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LIGHTYEAR NETWORK SOLUTIONS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of the results of operations and financial condition of Lightyear Network Solutions, Inc. and Subsidiaries ("Lightyear" or the "Company") for the three months ended March 31, 2012 and 2011 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Quarterly Report on Form 10-Q. References in this Management's Discussion and Analysis of Financial Condition and Results of Operations to "us," "we," "our," and similar terms refer to Lightyear. References to Lightyear LLC refer to the Company's wholly-owned subsidiary Lightyear Network Solutions, LLC. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties. Words such as "anticipate," "estimate," "plan," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions are used to identify forward-looking statements. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. See "Risk Factors" under Item 1A of Part I of Lightyear's Form 10-K filed March 30, 2012. Overview Lightyear, through its wholly owned subsidiaries, Lightyear Network Solutions, LLC, a Kentucky limited liability company ("Lightyear LLC"), SE Acquisitions, LLC d/b/a Lightyear Network Solutions of Kentucky, a Kentucky limited liability company ("Lightyear-KY"), provides telecommunications services throughout the United States primarily through a distribution network of authorized agents. In addition to long distance and local service, Lightyear currently offers a wide array of telecommunications products and services including internet/intranet, calling cards, advanced data, conferencing, VoIP services and wireless services. Lightyear LLC also operates in Puerto Rico through its wholly-owned subsidiary, Lightyear Alliance of Puerto Rico, LLC, a Kentucky limited liability company. Lightyear provides telecommunications services in 49 states and Puerto Rico and is a licensed local carrier in 44 states. We sell our products and services primarily through a distribution network of more than 150 authorized independent agents and more than 7,000 independent representatives. Lightyear provides service to approximately 70,000 customer locations as of March 31, 2012, with a significant concentration in the five state area of Kentucky, Ohio, Indiana, Florida and Georgia. We have built regional customer concentrations which provide a contiguous service area and operational efficiencies, resulting in higher margins, as well as a nationwide distribution network through which additional new concentrations may be built. We intend to increase our revenue and earnings via a combination of organic and acquisition growth. We intend to grow organically by expanding our revenue base from agents through creative marketing and incentive plans, new carrier partnerships and enhancements to our wireless, VoIP and data products lines which complement our history of selling landline services. We intend to combine with small to mid-sized competitors and thereby aggregate revenue, and increase earnings through the elimination of duplicate costs. Each series of combinations will be followed by a period of integration and consolidation. Potential acquisition candidates are expected to meet specific criteria including the following: · Supporting or providing Cloud based services; · EBITDA positive; and · Trained technical staff meeting our internal requirements and the requirements of our customers. We anticipate entering into non-binding letters of intent with target candidates to set forth the basic business terms of potential acquisitions, which will usually be subject to various closing conditions, including due diligence, the negotiation of definitive acquisition documents, regulatory consents and other customary matters. Factors which may affect future acquisition decisions include the quality and potential profitability of the business under consideration, and our profitability and ability to finance the transaction. We continue to review opportunities for expansion of our network. Criteria for future builds would include the immediate and substantial reduction of cost of goods sold or support of a committed revenue stream. Lightyear-KY falls within the FCC's definition of a rural Competitive Local Exchange Carrier (CLEC) because its entire service area falls within rural markets. This allows us to charge a premium "rural exempt" rate for interstate switched access services. On November 18, 2011, the FCC released an order (the Order) which established a framework for reform of the intercarrier compensation system and Federal Universal Service Fund. We are estimating that the Order could have the impact of reducing our revenues by less than 1% during 2012 and 2013, 1.5% in 2014 and 2.8% in 2015. -12- Results of Operations Revenues Our revenues are primarily derived from the sales and provision of the following services: · Voice Services · Local Services · VoIP Services · Data Services · Wireless Services · Representative Fees · Regulatory Revenue · Other Services Cost of Revenues Cost of revenues consist primarily of carrier access fees, network costs and usage fees associated with providing our wholesale telecommunications services. Operating Expenses Operating expenses include: · commission expense which consists of payments to agents based on a percentage of the monthly billings and upfront payments to agents at the time the customer was acquired; · depreciation and amortization, including depreciation of long-lived property, plant and equipment and amortization of intangible assets where applicable; · bad debt expense represents an estimate of the incremental non-collectible receivables; and · selling, general and administrative expenses which consist of selling, advertising, marketing, billing and promotion expenses, plus salaries and benefits, rent associated with our office space, professional fees, travel and entertainment, depreciation and amortization and other costs. Other (Expense) Income · Interest income - related parties represents interest earned on the notes receivable from LY Holdings that were extinguished in November 2011. · Interest expense - related parties represents interest payable on a note or interest payable on a non-current note payable to a Company director. -13- Quarter Ended March 31, 2012 Compared to Quarter Ended March 31, 2011 Revenues Revenues were approximately $17.0 million and $18.6 million, respectively, for the quarters ended March 31, 2012 and 2011, a decrease of $1.6 million or 9%. The decrease of $1.6 million resulted primarily from continued market pressures, including heightened competition, as well as the shift away from lower margin revenue to sales programs designed to capture higher margin, lower turnover revenue, such as dedicated local services. The following table presents our operating revenues by product category for the quarters ended March 31, 2012 and 2011. (in millions) For The Three Months Ended March 31, 2012 2011Voice service $ 4.1 $ 4.9 Local service 6.9 7.7 VoIP 0.8 1.0 Data services 1.8 1.9 Wireless services 1.3 0.9 Representative fees 0.5 0.6 Regulatory revenue 0.8 0.9 Other services 0.8 0.7 TOTAL $ 17.0 $ 18.6 Cost of Revenues Cost of revenues for the quarters ended March 31, 2012 and 2011 amounted to approximately $11.1 million (65% of revenue) and $12.0 million (65% of revenue), respectively, a decrease of $1.0 million or 8%. The decrease in cost of sales was primarily related directly to the lower revenues. Gross Profit Gross profits were approximately $5.9 million (35% of revenue) and $6.6 million (35%), respectively for the quarters ended March 31, 2012 and 2011, a decrease of $0.7 million or 10%, or a 0% change in the gross margin percentage. This decrease is directly related to lower revenues discussed above. Operating Expenses Operating expenses decreased $0.8 million or 11% to $6.4 million from $7.2 million for the quarters ended March 31, 2012 and 2011, respectively. The decrease was attributable to the 20% decrease in depreciation expense due to the sale of fixed assets in 2011 and reductions in headcount and related costs. Other (Expense) Income Interest income declined 98% from $0.2 million due to the extinguishment of the notes receivable due from related parties. Interest expense decreased $0.05 million or 27% to $0.1 million from $0.2 million, due principally to lower rates on indebtedness and lower principal balances on existing facilities. -14- Liquidity and Capital Resources Overview Since Lightyear began operations in 2004, we have incurred significant operating losses. Through February 12, 2010, the date of the reverse merger transaction, Lightyear had an accumulated member's deficit of approximately $26.6 million. As a result, we have managed our cash receipts and disbursements, as well as our operating costs in order to maintain an adequate level of cash. As of March 31, 2012, Lightyear had a cash balance of $0.2 million, a working capital deficit of $1.6 million and was in violation of two of its debt covenants. We have instituted cost reductions, raised our customer credit requirements, and improved our efforts to increase revenues through targeted promotions over the past 18 months, all toward the goal of achieving positive cash flow from operations. During the three months ended March 31, 2012, we generated $0.5 million of cash flow from operating activities. Currently, the most significant item impacting Lightyear's liquidity is a note and interest payable to a Company director of $6.3 million. On March 20, 2012, the Company director agreed to forbear from demanding payment of the principal balance until August 30, 2013. In addition, we have a secured promissory note arrangement with a bank with a principal balance of approximately $1.9 million at March 31, 2012. We are currently making principal and interest payments totaling $37,780 per month and all remaining principal and interest is due on the January 25, 2014 maturity date. On May 8, 2012, the bank waived two first quarter debt covenant violations that resulted from earnings forecast shortfalls. We are in discussions with the bank with regards to resetting the debt covenants on a go forward basis, but there can be no assurance that the bank will agree to reset the debt covenants. Quarter Ended March 31, 2012 and 2011 Operating Activities Net cash provided by operating activities was $0.5 million for the quarter ended March 31, 2012 compared to $0.5 million net cash used for the quarter ended March 31, 2011. The amount provided during the quarter ended March 31, 2012 was primarily due to cash used to fund a net loss of $0.6 million, positively adjusted for non-cash expenses in the aggregate amount of $0.9 million, and $0.2 million of cash generated from changes in operating assets and liabilities, primarily due to improved collections of accounts receivable. The amount used during the quarter ended March 31, 2011 was primarily due to cash used to fund a net loss of $0.3 million, positively adjusted for non-cash expenses in the aggregate amount of $0.4 million, and $0.6 million of cash used from changes in operating assets and liabilities, primarily due to a build-up of accounts receivable and additional requirements for vendor deposits. Investing Activities Net cash used in investing activities was $0.1 million for the quarter ended March 31, 2012 compared to $0.2 million for the quarter ended March 31, 2011. The usage of cash during the quarter ended March 31, 2012 was attributable to $0.1 million for purchases of property and equipment. The usage of cash during the quarter ended March 31, 2011 was attributable to $0.4 million for purchases of property and equipment, partially offset by the sale of fixed assets totaling $0.2 million. Financing Activities Net cash used in financing activities was $0.3 million for the quarter ended March 31, 2012 compared to $0.5 million net cash provided by financing activities for the quarter ended March 31, 2011. The cash used in financing for the quarter ended March 31, 2012 related to principal payments made on the Company's note payable and capital lease obligations. The cash provided by financing for the quarter ended March 31, 2011 included $2.0 million of net proceeds from a new credit facility, offset by $1.5 million of repayments of short term borrowings, notes and other obligations. -15- Potential Future Requirements and Sources of Liquidity We expect our 2012 operating activities to be self-sufficient from a cash perspective, but there can be no assurance that this objective will be met. Our future capital requirements are expected to be driven by (i) network build-out costs; (ii) debt reduction and debt service; (iii) public/investor relations costs; (iv) acquisition opportunities; and (v) the need to supplement working capital levels. We are currently investigating the capital markets for sources of funding, which could take the form of additional debt or equity financings. There can be no assurance that the Company will be successful in securing additional capital. If the Company is unable to raise additional funds, the Company might (a) initiate additional cost reductions; (b) forego acquisition or network build-out opportunities; and/or (c) seek extensions of our scheduled payment obligations, including the non-current note payable to a Company director. Off Balance Sheet Arrangements As of March 31, 2012, we have provided irrevocable standby letters of credit, aggregating approximately $125,000 to five states and one vendor, which automatically renew for terms not longer than one year, unless notified otherwise. As of March 31, 2012 and December 31, 2011, these letters of credit had not been drawn upon. Critical Accounting Policies There are no material changes from the critical accounting policies set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our December 31, 2011 financial statements filed on Form 10-K dated March 30, 2012. Please refer to that document for disclosures regarding the critical accounting policies related to our business. |