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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 September 30, 2014

 

OR

 

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

 

For the transition period from          to         

 

Commission File No. 001-35724

 


 

Alteva, Inc.

(Exact name of registrant as specified in its charter)

 

New York

 

14-1160510

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

401 Market Street, 1st Floor

 

 

Philadelphia, PA

 

19106

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone, including area code:   (877) 258-3722

 

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 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.

 

Large accelerated filer o

 

Accelerated filer o

Non-accelerated filer o (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 by Rule 12b-2 of the Exchange Act.  YES o  NO x

 

The number of shares of Alteva, Inc. common stock outstanding as of November 3, 2014 was 5,975,970.

 

 

 



Table of Contents

 

Index to Form 10-Q

 

Part I

Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013 (unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2014 and 2013 (unaudited)

4

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (unaudited)

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

23

 

 

 

Item 4.

Controls and Procedures

23

 

 

 

Part II

Other Information

 

 

 

 

Item 1.

Legal Proceedings

24

 

 

 

Item 1A.

Risk Factors

24

 

 

 

Item 5.

Other Information

24

 

 

 

Item 6.

Exhibits

25

 

2



Table of Contents

 

Part I — Financial Information

 

Item 1.  Financial Statements

 

ALTEVA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(amounts in thousands, except per share amounts)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net Revenue

 

 

 

 

 

 

 

 

 

Unified Communications

 

$

4,308

 

$

4,043

 

$

12,753

 

$

11,919

 

Telephone

 

3,263

 

3,487

 

9,946

 

10,798

 

Total operating revenues

 

7,571

 

7,530

 

22,699

 

22,717

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Cost of services and products (exclusive of depreciation and amortization expense)

 

2,924

 

3,154

 

8,843

 

10,158

 

Selling, general and administrative expenses

 

4,726

 

5,115

 

15,686

 

18,589

 

Loss on disposal, restructuring costs and other special charges

 

600

 

404

 

700

 

404

 

Depreciation and amortization

 

931

 

956

 

2,753

 

2,919

 

Total operating expenses

 

9,181

 

9,629

 

27,982

 

32,070

 

Operating loss

 

(1,610

)

(2,099

)

(5,283

)

(9,353

)

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

20

 

(179

)

(173

)

(593

)

Income from investment

 

 

3,250

 

52,373

 

9,750

 

Other income (expense), net

 

(4

)

25

 

23

 

162

 

Total other income

 

16

 

3,096

 

52,223

 

9,319

 

Income (loss) before income taxes

 

(1,594

)

997

 

46,940

 

(34

)

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

(264

)

654

 

16,982

 

303

 

Net income (loss)

 

(1,330

)

343

 

29,958

 

(337

)

 

 

 

 

 

 

 

 

 

 

Preferred dividends

 

6

 

6

 

19

 

19

 

Income (loss) applicable to common stock and participating securities

 

$

(1,336

)

$

337

 

$

29,939

 

$

(356

)

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

(0.23

)

$

0.06

 

$

4.96

 

$

(0.06

)

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

$

(0.23

)

$

0.06

 

$

4.96

 

$

(0.06

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock used to calculate earnings per share

 

 

 

 

 

 

 

 

 

Basic

 

5,826

 

5,776

 

5,802

 

5,765

 

Diluted

 

5,826

 

5,776

 

5,802

 

5,765

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

 

$

 

$

 

$

0.54

 

 

Please see accompanying condensed notes, which are an integral part of the condensed consolidated financial statements.

 

3



Table of Contents

 

ALTEVA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(1,330

)

$

343

 

$

29,958

 

$

(337

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

Amortization of prior service costs

 

(35

)

(69

)

(105

)

(206

)

Amortization of actuarial loss

 

148

 

213

 

515

 

640

 

Other comprehensive income

 

113

 

144

 

410

 

434

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(1,217

)

$

487

 

$

30,368

 

$

97

 

 

Please see accompanying notes, which are an integral part of the condensed consolidated financial statements.

 

4



Table of Contents

 

ALTEVA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

28,949

 

$

1,636

 

Trade accounts receivable - net of allowance for uncollectibles - $390 and $378 at September 30, 2014 and December 31, 2013, respectively

 

3,105

 

2,836

 

Other accounts receivable

 

579

 

480

 

Materials and supplies

 

197

 

237

 

Prepaid expenses

 

612

 

774

 

Deferred income taxes

 

108

 

108

 

Total current assets

 

33,550

 

6,071

 

 

 

 

 

 

 

Property, plant and equipment, net

 

12,687

 

13,837

 

Intangibles, net

 

5,233

 

5,856

 

Seat licenses

 

1,684

 

1,749

 

Goodwill

 

9,006

 

9,006

 

Other assets

 

991

 

744

 

Total assets

 

$

63,151

 

$

37,263

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Short-term debt

 

$

328

 

$

10,126

 

Accounts payable

 

1,009

 

944

 

Advance billing and payments

 

342

 

341

 

Accrued taxes

 

5,721

 

1,692

 

Pension and post retirement benefit obligations

 

267

 

267

 

Accrued wages

 

1,613

 

1,007

 

Other accrued expenses

 

3,365

 

2,927

 

Total current liabilities

 

12,645

 

17,304

 

 

 

 

 

 

 

Long-term debt

 

363

 

297

 

Deferred income taxes

 

773

 

649

 

Pension and post retirement benefit obligations

 

5,737

 

6,007

 

Total liabilities

 

19,518

 

24,257

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Preferred shares - $100 par value, authorized and issued shares of 5; $0.01 par value, authorized and unissued shares of 10,000

 

500

 

500

 

Common stock - $0.01 par value, authorized shares of 10,000; 6,851 and 6,971 shares issued at September 30, 2014 and December 31, 2013, respectively

 

69

 

70

 

Treasury stock - at cost, 875 and 830 common shares at September 30, 2014 and December 31, 2013, respectively

 

(8,011

)

(7,612

)

Additional paid in capital

 

13,958

 

13,279

 

Accumulated other comprehensive loss

 

(1,027

)

(1,436

)

Retained earnings

 

38,144

 

8,205

 

Total shareholders’ equity

 

43,633

 

13,006

 

Total liabilities and shareholders’ equity

 

$

63,151

 

$

37,263

 

 

Please see accompanying notes, which are an integral part of the condensed consolidated financial statements.

 

5



Table of Contents

 

ALTEVA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

CASH FLOW FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

29,958

 

$

(337

)

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

2,753

 

2,919

 

Stock based compensation expense

 

677

 

1,020

 

Distributions in excess of equity in earnings and gain on sale from equity investment

 

(49,776

)

(4,209

)

Other non-cash operating activities

 

230

 

880

 

Changes in assets and liabilities

 

 

 

 

 

Trade accounts receivable

 

(269

)

117

 

Other assets

 

(272

)

(257

)

Accrued taxes

 

4,029

 

34

 

Accounts payable

 

65

 

586

 

Other accruals and liabilities

 

996

 

(96

)

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

(11,609

)

657

 

 

 

 

 

 

 

CASH FLOW FROM INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(222

)

(499

)

Proceeds from sale of assets

 

33

 

175

 

Acquired intangibles

 

(16

)

(58

)

Purchase of seat licenses

 

(99

)

(501

)

Proceeds received in excess of income from equity investments

 

49,776

 

4,209

 

Net cash provided by investing activities

 

49,472

 

3,326

 

 

 

 

 

 

 

CASH FLOW FROM FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from debt

 

2,443

 

18,896

 

Repayment of debt and capital leases

 

(12,575

)

(20,381

)

Payment of fees for acquisition of debt

 

 

(119

)

Purchase of treasury stock

 

(399

)

(126

)

Dividends (Common and Preferred)

 

(19

)

(3,333

)

 

 

 

 

 

 

Net cash used in financing activities

 

(10,550

)

(5,063

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

27,313

 

(1,080

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

1,636

 

1,799

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

28,949

 

$

719

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

Acquisition of seat licenses and equipment under capital leases

 

$

390

 

$

248

 

Seat licenses acquired, but not paid

 

$

188

 

$

 

Receivables from sale of assets

 

$

 

$

408

 

 

Please see the accompanying notes, which are an integral part of the condensed consolidated financial statements.

 

6



Table of Contents

 

ALTEVA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1:   NATURE OF OPERATIONS AND CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Nature of Operations

 

Alteva, Inc. (“Alteva” or the “Company”) is a cloud-based communications company that provides Unified Communications (“UC”) solutions, including enterprise hosted Voice over Internet Protocol (“VoIP”) and operates as a regional Incumbent Local Exchange Carrier (“ILEC”) in southern Orange County, New York and northern New Jersey.  Unless otherwise indicated or unless the context requires, all references to the Company means the Company and its wholly-owned subsidiaries.  The Company delivers cloud-based UC solutions including BroadSoft-based VoIP integrated with Microsoft Lync, Microsoft Exchange, Google Apps for Business, leading customer relationship management (CRM) applications such as Salesforce.com and Bring-Your-Own-Device (BYOD) solutions for Mobility, which allows users to take advantage of all of the features available to them no matter where they are located or what device they are using.  The Company’s ILEC operations consist of providing local and toll telephone service to residential and business customers, Internet high-speed broadband service, and satellite television services provided by DIRECTV.

 

Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information, the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  The operating results for the interim periods are not necessarily indicative of the results that may be expected for the entire year or any other future period.  The consolidated balance sheet as of December 31, 2013 has been derived from the audited consolidated financial statements as of that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

 

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.  All material intercompany transactions and balances have been eliminated.  The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period.  Significant estimates include, but are not limited to, depreciation and amortization expense, allowance for doubtful accounts, long-lived assets, pension and postretirement expenses, and income taxes.  Actual results could differ from those estimates.

 

Revenue Recognition

 

The Company derives its revenue from the sale of UC services as well as traditional telephone services.

 

The Company recognizes revenue when (i) persuasive evidence of an arrangement between the Company and the customer exists, (ii) the delivery of the product to the customer has occurred or service has been provided to the customer, (iii) the price to the customer is fixed or determinable, and (iv) collectability of the sales or service price is reasonably assured.  Revenue is reported net of all applicable sales tax.

 

UC

 

The Company’s UC services and solutions consist primarily of its hosted VoIP UC system, certain UC applications, and other professional services associated with the installation and activation. Additionally, the Company offers customers the ability to purchase telephone equipment from the Company directly or independently from external vendors.

 

Multiple element arrangements primarily include the sale of telephone equipment, along with professional services associated with installation, activation and implementation services, as well as follow on hosting services.  The Company has concluded that the separate units of accounting in these arrangements consist of (i) the telephone equipment sale and (ii) the professional services provided combined with the follow on hosting services.  The professional services provided do not constitute a separate unit of accounting as they do not have value to the customer on a stand-alone basis.  Arrangement consideration is allocated to the separate units of accounting based on the relative selling price.  The selling price for telephone equipment is based on third-party evidence representing list prices for similar equipment when sold a stand-alone basis.  The selling price for professional and hosting services is based on the Company’s best estimate of selling price (“BESP”).  The Company develops its BESP by considering pricing practices, margin, competition and overall market trends.

 

7



Table of Contents

 

The Company bills a portion of its monthly recurring hosted service revenue a month in advance. Any amounts billed and collected, but for which the service is not yet delivered, are included in deferred revenue. These amounts are recognized as revenues only when the service is delivered.

 

Equipment sales associated with the sale of telephone equipment are recognized upon delivery to the customer, as it is considered to be a separate earnings process. The sales are recognized on a gross basis, as the Company is considered the principal obligor in customer transactions among other considerations.  Other upfront fees, excluding equipment, along with associated costs, up to but not exceeding these fees, are deferred and recognized over the estimated life of the customer relationship.  The Company has estimated its customer relationship life at eight years and evaluates it periodically for continued appropriateness.

 

Telephone

 

Revenue is earned from monthly billings to customers for local voice services, long distance, DSL, Internet services, hardware and other services. Revenue is also derived from charges for network access to the local exchange telephone network from subscriber line charges and from contractual arrangements for services such as billing and collection and directory advertising. Revenue is recognized in the period in which service is provided to the customer. Directory advertising revenue is recorded ratably over the life of the directory. With multiple billing cycles, the Company accrues revenue earned but not yet billed at the end of a quarter. The Company also defers services billed in advance and recognizes them as income when earned.

 

The Telephone segment markets competitive service bundles which may include multiple deliverables. The base bundles consist of voice services (including a business or residential phone line), calling features and long distance services and customers may choose to add internet services to a base bundle package. Separate units of accounting within the bundled packages include voice services, long distance and Internet services. Revenue for all services included in bundles are recognized over the same service period, which is the time period in which the service is provided to the customer.

 

Certain revenue is realized under pooling arrangements with other service providers and is divided among the companies based on respective costs and investments to provide the services. The companies that take part in pooling arrangements may adjust their costs and investments for a period of two years, which causes the funds distributed by the pool to be adjusted retroactively. The Company believes that recorded amounts represent reasonable estimates of the final distribution from these pools. However, to the extent that the companies participating in these pools make adjustments, there will be corresponding adjustments to the Company’s recorded revenue in future periods.

 

Revenue from these pooling arrangements which includes Universal Service Funds (“USF”) and National Exchange Carrier Association (“NECA”) pool settlements, accounted for 3% and 5% of the Company’s consolidated revenues for the nine months ended September 30, 2014 and 2013, respectively.

 

Materials and Supplies

 

The Company’s materials and supplies are carried at average cost, net of reserves for obsolescence, and consist principally of telephone equipment, telephone pole and wiring spare parts and other ancillary equipment for resale.

 

Fair Value

 

Fair value is the estimated price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company is required by accounting standards to provide the disclosure framework for measuring fair value and expanded disclosure about fair value measurements.  Fair value measurements are classified and disclosed in one of the following categories:

 

Level 1:                            Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

 

Level 2:                            These are inputs, other than quoted prices that are included in Level 1, which are observable in the marketplace throughout the term of the assets or liabilities, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace.

 

Level 3:                           Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e. supported by little or no market activity). The Company does not have sufficient corroborating evidence to support classifying these assets and liabilities as Level 1 or Level 2.

 

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.  The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

 

8



Table of Contents

 

Goodwill

 

Goodwill represents the excess of the purchase price of an acquired business over the net fair value of identifiable assets acquired and liabilities assumed.  Goodwill is not amortized, but rather is assessed for impairment at least annually.  The Company tests goodwill for impairment at the reporting unit level annually on December 31, or whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.  If it is determined that an impairment has occurred, the Company records a write down of the carrying value and records the charge for the impairment as an operating expense during the period in which the determination is made.

 

The Company only has goodwill that is associated with its UC segment, resulting from the purchase of certain assets and certain liabilities of Alteva, LLC in 2011.  The Company is not aware of any events or circumstances that occurred during the nine months ended September 30, 2014 that would have more likely than not reduced the fair value of this reporting unit below its carrying value.

 

Income Taxes

 

The Company records deferred taxes that arise from temporary differences between the financial statement and the tax basis of assets and liabilities.  Deferred taxes are classified as current or non-current, depending on the classification of the assets and liabilities to which they relate.  Deferred tax assets and deferred tax liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.  The Company’s deferred taxes result principally from differences in the timing of depreciation and in the accounting for pensions and other postretirement benefits.

 

The process of providing for income taxes and determining the related balance sheet accounts requires management to assess uncertainties, make judgments regarding outcomes and utilize estimates. Management must make judgments currently about such uncertainties and determine estimates of the Company’s tax assets and liabilities. To the extent the final outcome differs, future adjustments to the Company’s tax assets and liabilities may be necessary.

 

The Company assesses the realizability of its deferred tax assets, taking into consideration future reversals of existing temporary differences, the Company’s forecast of future taxable income, and available tax planning strategies that could be implemented to realize the deferred tax assets. Based on this assessment, management must evaluate the need for, and the amount of, valuation allowances against the Company’s deferred tax assets. To the extent facts and circumstances change in the future, adjustments to the valuation allowances may be required.

 

Accounting for uncertainty in income taxes requires uncertain tax positions to be classified as non-current income tax liabilities unless they are expected to be paid within one year.  The Company recognizes interest accrued related to unrecognized tax benefits in interest expense.

 

Accounting Policies

 

There were no material changes to the Company’s other accounting policies as presented in Item 8 of its Annual Report on Form 10-K for the year ended December 31, 2013.

 

NOTE 2:  NEW ACCOUNTING PRONOUNCEMENTS

 

In August 2014, the Financial Accounting Standards Board (“FASB”) issued accounting standards update (“ASU”) 2014-15  Presentation of Financial Statements — Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  The update provides guidance that previously did not exist under US GAAP about a company’s management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures, if applicable.  The standard is effective for annual and interim periods within those annual periods beginning after December 15, 2016.  Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a significant impact to the disclosures in its consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.  The update provides guidance on how to account for certain share-based payment awards where employees would be eligible to vest in the award regardless of whether the employee is still rendering service on the date the performance target is achieved.  The standard is effective for annual and interim periods within those annual periods beginning after December 15, 2015.  Early adoption is permitted.  The Company does not expect the adoption of ASU 2014-12 to have a material impact to its consolidated results of operation.

 

In May 2014, the FASB and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard, ASU 2014-09, Revenue from Contract with Customers, that will supersede nearly all existing revenue recognition guidance under US GAAP and IFRS. The standard’s primary principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.  The standard is effective for public entities for annual and interim periods beginning after December 15, 2016. We expect to adopt this standard in the quarter ending March 31, 2017. The Company is still evaluating the impact of adopting ASU 2014-09 on its consolidated financial statements.

 

In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 revised guidance to only allow disposals of components of an entity that represent a strategic shift (e.g., disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of

 

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an entity) and that have a major effect on a reporting entity’s operations and financial results to be reported as discontinued operations. The revised guidance also requires expanded disclosure in the financial statements for discontinued operations, as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. ASU 2014-08 is effective for interim and annual reporting periods beginning after December 15, 2014. The Company does not expect the adoption of ASU 2014-08 to have a significant impact on the Company’s consolidated results of operations, financial position or cash flows.

 

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 provides guidance for the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The Company adopted ASU 2013-11 effective January 1, 2014 and the adoption did not have a significant impact on the Company’s consolidated financial statement presentation.

 

NOTE 3:  SEAT LICENSES AND OTHER INTANGIBLE ASSETS

 

Intangible assets with finite lives are amortized over their respective estimated useful lives to their estimated residual value. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable.

 

The components of seat licenses are as follows:

 

 

 

Estimated

 

Gross

 

Accumulated

 

Net

 

($ in thousands)

 

Useful Lives

 

Value

 

Amortization

 

Value

 

As of September 30, 2014

 

 

 

 

 

 

 

 

 

Seat licenses

 

5 years

 

$

2,934

 

$

(1,250

)

$

1,684

 

 

 

 

Estimated

 

Gross

 

Accumulated

 

Net

 

($ in thousands)

 

Useful Lives

 

Value

 

Amortization

 

Value

 

As of December 31, 2013

 

 

 

 

 

 

 

 

 

Seat licenses

 

5 years

 

$

2,606

 

$

(857

)

$

1,749

 

 

The components of other intangible assets are as follows:

 

 

 

Estimated

 

Gross

 

Accumulated

 

Net

 

($ in thousands)

 

Useful Lives

 

Value

 

Amortization

 

Value

 

As of September 30, 2014

 

 

 

 

 

 

 

 

 

Customer relationships

 

8 years

 

$

5,400

 

$

(2,138

)

$

3,262

 

Trade name

 

15 years

 

2,400

 

(507

)

1,893

 

Website

 

12 years

 

96

 

(18

)

78

 

Total

 

 

 

$

7,896

 

$

(2,663

)

$

5,233

 

 

 

 

Estimated

 

Gross

 

Accumulated

 

Net

 

($ in thousands)

 

Useful Lives

 

Value

 

Amortization

 

Value

 

As of December 31, 2013

 

 

 

 

 

 

 

 

 

Customer relationships

 

8 years

 

$

5,400

 

$

(1,631

)

$

3,769

 

Trade name

 

15 years

 

2,400

 

(387

)

2,013

 

Website

 

12 years

 

79

 

(5

)

74

 

Total

 

 

 

$

7,879

 

$

(2,023

)

$

5,856

 

 

NOTE 4:  LOSS ON DISPOSAL/BUSINESS RESTRUCTURING

 

As part of its ongoing efforts to improve performance of the UC segment, the Company initiated a restructuring of its business by disposing of its Syracuse, New York operations.  Effective September 1, 2013, the Company sold certain assets of its wholly-owned subsidiary Alteva of Syracuse, Inc. to a third-party for approximately $0.6 million.  The Company recorded a $0.4 million loss in the three months ended September 30, 2013 related to the disposal of the Syracuse, New York operations.

 

NOTE 5: SEVERANCE

 

On May 25, 2014, the Company continued to carry out its plan to contain costs by reducing its company-wide headcount by 7%.  Total severance expense recognized in selling, general and administrative expense during the nine months ended September 30, 2014 related to this reduction was $0.2 million. The Company expects to payout its remaining accrual balance associated with this workforce reduction through December 2014.

 

On May 21, 2013, the Company announced a reduction in workforce of its Warwick, New York facility of approximately 17%

 

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due to the decline in work associated with the Telephone segment.  Total severance expense recognized in selling, general and administrative expenses during the nine months ended September 30, 2013 related to this reduction was $0.3 million. The Company paid out its remaining accrual balance associated with this workforce reduction in August 2014.

 

The Company reports unpaid severance accrual within other accrued expenses on its balance sheet.  The following summarizes the movement in the severance accrual balance associated with its workforce reductions, for the nine months ended September 30, 2014:

 

($ in thousands)

 

 

 

Beginning balance - December 31, 2013

 

$

247

 

Additional accrual

 

307

 

Payments

 

(491

)

Ending balance - September 30, 2014

 

$

63

 

 

On October 22, 2014, the Company furthered its cost cutting initiatives and eliminated the Chief Administrative Officer position.  As a result, Ms. Jennifer M. Brown the Company’s Chief Administrative Officer, Corporate Secretary and Executive Vice President left the Company.  On November 6, 2014, Ms. Brown signed a severance agreement with terms of six months of severance, plus benefits; however there is a seven day period in which she can repudiate the signed agreement.

 

NOTE 6:  ORANGE COUNTY-POUGHKEEPSIE LIMITED PARTNERSHIP

 

The Company was a limited partner in the Orange County-Poughkeepsie Limited Partnership (“O-P”) and had an 8.108% limited partnership interest until April 30, 2014, which was accounted for under the equity method of accounting.  The majority owner and general partner of the O-P is Verizon Wireless of the East LP (“Verizon”).

 

On May 26, 2011, the Company entered into an agreement with Verizon and Cellco Partnership (d/b/a Verizon Wireless), the other limited partner, in the O-P to make certain changes to the O-P partnership agreement which, among other things, specifies that the O-P will provide 4G cellular services (the “4G Agreement”).  The 4G Agreement provides that the O-P’s business will be converted from a wholesale business to a retail business.  The 4G Agreement provided for guaranteed annual cash distributions to the Company from the O-P through 2013.  For the years ended December 31, 2013, 2012 and 2011, the Company received annual cash distributions from the O-P of $13.0 million, $13.0 million and $13.6 million, respectively.  Starting in 2014, the agreement provided that the Company would receive cash distributions equal to its ownership share percentage of the approved total distributions by the O-P. The 4G Agreement also gave the Company the right (the “Put”) to require Verizon to purchase all of the Company’s ownership interest in the O-P during April 2013 or April 2014 for an amount equal to the greater of (a) $50.0 million or (b) the product of five (5) times 0.081081 times the O-P’s EBITDA, as defined in the 4G Agreement for the calendar year preceding the exercise of the Put.

 

On April 30, 2014, the Company exercised the Put option and sold all of its ownership interest in the O-P for gross proceeds of $50 million, which resulted in a gain on the sale of $49.8 million.  The Company has not and will not receive any income from the O-P after April 30, 2014.  The Company used a portion of the proceeds to repay all of the outstanding borrowings under the TriState credit facility and paid taxes on the related gain (see Note 7).  The Company expects to use the remaining gross proceeds to fund working capital needs and support growth initiatives.

 

Pursuant to the equity method accounting of the Company’s investment income, the Company is required to record the income from the O-P as an increase to the Company’s investment account.  The Company is required to apply the cash payments made under the 4G Agreement as a return on its investment when received. As a result of receiving the fixed guaranteed cash distributions from the O-P in excess of the Company’s proportionate share of the O-P income, the investment account was reduced to zero within the first nine months of 2012. Thereafter, the Company recorded the fixed guaranteed cash distributions that were received from the O-P in excess of the proportionate share of the O-P income directly to the Company’s statement of operations as other income.  In 2014 when guaranteed distribution ceased, the Company returned to recording the income from the O-P as in increase to the Company’s investment account and any cash payments received were applied as a return on its investment.  As of September 30, 2014, the investment account had been reduced to zero.

 

For the three and nine months ended September 30, 2014, the Company had zero and $2.6 million in income from the O-P equity investment.

 

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The following summarizes the income statement (unaudited) for the three months ended September 30, 2013 that the O-P provided to the Company:

 

 

 

For the three

 

 

 

months ended

 

($ in thousands)

 

September 30, 2013

 

Net sales

 

$

84,444

 

Cellular service cost

 

38,608

 

Operating expenses

 

22,659

 

Operating income

 

23,177

 

Other income (expense)

 

8

 

Net income

 

$

23,185

 

Company’s share

 

$

1,880

 

 

The following summarizes the income statement (unaudited) for the nine months ended September 30, 2013 that O-P provided to the Company:

 

 

 

For the nine

 

 

 

months ended

 

($ in thousands)

 

September 30, 2013

 

Net sales

 

$

245,512

 

Cellular service cost

 

110,895

 

Operating expenses

 

66,294

 

Operating income

 

68,323

 

Other income (expense)

 

15

 

Net income

 

$

68,338

 

Company’s share

 

$

5,541

 

 

The following summarizes the balance sheet as of December 31, 2013 that the O-P provided to the Company:

 

 

 

As of

 

($ in thousands)

 

December 31, 2013

 

Current assets

 

$

23,351

 

Property, plant and equipment, net

 

41,646

 

Other assets

 

365

 

Total assets

 

$

65,362

 

 

 

 

 

Total liabilities

 

$

17,887

 

Partners’ capital

 

47,475

 

Total liabilities and partners’ capital

 

$

65,362

 

 

NOTE 7: DEBT OBLIGATIONS

 

Debt obligations consisted of the following at September 30, 2014 and December 31, 2013:

 

 

 

As of

 

($ in thousands)

 

September 30, 2014

 

December 31, 2013

 

 

 

 

 

 

 

Short-term debt:

 

 

 

 

 

Capital leases and other borrowings, current portion

 

$

328

 

$

428

 

TriState credit line

 

 

9,698

 

 

 

328

 

10,126

 

Long-term debt:

 

 

 

 

 

Capital leases and other borrowings

 

363

 

297

 

Total debt obligations

 

$

691

 

$

10,423

 

 

On March 11, 2013, the Company entered into a credit agreement with TriState Capital Bank (“TriState”) to provide for borrowings up to $17.0 million with the ability to increase the facility for borrowings up to $20.0 million with the participation of another lender (the “Credit Agreement”).  All borrowings were to become due and payable on June 30, 2014. The TriState borrowings bore interest at a variable rate based on either LIBOR or a Base Rate, as defined in the Credit Agreement, plus an applicable margin of 3.50% or 2.00%, respectively.

 

Under the terms of the Credit Agreement, the Company was required to comply with certain loan covenants, which included, but were not limited to, the achievement of certain financial ratios and certain financial reporting requirements. The Company was required to maintain a consolidated liquidity ratio, as defined in the Credit Agreement, in excess of 1.0 to 1.0.  The Company obtained the consent of TriState prior to agreeing to any amendment to the agreements the Company has with the O-P. The Company’s obligations under the TriState credit facility were secured by all of the Company’s assets and guaranteed by all of the Company’s wholly-owned subsidiaries except for the Company’s ILEC subsidiary.  The ILEC subsidiary entered into a

 

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negative pledge agreement with TriState whereby the ILEC subsidiary agreed not to pledge any of its assets as collateral or lien to be placed on any of its assets.

 

On April 30, 2014, the Company sold its ownership interest in the O-P on (see Note 6) and a portion of the proceeds was used to repay all of the outstanding borrowings under the TriState credit facility.

 

On June 1, 2014, the Company reduced the borrowing capacity under the Credit Agreement from a ceiling of $17.0 million to a ceiling of $5.0 million.  On June 30, 2014, the Credit Agreement was amended to extend the expiration of the Credit Agreement from June 30, 2014 to October 8, 2014.  As of September 30, 2014, the Company had $5.0 million available under the Credit Agreement and was in compliance with all of its loan covenants.

 

The Company’s Credit Agreement expired on October 8, 2014.  On November 7, 2014, the Company entered into a demand line of credit with TriState to allow for borrowings up to $5.0 million.  The Company borrows or repays its debt as needed based upon its working capital obligations.  It is up to the discretion of TriState to approve borrowings within the allowed line of credit limit and may, at any time, demand that the Company make payment on an outstanding balance. The Company was previously required to comply with certain loan covenants and restrictions under its prior Credit Agreement.  There are no financial covenants under the new demand line of credit.

 

NOTE 8:  INCOME TAXES

 

The effective tax rate for the nine months ended September 30, 2014, and September 30, 2013 was 36% and 891%, respectively.  We determined our interim tax provision by developing an estimate of the annual effective tax rate and applying such rate to interim pre-tax results. The estimated rate includes projections of tax expense on the expected increase in our valuation allowance for deferred tax assets.  The estimated effective tax rate differed from the U.S. statutory rate primarily due to the expected increase in the valuation allowance, which reduced the overall tax benefit recorded for the period ended September 30, 2014. The estimated tax effects of the gain on the O-P put exercise have been treated as a discrete item in the second quarter.

 

As of September 30, 2014 and December 31, 2013, the Company carried a full valuation allowance against its deferred tax assets because management determined that it was not more likely than not that it would realize the benefits of such deferred tax assets. The Company maintains a deferred tax liability related to indefinite lived intangibles.

 

The Company periodically assesses liabilities and contingencies for all periods open to examination by tax authorities based on the latest available information. Where it is not more likely than not that the Company’s tax position will be sustained, the Company records its best estimate of the resulting tax liability and interest in the consolidated financial statements.  As of September 30, 2014 and December 31, 2013, the Company had no liability for unrecognized tax benefits.

 

The Company’s policy is to recognize interest related to unrecognized tax benefits in interest expense.  For the nine months ended September 30, 2014 and 2013, there was no interest expense relating to unrecognized tax benefits.

 

NOTE 9:  PENSION AND POSTRETIREMENT OBLIGATIONS

 

The components of net periodic cost (benefit) for the three months ended September 30, 2014 and 2013 are as follows:

 

 

 

Pension Benefits

 

Postretirement Benefits

 

 

 

For the three months ended

 

For the three months ended

 

($ in thousands)

 

September 30, 2014

 

September 30, 2013

 

September 30, 2014

 

September 30, 2013

 

Service cost

 

$

 

$

 

$

3

 

$

3

 

Interest cost

 

191

 

187

 

30

 

(29

)

Expected return on plan assets

 

(228

)

(207

)

(9

)

75

 

Amortization of transition asset

 

 

 

 

(14

)

Amortization of prior service cost

 

14

 

14

 

(49

)

(83

)

Recognized actuarial loss

 

142

 

216

 

6

 

(3

)

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost (benefit)

 

$

119

 

$

210

 

$

(19

)

$

(51

)

 

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The components of net periodic cost (benefit) for the nine months ended September 30, 2014 and 2013 are as follows:

 

 

 

Pension Benefits

 

Postretirement Benefits

 

 

 

For the nine months ended

 

For the nine months ended

 

($ in thousands)

 

September 30, 2014

 

September 30, 2013

 

September 30, 2014

 

September 30, 2013

 

Service cost

 

$

 

$

 

$

9

 

$

10

 

Interest cost

 

604

 

567

 

89

 

84

 

Expected return on plan assets

 

(669

)

(731

)

(24

)

(134

)

Amortization of transition asset

 

 

 

 

 

Amortization of prior service cost

 

42

 

42

 

(147

)

(248

)

Recognized actuarial loss

 

497

 

612

 

18

 

28

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost (benefit)

 

$

474

 

$

490

 

$

(55

)

$

(260

)

 

For the nine months ended September 30, 2014 and September 30, 2013, the Company has contributed $0.2 million and $0.8 million, respectively, to its pension and postretirement benefits plans.  The amortization of prior service cost and recognized actuarial (gain) loss included in pension and postretirement expense represent reclassifications out of other comprehensive income (loss).

 

NOTE 10:    STOCK BASED COMPENSATION

 

The Company has a shareholder approved long-term incentive plan (the “LTIP”) to assist the Company and its affiliates in attracting, motivating and retaining selected individuals to serve as employees, directors, consultants and advisors of the Company and its affiliates by providing incentives to such individuals through the ownership and performance of the Company’s common stock. There are 1.1 million shares of common stock authorized for issuance under the LTIP.  Shares available for grant under the LTIP may be either authorized, but unissued shares or shares that have been reacquired by the Company and designated as treasury shares. As of September 30, 2014 and December 31, 2013, 371,910 and 57,923 shares, respectively, of the Company’s common stock were available for grant under the LTIP. The LTIP permits the issuance by the Company of awards in the form of stock options, stock appreciation rights, restricted stock and restricted stock units and performance shares. The exercise price per share of the Company’s common stock purchasable under any stock option or stock appreciation right may not be less than 100% of the fair market value of one share of common stock on the date of grant. The term of any stock option or stock appreciation right may not exceed ten years. The LTIP also provides plan participants with a cashless mechanism to exercise their stock options. Issued restricted stock, stock options and restricted stock units are subject to vesting restrictions.

 

Restricted Stock Awards

 

Stock-based compensation expense for restricted stock awards was $0.7 million and $1.0 million for the nine months ended September 30, 2014 and 2013, respectively.  Restricted stock awards are amortized over their respective vesting periods of two or three years.  The Company records stock-based compensation for grants of restricted stock awards on a straight-line basis.

 

The following table summarizes the restricted common stock activity for the nine months ended September 30, 2014:

 

 

 

September 30, 2014

 

 

 

 

 

Weighted

 

 

 

 

 

Average Fair

 

 

 

Shares

 

Value

 

 

 

 

 

 

 

Balance - nonvested at January 1, 2014

 

409,889

 

$

10.33

 

Granted

 

22,508

 

8.35

 

Vested

 

(140,476

)

10.36

 

Forfeited

 

(141,847

)

10.50

 

Balance - nonvested at September 30, 2014

 

150,074

 

$

9.86

 

 

The total grant-date fair value of restricted stock vested for the nine months ended September 30, 2014 was $1.5 million.  As of September 30, 2014, $1.0 million of total unrecognized compensation expense related to restricted common stock is expected to be recognized over a weighted average period of approximately 2 years.

 

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Stock Options

 

The following tables summarize stock option activity for the nine months ended September 30, 2014, along with stock options exercisable at the end of the period:

 

 

 

For the nine months Ended

 

 

 

September 30, 2014

 

 

 

Shares

 

Weighted
Average
Exercise Price

 

Weighted
Average
Contractual
Life (Years)

 

 

 

 

 

 

 

 

 

Outstanding - Beginning of period

 

499,542

 

$

11.78

 

 

 

Forfeited or expired

 

(149,304

)

10.72

 

 

 

Outstanding - End of period

 

350,238

 

$

12.04

 

7

 

 

 

 

 

 

 

 

 

Vested and Expected to Vest at September 30, 2014

 

332,726

 

 

 

 

 

Exercisable at September 30, 2014

 

232,813

 

 

 

 

 

 

The fair value of the stock-based awards was estimated using the Black-Scholes model.  No options were granted in the three or nine month periods ended September 30, 2014.

 

As of September 30, 2014, $0.1 million of total unrecognized compensation expense related to stock options awards is expected to be recognized over a weighted average period of approximately 2 years.

 

The following table sets forth the total stock-based compensation expense resulting from stock options and restricted stock granted to employees that are included in the Company’s condensed consolidated statements of operations for the three months ended and nine months ended September 30, 2014 and 2013:

 

($ in thousands)

 

For the three months ended September 30,

 

For the nine months ended September 30,

 

Stock-Based Compensation Expense

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Cost of services and products

 

$

 

$

 

$

 

$

6

 

Selling, general and administrative expenses

 

170

 

333

 

677

 

1,014

 

 

 

$

170

 

$

333

 

$

677

 

$

1,020

 

 

Shareholder Rights Plan

 

On September 2, 2014, in connection with an unsolicited, non-binding acquisition proposal, the Company’s Board of Directors (the “Alteva Board”) adopted a Stockholder Rights Plan that provides for the distribution of one right of each share of common stock outstanding.  Each right entitles the holder to purchase one one-thousandth (1/1000th) of a share of Series A Junior Participating Preferred Stock, par value of $0.01 per share, of the Company (the “Preferred Stock”) at a price of $22.20 per one-thousandth of a share of Preferred Stock, subject to adjustment.  The rights generally become distributed and exercisable at the discretion of the Board following a public announcement that 20% or more of the Company’s common stock has been acquired or an intent to acquire has become apparent.  The rights will expire on September 1, 2015, unless the final expiration date is advanced or extended or unless the rights are earlier redeemed or exchanged by the Company.  Further description and terms of the rights are set forth in the Rights Agreement between the Company and American Stock Transfer & Trust Company, LLC.  As of September 30, 2014, the Company is not aware of the occurrence of any events that would trigger the rights under the plan.

 

Share Buyback Program

 

On August 25, 2014, the Alteva Board authorized a repurchase program for up to $3.0 million of its common stock.  Share purchases may take place in open market transactions or in privately negotiated transaction and may be made from time to time depending on market conditions, share price, trading volume and other factors. The repurchase program authorized by the Alteva Board does not require the Company to acquire a specific number of shares, and may be terminated, suspended, or modified at any time.  The share repurchase is expected to be funded from available cash on hand.  As of September 30, 2014, the Company had not repurchased any shares under the repurchase program.

 

NOTE 11:  EARNINGS (LOSS) PER SHARE

 

Basic earnings (loss) per share is computed by dividing net income (loss) applicable to common stock by the weighted average number of shares of common stock outstanding during the period.  Diluted earnings (loss) per share is computed by dividing net income (loss) applicable to common stock by the weighted average number of shares of common stock adjusted to include the effect of potentially dilutive securities.  Potentially dilutive securities include incremental shares issuable upon exercise of outstanding stock options and shares of unvested restricted stock.  Diluted earnings (loss) per share excludes all dilutive securities if their effect is anti-dilutive.

 

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The Company’s restricted stock awards are considered “participating securities” because they contain non-forfeitable rights to dividends. Under the two-class method, earnings per share (“EPS”) is computed by dividing earnings allocated to common shareholders by the weighted-average number of common shares outstanding for the period. In applying the two-class method, earnings are allocated to both shares of common stock and participating securities based on their respective weighted-average shares outstanding for the period.

 

For the three months ended September 30, 2014 and nine months ended September 30, 2013, the Company experienced a net loss.  As a result, the effect of participating securities was excluded from the computation of basic and diluted EPS.  The net losses were not allocated because the restricted stockholders are not required to fund losses.

 

The weighted average number of shares of common stock used in basic and diluted earnings per share for the three and nine months ended September 30, 2014 and 2013 is as follows:

 

 

 

For the three months ended September 30,

 

(amounts in thousands, except for per share)

 

2014

 

2013

 

 

 

 

 

 

 

NUMERATOR:

 

 

 

 

 

Net income (loss) applicable to common stock and participating securities

 

$

(1,336

)

$

337

 

Less: income applicable to participating securities (1)

 

 

(22

)

Net income (loss) applicable to common stock

 

$

(1,336

)

$

315

 

 

 

 

 

 

 

DENOMINATOR:

 

 

 

 

 

Weighted average shares outstanding - Basic and Diluted (2)

 

5,826

 

5,776

 

 

 

 

 

 

 

EPS:

 

 

 

 

 

Net income (loss) per share - Basic and Diluted

 

$

(0.23

)

$

0.06

 

 


(1)         For the three months ended September 30, 2014 and 2013, the Company had 0.2 million and 0.4 million in nonvested participating securities, respectively. As the participating securities do not participate in losses, there was no allocation of loss for the three months ended September 30, 2014.

 

(2)         For the three months ended September 30, 2014 and 2013, potentially dilutive shares related to out of the money common stock options that were excluded from EPS, as their effect was anti-dilutive, were 0.3 million and 0.2 million, respectively.

 

 

 

For the nine months ended September 30,

 

(amounts in thousands, except for per share)

 

2014

 

2013

 

 

 

 

 

 

 

NUMERATOR:

 

 

 

 

 

Net income (loss) applicable to common stock and participating securities

 

$

29,939

 

$

(356

)

Less: income applicable to participating securities (1)

 

(1,174

)

 

Net income (loss) applicable to common stock

 

$

28,765

 

$

(356

)

 

 

 

 

 

 

DENOMINATOR:

 

 

 

 

 

Weighted average shares outstanding - Basic and Diluted (2)

 

5,802

 

5,765

 

 

 

 

 

 

 

EPS:

 

 

 

 

 

Net income (loss) per share - Basic and Diluted

 

$

4.96

 

$

(0.06

)

 


(1)         For the nine months ended September 30, 2014 and 2013, the Company had 0.2 million and 0.3 million in nonvested participating securities, respectively.  As the participating securities do not participate in losses, there was no allocation of loss for the nine months ended September 30, 2013.

 

(2)         For the nine months ended September 30, 2014 and 2013, potentially dilutive shares related to out of the money common stock options that were excluded from EPS, as their effect was anti-dilutive, were 0.2 million and 0.1 million, respectively.

 

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NOTE 12:  SHAREHOLDERS’ EQUITY

 

A summary of the changes to shareholders’ equity for the nine months ended September 30, 2014 and 2013 is provided below:

 

 

 

For the nine months ended September 30,

 

($ in thousands)

 

2014

 

2013

 

Shareholders’ equity, beginning of period

 

$

13,006

 

$

13,098

 

Net income (loss)

 

29,958

 

(337

)

Dividends paid on common stock

 

 

(3,314

)

Dividends paid on preferred stock

 

(19

)

(19

)

Stock based compensation

 

677

 

1,020

 

Treasury stock purchases

 

(399

)

(126

)

Changes in pension and postretirement benefit plans

 

410

 

434

 

 

 

 

 

 

 

Shareholders’ equity, end of period

 

$

43,633

 

$

10,756

 

 

NOTE 13:  SEGMENT INFORMATION

 

The Company’s two segments, UC and Telephone, are strategic business units that offer different products and services.  The Company evaluates the performance of its two segments based upon factors such as revenue growth, expense containment, market share and operating results.

 

The UC segment is a premier provider of hosted Unified Communications as a Service (UCaaS) including VoIP, hosted Microsoft communication services, fixed mobile convergence and advanced voice applications for a broad customer base including, medium and large-sized businesses and enterprise business customers.

 

The Telephone segment operates as an ILEC in southern Orange County, New York and northern New Jersey.  The Telephone segment consists of providing local and toll telephone service, high-speed broadband and fiber Internet access services and satellite video services to residential and business customers.  The ILEC service areas are primarily rural and have an estimated population of 50,000.  The Company also operates as a CLEC in in Middletown, New York, Scotchtown, New York and Vernon, New Jersey.

 

The segment results presented below are not necessarily indicative of the results of operations these segments would have achieved had they operated as stand-alone entities during the periods presented.  All intersegment transactions are shown net of eliminations.

 

Segment statement of operations information for the three months ended September 30, 2014 and 2013 is set forth below:

 

 

 

For the three months ended September 30,

 

 

 

2014

 

2013

 

 

 

UC

 

Telephone

 

Consolidated

 

UC

 

Telephone

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

4,308

 

$

3,263

 

$

7,571

 

$

4,043

 

$

3,487

 

$

7,530

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services and products

 

1,923

 

1,001

 

2,924

 

2,009

 

1,145

 

3,154

 

Selling, general and administrative expense

 

3,048

 

1,678

 

4,726

 

3,546

 

1,569

 

5,115

 

Loss on disposal, restructuring costs and other special charges

 

336

 

264

 

600

 

404

 

 

404

 

Depreciation and amortization

 

546

 

385

 

931

 

595

 

361

 

956

 

Total operating expenses

 

5,853

 

3,328

 

9,181

 

6,554

 

3,075

 

9,629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(1,545

)

(65

)

(1,610

)

(2,511

)

412

 

(2,099

)

Interest income, (expense), net

 

 

 

 

 

20

 

 

 

 

 

(179

)

Income from equity method investment

 

 

 

 

 

 

 

 

 

 

3,250

 

Other (expense) income, net

 

 

 

 

 

(4

)

 

 

 

 

25

 

Income (loss) before income taxes

 

 

 

 

 

$

(1,594

)

 

 

 

 

$

997

 

 

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Segment statement of operations information for the nine months ended September 30, 2014 and 2013 is set forth below:

 

 

 

For the nine months ended September 30,

 

 

 

2014

 

2013

 

 

 

UC

 

Telephone

 

Consolidated

 

UC

 

Telephone

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

12,753

 

$

9,946

 

$

22,699

 

$

11,919

 

$

10,798

 

$

22,717

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services and products

 

5,838

 

3,005

 

8,843

 

6,594

 

3,564

 

10,158

 

Selling, general and administrative expense

 

10,059

 

5,627

 

15,686

 

12,047

 

6,542

 

18,589

 

Loss on disposal, restructuring costs and other special charges

 

392

 

308

 

700

 

404

 

 

404

 

Depreciation and amortization

 

1,606

 

1,147

 

2,753

 

1,777

 

1,142

 

2,919

 

Total operating expenses

 

17,895

 

10,087

 

27,982

 

20,822

 

11,248

 

32,070

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(5,142

)

(141

)

(5,283

)

(8,903

)

(450

)

(9,353

)

Interest income, (expense), net

 

 

 

 

 

(173

)

 

 

 

 

(593

)

Income from equity method investment

 

 

 

 

 

52,373

 

 

 

 

 

9,750

 

Other (expense) income, net

 

 

 

 

 

23

 

 

 

 

 

162

 

Income (loss) before income taxes

 

 

 

 

 

$

46,940

 

 

 

 

 

$

(34

)

 

The Company’s assets for each of the two segments have not significantly changed since December 31, 2013, except for the $29 million in cash due to the proceeds from exercising the O-P Put.

 

NOTE 14:    COMMITMENTS AND CONTINGENCIES

 

The Company is party, from time to time, to various legal proceedings, including patent infringement claims, regulatory investigations and tax examinations incidental to its business.  The Company continually monitors these legal proceedings, regulatory investigations and tax examinations to determine the impact and any required accruals.

 

On March 31, 2014, David J. Cuthbert was terminated as President and Chief Executive Officer of Alteva.  The Company notified Mr. Cuthbert that his termination was for “cause” and, as such, Mr. Cuthbert was not entitled to any of the benefits provided for under his employment agreement dated March 5, 2013, including cash severance and the acceleration of vesting on any unvested equity instruments.  Mr. Cuthbert disputed the Company’s basis for termination and claimed that he was due his full severance benefits.  The Company accrued $0.1 million during the three months ended March 31, 2014, in connection with the potential exposure for this matter based upon the then current facts and circumstances.

 

As the Company did not want to incur further legal fees or the risk of distraction of a protracted legal dispute, on October 16, 2014, the Company, through mediation, entered into a settlement agreement and mutual release agreement (the “Settlement Agreement”) with Mr. Cuthbert.   In consideration for Mr. Cuthbert’s execution of the Settlement Agreement, the Company agreed to pay to Mr. Cuthbert the amount of $0.75 million less certain taxes and withholdings, which was paid out on October 28, 2014.

 

As a result of the settlement, the Company accrued $0.6 million during the three months ended September 30, 2014, which is net of a $50,000 insurance reimbursement.  Total expense of $0.7 million for the nine months ended September 30, 2014 is included in the loss on disposal, restructuring costs and other special charges line in the condensed statement of operations.

 

During the three months ended September 30, 2014, the Company was named as a party to a lawsuit from Sprint regarding a certain tariff charge (IntraMTA carrier charge) billed by Alteva, paid by Sprint over a number of years and had not previously been disputed. Sprint has filed similar lawsuits against other carriers related to the same tariff charges. The Company has filed a motion to dismiss.  The amount of the claim filed by Sprint is for $0.2 million; however the Company has not recorded an accrual as of September 30, 2014 as management is not able to estimate the likelihood of a loss at this time. The Company will continue to monitor the status of this matter and will account for it accordingly based on any updates.  Matters such as this are subject to considerable judgment and could change significantly in the near term.

 

NOTE 15:    SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events occurring after the balance sheet date.  Based on this evaluation, the Company has determined that no subsequent events, except for the matters discussed in the footnotes above, have occurred which require disclosure in the condensed consolidated financial statements.

 

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

 

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS

 

Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words “believes,” “anticipates,” “intends,” “expects” and words of similar import, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally and in the geographic regions in which we operate; industry capacity; goodwill and long-lived asset impairment; demographic changes; management turnover; technological changes and changes in consumer demand; existing governmental regulations and changes in or our failure to comply with, governmental regulations; legislative proposals relating to the businesses in which we operate; changes to the USF; changes in the Orange County-Poughkeepsie Limited Partnership (“O-P”) distributions; risks associated with the exercise of our option to sell our O-P interest back to Verizon; risks associated with our unfunded pension liability; competition; the loss of any significant ability to attract and retain highly skilled personnel and any other factors that are described in “Risk Factors.” Given these uncertainties, current and prospective investors should be cautioned regarding reliance on such forward-looking statements. Except as required by law, we disclaim any obligation to update any such factors or to publicly announce the results of any revision to any of the forward-looking statements contained herein to reflect future events or developments. For a further discussion of the matters described above, see Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Overview

 

Alteva, Inc. (we, our or us) is a cloud-based communications company that provides Unified Communications (“UC”) solutions, including enterprise hosted Voice-over-Internet Protocol (“VoIP”) and operates as a regional Incumbent Local Exchange Carrier (“ILEC”) in southern Orange County, New York and northern New Jersey.    We deliver cloud-based UC solutions including BroadSoft-based VoIP integrated with Microsoft Lync, Microsoft Exchange, Google Apps for Business, leading customer relationship management (CRM) applications such as Salesforce.com and Bring-Your-Own-Device (BYOD) solutions for Mobility, which allows users to take advantage of all of the features available to them no matter where they are located or what device they are using. Our ILEC operations consist of providing local and toll telephone service to residential and business customers, Internet high-speed broadband service, and satellite television services provided by DIRECTV. Our cloud-based Unified Communication as a Service (“UCaaS”) solutions are focused on medium, large and enterprise markets. We meet our customers’ unique needs for a business communications solution that integrates multi-location, mobility, business productivity and analytics, into a single seamless experience.

 

This discussion and analysis provides information about the important aspects of our operations and investments, both at the consolidated and segment levels, and includes discussions of our results of operations, financial position and sources and uses of cash.

 

This discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

 

Executive Summary

 

 

 

Nine months ended September 30, 2014

 

Nine months ended September 30, 2013

 

Change

 

 

 

 

 

% of Total

 

Operating

 

Operating

 

 

 

% of Total

 

Operating

 

Operating

 

 

 

Operating

 

($ in thousands)

 

Revenue

 

Revenue

 

Loss

 

Margin

 

Revenue

 

Revenue

 

Loss

 

Margin

 

Revenue

 

Loss

 

UC

 

$

12,753

 

56

%

$

(5,142

)

(40

)%

$

11,919

 

52

%

$

(8,903

)

(75

)%

$

834

 

$

3,761

 

Telephone

 

9,946

 

44

%

(141

)

(1

)%

10,798

 

48

%

(450

)

(4

)%

(852

)

309

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

22,699

 

100

%

$

(5,283

)

(23

)%

$

22,717

 

100

%

$

(9,353

)

(41

)%

$

(18

)

$

4,070

 

 

Overall revenues were relatively consistent at $22.7 million for both the nine months ended September 30, 2014 and 2013.  We experienced a 7% increase in our UC revenues despite a $1.5 million decrease in revenue from our Syracuse, New York operations that were sold in August 2013.  Excluding the Syracuse operations, UC had organic growth of 22% from the sales to new customers and increase in services to existing customers.  The decrease in our Telephone segment revenues for the nine months ended September 30, 2014 was primarily due to a $0.6 million decrease in our Universal Service Fund subsidies revenues, due to the expected trend of lower reimbursable costs. In addition, for the past several years, we have experienced declines in telephone access lines within our Telephone segment due to sustained competition and cellular substitution for landline telephone services in our regulated franchise area that have reduced revenue in this segment. We partially offset the decline in telephone access lines by focusing our efforts on identifying and pursuing growth opportunities including fiber deals and expansion of our broadband Internet business.

 

During the nine months ended September 30, 2014, we had an operating loss of $5.3 million, compared to an operating loss of $9.4 million for the nine months ended September 30, 2013.  The decrease in operating loss was attributed to our organic UC growth and lower payroll and operating costs in 2014 due to cost saving initiatives implemented in 2013 and the first half of 2014, severance charges related to management changes and staff rationalization occurring primarily in 2013 and due to the sale of the operations in Syracuse, New York, which had incurred higher operating costs than revenue. During the nine months

 

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Table of Contents

 

ended September 30, 2014, we had net income of $30.0 million, compared to a net loss of $0.3 million for the nine months ended September 30, 2013, driven primarily by our exercise of the Orange County-Poughkeepsie Limited Partnership (“O-P”) Put for gross proceeds of $50 million and the decrease in operating costs discussed above.

 

Results of Operations for the three and nine months ended September 30, 2014 and 2013

 

OPERATING REVENUES

 

Three months ended September 30, 2014 as compared to the three months ended September 30, 2013:

 

 

 

For the three months ended September 30, 2014

 

For the three months ended September 30, 2013

 

Change

 

 

 

 

 

% of Total

 

 

 

% of Total

 

 

 

($ in thousands)

 

Revenue

 

Revenue

 

Revenue

 

Revenue

 

Revenue

 

UC

 

$

4,308

 

57

%

$

4,043

 

54

%

$

265

 

Telephone

 

3,263

 

43

%

3,487

 

46

%

(224

)

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

7,571

 

100

%

$

7,530

 

100

%

$

41

 

 

Revenues for our UC segment increased 7% for the three months ended September 30, 2014 as compared to the same period in 2013,  despite a $0.3 million decrease in revenue from previous customers within our Syracuse, New York operations that were sold in August 2013.  Excluding the Syracuse operations, UC had 16% organic growth primarily driven by a $0.6 million increase in license and usage revenue.

 

Revenues for our Telephone segment decreased 6% for the three months ended September 30, 2014 compared to the same period in 2013.  The decrease was driven by an overall decrease in access line revenue.

 

Nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013:

 

 

 

For the nine months ended September 30, 2014

 

For the nine months ended September 30, 2013

 

Change

 

 

 

 

 

% of Total

 

 

 

% of Total

 

 

 

($ in thousands)

 

Revenue

 

Revenue

 

Revenue

 

Revenue

 

Revenue

 

UC

 

$

12,753

 

56

%

$

11,919

 

52

%

$

834

 

Telephone

 

9,946

 

44

%

10,798

 

48

%

(852

)

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

22,699

 

100

%

$

22,717

 

100

%

$

(18

)

 

Revenues for our UC segment increased 7% for the nine months ended September 30, 2014 as compared to the same period in 2013 despite a $1.5 million decrease due to our sale of operations in Syracuse, New York in August 2013.  Excluding the Syracuse operations, UC had organic growth of 22% primarily driven by a $2.3 million increase in license and usage revenue.

 

Revenues for our Telephone segment decreased 8% for the nine months ended September 30, 2014 compared to the same period in 2013.  The decrease was driven by a $0.6 million decline in USF revenues and a decrease in access line revenue.

 

OPERATING EXPENSES

 

Three months ended September 30, 2014 as compared to the three months ended September 30, 2013:

 

 

 

Unified Communications

 

Telephone

 

Consolidated

 

 

 

For the Three Months Ended September 30,

 

For the Three Months Ended September 30,

 

For the Three Months Ended September 30,

 

($ in thousands)

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

Cost of services and products

 

$

1,923

 

$

2,009

 

$

(86

)

$

1,001

 

$

1,145

 

$

(144

)

$

2,924

 

$

3,154

 

$

(230

)

Selling, general and administrative 

 

3,048

 

3,546

 

(498

)

1,678

 

1,569

 

109

 

4,726

 

5,115

 

(389

)

Loss on disposal, restructuring costs and other special charges 

 

336

 

404

 

(68

)

264

 

 

264

 

600

 

404

 

196

 

Depreciation and amortization 

 

546

 

595

 

(49

)

385

 

361

 

24

 

931

 

956

 

(25

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

$

5,853

 

$

6,554

 

$

(701

)

$

3,328

 

$

3,075

 

$

253

 

$

9,181

 

$

9,629

 

$

(448

)

 

Cost of Services and Products

 

Cost of services and products for our UC segment decreased 4% for three months ended September 30, 2014 as compared to the same period in 2013 and decreased as a percentage of revenue to 45% from 50%.  The decrease was primarily due to leveraging the UC infrastructure over a larger revenue base and lower third-party carrier costs as a part of our cost reduction initiatives, and cost savings from the sale of our operations in Syracuse, New York.  These decreases were partially offset by a $0.2 million increase in circuit and usage costs due to increases in customers.

 

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Table of Contents

 

Cost of services and products for our Telephone segment decreased for three months ended September 30, 2014 compared to the same period in 2013 primarily due to a $0.1 million realized cost savings from a reduction in headcount.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses decreased 8% for the three months ended September 30, 2014 as compared to the same period in 2013 primarily due to a $0.5 million decrease in wages, equity compensation and associated benefits due to staff reductions and management changes over the last year across both segments.

 

Loss on Disposal, Restructuring Costs and Other Special Charges

 

We incurred a $0.6 million charge in connection with the Settlement Agreement with our former CEO for the three months ended September 30, 2014.

 

We incurred a $0.4 million loss due to the disposal of our Syracuse, New York operations for the three months ended September 30, 2013.

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense in the UC segment decreased 8% for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 primarily due to a lower depreciable base due to the sale of our operations in Syracuse, New York in August 2013.

 

Nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013:

 

 

 

Unified Communications

 

Telephone

 

Consolidated

 

 

 

For the Nine Months Ended September 30,

 

For the Nine Months Ended September 30,

 

For the Nine Months Ended September 30,

 

($ in thousands)

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

Cost of services and products

 

$

5,838

 

$

6,594

 

$

(756

)

$

3,005

 

$

3,564

 

$

(559

)

$

8,843

 

$

10,158

 

$

(1,315

)

Selling, general and administrative

 

10,059

 

12,047

 

(1,988

)

5,627

 

6,542

 

(915

)

15,686

 

18,589

 

(2,903

)

Loss on disposal, restructuring costs and other special charges

 

392

 

404

 

(12

)

308

 

 

308

 

700

 

404

 

296

 

Depreciation and amortization

 

1,606

 

1,777

 

(171

)

1,147

 

1,142

 

5

 

2,753

 

2,919

 

(166

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

$

17,895

 

$

20,822

 

$

(2,927

)

$

10,087

 

$

11,248

 

$

(1,161

)

$

27,982

 

$

32,070

 

$

(4,088

)

 

Cost of Services and Products

 

Cost of services and products for our UC segment decreased 12% for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 and decreased as a percentage of revenue to 46% from 55%.  The decrease was primarily due to a reduction in third-party carrier costs as a part of our cost reduction initiatives, cost savings from the sale of our operations in Syracuse, New York and the leveraging of the UC infrastructure over a larger revenue base.  The decreases were partially offset by a $0.5 million increase in circuit and usage costs due to new customers.

 

Cost of services and products for our Telephone segment decreased for the nine months ended September 30, 2014 compared to the same period in 2013 due to $0.5 million in lower wages from staff rationalizations over the last year and $0.3 million reduction in circuit costs as part of our cost reduction initiatives.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses decreased 16% for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, primarily due to a $2.1 million decrease in wages, equity compensation, and associated benefits from staff reductions and management changes over the last year across both segments.  Selling, general and administrative expenses included $0.3 million and $1.2 million of severance charges for the nine months ended September 30, 2014 and 2013, respectively, related to management changes and staff reductions.  In addition, marketing decreased by $0.3 million which was primarily driven by higher costs in 2013 from the rebranding to the Alteva name and cost reduction initiatives put in place in 2014.

 

Loss on Disposal, Restructuring Costs and Other Special Charges

 

We incurred a $0.7 million charge in connection with the Settlement Agreement with our former CEO for the nine months ended September 30, 2014.

 

We incurred a $0.4 million loss due to the disposal of our Syracuse, New York operations for the nine months ended September 30, 2013.

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense in the UC segment decreased 10% for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 primarily due to a lower depreciable base due to the sale of our operations in Syracuse, New York in August 2013.

 

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OTHER INCOME (EXPENSE)

 

 

 

For the Three Months Ended September 30,

 

($ in thousands)

 

2014

 

2013

 

Change

 

Interest expense, net

 

$

20

 

$

(179

)

$

199

 

Income from equity method investment

 

 

3,250

 

(3,250

)

Other income, net

 

(4

)

25

 

(29

)

 

 

 

 

 

 

 

 

Total other income

 

$

16

 

$

3,096

 

$

(3,080

)

 

Total other income decreased 100% for the three months ended September 30, 2014 as compared to three months ended September 30, 2013, primarily due to the sale of our ownership interest in the O-P in April 2014.

 

 

 

For the Nine Months Ended September 30,

 

($ in thousands)

 

2014

 

2013

 

Change

 

Interest expense, net

 

$

(173

)

$

(593

)

$

420

 

Income from equity method investment

 

52,373

 

9,750

 

42,623

 

Other income, net

 

23

 

162

 

(139

)

 

 

 

 

 

 

 

 

Total other income

 

$

52,223

 

$

9,319

 

$

42,904

 

 

Total other income increased 460% for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, due to the $49.8 million gain on the sale of our ownership interest in the O-P.  In 2013 we received guaranteed annual distributions of $13 million ($3.25 million each quarter). In 2014, in accordance with the O-P agreement, our guaranteed distribution levels stopped and we received income from the equity investment only for our ownership share of 8.108% of the O-P’s net income, which was $2.6 million for the four months ended April 30, 2014.

 

Interest expense decreased for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 due to us not having an outstanding balance on our line of credit with TriState since April 2014.  On April 30, 2014 we paid off the balance with the proceeds from the sale of our interest in the O-P.

 

INCOME TAXES

 

For the three months ended September 30, 2014, we had an income tax benefit of $0.3 million or 17% of loss before income taxes as compared to income tax expense of $0.7 million, or 66% of income before income taxes, for the three months ended September 30, 2013.  For the nine months ended September 30, 2014, we had an income tax expense of $17.0 million, or 36% of income before income taxes, as compared to income tax benefit of $0.3 million, or 891% of loss before income taxes, for the nine months ended September 30, 2013.  The estimated effective tax rate for each period includes projections of tax expense on the expected change in our valuation allowance for deferred tax assets. The estimated annual effective tax rate for the year ended December 31, 2014 excludes the estimated tax effects of the O-P gain on the put exercise, which was treated as a discrete item in the Company’s second quarter of 2014.  The increase in the effective tax rate is due to exercise of the Put being treated as a discrete item and is taxed at the full federal tax rate of 35% for period ended September 30, 2014. Due to the nature of the gain on the Put, we have nominal state taxes associated with the gain which minimally impacts our effective tax rate.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We had $28.9 million of cash and cash equivalents at September 30, 2014 as compared with $1.6 million at December 31, 2013.  Our increase in cash flows was primarily generated from cash proceeds from the sale of our ownership in the O-P.

 

We sold all of our ownership interest in the O-P on April 30, 2014 for gross proceeds of $50 million (see Note 6).  We have not and will not receive any income from the O-P after April 30, 2014.  We used a portion of the proceeds to repay all of the outstanding borrowings under the TriState credit facility and pay taxes on the related gain.  We expect the remaining gross proceeds to be used to fund working capital needs and support growth initiatives.

 

In August 2014, our Board of Directors (“Board”) authorized a repurchase program for up to $3.0 million of our common stock.  Share purchases may take place in open market transactions or in privately negotiated transaction and may be made from time to time depending on market conditions, share price, trading volume and other factors. The repurchase program authorized our Board does not require us to acquire a specific number of shares, and may be terminated, suspended, or modified at any time.  The share repurchase will be funded from available cash on hand.  As of September 30, 2014, the Company had not repurchased any shares under the repurchase program.

 

In August 2013, we announced the discontinuation of dividends on our common stock to support future growth initiatives and strengthen our financial position.

 

On March 11, 2013, we entered into a credit agreement with TriState to provide for borrowings up to $17.0 million with the ability to increase the facility for borrowings up to $20.0 million with the participation of another lender.  On March 11, 2013, we

 

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Table of Contents

 

borrowed $15.2 million to repay all borrowings outstanding under the CoBank, Provident and prior TriState credit facilities and retired those facilities.  On April 30, 2014, upon receiving proceeds for the exercise of the O-P Put, we repaid all $11.6 million of the then outstanding debt on the credit facility.  On June 1, 2014, the credit agreement was amended to reduce the borrowing capacity from a ceiling of $17.0 million to a ceiling of $5.0 million.   On June 30, 2014, the credit agreement was amended to extend the expiration of the Credit Agreement from June 30, 2014 to October 8, 2014 (see Note 7). The TriState borrowings incur interest at a variable rate based on either LIBOR or a Base Rate, as defined in the credit agreement, plus an applicable margin 3.50% or 2.00%, respectively.  As of September 30, 2014, the Company had $5.0 million available under the Credit Agreement.

 

Under the terms of the TriState credit agreement, we are required to comply with certain loan covenants, which include, but are not limited to, the achievement of certain financial ratios as well as certain financial reporting requirements. We have to maintain a Consolidated Liquidity Ratio, as defined in the TriState credit agreement, in excess of 1.0 to 1.0.  Our obligations under the TriState credit facility are secured by all of our assets and guaranteed by all of our wholly-owned subsidiaries except for the subsidiary that is operating as an ILEC.  The ILEC subsidiary entered into a negative pledge agreement with TriState whereby the ILEC subsidiary agreed not to pledge any of its assets as collateral or lien to be placed on any of its assets.  These terms did not change when the credit agreement was amended on June 30, 2014.

 

Our Credit Agreement expired on October 8, 2014.  On November 7, 2014, we entered into a demand line of credit with TriState to allow for borrowings up to $5.0 million.  We borrow or repay our debt as needed based upon our working capital obligations.  It is up to the discretion of TriState to approve borrowings within the allowed line of credit limit and may, at any time, demand that we make payment on an outstanding balance. We were previously required to comply with certain loan covenants and restrictions under our prior Credit Agreement.  There are no measured financial covenants under the new demand line of credit.

 

CASH FROM OPERATING ACTIVITIES

 

Net cash used in operating activities was $11.6 million for the nine months ended September 30, 2014 as compared to net cash provided by operating activities of $0.7 million for the nine months ended September 30, 2013.  The change in cash from operating activities was primarily due to payments of taxes associated with the gain on the sale of our ownership interest in the O-P.

 

CASH FROM INVESTING ACTIVITIES

 

Net cash provided by investing activities was $49.5 million for the nine months ended September 30, 2014, primarily due to the $49.8 million proceeds from the sale of our ownership interest in the O-P.  Net cash provided by investing activities was $3.3 million for the nine months ended September 30, 2013 was primarily due to distributions of $4.2 million we received from the O-P in excess of our share of the O-P’s income.

 

CASH FROM FINANCING ACTIVITIES

 

Net cash used in financing activities during the nine months ended September 30, 2014 was $10.6 million, as compared to $5.1 million for the nine months ended September 30, 2013.  We repaid our outstanding balance of $11.6 million on our TriState credit facility from the proceeds received for the sale of our ownership interest in the O-P.  Dividends declared on our common shares by the Board of Directors were $0.54 per share for the nine months ended September 30, 2013.  The total amount of dividends paid on our common shares by us for the nine months ended September 30, 2013 was $3.3 million.  The additional financing activities for the nine months ended September 30, 2013 were attributable to the repayment of debt of $20.3 million offset by $18.0 million proceeds from our debt with TriState.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are not subject to any material market risk. Although our cash is held in several financial institutions there is a concentration of credit risk due to our cash holdings exceeding the FDIC insurance on deposits.  Our exposure to changes in interest rates has been minimized since the year ended December 31, 2013 due to the pay down of our debt. There were no other material changes to our quantitative disclosure about market risk as presented in item 7A of our Annual Report on Form 10-K for the year ended December 31, 2013.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Background

 

On March 14, 2014, management and the Audit Committee of our Board of Directors (the “Audit Committee”) determined that, due to an error in the application of U.S. generally accepted accounting principles (“GAAP”) for income taxes related to the determination of the valuation allowance needed to reflect its deferred tax assets at the amount that is more than likely than not realizable, our previously filed consolidated financial statements and related financial statement schedules as of and for the year ended December 31, 2012, contained in our Annual Report on Form 10-K/A for the year ended December 31, 2012, should be restated.  This conclusion was reached because the Company determined that it overstated its prepaid income taxes and deferred income taxes in the consolidated balance sheet at December 31, 2012 by $0.3 million and $1.1 million, respectively, due to the need to increase its valuation allowance, which resulted in an understatement of the net loss reported for the year ended December 31, 2012 by $1.4 million.

 

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Table of Contents

 

In addition, the Audit Committee concluded that, due to similar errors in income tax accounting, the condensed interim financial statements as of March 31, 2013, June 30, 2013 and September 30, 2013 included in our Quarterly Reports on Forms 10-Q for the respective fiscal quarters then ended should be restated.

 

Evaluation of Disclosure Controls and Procedures

 

As of September 30, 2014, our management, with the assistance from an external service provider, carried out an assessment, under the supervision of and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our internal disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b).  Based on this assessment, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2014, since the remediation of the previously identified material weaknesses remains in process.

 

Plan for Remediation of Material Weakness

 

We continue with our remediation process for the material weakness identified at December 31, 2013.  We performed a multi-year evaluation of the recoverability of our deferred tax assets and we continue to enhance our quarterly and annual review process and related controls for income taxes through a combination.  In addition, we have changed our external tax provider. The enhanced review process includes a more robust valuation allowance review process including a detailed analysis of the expected timing of the reversal of temporary differences.  Management believes that the new review process in addition to incremental internal and external resources will remediate the identified control deficiency.

 

Changes in Internal Control over Financial Reporting

 

Other than as discussed above under “Plan for Remediation of Material Weakness,” there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the third quarter ended September 30, 2014 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

 

See Note 14 of the Notes to the Consolidated Financial Statements included in Part I. Item 1 of this report.

 

ITEM 1A. - RISK FACTORS

 

Risks related to our business are detailed in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission.

 

ITEM 5. — OTHER INFORMATION

 

On November 7, 2014, the Company and TriState Capital Bank entered into a Discretionary Demand Credit Agreement (“Demand Agreement”).  The Demand Agreement allows for borrowings of up to $5.0 million.  The Company borrows or repays its debt on an as needed based.  Tristate, in its sole discretion, may make loans to the Company and it, at any time, can demand that the Company make payment on an outstanding balance.   There are no financial covenants under the Demand Agreement.

 

24



Table of Contents

 

ITEM 6. EXHIBITS

 

3.1

 

Articles of Incorporation, as amended, are incorporated herein by reference from Exhibit 3(i) to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.

 

 

 

3.2

 

By-Laws, as amended, are incorporated herein by reference from Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.

 

 

 

3.3

 

Certificate of Amendment of the Certificate of Incorporation filed with the New York Department of State on May 21, 2013 is incorporated herein by reference from Exhibit 3.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.

 

 

 

4.1

 

Rights agreement between Alteva, Inc. and American Stock Transfer & Trust Company, LLC as dated September 2, 2014 is incorporated herein by reference from Exhibit 4.1 to our current report on Form 8-K filed on September 9, 2014.

 

 

 

10.1

 

Partnership Interest Purchase Agreement as of April 30, 2014 between Alteva, Inc. and Cellco Partnership is incorporated herein by reference from Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.

 

 

 

10.2

 

First Amendment to the Credit Agreement dated as of June 30, 2014 by and among Warwick Valley Telephone Company and TriState Capital Bank, incorporated herein by reference from Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.

 

 

 

10.3

 

Settlement Agreement and Mutual Release of All Claims between Alteva, Inc. and David J. Cuthbert, dated October 16, 2014, is incorporated herein by reference from Exhibit 10.1 to our current report on Form 8-K, filed October 22, 2014.

 

 

 

10.4

 

Amended and Restated Discretionary Demand Credit Agreement between Alteva, Inc and TriState Capital Bank, dated November 7, 2014.

 

 

 

31.1

 

Rule 13a-14(a)/15d-14(a) Certification signed by Brian J. Kelley, Chief Executive Officer.

 

 

 

31.2

 

Rule 13a-14(a)/15d-14(a) Certification signed by Brian H. Callahan, Executive Vice President, Chief Financial Officer, Treasurer and Corporate Secretary.

 

 

 

32.1

 

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Brian J. Kelley, Chief Executive Officer.

 

 

 

32.2

 

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Brian H. Callahan, Executive Vice President, Chief Financial Officer, Treasurer and Corporate Secretary.

 

 

 

101.INS

 

XBRL Instance Document.

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

25



Table of Contents

 

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.

 

 

 

Alteva, Inc.

 

(Registrant)

 

 

 

 

Date:

November 10, 2014

 

/s/ Brian J. Kelley

 

 

 

Brian J. Kelley

 

 

 

Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

Date:

November 10, 2014

 

/s/ Brian H. Callahan

 

Brian H. Callahan

 

Executive Vice President, Chief Financial Officer,

 

Treasurer and Corporate Secretary (Principal Financial and Accounting Officer)

 

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Table of Contents

 

Index to Exhibits

 

3.1

 

Articles of Incorporation, as amended, are incorporated herein by reference from Exhibit 3(i) to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.

 

 

 

3.2

 

By-Laws, as amended, are incorporated herein by reference from Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.

 

 

 

3.3

 

Certificate of Amendment of the Certificate of Incorporation filed with the New York Department of State on May 21, 2013 is incorporated herein by reference from Exhibit 3.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.

 

 

 

4.1

 

Rights agreement between Alteva, Inc. and American Stock Transfer & Trust Company, LLC as dated September 2, 2014 is incorporated herein by reference from Exhibit 4.1 to our current report on Form 8-K filed on September 9, 2014.

 

 

 

10.1

 

Partnership Interest Purchase Agreement as of April 30, 2014 between Alteva, Inc. and Cellco Partnership is incorporated herein by reference from Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.

 

 

 

10.2

 

First Amendment to the Credit Agreement dated as of June 30, 2014 by and among Warwick Valley Telephone Company and TriState Capital Bank, incorporated herein by reference from Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.

 

 

 

10.3

 

Settlement Agreement and Mutual Release of All Claims between Alteva, Inc. and David J. Cuthbert, dated October 16, 2014, is incorporated herein by reference from Exhibit 10.1 to our current report on Form 8-K, filed October 22, 2014.

 

 

 

10.4

 

Amended and Restated Discretionary Demand Credit Agreement between Alteva, Inc and TriState Capital Bank, dated November 7, 2014.

 

 

 

31.1

 

Rule 13a-14(a)/15d-14(a) Certification signed by Brian J. Kelley, Chief Executive Officer.

 

 

 

31.2

 

Rule 13a-14(a)/15d-14(a) Certification signed by Brian H. Callahan, Executive Vice President, Chief Financial Officer, Treasurer and Corporate Secretary.

 

 

 

32.1

 

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Brian J. Kelley, Chief Executive Officer.

 

 

 

32.2

 

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Brian H. Callahan, Executive Vice President, Chief Financial Officer, Treasurer and Corporate Secretary.

 

 

 

101.INS

 

XBRL Instance Document.

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

27