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ALTV > SEC Filings for ALTV > Form 10-K on 28-Mar-2014All Recent SEC Filings

Show all filings for ALTEVA, INC.

Form 10-K for ALTEVA, INC.


28-Mar-2014

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-K, including, without limitation, statements containing the words "believes," "anticipates," "intends," "expects," "will" 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; 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; current and potential restatements of our financial statements and associated material weaknesses, 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.

Restatement of Consolidated Financial Statements

On March 14, 2014, the Audit Committee of our Board of Directors (the "Audit Committee"), in consultation with management, determined that, due to an error in the application of U.S. generally accepted accounting principles ("GAAP") for income taxes related to the determination of the valuation allowance needed to reflect our deferred tax assets at the amount that is more than likely than not realizable, our previously filed consolidated financial statements and related financial statement schedules as of and for the year ended December 31, 2012, contained in our Annual Report on Form 10-K/A for the year ended December 31, 2012, should be restated. In addition, the Audit Committee concluded that, due to similar errors in income tax accounting, the condensed interim financial statements as of March 31, 2013, June 30, 2013 and September 30, 2013 included in our Quarterly Reports on Forms 10-Q for the respective fiscal quarters then ended should be restated. (See Note 1 and Note 18 in our Notes to Consolidated Financial Statements).

Effects of the Restatement

The following tables provide a summary of selected line items from our consolidated statement of operations, consolidated statement of comprehensive income (loss), consolidated statement of cash flows and consolidated statement of shareholders' equity for the year ended December 31, 2012 and consolidated balance sheet as of December 31, 2012 affected by this restatement. The restatement impacted the consolidated statement of operations for the three months ended December 31, 2012, and, therefore, no restatement was required for any interim periods prior to the three month period ended December 31, 2012. The restatement impacted the condensed consolidated statements of operations and statements of comprehensive income (loss) for the three months ended March 31, 2013, for the three and six months ended June 30, 2013, and for the three and nine months ended September 30, 2013, and the condensed consolidated statements of cash flows for the three, six and nine months ended March 31, 2013, June 30, 2013 and September 30, 2013, respectively, and the condensed consolidated balance sheets as of March 31, 2013, June 30, 2013, and September 30, 2013. See Note 1 and Note 18 in our Notes to Consolidated Financial Statements.

                      CONSOLIDATED STATEMENT OF OPERATIONS




                                                     For the Year Ended December 31, 2012
                                                  ($ in thousands, except per share amounts)
                                                                       Correction of
                                          As previously reported       Income Taxes       As restated

Income tax expense (benefit)             $                 (4,481 )   $         1,437    $      (3,044 )
Net loss                                                   (9,452 )            (1,437 )        (10,889 )
Net loss applicable to common stock                        (9,477 )            (1,437 )        (10,914 )
Basic loss per common share                                 (1.66 )             (0.25 )          (1.91 )
Diluted loss per common share                               (1.66 )             (0.25 )          (1.91 )

             CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)



                                 For the Year Ended December 31, 2012
                                           ($ in thousands)
                                                 Correction of
                     As Previously Reported      Income Taxes       As Restated

Net loss             $                (9,452 )  $        (1,437 )  $      (10,889 )
Comprehensive loss                    (8,472 )           (1,437 )          (9,909 )


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                           CONSOLIDATED BALANCE SHEET



                                                                As of December 31, 2012
                                                                    ($ in thousands)
                                                                           Correction of
                                               As Previously Reported     Deferred Taxes      As Restated

Current assets:
Prepaid income taxes                          $                  1,222    $          (298 )  $         924
Deferred income taxes                                              268               (151 )            117
Total current assets                                             8,453               (449 )          8,004
Long-term assets:
Deferred income taxes                                              874               (874 )              -
Total assets                                                    43,445             (1,323 )         42,122
Long-term liabilities:
Deferred income taxes                                                -                114              114
Total liabilities                                               28,910                114           29,024
Retained earnings                                               13,628             (1,437 )         12,191
Total shareholders' equity                                      14,535             (1,437 )         13,098
Total liabilities and shareholders' equity                      43,445             (1,323 )         42,122

                      CONSOLIDATED STATEMENT OF CASH FLOWS



                                                      For the Year Ended December 31, 2012
                                                                ($ in thousands)
                                                                      Correction of
                                          As previously reported      Income Taxes       As restated

Net loss                                  $                (9,452 )  $        (1,437 )  $      (10,889 )
Deferred income taxes                                      (3,949 )            1,139            (2,810 )
Prepaid income taxes                                        1,493                298             1,791
Net cash used in operating activities                      (2,583 )                -            (2,583 )

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY



                                 As previously reported              Correction of income taxes                   As restated
                                                  Total                                    Total                            Total
                               Retained       Shareholders'       Retained             Shareholders'      Retained      Shareholders'
                               Earnings          Equity           Earnings                 Equity         Earnings         Equity
                                                                         ($ in thousands)
Balance, December 31, 2011   $     29,364    $        24,876   $             -        $              -   $    29,364   $        24,876
Net loss for the year              (9,452 )           (9,452 )          (1,437 )                (1,437 )     (10,889 )         (10,889 )
Balance, December 31, 2012         13,628             14,535            (1,437 )                (1,437 )      12,191            13,098


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OVERVIEW

Alteva, Inc. (we, our or us), formerly known as Warwick Valley Telephone Company, is a cloud-based communications company that provides Unified Communication ("UC") solutions that unify an organization's communications systems; enterprise hosted VoIP and we operate a regional Incumbent Local Exchange Carrier ("ILEC") in southern Orange County, New York and northern New Jersey. Our UC segment delivers cloud-based UC solutions including enterprise hosted VoIP, hosted Microsoft Communication Services, 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 Telephone segment consists of our ILEC operations that provide local and toll telephone service to residential and business customers, internet high-speed broadband service, and DIRECTV. Our cloud-based Unified Communication as a Service ("UCaaS") solutions are focused on medium, large and enterprise markets, which are defined as 20-500 users per location. We meet our customers' unique needs for a business communications solution that integrates multi-location, mobility, business productivity and analytics, into a single seamless experience.

This discussion and analysis provides information about the important aspects of our operations and investments, both at the consolidated and segment levels, and includes discussions of our results of operations, financial position and sources and uses of cash.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

General

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Certain of these accounting policies require management to make estimates and assumptions about future events that could materially affect the reported amounts of assets, liabilities, revenues and expenses and any disclosure of contingent assets and liabilities. Significant estimates include, but are not limited to, depreciation expense, allowance for doubtful accounts, long-lived assets, goodwill, pension and postretirement expenses and income taxes. Actual results could differ from those estimates.

The consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in the consolidated financial statements.

Equity Method Accounting

Our interest in the O-P is accounted for under the equity method of accounting.

Pursuant to the equity method accounting, we record our proportionate share of the O-P's net income as an increase to our investment account. We apply the cash payments up to our proportionate share of the O-P's net income made under the 4G Agreement as a return on our investment when received. As a result of receiving the fixed guaranteed cash distributions from the O-P in excess of our proportionate share of the O-P income, the investment account was reduced to zero within the first six months of 2012. Thereafter, we recorded the fixed guaranteed cash distributions that were received from the O-P in excess of the proportionate share of the O-P income directly to our statement of operations as other income.

Revenue Recognition

We derive our revenue from the sale of UC services as well as traditional telephone service.

We recognize revenue when (i) persuasive evidence of an arrangement between us and the customer exists, (ii) the delivery of the product to the customer has occurred or service has been provided to the customer, (iii) the price to the customer is fixed or determinable, and (iv) collectability of the sales or service price is assured.

UC Services

The Company's UC services and solutions consist primarily of its hosted VoIP UC system, certain UC applications, and other professional services associated with the installation and activation. Additionally, the Company offers customers the ability to purchase telephone equipment from the Company directly or independently from external vendors.

Multiple element arrangements primarily include the sale of telephone equipment, along with professional services associated with installation, activation and implementation services, as well as follow on hosting services. The Company has concluded that the separate units of accounting in these arrangements consist of
(i) the telephone equipment sale and (ii) the professional services provided combined with the follow on hosting services. The professional services provided do not constitute a separate unit of accounting as they do not have value to the customer on a stand-alone basis. Arrangement consideration is allocated to the separate units of accounting based on the relative selling price. The selling price for telephone equipment is based on third-party evidence representing list prices for similar equipment when sold a stand-alone basis. The selling price for professional and hosting services is based on the Company's best estimate of selling price (BESP). We develop our BESP by considering pricing practices, margin, competition and overall market trends.


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The Company bills a portion of its monthly recurring hosted service revenue a month in advance. Any amounts billed and collected, but for which the service is not yet delivered, are included in deferred revenue. These amounts are recognized as revenues only when the service is delivered.

Equipment sales associated with the sale of telephone equipment is recognized upon delivery to the customer, as it is considered to be a separate earnings process. The sales are recognized on a gross basis, as the Company is considered the principal obligor in customer transactions among other considerations. Other upfront fees, excluding equipment, along with associated costs, up to but not exceeding these fees, are deferred and recognized over the estimated life of the customer relationship. The Company has estimated its customer relationship life at eight years and evaluates it periodically for continued appropriateness.

Telephone

Revenue is earned from monthly billings to customers for local voice services, long distance, DSL, Internet services, hardware and other services. Revenue is also derived from charges for network access to the local exchange telephone network from subscriber line charges and from contractual arrangements for services such as billing and collection and directory advertising. Revenue is recognized in the period in which service is provided to the customer. Directory advertising revenue is recorded ratably over the life of the directory. With multiple billing cycles, the Company accrues revenue earned but not yet billed at the end of a quarter. The Company also defers services billed in advance and recognizes them as income when earned.

The Telephone Segment markets competitive service bundles which may include multiple deliverables. The base bundles consist of voice services (including a business or residential phone line), calling features and long distance services and customers may choose to add internet services to a base bundle package. Separate units of accounting within the bundled packages include voice services, long distance and Internet services. Revenue for all services included in bundles are recognized over the same service period, which is the time period in which the service is provided to the customer.

Certain revenue is realized under pooling arrangements with other service providers and is divided among the companies based on respective costs and investments to provide the services. The companies that take part in pooling arrangements may adjust their costs and investments for a period of two years, which causes the dollars distributed by the pool to be adjusted retroactively. The Company believes that recorded amounts represent reasonable estimates of the final distribution from these pools. However, to the extent that the companies participating in these pools make adjustments, there will be corresponding adjustments to the Company's recorded revenue in future periods.

Certain revenue from these pooling arrangements which includes Universal Service Funds ("USF") and National Exchange Carrier Association ("NECA") pool settlements, accounted for 3% and 9% of the Company's consolidated revenues for the three months ended December 31, 2013 and 2012, respectively, and 5% and 8% of the Company's consolidated revenues for the years ended December 31, 2013 and 2012, respectively.

It is our policy to classify sales taxes collected from our customers and remitted to the government as netted through revenue.

Income Taxes

We record deferred taxes that arise from temporary differences between the financial statement and the tax basis of assets and liabilities. Deferred taxes are classified as current or non-current, depending on the classification of the assets and liabilities to which they relate. Deferred tax assets and deferred tax liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment. Our deferred taxes result principally from differences in the timing of depreciation and in the accounting for pensions and other postretirement benefits.

The process of providing for income taxes and determining the related balance sheet accounts requires management to assess uncertainties, make judgments regarding outcomes and utilize estimates. Management must make judgments currently about such uncertainties and determine estimates of our tax assets and liabilities. To the extent the final outcome differs, future adjustments to our tax assets and liabilities may be necessary.

In assessing the realizability of deferred tax assets, we consider whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and the tax credits and loss carryforwards are available to reduce taxable income. In making its assessment, we considered all sources of taxable income including carryback potential, future reversals of existing deferred tax liabilities, prudent and feasible tax planning strategies, and lastly, objectively verifiable projections of future taxable income exclusive of reversing temporary differences and carryforwards. Based on this assessment, we must evaluate the need for, and the amount of, valuation allowances against our deferred tax assets. To the extent facts and circumstances change in the future, adjustments to the valuation allowances may be required.

Accounting for uncertainty in income taxes requires uncertain tax positions to be classified as non-current income tax liabilities unless they are expected to be paid within one year. We have adopted the accounting guidance for uncertain tax positions and have concluded that there are no uncertain tax positions requiring recognition in our consolidated financial statements as of December 31, 2013 and 2012. We recognize interest accrued related to unrecognized tax benefits in interest income (expense).

Goodwill and Other Intangible Assets

Assets acquired and liabilities assumed must be recorded at their fair value at the date of acquisition. Our balance sheet includes amounts designated as goodwill and other intangible assets. Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired businesses. Other intangible assets primarily represent the Alteva trade name, customer relationships, and seat licenses.

Goodwill is not amortized, rather tested for impairment at least annually. Our impairment testing for goodwill is performed annually on December 31, or whenever events or circumstances indicate that there may be impairment. For the purpose of the goodwill impairment test, the Company can elect to perform a qualitative analysis to determine if it is more likely than not that the fair values of its reporting units are less than the respective carrying values of those reporting units. We elected to bypass performing the qualitative screen and went directly to performing the first step quantitative analysis of the goodwill impairment test in the current year, primarily due to the UC segment's historical operating losses that have been generated since the goodwill was acquired in August 2011. Management believes that these operating losses were a result of the investments made to support the future growth of the UC segment and are not indicative of the future operating performance of the UC segment. We may elect to perform the qualitative analysis in future periods. The first step in the quantitative process is to compare the carrying amount of the reporting unit's net assets to the fair value of the reporting unit. If the fair value exceeds the carrying value, no further evaluation is required and no impairment loss is recognized. If the carrying amount exceeds the fair value, then the second step must be completed, which involves allocating the fair value of the reporting unit to each asset and liability, with the excess being implied goodwill. An impairment loss occurs if the amount of the recorded goodwill exceeds the implied goodwill. We would be required to record any such impairment losses.


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We have determined that our operating segments are the applicable reporting units because they are the lowest level at which discrete, reliable financial and cash flow information is regularly reviewed by segment management.

The estimated fair value of the UC reporting unit is based on a weighting of the income and market approach, with significant weighting given to the income approach. We principally rely on a discounted cash flow analysis to determine the fair value of the UC reporting unit, which considers forecasted cash flows discounted at an appropriate discount rate. We believe that market participants would use a discounted cash flow analysis to determine the fair value of our reporting units in a sale transaction. The annual goodwill impairment test requires us to make a number of assumptions and estimates concerning future levels of revenue growth, operating margins, depreciation, amortization and working capital requirements, which are based upon our long-range plan. Our long-range plan is updated as part of our annual planning process and is reviewed and approved by management. The growth rates are based upon the UC segment's historical performance and the future expectations of the unified communications industry. The future profitability is based upon our estimated expenses required to obtain and support the estimated revenue growth, and the UC segment's ability to leverage its current infrastructure. The UC segment and unified communications industry have experienced strong growth in recent years. The discount rate is an estimate of the overall after-tax rate of return required by a market participant, whose weighted average cost of capital includes both equity and debt, including a risk premium. While we use the best available information to prepare our cash flow and discount rate assumptions, actual future cash flows or market conditions could differ significantly resulting in future impairment charges related to recorded goodwill balances. In order to evaluate the sensitivity of the goodwill impairment test to changes in the fair value calculations, we applied a hypothetical 20% decrease in the fair value of the UC reporting unit. The 2013 results (expressed as a percentage of carrying value for the unit) showed that, despite the hypothetical 20% decrease in fair value, the fair value of our UC reporting unit still exceeded the carrying value by over 10%.

At December 31, 2013, goodwill of $9.0 million which was solely in our UC reporting unit, represented 24% of total assets. We performed our required annual impairment test in the fourth quarter of 2013 and determined that our goodwill was not impaired. There can be no assurance that goodwill impairment will not occur in the future.

Intangible assets that have finite useful lives are amortized by the straight-line method over their useful lives ranging from 3 to 15 years. Other intangible assets with finite lives are evaluated for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. The carrying value of other intangible assets with finite lives is considered impaired when the total projected undiscounted cash flows from those assets are less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of those assets. Fair market value is determined primarily using present value techniques based on projected cash flows from the asset group. As of December 31, 2013, our balance sheet included other intangibles that represented 20% of total assets.

Property, Plant and Equipment

We record property, plant and equipment at cost. Construction costs, labor and applicable overhead related to installations and interest during construction are capitalized. Costs of maintenance and repairs of property, plant and equipment are charged to operating expense. The estimated useful life of support equipment (vehicles, computers, etc.) ranges from 3 to 19 years. The estimated useful life of Internet equipment ranges from 3 to 5 years. The estimated useful life of communication and network equipment ranges from 10 to 15 years. The estimated useful life of buildings and other equipment ranges from 14 to 50 years. Depreciation expense is computed using the straight-line method.

We review the recoverability of our long-lived assets, including buildings, equipment, internal-use software and other intangible assets, when events or . . .

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