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INTERNET AMERICA INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
Certain statements contained in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements, identified by words such as "anticipate," "believe," "estimate,"
"should," "expect" and similar expressions include our expectations and
objectives regarding our future financial position, operating results and
business strategy. These statements reflect the current views of management with
respect to future events and are subject to risks, uncertainties and other
factors that may cause our actual results, performance or achievements, or
industry results, to be materially different from those described in the
forward-looking statements. We do not intend to update the forward-looking
information to reflect actual results or changes in the factors affecting such
forward-looking information. Our Annual Report on Form 10-K for the fiscal year
ended June 30, 2011 and other publicly filed reports discuss some additional
important factors that could cause our actual results to differ materially from
those in any forward-looking statements. Some of these factors are also
discussed in this Quarterly Report under the heading "Safe Harbor Statement and
Risk Factors" later in this Item 2.
Overview
As expected, the quarter ended December 31, 2011 showed similar Adjusted EBITDA
(as defined below) and a slightly improved level of net income as compared to
the prior year and prior quarter periods. During the quarter ended December 31,
2011, we focused more and invested more of our surplus cash on infrastructure
upgrades; installation of higher throughput licensed wireless backhauls; and
improvements to our system monitoring and service to our existing customers.
During the foreseeable future we anticipate using even more of our excess cash
for technology improvements and acquisitions while continuing to focus on top
line revenue growth and profitability. We continue to believe that we are well
positioned to withstand a prolonged sluggish economy and/or to capitalize on
growth possibilities through internal growth and acquisitions.
We have begun to see more potential acquisitions that utilize both licensed and
unlicensed spectrum at more attractive prices than in previous years. On January
31, 2012, we closed the purchase of wireless radios (access points) on three
leased towers in Joplin, Missouri and control hardware and software for these
radios for a total consideration of $104,000. Although the Company has not had
adequate time to quantify the estimated fair value of the acquired assets as of
this filing date, management believes that the estimated value of the acquired
assets will exceed the purchase consideration. This asset acquisition is the
first time in more than five years that the Company has entered into operations
outside the state of Texas and it is the first time that we have utilized 2.5
GHz spectrum.
9
Statement of Operations
Internet services revenue is derived from dial-up Internet access, including
analog and ISDN access, DSL access, dedicated connectivity, wireless access,
bulk dial-up access, web hosting services, and value-added services, such as
multiple e-mail boxes, personalized e-mail addresses and Fax-2-Email services.
A brief description of each element of our operating expenses follows:
Connectivity and operations expenses consist primarily of setup costs for new
subscribers, telecommunication costs, merchant processing fees, and wages of
network operations and customer support personnel. Connectivity costs include
fees paid to telephone companies for subscribers' dial-up connections to our
network, fees paid to backbone providers for connections from our network to the
Internet, and equipment and tower lease costs for our new wireless networks.
Sales and marketing expenses consist primarily of creative and production costs,
costs of media placement, management salaries and call center wages. Advertising
costs are expensed as incurred.
General and administrative expenses consist primarily of administrative
salaries, professional services, rent and other general office and business
expenses.
Bad debt expenses (recoveries) consist primarily of customer accounts that have
been deemed uncollectible and will potentially be written off in future periods,
net of recoveries. Historically, the expense has been based on the aging of
customer accounts whereby all customer accounts that are 90 days or older have
been provided for as a bad debt expense.
Depreciation expense is computed using the straight-line or double declining
method over the estimated useful lives of the assets or the capital lease term,
as appropriate. Data communications equipment, computers, data servers and
office equipment are depreciated over five years. Furniture, fixtures and
leasehold improvements are depreciated over five years or the lease term.
Buildings are depreciated over fifteen years. Amortization expense consists of
the amortization of subscriber acquisition costs, which are amortized overfour
years.
Our business is not subject to any significant seasonal influences.
10
Results of Operations
Three Months Ended December 31, 2011 Compared to Three Months Ended December 31,
2010
The following table sets forth certain unaudited financial data for the three
months ended December 31, 2011 and December 31, 2010. Operating results for any
period are not indicative of results for any future period. Amounts are shown in
thousands (except share, per share and subscriber count data).
Three Months Ended December 31,
2011 % of Revenues 2010 % of Revenues
STATEMENT OF OPERATIONS DATA:
REVENUES:
Internet services $ 1,786 100.0 % $ 1,722 100.0 %
TOTAL REVENUES 1,786 100.0 % 1,722 100.0 %
OPERATING EXPENSES:Connectivity and operations 1,010 56.6 % 1,050 61.0 %
Sales and marketing 92 5.2 % 45 2.6 %
General and administrative 361 20.2 % 299 17.4 %
Recovery of bad debt expense 4 0.2 % 1 0.1 %
Depreciation and amortization 197 11.0 % 254 14.7 %
TOTAL OPERATING EXPENSES 1,664 93.2 % 1,649 95.8 %
OPERATING INCOME 122 6.8 % 73 4.2 %
INTEREST INCOME (1 ) (0.1 )% (2 ) (0.1 )%
INTEREST EXPENSE 9 0.5 % 14 0.8 %
NET INCOME $ 114 6.4 % $ 61 3.5 %
NET INCOME PER COMMON SHARE:
BASIC $ 0.01 $ 0.00
DILUTED $ 0.01 $ 0.00
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
BASIC 16,729,562 16,718,433
DILUTED 19,447,990 19,447,990
OTHER DATA:Subscribers at end of period (1) 25,000 25,100
Adjusted EBITDA(2) $ 319 $ 330
Adjusted EBITDA margin(3) 17.9 % 19.2 %
Reconciliation of net income to
Adjusted EBITDA:
Net Income $ 114 $ 61
Add:
Depreciation and amortization 197 254
Stock compensation - 3
Interest expense 9 14
Less: Interest income (1 ) (2 )
Adjusted EBITDA (2) $ 319 $ 330
(1) A subscriber represents an active, billed service. One customer account may
represent multiple subscribers depending on the number of active and billed
services for that customer.
(2) Adjusted EBITDA, which as used herein means earnings before the effect of
interest, taxes, depreciation, amortization , stock based compensation and
transfer of assets, is not a measurement of financial performance under
generally accepted accounting principles (GAAP) and should not be considered an
alternative to net income as a measure of performance. Management has
consistently used adjusted EBITDA on a historical basis as a measurement of the
Company's current operating cash income.
(3) Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of total
revenue.
11
Total revenue. Total revenue increased by $64,000, or 3.7%, to $1,786,000 for
the three months ended December 31, 2011, from $1,722,000 for the three months
ended December 31, 2010.Wireless broadband Internet revenue increased by
$162,000 to $1,343,000 during the current year period compared to $1,181,000 for
the prior year period, primarily due to the stability of the subscriber base and
customers migrating to upgraded service levels and purchasing additional
services during the quarter ended December 31, 2011. The increase in revenues
derived from wireless broadband Internet subscribers were partially offset by
the decrease in other types of Internet service revenues of $98,000 during the
current year period compared to the prior year period, which is primarily
attributed to the expected decline of dial-up customers.
Connectivity and operations.Connectivity and operations expense decreased by
$40,000, or 3.8%, to $1,010,000 for the three months ended December 31, 2011,
from $1,050,000 for the three months ended December 31, 2010. Salaries, wages
and related personnel expense decreased by approximately $19,000 to $473,000 for
the current year period compared to $492,000 for the prior year period, which is
attributed mainly to the reduction in headcount to streamline our efficiencies
gained from quality process initiatives. Data and telecommunications expense
decreased by $32,000 to $289,000 for the current year period compared to
$321,000 for the prior year perioddue to our renegotiating more favorable terms
with telecommunications service providers.
The above described decreases in expenses were partially offset by an increase
in tower leases costs of $7,000 to $125,000 for the current year period compared
to $118,000 for the prior year period, and an increase in merchant fees of
$1,000 to $39,000 for the current year period compared to $38,000 for the prior
year period. Expensed assets also increased by $3,000 to $84,000 for the current
year period compared to $81,000 for the prior year period due to an increase in
supplies, installation costs and repairs.
Sales and marketing.Sales and marketing expense increased by $47,000, or 104.4%,
to $92,000 for the three months ended December 31, 2011 compared to $45,000 for
the three months ended December 31, 2010. Salaries, wages and related personnel
costs increased by approximately $19,000 to $52,000 for the current year period
compared to $33,000 for the prior year period, which is attributed mainly to the
addition of sales and marketing personnel to expand sales efforts. Advertising
expense increased by $4,000 to $10,000 for the current year period compared to
$6,000 for the prior year period primarily due to the Company bringing all
direct advertising related expenses in house to streamline cost and focus on all
improved or enhanced network areas. The remainder of this increase is attributed
to the addition of an outside sales force for a total of $24,000 for the current
year period, as compared to $0 for the prior year period. Facilities expense
remained constant at $6,000 for each of the current and prior year periods.
General and administrative. General and administrative expense increased by
$62,000, or 20.7%, to $361,000 for the three months ended December 31, 2011,
from $299,000 for the three months ended December 31, 2010. Personnel costs
increased by $24,000 to $113,000 for the current year period compared to $89,000
for the prior year period due to the addition of full time employees. Insurance
expense increased by $2,000 to $22,000 for the current year period compared to
$20,000 for the prior year period due to the addition of full time employee
benefits. Personnel travel expenses increased by $8,000 to $12,000 for the
current year period compared to $4,000 for the prior year period, and
professional and consulting fees increased by $14,000 to $46,000 for the current
year period compared to $32,000 for the prior year period. There was an
additional $21,000 increase in other general and administrative expenses.
The above described increases were partially offset by the decrease in stock
compensation expense and directors' fees by $2,000 to $16,000 for the current
year period compared to $18,000 for the prior year period. In addition,
telecommunications expense decreased by $5,000 to $40,000 for the current year
period compared to $45,000 for the prior year period.
Provision for bad debt expense (recovery). Provision for bad debt expense
increased by $3,000 to $4,000 for the three months ended December 31, 2011
compared to $1,000 for the three months ended December 31, 2010. Due to our
practice of billing in advance of providing services and our policy regarding
discontinuation of services for non-payment, we rarely, if ever, have customer
accounts that are more than 60 days past due. We fully reserve for account
balances more than 90 days past due, which resulted in an insignificant
allowance for uncollectable accounts at December 31, 2011.
Depreciation and amortization.Depreciation and amortization decreased by
$57,000, or 22.4%, to $197,000 for the three months ended December 31, 2011,
from $254,000 for the three months ended December 31, 2010. This decrease is due
to a $67,000 decrease in amortization expense relating to acquired subscriber
costs resulting from the Company's prior wireless acquisitions in fiscal 2006
and 2007 becoming fully amortized partially offset by a $10,000 increase in
depreciation relating to the improvements in existing wireless broadband
Internet infrastructure.
12
Interest income and expense. Interest expense decreased by $5,000, or 35.7%, to
$9,000 for the three months ended December 31, 2011 from $14,000 for the three
months ended December 31, 2010, primarily resulting from the reduction in the
Company's long-term debt. Interest income for the three months ended December
31, 2011 decreased by $1,000 to $1,000 for the three months ended December 31,
2011, as compared to $2,000 for the three months ended December 31, 2010.
13
Six Months Ended December 31, 2011 Compared to Six Months Ended December 31,
2010
The following table sets forth certain unaudited financial data for the six
months ended December 31, 2011 and December 31, 2010. Operating results for any
period are not indicative of results for any future period. Amounts are shown in
thousands (except share, per share and subscriber count data).
Six Months Ended December 31,
2011 % of Revenues 2010 % of Revenues
STATEMENT OF OPERATIONS DATA:
REVENUES:
Internet services $ 3,623 100.0 % $ 3,501 100.0 %
TOTAL REVENUES 3,623 100.0 % 3,501 100.0 %
OPERATING EXPENSES:Connectivity and operations 2,079 57.4 % 2,145 61.3 %
Sales and marketing 188 5.2 % 101 2.9 %
General and administrative 722 19.9 % 613 17.5 %
Recovery of bad debt expense 4 0.1 % - 0.0 %
Depreciation and amortization 387 10.7 % 503 14.4 %
Loss from transfer of assets - 0.0 % 26 0.8 %
TOTAL OPERATING EXPENSES 3,380 93.3 % 3,388 96.8 %
OPERATING INCOME 243 6.7 % 113 3.2 %
INTEREST INCOME (2 ) (0.1 )% (3 ) (0.1 )%
INTEREST EXPENSE 20 0.6 % 30 0.9 %
NET INCOME $ 225 6.2 % $ 86 2.4 %
NET INCOME PER COMMON SHARE:
BASIC $ 0.01 $ 0.01
DILUTED $ 0.01 $ 0.00
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
BASIC 16,729,562 16,638,673
DILUTED 19,447,990 19,447,990
OTHER DATA:Subscribers at end of period(1) 25,000 25,100
Adjusted EBITDA(2) $ 638 $ 646
Adjusted EBITDA margin(3) 17.6 % 18.5 %
Reconciliation of net income to
Adjusted EBITDA:
Net Income $ 225 $ 86
Add:
Depreciation and amortization 387 503
Stock compensation 8 4
Interest expense 20 30Loss from transfer of assets - 26
Less: Interest income (2 ) (3 )
Adjusted EBITDA(2) $ 638 $ 646
(1) A subscriber represents an active, billed service. One customer account
may represent multiple subscribers depending on the number of active and billed
services for that customer.
(2) Adjusted EBITDA, which as used herein means earnings before the effect of
interest, taxes, depreciation, amortization , stock based compensation and
transfer of assets, is not a measurement of financial performance under
generally accepted accounting principles (GAAP) and should not be considered an
alternative to net income as a measure of performance. Management has
consistently used adjusted EBITDA on a historical basis as a measurement of the
Company's current operating cash income.
(3) Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of total
revenue.
14
Total revenue. Total revenue increased by $122,000, or 3.5%, to $3,623,000 for
the six months ended December 31, 2011, from $3,501,000 for the six months ended
December 31, 2010. Wireless broadband Internet revenue increased by $277,000 to
$2,676,000 for the current year period compared to $2,399,000 for the prior year
period, primarily due to the stability of the subscriber base and customers
migrating to upgraded service levels and purchasing additional services during
the current year period. Increased revenues derived from wireless broadband
Internet subscribers were offset by decreases in other types of Internet service
revenues of $155,000 during the current year period compared to the prior year
period, which is primarily attributed to the expected decline of dial-up
customers moving to other providers' broadband service.
Connectivity and operations.Connectivity and operations expense decreased by
$66,000, or 3.1%, to $2,079,000 for the six months ended December 31, 2011, from
$2,145,000 for the six months ended December 31, 2010. Salaries, wages and
related personnel expense decreased by $53,000 to $959,000 for the current year
period compared to $1,012,000 for the prior year period, which is attributed
mainly to the reduction in headcount to streamline our efficiencies gained from
quality process initiatives. Data and telecommunications expense decreased by
$44,000 to $614,000 for the current year period compared to $658,000 for the
prior year period due to decreased call volume made by improvements in our
systems and renegotiating more favorable terms with telecommunications service
providers.
The above described decreases were partially offset by an increase in expensed
assets of $8,000 to $170,000 for the current year period compared to $162,000
for the prior year period. Tower lease costs increased by $17,000 to $253,000
for the current year period compared to $236,000 for the prior year period.
Merchant fees expense increased by $6,000 to $83,000 for the current year period
compared to $77,000 for the prior year period.
Sales and marketing.Sales and marketing expense increased by $87,000, or 86.1%,
to $188,000 for the six months ended December 31, 2011, compared to $101,000 for
the six months ended December 31, 2010. This increase is primarily due to the
addition of an outside sales force of $63,000 for the current year period.
Salaries, wages and related personnel costs increased by approximately $4,000 to
$81,000 for the current year period compared to $77,000 for the prior year
period, and advertising expense increased by $20,000 to $32,000 for the current
year period compared to $12,000 for the prior year period.
General and administrative. General and administrative expense increased by
$109,000, or 17.8%, to $722,000 for the six months ended December 31, 2011, from
$613,000 for the six months ended December 31, 2010. Personnel costs increased
by $52,000 to $215,000 for the six current year period compared to $163,000 for
the prior year period due to addition of full time employees including Director
of Corporate Development and Director of Sales. Professional and consulting fees
increased by $13,000 to $105,000 for the current year period compared to $92,000
for the prior year period. Travel expenses increased by $11,000 to $16,000 for
the current year period compared to $5,000 for the prior year period. Insurance
expense increased by $1,000 to $43,000 for the current year period compared to
$42,000 for the prior year period. The expense related to the issuance of stock
options and directors' fees increased by $4,000 to $39,000 for the current year
period compared to $35,000 for the prior year period. Telecommunications and
facilities expense slightly increased by $1,000 to $92,000 for the current year
period, from $91,000 for the prior year period. Other general and administrative
costs increased by $27,000 to $118,000 for the current year period compared to
$91,000 for the prior year period.
Recovery of bad debt expense. Bad debt expense was $4,000 for the six months
ended December 31, 2011 compared to $0 for the six months ended December 31,
2010 due to decreased recoveries. Due to our practice of billing in advance of
providing services and our policy regarding discontinuation of services for
non-payment, we rarely, if ever, have customer accounts that are more than 60
days past due. We fully reserve for account balances more than 90 days past due,
which resulted in an insignificant allowance for uncollectable accounts at
December 31, 2011.
Depreciation and amortization. Depreciation and amortization decreased by
$116,000, or 23.1%, to $387,000 for the six months ended December 31, 2011, from
$503,000 for the six months ended December 31, 2010. This decrease is due to a
$131,000 decrease in amortization expense relating to acquired subscriber costs
resulting from the Company's prior wireless acquisitions in fiscal 2006 and 2007
becoming fully amortized partially offset by a $15,000 increase in depreciation
relating to the improvements in existing wireless broadband Internet
infrastructure.
Loss from transfer of assets. In July 2010, former owners of TeleShare
surrendered their noncontrolling interest in exchange for $25,000 of certain
assets and liabilities of TeleShare. The Company recognized a loss of $26,000 on
the transfer of these assets.
15
Interest income and expense.For the six months ended December 31, 2011 and
December 31, 2010, the Company recorded interest expense of $20,000 and $30,000,
respectively. The $10,000 decrease in interest expense is related to a decrease
in acquisition debt and in the RUS loan outstanding. Interest income for the six
months ended December 31, 2011 decreased by $1,000 to $2,000 for the three
months ended December 31, 2011, as compared to $3,000 for the six months ended
December 31, 2010.
16
Liquidity and Capital Resources
We have historically financed our operations to date primarily through (i) cash
flows from operations, (ii) public and private sales of equity securities and
(iii) loans from shareholders and third parties. During the three and six months
ended December 31, 2011, the Company recognized net income of $114,000 and
$225,000, respectively. During the six months ended December 31, 2011, the
Company recognized positive cash flow from operations of $656,000, thereby
enabling the Company to fund its operations from current period operating cash
flow and resulting in cash on hand of $1,646,000 at December 31, 2011, compared
to cash on hand of $1,513,000 at June 30, 2011. The Company expects to continue
to fund its operations during fiscal 2012 with cash flow from operations. The
Company will continue to focus on sales and expense management during fiscal
2012 and expects continuing improvement in profits in the near and medium term.
The Company plans to pursue strategic acquisitions in the near and medium term
in addition to upgrading its systems to provide higher speeds and increased
reliability for its customers. We expect that our capital expenditures and any
future acquisitions will be funded from available cash, public or private sales
of debt or equity securities, or borrowing from commercial banks and/or third
parties; however there is no assurance that such financing will be able to be
obtained when needed at desirable rates which could affect our success in
achieving any or all of our initiatives. Any unexpected decreases in revenue or
subscriber count may adversely affect our liquidity and plans for future growth.
Cash provided by operating activities is net income adjusted for certain
non-cash items and changes in assets and liabilities. For the six months ended
December 31, 2011, cash provided by operations was $656,000 compared to $581,000
for the six months ended December 31, 2010. For the six months ended December
31, 2011, net income plus non-cash items contributed cash of $632,000 compared
to $617,000 during the prior year period. Changes in operating assets and
liabilities provided cash of $24,000 for the six months ended December 31, 2011
and used cash of $36,000 for the six months ended December 31, 2010.
Cash used in investing activities totaled $269,000 and $147,000 for the six
months ended December 31, 2011 and December 31, 2010, respectively, which
relates primarily to the improvements in existing wireless broadband Internet
infrastructure.
Cash used in financing activities, which totaled $254,000 for the six months
ended December 31, 2011, consisted of principal payments on long-term debt,
including notes related to acquisitions and the RUS loan. Cash used in financing
activities, which totaled $206,000 for the six months ended December 31, 2010,
consisted of principal payments on long term-debt and capital leases.
Cash on hand increased by $133,000 during the six months ended December 31,
2011. We believe our continuing efforts to improve the quality and efficiency of
our operations, along with our focus on increasing revenues, may lead to a more
rapid rate of growth and continued increases in cash flow from operations.Off Balance Sheet Arrangements
None.
17
"Safe Harbor" Statement and Risk Factors
The following "Safe Harbor" Statement is made pursuant to the Private Securities
Litigation Reform Act of 1995. Certain of the statements contained in the body
of this Quarterly Report are forward-looking statements (rather than historical
facts) that are subject to risks and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. With respect to such forward-looking statements, we seek the
protections afforded by the Private Securities Litigation Reform Act of
1995. These risks include, without limitation, that (1) we will not be able to
increase our rural customer base at the expected rate, (2) we will not improve
EBITDA, profitability or product margins, (3) Internet revenue in high-speed
broadband will continue to increase at a slower pace than the decrease in
revenue from other Internet services resulting in greater operating losses in
future periods, (4) financing will not be available to us if and as needed, (5)
we will not be competitive with existing or new competitors, (6) we will not
keep up with industry pricing or technological developments impacting the
Internet, (7) we will be adversely affected by dependence on network
infrastructure, telecommunications providers and other vendors or by regulatory
changes, (8) service interruptions or impediments could harm our business, (9)
acts of God and other events outside our control, such as hurricanes and other
dangerous weather conditions, fires and lightning, could damage or destroy our
facilities and network infrastructure, (10) we may be accused of infringing upon
the intellectual property rights of third parties, which will be costly to
defend and could limit our ability to use certain technologies in the future,
(11) government regulations could force us to change our business practices,
(12) we may be unable to hire and retain qualified personnel, including our key
officers, (13) future acquisitions of wireless broadband Internet customers and
infrastructure may not be available on attractive terms and, if available, we
may not successfully integrate those acquisitions into our operations, (14)
provisions in our certificate of incorporation, bylaws and shareholder rights
plan could limit our share price and delay a change of management and (15) our
stock price has historically been thinly traded and volatile and may continue to
be thinly traded and volatile. This list is intended to identify certain of the
principal factors that could cause actual results to differ materially from
those described in the forward-looking statements included elsewhere herein but
is not a comprehensive list of all of such factors.
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