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ALTV > SEC Filings for ALTV > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for ALTEVA, INC.

Form 10-Q for ALTEVA, INC.


9-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes," "anticipates," "intends," "expects" and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally and in the geographic regions in which we operate; industry capacity; our ability to continue to pay dividends; goodwill and long-lived asset impairment; changes in the Orange County-Poughkeepsie Limited Partnership ("O-P") distributions; risks associated with the exercise of our option to sell our O-P interest back to Verizon; demographic changes; management turnover; technological changes and changes in consumer demand; existing governmental regulations and changes in or our failure to comply with, governmental regulations; legislative proposals relating to the businesses in which we operate; changes to the USF; risks associated with our unfunded pension liability; competition; the loss of any significant ability to attract and retain highly skilled personnel and any other factors that are described in "Risk Factors." Given these uncertainties, current and prospective investors should be cautioned regarding reliance on such forward-looking statements. Except as required by law, we disclaim any obligation to update any such factors or to publicly announce the results of any revision to any of the forward-looking statements contained herein to reflect future events or developments. For a further discussion of the matters described above, see Item 1A, "Risk Factors" in our Annual Report on Form 10-K/A for the year ended December 31, 2012.

Overview

Alteva, Inc., formerly Warwick Valley Telephone Company, (we, our or us) is a cloud-based communications company that provides Unified Communications ("UC") solutions that unify an organization's communications systems, including enterprise hosted Voice over Internet Protocol ("VoIP"). We also operate a regional Incumbent Local Exchange Carrier ("ILEC") in southern Orange County, New York and northern New Jersey. We deliver cloud-based UC solutions including enterprise hosted VoIP, Hosted Microsoft Communication Services (OCS and Lync), fixed mobile convergence and advanced voice applications for the desktop. By combining voice service with Microsoft Communications Services products, our customers receive a voice-enabled UC solution that integrates with existing business applications. Our ILEC operations consist of providing local and toll telephone service to residential and business customers, Internet high speed broadband service, and DIRECTV.

On May 16, 2013, as part of our annual shareholders meeting, our shareholders approved the proposal to amend our certificate of incorporation, changing our name from Warwick Valley Telephone Company to Alteva, Inc.

This discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

Executive Summary

Revenues increased $0.5 million or 8% to $7.4 million for the three months ended June 30, 2013, in comparison to $6.9 million for the three months ended June 30, 2012. The increase in revenues was attributable to a 21% increase in revenues from our UC segment resulting from the addition of new customers on our platform. This increase was partially offset by the decrease in our Telephone segment due to the continued decline in access lines, partially offset by increases in Broadband and rate changes.

During the three months ended June 30, 2013, we had slightly positive net income, compared to a net loss of $0.2 million for the three months ended June 30, 2012. This increase was primarily attributable to the increase of $0.8 million, or 23%, in gross profit, calculated as net revenues less cost of services and products (exclusive of depreciation and amortization expense), driven by our increase in UC revenue and our ability to leverage our UC infrastructure.

    Results of Operations for the Three Months Ended June 30, 2013 and 2012



The following table presents a summary of operating results for our UC and
Telephone operating segments for the periods indicated:



                              Three months ended June 30, 2013                          Three months ended June 30, 2012
                                % of Total        Segment        Segment                  % of Total        Segment        Segment
($ in thousands)    Revenue      Revenue       Profit (loss)      Margin      Revenue      Revenue       Profit (loss)      Margin

Unified
Communications     $    3,920           53 %  $        (2,522 )       (64 )% $    3,252           47 %  $        (3,137 )       (96 )%
Telephone               3,527           47 %             (536 )       (15 )%      3,634           53 %             (310 )        (9 )%

Total              $    7,447          100 %  $        (3,058 )       (41 )% $    6,886          100 %  $        (3,447 )       (50 )%


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OPERATING REVENUES

Operating revenues for the three months ended June 30, 2013 increased $0.5 million, or 8%, to $7.4 million from $6.9 million in the same period in 2012. This increase was due primarily to a 21% increase in revenues from the organic growth of our UC segment resulting from the addition of new customers on our platform.

Revenues for our UC segment increased 21% to $3.9 million for the three months ended June 30, 2013 from $3.3 million for the three months ended June 30, 2012. This increase was primarily due to an increase in recurring license and usage revenue of $0.5 million and in equipment revenue of $0.1 million resulting primarily from new customers.

Revenues for our Telephone segment decreased 3% to $3.5 million for the three months ended June 30, 2013 from $3.6 million for the three months ended June 30, 2012. The decrease was primarily due to the continued decline in access lines partially offset by increases in Broadband and rate changes.

OPERATING EXPENSES

Cost of Services and Products

The cost of services and products for the three months ended June 30, 2013 decreased $0.2 million or 6% to $3.2 million from $3.4 million for the same period in 2012 primarily as a result of lower carrier circuits cost due to initiatives to reduce costs in 2012 and 2013.

Cost of services and products for our UC segment decreased $0.2 million, or 8%, to $2.0 million for the three months ended June 30, 2013 from $2.2 million for the three months ended June 30, 2012. This decrease was primarily due to lower third-party carrier costs as part of our cost reduction initiative.

Cost of services and products for our Telephone segment remained consistent at $1.2 million for the three months ended June 30, 2013 and June 30, 2012.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended June 30, 2013 increased $0.7 million, or 13%, to $6.3 million from $5.6 million for the same period in 2012. This increase was primarily associated with severance costs related to management changes and the workforce reduction in our Telephone segment $0.3 million, as well as a $0.3 million increase in non-cash stock expense related to 2013 restricted stock and option grants. We believe that the current level of selling, general and administrative expenses are sufficient to support our business as we focus on growth and profitability.

Depreciation and Amortization Expense

Depreciation and amortization expense for the three months ended June 30, 2013 decreased $0.3 million, or 26%, to $1.0 million from $1.3 million for the same period in 2012. This is primarily due to the lower depreciable basis on our Telephone segment assets as a result of the $8.9 million write-down of property, plant and equipment during the three months ended December 31, 2012.

TOTAL OTHER INCOME (EXPENSE)

Total other income (expense) for the three months ended June 30, 2013 and 2012 remained consistent at $3.1 million.

Results of Operations for the Six Months Ended June 30, 2013 and 2012



The following table presents a summary of operating results for our UC and
Telephone operating segments for the periods indicated:



                              Six months ended June 30, 2013                           Six months ended June 30, 2012
                               % of Total        Segment        Segment                 % of Total        Segment        Segment
($ in thousands)    Revenue     Revenue       Profit (loss)      Margin      Revenue     Revenue       Profit (loss)      Margin

Unified
Communications     $   7,876           52 %  $        (6,495 )       (82 )% $   6,526           47 %  $        (5,908 )       (91 )%
Telephone              7,311           48 %             (966 )       (13 )%     7,441           53 %             (693 )        (9 )%

Total              $  15,187          100 %  $        (7,461 )       (49 )% $  13,967          100 %  $        (6,601 )       (47 )%

OPERATING REVENUES

Operating revenues for the six months ended June 30, 2013 increased $1.2 million, or 9%, to $15.2 million from $14.0 million during the same period in 2012. This increase was due primarily to a 21% increase in revenues from the organic growth of our UC segment resulting from the addition of new customers on our platform.

Revenues for our UC segment increased $1.4 million, or 21%, to $7.9 million for the six months ended June 30, 2013 from $6.5 million for the six months ended June 30, 2012. This increase was primarily due to an increase in recurring license and usage revenue of $0.8 million and equipment revenue of $0.6 million resulting primarily from the addition of new customers.


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Revenues for our Telephone segment decreased $0.1 million, or 2%, to $7.3 million for the six months ended June 30, 2013 from $7.4 million for the six months ended June 30, 2012. The decrease was primarily due to the continued decline in access lines, partially offset by increases in Broadband and rate increases.

OPERATING EXPENSES

Operating expenses for the six months ended June 30, 2013 increased $2.1 million or 10% to $22.7 million from $20.6 million for the same period in 2012. This increase was primarily due to an increase of 24% in selling, general and administrative expenses associated with the growth of our UC segment, primarily from management changes and staff rationalization of $1.6 million as well as a $0.3 million increase in non-cash stock expense related to 2013 restricted stock and option grants. We believe that the current level of selling, general and administrative expenses are sufficient to support our business as we focus on growth and profitability.

Cost of Services and Products

The cost of services and products remained consistent at $7.0 million for the six months ended June 30, 2013 and 2012.

Cost of services and products for our UC segment increased $0.1 million or 2% from $4.5 million for the six months ended June 30, 2012 to $4.6 million for the six months ended June 30, 2013 and decreased as a percentage of revenue from 69% to 58%. The decrease as a percentage of revenue was due to leveraging the UC infrastructure over a larger revenue base.

Cost of services and products for our Telephone segment remained consistent at $2.4 million for the six months ended June 30, 2012 and 2013.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the six months ended June 30, 2013 increased $2.7 million, or 24%, to $13.7 from $11.0 million for the same period in 2012. This increase was primarily associated with investments in personnel made to support the growth of the UC segment and severance costs related to management changes and staff rationalization of $1.6 million, as well as a $0.3 million increase in non-cash stock expense related to 2013 restricted stock and option grants. This increase was also due to the ramp-up of infrastructure in the second half of 2012 to support the growth of our UC segment. We believe that selling, general and administrative expenses are at adequate levels to support our near-term growth initiatives. We believe that the current level of selling, general and administrative expenses are sufficient to support our business as we focus on growth and profitability.

Depreciation and Amortization Expense

Depreciation and amortization expense for the six months ended June 30, 2013 decreased $0.6 million, or 24%, to $2.0 million from $2.6 million for the same period in 2012. This is primarily due to the lower depreciable basis on our Telephone segment assets as a result of the $8.9 million write-down of property, plant and equipment during the three months ended December 31, 2012.

TOTAL OTHER INCOME (EXPENSE)

Total other income (expense) for the six months ended June 30, 2013 increased $1.7 million or 39% to $6.2 million from $4.5 million in the same period of 2012. This increase is due primarily to the increase in our income from the equity method investment, which was $6.5 million for the six months ended June 30, 2013, an increase of 44%, or $2.0 million from the prior year quarter. During the second quarter of 2012, our remaining investment in the O-P was reduced to zero. As a result, all subsequent disbursements received from the O-P are recorded as other income. The annual cash distributions of $13.0 million we will receive in 2013 from the O-P remains unchanged pursuant to the terms of the 4G Agreement. For more information on the 4G Agreement and the accounting treatment of the distributions we receive from the O-P, see Note 8 to our Condensed Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

We had $0.8 million of cash and cash equivalents at June 30, 2013, as compared with $1.8 million at December 31, 2012. Our primary source of liquidity continues to be our guaranteed payments from the O-P pursuant to the 4G Agreement and borrowings under our credit facility. Pursuant to the terms of the 4G Agreement, we are guaranteed annual cash distributions from the O-P of $13.0 million for 2013. The O-P's cash distributions are made to us on a quarterly basis. The distributions in excess of our proportionate share of O-P income are considered a return of our investment.

The 4G Agreement also gives us the right (the "Put") to require one of the O-P's limited partners to purchase all our ownership interest in the O-P during April 2014 for an amount equal to the greater of (a) $50 million or (b) the product of five (5) times 0.081081 times the O-P's 2013 EBITDA, as defined in the 4G Agreement.

As of June 30, 2013, we had a working capital deficit of $14.8 million, which was primarily due to borrowings of $14.5 million under the TriState credit facility that matures on June 30, 2014. This debt was primarily incurred to fund the purchase of Alteva, LLC in 2011. We believe this working capital deficiency is short-term in nature and we expect to satisfy these short-term borrowings by extending or refinancing our debt before its maturity and, if necessary, utilizing cash distributions received from the O-P.

CASH FROM OPERATING ACTIVITIES

Net cash used in operating activities for the six months ended June 30, 2013 was $0.2 million, as compared to $2.2 million for the six months ended June 30, 2012. Operating cash flows for the six months ended June 30, 2013 included $3.7 million of distributions from the O-P that represented our share of the O-P's income, as compared $3.1 million for the six months ended June 30, 2012. The improvement in operating cash flows was primarily attributable to the increase in gross profit driven by our increase in UC revenue and our ability to leverage our UC infrastructure. The additional operating cash flows were also driven by improvements in working capital, including trade accounts receivable.


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CASH FROM INVESTING ACTIVITIES

Cash flow from investing activities provided $2.0 million for the six months ended June 30, 2013, as compared to $1.5 million for the six months ended June 30, 2012. Net cash provided by investing activities for the six months ended June 30, 2013 included distributions we received from the O-P in excess of our share of the O-P's income of $2.8 million, as compared to $3.4 million for the six months ended June 30, 2012. Capital expenditures, excluding seat licenses, decreased to $0.4 million during the six months ended June 30, 2013, as compared to $1.5 million for the corresponding period in 2012. Our planned expenditures for 2013 are down compared to 2012, as we made significant additions to our infrastructure in 2012 to support future revenue growth. Generally, planned capital expenditures for 2013 are to support our planned product releases as we seek to enhance our solutions and provide increased value to our customers.

CASH FROM FINANCING ACTIVITIES

We used $2.9 million in financing activities during the six months ended June 30, 2013 compared to $2.4 million for the six months ended June 30, 2012. Dividends declared on our common shares by the Board of Directors were $0.54 per share for the six months ended June 30, 2013 and 2012. The total amount of dividends paid on our common shares by us for each of the six months ended June 30, 2013 and 2012 was $3.3 million and $3.1 million, respectively. The additional financing activities for the six months ended June 30, 2013 is attributed to the repayment of debt of $15.1 million offset by $15.5 million proceeds from our new debt with TriState during the first quarter of 2013. The remaining $1.8 million repayments and $2.1 million proceeds relate to our working capital financing activities under our TriState facility and capital leases. Additional financing activities for the six months ended June 30, 2012 were attributed to $1.7 million in proceeds of short-term borrowings related to working capital financing activities, offset by repayment of long-term borrowing of $0.8 million.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

We entered into a purchase commitment from one of our vendors to purchase $0.7 million in software licenses through March 2014. As of June 30, 2013 we have made $0.4 million purchases against the commitment.

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