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VOLTARI CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements The following discussion should be read in conjunction with our condensed consolidated financial statements included elsewhere herein. This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933, as amended, (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements 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," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," "continues," "endeavors," "strives," "may," "should" and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements regarding various estimates we have made in preparing our financial statements, including our estimated impairment charges, statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, the sufficiency of our capital resources, our evaluation of strategic and financing alternatives 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. We may, through our senior management, from time to time make "forward looking statements" about matters described herein or other matters concerning us. You should consider our forward-looking statements in light of the risks and uncertainties that could cause our actual results to differ materially from those which are management's current expectations or forecasts. Risks and uncertainties that could adversely affect our business and prospects include, but are not limited to, those discussed in Part II, Item 1A - Risk Factors of this quarterly report, as well as the risks and uncertainties discussed in our Annual Report on Form 10-K for the year ended December 31, 2012 filed by Motricity, Inc. ("Motricity") and elsewhere in this quarterly report. We qualify all of our forward-looking statements by these cautionary statements. We caution you that these risks are not exhaustive. We operate in a continually changing business environment and new risks emerge from time to time. Except as required by law, we disclaim any intent or obligation to revise or update any forward-looking statements for any reason. Business Overview Voltari Corporation ("Voltari" or the "Company") empowers mobile operators, brands and advertising agencies to maximize the reach and economic potential of the mobile ecosystem through the delivery of relevance-driven merchandising, marketing and advertising solutions. Voltari leverages advanced predictive analytics capabilities to deliver the right content, to the right person at the right time. Voltari provides their entire suite of mobile data service solutions through one, integrated, highly scalable managed service platform. Voltari's unique combination of technology, expertise and go-to-market approach delivers return-on-investment for our mobile operator, brand and advertising agency customers. To date, most of our revenue has come from our wireless carrier customers, but the increased use of smartphones and other mobile devices using so-called open operating systems (e.g., Android, iOS, Windows Mobile and Blackberry) has caused this business to decline rapidly. As previously announced, in anticipation of this decline, we increased the focus on our mobile media business and the services provided to advertisers and markets and expect that future growth will come from these activities. We exited most of our non-United States ("U.S.") carrier business in 2012 and AT&T, our single largest customer, has given notice that it will terminate its contracts that accounted for approximately 62% of our annual revenue in 2012 and 56% of our revenue for the three months ended March 31, 2013. This revenue contributed positively to our cash flow from operations during these periods. See Part II, Item 1A - Risk Factors for additional details. Motricity Inc., a Delaware corporation, was incorporated on March 17, 2004 under the name Power By Hand, Inc. ("PBH, Inc."). PBH, Inc. was formed as a new entity to be the surviving corporation in the merger of Pinpoint Networks, Inc. (the acquiring corporation for accounting purposes) and Power By Hand Holdings, LLC ("PBH Holdings"), which occurred on April 30, 2004. On October 29, 2004, we changed our name from Power By Hand, Inc. to Motricity, Inc. In 2007, we acquired the assets of the mobile division of InfoSpace, Inc. ("InfoSpace Mobile"). Located in Bellevue, Washington, InfoSpace Mobile was a provider of mobile content solutions and services for the wireless industry. On June 23, 2010, we completed our offering of 6,000,000 shares of common stock in an initial public offering. 14 -------------------------------------------------------------------------------- Table of Contents On April 14, 2011, Motricity acquired substantially all of the assets of Adenyo Inc. ("Adenyo") and its subsidiaries and assumed certain of Adenyo's liabilities (including those of its subsidiaries), pursuant to an Arrangement Agreement, dated as of March 12, 2011, by and among Adenyo Inc., Motricity Canada Inc. (formerly 7761520 Canada Inc.), Motricity, Inc. and the other parties thereto. The assets include Adenyo's interest in a subsidiary, equipment, software, accounts receivable, licenses, intellectual property, customer lists, supplier lists and contractual rights. Adenyo was a mobile marketing, advertising and analytics solutions provider with operations in the U.S., Canada and France. On April 9, 2013, Motricity and Voltari consummated a transaction intended to protect the long-term value of Motricity's substantial net operating loss carryforwards (the "Reorganization") pursuant to an agreement and plan of reorganization by and among Motricity, Voltari and Voltari Merger Sub, Inc. (the "Agreement and Plan of Reorganization"). The Agreement and Plan of Reorganization and the transactions contemplated thereby were approved and adopted by Motricity's stockholders on April 9, 2013. Upon completion of the Reorganization, Motricity became a wholly owned subsidiary of Voltari, which replaced Motricity as the publicly held corporation. As of April 10, 2013, shares of Voltari's common stock commenced trading on the NASDAQ Capital Market ("NASDAQ") under the symbol "VLTC." On April 9, 2013, Motricity's stockholders also approved an amendment to Voltari's Certificate of Incorporation (the "Certificate of Amendment") to effect a one-for-ten reverse stock split of the outstanding shares of Voltari's common stock if the board of directors (the "Board") determined that the reverse stock split was appropriate in order to regain compliance with the listing requirements of NASDAQ. The Board made the determination that the reverse stock split was appropriate on April 15, 2013, and the Certificate of Amendment was filed with the Secretary of State of the State of Delaware and became effective on April 23, 2013. Trading on NASDAQ of our common stock reflecting the reverse stock split commenced on April 24, 2013. On April 23, 2013, we affected a one-for-ten reverse stock split of our common stock. As a result, the number of shares outstanding has been adjusted retrospectively to reflect the reverse stock split in all periods presented. In addition, the exercise price and the number of common shares issuable under the Company's share-based compensation plans and the authorized, issued and outstanding share capital have been adjusted retrospectively to reflect the reverse stock split. Our operations are predominantly based in the U.S., with international operations in Canada and the United Kingdom ("UK"). We exited our operations in India, the Asia Pacific region, France and the Netherlands during 2012. As of January 1, 2012, all of the operations related to India, the Asia Pacific region, our France subsidiary and our Netherlands subsidiary are reported as discontinued operations in the condensed consolidated financial statements. Recent Developments. Overview. We have undergone significant changes over the past several months as described in more detail below. These changes have included: an increased focus on our mobile media business, exiting international operations, implementing cost reduction measures, exploring strategic and financing alternatives including a sale of our company, securing and amending a term loan, implementing changes in management, closing a fully subscribed rights offering and consummating a reorganization transaction designed to help protect the long-term value of our substantial net operating loss carryforwards. During this period of transformation, we have continued to deliver value-added solutions and roll out new services to customers, and we have taken a number of proactive steps to evolve our strategy to rebuild the Company and lower operating expenses. We believe that these measures have helped improve our ability to take advantage of the growth opportunities in the mobile media industry. The competitive landscape continues to affect our business. In North America, our wireless carrier business is continuing to experience downward pressures related to the mass adoption of smartphones at the expense of feature phones. While this transition has been underway for some time, our large carrier customers are reporting that this trend is accelerating faster than they expected and it is affecting revenues not just for Voltari, but for the industry. With the shift in our focus from large solution customization and implementation projects to mobile media and enterprise solutions, we have seen a downward trend in our carrier service revenue on a sequential basis and we believe that this trend will continue. We currently depend on a limited number of significant wireless carriers for a substantial portion of our revenues. Certain of our customers, including Verizon, may terminate our agreements by giving advance notice. In light of these circumstances, we decided to accelerate our focus on our media business and this could reduce our revenues. As noted below, AT&T recently gave notice that it will terminate both of its contracts with us that have historically accounted for a significant portion of our revenue. See Part II, Item 1A - Risk Factors. The continuing uncertainty surrounding worldwide financial markets and macroeconomic conditions has caused and may continue to cause our customers to decrease or delay their expansion, purchasing and promotional activities. Additionally, constrictions in world credit markets may cause our customers to experience difficulty securing the financing necessary to expand their operations and purchase our services. Economic uncertainty and unemployment have resulted in and may continue to result in cost-conscious consumers, which has adversely affected and may continue to adversely affect demand for our services. If the current adverse 15 -------------------------------------------------------------------------------- Table of Contents macroeconomic conditions continue, the negative impact on our business and prospects may continue. Strategic Review. Beginning in September 2011, with the assistance of GCA Savvian Advisors, LLC ("Savvian"), we explored strategic options, including a spin-off, sale or other transaction involving our carrier business and mobile media. After considering the indications of interest and offers received in this process, we decided to end the process of actively pursuing a sale of our business. As such, we decided to focus our resources on other strategic paths, including increasing the focus on our mobile media business and consummating the rights offering that closed on October 11, 2012. As part of our increased focus on our mobile media opportunities, we are pursuing new product development opportunities designed to enhance and expand our existing services, seeking to develop new technology that addresses the increasingly sophisticated and varied needs of our customers, and responding to technological advances and emerging industry standards and practices and license leading technologies that will be useful in our business in a cost-effective and timely way. As discussed above, we are increasing our focus on our mobile media business. The realignment of our strategic path and consideration of financing options will continue to require management time and resources, while we simultaneously focus on developing new product offerings and reducing costs. We cannot assure that we will be successful in our efforts in obtaining financing, realigning our strategic path, or increasing our focus on our mobile media business. The uncertainty inherent in our strategic review can be difficult to manage, may cause concerns from current and potential customers, suppliers and other third parties with whom we do business, and may increase the likelihood of turnover of other key officers and employees. To address the challenges presented by the market conditions and the other risks and uncertainties facing our business and to realign our strategic path, we have continued to implement cost saving measures, including a reduction in our workforce, the cancellation of some hiring plans, and a restructuring of our facilities and data centers. We continue to review our cost structure and may implement further cost saving initiatives. These measures are designed to realign our strategic path, streamline our business, improve the quality of our product offerings and implement cost saving measures. We cannot guarantee that we will be able to execute on our realigned strategic path, realize cost savings and other anticipated benefits from our cost saving efforts, or that such efforts will not interfere with our ability to achieve our business objectives. Moreover, the reduction in force and the realignment of our strategic path and other cost savings measures can be difficult to manage, may cause concerns from current and potential customers, suppliers and other third parties with whom we do business, may increase the likelihood of turnover of other key employees, and may have an adverse impact on our business. Our success will depend on our ability to successfully execute one or more financing alternatives, our ability to successfully develop and use new technologies and adapt our current and planned services to new customer requirements or emerging industry standards and expand our customer base and risks and uncertainties discussed in in Part II, Item 1A - Risk Factors. Our operating history includes business in geographic areas in which we are no longer active and our U.S.-based wireless carrier business, which we anticipate will continue to decline during 2013, has resulted in revenue and profitability growth rates that may not be indicative of our future results of operations. For example, AT&T, our single largest customer, has given notice that it will terminate its contracts that accounted for approximately 62% of our annual revenue in 2012 and 56% of our revenue for the three months ended March 31, 2013. This revenue contributed positively to our cash flow from operations during these periods. As a result of the foregoing factors, the recent significant changes in our company, the realignment of our strategic path, our exploration of financing alternatives and other changes in our business prior to 2012, our historical results of operations, including periods prior to the periods presented herein, are not necessarily indicative of the operating results to be expected in the future. Liquidity and Capital Resources. We entered into a $20.0 million term loan with High River Limited Partnership ("High River") on September 16, 2011, which term loan was subsequently amended. The maturity date for the term loan is August 28, 2013. High River is beneficially owned by Mr. Carl C. Icahn, who, as of May 3, 2013, beneficially owns approximately 30.4% of our outstanding shares of common stock, controls approximately 14.5% of the voting power of our common stock and beneficially owns approximately 95.5% of our Series J preferred stock. Mr. Brett M. Icahn, a director of the Company, is the son of Mr. Carl C. Icahn, and Mr. Hunter C. Gary, a director of the Company, is married to Mr. Carl C. Icahn's wife's daughter. The term loan, as amended, was approved by a committee comprised of disinterested directors of our Board of Directors. On July 24, 2012, we launched a rights offering pursuant to which we distributed to holders of our common stock at the close of business on July 23, 2012 one transferable subscription right for every one share of common stock owned as of that date. Each subscription right, subject to certain limitations, entitled the holder thereof to subscribe for units consisting of shares of our 13% Series J preferred stock and warrants to purchase common stock at a subscription price of $0.65 per unit. The rights offering was fully subscribed and closed on October 11, 2012. We received approximately $27.8 million in net proceeds from the rights offering. We believe that our future cash flow from operations and available cash and cash equivalents will be sufficient to meet our liquidity needs for the next 12 months, but this may not be the case. Our liquidity may be affected by risks and uncertainties discussed in Part II, Item 1A - Risk Factors. Our longer-term liquidity and ability to execute on our longer term business plan is contingent on our ability to raise additional capital and on our not experiencing any events that may accelerate the payment of our term loan or cause 16 -------------------------------------------------------------------------------- Table of Contents redemption of our Series J preferred stock. Our ability to fund our capital needs also depends on our future operating performance, our ability to successfully realign our costs and strategic path, the effect of any financing alternatives we may pursue and our ability to meet financial covenants under any indebtedness we may incur. We cannot assure that sufficient capital will be available on acceptable terms, if at all, or that we will generate sufficient funds from operations to repay our term loan when due or to adequately fund our longer term operating needs. If we are unable to raise sufficient funds, we may need to implement additional cost reduction measures and explore other sources to fund our longer term business needs and repay our term loan when due. Our failure to do so could result, among other things, in a default under our term loan, loss of our customers and a loss of our stockholders' entire investment. Our ability to meet our liquidity needs or raise additional funds may also be adversely affected by the legal proceedings we are subject to as described in more detail in Part II, Item 1 - Legal Proceedings. Our operating performance may also be affected by risks and uncertainties discussed in Part II, Item 1A - Risk Factors. These risks and uncertainties may also adversely affect our short and long-term liquidity. Management and Director Changes. On November 15, 2012, the employment of our President and Interim Chief Executive Officer James R. Smith, Jr., was terminated, and Richard Stalzer was appointed Chief Executive Officer. Mr. Stalzer was initially hired by the Company in January 2012 as President of our mobile marketing and advertising business when Charles P. Scullion, our Chief Strategy Officer and interim President of our mobile marketing and advertising business, resigned for good reason. Also on November 15, 2012, Nathan Fong was appointed Chief Operating Officer in addition to his role as our Chief Financial Officer which he assumed on June 12, 2012. On March 26, 2013, Mr. Fong notified the Company that he would resign from his positions as Chief Financial Officer and Chief Operating Officer, effective April 12, 2013. We have initiated a search for candidates for the positions of Chief Financial Officer and Chief Operating Officer, but we cannot assure that our efforts to identify and recruit a permanent replacement will be successful. Richard Sadowsky, who had, since July of 2012, been serving as our General Counsel on secondment from SNR Denton US LLP, was appointed Chief Administrative Officer as well as General Counsel and began serving as an employee of the Company on January 1, 2013. The uncertainty inherent in our ongoing leadership transition can be difficult to manage, may cause concerns from current and potential customers, suppliers and other third parties with whom we do business, and may increase the likelihood of turnover of other key officers and employees. Further, on January 16, 2013, Lady Barbara Judge, CBE, a member of our board of directors resigned from her position as a director and as a member of our compensation committee and governance and nominating committee, effective immediately. Her decision to resign was not a result of any disagreement with the Company or its management. Also on January 16, 2013, the board of directors appointed Kevin Lewis as a director to fill the vacancies on the board of directors and on the compensation committee created by Lady Judge's resignation. The board of directors appointed James Nelson as a member of the Company's governance and nominating committee to fill the vacancy left by Lady Judge. Sales Process. As a result of the exploration of a sale of all or a portion of our business, during September through December 2011 we received indications of interest to sell all or a portion of our business. At the end of 2011, after determining that none of the indications of interest received at that point were likely to result in a sale of the Company at a meaningful premium over the market price of our common stock and considering the uncertainty of consummating a transaction on favorable terms if at all, we ended the process led by Savvian. Nevertheless, we continued to receive and evaluate inquiries and offers from parties interested in acquiring our carrier business. These inquiries and offers included purchase prices of up to $40 million. These offers and inquiries were subject to due diligence, price adjustments, buyer contingencies and optionality, uncertainties, and other proposed transaction terms that ultimately led us to conclude, after lengthy negotiations and based on a recommendation by disinterested directors, to elect to retain our carrier business and the current positive cash flows it provides, and forego the cost and expense of pursuing a transaction that we did not believe would be completed at the price initially proposed, if at all. The carrier business is subject to the risks and uncertainties discussed in Part II, Item 1A - Risk Factors. Listing on Nasdaq. On June 14, 2012, we received a letter from NASDAQ Staff advising that for the previous 30 consecutive business days, the bid price of our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on The NASDAQ Global Select Market pursuant to NASDAQ Listing Rule 5450(a)(1). NASDAQ stated in its letter that in accordance with the NASDAQ Listing Rules, we would be provided 180 calendar days, or until December 11, 2012, to regain compliance with the minimum bid price requirement. On December 13, 2012, we received the Delisting Notice notifying us that we did not regain compliance with the Minimum Bid Requirement and, accordingly would be delisted from The NASDAQ Global Select Market unless we requested a hearing before a NASDAQ Listing Qualifications Panel (the "Panel"). Accordingly, we timely submitted to NASDAQ a request for a hearing, which resulted in a stay of the suspension of trading of our common stock pending the conclusion of the hearing process and the expiration of any extensions granted by the Panel. On January 2, 2013, we received a third letter from NASDAQ advising us that our failure to meet the Proxy Solicitation and Annual Meeting Requirements serves as an additional basis for delisting our common stock. We presented our plan for regaining compliance with the Minimum Bid Requirement and the Proxy Solicitation and Annual Meeting Requirements at a hearing on January 31, 2013, and by letter, dated February 28, 2013, the Panel granted our request for continued listing, subject to, among other things, the requirement that we satisfy the $1.00 per share minimum bid requirement for the ten trading days prior to March 29, 2013 and that we solicit proxies and hold our annual meeting of 17 -------------------------------------------------------------------------------- Table of Contents stockholders by April 15, 2013. We subsequently requested additional time to comply with the Minimum Bid Requirement. On March 15, 2013 we received a letter from NASDAQ notifying us that the Panel granted our request to transfer the shares of the Company's common stock to the NASDAQ Capital Market, subject to the NASDAQ Staff's approval of our transfer application. Our transfer application was subsequently approved and our common stock began trading on the NASDAQ Capital Market on March 19, 2013. On April 15, 2013, we received a letter from the NASDAQ office of General Counsel, Hearings, advising us that the appeals panel had determined to continue our listing on the NASDAQ Capital Market based on our having regained or maintained compliance with the listing requirements. See Part II, Item 1A - Risk Factors. Results of Operations As previously discussed, in the first quarter of 2012 we decided to exit our operations in India, the Asia Pacific region, France and the Netherlands. As of January 1, 2012, all of the operations related to these regions, as well as any resulting gain or loss recognized from the exit activity are reported as discontinued operations in the condensed consolidated financial statements. See Note 3 - Discontinued Operations to our condensed consolidated financial statements for more information. Total revenues Three Months Ended March 31, 2013 2012 $ Change % Change (Dollars in thousands) Total revenues $ 18,372 $ 22,786 $ (4,414 ) (19.4 )% Total revenues for the three months ended March 31, 2013 decreased $4.4 million, or 19.4%, compared to the three months ended March 31, 2012. This decrease is primarily due to: • $3.9 million reduction attributable to lower revenue from our U.S. carrier customers; • $1.2 million of decreased revenue from the premium messaging business reflecting our decision to exit this business in late 2012; and • $0.6 million decrease in revenue associated with our mobile media enterprise solutions. The decrease was partially offset by: • $0.9 million increase in revenue attributable to our advertising business, primarily due to an increase in customers; and • $0.4 million increase in revenue associated with Virgin Mobile in the UK, largely due to timing. We generated 92.5% of our revenues in the U.S. for the three months ended March 31, 2013, as compared to 92.4% for the three months ended March 31, 2012. Significant customers as a percentage of total revenues: Three Months Ended March 31, 2013 2012 AT&T 56 % 62 % Verizon Wireless 18 % 19 % 18-------------------------------------------------------------------------------- Table of Contents Operating expenses Three Months Ended March 31, 2013 2012 $ Change % Change (Dollars in thousands) Direct third-party expenses $ 3,851 $ 5,154 $ (1,303 ) (25.3 )% Datacenter and network operations* 3,029 3,441 (412 ) (12.0 ) Product development and sustainment* 1,947 5,032 (3,085 ) (61.3 ) Sales and marketing* 2,418 2,525 (107 ) (4.2 ) General and administrative* 4,820 6,298 (1,478 ) (23.5 ) Depreciation and amortization 1,560 1,754 (194 ) (11.1 ) Restructuring - 2,037 (2,037 ) (100.0 ) Total operating expenses $ 17,625 $ 26,241 $ (8,616 ) (32.8 )% * excluding depreciation Direct third party expenses For the three months ended March 31, 2013, direct third party expenses decreased $1.3 million, or 25.3%, compared to the three months ended March 31, 2012. This decrease was primarily due to: • $1.2 million decrease in fees associated with the carrier business, largely driven by a reduction in associated revenues; • $0.8 million cost improvement reflecting penalties incurred during the three months ended March 31, 2012 related to our volume minimums in the premium messaging business that were not met; and • $0.2 million decrease in fees associated with our Canadian messaging business largely due to reduced usage of external vendors on professional services projects. These decreases were partially offset by a $0.9 million increase in costs associated with our mobile media and advertising business, primarily fees paid to publishers for displaying customer advertisements. Datacenter and network operations, excluding depreciation For the three months ended March 31, 2013, datacenter and network operations expense, excluding depreciation, decreased $0.4 million, or 12.0%, compared to the three months ended March 31, 2012. This decrease was primarily driven by: • $0.5 million decrease in software and maintenance costs; and • $0.1 million decrease in contractor expenses due to a reduction in the use of internal and offshore contractors. These decreases were partially offset by a $0.1 million increase in bandwidth and hosting expense. Product development and sustainment, excluding depreciation For the three months ended March 31, 2013, product development and sustainment expense, excluding depreciation, decreased $3.1 million, or 61.3%, as compared to the three months ended March 31, 2012. This decrease was primarily due to: • $2.0 million reduction in salaries and benefits reflecting a reduction in headcount and capitalization of certain software development costs associated with our Voltari-Connect platform; • $0.9 million decrease in offshore contractor expenses primarily due to the exit from the majority of our international operations in 2011 and 2012; and • $0.2 million reduction in facilities and equipment costs, primarily resulting from a decrease in allocated rent expense. Sales and marketing, excluding depreciation For the three months ended March 31, 2013, sales and marketing expense, excluding depreciation, decreased $0.1 million, or 4.2%, compared to the three months ended March 31, 2012 . This decrease was primarily due to a $0.2 million reduction in salaries and benefits reflecting a reduction in headcount, partially offset by higher recruiting fees and consulting expenses incurred during the current quarter. 19 -------------------------------------------------------------------------------- Table of Contents General and administrative, excluding depreciation For the three months ended March 31, 2013, general and administrative expense, excluding depreciation, decreased $1.5 million, or 23.5%, as compared to the three months ended March 31, 2012. This decrease was primarily due to: • $2.3 million reduction in salaries and benefits and other employee expenses reflecting a reduction in headcount; and • $0.3 million decrease in facilities and equipment costs, primarily a reduction in allocated rent attributable to lower headcount. These decreases were partially offset by a $1.2 million increase in legal, accounting, printing and other professional services, primarily costs associated with various SEC filings during the 2013 first quarter. Depreciation and amortization For the three months ended March 31, 2013, depreciation and amortization expense decreased $0.2 million, or 11.1%, compared to the three months ended March 31, 2012. The decrease was primarily due to a reduction in amortization associated with intangible assets as the direct result of impairment of certain intangible assets that occurred in December 2012. The decrease also reflects accelerated depreciation of certain fixed assets associated with our corporate headquarters, the majority of which were fully depreciated by the end of 2012. Restructuring During the first quarter of 2012, as part of the overall realignment of our strategic path, and following the termination of our agreement with XL on December 31, 2011, we initiated a restructuring plan related to our international operations. In connection with the implementation of the restructuring plan, we incurred $2.0 million of restructuring charges during the three months ended March 31, 2012, primarily costs associated with involuntary termination benefits and retention bonuses. Other expense, net Three Months Ended March 31, 2013 2012 (Dollars in thousands) Other income (expense) $ (58 ) $ 4 Interest and investment income, net 7 - Interest expense (500 ) (461 ) Total other expense, net $ (551 ) $ (457 ) For the three months ended March 31, 2013 and 2012, other expense, net, of $0.6 million and $0.5 million, respectively, primarily consists of interest expense associated with the term loan we entered into on September 16, 2011. See Note 5-Debt Facilities to our condensed consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources for more information. Provision for income taxes Three Months Ended March 31, 2013 2012 (Dollars in thousands) Provision for income taxes $ - $ 92 The provision for income taxes for the three months ended March 31, 2012 primarily consists of a deferred U.S. tax provision for the difference between book and tax treatment of goodwill associated with our acquisition of Adenyo and InfoSpace Mobile. Our historical lack of profitability is a key factor in concluding there is insufficient evidence of our ability to realize any future benefits from our deferred tax assets and accordingly, we maintain a full valuation allowance against our net deferred tax assets. 20 -------------------------------------------------------------------------------- Table of Contents Loss from discontinued operations Three Months Ended March 31, 2013 2012 $ Change % Change (Dollars in thousands) Loss from discontinued operations $ - $ (4,681 ) $ 4,681 (100.0 )% Loss from discontinued operations of $4.7 million for the three months ended March 31, 2012 includes the results of our operations in India, the Asia Pacific region, the Netherlands and France. See Note 3 - Discontinued Operations to our condensed consolidated financial statements for more information. Net income (loss) Three Months Ended March 31, 2013 2012 $ Change % Change (Dollars in thousands) Net income (loss) $ 196 $ (8,685 ) $ 8,881 (102.3 )% For the three months ended March 31, 2013, net income was $0.2 million, compared to a net loss of $8.7 million for the three months ended March 31, 2012. The $8.9 million increase in net income (reduction in net loss) is primarily due to: • $8.6 million reduction in operating expenses; and • $4.7 million loss from discontinued operations in 2012. These decreases were partially offset by a $4.4 million decline in revenues. Liquidity and Capital Resources General Our principal needs for liquidity have been to fund operating expenses, working capital requirements, capital expenditures, debt service, restructuring expenses, international activity, acquisitions and integration. Our principal sources of liquidity as of March 31, 2013 consisted of cash and cash equivalents of $54.3 million. We believe that our future cash flow from operations and available cash and cash equivalents will be sufficient to meet our liquidity needs for the next 12 months, but this may not be the case. Our longer-term liquidity and ability to execute on our longer term business plan is contingent on our ability to raise additional capital, and on our not experiencing any events that may accelerate the payment of our term loan or cause redemption of our Series J preferred stock. Our liquidity may also be adversely impacted if and to the extent that our Series J preferred stock becomes redeemable. Our ability to fund our capital needs also depends on our future operating performance, our ability to successfully realign our costs and strategic path, the effect of any financing alternatives we may pursue, and our ability to meet financial covenants under any indebtedness we may incur. We may also need to raise additional capital to execute our longer-term business plan. We cannot assure that sufficient capital will be available on acceptable terms, if at all, or that we will generate sufficient funds from operations to repay our term loan when due or to adequately fund our longer term operating needs. If we are unable to raise sufficient funds, we may need to implement additional cost reduction measures and explore other sources to fund our longer term business needs and repay our term loan when due. Our failure to do so could result, among other things, in a default under our term loan, loss of our customers and a loss of our stockholders' entire investment. Our ability to meet our liquidity needs or raise additional funds may also be adversely affected by the legal proceedings we are subject to as described in Part II, Item 1 - Legal Proceedings. Our operating performance may also be affected by risks and uncertainties discussed in Part II, Item 1A - Risk Factors. These risks and uncertainties may also adversely affect our short and long-term liquidity. Rights Offering. In October 2012, we completed a rights offering pursuant to which we received approximately $27.8 million in net proceeds in exchange for the issuance of Series J redeemable preferred stock and common stock warrants. We intend to use these proceeds for general corporate and working capital purposes, which may include any acquisitions we may pursue. We have no current plans to pursue any specific acquisition. Term Loan. We entered into a $20.0 million term loan with High River on September 16, 2011, which term loan was subsequently amended. The term loan accrues interest at 9% per year, which is paid-in-kind quarterly through capitalizing interest and adding it to the principal balance. It is secured by a first lien on substantially all of our assets and is guaranteed by two of our subsidiaries, mCore 21 -------------------------------------------------------------------------------- Table of Contents International and Motricity Canada. The principal and interest of the term loan are due and payable at maturity on August 28, 2013. The term loan provides High River with a right to accelerate the payment of the term loan if, among other things, we experience an ownership change (within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended ("Code")) that (i) results in a substantial limitation on our ability to use our net operating loss carryforwards and related tax benefits or (ii) if the shares of our Series J preferred stock or any other preferred stock we may issue become redeemable at the option of the holders or (iii) if we are required to pay the liquidation preference for such shares. Subject to certain limited exceptions, the term loan is subject to mandatory prepayment (without premium or penalty) from the net proceeds of corporate transactions, including dispositions of assets outside of the ordinary course of business or the issuance of additional debt or equity securities. High River is beneficially owned by Carl C. Icahn, who, as of May 3, 2013, beneficially owns approximately 30.4% of the Company's outstanding shares of common stock, controls approximately 14.5% of the voting power of our common stock and beneficially owns approximately 95.5% of our Series J preferred stock. Brett M. Icahn, a director of the Company, is the son of Carl C. Icahn, and Hunter C. Gary, a director of the Company, is married to Carl C. Icahn's wife's daughter. The term loan, as amended, was unanimously approved by a committee comprised of disinterested directors of the Company's Board of Directors. Cash Flows As of March 31, 2013 and December 31, 2012, we had cash and cash equivalents of $54.3 million and $51.5 million, respectively. The $2.8 million increase reflects $3.9 million of cash provided by operating activities, partially offset by $0.6 million of cash used in investing activities and $0.4 million of cash used in financing activities. Net Cash Provided by Operating Activities For the three months ended March 31, 2013, cash of $3.9 million was provided by operating activities. Cash provided by operating activities consisted primarily of our net income of $0.2 million, adjusted for a $1.6 million net change in our operating assets and liabilities, as well as various non-cash items including $1.6 million for depreciation and amortization, $0.5 million for non-cash interest expense and $0.1 million for stock-based compensation expense. The change in our operating assets and liabilities was driven by a decrease in accounts receivable, primarily related to timing of invoicing and cash collection, as well as a reduction in prepaid expenses, partially offset by a decrease in accounts payable and accrued expenses. Net Cash Used in Investing Activities For the three months ended March 31, 2013, cash of $0.6 million was used in investing activities. During the period, we capitalized software development costs of $0.5 million associated with our Voltari-Connect platform, including costs to develop new software products and significant enhancements to existing software products. We also used $0.1 million of cash to purchase property and equipment associated with our network operations. Net Cash Used in Financing Activities For the three months ended March 31, 2013, cash used in financing activities consisted of $0.4 million paid for rights offering costs. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions and in certain cases the difference may be material. Any differences may have a material impact on our financial condition and results of operations. For a discussion of how these and other factors may affect our business, see Recent Developments above and Risk Factors in Part II, Item 1A of this report, as well as other cautionary statements set forth in this report. Our critical accounting policies are available in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2012. There have not been any material changes with respect to these policies or estimates during the period covered by this Quarterly Report on Form 10-Q, other than as noted below. During the three months ended March 31, 2013, we began capitalizing certain software development costs associated with our Voltari-Connect platform, which include the costs to develop new software products or significant enhancements to existing software products, which are developed or obtained for internal use. Costs associated with preliminary project stage activities, training, 22 -------------------------------------------------------------------------------- Table of Contents maintenance and all post implementation stage activities are expensed as incurred. We capitalize software development costs when application development begins, it is probable that the project will be completed and the software will be used as intended. Such capitalized costs are included within Property and equipment, net, on our condensed consolidated balance sheets and amortized on a straight-line basis over the estimated useful life of the related asset, which is generally three years. For the three months ended March 31, 2013, we capitalized software development costs of $0.5 million. Recent Accounting Pronouncements We have evaluated recent accounting pronouncements and believe none will have a material effect on our financial condition, results of operations or cash flows. |