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BOINGO WIRELESS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in "Item 1. Financial Statements" of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and the section titled "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities Exchange Commission on March 17, 2014. Forward-Looking Statements This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, as amended, based on our current expectations, estimates and projections about our operations, industry, financial condition, performance, results of operations, and liquidity. Statements containing words such as "may," "believe," "anticipate," "expect," "intend," "plan," "project," "projections," "business outlook," "estimate," or similar expressions constitute forward-looking statements. These forward-looking statements include, but are not limited to, statements about future financial performance; revenues; metrics; operating expenses; market trends, including those in the markets in which we compete; operating and marketing efficiencies; liquidity; cash flows and uses of cash; dividends; capital expenditures; depreciation and amortization; tax payments; foreign currency exchange rates; hedging arrangements; our ability to repay indebtedness, pay dividends and invest in initiatives; our products and services; pricing; competition; strategies; and new business initiatives, products, services, and features. Potential factors that could affect the matters about which the forward-looking statements are made include, among others, the factors disclosed in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q and additional factors that accompany the related forward-looking statements in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as the date hereof. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that may cause actual performance and results to differ materially from those predicted. Reported results should not be considered an indication of future performance. Except as required by law, we undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Overview Boingo helps the world stay connected. We have established a global footprint of small cell networks that provide high-speed, high-bandwidth wireless Internet service to smartphones, tablet computers, laptops, and other wireless-enabled devices. Small cells are low-powered radio access nodes that operate in licensed and unlicensed spectrum that have a range of 10 meters to 1 to 2 kilometers. These small cell networks cover more than a million distributed antenna system ("DAS") and Wi-Fi locations and reach more than one billion consumers annually. With the proliferation of mobile Internet-enabled wireless devices, and growth of high-bandwidth usage from streaming media and smartphone apps, we expect these small cells to play a significant role in helping meet the ever-increasing data demands of connected consumers who are accustomed to the benefits of broadband performance at home and work and are seeking the same applications, performance and availability on-the-go. Our small cell networks include DAS and Wi-Fi networks that we manage and operate ourselves, which we refer to as our "managed and operated" locations, as well as Wi-Fi networks managed and operated by third-parties with whom we contract for access, which we refer to as our "roaming" networks. Our managed and operated locations are typically located in large venues with big audiences, such as airports, stadiums, arenas, universities, convention centers, shopping malls, and military bases where we install a wireless network infrastructure and generally have exclusive multi-year agreements. Our roaming networks comprise more than 1,000,000 commercial Wi-Fi hotspots in over 100 countries around the world. We also sell advertising and sponsorships on other Wi-Fi networks that are not part of our network on behalf of the network owner. We generate revenue through wholesale partnerships, retail sales, and advertising and sponsorships. We have direct customer relationships with users who have purchased our mobile Internet services, and we also provide mobile Internet access and solutions to our partners, which include telecom operators, cable companies, technology companies, enterprise software and services companies, and communications service providers to allow their millions of users to connect to the mobile Internet through hotspots in our network. Our software solution-which provides one-click access to our global footprint of hotspots-has been rebranded for wholesale partners, in addition to being marketed under the Boingo brand. In combination with our back-end system infrastructure, it creates a global roaming solution for operators, carriers and other service providers. 17 -------------------------------------------------------------------------------- Table of Contents We generate wholesale revenue from telecom operators that pay us build-out fees and recurring access fees so that their cellular customers may use our DAS networks at locations where we manage and operate the wireless network. In addition, our partners pay us usage-based Wi-Fi network access and software licensing fees to allow their customers' access to our footprint worldwide. We generated revenue from individual users purchasing month-to-month retail subscription plans that automatically renew hotspot specific single-use access to our network, or residential broadband and Internet Protocol television ("IPTV") services in military barracks. As of June 30, 2014 and 2013, we had approximately 300,000 and 313,000 subscribers, respectively. We also generate revenue from advertisers that seek to reach our users with sponsored access, promotional programs and online display advertising at locations where we manage and operate the Wi-Fi network and locations where we solely provide authorized access to a partner's Wi-Fi network through sponsored access and promotional programs. We believe we are the leading global provider of commercial mobile Wi-Fi Internet solutions and indoor DAS services for carriers. Key elements of our strategy are to: † expand our footprint of managed and operated and aggregated networks; † leverage our neutral-host business model to accelerate wholesaleroaming and carrier offload partnerships; † maximize advertising and sponsorship sell-through for our inventory of advertising-enabled networks; and † increase our brand awareness. Reconciliation of Non-GAAP Financial Measures We define Adjusted EBITDA as net loss attributable to common stockholders plus depreciation and amortization of property and equipment, income tax expense (benefit), amortization of intangible assets, stock-based compensation expense, non-controlling interests and interest and other expense (income), net. We believe that Adjusted EBITDA is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods. We believe that: † Adjusted EBITDA provides investors and other users of our financial information consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations and facilitates comparisons with other companies, many of which use similar non-generally accepted accounting principles in the United States ("GAAP") financial measures to supplement their GAAP results; and † it is useful to exclude non-cash charges, such as depreciation and amortization of property and equipment, amortization of intangible assets and stock-based compensation, from Adjusted EBITDA because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations, and these expenses can vary significantly between periods as a result of full amortization of previously acquired tangible and intangible assets or the timing of new stock-based awards. We use Adjusted EBITDA in conjunction with traditional GAAP measures as part of our overall assessment of our performance, for planning purposes, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance. We do not place undue reliance on Adjusted EBITDA as our only measure of operating performance. Adjusted EBITDA should not be considered as a substitute for other measures of financial performance reported in accordance with GAAP. There are limitations to using non-GAAP financial measures, including that other companies may calculate these measures differently than we do. We compensate for the inherent limitations associated with using Adjusted EBITDA through disclosure of these limitations, presentation of our financial statements in accordance with GAAP and reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net loss attributable to common stockholders. 18 -------------------------------------------------------------------------------- Table of Contents The following provides a reconciliation of net loss attributable to common stockholders to Adjusted EBITDA: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (unaudited) (in thousands) Net loss attributable to common stockholders $ (3,734 ) $ (399 ) $ (9,182 ) $ (1,520 ) Depreciation and amortization of property and equipment 6,531 4,734 12,315 8,867 Income tax expense (benefit) 155 (173 ) 303 (640 ) Amortization of intangible assets 928 516 1,853 915 Stock-based compensation expense 1,851 1,245 3,368 1,847 Non-controlling interests 209 173 355 306 Interest and other expense (income), net 18 (25 ) (1 ) (72 ) Adjusted EBITDA $ 5,958 $ 6,071 $ 9,011 $ 9,703 Results of Operations The following tables set forth our results of operations for the specified periods. Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (unaudited) (in thousands) Consolidated Statement of Operations Data: Revenue $ 28,396 $ 26,239 $ 54,848 $ 49,373 Costs and operating expenses: Network access 13,247 11,035 26,172 20,705 Network operations 5,793 4,753 11,617 8,704 Development and technology 3,169 2,726 6,840 5,862 Selling and marketing 3,966 3,822 7,851 6,812 General and administrative 4,645 3,811 9,040 8,301 Amortization of intangible assets 928 516 1,853 915 Total costs and operating expenses 31,748 26,663 63,373 51,299 Loss from operations (3,352 ) (424 ) (8,525 ) (1,926 ) Interest and other (expense) income, net (18 ) 25 1 72 Loss before income taxes (3,370 ) (399 ) (8,524 ) (1,854 ) Income tax expense (benefit) 155 (173 ) 303 (640 ) Net loss (3,525 ) (226 ) (8,827 ) (1,214 ) Net income attributable to non-controlling interests 209 173 355 306 Net loss attributable to common stockholders $ (3,734 ) $ (399 ) $ (9,182 ) $ (1,520 ) Depreciation and amortization expense included in costs and operating expenses: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (unaudited) (in thousands) Network access $ 4,511 $ 3,205 $ 8,373 $ 6,082 Network operations 1,182 1,008 2,369 1,816 Development and technology 782 472 1,479 888 General and administrative 56 49 94 81 Total (1) $ 6,531 $ 4,734 $ 12,315 $ 8,867 -------------------------------------------------------------------------------- (1) The $1.8 million and $3.4 million increase in depreciation and amortization expense of property and equipment for the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013, respectively, is primarily due to increased depreciation and amortization expense from our increased fixed assets from our DAS build-out projects, Wi-Fi networks, and software development in 2013 and 2014. 19 -------------------------------------------------------------------------------- Table of Contents Stock-based compensation expense included in costs and operating expenses: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (unaudited) (in thousands) Network operations $ 351 $ 231 $ 639 $ 397 Development and technology 119 142 260 99 Selling and marketing 402 340 736 458 General and administrative 979 532 1,733 893 Total (2) $ 1,851 $ 1,245 $ 3,368 $ 1,847 -------------------------------------------------------------------------------- (2) The $0.6 million increase in stock-based compensation expense for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 is due primarily to $0.7 million of additional stock-based compensation expense related to the stock options and restricted stock units ("RSU") issued in 2013 and 2014, which was partially offset by $0.1 million of additional reductions recorded in 2013 for employees who left the Company during 2013. The $1.5 million increase in stock-based compensation expense for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 is due primarily to $2.0 million of additional stock-based compensation expense related to the stock options and restricted stock units ("RSU") issued in 2013 and 2014, which was partially offset by $0.5 million of additional reductions recorded in 2013 for employees who left the Company during 2013. The following table sets forth our results of operations for the specified periods as a percentage of our revenue for those periods. Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (unaudited) (as a percentage of revenue) Consolidated Statement of Operations Data: Revenue 100.0 % 100.0 % 100.0 % 100.0 % Costs and operating expenses: Network access 46.7 42.1 47.7 41.9 Network operations 20.4 18.1 21.2 17.6 Development and technology 11.2 10.4 12.5 11.9 Selling and marketing 14.0 14.6 14.3 13.8 General and administrative 16.4 14.5 16.5 16.8 Amortization of intangible assets 3.3 2.0 3.4 1.9 Total costs and operating expenses 111.8 101.6 115.5 103.9 Loss from operations (11.8 ) (1.6 ) (15.5 ) (3.9 ) Interest and other (expense) income, net (0.1 ) 0.1 0.0 0.1 Loss before income taxes (11.9 ) (1.5 ) (15.5 ) (3.8 ) Income tax expense (benefit) 0.5 (0.7 ) 0.6 (1.3 ) Net loss (12.4 ) (0.9 ) (16.1 ) (2.5 ) Net income attributable to non-controlling interests 0.7 0.7 0.6 0.6 Net loss attributable to common stockholders (13.1 )% (1.5 )% (16.7 )% (3.1 )% 20 -------------------------------------------------------------------------------- Table of Contents Three Months ended June 30, 2014 and 2013 Revenue Three Months Ended June 30, 2014 2013 Change % Change (unaudited) (in thousands, except churn data and percentages) Revenue: Wholesale $ 12,872 $ 12,339 $ 533 4.3 % Retail subscription 8,161 8,731 (570 ) (6.5 )% Retail single-use 2,830 2,830 - 0.0 % Advertising and other 4,533 2,339 2,194 93.8 % Total revenue $ 28,396 $ 26,239 $ 2,157 8.2 % Key business metrics: Subscribers 300 313 (13 ) (4.2 )% Monthly churn 10.9 % 10.2 % 0.7 % 6.9 % Connects 20,286 11,230 9,056 80.6 % DAS nodes 7.6 5.6 2.0 35.7 % There are four key metrics that we use to monitor results and activity in the business as follows: Subscribers. This metric represents the number of paying retail customers who are on a recurring month-to-month subscription plan at a given period end. Monthly churn. This metric shows the number of subscribers who canceled their subscriptions in a given month, expressed as a percentage of the average subscribers in that month. The churn in a given period is the average monthly churn in that period. This measure is one indicator of the longevity of our subscribers. Some of our customers who cancel subscriptions maintain accounts for single-use access. Connects. This metric shows how often individuals connect to our non-military global Wi-Fi network in a given period. The connects include retail and wholesale customers in both customer pay locations and customer free locations where we are a paid service provider or receive sponsorship or promotional fees. We count each connect as a single connect regardless of how many times the individual accesses the network at a given venue during their 24 hour period. This measure is an indicator of paid activity throughout our network. DAS nodes. This metric represents the number of active DAS nodes as of the end of the period. A DAS node is a single communications endpoint, typically an antenna, which transmits or receives radio frequency signals wirelessly. This measure is an indicator of the reach of our DAS network. Total revenue. Total revenue increased $2.2 million or 8.2%, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013. Wholesale. Wholesale revenue increased $0.5 million, or 4.3%, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, due to a $1.7 million increase in revenues related to new DAS build-out projects in our managed and operated locations and a $0.5 million increase in DAS access fees from our telecom operators. The increase was partially offset by a $1.8 million decrease in partner usage-based fees. Retail subscription. Retail subscription revenue decreased $0.6 million, or 6.5%, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013. The decrease is primarily due a decrease in our average monthly subscribers and a 2.3% decrease in our average monthly revenue per subscriber for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013. Retail single-use. Retail single-use revenue was unchanged for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013. Retail single-use revenue includes $0.6 million of revenues related to the venues acquired from Electronic Media Systems, Inc. and Advanced Wireless Group, LLC (collectively, "AWG") in October 2013. Advertising and other. Advertising and other revenue increased $2.2 million, or 93.8%, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013 due to a $2.2 million increase in advertising sales at our managed and operated locations, which includes $1.8 million of advertising sales at the venues acquired from AWG in October 2013. 21 -------------------------------------------------------------------------------- Table of Contents Costs and Operating Expenses Three Months Ended June 30, 2014 2013 Change % Change (unaudited) (in thousands, except percentages) Costs and operating expenses: Network access $ 13,247 $ 11,035 $ 2,212 20.0 % Network operations 5,793 4,753 1,040 21.9 % Development and technology 3,169 2,726 443 16.3 % Selling and marketing 3,966 3,822 144 3.8 % General and administrative 4,645 3,811 834 21.9 % Amortization of intangible assets 928 516 412 79.8 % Total costs and operating expenses $ 31,748 $ 26,663 $ 5,085 19.1 % Network access. Network access costs increased $2.2 million, or 20.0%, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013. The increase is primarily due to a $1.3 million increase in depreciation expense, a $1.2 million increase in revenue share paid to venues in our managed and operated locations resulting from our increased sales, and a $0.6 million increase in bandwidth and other direct costs. The increases were partially offset by a $0.9 million decrease from customer usage at partner venues. Network operations. Network operations expenses increased $1.0 million, or 21.9%, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, due to a $0.8 million increase in personnel related expenses primarily resulting from increased headcount and a $0.2 million increase in depreciation expense. Development and technology. Development and technology expenses increased $0.4 million, or 16.3% for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, due primarily to a $0.3 million increase in depreciation expense and a $0.3 million increase in hardware and software maintenance expenses. The increases were partially offset by a $0.4 million decrease in personnel related expenses. Selling and marketing. Selling and marketing expenses increased $0.1 million, or 3.8%, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, due primarily to a $0.5 million increase in personnel related expenses primarily resulting from increased headcount. The increase was partially offset by a $0.3 million decrease in marketing related expenses. General and administrative. General and administrative expenses increased $0.8 million, or 21.9%, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, due to a $0.5 million increase in personnel related expenses, inclusive of a $0.4 million increase in stock-based compensation expenses, and a $0.2 million increase in professional fees. Amortization of intangible assets. Amortization of intangible assets expense increased $0.4 million, or 79.8%, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, due to our acquisition of AWG in October 2013. Interest and Other (Expense) Income, Net Interest and other (expense) income, net, remained essentially unchanged for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013. Income Tax Expense (Benefit) We had income tax expense of $0.2 million for the three months ended June 30, 2014 compared to income tax benefit of $0.2 million for the three months ended June 30, 2013. Our effective tax rate decreased to (4.6)% for the three months ended June 30, 2014 compared to 43.4% for the three months ended June 30, 2013 due primarily to the valuation allowance we established at year-end in 2013. Non-controlling Interests Non-controlling interests remained essentially unchanged for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013. 22 -------------------------------------------------------------------------------- Table of Contents Net Loss Attributable to Common Stockholders Our net loss for the three months ended June 30, 2014 increased as compared to the three months ended June 30, 2013, primarily as a result of the $5.1 million increase in costs and operating expenses and the $0.3 million decrease in income tax benefits, which was partially offset by the $2.2 million increase in revenues. Our diluted net loss per share increased primarily as a result of the increase in our net loss. Adjusted EBITDA Adjusted EBITDA was $6.0 million for the three months ended June 30, 2014, down 1.9% from the $6.1 million recorded in the three months ended June 30, 2013. As a percent of revenue, Adjusted EBITDA was 21.0% for the three months ended June 30, 2014, down from 23.1% of revenue for the three months ended June 30, 2013. The Adjusted EBITDA decrease was due primarily to the $3.3 million increase in our net loss attributable to common stockholders for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The decrease was partially offset by a $2.2 million increase in depreciation and amortization expense, a $0.6 million increase in stock-based compensation expenses, and a $0.3 million decrease in income tax benefits. Six Months ended June 30, 2014 and 2013 Revenue Six Months Ended June 30, 2014 2013 Change % Change (unaudited) (in thousands, except churn data) Revenue: Wholesale $ 23,995 $ 23,894 $ 101 0.4 % Retail subscription 16,455 16,798 (343 ) (2.0 )% Retail single-use 5,366 5,416 (50 ) (0.9 )% Advertising and other 9,032 3,265 5,767 176.6 % Total revenue $ 54,848 $ 49,373 $ 5,475 11.1 % Key business metrics: Subscribers 300 313 (13 ) (4.2 )% Monthly churn 11.6 % 10.0 % 1.6 % 16.0 % Connects 37,793 17,496 20,297 116.0 % DAS nodes 7.6 5.6 2.0 35.7 % Total revenue. Total revenue increased $5.5 million or 11.1%, for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013. Wholesale. Wholesale revenue increased $0.1 million, or 0.4%, for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, due to a $2.9 million increase in revenues related to new DAS build-out projects in our managed and operated locations, a $0.6 million increase in DAS access fees from our telecom operators, and a $0.2 million increase in our wholesale service provider revenues. The increases were primarily offset by a $3.6 million decrease in partner usage-based fees. Retail subscription. Retail subscription revenue decreased $0.3 million, or 2.0%, for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013. The decrease is primarily due to a 1.1% decrease in our average monthly revenue per subscriber for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013. Retail single-use. Retail single-use revenue remained essentially unchanged for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013. Retail single-use revenue includes $1.3 million of revenues related to the venues acquired from AWG in October 2013. Advertising and other. Advertising and other revenue increased $5.8 million, or 176.6%, for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013 due primarily to a $6.0 million increase in advertising sales at our managed and operated locations, which includes $3.5 million of advertising sales at the venues acquired from AWG in October 2013. 23 -------------------------------------------------------------------------------- Table of Contents Costs and Operating Expenses Six Months Ended June 30, 2014 2013 Change % Change (unaudited) (in thousands, except percentages) Costs and operating expenses: Network access $ 26,172 $ 20,705 $ 5,467 26.4 % Network operations 11,617 8,704 2,913 33.5 % Development and technology 6,840 5,862 978 16.7 % Selling and marketing 7,851 6,812 1,039 15.3 % General and administrative 9,040 8,301 739 8.9 %Amortization of intangible assets 1,853 915 938 102.5 % Total costs and operating expenses $ 63,373 $ 51,299 $ 12,074 23.5 % Network access. Network access costs increased $5.5 million, or 26.4%, for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013. The increase is primarily due to a $3.3 million increase in revenue share paid to venues in our managed and operated locations resulting from our increased sales, a $2.3 million increase in depreciation expense, and a $1.2 million increase in bandwidth and other direct costs. The increases were partially offset by a $1.2 million decrease from customer usage at partner venues. Network operations. Network operations expenses increased $2.9 million, or 33.5%, for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, due to a $1.9 million increase in personnel related expenses primarily resulting from increased headcount, a $0.6 million increase in depreciation expense, and a $0.4 million increase in other operating expenses. Development and technology. Development and technology expenses increased $1.0 million, or 16.7% for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, due primarily to a $0.6 million increase in depreciation expense, a $0.5 million increase in hardware and software maintenance expenses, and a $0.2 million increase in technology service expenses. The increases were partially offset by a $0.3 million decrease in personnel related expenses. Selling and marketing. Selling and marketing expenses increased $1.0 million, or 15.3%, for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, due primarily to a $1.4 million increase in personnel related expenses primarily resulting from increased headcount. The increase was partially offset by a $0.4 million decrease in marketing related expenses. General and administrative. General and administrative expenses increased $0.7 million, or 8.9%, for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, due primarily to a $1.2 million increase in personnel related expenses, inclusive of a $0.8 million increase in stock-based compensation expenses. The increases were partially offset by a $0.4 million decrease in other expenses. Amortization of intangible assets. Amortization of intangible assets expense increased $0.9 million, or 102.5%, for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, due to our acquisitions of Endeka Group, Inc. and AWG in February 2013 and October 2013, respectively. Interest and Other Income, Net Interest and other income, net, remained essentially unchanged for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013. Income Tax Expense (Benefit) We had income tax expense of $0.3 million for the six months ended June 30, 2014 compared to income tax benefit of $0.6 million for the six months ended June 30, 2013. Our effective tax rate decreased to (3.6)% for the six months ended June 30, 2014 compared to 34.5% for the six months ended June 30, 2013 due primarily to the valuation allowance we established at year end in 2013. 24 -------------------------------------------------------------------------------- Table of Contents Non-controlling Interests Non-controlling interests remained essentially unchanged for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013. Net Loss Attributable to Common Stockholders Our net loss for the six months ended June 30, 2014 increased as compared to the six months ended June 30, 2013, primarily as a result of the $12.1 million increase in costs and operating expenses and the $0.9 million decrease in income tax benefits, which was partially offset by the $5.5 million increase in revenues. Our diluted net loss per share increased primarily as a result of the increase in our net loss. Adjusted EBITDA Adjusted EBITDA was $9.0 million for the six months ended June 30, 2014, down 7.1% from the $9.7 million recorded in the six months ended June 30, 2013. As a percent of revenue, Adjusted EBITDA was 16.4% for the six months ended June 30, 2014, down from 19.7% of revenue for the six months ended June 30, 2013. The Adjusted EBITDA decrease was due primarily to the $7.7 million increase in our net loss attributable to common stockholders for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. The decrease was partially offset by a $4.4 million increase in depreciation and amortization expense, a $1.5 million increase in stock-based compensation expenses, and a $0.9 million decrease in income tax benefits. Liquidity and Capital Resources We have financed our operations primarily through cash provided by operating activities. Our primary sources of liquidity as of June 30, 2014 consisted of $8.0 million of cash and cash equivalents and $29.9 million of marketable securities. Our principal uses of liquidity have been to fund our operations, working capital requirements, capital expenditures and acquisitions. We expect that these requirements will be our principal needs for liquidity over the near term. Our capital expenditures in the six months ended June 30, 2014 were $35.9 million, of which $22.5 million will be reimbursed through revenue for DAS build-out projects from our telecom operators. We believe that our existing cash and cash equivalents, working capital and our cash flow from operations will be sufficient to fund our operations, planned capital expenditures and potential acquisitions for at least the next 12 months. There can be no assurance, however, that future industry-specific or other developments, general economic trends, or other matters will not adversely affect our operations or our ability to meet our future cash requirements. Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and size of our managed and operated location expansion efforts, the timing and extent of spending to support product development efforts, the timing of introductions of new solutions and enhancements to existing solutions and the continuing market acceptance of our solutions. We expect our capital expenditures for the remainder of 2014 will range from $17 million to $27 million, excluding capital expenditures for DAS build-out projects which are reimbursed through revenue from our telecom operator customers. The majority of our remaining 2014 capital expenditures will be used to build out residential broadband and IPTV networks for troops stationed on military bases pursuant to our contracts with the U.S. government. The investment of these resources will occur in advance of experiencing any direct benefit from them including generation of revenues. The U.S. government may modify, curtail or terminate its contracts with us, either at its convenience or for default based on performance. Any such modification, curtailment, or termination of one or more of our government contracts could have a material adverse effect on our earnings, cash flow and/or financial position. We may seek additional equity or debt financing to fund our capital requirements and any potential acquisitions. Additional funds may not be available on terms favorable to us, or at all. The following table sets forth cash flow data for the six months ended June 30: 2014 2013 (unaudited) (in thousands) Net cash provided by operating activities $ 15,508 $ 9,265 Net cash used in investing activities (32,833 ) (14,962 ) Net cash used in financing activities (2,059 ) (4,349 ) 25 -------------------------------------------------------------------------------- Table of Contents Net Cash Provided by Operating Activities For the six months ended June 30, 2014, we generated $15.5 million of net cash from operating activities, an increase of $6.2 million from the prior year comparative period. The increase is primarily due to a $5.0 million change in our operating assets and liabilities, net of effect of acquisition, a $4.4 million increase in depreciation and amortization expenses, a $3.1 million decrease in excess windfall tax benefits from stock option exercises, a $1.5 million increase in stock-based compensation expenses, and a $0.2 million increase in our net deferred tax liabilities. The increases were partially offset by the $7.6 million increase in our net loss and the $0.4 million change in fair value for our contingent consideration liabilities. Net Cash Used in Investing Activities For the six months ended June 30, 2014, we used $32.8 million in investing activities, an increase of $17.9 million from the prior year comparative period. This increase is primarily due to a $23.7 million increase in purchases of property and equipment. The increase was partially offset by the $4.9 million of cash used for the acquisition of Endeka during the six months ended June 30, 2013 and a $0.9 million increase in cash provided by net proceeds from sales of marketable securities. Net Cash Used in Financing Activities For the six months ended June 30, 2014, we used $2.1 million in financing activities, a decrease of $2.3 million from the prior year comparative period. This decrease is primarily due to $6.1 million of cash used for payment of certain assumed liabilities related to the acquisition of Endeka and $1.1 million of cash used for the repurchase of stock during the six months ended June 30, 2013. The decreases were partially offset by the $3.1 million decrease in excess windfall tax benefits from stock option exercises, $1.0 million in cash used to pay minimum statutory taxes related to our time-based RSUs that vested during the six months ended June 30, 2014, $0.3 million in cash used to pay holdback liabilities related to the Endeka acquisition during the six months ended June 30, 2014, a $0.3 million increase in cash used for capital leases and notes payable, and a $0.1 million decrease in proceeds from exercise of stock options. Off-Balance Sheet Arrangements We do not have any off-balance sheet financing arrangements and we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Critical Accounting Policies and Estimates There have been no material changes to our critical accounting policies and estimates from the information provided for the year ended December 31, 2013 in "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our annual report on Form 10-K filed by us with the SEC on March 17, 2014. Recently Issued Accounting Standards Information regarding recent accounting pronouncements is contained in Note 2 "Summary of Significant Accounting Policies" to the accompanying Condensed Consolidated Financial Statements included in Part I, Item 1, which is incorporated herein by this reference. |