TMCnet News
IPASS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Management's Discussion and Analysis of Financial Condition and Results of Operations (or "MD&A") is provided in addition to the condensed consolidated financial statements and notes, included elsewhere in this report, to assist readers in understanding our results of operations, financial condition, and cash flows. The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and with the MD&A in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013. We announced on July 1, 2014, that we signed and closed the sale of our Unity Managed Network Services business unit ("Unity business") on June 30, 2014. Our third quarter 2014 results of operations and all prior comparative periods are recasted to reflect the Unity business as a discontinued operation, and our MD&A focuses primarily on our continuing operations. This MD&A is organized as follows: Overview Discussion of our business Significant Trends and Events Operating, financial and other material trends and events that affect our company and may reflect our performance Key Operating Metrics Discussion of key metrics and measures that we use to evaluate our operating performance Critical Accounting Policies and Accounting policies and estimates that we believe Estimates are most important to understanding the assumptions and judgments incorporated in our reported financial results Results of Operations An analysis of our financial results comparing the three and nine months ended September 30, 2014, and September 30, 2013 Liquidity and Capital Resources An analysis of changes in our balance sheet and cash flows, and discussion of our financial condition and potential sources of liquidity The various sections of this MD&A contain forward-looking statements regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as "expect," "will," "anticipate," "intend," "believe," "estimate," variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements which refer to projections of our future financial performance, our anticipated trends in our business, and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified in "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013 and Form 10-Qs filed in 2014, for factors that may cause actual results to be different from those expressed in these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and, except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason. Investors and others should note that we announce material financial information to our investors using our investor relations website, SEC filings, press releases, public conference calls and webcasts. We also use social media to communicate with our customers and the public about our company, our products and services and other matters relating to our business and market. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the U.S. social media channels including the iPass Twitter Feed, the iPass LinkedIn Feed, the iPass Google+ Feed, the iPass Facebook Page, the iPass Blog, the iPass Instagram, the iPass Pinterest and Evan Kaplan's Twitter Feed. These social media channels may be updated from time to time. Overview With the world's largest commercial Wi-Fi network, iPass delivers mobility services for easy connectivity and roaming cost control. 14-------------------------------------------------------------------------------- Table of Contents iPass is a global Wi-Fi roaming leader for enterprises and telecom service providers and their consumer subscribers. We believe that we are uniquely positioned to take advantage of expanding global demand for Wi-Fi. iPass was incorporated in California in July 1996 and reincorporated in Delaware in June 2000. Our corporate headquarters are located in Redwood Shores, California. We are publicly traded on NASDAQ under symbol IPAS. We provide global enterprises and telecommunications carriers with cloud-based mobility management and Wi-Fi connectivity services. Through our proprietary technology platform and global Wi-Fi network, we offer enterprises internet connectivity services and significant cost savings. Based on this same technology platform and our global authentication and settlements infrastructure, we also offer global telecommunications carriers Wi-Fi enablement services allowing them to monetize their Wi-Fi networks and enable data roaming solutions for their subscribers. Strategic Mobility Assets We believe iPass has a unique set of mobility assets that provides us with competitive advantages. We see our three core assets as follows: Open Mobile Platform: Our Open Mobile (OM) platform is a cloud-based mobility management platform that securely manages network connectivity and subscribers across a wide variety of computing and mobile devices and provider networks. We believe this scalable subscriber management, billing and reporting platform is unique in the industry and would be time consuming and expensive to replicate. Integrated Authentication Fabric: We have a global authentication fabric of integrated servers and software that is interconnected with 158 unique global Wi-Fi networks. This infrastructure allows us to provide secure, highly-available and seamless four party global authentication, clearing and settlement of Wi-Fi users for our partners and customers. Global Wi-Fi Footprint: We have a Wi-Fi network footprint and supply chain that consists of more than 15 million hotspots in 120 countries and territories, including major airports, convention centers, airplanes, trains, train stations, hotels, restaurants, retail, and small business locations. Starting in the second quarter of 2014, we are now including both commercial grade venues and public access and community locations that are accessible in the iPass network. Our technology integration across multiple global network providers forms the basis of our network services and we believe creates a unique cost advantage for our customers. We typically contract with network service providers, integrate their networks into our global infrastructure, and monitor their performance to ensure that our customers have a consistent and reliable end user experience. Business Portfolio and Our Strategy (Continuing Operations) Mobility Services: We provide iPass Open Mobile Enterprise Services ("iPass OME" or "OME") to large enterprises to deliver enhanced network mobility services, addressing large enterprises' needs to manage their mobility economics, high speed network connectivity requirements and proliferation of mobile devices, including the "bring-your-own-device" trend. Our growth strategy for OME consists of focusing on increased penetration in existing customers, new customer acquisition via increased brand awareness, and continued optimization of the end user experience on our OM platform. We also provide our iPass Open Mobile Exchange services ("iPass OMX" or "OMX") to strategic partners that incorporate iPass OMX into their core products and services, geared for the mass market. iPass OMX strategic partners may include global OEMs, credit card companies, airline alliances, hotel brands and telecom carriers. We continue to focus on adding new channels as customers to further grow our OMX services. For a detailed discussion regarding our mobility business, including our strategy and our service offerings, see "Item 1. Business" included in our Annual Report on Form 10-K for the year ended December 31, 2013. Significant Trends and Events The following describes significant trends and events of our business during the third quarter of 2014: Continued Focus on our Open Mobile Business We continued to show solid progress against two key metrics for our OM business: (i) the number of active Open Mobile Platform users; and (ii) the number of Open Mobile Wi-Fi Network users. We grew our Open Mobile Platform users from 574,000 for the third quarter of 2013 and 753,000 for the second quarter of 2014 to 770,000 for the third quarter of 2014. In addition, our Open Mobile Wi-Fi Network users were 59,000 for the third quarter of 2013, 80,000 for the second quarter of 15-------------------------------------------------------------------------------- Table of Contents 2014, and 78,000 for the third quarter of 2014. While the third quarter is typically our seasonally slowest period due primarily to summer vacations in July and August throughout the European region, we exited the current quarter with 86,000 Open Mobile Wi-Fi Network users as of September 30, 2014, representing 34% growth from the same period in 2013 or 5% growth from June 30, 2014. Our Open Mobile growth has been driven by a combination of organic customer user and usage ramps, legacy platform customer migrations, and new customer acquisition. We are focused on growing Open Mobile revenues based on our ability to grow Open Mobile platform and Wi-Fi network users, especially through the continued deployment of our Open Mobile platform on smartphone and tablet devices. See "Key Operating Metrics" below for a full discussion of our user metrics. Continued Decline in our Legacy Revenues We define our legacy revenue to include Dial-up and 3G network, our iPC platform, and related platform services, as well as iPC driven network usage, including iPC user driven Wi-Fi and minimum commit shortfall. Legacy revenue declined from $24.8 million for the nine months ending September 30, 2013, to $10.1 million for the nine months ending September 30, 2014, a decline of 59%. We expect our legacy revenue to represent a declining percentage of our total Mobility revenue during the remainder of 2014 as customers migrate or terminate legacy service contracts. Sale of Unity Managed Network Servicing Business We announced on July 1, 2014, that we signed and closed the sale of the Unity business on June 30, 2014. Our third quarter 2014 results of operations and all prior comparative periods are recast to reflect the Unity business as a discontinued operation. Key Operating Metrics Described below are key metrics that we use to evaluate our operating performance and our success in transforming our business and driving future growth. OM Wi-Fi Network Users OM Wi-Fi Network Users is the number of our OM platform users each month in a given quarter that paid for iPass Wi-Fi network services. OM Platform Active Users OM Platform Active Users is the number of users who were billed Open Mobile platform fees and who have used or deployed Open Mobile. The following table summarizes the number of active users of iPass OME services (in thousands). Each metric below is calculated as the average number of active users per month, during a given quarter, for which a fee was billed by iPass for either Wi-Fi or Platform services: For the Quarter Ended September 30, June 30, March 31, December 31, September 30, 2014 2014 2014 2013 2013 Wi-Fi Network Users 78 80 71 67 59 Active Platform Users: 770 753 681 622 574 As mentioned above, organic growth of Wi-Fi Network users is slowed during the third quarter due to seasonal impacts of summer vacations, especially in Europe. While Network users declined in July and August, they rebounded in September to exit the quarter at 86,000 users. 16-------------------------------------------------------------------------------- Table of Contents Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") Adjusted EBITDA is used by our management as a measure of operating efficiency, financial performance and as a benchmark against our peers and competitors. In addition, we also use this metric as a factor in our incentive compensation payouts. Management also believes that Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to understand our performance excluding the impact of items which may obscure trends in our core operating performance. Furthermore, the use of Adjusted EBITDA facilitates comparisons with other companies in our industry which may use similar financial measures to supplement their GAAP results. We define Adjusted EBITDA as net loss adjusted for interest income, income taxes, depreciation and amortization, stock-based compensation, restructuring charges, net income (loss) from discontinued operations, collection of previously written off bad debt expense from bankruptcy proceeding, and certain state sales and federal tax charges. We adjust for these excluded items because we believe that, in general, these items possess one or more of the following characteristics: their magnitude and timing is largely outside of our control; they are unrelated to the ongoing operation of the business in the ordinary course; they are unusual or infrequent and we do not expect them to occur in the ordinary course of business; or non-cash expenses involving stock option grants and restricted stock issuances. Adjusted EBITDA is not a measure determined in accordance with GAAP and should not be considered in isolation or as a substitute for operating income (loss), net income (loss) or any other measure determined in accordance with GAAP. The following table reconciles Adjusted EBITDA to GAAP total net income (loss): Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 (In thousands) Adjusted EBITDA $ (3,128 ) $ (2,196 ) $ (11,368 ) $ (5,777 ) Interest income (expense) (29 ) 2 (95 ) 9 Income tax benefit 1,355 31 5,538 714 Depreciation of property and equipment (812 ) (520 ) (2,363 ) (1,578 ) Stock-based compensation (129 ) (869 ) (1,086 ) (2,387 ) Restructuring charges and related adjustments (715 ) (13 ) (745 ) (639 ) Certain state sales and federal tax items - - - 10 Collection of previously written off bad debt expense from bankruptcy proceeding 345 - 345 - Net income (loss) from discontinued operations (1,296 ) 723 20,693 1,845 GAAP Total Net income (loss) $ (4,409 ) $ (2,842 ) $ 10,919 $ (7,803 ) In the table above, Adjusted EBITDA for prior periods has been recast to exclude net income from discontinued operations and related changes to adjustment items such as tax, depreciation and stock based compensation. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements which have been prepared in accordance with the accounting principles generally accepted in the United States ("GAAP"). The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on our historical experience, knowledge of current conditions and our belief of what could occur in the future considering available information, including assumptions that we believe to be reasonable under the circumstances. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results could differ materially from the amounts reported based on these policies. On an ongoing basis, we evaluate our estimates and judgments. There have been no significant changes in our critical accounting policies and estimates during the three and nine months ended September 30, 2014, as compared to the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2013. 17-------------------------------------------------------------------------------- Table of Contents In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 changes the requirements for reporting discontinued operations under current U.S. GAAP (Accounting Standards Codification Subtopic 205-20 Discontinued Operations, "ASC 205-20") and provides a new definition of discontinued operations. ASU No. 2014-08 is effective prospectively for fiscal years, and interim periods within those years beginning after December 15, 2014. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. We have not adopted ASU 2014-08 in the current fiscal quarter. We do not expect that this guidance will materially impact our consolidated financial statements. On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting. On August 27, 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which requires management to assess an entity's ability to continue as a going concern, and provide related footnote disclosures in certain circumstances. The new standard is effective for us in the first annual period ending after December 31, 2016. Early adoption is permitted. We have not adopted ASU 2014-15 in the current fiscal quarter. We do not expect that this guidance will materially impact our consolidated financial statements. Results of Operations Sources of Revenues On June 30, 2014, we entered into an agreement and completed the sale of our Unity business. Accordingly, we currently have a single reportable operating segment, Mobility Services, and analyze revenue from continuing operations. Within Mobility Services, we differentiate and analyze our Open Mobile and legacy generated revenues separately. Open Mobile generated revenues consist of: • Network-Wi-Fi and minimum customer commitments based on the number of network users sourced from the Open Mobile platform. • Platform-Fees based on the number of Active Open Mobile monetized platform users and other fees specific to providing additional value add services to Open Mobile customers. • Open Mobile Exchange-Revenues generated from our OMX customers. Legacy generated revenues consist of Dial-up and 3G network, our iPC platform, and related platform services, as well as iPC driven network usage, including iPC user driven Wi-Fi and minimum commit shortfall. Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 (In thousands) Mobility Services $ 17,250 $ 18,539 $ 52,649 $ 59,736 Open Mobile 14,611 12,563 42,533 34,966 Open Mobile Enterprise 13,827 11,930 40,329 33,351 Network 9,819 7,867 28,176 21,401 Platform 4,008 4,063 12,153 11,950 Open Mobile Exchange 784 633 2,204 1,615 Legacy iPC 2,639 5,976 10,116 24,770 For the three months ended September 30, 2014, Mobility Services revenue decreased $1.3 million or 7% compared to the same period in 2013 as the decrease in legacy iPC revenue of $3.3 million outpaced the increase in Open 18-------------------------------------------------------------------------------- Table of Contents Mobile ("OM") revenue of $2.0 million. Legacy iPC declines were attributed to customer terminations, anticipated usage reductions in our 3G and Dial-up services, and continued migrations to OM. Growth in OM was attributable to organic growth of OM network and active platform users, and migration of Legacy iPC customers. For the nine months ended September 30, 2014, Mobility Services revenue decreased $7.1 million or 12% compared to the same period in 2013 as the decrease in legacy iPC revenue of $14.7 million outpaced the increase in Open Mobile ("OM") revenue of $7.6 million. Legacy iPC declines were attributed to customer terminations, anticipated usage reductions in our 3G and Dial-up services, and continued migrations to OM. Growth in OM was attributable to the organic growth of OM network and active platform users, and migration of Legacy iPC customers. Network Gross Margin We use network gross margin as a metric to assist us in assessing the profitability of our various network services. Our overall network gross margin is defined as network revenue less network access costs divided by network revenue. Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 Network Gross Margin (%) 38.6 % 44.8 % 40.1 % 46.4 % For the three and nine months ending September 30, 2014, compared to the same periods in 2013, network gross margin decreased by 6.2 and 6.3 percentage points, primarily due to decreases in high margin revenue streams such as monthly minimum commitment revenue and Dial-up, as well as the impact of higher Wi-Fi usage by customers on flat rate price plans. Operating Expenses Network Access Costs (NAC) NAC consist of charges for network access which we pay to our network service providers and other direct cost of sales. Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 (Dollars in thousands) Network access costs $ 7,584 7,092 $ 22,462 $ 21,942As a percentage of total revenue 44.0 % 38.3 % 42.7 % 36.7 % For the three months ended September 30, 2014, compared to the same period in 2013, network access costs increased approximately $0.5 million or 7% primarily due to the increase of OME network access costs of $1.0 million driven by the growth in Wi-Fi network users and usage, partially offset by the decrease of 3G network access costs of $0.5 million due to a decline on 3G legacy customer. In addition, network access costs as a percentage of revenue increased by 5.7 percentage points from 38.3% for the three months ended September 30, 2013 to 44.0% for the same period in 2014 primarily due to the decrease in minimum commitment and platform revenue of 21% and 15%, respectively. For the nine months ended September 30, 2014, compared to the same period in 2013, network access costs increased approximately $0.5 million or 2% primarily due to the increase of OME network access costs of $1.7 million driven by the growth in Wi-Fi network users and usage as well as the increase in OMX network access costs of $0.2 million, partially offset by the decrease of 3G network access costs of $1.4 million due to a decline on 3G legacy customer. In addition, network access costs as a percentage of revenue increased by 6.0 percentage points from 36.7% for the nine months ended September 30, 2013 to 42.7% for the same period in 2014 primarily due to the decrease in minimum commitment and platform revenue of 27% and 16%, respectively. Network Operations Network operations expenses consist of compensation and benefits for our network engineering, customer support and network access quality personnel, outside consultants, transaction center fees, network equipment depreciation, and allocated overhead costs. 19-------------------------------------------------------------------------------- Table of Contents Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 (Dollars in thousands)Network operations expense $ 3,093 $ 3,150 $ 10,146 $ 9,267 As a percentage of total revenue 18.0 % 17.0 % 19.3 % 15.5 % Network operations expense for the three months ended September 30, 2014, remained fairly consistent to the same period in 2013. Network operations expense for the nine months ended September 30, 2014, increased by approximately $0.9 million or 9% compared to the same period in 2013, primarily due to an increase in depreciation and maintenance expenses of $1.1 million as we have invested to refresh our technology infrastructure, partially offset by an decrease in headcount-related expenses of $0.2 million. Research and Development Research and development expenses consist of compensation and benefits for our research and development personnel, consulting, and allocated overhead costs. Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 (Dollars in thousands)Research and development expense $ 2,853 $ 3,171 $ 9,114 $ 10,199 As a percentage of total revenue 16.5 % 17.1 % 17.3 % 17.1 % For the three months ended September 30, 2014, research and development expense decreased by approximately $0.3 million or 10% compared to the same period in 2013, mainly due to the decrease in headcount and consulting expenses of $0.3 million as our OM platform has reached increasing product maturity. For the nine months ended September 30, 2014, research and development expense decreased by approximately $1.1 million or 11% compared to the same period in 2013, mainly due to the decrease in headcount, consulting, and maintenance expenses of $1.1 million as our OM platform has reached increasing product maturity. Sales and Marketing Sales and marketing expenses consist of compensation, benefits, advertising and promotion costs, and allocated overhead costs. Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 (Dollars in thousands)Sales and marketing expenses $ 3,548 $ 3,892 $ 12,325 $ 12,134 As a percentage of total revenue 20.6 % 21.0 % 23.4 % 20.3 % Sales and marketing expenses for the three months ended September 30, 2014, decreased by approximately $0.3 million or 9% compared to the same period in 2013, primarily due the reduction of headcount and travel related costs of $0.5 million, offset by increased focus on marketing efforts, resulting in an increase in marketing program expenses of $0.2 million. Sales and marketing expenses for the nine months ended September 30, 2014 increased by approximately $0.2 million or 2% compared to the same period in 2013, primarily due to the increase of marketing program due to increased focus on marketing efforts of $0.3 million, offset by the decrease in headcount costs of $0.1 million. General and Administrative 20-------------------------------------------------------------------------------- Table of Contents General and administrative expenses consist primarily of compensation and benefits for general and administrative personnel, legal and accounting expenses. Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 (Dollars in thousands)General and administrative expenses $ 4,286 $ 4,664 $ 13,287 $ 15,584 As a percent of total revenue 24.8 % 25.2 % 25.2 % 26.1 % General and administrative expenses for the three months ended September 30, 2014, decreased by approximately $0.4 million or 8% compared to the same period in 2013, primarily due to a decrease in headcount, facilities and consulting related costs of $0.4 million. The decrease in headcount-related costs are associated with ongoing cost management initiatives, and the decrease due to spend in 2013 related to post go-live support for our new ERP system. General and administrative expenses for the nine months ended September 30, 2014, decreased by approximately $2.3 million or 15% compared to the same period in 2013, primarily due to a decrease in headcount, facilities, and professional service related costs of $1.6 million associated with ongoing cost management initiatives, and a decrease in consulting expense by $0.7 million mainly due to spend in 2013 related to post go-live support for our new ERP system. Other Income and Expenses Foreign Exchange Gains and Losses Foreign exchange gains and losses primarily include realized and unrealized gains and losses on foreign currency transactions. Foreign currency exchange rate fluctuations impact the re-measurement of certain assets and liabilities denominated in currencies other than the U.S. Dollar and generate unrealized foreign exchange gains or losses. In addition, some of our network access costs are invoiced in currencies other than the U.S. Dollar. The transactional settlement of these outstanding invoices and other cross-currency transactions generate realized foreign exchange gains or losses depending on the fluctuation of exchange rates between the date of invoicing and the date of payment. For the three and nine months ended September 30, 2014 and 2013, we did not enter into any hedging contracts. Foreign exchange gain for the three months ended September 30, 2014 was less than $0.1 million. Foreign exchange loss for the nine months ended September 30, 2014 was approximately $0.1 million. Foreign exchange loss for the three and nine months ended September 30, 2013 was approximately $0.1 million and $0.3 million, respectively. Provision for Income Taxes Income tax benefit for the three months ended September 30, 2014, was approximately $1.4 million, compared to zero income tax benefit for the same period in 2013. Income tax benefit for the nine months ended September 30, 2014 and 2013, was approximately $5.5 million and $0.7 million, respectively. The income tax benefit recorded in the three and nine months ended September 30, 2014 and 2013, primarily related to the utilization of tax losses from continuing operations against discontinued operations gains pursuant to the intraperiod allocation rules of ASC 740 Income Taxes, which requires that income tax expense (benefit) be allocated to continuing and discontinued operations for each year for which those items are presented. Divestiture of Business Segment We announced on July 1, 2014, that we had completed the sale of our Unity business for $28.1 million to Tolt Solutions, and accrued approximately $2.2 million of transaction costs. Approximately $1.5 million of transaction costs were paid in the third quarter of 2014, and remaining balance is expected to be paid in the fourth quarter of 2014. Of the purchase price, $1.4 million was placed in an escrow account until June 30, 2015, to satisfy any claims for the indemnification obligations of iPass for breaches of representations, warranties and covenants and certain other specified matters. The sale resulted in a before tax gain of $25.0 million in the second quarter of 2014. The purchase agreement was signed and the sale was completed on June 30, 2014. Unity focused on delivering high speed Wi-Fi and WAN managed network solutions to customers in a variety of industries, including retail, financial services, and healthcare. In accordance with applicable accounting guidance for the disposal of long-lived assets, the results of the Unity business are presented as discontinued operations and, as such, have been excluded from continuing operations and from segment results for all periods presented. 21-------------------------------------------------------------------------------- Table of Contents The following table presents the revenues and components of discontinued operations, net of tax. Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 Revenue - 8,330 15,458 25,427 Income from discontinued operations before income taxes - 1,095 1,506 2,886 Gain on sale of discontinued operations before income taxes - - 25,014 - Provision for income taxes (1,296 ) (372 ) (5,827 ) (1,041 ) Income from discontinued operations, net of tax $ (1,296 ) $ 723 $ 20,693 $ 1,845 The above table excludes certain shared overhead costs and transfer pricing adjustments that were previously allocated to the Unity business segment in the historical iPass consolidated financial statements that were filed with the Securities and Exchange Commission. The provisions for income taxes primarily reflect tax expense on discontinued operations including the gain on sale, which is mostly offset by the benefit in continuing operations. Liquidity and Capital Resources We had cash and cash equivalents of $37.1 million at September 30, 2014, compared to $24.0 million at December 31, 2013. Nine months ended September 30, 2014 2013 (In thousands) Cash Flows Net cash used in operating activities $ (12,234 ) $ (1,825 ) Net cash provided by (used in) investing activities 25,738 (1,033 ) Net cash provided by (used in) financing activities (406 ) 1,237 Net increase (decrease) in cash and cash equivalents $ 13,098 $ (1,621 ) Operating Activities Net cash used in operating activities increased by approximately $10.4 million from $1.8 million for the nine months ended September 30, 2013 to $12.2 million for the same period in 2013. This increase is mainly due to an increase in net loss after adjusting for the gain on sale of discontinued operations, and changes in working capital mainly driven by timing of payments and reduction of accrued liabilities after accounting for sales of Unity as discontinued operation. Investing Activities Net cash provided by investing activities increased by approximately $26.7 million from the net cash used in investing activities of $1.0 million for the nine months ended September 30, 2013 to the net cash provided by investing activities of $25.7 million for the same period in 2014. This increase is mainly due to cash proceeds from the sale of discontinued operations of $26.8 million, partially offset by $1.1 million of purchases of property and equipment. Financing Activities Net cash used in financing activities increased by approximately $1.6 million from the net cash provided by financing activities of $1.2 million for the nine months ended September 30, 2013 to the net cash used in financing activities of $0.4 million for the same period in 2014, mainly due to a decrease in the proceeds from the exercise of stock options of $1.0 million and approximately $0.6 million of principal payments for vendor financed property and equipment. Sources of Cash and Future Cash Requirements 22-------------------------------------------------------------------------------- Table of Contents We have historically relied on existing cash and cash equivalents and cash flow from operations for our liquidity needs. We use a professional investment management firm to manage a large portion of our cash which is invested primarily in money market accounts. We believe that based on our current business plan and revenue prospects and our anticipated cash flows from operations, our existing cash balances will be sufficient to meet our working capital and operating resource expenditure requirements for at least the next twelve months. The amount of cash and cash equivalents held by our foreign subsidiaries as of September 30, 2014, and December 31, 2013, was $0.8 million and $0.9 million, respectively. We currently do not intend to distribute any of our cumulative earnings by our foreign subsidiaries to the parent company in the U.S. Primary Uses of Cash Our principal use of cash during the nine months ended September 30, 2014, was for network access costs, payroll related expenses, transactions costs related to the sale of the Unity business segment, settlement of restructuring obligations, and general operating expenses including marketing, office rent, and capital expenditures. Contractual Obligations The following are our contractual obligations as of September 30, 2014: Less Than Total 1 Year 1-3 Years (In thousands)Operating Lease Obligations $ 2,255 $ 1,705 $ 550 Other Purchase Commitments 9,116 5,668 3,448 Total Contractual Obligations(1) $ 11,371 $ 7,373 $ 3,998 (1) See Note 8. Commitments and Contingencies. The Company expects to pay principal payments related to vendor financed property and equipments of $0.3 million, $1.1 million and $0.9 million in the last three months of 2014, and in fiscal year 2015, and fiscal year 2016, respectively. For information on our contractual commitments at December 31, 2013, see "Contractual Obligations" in Item 7, Management's Discussion and Analysis of Financial Conditions and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2013. Contractual obligations at December 31, 2013, were $8.4 million. Off-Balance Sheet Arrangements As part of our ongoing business, we do not participate in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. We did not have any off-balance sheet arrangements at September 30, 2014, and December 31, 2013, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. |