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NTS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) FORWARD-LOOKING STATEMENTS The information set forth in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, including, among others (i) expected changes in NTS, Inc.'s (referred to herein as the "Company", or "NTSI", "we", "our", "ours" and "us") revenues and profitability, (ii) prospective business opportunities and (iii) our strategy for financing our business. Forward-looking statements are statements other than historical information or statements of current condition. Some forward-looking statements may be identified by use of terms such as "believes", "anticipates", "intends" or "expects". These forward-looking statements relate to our plans, objectives and expectations for future operations. Although we believe that our expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of our knowledge of our business and operations, in light of the risks and uncertainties inherent in all future projections, the inclusion of forward-looking statements in this Quarterly Report should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. You should read the following discussion and analysis in conjunction with the Condensed Consolidated Financial Statements and Notesattached hereto, and the other financial data appearing elsewhere in this Quarterly Report. Our revenues and results of operations could differ materially from those projected in the forward-looking statements as a result of numerous factors, including, but not limited to, the following: negative changes in the credit rating of customers, the risk of significant natural disaster, the inability of the Company to insure against certain risks, inflationary and deflationary conditions and cycles, currency exchange rates, and changing government regulations domestically and internationally affecting our businesses. US Dollars are denoted herein by "USD" and New Israeli Shekels are denoted herein by "NIS". OVERVIEW NTSI was incorporated in the State of Nevada, U.S.A. in September 2000 under the name Xfone, Inc. We provide, through our subsidiaries, integrated communications services which include voice, video and data over our Fiber-To-The-Premise ("FTTP") and other networks. We currently have operations in Texas, Mississippi and Louisiana. Effective as of February 1, 2012, we changed our name to "NTS, Inc." and as of February 2, 2012 our shares of common stock are traded on the NYSE MKT and the TASE under the new ticker symbol "NTS". The name change is a reflection of our refined and enhanced business strategy which began with our acquisition of NTSC in 2008 and our focus on the build out of our high-speed, FTTP network. 4-------------------------------------------------------------------------------- Back to Table of Contents RESULTS OF OPERATIONS Financial Information - Percentage of Revenues: Three months ended March 31, 2013 2012 Revenues: Services on Fiber-To-The-Premise network 35.8 % 27.3 % Leased local loop services and other 64.2 % 72.7 % Total Revenues 100 % 100 % Expenses:Cost of services (excluding depreciation and amortization) 44.5 % 47.7 % Selling, general and administrative 33.4 % 34.4 % Depreciation and amortization 11.1 % 10.3 % Financing expenses, net 8.0 % 9.7 % Other expenses 1.4 % 1.3 % Total expenses 98.4 % 103.4 % Income (loss) before taxes 1.6 % (3.4) % Income tax benefit (expense) (0.3) % 1.1 % Net income (loss) 1.3 % (2.3) % COMPARISON OF THE THREE MONTHS PERIODS ENDED MARCH 31, 2013 AND MARCH 31, 2012 Revenues. Revenues for the quarter ended March 31, 2013 increased 0.1% to $14,936,236 from $14,923,829 for the same period in 2012. Revenues from our FTTP network in the quarter ended March 31, 2013 increased 31.3% to $5,346,152 from $4,072,667 in the same period in 2012. As percentage of total sales, FTTP revenues in the quarter ended March 31, 2013 increased to 35.8% from 27.3% for the quarter ended March 31, 2012. The growth of FTTP revenues is expected to continue due to the progress in the build out of our FTTP network in the communities which are located in the areas of the PRIDE Network projects in Texas and Louisiana as well as the expansion of our fiber network in selected areas in Wichita Falls and other markets in west Texas. Revenues from our leased local loop include revenues from wholesale, other carriers and other non-FTTP customers. Revenues from leased local loop in the quarter ended March 31, 2013 decreased 11.6% to $9,590,084 from $10,851,162 for the same period in 2012. As percentage of total sales, leased local loop revenues in the quarter ended March 31, 2013 decreased to 64.2% from 72.7% for the same period in 2012. We expect that the decline in revenues from non-FTTP residential customer will continue in 2013, but will be offset by the increase in revenues in FTTP from business and residential customers. 5-------------------------------------------------------------------------------- Back to Table of Contents Cost of Services (excluding depreciation and amortization). Cost of services consists primarily of facilities and traffic time purchased from other telephone companies and content for our video services. Cost of services for the quarter ended March 31, 2013 decreased 6.8% to $6,640,418 from $7,122,654 for the same period in 2012. Cost of services, as a percentage of revenues in the quarter ended March 31, 2013, decreased to 44.5% from 47.7% in the same period in 2012. We expect that the cost of services, as a percentage of revenues, will decline as we increase the portion of revenues generated from our high-margin FTTP services. FTTP services are provided over our fully owned fiber network and therefore we do not incur third party costs for leased network lines. As the revenue mix changes towards greater percentage of the high-margin FTTP revenues, and a lesser percentage of the low-margin revenues from non-FTTP residential customers and wholesale, the cost of services, as a percentage of revenues, is expected to decline. Selling, General and Administrative Expenses. Selling expenses consist primarily of compensation costs for our sales, administrative and management employees. Selling, general and administrative expenses for the quarter ended March 31, 2013, decreased 2.9% to $4,987,133 from $5,136,761 for the same period in 2012. The decrease in the expenses resulted mainly from outsourcing most of our installation and maintenance work in the FTTP markets to subcontractors, which was offset by an increase in sales commission related to the increase in new FTTP revenues. As a percentage of revenues, selling, general and administrative expenses decreased by 1.0%. We expect that these changes will allow us to be more efficient on our operations and construction work. Depreciation and Amortization. Depreciation and amortization expense for the quarter ended March 31, 2013 increased 8.5% to $1,664,842 from $1,533,973 for the same period in 2012. The increase was due to the large investments in the development of the FTTP networks and is offset by retirement of equipment related to our non-fiber network. Financing Expenses. Financing expenses, net, for the quarter ended March 31, 2013, decreased 16.6% to $1,201,690 from $1,441,699 for the same period in 2012. Financing expenses consist of interest payable on our financial obligations, and the measurement of the Bonds, which are stated in NIS and linked to the Israeli Consumer Price Index ("CPI"). The decrease in financing expenses is mainly due the decrease in principal of our outstanding bonds and the buy-back of NIS 2,401,838 in par value of our Bonds which represents 6.4% of the outstanding NIS 37,643,288 in par value during the first quarter of 2012. The decrease in the financial expenses is offset by an increase in financing expenses incurred for an additional advances from the United States Department of Agriculture in the amount of $4,456,619 during the quarter ended March 31, 2013 and additional loans from ICON of $1,700,000 during the quarter ended March 31, 2013. The financing expenses are presented net of unearned gain on the hedging of interest and principal bond payments in 2013. Other Expenses. Other expenses for the quarter ended March 31, 2013 increased 5.8% to $210,245 from $198,669 for the same period in 2012. Other expenses consist of real estate taxes. We expect that real estate taxes will increase as we continue to expand our operations in the PRIDE Network markets. Income taxes. We conduct our business in several states in the US. Therefore, our operating income is subject to varying rates of state tax in the US. Consequently, our effective tax rate is dependent upon the geographic distribution of our earnings or losses. However, we expect that our income taxes will not materially vary in relation to the geographic distribution of our profits inside the US. Due to non-deductible compensation related to stock options and non-deductible amortization of intangible assets, our effective tax rate was 19.37% and 33.52% for the quarter ended March 31, 2013 and 2012, respectively. Net Income (loss). Net income for the quarter ended March 31, 2013 increased 155.2% to $186,981 from net loss of $339,001 for the same period in 2012. 6-------------------------------------------------------------------------------- Back to Table of Contents LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents as of March 31, 2013 amounted to $6,872,540 compared to $3,908,620 as of December 31, 2012, an increase of $2,963,920. Net cash provided by operating activities in the quarter ended March 31, 2013 was $2,999,638, an increase of $1,630,373 compared to $1,369,265 which was provided by operating activities in the quarter ended March 31, 2012. The increase in cash flow from operating activities is mostly related to the following changes in working capital: (1) an increase in accounts receivable of $262,455 during the quarter ended March 31, 2013, compared to an increase of $378,856 in the same period of 2012; (2) an increase in prepaid expenses and other receivables of $510,891 in the quarter ended March 31, 2013, compared to an increase of $349,831 in the same period of 2012; (3) a decrease in the provision for bad debt of $168,047 during the quarter ended March 31, 2013, compared to an increase of $140,524 in the same period of 2012; (4) an increase in other liabilities and accrued expenses of $289,182 in the quarter ended March 31, 2013, compared to an increase of $212,460 during the same period of 2012 and (5) an increase in trade payables of $1,838,366 during the quarter ended March 31, 2013, compared to an increase of 558,232 during the same period of 2012. Net cash used by investing activities in the quarter ended March 31, 2013 was $3,732,690 compared to $3,309,512 in the same period of 2012. Of that amount, $725,115 is attributable to the build out of our FTTP projects in Levelland, Texas and the PRIDE Network projects and $3,007,575 to the purchase of other equipment. Net cash provided by financing activities for the quarter ended March 31, 2013 was $3,696,972 compared to $3,048,925 in the same period of 2012. Net cash provided by financing activities in 2013 is primarily attributable to proceeds from long-term loans from the United States Department of Agriculture, and the Loan Agreement with ICON, which are offset by repayment of the long-term loans from the United States Department of Agriculture and capital lease obligations. Capital lease obligations: We are the lessee of switching and other telecom equipment under capital leases expiring on various dates through 2017. As of March 31, 2013, we reported a working capital deficit of $8,227,723 compared to a working capital deficit of $6,248,721 on December 31, 2012. On February 12, 2013, we entered into a further amendment to the Original ICON Agreement providing for an additional secured delayed draw term loan in the amount of $6,000,000 for the purchase of equipment in connection with our project to expand our fiber network in the region of West Texas and the delay of amortization schedules of the previously drawn down loans by six months. On March 28, 2013, we drew down an aggregate amount of $1,700,000 under the additional secured delayed draw term loan. We believe that increased revenues from the higher margin Fiber-To-The-Premise network together with increasing operating efficiency will result in increased profitability and cash flows, which will lead to improvement in the working capital deficit to meet our anticipated cash requirements for at least the next 12 months. If, however, we do not generate sufficient cash from operations, or if we incur additional unanticipated liabilities or we are unable to renew and/or extend a portion of our short-term liabilities, we may be required to seek additional financing or sell equity or debt on terms which may not be as favorable as we could have otherwise obtained. No assurance can be given that any refinancing, additional borrowing or sale of equity or debt will be possible when needed or that we will be able to negotiate acceptable terms. In addition, our access to capital is affected by prevailing conditions in the financial and equity capital markets, as well as our own financial condition. While management believes that we will be able to meet our liquidity needs for at least the next 12 months, no assurance can be given that we will be able to do so. 7-------------------------------------------------------------------------------- Back to Table of Contents The following table represents our contractual obligations and commercial commitments, excluding interest expense, as of March 31, 2013: Payments Due by Period Less than More than Contractual Obligations Total 1 Year 1-3 Years 4-5 Years 5 Years Domestic Note Payable $ 16,590,326 $ 975,964 $ 4,949,362 $ 10,665,000 $ - Notes Payable from the United States Department of Agriculture 41,277,130 2,025,074 4,050,149 4,050,149 31,151,758 Bonds 11,183,749 3,906,923 7,276,826 - - Capital leases 542,105 373,593 141,559 26,953 - Operating leases 1,062,750 655,831 380,097 26,822 - Total contractual cash obligations $ 70,656,060 $ 7,937,385 $ 16,797,993 $ 14,768,924 $ 31,151,758 NTS, Inc. The Series A Bonds On December 13, 2007 (the "Date of Issuance"), we issued non-convertible bonds to Israeli institutional investors, for total gross proceeds of NIS 100,382,100 (approximately $25,562,032, based on the exchange rate as of December 13, 2007) (the "Series A Bonds"). The Series A Bonds were issued for an amount equal to their par value. The Series A Bonds accrue annual interest that is paid semi-annually on the 1st of June and on the 1st of December of every year from 2008 until 2015 (inclusive). The principal of the Series A Bonds is repaid in eight equal annual payments on the 1st of December of every year from 2008 until 2015 (inclusive). The principal and interest of the Series A Bonds are linked to the Israeli CPI. On November 4, 2008, we filed a public prospectus (the "Prospectus") with the Israel Securities Authority (the "ISA") and the TASE for listing of the Series A Bonds for trading on the TASE. On November 11, 2008 (the "Date of Listing"), the Series A Bonds commenced trading on the TASE. From the Date of Issuance until the Date of Listing, the Series A Bonds accrued annual interest at a rate of 9%. As of the Date of Listing, the interest rate for the unpaid balance of the Series A Bonds was reduced by 1% to an annual interest rate of 8%. On March 25, 2008, we issued the holders of the Series A Bonds, for no additional consideration, 956,020 (non-tradable) warrants, each exercisable at an exercise price of $2.04 (as adjusted in November 2011) with a term of 4 years, commencing on September 2, 2008. These warrants expired unexercised in September 2012. The Series A Bonds may only be traded in Israel. As of August 6, 2012, the Series A Bonds are rated Ba1 with a stable outlook by Midroog Limited, an Israeli rating company which is a subsidiary of Moody's Investor Services. 8-------------------------------------------------------------------------------- Back to Table of Contents Loan agreement with ICON Agent, LLC On October 6, 2011, we entered into a term loan, guarantee and security agreement (the "Original ICON Agreement"), as amended by the Amended & Restated Consent, Waiver & Amendment Agreement dated November 1, 2011 by and between the following: (1) ICON Agent, LLC (the "Agent"), acting as agent for the Lenders signatory thereto; (2) we, as Guarantor; (3) Xfone USA, Inc., NTS Communications, Inc., Gulf Coast Utilities, Inc., eXpeTel Communications, Inc., NTS Construction Company, Garey M. Wallace Company, Inc., Midcom of Arizona, Inc., Communications Brokers, Inc., and NTS Management Company, LLC, acting as Borrowers and Guarantors; and (4) PRIDE Network, Inc., and NTS Telephone Company, LLC (together with the Borrowers and Guarantors acting as Credit Parties) that provided for a secured term loan in the amount of $7,500,000 (the "First ICON Loan"). On June 22, 2012, we entered into Amendment No. 1 to the Original ICON Agreement ("Amendment No. 1") providing for an additional secured term loan in the amount of $3,500,000, for the payment of all liabilities owed by us to Burlingame Equity Investors, LP (the "Second ICON Loan"); a secured delayed draw term loan in the amount of $3,100,000, for the purchase of equipment in connection with our project to construct a fiber network in Wichita Falls, Texas (the "Third ICON Loan"); and certain other amendments to the Original ICON Agreement and the First ICON Loan, as described in Amendment No. 1. Each of the First ICON Loan, Second ICON Loan and Third ICON Loan bear interest at 12.75% per annum. The fundings of the First ICON Loan and the Second ICON Loan were made on October 27, 2011 and June 22, 2012, respectively. On August 9, 2012, we entered into Amendment No. 2 to the Original ICON Agreement providing for revised amortization schedules of the First ICON Loan and the Second ICON Loan. On September 27, 2012, we drew down the Third ICON Loan in the amount of $3,100,000. On February 12, 2013, we entered into Amendment No. 3 to the Original ICON Agreement ("Amendment No. 3") providing for (i) an additional secured delayed draw term loans in the aggregate amount of $6,000,000, bearing interest of 12.75% per annum for the purchase of equipment in connection with our project to expand our fiber network in the region of West Texas (the "Fourth ICON Loan"), (ii) revised amortization schedules of the First ICON Loan, Second ICON Loan and Third ICON Loan (as described below), and (iii) certain other amendments to the Original ICON Agreement (as amended by Amendment No. 1 and Amendment No. 2), described in Amendment No. 3. Pursuant to Amendment No. 3, the principal amount of the First ICON Loan is payable in 69 consecutive monthly installments with the first 27 monthly payments being payments of accrued interest only. The principal amount of the Second ICON Loan is payable in 61 consecutive monthly installments with the first 19 monthly payments being payments of accrued interest only. The principal amount of the Third ICON Loan is payable in 58 consecutive monthly installments with the first 16 monthly payments being payments of accrued interest only. On March 28, 2013, we entered into Amendment No. 4 to the Original ICON Agreement which contains some definitional clarifications. On the same day, we drew down on the Fourth ICON Loan in the aggregate amount of $1,700,000 which was the first drew down under the Fourth ICON Loan. The principal amount of the Fourth ICON Loan is payable in 51 consecutive monthly installments with the first nine monthly payments being payments of accrued interest only. Each of the foregoing loans are secured by a lien against all of each Borrower's and Guarantor's property and assets, whether real or personal, tangible or intangible, and whether now owned or hereafter acquired, or in which it now has or at any time in the future may acquire any right, title, or interest; provided, however, that none of the assets of PRIDE Network and NTS Telephone Company are being used as collateral for the loans and are specifically excluded. 9-------------------------------------------------------------------------------- Back to Table of Contents We are required maintain fixed charge coverage ratio of not less than 1.15 to 1.00 for the trailing four fiscal quarter period most recently ended if at any time cash was less than $3,000,000 as of the last day of any fiscal quarter. Pursuant to Amendment No. 3, senior leverage ratio should not exceed 2.25 to 1.00 from June 30, 2012 through March 31, 2013, 2.00 to 1.00 from June 30, 2013 through December 31, 2013, and 1.75 to 1.00 from March 31, 2014 and thereafter. As of March 31, 2013, we complied with the foregoing financial covenants. The total outstanding amount of the loans as of March 31, 2013 is $15,800,000. As of March 31, 2013, the total amount of loan available in the future on the Fourth ICON Loan was $4,300,000. 10-------------------------------------------------------------------------------- Back to Table of Contents US subsidiaries NTS Telephone Company, LLC (d/b/a NTS of Levelland), a wholly owned subsidiary of NTSC, received from the Rural Utilities Service ("RUS"), a division of the United States Department of Agriculture, a $11.5 million debt facility to complete a telecommunications overbuild project in Levelland, Texas. The principal of the RUS loan is repaid monthly starting one year from the initial advance date until full repayment after 17 years. Each advance bears interest that will become fixed at the date of the advance at the average yield on outstanding marketable obligations of the United States having the final maturity comparable to the final maturity of the advance. The loans are non-recourse to NTSC and all other NTSC subsidiaries and are secured by NTS Telephone's assets which were $14.4 million at March 31, 2013. As of March 31, 2013, the current average weighted interest rate on the outstanding advances was 3.52%. The total outstanding amount of these loans as of March 31, 2013 is $9,403,646. The loans are to be repaid in monthly installments until 2023. PRIDE Network, Inc., a wholly owned subsidiary of NTSC, has received approval from the Broadband Initiative Program of the American Recovery and Reinvestment Act, for a total $99.9 million funding in form of $45.9 million in grants and $54 million in 19 to 20-year loans. The aggregate amount of these loans and grants received by the Company as of March 31, 2013 is $33,151,444 and $27,444,703, respectively. Each advance bears interest that will become fixed at the date of the advance at the average yield on outstanding marketable obligations of the United States having the final maturity comparable to the final maturity of the advance. The funding created an opportunity for us to expand the roll out of our FTTP infrastructure, known as the PRIDE Network projects, in northwestern Texas and in southern Louisiana. Construction work of PRIDE Network's FTTP infrastructure started in October 2010. The loans are non-recourse to NTSC and all other NTSC subsidiaries and are secured by PRIDE Network's assets which were $47.2 million at March 31, 2013. As of March 31, 2013, the current average weighted interest rate on the outstanding advances was 2.88%. As of March 31, 2013, the total amount of loans and grants available in the future was $20,841,595 and $18,432,217, respectively. The loans are to be repaid in monthly installments until 2030. The total outstanding amount of these loans as of March 31, 2013 and December 31, 2012 are $31,873,483 and $27,748,342, respectively. IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS All of our assets, liabilities (except the Series A Bonds and other insignificant costs), revenues and expenditures are in USD. Notwithstanding having our Series A Bonds stated in NIS and linked to the Israeli Consumer Price Index, during the quarter ended March 31, 2013, our outstanding liability was increased by $275,902 as a result of the adjustment to the Israeli CPI and revaluation of the NIS in relation with the USD. We may use foreign currency exchange contracts and other derivatives instruments to be the appropriate tool for managing such exposure 11-------------------------------------------------------------------------------- Back to Table of Contents |