UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
S |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2012
£ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from_______to_______
Commission file number: 000-32451
LIGHTYEAR NETWORK SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Nevada | 91-1829866 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
1901 Eastpoint Parkway Louisville, Kentucky |
40223 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code: 502-244-6666
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | £ | Accelerated filer | £ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | S |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ¨ No x
As of November 9, 2012, there were 22,086,641 shares of the issuer’s common stock outstanding.
Lightyear Network Solutions, Inc. and Subsidiaries
Table of Contents
PART I | ||
FINANCIAL INFORMATION | ||
ITEM 1. Financial Statements. | ||
Condensed Consolidated Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011 | 1 | |
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and 2011 | 2 | |
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Deficiency for the Nine Months Ended September 30, 2012 | 3 | |
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 | 4 | |
Notes to Unaudited Condensed Consolidated Financial Statements | 5 | |
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 13 | |
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk. | 18 | |
ITEM 4. Controls and Procedures. | 18 | |
PART II | ||
OTHER INFORMATION | ||
ITEM 1. Legal Proceedings. | 19 | |
ITEM 1A. Risk Factors. | 19 | |
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds. | 19 | |
ITEM 3. Defaults Upon Senior Securities. | 19 | |
ITEM 4. Mine Safety Disclosures. | 19 | |
ITEM 5. Other Information. | 19 | |
ITEM 6. Exhibits. | 19 | |
Signatures. | 20 |
Lightyear Network Solutions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, | December 31, | |||||||
2012 | 2011 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash | $ | 27,841 | $ | 108,133 | ||||
Accounts receivable, net | 4,730,574 | 5,237,404 | ||||||
Vendor deposits | 1,898,788 | 1,771,028 | ||||||
Inventories, net | 244,707 | 335,964 | ||||||
Prepaid expenses and other current assets | 1,525,112 | 2,523,039 | ||||||
Total Current Assets | 8,427,022 | 9,975,568 | ||||||
Property and equipment, net | 6,862,059 | 7,161,057 | ||||||
Intangible assets, net | 1,601,249 | 1,928,749 | ||||||
Total Assets | $ | 16,890,330 | $ | 19,065,374 | ||||
Liabilities and Stockholders' Deficiency | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 6,781,160 | $ | 7,216,117 | ||||
Interest payable - related parties | 46,370 | 47,282 | ||||||
Accrued agent commissions | 520,717 | 530,268 | ||||||
Accrued agent commissions - related parties | 986 | 1,069 | ||||||
Deferred revenue | 489,636 | 427,715 | ||||||
Other liabilities | 1,616,476 | 1,876,163 | ||||||
Other liabilities - related parties | 127,111 | 81,718 | ||||||
Current portion of notes payable | 921,907 | 895,918 | ||||||
Current portion of capital lease obligations | 174,355 | 239,203 | ||||||
Total Current Liabilities | 10,678,718 | 11,315,453 | ||||||
Notes payable, non-current portion | 2,638,783 | 3,334,992 | ||||||
Capital lease obligation, non-current portion | 741,730 | 758,750 | ||||||
Note payable - related party | 6,250,000 | 6,250,000 | ||||||
Deferred tax liability, non-current portion, net | 326,683 | 326,683 | ||||||
Total Liabilities | 20,635,914 | 21,985,878 | ||||||
Commitments and contingencies | ||||||||
Stockholders' Deficiency: | ||||||||
Common stock, $0.001 par value; 70,000,000 shares authorized; 22,086,641 shares issued and outstanding at September 30, 2012 and December 31, 2011 | 22,087 | 22,087 | ||||||
Note receivable from affiliate | (1,223,203 | ) | (1,223,203 | ) | ||||
Additional paid-in capital | 10,067,172 | 9,490,226 | ||||||
Accumulated deficit | (12,611,640 | ) | (11,209,614 | ) | ||||
Total Stockholders' Deficiency | (3,745,584 | ) | (2,920,504 | ) | ||||
Total Liabilities and Stockholders' Deficiency | $ | 16,890,330 | $ | 19,065,374 |
See Notes to these Condensed Consolidated Financial Statements
-1- |
Lightyear Network Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(unaudited)
For The Three Months | For The Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenues | $ | 16,690,248 | $ | 17,409,514 | $ | 50,484,592 | $ | 53,886,561 | ||||||||
Cost of revenues | 11,535,727 | 11,089,139 | 33,786,834 | 34,735,187 | ||||||||||||
Gross Profit | 5,154,521 | 6,320,375 | 16,697,758 | 19,151,374 | ||||||||||||
Operating Expenses | ||||||||||||||||
Commission expense | 1,355,499 | 1,544,955 | 4,246,221 | 4,581,358 | ||||||||||||
Commission expense - related parties | 18,435 | 13,734 | 54,912 | (2,834 | ) | |||||||||||
Depreciation and amortization | 332,423 | 437,182 | 999,335 | 1,282,970 | ||||||||||||
Bad debt expense | 314,423 | 195,429 | 774,301 | 698,937 | ||||||||||||
Selling, general and administrative expenses | 3,677,626 | 4,098,751 | 11,578,934 | 13,341,507 | ||||||||||||
Selling, general and administrative expenses - related party | - | 75,159 | 96,769 | 125,231 | ||||||||||||
Total Operating Expenses | 5,698,406 | 6,365,210 | 17,750,472 | 20,027,169 | ||||||||||||
Loss From Operations | (543,885 | ) | (44,835 | ) | (1,052,714 | ) | (875,795 | ) | ||||||||
Other (Expense) Income | ||||||||||||||||
Interest income | 5,704 | 8,151 | 8,779 | 24,183 | ||||||||||||
Interest income - related parties | - | 192,664 | - | 570,967 | ||||||||||||
Interest expense | (57,424 | ) | (77,180 | ) | (182,256 | ) | (234,878 | ) | ||||||||
Interest expense - related parties | (70,075 | ) | (98,459 | ) | (209,985 | ) | (296,276 | ) | ||||||||
Other income | 32,723 | 122,304 | 34,150 | 233,372 | ||||||||||||
Total Other (Expense) Income | (89,072 | ) | 147,480 | (349,312 | ) | 297,368 | ||||||||||
(Loss) income before income taxes | (632,957 | ) | 102,645 | (1,402,026 | ) | (578,427 | ) | |||||||||
Income tax benefit | - | - | - | 123,800 | ||||||||||||
Net (Loss) Income | (632,957 | ) | 102,645 | (1,402,026 | ) | (454,627 | ) | |||||||||
Cumulative Preferred Stock Dividends | - | (383,122 | ) | - | (1,136,877 | ) | ||||||||||
Loss Attributable to Common Stockholders | $ | (632,957 | ) | $ | (280,477 | ) | $ | (1,402,026 | ) | $ | (1,591,504 | ) | ||||
Net Loss Per Common Share - Basic and Diluted | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.06 | ) | $ | (0.07 | ) | ||||
Weighted Average Number of Common Shares Outstanding - Basic and Diluted | 22,344,829 | 22,242,475 | 22,312,119 | 21,641,444 |
See Notes to these Condensed Consolidated Financial Statements
-2- |
Lightyear Network Solutions, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders' Deficiency
For The Nine Months Ended September 30, 2012
(unaudited)
Note | ||||||||||||||||||||||||
Receivable | Additional | |||||||||||||||||||||||
Common Stock | From | Paid-In | Accumulated | |||||||||||||||||||||
Shares | Amount | Affiliate | Capital | Deficit | Total | |||||||||||||||||||
Balance - December 31, 2011 | 22,086,641 | $ | 22,087 | $ | (1,223,203 | ) | $ | 9,490,226 | $ | (11,209,614 | ) | $ | (2,920,504 | ) | ||||||||||
Stock-based compensation | - | - | - | 576,946 | - | 576,946 | ||||||||||||||||||
Net loss | - | - | - | - | (1,402,026 | ) | (1,402,026 | ) | ||||||||||||||||
Balance - September 30, 2012 | 22,086,641 | $ | 22,087 | $ | (1,223,203 | ) | $ | 10,067,172 | $ | (12,611,640 | ) | $ | (3,745,584 | ) |
See Notes to these Condensed Consolidated Financial Statements
-3- |
Lightyear Network Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
For The Nine Months | ||||||||
Ended September 30, | ||||||||
2012 | 2011 | |||||||
Cash Flows From Operating Activities | ||||||||
Net loss | $ | (1,402,026 | ) | $ | (454,627 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 999,335 | 1,282,970 | ||||||
Provision for bad debt expense | 774,301 | 698,937 | ||||||
Stock-based compensation | 576,946 | 473,345 | ||||||
Interest income from affiliate | - | (570,967 | ) | |||||
Deferred taxes | - | (123,800 | ) | |||||
Gain on sale of fixed assets | - | (121,619 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (267,471 | ) | 259,032 | |||||
Other assets | - | (5,254 | ) | |||||
Vendor deposits | (127,760 | ) | (240,528 | ) | ||||
Inventories | 91,257 | (162,435 | ) | |||||
Prepaid expenses and other current assets | 997,927 | (70,232 | ) | |||||
Accounts payable | (434,957 | ) | 290,968 | |||||
Interest payable - related parties | (912 | ) | (48,535 | ) | ||||
Accrued agent commissions | (9,551 | ) | (22,137 | ) | ||||
Accrued agent commissions - related parties | (83 | ) | (22,279 | ) | ||||
Deferred revenue | 61,921 | (1,531,659 | ) | |||||
Other liabilities | (259,687 | ) | 11,849 | |||||
Other liabilities - related parties | 45,393 | (5,049 | ) | |||||
Total Adjustments | 2,446,659 | 92,607 | ||||||
Net Cash Provided by (Used in) Operating Activities | 1,044,633 | (362,020 | ) | |||||
Cash Flows From Investing Activities | ||||||||
Purchases of property and equipment | (246,607 | ) | (1,054,972 | ) | ||||
Proceeds from sale of fixed assets | - | 191,511 | ||||||
Net Cash Used in Investing Activities | (246,607 | ) | (863,461 | ) | ||||
Cash Flows From Financing Activities | ||||||||
Repayments of obligations payable - related party | - | (1,000,000 | ) | |||||
Repayments of capital lease obligations | (208,098 | ) | (256,020 | ) | ||||
Repayments of notes payable | (670,220 | ) | (320,428 | ) | ||||
Repayments of short term borrowings | - | (481,342 | ) | |||||
Proceeds from notes payable | - | 2,000,000 | ||||||
Proceeds from cash surrender value of life insurance | - | 316,736 | ||||||
Net Cash (Used In) Provided by Financing Activities | (878,318 | ) | 258,946 | |||||
Net Decrease In Cash | (80,292 | ) | (966,535 | ) | ||||
Cash - Beginning | 108,133 | 1,009,209 | ||||||
Cash - Ending | $ | 27,841 | $ | 42,674 | ||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 384,255 | $ | 498,095 | ||||
Non-cash investing and financing activites: | ||||||||
Purchase of property and equipment via capital lease | $ | 126,230 | $ | 143,370 |
See Notes to these Condensed Consolidated Financial Statements
-4- |
Lightyear Network Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note A – Organization, Operations and Basis of Presentation
Organization and Operations
Lightyear Network Solutions, Inc. (“LNSI”) was incorporated in 1997 and operates through its wholly owned subsidiaries, Lightyear Network Solutions, LLC, a Kentucky limited liability company organized in 2003 (“Lightyear LLC”), and SE Acquisitions, LLC d/b/a Lightyear Network Solutions of Kentucky, a Kentucky limited liability company organized on June 22, 2010, (“Lightyear-KY”). The Company was organized for the purpose of selling and marketing telecommunication services and solutions, and owning other companies which sell and market telecommunication services and solutions. Lightyear provides telecommunications services throughout the United States and Puerto Rico primarily through a distribution network of authorized independent agents and representatives. Lightyear is a licensed local carrier in 42 states and provides long distance service in 49 states and Puerto Rico. Lightyear delivers service to approximately 70,000 customer locations with a significant concentration in the five state area of Kentucky, Ohio, Indiana, Florida and Georgia. In addition to long distance and local service, Lightyear currently offers a wide array of telecommunications services including internet/intranet, calling cards, advanced data, wireless, Voice over Internet Protocol (“VoIP”) and conference calling. Lightyear maintains its own network infrastructure and is a telecommunications reseller and competes, both directly at the wholesale level and through agents and representatives, at the retail level. Lightyear is subject to regulatory requirements imposed by the Federal Communications Commission (“FCC”) and state and local governmental agencies. Regulations by the FCC as well as state agencies include limitations on types of services and service areas offered to the public.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the condensed consolidated financial statements of Lightyear Network Solutions, Inc. and Subsidiaries (“Lightyear,” or the “Company”) as of September 30, 2012 and for the three and nine months then ended. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the operating results for the full year. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the consolidated financial statements and related disclosures of Lightyear for the year ended December 31, 2011 which were filed with the Securities and Exchange Commission on March 30, 2012. The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or nonrecognized subsequent events that would have required further adjustment or disclosure in the unaudited condensed consolidated financial statements.
Liquidity Plan
Since February 12, 2010, the date of the Company’s reverse merger transaction, Lightyear had an accumulated deficit of approximately $12.6 million. As of September 30, 2012, Lightyear had a cash balance of $27,841, a working capital deficit of $2.3 million and was in violation of two of its debt covenants. On November 6, 2012, a noteholder waived two third quarter 2012 debt covenant violations that resulted from earnings forecast shortfalls. In addition, the noteholder waived the same two debt covenants for the fourth quarter of 2012 (see Note D).
For the nine months ended September 30, 2012, the Company’s operating activities provided $1.0 million of cash, while $0.2 million and $0.9 million were used to purchase property and equipment and to service debt, respectively. The Company’s future capital requirements are expected to be driven by (i) network build-out costs; (ii) debt reduction and debt service (including a $6.3 million principal payment due to a related party on November 30, 2013 – see Note E); (iii) public/investor relations costs; (iv) acquisition opportunities; and (v) the need to supplement working capital levels. The Company believes that its current cash and cash expected to be generated from operating activities will be sufficient to meet its working capital and capital expenditure requirements for at least the next 12 months. In addition, the Company continues to investigate the capital markets for sources of funding, which could take the form of additional debt or equity financings, however there can be no assurance that the Company will be successful in securing such capital. If the Company is unable to raise additional funds, the Company might (a) initiate additional cost reductions; (b) forego acquisition or network build-out opportunities; and/or (c) seek extensions of the scheduled payment obligations, including the long term related party note payable.
-5- |
Lightyear Network Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note B – Summary of Significant Accounting Policies
Principles of Consolidation
The balance sheets, statements of operations and cash flows of the Company and its wholly-owned subsidiaries have been included in our condensed consolidated financial statements. All intercompany accounts and transactions have been eliminated. The Company and its wholly-owned subsidiaries are managed as a single business and a single segment. Activity with its wholly-owned subsidiary, Lightyear Alliance of Puerto Rico, LLC, is insignificant.
Estimates
The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates include the reserves related to receivables, the recoverability and useful lives of long lived assets, anticipated carrier credits, the valuation allowance related to deferred tax assets and the valuation of equity instruments.
Accounts Receivable
Accounts receivable are shown net of an allowance for doubtful accounts of $1,623,954 and $1,215,735 as of September 30, 2012 and December 31, 2011, respectively. The Company’s management has established an allowance for doubtful accounts sufficient to cover probable and reasonably estimable losses. The allowance for doubtful accounts considers a number of factors, including collection experience, current economic trends, estimates of forecasted write-offs, aging of the accounts receivable portfolios, industry norms, regulatory decisions and other factors. Management’s policy is to fully reserve all accounts that are 180 days past due. Accounts are written off after use of a collection agency is deemed to be no longer effective.
Revenue Recognition
Telecommunications services income such as access revenue and usage revenue are recognized on the accrual basis as services are provided. In general, access revenue is billed one month in advance and is recognized when earned. Wireless handheld devices are sold at a discount when bundled with a long-term wireless service contract. We recognize the equipment revenue and associated costs when title has passed and the equipment has been accepted by the customer. The Company provides administrative and support services to its agents and pays commissions based on revenues from the agents’ accounts. Amounts invoiced to customers in advance of services are reflected as deferred revenues.
The Company pays certain agents an initial lump sum commission. A portion of this commission is deferred and is amortized over a three month period.
Cost of revenues represents primarily the direct costs associated with the cost of transmitting and terminating traffic on other carriers’ facilities.
Commissions paid to acquire customer call traffic are expensed in the period when associated call revenues are recognized.
The accounting standards guidance provides for how taxes collected from customers and remitted to governmental authorities should be presented in the income statement. The guidance states that if taxes are reported on a gross basis (included as revenue) a company should disclose those amounts, if significant. The Company does not include excise and other sales related taxes in its revenues.
Fair Value of Financial Instruments
The Company’s financial instruments are cash, accounts receivable and accounts payable each of which approximate their fair values based upon their short term nature. The Company’s other financial instruments include notes payable, capital lease obligations and obligations payable. The carrying value of these instruments approximates fair value, as they bear terms and conditions comparable to market for obligations with similar terms and maturities.
-6- |
Lightyear Network Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note B – Summary of Significant Accounting Policies – Continued
Stock-Based Compensation
The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the award is measured on the grant date. For non-employees, the award is measured on the grant date and then non-vested amounts are re-measured at each financial reporting date. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period.
Loss Per Common Share
Basic loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted loss per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and warrants (using the treasury stock method) and the conversion of the Company’s convertible preferred stock (using the if-converted method).
The following table reconciles the numerator and denominator for the calculation:
For The Three Months | For The Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Basic and diluted loss per share: | ||||||||||||||||
Numerator: | ||||||||||||||||
Net (loss) income | $ | (632,957 | ) | $ | 102,645 | $ | (1,402,026 | ) | $ | (454,627 | ) | |||||
Cumulative preferred stock dividends | - | (383,122 | ) | - | (1,136,877 | ) | ||||||||||
Numerator for basic and diluted loss per share: | ||||||||||||||||
Net loss attributable to common stockholders | $ | (632,957 | ) | $ | (280,477 | ) | $ | (1,402,026 | ) | $ | (1,591,504 | ) | ||||
Denominator: | ||||||||||||||||
Weighted average common stock shares outstanding | 22,086,641 | 22,089,888 | 22,086,641 | 21,528,021 | ||||||||||||
Weighted average warrants outstanding with an exercise price of $0.01 or less | 258,188 | 152,587 | 225,478 | 113,423 | ||||||||||||
Weighted average basic and diluted shares outstanding | 22,344,829 | 22,242,475 | 22,312,119 | 21,641,444 | ||||||||||||
Loss per basic and diluted share: | ||||||||||||||||
Net (loss) income | $ | (0.03 | ) | $ | 0.01 | $ | (0.06 | ) | $ | (0.02 | ) | |||||
Cumulative preferred stock dividends | - | (0.02 | ) | - | (0.05 | ) | ||||||||||
Net loss attributable to common stockholders | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.06 | ) | $ | (0.07 | ) |
The following securities are excluded from the calculation of weighted average dilutive common shares, because their inclusion would have been antidilutive:
As of | ||||||||
September 30, | ||||||||
2012 | 2011 | |||||||
Employee stock options | 780,500 | 820,333 | ||||||
Warrants | 1,059,327 | 1,047,883 | ||||||
Convertible preferred stock | - | 9,500,000 | ||||||
Unvested restricted stock | - | 12,987 | ||||||
Total potentially dilutive shares | 1,839,827 | 11,381,203 |
-7- |
Lightyear Network Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note B – Summary of Significant Accounting Policies – Continued
Recently Issued and Adopted Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, “Intangibles—Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment." This ASU simplifies the impairment testing of indefinite-lived intangible assets by eliminating the requirement to perform an annual quantitative test for impairment, unless a qualitative assessment reveals that impairment is likely. While the update is effective for impairment tests performed for fiscal years beginning after September 15, 2012, early adoption is permitted. The Company expects to early adopt ASU 2012-02 during the fourth quarter of 2012, which is expected to alter the Company’s annual procedures, but is not expected to have a material impact on the Company’s consolidated financial statements.
Note C – Other Liabilities
Other liabilities consist of the following:
September 30, | December 31, | |||||||
2012 | 2011 | |||||||
(unaudited) | ||||||||
Excise, state, local and property taxes payable | $ | 846,521 | $ | 843,671 | ||||
Other accrued expenses | 141,050 | 165,485 | ||||||
Payroll, payroll taxes and bonuses | 171,707 | 373,398 | ||||||
Deferred rent | 215,071 | 260,086 | ||||||
Regulatory fees | 130,464 | 132,133 | ||||||
Customer security deposits | 111,663 | 101,390 | ||||||
$ | 1,616,476 | $ | 1,876,163 |
Note D – Notes Payable
The Company has a secured promissory note arrangement with a bank with a principal balance of approximately $1.7 million at September 30, 2012. As of September 30, 2012, Lightyear was in violation of two of its debt covenants that resulted from earnings shortfalls. On November 6, 2012, a noteholder waived two third quarter 2012 debt covenant violations that resulted from earnings forecast shortfalls. In addition, the noteholder waived the same two debt covenants for the fourth quarter of 2012. The Company is in discussions with the bank with regard to resetting the debt covenants on a go forward basis, however, there is no assurance the bank will agree to reset the covenants.
Note E – Related Party Transactions
Lightyear has significant transactions with its largest shareholder, LY Holdings, LLC (“LY Holdings”) and members of LY Holdings. Lightyear also conducts business with certain companies or individuals which are related parties either by having common ownership or because they are controlled by members of LY Holdings, the directors and/or officers of the Company or by relatives of members of LY Holdings, directors of the Company and/or officers of the Company. Aggregate related party transactions are segregated on the face of the balance sheets and statements of operations.
Commission expense – related parties includes certain VoIP and wireless revenue override payments due to directors of the Company and/or members of LY Holdings. On June 22, 2011, all but one holder of the override rights waived their right to such payments for the second half of 2010 and the full year 2011, which resulted in the Company reversing approximately $86,000 of liabilities. On February 7, 2012, the same holders of the override rights waived their right to such payments for the year 2012. During the three and nine months ended September 30, 2012, Lightyear recorded approximately $16,000 and $45,000 of VoIP and wireless revenue override expense, respectively. During the three and nine months ended September 30, 2011, Lightyear recorded an immaterial amount of expense related to VoIP and wireless revenue overrides.
-8- |
Lightyear Network Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note E – Related Party Transactions – Continued
The Company obtained consulting services from a former officer and director, pursuant to a one year consulting agreement which terminated on April 30, 2012. Aggregate consulting expense was approximately $0 and $97,000 for the three and nine months ended September 30, 2012, respectively, and was approximately $75,000 and $125,000 for the three and nine months ended September 30, 2011, respectively.
On October 29, 2012, a Company director agreed to forbear from demanding payment until November 30, 2013 of the $6,250,000 principal payment currently scheduled to be paid on August 30, 2013.
Note F – Supplier Concentration
Of the telecommunications services used in its operations, Lightyear acquired approximately 33%, 21%, and 13% during the three months ended September 30, 2012 from three suppliers and 31%, 22% and 13% during the nine months ended September 30, 2012 from the same three suppliers. The Company acquired approximately 32% and 24% during the three months ended September 30, 2011 from two suppliers and 30%, 24% and 10% during the nine months ended September 30, 2011 from three suppliers. Although there are other suppliers of these services, a change in suppliers could have an adverse effect on the business which could ultimately negatively affect operating results.
Note G – Stockholders’ Deficiency
Warrants
Additional Warrants
In connection with a prior equity financing, the Company is required to periodically issue exercisable five-year warrants to purchase shares of common stock to investors with an exercise price of $0.01 per share and to selling agents with an exercise price of $4.00 per share (the “Additional Warrants”). The Additional Warrants are issued pursuant to a pre-determined formula at the end of each calendar quarter during which shares originally purchased in the equity financing are held by the original investor. The Additional Warrants are eligible to be issued for a period of five years from the equity financing. The Company issued 105,455 Additional Warrants (95,868 were issued to investors and 9,587 were issued to selling agents) during the nine months ended September 30, 2012. As of September 30, 2012, there were 317,267 Additional Warrants outstanding, of which 288,425 were issued to investors and 28,842 were issued to selling agents. See Note H – Commitments and Contingencies – Warrant Dispute.
Summary
A summary of the warrant activity for the nine months ended September 30, 2012 is as follows:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | |||||||||||||||
Number of | Exercise | Life | Intrinsic | |||||||||||||
Warrants | Price | In Years | Value | |||||||||||||
Outstanding at December 31, 2011 | 1,242,297 | $ | 3.38 | |||||||||||||
Granted | 105,455 | 0.37 | ||||||||||||||
Exercised | - | - | ||||||||||||||
Cancelled | - | - | ||||||||||||||
Outstanding at September 30, 2012 | 1,347,752 | $ | 3.15 | 3.2 | $ | 20,190 | ||||||||||
Exercisable at September 30, 2012 | 1,347,752 | $ | 3.15 | 3.2 | $ | 20,190 |
-9- |
Lightyear Network Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note G – Stockholders’ Deficiency – Continued
Stock Option Grants
On December 28, 2011, the Company entered into Option Termination Agreements with certain members of its management team (the “Optionees”), including each of the Company’s executive officers, through which the Company agreed to terminate all of the outstanding stock options that were previously issued to the Optionees pursuant to the Company’s 2010 Stock and Incentive Compensation Plan. The Optionees each received a total of $1.00 in consideration for the termination of their options, which accounted for 687,500 of the Company’s options outstanding. Such options were deemed to have negligible value as of the termination date. On March 1, 2012, the Company granted ten-year incentive stock options to the Optionees to purchase an aggregate of 732,500 shares of common stock at an exercise price of $0.22 per share. Of the total, 50% of the options vest immediately and 50% vest on the one-year anniversary of the grants. Since cancellation and issuance of new options is deemed to represent a modification of the original options, the approximate incremental $63,000 value of the new options was added to the approximate $663,000 of unrecognized compensation cost associated with the original options and the combined amount of $726,000 is being amortized proportionate to the vesting period.
On March 20, 2012, the Company granted ten-year incentive stock options to new and existing employees to purchase an aggregate of 74,000 shares of common stock at an exercise price of $0.21 per share. The options vest as follows: (i) options to purchase an aggregate of 71,000 shares of common stock granted to existing employees vest 50% immediately and 50% vest on the one-year anniversary of the grants; and (ii) an option to purchase 3,000 shares of common stock granted to a new employee vests ratably on an annual basis over a three-year term. The aggregate grant date value of approximately $6,200 is being amortized proportionate to the respective vesting periods.
The Company has computed the fair value of options granted using the Black-Scholes option pricing model. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate will be adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate, when it is material. The expected term of options granted represents the estimated period of time that options granted are expected to be outstanding. The Company utilizes the “simplified” method to develop an estimate of the expected term of “plain vanilla” option grants. Given that LNSI's shares have only been publicly traded in their current form since February 12, 2010, until such time as LNSI has sufficient trading history to compute the historical volatility of its common stock, the Company is utilizing an expected volatility figure based on a review of the historical volatilities, over a period of time equivalent to the expected life of these options, of similarly positioned public companies within its industry. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the options.
In applying the Black-Scholes option pricing model, the Company used the following weighted average assumptions:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Risk free interest rate | n/a | 1.58 | % | 0.95 | % | 1.58 | % | |||||||||
Expected term (years) | n/a | 6.00 | 5.25 | 6.00 | ||||||||||||
Expected volatility | n/a | 43.10 | % | 42.90 | % | 43.10 | % | |||||||||
Expected dividends | n/a | 0.00 | % | 0.00 | % | 0.00 | % |
The weighted average estimated fair value of the stock options granted during the nine months ended September 30, 2012 was $0.09 per share. The weighted average estimated fair value of the stock options granted during the three and nine months ended September 30, 2011 was $0.36 per share.
-10- |
Lightyear Network Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note G – Stockholders’ Deficiency – Continued
Stock Option Grants – Continued
The Company recognized approximately $68,000 and $577,000 of stock-based compensation expense during the three and nine months ended September 30, 2012, respectively, and approximately $133,000 and $430,000 of stock-based compensation expense during the three and nine months ended September 30, 2011, respectively, related to stock option grants, which is reflected as selling, general and administrative expense in the condensed consolidated statements of operations. As of September 30, 2012, there was approximately $164,000 of unrecognized employee stock-based compensation expense related to stock option grants that will be amortized over a weighted average period of 0.6 years.
A summary of the status of options issued under the 2010 Plan during the nine months ended September 30, 2012 is presented below:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | |||||||||||||||
Number of | Exercise | Life | Intrinsic | |||||||||||||
Options | Price | In Years | Value | |||||||||||||
Balance, December 31, 2011 | 96,666 | $ | 1.25 | |||||||||||||
Granted | 806,500 | 0.22 | ||||||||||||||
Exercised | - | - | ||||||||||||||
Forfeited | (122,666 | ) | 0.49 | |||||||||||||
Balance, September 30, 2012 | 780,500 | $ | 0.30 | 9.3 | $ | - | ||||||||||
Exercisable, September 30, 2012 | 418,566 | $ | 0.33 | 9.2 | $ | - |
Restricted Stock Grants
The Company recognized approximately $15,000 and $43,000 of stock-based compensation during the three and nine months ended September 30, 2011, respectively, related to director restricted stock grants issued on October 12, 2010, which is reflected as selling, general and administrative expense in the condensed consolidated statements of operations. As of September 30, 2012, there were no unvested restricted stock grants and, accordingly, there was no unrecognized stock-based compensation expense related to restricted stock grants.
Note H – Commitments and Contingencies
Litigation
Alden Halpern v. Lightyear Network Solutions, Inc. fka Libra Alliance Corporation was filed in Nevada District Court on March 1, 2012. The plaintiff alleges violations of federal and state securities laws with respect to his purchase of Lightyear securities. Mr. Halpern alleges that Lightyear falsely represented that the shares he was purchasing were “free-trading.” Lightyear denied the allegations. Mr. Halpern claimed damages of $750,000. On September 26, 2012, the Court granted Lightyear’s Motion to Dismiss, but provided Mr. Halpern with 30 days to amend his complaint to provide more details concerning the claim. On October 25, 2012, Mr. Halpern filed a motion to file the First Amended Complaint. Lightyear notified its insurance carriers concerning this matter and continues to contest the allegations vigorously. Lightyear has not recorded a provision for any loss that could be incurred as a result of the matter as Lightyear believes the allegations are without merit.
As of September 30, 2012, other claims have been asserted against Lightyear which arose in the normal course of business. While there can be no assurance, management believes that the ultimate outcome of these legal claims will not have a material adverse effect on the condensed consolidated financial statements of the Company.
-11- |
Lightyear Network Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note H – Commitments and Contingencies – Continued
Warrant Dispute
The Company’s former selling agent, on behalf of certain investors in the Company’s private placement, has disputed the Company’s methodology for computing the quantity of Additional Warrants that are issuable at each quarter end. The Company has issued Additional Warrants to purchase an insignificant number of common shares in partial settlement of this dispute with some of the investors. While there can be no assurance, management believes that the ultimate outcome of this dispute with the remaining investors will not have a material adverse effect on the condensed consolidated financial statements of the Company.
-12- |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of the results of operations and financial condition of Lightyear Network Solutions, Inc. and Subsidiaries (“Lightyear” or the “Company”) for the three and nine months ended September 30, 2012 and 2011 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Quarterly Report on Form 10-Q. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us,” “we,” “our,” and similar terms refer to Lightyear. References to Lightyear LLC refer to the Company’s wholly-owned subsidiary Lightyear Network Solutions, LLC. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties. Words such as “anticipate,” “estimate,” “plan,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions are used to identify forward-looking statements. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. See “Risk Factors” under Item 1A of Part I of Lightyear’s Form 10-K filed March 30, 2012.
Overview
Lightyear, through its wholly owned subsidiaries, Lightyear Network Solutions, LLC, a Kentucky limited liability company (“Lightyear LLC”) and SE Acquisitions, LLC d/b/a Lightyear Network Solutions of Kentucky, a Kentucky limited liability company (“Lightyear-KY”), provides telecommunications services throughout the United States primarily through a distribution network of authorized agents. In addition to long distance and local service, Lightyear currently offers a wide array of telecommunications products and services including internet/intranet, calling cards, advanced data, conferencing, VoIP services and wireless services. Lightyear LLC also operates in Puerto Rico through its wholly-owned subsidiary, Lightyear Alliance of Puerto Rico, LLC, a Kentucky limited liability company.
Lightyear provides telecommunications services in 49 states and Puerto Rico and is a licensed local carrier in 42 states. We sell our products and services primarily through a distribution network of more than 150 authorized independent agents and more than 7,000 independent representatives.
Lightyear provides service to approximately 70,000 customer locations as of September 30, 2012, with a significant concentration in the five state area of Kentucky, Ohio, Indiana, Florida and Georgia. We have built regional customer concentrations which provide a contiguous service area and operational efficiencies, resulting in higher margins, as well as a nationwide distribution network through which additional new concentrations may be built.
We intend to increase our revenue and earnings via a combination of organic and acquisition growth. We intend to grow organically by expanding our revenue base from agents through creative marketing and incentive plans, new carrier partnerships and enhancements to our wireless, VoIP and data products lines which complement our history of selling landline services.
We continue to search for combinations with small to mid-sized competitors and thereby aggregate revenue, and increase earnings through the elimination of duplicate costs. Each series of combinations will be followed by a period of integration and consolidation. Potential acquisition candidates are expected to meet specific criteria including the following:
· | Supporting or providing Cloud based services; |
· | EBITDA positive; and |
· | Trained technical staff meeting our internal requirements and the requirements of our customers. |
Upon locating suitable target candidates, we anticipate entering into non-binding letters of intent to set forth the basic business terms of potential acquisitions, which will usually be subject to various closing conditions, including due diligence, the negotiation of definitive acquisition documents, regulatory consents and other customary matters. Factors which may affect future acquisition decisions include the quality and potential profitability of the business under consideration, and our profitability and ability to finance the transaction.
We continue to review opportunities for expansion of our network. Criteria for future builds would include the immediate and substantial reduction of cost of goods sold or support of a committed revenue stream.
Lightyear-KY falls within the FCC’s definition of a rural Competitive Local Exchange Carrier (CLEC) because its entire service area falls within rural markets. This allows us to charge a premium “rural exempt” rate for interstate switched access services. On November 18, 2011, the FCC released an order (the “Order”) which established a framework for reform of the intercarrier compensation system and Federal Universal Service Fund. We estimate that the Order could have the impact of reducing our revenues by less than 1% during 2012 and 2013, and by approximately 1.5% and 2.8% in 2014 and 2015, respectively.
-13- |
Results of Operations
Revenues
Our revenues are primarily derived from the sales and provision of the following services:
· | Voice Services |
· | Local Services |
· | VoIP Services |
· | Data Services |
· | Wireless Services |
· | Representative Fees |
· | Regulatory Revenue |
· | Other Services |
Cost of Revenues
Cost of revenues consist primarily of carrier access fees, network costs and usage fees associated with providing our wholesale telecommunications services.
Operating Expenses
Operating expenses include:
· | commission expense which consists of payments to agents based on a percentage of the monthly billings and upfront payments to agents at the time the customer was acquired; |
· | depreciation and amortization, including depreciation of long-lived property, plant and equipment and amortization of intangible assets where applicable; |
· | bad debt expense represents an estimate of the incremental non-collectible receivables; and |
· | selling, general and administrative expenses which consist of selling, advertising, marketing, billing and promotion expenses, plus salaries and benefits, rent associated with our office space, professional fees, travel and entertainment, depreciation and amortization and other costs. |
Other (Expense) Income
· | Interest income – related parties represents interest earned on the notes receivable from LY Holdings that were extinguished in November 2011. |
· | Interest expense represents interest payable on notes payable to financial institutions or on capital lease obligations. |
· | Interest expense – related parties represents interest payable on a non-current note payable to a Company director. |
-14- |
Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011
Overview
Loss from operations was $0.54 million and $0.04 million for the three months ended September 30, 2012 and 2011, respectively, an increase of $0.5 million, due to a $1.2 million reduction in gross profit (due to a 4% decline in revenues and 5% decline in the gross profit percentage) partially offset by a $0.7 million reduction in operating expenses (primarily headcount and related costs).
Revenues
Revenues were approximately $16.7 million and $17.4 million, respectively, for the quarters ended September 30, 2012 and 2011, a decrease of $0.7 million or 4%. The decrease of $0.7 million resulted primarily from continued market pressures, including heightened competition. The following table presents our operating revenues by product category for the quarters ended September 30, 2012 and 2011.
(in millions) | ||||||||
For The Three Months | ||||||||
Ended September 30, | ||||||||
2012 | 2011 | |||||||
Voice service | $ | 4.2 | $ | 4.3 | ||||
Local service | 6.6 | 7.3 | ||||||
VoIP | 0.8 | 0.8 | ||||||
Data services | 1.8 | 1.8 | ||||||
Wireless services | 1.4 | 1.1 | ||||||
Representative fees | 0.4 | 0.4 | ||||||
Regulatory revenue | 0.7 | 0.7 | ||||||
Other services | 0.8 | 1.0 | ||||||
TOTAL | $ | 16.7 | $ | 17.4 |
Cost of Revenues
Cost of revenues for the quarters ended September 30, 2012 and 2011 amounted to approximately $11.5 million (69% of revenue) and $11.1 million (64% of revenue), respectively, an increase of $0.4 million or 4%. See gross profit discussion.
Gross Profit
Gross profits were approximately $5.2 million (31% of revenue) and $6.3 million (36% of revenue), respectively for the quarters ended September 30, 2012 and 2011, a decrease of $1.1 million or 18%, or a 5.0% change in the gross margin percentage. The decline in revenues has been concentrated in the higher-margin revenue streams, such that the decline in the gross margin percentage is a function of the revenue mix, plus recent unfavorable charges and fewer credits from carriers.
Operating Expenses
Operating expenses decreased $0.7 million, or 10%, to $5.7 million from $6.4 million for the quarters ended September 30, 2012 and 2011, respectively. The decrease was attributable to the 24% decrease in depreciation expense due to the sale of fixed assets in 2011 and reductions in headcount and related costs due to a 9% decline in full-time employees from 173 at September 30, 2011 to 158 at September 30, 2012.
Other (Expense) Income
Interest income declined 97% from $0.2 million due to the elimination of certain notes receivable due from related parties. Interest expense decreased $0.05 million or 27% to $0.1 million from $0.2 million, due principally to lower rates on indebtedness and lower principal balances on existing facilities, which declined from approximately $12 million at September 30, 2011 to approximately $11 million at September 30, 2012.
-15- |
Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011
Overview
Loss from operations was $1.1 million and $0.9 million for the nine months ended September 30, 2012 and 2011, respectively, an increase of $0.2 million, due to a $2.5 million reduction in gross profit (due to a 6% decline in revenues and a 3% decline in the gross profit percentage) partially offset by a $2.2 million reduction in operating expenses (primarily headcount and related costs).
Revenues
Revenues were approximately $50.5 million and $53.9 million, respectively, for the nine months ended September 30, 2012 and 2011, a decrease of $3.4 million or 6%. The decrease of $3.4 million resulted primarily from continued market pressures, including heightened competition. The following table presents our operating revenues by product category for the nine months ended September 30, 2012 and 2011.
(in millions) | ||||||||
For The Nine Months | ||||||||
Ended September 30, | ||||||||
2012 | 2011 | |||||||
Voice service | $ | 12.5 | $ | 13.6 | ||||
Local service | 20.2 | 22.7 | ||||||
VoIP | 2.5 | 2.7 | ||||||
Data services | 5.2 | 5.6 | ||||||
Wireless services | 4.1 | 2.9 | ||||||
Representative fees | 1.3 | 1.5 | ||||||
Regulatory revenue | 2.3 | 2.4 | ||||||
Other services | 2.4 | 2.5 | ||||||
TOTAL | $ | 50.5 | $ | 53.9 |
Cost of Revenues
Cost of revenues for the nine months ended September 30, 2012 and 2011 amounted to approximately $33.8 million (67% of revenue) and $34.7 million (64% of revenue), respectively, a decrease of $0.9 million or 3%. See gross profit discussion.
Gross Profit
Gross profits were approximately $16.7 million (33% of revenue) and $19.2 million (36% of revenue), respectively, for the nine months ended September 30, 2012 and 2011, a decrease of $2.5 million or 13%, or a 3% change in the gross margin percentage. The decline in revenues has been concentrated in the higher-margin revenue streams, such that the decline in the gross margin percentage is a function of the revenue mix, plus recent unfavorable charges and fewer credits from carriers.
Operating Expenses
Operating expenses decreased $2.2 million, or 11%, to $17.8 million from $20.0 million for the nine months ended September 30, 2012 and 2011, respectively. The decrease was attributable to the 22% decrease in depreciation expense due to the sale of fixed assets in 2011, a 6.0% decrease in commissions due to the 6% decline in revenues, and reductions in headcount and related costs due to a 9% decline in full-time employees from 173 at September 30, 2011 to 158 at September 30, 2012.
Other (Expense) Income
Interest income declined 99% from $0.6 million due to the elimination of certain notes receivable due from related parties. Interest expense decreased $0.1 million or 26% to $0.4 million from $0.5 million, due principally to lower rates on indebtedness and lower aggregate principal balances on existing facilities, which declined from approximately $12 million at September 30, 2011 to approximately $11 million at September 30, 2012.
-16- |
Liquidity and Capital Resources
Overview
Since February 12, 2010, the date of the Company’s reverse merger transaction, Lightyear had an accumulated deficit of approximately $12.6 million. As a result, we have managed our cash receipts and disbursements, as well as our operating costs in order to maintain an adequate level of cash. As of September 30, 2012, Lightyear had a cash balance of $27,841, a working capital deficit of $2.3 million and was in violation of two of its debt covenants.
We have instituted cost reductions, raised our customer credit requirements, and implemented efforts to increase revenues through targeted promotions over the past 21 months, all toward the goal of achieving positive cash flow from operations. During the nine months ended September 30, 2012, we generated $1.0 million of cash flow from operating activities and used $0.2 million and $0.9 million to purchase property and equipment and to service debt, respectively.
Currently, the most significant item impacting Lightyear’s liquidity is a note and interest payable to a Company director of $6.3 million. On October 29, 2012, the Company director agreed to forbear from demanding payment of the principal balance until November 30, 2013.
In addition, we have a secured promissory note arrangement with a bank with a principal balance of approximately $1.7 million at September 30, 2012. We are currently making principal and interest payments totaling $37,780 per month and all remaining principal and interest is due on the January 25, 2014 maturity date. On November 6, 2012, the bank waived two third quarter 2012 debt covenant violations that resulted from earnings forecast shortfalls. In addition, the bank waived the same two debt covenants for the fourth quarter of 2012. We are in discussions with the bank with regards to resetting the debt covenants on a go forward basis, however, there is no assurance the bank will agree to reset the covenants.
Nine Months Ended September 30, 2012 and 2011
Operating Activities
Net cash provided by operating activities was $1.0 million for the nine months ended September 30, 2012 compared to $0.4 million of net cash used for the nine months ended September 30, 2011. The amount provided during the nine months ended September 30, 2012 was primarily due to cash used to fund our operations which generated a net loss of $1.4 million, positively adjusted for non-cash expenses in the aggregate amount of $2.4 million, and $0.1 million of cash used to fund changes in operating assets and liabilities. The amount used during the nine months ended September 30, 2011 was primarily due to cash used to fund our operations which generated a net loss of $0.5 million, positively adjusted for non-cash expenses in the aggregate amount of $1.6 million, and $1.5 million of cash used to fund changes in operating assets and liabilities.
Investing Activities
Net cash used in investing activities was $0.2 million for the nine months ended September 30, 2012 compared to $0.9 million for the nine months ended September 30, 2011. The usage of cash during the nine months ended September 30, 2012 was attributable to purchases of property and equipment. The usage of cash during the nine months ended September 30, 2011 was attributable to $1.1 million of purchases of property and equipment, partially offset by $0.2 million of proceeds from the sale of fixed assets.
Financing Activities
Net cash used in financing activities was $0.9 million for the nine months ended September 30, 2012 compared to $0.3 million of net cash provided by financing activities for the nine months ended September 30, 2011. The cash used in financing activities for the nine months ended September 30, 2012 related to principal payments made on the Company’s notes payable and capital lease obligations. The cash provided by financing activities for the nine months ended September 30, 2011 included $2.0 million of net proceeds from a new credit facility and $0.3 million of proceeds from the cash surrender value of a life insurance policy, offset by repayments of $2.1 million against the obligation to related party and other obligations.
-17- |
Potential Future Requirements and Sources of Liquidity
We expect our 2012 operating activities to be self-sufficient from a cash perspective, but there can be no assurance that this objective will be met. Our future capital requirements are expected to be driven by (i) network build-out costs; (ii) debt reduction and debt service; (iii) public/investor relations costs; (iv) acquisition opportunities; and (v) the need to supplement working capital levels. We are currently investigating the capital markets for sources of funding, which could take the form of additional debt or equity financings. There can be no assurance that the Company will be successful in securing additional capital. If the Company is unable to raise additional funds, the Company might (a) initiate additional cost reductions; (b) forego acquisition or network build-out opportunities; and/or (c) seek extensions of our scheduled payment obligations, including the non-current note payable to a Company director.
Off Balance Sheet Arrangements
As of September 30, 2012, we have provided irrevocable standby letters of credit, aggregating approximately $100,000 to five states, which automatically renew for terms not longer than one year, unless notified otherwise. As of September 30, 2012 and December 31, 2011, these letters of credit had not been drawn upon.
Critical Accounting Policies
There are no material changes from the critical accounting policies set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our December 31, 2011 financial statements filed on Form 10-K dated March 30, 2012. Please refer to that document for disclosures regarding the critical accounting policies related to our business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized, recorded and reported; and (2) our assets are safeguarded against unauthorized or improper use, to permit the preparation of our condensed consolidated financial statements in conformity with United States generally accepted accounting principles.
In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, management, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report on Form 10-Q, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls or in other factors that could significantly affect these controls, during our quarter ended September 30, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On July 9, 2012, Elaine G. Bush notified us that, effective July 20, 2012, she was resigning her position as our Chief Financial Officer and all other positions she held with Lightyear. On July 25, 2012, we appointed Randy Ammon as our Interim Chief Financial Officer.
Limitations of the Effectiveness of Control
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations of any control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
-18- |
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Alden Halpern v. Lightyear Network Solutions, Inc. fka Libra Alliance Corporation was filed in Nevada District Court on March 1, 2012. The plaintiff alleges violations of federal and state securities laws with respect to his purchase of our securities. Mr. Halpern alleges that we falsely represented that the shares he was purchasing were “free-trading.” We have denied the allegations. Mr. Halpern claimed damages of $750,000. On September 26, 2012, the Court granted our Motion to Dismiss, but provided Mr. Halpern with 30 days to amend his complaint to provide more details concerning the claim. On October 25, 2012, Mr. Halpern filed a motion to file the First Amended Complaint. We notified our insurance carriers concerning this matter and continue to contest the allegations vigorously. We have not recorded a provision for any loss that could be incurred as a result of the matter as we believe the allegations are without merit.
As of September 30, 2012, other claims have been asserted against us which arose in the normal course of business. While there can be no assurance, management believes that the ultimate outcome of these legal claims will not have a material adverse effect on our consolidated financial statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) | Not applicable. |
(b) | Not applicable. |
(c) | Not applicable. |
Item 3. Defaults Upon Senior Securities.
(a) | There has been no material default in the payment of principal or interest with respect to any of our indebtedness. |
(b) | Not applicable. |
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
Exhibit | Description | |
31.1 | Chief Executive Officer Certification * | |
31.2 | Chief Financial Officer Certification * | |
32 | Section 1350 Certification ** | |
101.INS | XBRL Instance Document ** | |
101.SCH | XBRL Schema Document ** | |
101.CAL | XBRL Calculation Linkbase Document ** | |
101.DEF | XBRL Definition Linkbase Document ** | |
101.LAB | XBRL Label Linkbase Document ** | |
101.PRE | XBRL Presentation Linkbase Document ** | |
* | Filed herewith | |
** | Furnished herewith |
-19- |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LIGHTYEAR NETWORK SOLUTIONS, INC. | ||
By: | /s/ Stephen M. Lochmueller | |
Stephen M. Lochmueller | ||
Chief Executive Officer | ||
By: | /s/ Randy Ammon | |
Randy Ammon | ||
President, Chief Operating Officer | ||
and Interim Chief Financial Officer | ||
Date: November 14, 2012 |
-20- |
EXHIBIT 31.1
SECTION 302 CERTIFICATION OF PRINCIPAL
EXECUTIVE OFFICER
I, Stephen M. Lochmueller, certify that:
1) | I have reviewed this quarterly report on Form 10-Q of Lightyear Network Solutions, Inc.; |
2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4) | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5) | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: | November 14, 2012 | |
/s/ | Stephen M. Lochmueller | |
Stephen M. Lochmueller | ||
Chief Executive Officer |
EXHIBIT 31.2
SECTION 302 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Randy Ammon, certify that:
1) | I have reviewed this quarterly report on Form 10-Q of Lightyear Network Solutions, Inc.; |
2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4) | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5) | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 14, 2012
/s/ | Randy Ammon | |
Randy Ammon | ||
President, Chief Operating Officer and Interim Chief Financial Officer |
EXHIBIT 32
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
Pursuant to 18 U.S.C. § 1350, the undersigned officers of Lightyear Network Solutions, Inc. (the “Company”), hereby certify that the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 14, 2012 | /s/ Stephen M. Lochmueller | |
Stephen M. Lochmueller | ||
Chief Executive Officer | ||
Date: November 14, 2012 | /s/ Randy Ammon | |
Randy Ammon | ||
President, Chief Operating Officer | ||
and Interim Chief Financial Officer |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.
Notes Payable - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified |
Sep. 30, 2012
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Promissory Notes [Member]
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Short-term Debt [Line Items] | |
Promissory note payable to bank | $ 1.7 |
Debt Covenant [Member]
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Short-term Debt [Line Items] | |
Number of convenants in violation | 2 |
Other Liabilities
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9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2012
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Other Liabilities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other Liabilities | Note C – Other Liabilities
Other liabilities consist of the following:
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