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IPASS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Management's Discussion and Analysis of Financial Condition and Results of Operations (or "MD&A") is provided in addition to the condensed consolidated financial statements and notes, included elsewhere in this report, to assist readers in understanding our results of operations, financial condition, and cash flows. The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and with the MD&A in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012. This MD&A is organized as follows: Overview Discussion of our business Significant Trends and Events, Operating, financial and other material trends and and Key Operating Highlights highlights that affect our company and may reflect our performance Key Operating Metrics Discussion of key metrics and measures that we use to evaluate our operating performance Critical Accounting Policies and Accounting policies and estimates that we believe are Estimates most important to understanding the assumptions and judgments incorporated in our reported financial results Results of Operations An analysis of our financial results comparing the three months ended March 31, 2013, and March 31, 2012 Liquidity and Capital Resources An analysis of changes in our balance sheet and cash flows, and discussion of our financial condition and potential sources of liquidity The various sections of this MD&A contain forward-looking statements regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as "expects," "will," "anticipates," "projects," "intends," "believes," "estimates," "potential," variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements which refer to projections of our future financial performance, our anticipated growth and trends in our business, and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified in "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012, for factors that may cause actual results to be different from those expressed in these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason. Investors and others should note that we announce material financial information to our investors using our investor relations website, SEC filings, press releases, public conference calls and webcasts. We also use social media to communicate with our customers and the public about our company, our products and services and other matters relating to our business and market. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the U.S. social media channels including the iPass Twitter Feed, the iPass LinkedIn Feed, the iPass Google+ Feed, the iPass Facebook Page, the iPass Blog and Evan Kaplan's Twitter Feed. These social media channels may be updated from time to time. Overview iPass is a global Wi-Fi roaming leader for enterprises and telecom service providers and their consumer subscribers. We knit the world's commercial Wi-Fi networks together to create a single global Wi-Fi network. With the massive acceleration of the broader Wi-Fi industry, where every mobile phone, tablet and laptop is Wi-Fi enabled, and where Wi-Fi has become the preferred connectivity option for billions of devices, we believe that we are uniquely positioned to take advantage of expanding global demand for Wi-Fi. iPass was incorporated in California in July 1996 and reincorporated in Delaware in June 2000. Our corporate headquarters are located in Redwood Shores, California. We are publicly traded on NASDAQ under symbol IPAS and included in the Russell 2000 and Russell Global Index. 12 -------------------------------------------------------------------------------- Table of Contents We provide global enterprises and telecommunications carriers with cloud-based mobility management and Wi-Fi connectivity services. Through our proprietary technology platform and global Wi-Fi network, we offer enterprises cross-device, cross-network seamless Wi-Fi connectivity services along with cost control, reporting and policy compliance management tools. Based on this same technology platform and our global authentication and settlements infrastructure, we also offer global telecommunications carriers Wi-Fi enablement services that allow them to monetize their Wi-Fi networks and enable data roaming solutions for their subscribers. In addition, we design, deliver and manage tailored Wi-Fi and Wide Area Network solutions to customers in the retail, finance, healthcare, and carrier operator space throughout North America. Strategic Mobility Assets We believe iPass has a unique set of mobility assets that provides us with competitive advantages. We see our three core assets as follows: Advanced Open Mobile Platform: Our Open Mobile (OM) platform is a cloud-based mobility management platform that securely manages network connectivity and subscribers across a wide variety of computing and mobile devices and provider networks. We believe this scalable subscriber management, billing and reporting platform is unique in the industry and would be time consuming and expensive to replicate. Integrated Authentication Fabric: We have a global authentication fabric of integrated servers and software that is interconnected with approximately 140 global Wi-Fi network service providers. This infrastructure allows us to provide secure, highly-available and seamless four party global authentications, clearing and settlement of Wi-Fi users for our partners and customers. Global Wi-Fi Footprint: We have a Wi-Fi network footprint and supply chain that consists of more than 1.2 million commercial Wi-Fi hotspots in over 123 countries globally and across leading Wi-Fi venues, including major airports, convention centers, airplanes, hotels, restaurants, retail and small business locations. Our technology integration across multiple global network providers forms the basis of our network services and we believe creates a unique cost advantage for our customers. Business Portfolio and Our Strategy Our business consists of two operating segments: (i) Mobility Services and (ii) iPass Unity Network Services ("iPass Unity"; formerly known as Managed Network Services). Our Mobility Services segment comprises two service offerings: (1) our Open Mobile Enterprise Services, and (2) our Open Mobile Exchange. Mobility Services Open Mobile Enterprise Services ("iPass OME" or "OME"): iPass OME delivers enhanced network mobility services, addressing large enterprises' needs to manage their mobility economics, high speed network connectivity requirements and proliferation of mobile devices, including the "bring-your-own-device" trend. Our growth strategy for OME consists of focusing on accelerating smartphone and tablet user adoption of Open Mobile, completing the migration of our legacy-customer installed base to the OM platform, improving the end user experience on our Open Mobile platform, and enhancing our sales efforts to large multi-national customers. Open Mobile Exchange ("iPass OMX" or "OMX"): iPass OMX service offerings extend and enhance core mobility and internet offerings by integrating our Open Mobile Platform technology and our worldwide Wi-Fi Network, to allow global telecommunications carriers and service providers to seamlessly connect their customers and subscribers to preferred global Wi-Fi networks. While our OMX revenue is still not yet significant to our mobility service revenue, we continue to focus on adding new carrier and service provider partners as customers to further grow our OMX services. iPass Unity iPass Unity provides customers with accelerated Wi-Fi and Wide Area Network solutions in the retail, finance, healthcare, and carrier operator space throughout North America. Based on expected demand for our managed Wi-Fi service offerings, we are focused on growing iPass Unity Network Services by offering our customers additional services that leverage synergies with our Wi-Fi mobility expertise. For a detailed discussion regarding our business, including our strategy and our service offerings, see "Item 1. Business" included in our Annual Report on Form 10-K for the year ended December 31, 2012. 13-------------------------------------------------------------------------------- Table of Contents Significant Trends and Events The following describes significant trends and events of our business during the first quarter of 2013: Continued Focus on our Open Mobile Enterprise Business We continued to show solid progress against three key metrics for our OME business: (i) increasing the number of Open Mobile Wi-Fi Network users; (ii) growing Open Mobile revenue; and (iii) increasing the number of active Open Mobile Platform users. We grew our percentage of Open Mobile Wi-Fi Network users as a percentage of total Wi-Fi network users from 12% and 43% during the first quarter of 2012 and the fourth quarter of 2012, respectively to 53% during the first quarter of 2013. In addition, our total Open Mobile revenue grew by $6.3 million during the first quarter of 2013, or 150% compared to the same quarter in 2012. We also increased our percentage of Open Mobile Platform users as a percentage of total platform users from 17% and 55% during the first quarter of 2012 and fourth quarter of 2012, respectively to 64% during the first quarter of 2013. Our Open Mobile growth has been driven by a combination of legacy platform customer migrations, growth of Open Mobile usage within customers, and new customer acquisition. We believe the key to our future revenue growth is based on our ability to grow Open Mobile platform and Wi-Fi network users, primarily through the continued focus on the deployment of our Open Mobile platform on smartphone and tablet devices. See "Key Operating Metrics" below for a full discussion of our user metrics. Adding Partners for our Open Mobile Exchange Business We continue to develop our OMX business. During the first quarter of 2013, we signed four strategic telecommunication carrier partners across Africa, the Middle East, and South East Asia. We are focused on expanding the number of carrier partners and the total number of potential end user customers for our Wi-Fi roaming and exchange services. We expect to add additional partners during 2013. Continued Decline in our Legacy Revenues and QI Restructuring Our legacy revenue includes Dial-up and 3G network revenue, our iPC platform revenue, and related platform services revenue, as well as iPC driven network usage revenue, including iPC user driven Wi-Fi and minimum commit shortfall. With our announcement to fully end-of-life the iPC platform effective July 1, 2012, we continue to experience anticipated revenue declines in our legacy revenue streams. Legacy network revenues declined by $9.5 million or 55% from $17.3 million in the first quarter of 2012 to $7.8 million in the first quarter of 2013. Legacy platform revenue declined by $1.8 million or 56% from $3.2 million in the first quarter of 2012 to $1.4 million in the first quarter of 2013 as customers migrated to the Open Mobile platform or terminated their iPC contracts with us. We expect our legacy revenue streams to represent a smaller percentage of our total revenue during the remainder of 2013. In addition, as we shift away from the legacy product and re-align our resources, and operating expenses with our Open Mobile initiatives, we reduced 16 positions as a part of a restructuring plan implemented during the first quarter of 2013. Key Operating Metrics Described below are key metrics that we use to evaluate our operating performance and our success in transforming our business and driving future growth. OM Wi-Fi Network Users OM Wi-Fi Network Users is the number of our OM platform users each month in a given quarter that paid for Wi-Fi network services from iPass. OM Platform Active Users OM Platform Active Users is the number of users who were billed Open Mobile platform fees and who have used or deployed Open Mobile. 14-------------------------------------------------------------------------------- Table of Contents The following table summarizes our key operating metrics in relation to the Average Number of Monthly Monetized Users(1) (in thousands): For the Quarter Ended March 31, December 31, September 30, June 30, March 31, 2013 2012 2012 2012 2012 Open Mobile Users: Wi-Fi Network Users(2) 46 35 27 22 12 Platform Users: Active 444 355 270 176 91 Gross(3) 955 822 689 437 286 Legacy Users: Wi-Fi Network Users(2) 40 46 54 76 92 Other Network Users(4) 26 28 31 33 35 Platform Users(5) 246 286 320 369 450 Total Users: Total Network Users 112 109 112 131 139 Open Mobile as a Percentage of Total Wi-Fi Network Users 53 % 43 % 33 % 22 % 12 % Open Mobile as Percentage of Total Network Users 41 % 32 % 24 % 17 % 9 % Total Platform Users 690 641 590 545 541 Open Mobile as Percentage of Total Platform Users 64 % 55 % 46 % 32 % 17 % (1) We have presented Average Monthly Monetized Users (referred to as "AMMU") as a metric that we use to track and evaluate the operating performance of our overall Mobility business. The AMMU metric is based on the number of active users of our network and platform services across both our Open Mobile Enterprise offering and legacy iPC offerings. Network users are billed for their use of our Wi-Fi, Dial-up or 3G network services. Platform users are billed for their use of our legacy iPC client or our Open Mobile client. AMMU is defined as the average number of users per month, during a given quarter, for which a fee was billed by us to a customer for such users. (2) Wi-Fi Network Users represent unique users of Wi-Fi network. Starting from the first quarter of 2013, OM Wi-Fi Network Users include In-Flight Wi-Fi users. (3) Open Mobile Platform Gross Users is the total number of unique Active and Paying-Undeployed monetized users on the OM platform. (4) Other Network Users represents unique users of Dial-up and 3G network. (5) Legacy Platform Users represents unique users of the legacy iPC platform. Smartphone and Tablet Users Smartphone and Tablet Users mean users who have deployed Open Mobile on their smartphone or tablet devices and used those devices to access Wi-Fi network services from iPass. Our focus is to increase the adoption of OM on smartphones and tablets to drive additional Wi-Fi network users and network usage. As we continue to focus on accelerating the adoption of Smartphone and Tablet Users on our Open Mobile platform, we expect users of these devices to become a significant percentage of our network users. Open Mobile Smartphone and Tablet Wi-Fi Network Users grew as a percentage of total OM Wi-Fi Network Users from 15% and 24% during the month of March 2012 and the month of December 2012, respectively, to 27% during the month of March 2013. Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") Adjusted EBITDA is used by our management as a measure of operating efficiency, financial performance and as a benchmark against our peers and competitors. In addition, we also use this metric to determine a portion of our incentive compensation payouts. Management also believes that Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to understand our performance excluding the impact of items which may obscure trends in our core operating performance. Furthermore, the use of Adjusted EBITDA facilitates comparisons with other companies in our industry which may use similar financial measures to supplement their GAAP results. We define Adjusted EBITDA as net loss adjusted for: interest income, income taxes, depreciation and amortization, stock-based compensation, restructuring charges, and certain state sales and federal tax charges. We adjust for these excluded items because we believe that, in general, these items possess one or more of the following characteristics: their magnitude and timing is largely outside of our control; they are unrelated to the ongoing operation of the business in the ordinary course; they are unusual or infrequent and we do not expect them to occur in the ordinary course of business; or non-cash expenses involving stock option grants. Adjusted EBITDA is not a measure determined in accordance with GAAP and should not be considered in isolation or as a substitute for operating income (loss), net income (loss) or any other measure determined in accordance with GAAP. 15-------------------------------------------------------------------------------- Table of Contents The following table reconciles Adjusted EBITDA to GAAP net loss: Three Months Ended March 31, 2013 2012 (In thousands) Adjusted EBITDA $ (1,388 ) $ 33 Interest income 4 3 Income tax expense (27 ) (137 ) Depreciation of property and equipment (624 ) (623 ) Amortization of intangible assets - (60 ) Stock-based compensation (750 ) (529 ) Restructuring (charges) benefits and related adjustments (600 ) 4 Certain state sales and federal tax items 10 34 GAAP Net loss $ (3,375 ) $ (1,275 ) Adjusted EBITDA for the three months ended March 31, 2013, decreased by $1.4 million compared to the same period in the prior year, primarily due to a decrease in gross profit (calculated as revenues less network access costs) of approximately $1.8 million driven by the decrease in legacy iPC revenue, partially offset by favorable operating expenses, after adjusting for the above excluded items, of approximately $0.4 million. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements which have been prepared in accordance with the accounting principles generally accepted in the United States ("GAAP"). The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on our historical experience, knowledge of current conditions and our belief of what could occur in the future considering available information, including assumptions that we believe to be reasonable under the circumstances. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results could differ materially from the amounts reported based on these policies. On an ongoing basis, we evaluate our estimates and judgments. There have been no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2013, as compared to the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2012. Results of Operations Sources of Revenues From a broad perspective, we report and analyze revenue under two primary offerings reflecting our operating segments: Mobility Services and iPass Unity. Within Mobility Services, we differentiate and analyze our Open Mobile and legacy generated revenues separately. Open Mobile generated revenues include: • Network-Wi-Fi and minimum customer commitments based on the number of network users sourced from the Open Mobile platform. • Platform-Fees based on the number of Active Open Mobile monetized platform users and fees for fully dedicated Open Mobile carrier arrangements. • Other Fees and Revenue-Fees specific to providing additional value add services to Open Mobile customers. • OMX-Revenues generated from our OMX customers. Legacy generated revenues include: • Network-Wi-Fi and minimum customer commitments based on the number of network users sourced from the legacy iPC platform. In addition, network revenues derived from our 3G and Dial-up products are categorized as legacy network revenues. • Platform-Fees based on the number of legacy iPC monetized platform users and fees related to legacy add-on platform products and related services. • Other Fees and Revenue-Fees specific to providing additional value add service to legacy iPC customers. 16 -------------------------------------------------------------------------------- Table of Contents Three Months Ended March 31, (in thousands) 2013 2012 Mobility Services $ 20,951 $ 25,165 Segment Operating Loss (2,535 ) (951 ) Open Mobile Enterprise: 10,155 4,037 Network 6,154 1,698 Platform 3,776 2,160 Other Fees 225 179 Open Mobile Exchange 350 135 Legacy iPC 10,446 20,993 Network 7,834 17,331 Platform 1,433 3,228 Other Fees 1,179 434 iPass Unity Network Services 8,678 8,129 Segment Operating Loss (154 ) (139 ) Total Revenue 29,629 33,294 Service Offering Revenue as a Percentage of Total Revenue: Mobility Services 71 % 76 % Open Mobile Enterprise 34 % 12 % Open Mobile Exchange 1 % 1 % Legacy iPC 36 % 63 % iPass Unity Network Services 29 % 24 % Total Revenue 100 % 100 % Mobility Services Revenue For the first quarter of 2013 compared to 2012, Mobility Service revenue decreased $4.2 million or 17% as the decrease in legacy iPC revenue of $10.5 million outpaced the increase in Open Mobile Enterprise revenue of $6.1 million. The decrease in legacy iPC revenue was attributed to the continued migrations by customers to Open Mobile, customer terminations, and anticipated usage reductions in our 3G and Dial-up services. The net decline of $4.2 million for Mobility Services revenue was mainly driven by a $2.5 million decline in Wi-Fi revenue, a $1.6 million decline in Dial-up and 3G revenue, and a $0.9 million decline in monthly minimum commitment (MMC) revenue, partially offset by an increase in other revenue including extended platform support fees of $0.8 million. The decrease in total Wi-Fi revenues was primarily driven by legacy iPC customer terminations as the iPC product reached end-of-life in July 2012. Mobility Services Operating Loss The increase in Mobility Services operating loss by $1.6 million for the first quarter of 2013 compared to the first quarter of 2012 was primarily due to lower gross profit of approximately $2.1 million due to the decrease in Mobility Service revenue, partially offset by a decrease in operating expense of approximately $0.5 million due to ongoing cost management efforts. iPass Unity Network Services Revenue For the first quarter of 2013 compared to the first quarter of 2012, iPass Unity revenue increased $0.5 million or 7% due to growth in the number of installed customer endpoints. The number of installed customer endpoints at March 31, 2013 was approximately 25,100 compared to 24,700 at March 31, 2012. In addition, revenue per endpoint increased approximately 7% in the first quarter of 2013 over the same quarter in 2012 as we continue to deliver additional value added services to our managed network customers. iPass Unity Network Services Operating Loss The iPass Unity operating loss for the first quarter of 2013 was flat compared to the first quarter of 2012 as higher gross profit of $0.3 million from an increased installed customer endpoint base and incremental professional services revenues was offset by $0.3 million in higher operating expenses. 17-------------------------------------------------------------------------------- Table of Contents Network Gross Margin We use network gross margin as a metric to assist us in assessing the profitability of our various network services. Our overall network gross margin is defined as (Mobility Services Network revenue plus iPass Unity revenue less network access costs divided by Mobility Services Network revenue plus iPass Unity revenue). Three Months Ended March 31, 2013 2012 Network Gross Margin (%) 44.3 % 46.4 % The 2.1% decrease in network gross margin from the first quarter of 2012 to the first quarter of 2013 was driven by the decreases in higher margin revenue streams such as MMC and Dial-up, adverse impacts to gross margin from flat rate price plans, and non-recurring supplier credits received during the first quarter of 2012, partially offset by improvements in iPass Unity margins from ongoing network access costs ("NAC") reduction initiatives. Q2 2013 Outlook For the second quarter of 2013 ending June 30, 2013, iPass anticipates total revenue to be in the range of $28 million to $32 million, and adjusted EBITDA income (loss) to be in the range of $(0.75) million to $0.75 million. The following table reconciles projected adjusted EBITDA income (loss) to projected net loss: (In millions) Adjusted EBITDA Income (Loss) $ (0.75 ) $ 0.75 (a) Provision for income taxes $ (0.1 ) (b) Depreciation of property and equipment $ (0.5 ) (c) Stock-based compensation $ (0.7 ) GAAP Net Loss $ (2.05 ) $ (0.55 ) The projected Adjusted EBITDA income (loss) does not include the projected impact of any foreign exchange gains or losses. Operating Expenses Network Access Costs NAC consist of charges for network access which we pay to our network service providers and other direct cost of sales. Three Months Ended March 31, 2013 2012 (in thousands, except percentages) Network access costs $ 12,757 $ 14,640 As a percentage of total revenue 43.1 % 44.0 % The decrease in network access costs of approximately $1.9 million or 13% for the three months ended March 31, 2013, compared to the same period in 2012, was primarily due to a combination of lower Wi-Fi and 3G network usage that decreased Mobility Services NAC by $1.0 million and $1.1 million, respectively, partially offset by an increase in iPass Unity NAC of $0.2 million. Network Operations Network operations expenses consist of compensation and benefits for our network engineering, customer support and network access quality personnel, outside consultants, transaction center fees, network equipment depreciation, costs of 3G data cards and allocated overhead costs. 18-------------------------------------------------------------------------------- Table of Contents Three Months Ended March 31, 2013 2012 (in thousands, except percentages) Network operations expense $ 4,841 $ 5,399 As a percentage of total revenue 16.3 % 16.2 % The decrease in network operations expense of approximately $0.6 million or 10% for the three months ended March 31, 2013, compared to the same period in 2012 was primarily due to a decrease in legacy 3G mobile data cards subsidized expenses of $0.2 million as we continue to phase out this legacy 3G offering as well as lower headcount related expense of $0.2 million. Research and Development Research and development expenses consist of compensation and benefits for our research and development personnel, consulting, and allocated overhead costs. Three Months Ended March 31, 2013 2012 (in thousands, except percentages) Research and development expenses $ 3,614 $ 3,702 As a percentage of total revenue 12.2 % 11.1 % Research and development expenses were relatively consistent for the three months ended March 31, 2013 compared to the same period in 2012. Sales and Marketing Sales and marketing expenses consist of compensation, benefits, advertising and promotion costs, and allocated overhead costs. Three Months Ended March 31, 2013 2012 (in thousands, except percentages) Sales and marketing expenses $ 4,917 $ 5,350 As a percentage of total revenue 16.6 % 16.1 % The decrease in sales and marketing expenses of approximately $0.4 million or 8% for the three months ended March 31, 2013, compared to the same period in 2012 was primarily due to decreases in salaried headcount related expenses of $0.3 million. General and Administrative General and administrative expenses consist primarily of compensation and benefits for general and administrative personnel, legal and accounting expenses. Three Months Ended March 31, 2013 2012 (In thousands, except percentages) General and administrative expenses $ 6,179 $ 5,259 As a percent of total revenue 20.9 % 15.8 % 19 -------------------------------------------------------------------------------- Table of Contents The increase in general and administrative expenses of approximately $0.9 million or 18% for the three months ended March 31, 2013, compared to the same period in 2012 was due to an increase in expenses related to our going "live" with our new ERP system in January 2013 of $0.4 million including non-recurring support of $0.3 million and increased depreciation expense of $0.1 million, and an increase of approximately $0.4 million related to employee turnover expenses, including executive recruiting search of $0.2 million and temporary backfill expenses of $0.2 million. Restructuring Charges We incurred a restructuring charge of approximately $0.6 million for the three months ended March 31, 2013. During the first quarter of 2013, we announced a restructuring plan to reduce 16 positions in order to re-align our resources and operating expenses with the company's Open Mobile initiatives and recorded approximately $0.6 million of restructuring charges, which included severance, facility exit cost and other associated costs. We made cash payments of approximately $0.2 million during the first quarter of 2013, and had approximately $0.4 million of restructuring accrual remaining as of March 31, 2013. The remaining cash payments are expected to be materially completed in the second quarter of 2013. For further information, see Note 6, "Accrued Restructuring", in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q. Other Income and Expenses Foreign Exchange Gains and Losses Foreign exchange gains and losses primarily include realized and unrealized gains and losses on foreign currency transactions. Foreign currency exchange rate fluctuations impact the re-measurement of certain assets and liabilities denominated in currencies other than the U.S. Dollar and generate unrealized foreign exchange gains or losses. In addition, some of our network access costs are invoiced in currencies other than the U.S. Dollar. The transactional settlement of these outstanding invoices and other cross-currency transactions generate realized foreign exchange gains or losses depending on the fluctuation of exchange rates between the date of invoicing and the date of payment. For the three months ended March 31, 2013 and 2012, we did not enter into any hedging contracts. Foreign exchange gains and losses for the three months ended March 31, 2013, and 2012 were less than $0.1 million at period end. Liquidity and Capital Resources We had cash and cash equivalents of $24.8 million at March 31, 2013, compared to $26.8 million at December 31, 2012. Three months ended March 31, 2013 2012 (In thousands) Cash Flows Net cash provided by (used in) operating activities $ (1,974 ) $ 1,736 Net cash used in investing activities (568 ) (1,783 ) Net cash provided by financing activities 530 420 Net increase (decrease) in cash and cash equivalents $ (2,012 ) $ 373 Operating Activities Net cash used in operating activities was $2.0 million for the three months ended March 31, 2013, compared to net cash provided by operating activities of $1.7 million for the same period in 2012. Adjusting our net loss for non-cash items, resulted in $2.1 million and $0.1 million of cash used in the first quarter of 2013 and 2012 respectively. Working capital fluctuations such as the timing of cash receipts and payments, provided $0.1 million and $1.8 million in the first quarter of 2013 and 2012, respectively. Investing Activities During the three months ended March 31, 2013 and 2012, we used $0.6 million and $1.8 million, respectively, for capital expenditures. The decrease in capital expenditures is mainly related to a decrease of approximately $0.6 million in capitalizable activities in relation to migrating to a new ERP system that went "live" in January 2013 as well as a decrease of approximately $0.6 million relating to a purchase of a capitalizable license for iPass Unity in the first quarter of 2012. Financing Activities During the three months ended March 31, 2013 and 2012, net cash provided by financing activities was $0.5 million and $0.4 million, respectively, due to proceeds from the exercise of stock options and purchases of stock under our employee stock purchase plan. 20-------------------------------------------------------------------------------- Table of Contents Sources of Cash and Future Cash Requirements We have historically relied on existing cash and cash equivalents and cash flow from operations for our liquidity needs. We use a professional investment management firm to manage a large portion of our cash which is invested primarily in money market accounts with a remaining maturity of three months or less at the time of purchase. We believe that based on our current business plan and revenue prospects and our anticipated cash flows from operations, our existing cash balances will be sufficient to meet our working capital and operating resource expenditure requirements for at least the next twelve months. The amount of cash and cash equivalents held by our foreign subsidiaries as of March 31, 2013, and December 31, 2012, was $1.7 million and $1.4 million, respectively. We currently do not intend to distribute any of our cumulative earnings by our foreign subsidiaries to the parent company in the U.S. Primary Uses of Cash Our principal use of cash for the three months ended March 31, 2013, was for network access costs, payroll related expenses and general operating expenses including marketing, office rent, capital expenditures, and settlement of remaining restructuring obligations. Contractual Commitments The following are our contractual commitments as of March 31, 2013: Less Than Total 1 Year 1-3 Years 3-5 Years (In thousands) Operating Lease Obligations $ 7,268 $ 3,050 $ 4,089 $ 129 Network Service Commitments(1) 2,909 2,315 594 - Total Contractual Obligations $ 10,177 $ 5,365 $ 4,683 $ 129 (1) In the normal course of our business, we have signed contracts with certain network service providers under which we have minimum purchase commitments. These commitments expire on various dates through April 2015. For information on our contractual commitments at December 31, 2012, see "Commitments" in Part 7, Management's Discussion and Analysis of Financial Conditions and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2012. Contractual commitments at December 31, 2012 were $11.5 million. Off-Balance Sheet Arrangements As part of our ongoing business, we do not participate in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. We did not have any off-balance sheet arrangements at March 31, 2013, and December 31, 2012, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. |