2)		$	319							$	330
Adjusted EBITDA margin(3)			17.9	%							19.2	%
Reconciliation of net income to Adjusted EBITDA:
Net Income		$	114							$	61
Add:
Depreciation and amortization			197								254
Stock compensation			-								3
Interest expense			9								14
Less: Interest income			(1	)							(2	)
Adjusted EBITDA (2)		$	319							$	330

 

(1) A subscriber represents an active, billed service. One customer account may represent multiple subscribers depending on the number of active and billed services for that customer.

(2) Adjusted EBITDA, which as used herein means earnings before the effect of interest, taxes, depreciation, amortization , stock based compensation and transfer of assets, is not a measurement of financial performance under generally accepted accounting principles (GAAP) and should not be considered an alternative to net income as a measure of performance. Management has consistently used adjusted EBITDA on a historical basis as a measurement of the Company’s current operating cash income.

(3) Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of total revenue.

 

 

Total revenue. Total revenue increased by $64,000, or 3.7%, to $1,786,000 for the three months ended December 31, 2011, from $1,722,000 for the three months ended December 31, 2010.Wireless broadband Internet revenue increased by $162,000 to $1,343,000 during the current year period compared to $1,181,000 for the prior year period, primarily due to the stability of the subscriber base and customers migrating to upgraded service levels and purchasing additional services during the quarter ended December 31, 2011. The increase in revenues derived from wireless broadband Internet subscribers were partially offset by the decrease in other types of Internet service revenues of $98,000 during the current year period compared to the prior year period, which is primarily attributed to the expected decline of dial-up customers.

 

Connectivity and operations. Connectivity and operations expense decreased by $40,000, or 3.8%, to $1,010,000 for the three months ended December 31, 2011, from $1,050,000 for the three months ended December 31, 2010. Salaries, wages and related personnel expense decreased by approximately $19,000 to $473,000 for the current year period compared to $492,000 for the prior year period, which is attributed mainly to the reduction in headcount to streamline our efficiencies gained from quality process initiatives. Data and telecommunications expense decreased by $32,000 to $289,000 for the current year period compared to $321,000 for the prior year perioddue to our renegotiating more favorable terms with telecommunications service providers.

 

The above described decreases in expenses were partially offset by an increase in tower leases costs of $7,000 to $125,000 for the current year period compared to $118,000 for the prior year period, and an increase in merchant fees of $1,000 to $39,000 for the current year period compared to $38,000 for the prior year period. Expensed assets also increased by $3,000 to $84,000 for the current year period compared to $81,000 for the prior year period due to an increase in supplies, installation costs and repairs.

 

Sales and marketing. Sales and marketing expense increased by $47,000, or 104.4%, to $92,000 for the three months ended December 31, 2011 compared to $45,000 for the three months ended December 31, 2010. Salaries, wages and related personnel costs increased by approximately $19,000 to $52,000 for the current year period compared to $33,000 for the prior year period, which is attributed mainly to the addition of sales and marketing personnel to expand sales efforts. Advertising expense increased by $4,000 to $10,000 for the current year period compared to $6,000 for the prior year period primarily due to the Company bringing all direct advertising related expenses in house to streamline cost and focus on all improved or enhanced network areas. The remainder of this increase is attributed to the addition of an outside sales force for a total of $24,000 for the current year period, as compared to $0 for the prior year period. Facilities expense remained constant at $6,000 for each of the current and prior year periods.

 

General and administrative. General and administrative expense increased by $62,000, or 20.7%, to $361,000 for the three months ended December 31, 2011, from $299,000 for the three months ended December 31, 2010. Personnel costs increased by $24,000 to $113,000 for the current year period compared to $89,000 for the prior year period due to the addition of full time employees. Insurance expense increased by $2,000 to $22,000 for the current year period compared to $20,000 for the prior year period due to the addition of full time employee benefits. Personnel travel expenses increased by $8,000 to $12,000 for the current year period compared to $4,000 for the prior year period, and professional and consulting fees increased by $14,000 to $46,000 for the current year period compared to $32,000 for the prior year period. There was an additional $21,000 increase in other general and administrative expenses.

 

The above described increases were partially offset by the decrease in stock compensation expense and directors’ fees by $2,000 to $16,000 for the current year period compared to $18,000 for the prior year period. In addition, telecommunications expense decreased by $5,000 to $40,000 for the current year period compared to $45,000 for the prior year period.

 

Provision for bad debt expense (recovery). Provision for bad debt expense increased by $3,000 to $4,000 for the three months ended December 31, 2011 compared to $1,000 for the three months ended December 31, 2010. Due to our practice of billing in advance of providing services and our policy regarding discontinuation of services for non-payment, we rarely, if ever, have customer accounts that are more than 60 days past due. We fully reserve for account balances more than 90 days past due, which resulted in an insignificant allowance for uncollectable accounts at December 31, 2011.

 

Depreciation and amortization. Depreciation and amortization decreased by $57,000, or 22.4%, to $197,000 for the three months ended December 31, 2011, from $254,000 for the three months ended December 31, 2010. This decrease is due to a $67,000 decrease in amortization expense relating to acquired subscriber costs resulting from the Company’s prior wireless acquisitions in fiscal 2006 and 2007 becoming fully amortized partially offset by a $10,000 increase in depreciation relating to the improvements in existing wireless broadband Internet infrastructure.

 

 

Interest income and expense. Interest expense decreased by $5,000, or 35.7%, to $9,000 for the three months ended December 31, 2011 from $14,000 for the three months ended December 31, 2010, primarily resulting from the reduction in the Company's long-term debt. Interest income for the three months ended December 31, 2011 decreased by $1,000 to $1,000 for the three months ended December 31, 2011, as compared to $2,000 for the three months ended December 31, 2010.

 

 

Six Months Ended December 31, 2011 Compared to Six Months Ended December 31, 2010

 

The following table sets forth certain unaudited financial data for the six months ended December 31, 2011 and December 31, 2010. Operating results for any period are not indicative of results for any future period. Amounts are shown in thousands (except share, per share and subscriber count data).

 

		Six Months Ended December 31,
		2011				% of Revenues				2010				% of Revenues
STATEMENT OF OPERATIONS DATA:
REVENUES:
Internet services		$	3,623				100.0	%		$	3,501				100.0	%
TOTAL REVENUES			3,623				100.0	%			3,501				100.0	%
OPERATING EXPENSES:
Connectivity and operations			2,079				57.4	%			2,145				61.3	%
Sales and marketing			188				5.2	%			101				2.9	%
General and administrative			722				19.9	%			613				17.5	%
Recovery of bad debt expense			4				0.1	%			-				0.0	%
Depreciation and amortization			387				10.7	%			503				14.4	%
Loss from transfer of assets			-				0.0	%			26				0.8	%
TOTAL OPERATING EXPENSES			3,380				93.3	%			3,388				96.8	%
OPERATING INCOME			243				6.7	%			113				3.2	%
INTEREST INCOME			(2	)			(0.1	)%			(3	)			(0.1	)%
INTEREST EXPENSE			20				0.6	%			30				0.9	%
NET INCOME		$	225				6.2	%		$	86				2.4	%
NET INCOME PER COMMON SHARE:
BASIC		$	0.01							$	0.01
DILUTED		$	0.01							$	0.00
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
BASIC			16,729,562								16,638,673
DILUTED			19,447,990								19,447,990
OTHER DATA:
Subscribers at end of period(1)			25,000								25,100
Adjusted EBITDA(2)		$	638							$	646
Adjusted EBITDA margin(3)			17.6	%							18.5	%
Reconciliation of net income to Adjusted EBITDA:
Net Income		$	225							$	86
Add:
Depreciation and amortization			387								503
Stock compensation			8								4
Interest expense			20								30
Loss from transfer of assets			-								26
Less: Interest income			(2	)							(3	)
Adjusted EBITDA(2)		$	638							$	646

 

(1)     A subscriber represents an active, billed service. One customer account may represent multiple subscribers depending on the number of active and billed services for that customer.

 

(2)    Adjusted EBITDA, which as used herein means earnings before the effect of interest, taxes, depreciation, amortization , stock based compensation and transfer of assets, is not a measurement of financial performance under generally accepted accounting principles (GAAP) and should not be considered an alternative to net income as a measure of performance. Management has consistently used adjusted EBITDA on a historical basis as a measurement of the Company’s current operating cash income.

 

(3)    Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of total revenue.

 

 

Total revenue. Total revenue increased by $122,000, or 3.5%, to $3,623,000 for the six months ended December 31, 2011, from $3,501,000 for the six months ended December 31, 2010. Wireless broadband Internet revenue increased by $277,000 to $2,676,000 for the current year period compared to $2,399,000 for the prior year period, primarily due to the stability of the subscriber base and customers migrating to upgraded service levels and purchasing additional services during the current year period. Increased revenues derived from wireless broadband Internet subscribers were offset by decreases in other types of Internet service revenues of $155,000 during the current year period compared to the prior year period, which is primarily attributed to the expected decline of dial-up customers moving to other providers’ broadband service.

 

Connectivity and operations. Connectivity and operations expense decreased by $66,000, or 3.1%, to $2,079,000 for the six months ended December 31, 2011, from $2,145,000 for the six months ended December 31, 2010. Salaries, wages and related personnel expense decreased by $53,000 to $959,000 for the current year period compared to $1,012,000 for the prior year period, which is attributed mainly to the reduction in headcount to streamline our efficiencies gained from quality process initiatives. Data and telecommunications expense decreased by $44,000 to $614,000 for the current year period compared to $658,000 for the prior year period due to decreased call volume made by improvements in our systems and renegotiating more favorable terms with telecommunications service providers.

 

The above described decreases were partially offset by an increase in expensed assets of $8,000 to $170,000 for the current year period compared to $162,000 for the prior year period. Tower lease costs increased by $17,000 to $253,000 for the current year period compared to $236,000 for the prior year period. Merchant fees expense increased by $6,000 to $83,000 for the current year period compared to $77,000 for the prior year period.

 

Sales and marketing. Sales and marketing expense increased by $87,000, or 86.1%, to $188,000 for the six months ended December 31, 2011, compared to $101,000 for the six months ended December 31, 2010. This increase is primarily due to the addition of an outside sales force of $63,000 for the current year period. Salaries, wages and related personnel costs increased by approximately $4,000 to $81,000 for the current year period compared to $77,000 for the prior year period, and advertising expense increased by $20,000 to $32,000 for the current year period compared to $12,000 for the prior year period.

 

General and administrative. General and administrative expense increased by $109,000, or 17.8%, to $722,000 for the six months ended December 31, 2011, from $613,000 for the six months ended December 31, 2010. Personnel costs increased by $52,000 to $215,000 for the six current year period compared to $163,000 for the prior year period due to addition of full time employees including Director of Corporate Development and Director of Sales. Professional and consulting fees increased by $13,000 to $105,000 for the current year period compared to $92,000 for the prior year period. Travel expenses increased by $11,000 to $16,000 for the current year period compared to $5,000 for the prior year period. Insurance expense increased by $1,000 to $43,000 for the current year period compared to $42,000 for the prior year period. The expense related to the issuance of stock options and directors’ fees increased by $4,000 to $39,000 for the current year period compared to $35,000 for the prior year period. Telecommunications and facilities expense slightly increased by $1,000 to $92,000 for the current year period, from $91,000 for the prior year period. Other general and administrative costs increased by $27,000 to $118,000 for the current year period compared to $91,000 for the prior year period.

 

Recovery of bad debt expense. Bad debt expense was $4,000 for the six months ended December 31, 2011 compared to $0 for the six months ended December 31, 2010 due to decreased recoveries. Due to our practice of billing in advance of providing services and our policy regarding discontinuation of services for non-payment, we rarely, if ever, have customer accounts that are more than 60 days past due. We fully reserve for account balances more than 90 days past due, which resulted in an insignificant allowance for uncollectable accounts at December 31, 2011.

 

Depreciation and amortization. Depreciation and amortization decreased by $116,000, or 23.1%, to $387,000 for the six months ended December 31, 2011, from $503,000 for the six months ended December 31, 2010. This decrease is due to a $131,000 decrease in amortization expense relating to acquired subscriber costs resulting from the Company’s prior wireless acquisitions in fiscal 2006 and 2007 becoming fully amortized partially offset by a $15,000 increase in depreciation relating to the improvements in existing wireless broadband Internet infrastructure.

 

Loss from transfer of assets. In July 2010, former owners of TeleShare surrendered their noncontrolling interest in exchange for $25,000 of certain assets and liabilities of TeleShare. The Company recognized a loss of $26,000 on the transfer of these assets.

 

 

Interest income and expense. For the six months ended December 31, 2011 and December 31, 2010, the Company recorded interest expense of $20,000 and $30,000, respectively. The $10,000 decrease in interest expense is related to a decrease in acquisition debt and in the RUS loan outstanding. Interest income for the six months ended December 31, 2011 decreased by $1,000 to $2,000 for the three months ended December 31, 2011, as compared to $3,000 for the six months ended December 31, 2010.

 

 

Liquidity and Capital Resources

 

We have historically financed our operations to date primarily through (i) cash flows from operations, (ii) public and private sales of equity securities and (iii) loans from shareholders and third parties. During the three and six months ended December 31, 2011, the Company recognized net income of $114,000 and $225,000, respectively. During the six months ended December 31, 2011, the Company recognized positive cash flow from operations of $656,000, thereby enabling the Company to fund its operations from current period operating cash flow and resulting in cash on hand of $1,646,000 at December 31, 2011, compared to cash on hand of $1,513,000 at June 30, 2011. The Company expects to continue to fund its operations during fiscal 2012 with cash flow from operations. The Company will continue to focus on sales and expense management during fiscal 2012 and expects continuing improvement in profits in the near and medium term.

 

The Company plans to pursue strategic acquisitions in the near and medium term in addition to upgrading its systems to provide higher speeds and increased reliability for its customers. We expect that our capital expenditures and any future acquisitions will be funded from available cash, public or private sales of debt or equity securities, or borrowing from commercial banks and/or third parties; however there is no assurance that such financing will be able to be obtained when needed at desirable rates which could affect our success in achieving any or all of our initiatives. Any unexpected decreases in revenue or subscriber count may adversely affect our liquidity and plans for future growth.

 

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. For the six months ended December 31, 2011, cash provided by operations was $656,000 compared to $581,000 for the six months ended December 31, 2010. For the six months ended December 31, 2011, net income plus non-cash items contributed cash of $632,000 compared to $617,000 during the prior year period. Changes in operating assets and liabilities provided cash of $24,000 for the six months ended December 31, 2011 and used cash of $36,000 for the six months ended December 31, 2010.

 

Cash used in investing activities totaled $269,000 and $147,000 for the six months ended December 31, 2011 and December 31, 2010, respectively, which relates primarily to the improvements in existing wireless broadband Internet infrastructure.

 

Cash used in financing activities, which totaled $254,000 for the six months ended December 31, 2011, consisted of principal payments on long-term debt, including notes related to acquisitions and the RUS loan. Cash used in financing activities, which totaled $206,000 for the six months ended December 31, 2010, consisted of principal payments on long term-debt and capital leases.

 

Cash on hand increased by $133,000 during the six months ended December 31, 2011. We believe our continuing efforts to improve the quality and efficiency of our operations, along with our focus on increasing revenues, may lead to a more rapid rate of growth and continued increases in cash flow from operations.

 

Off Balance Sheet Arrangements

 

None.

 

 

“Safe Harbor” Statement and Risk Factors

 

The following "Safe Harbor" Statement is made pursuant to the Private Securities Litigation Reform Act of 1995.  Certain of the statements contained in the body of this Quarterly Report are forward-looking statements (rather than historical facts) that are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. With respect to such forward-looking statements, we seek the protections afforded by the Private Securities Litigation Reform Act of 1995.  These risks include, without limitation, that (1) we will not be able to increase our rural customer base at the expected rate, (2) we will not improve EBITDA, profitability or product margins, (3) Internet revenue in high-speed broadband will continue to increase at a slower pace than the decrease in revenue from other Internet services resulting in greater operating losses in future periods, (4) financing will not be available to us if and as needed, (5) we will not be competitive with existing or new competitors, (6) we will not keep up with industry pricing or technological developments impacting the Internet, (7) we will be adversely affected by dependence on network infrastructure, telecommunications providers and other vendors or by regulatory changes, (8) service interruptions or impediments could harm our business, (9) acts of God and other events outside our control, such as hurricanes and other dangerous weather conditions, fires and lightning, could damage or destroy our facilities and network infrastructure, (10) we may be accused of infringing upon the  intellectual property rights of third parties, which will be costly to defend and could limit our ability to use certain technologies in the future, (11) government regulations could force us to change our business practices, (12) we may be unable to hire and retain qualified personnel, including our key officers, (13) future acquisitions of wireless broadband Internet customers and infrastructure may not be available on attractive terms and, if available, we may not successfully integrate those acquisitions into our operations, (14) provisions in our certificate of incorporation, bylaws and shareholder rights plan could limit our share price and delay a change of management and (15) our stock price has historically been thinly traded and volatile and may continue to be thinly traded and volatile.  This list is intended to identify certain of the principal factors that could cause actual results to differ materially from those described in the forward-looking statements included elsewhere herein but is not a comprehensive list of all of such factors.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our Chief Executive Officer, who also performs the functions of the principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of December 31, 2011 was conducted under the supervision and with the participation of our management, including our Chief Executive Officer, who also serves as our principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer, also performing function of the principal financial officer, concluded that, as of December 31, 2011, our disclosure controls and procedures were effective.

 

(b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

None.

 

ITEM 1A.

RISK FACTORS

 

Not applicable.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.

(REMOVED AND RESERVED)

 

ITEM 5.

OTHER INFORMATION

 

None.

 

ITEM 6.

EXHIBITS

 

Exhibit		Description
31.1*		Rule 13a-14(a)/15d-14(a) Certification of William E. Ladin, Jr.
31.2*		Rule 13a-14(a)/15d-14(a) Certification of William E. Ladin, Jr.
32.1*		Section 1350 Certification of William E. Ladin, Jr.
101.INS**		XBRL Instance Document
101.SCH**		XBRL Taxonomy Extension Schema
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase
101.LAB**		XBRL Taxonomy Extension Label Linkbase
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase

 

*Filed herewith.

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

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

INTERNET AMERICA, INC.
(Registrant)
Date:  February 13, 2012
By:  /s/ William E. Ladin, Jr.
William E. Ladin, Jr.
Chairman and Chief Executive Officer
Date:  February 13, 2012
By:  /s/ William E. Ladin, Jr.
William E. Ladin, Jr.
Chief Financial Officer and Chief Accounting Officer

 

 

 

INDEX TO EXHIBITS

 

Exhibit No.		Description
31.1*		Rule 13a-14(a)/15d-14(a) Certification of William E. Ladin, Jr.
31.2*		Rule 13a-14(a)/15d-14(a) Certification of William E. Ladin, Jr.
32.1*		Section 1350 Certification of William E. Ladin, Jr.
101.INS**		XBRL Instance Document
101.SCH**		XBRL Taxonomy Extension Schema
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase
101.LAB**		XBRL Taxonomy Extension Label Linkbase
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase

 

*Filed herewith

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