Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - BROADVIEW NETWORKS HOLDINGS INC | c04801exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - BROADVIEW NETWORKS HOLDINGS INC | c04801exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - BROADVIEW NETWORKS HOLDINGS INC | c04801exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - BROADVIEW NETWORKS HOLDINGS INC | c04801exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For The Quarterly Period Ended June 30, 2010 |
o | 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 333-142946
Broadview Networks Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
11-3310798 (IRS Employer Identification Number) |
|
800 Westchester Avenue, | ||
Suite N501 Rye Brook, NY 10573 | 10573 | |
(Address of principal executive offices) | (Zip code) |
(914) 922-7000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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 o No o
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 o No o
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 the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
Class | Outstanding at August 12, 2010 | |
Class A Common Stock, $.01 par value per share | 9,333,680 | |
Class B Common Stock, $.01 par value per share | 360,050 |
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report contains both historical and forward-looking statements. All
statements other than statements of historical fact included in this report that address
activities, events or developments that we expect, believe or anticipate will or may occur in the
future are forward-looking statements including, in particular, the statements about our plans,
objectives, strategies and prospects regarding, among other things, our financial condition,
results of operations and business. We have identified some of these forward-looking statements
with words like believe, may, will, should, expect, intend, plan, predict,
anticipate, estimate or continue and other words and terms of similar meaning. These
forward-looking statements may be contained throughout this report, including but not limited to
statements under the caption Managements Discussion and Analysis of Financial Condition and
Results of Operations. These forward-looking statements are based on current expectations about
future events affecting us and are subject to uncertainties and factors relating to our operations
and business environment, all of which are difficult to predict and many of which are beyond our
control and could cause our actual results to differ materially from those matters expressed or
implied by forward-looking statements. Many factors mentioned in our discussion in this report will
be important in determining future results. Although we believe that the expectations reflected in
these forward-looking statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Forward-looking statements (including oral representations)
are only predications or statements of current plans, which we review continuously. They can be
affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties,
including, among other things, risks associated with:
| servicing and refinancing our substantial indebtedness; |
||
| our history of net losses; |
||
| the elimination or relaxation of certain regulatory rights and protections; |
||
| billing and other disputes with vendors; |
||
| failure to maintain interconnection and service agreements with incumbent local
exchange and other carriers; |
||
| the loss of customers in an adverse economic environment; |
||
| regulatory uncertainties in the communications industry; |
||
| system disruptions or the failure of our information systems to perform as
expected; |
||
| the failure to anticipate and keep up with technological changes; |
||
| inability to provide services and systems at competitive prices; |
||
| difficulties associated with collecting payment from incumbent local exchange
carriers, interexchange carriers and wholesale customers; |
||
| the highly competitive nature of the communications market in which we operate
including competition from incumbents, cable operators and other new market entrants,
and declining prices for communications services; |
||
| continued industry consolidation; |
||
| restrictions in connection with our indenture governing the notes and credit
agreement governing the credit facility; |
||
| government regulation; |
3
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| increased regulation of Internet-protocol-based service providers; |
||
| vendor bills related to past periods; |
||
| the ability to maintain certain real estate leases and agreements; |
||
| interruptions in the business operations of third party service providers; |
||
| limits on our ability to seek indemnification for losses from individuals and
entities from whom we have acquired assets and operations; |
||
| disruption and instability in the financial markets; |
||
| the financial difficulties by others in our industry; |
||
| the solvency and liquidity of the administrative agent and primary creditor under
our revolving credit facility; |
||
| the failure to retain and attract management and key personnel; |
||
| the failure to manage and expand operations effectively; |
||
| the failure to successfully engage in future acquisitions, if any; |
||
| misappropriation of our intellectual property and proprietary rights; |
||
| the possibility of incurring liability for information disseminated through our
network; |
||
| service network disruptions due to software or hardware bugs of the network
equipment; and |
||
| fraudulent usage of our network and services. |
Because our actual results, performance or achievements could differ materially from those
expressed in, or implied by, these forward-looking statements, we cannot give any assurance that
any of the events anticipated by these forward-looking statements will occur or, if any of them do,
what impact they will have on our business, results of operations and financial condition. You are
cautioned not to place undue reliance on these forward-looking statements, which speak only as of
the date of this report. We do not undertake any obligation to update these forward-looking
statements to reflect new information, future events or otherwise, except as may be required under
federal securities laws.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Broadview Networks Holdings, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
December 31, | June 30, | |||||||
2009 | 2010 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 21,975 | $ | 15,216 | ||||
Certificates of deposit |
1,878 | 2,094 | ||||||
Investment securities |
23,549 | 18,554 | ||||||
Accounts receivable, less allowance for doubtful accounts of $7,942 and $9,323 |
41,388 | 37,262 | ||||||
Other current assets |
10,976 | 10,550 | ||||||
Total current assets |
99,766 | 83,676 | ||||||
Property and equipment, net |
86,875 | 87,638 | ||||||
Goodwill |
98,238 | 98,238 | ||||||
Intangible assets, net of accumulated amortization of $51,728 and $58,738 |
27,484 | 20,474 | ||||||
Other assets |
14,965 | 9,736 | ||||||
Total assets |
$ | 327,328 | $ | 299,762 | ||||
LIABILITIES AND STOCKHOLDERS DEFICIENCY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 9,196 | $ | 9,066 | ||||
Accrued expenses and other current liabilities |
35,630 | 30,312 | ||||||
Taxes payable |
12,768 | 10,188 | ||||||
Deferred revenues |
8,965 | 8,754 | ||||||
Current portion of capital lease obligations |
3,080 | 2,143 | ||||||
Total current liabilities |
69,639 | 60,463 | ||||||
Long-term debt |
326,510 | 319,635 | ||||||
Deferred rent payable |
3,343 | 3,317 | ||||||
Deferred revenues |
1,445 | 1,285 | ||||||
Capital lease obligations, net of current portion |
1,776 | 1,023 | ||||||
Deferred income taxes payable |
3,040 | 3,525 | ||||||
Other |
721 | 751 | ||||||
Total liabilities |
406,474 | 389,999 | ||||||
Stockholders deficiency: |
||||||||
Common stock A $.01 par value; authorized 80,000,000 shares, issued 9,342,509 shares and
outstanding 9,333,680 shares |
107 | 107 | ||||||
Common stock B $.01 par value; authorized 10,000,000 shares, issued and outstanding 360,050
shares |
4 | 4 | ||||||
Series A Preferred stock $.01 par value; authorized 89,526 shares, designated, issued and
outstanding
87,254 shares entitled in liquidation to $156,927 and $166,484 |
1 | 1 | ||||||
Series A-1 Preferred stock $.01 par value; authorized 105,000 shares, designated, issued and
outstanding 100,702 shares, entitled in liquidation to $181,114 and $192,144 |
1 | 1 | ||||||
Series B Preferred stock $.01 par value; authorized 93,180 shares, designated, issued and
outstanding
91,187 shares entitled in liquidation to $164,001 and $173,989 |
1 | 1 | ||||||
Series B-1 Preferred stock $.01 par value; authorized 86,000 shares, designated and issued
64,986 shares, and
outstanding 64,633 shares entitled in liquidation to $116,243 and $123,381 |
1 | 1 | ||||||
Series C Preferred stock $.01 par value; authorized 52,332 shares, designated, issued and
outstanding
14,402 shares entitled in liquidation to $18,466 and $20,043 |
| | ||||||
Additional paid-in capital |
140,752 | 140,811 | ||||||
Accumulated deficit |
(219,836 | ) | (230,986 | ) | ||||
Treasury stock, at cost |
(177 | ) | (177 | ) | ||||
Total stockholders deficiency |
(79,146 | ) | (90,237 | ) | ||||
Total liabilities and stockholders deficiency |
$ | 327,328 | $ | 299,762 | ||||
See notes to unaudited condensed consolidated financial statements.
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Broadview Networks Holdings, Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share amounts)
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share amounts)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
Revenues |
$ | 116,050 | $ | 102,907 | $ | 238,021 | $ | 208,613 | ||||||||
Operating expenses: |
||||||||||||||||
Cost of revenues (exclusive of depreciation and amortization) |
57,477 | 49,605 | 119,128 | 99,665 | ||||||||||||
Selling, general and administrative (includes share-based
compensation of $59, $0, $116 and $59) |
39,629 | 39,701 | 81,262 | 77,471 | ||||||||||||
Depreciation and amortization |
12,245 | 11,343 | 25,803 | 22,751 | ||||||||||||
Total operating expenses |
109,351 | 100,649 | 226,193 | 199,887 | ||||||||||||
Income from operations |
6,699 | 2,258 | 11,828 | 8,726 | ||||||||||||
Interest expense |
(10,124 | ) | (9,440 | ) | (20,101 | ) | (19,363 | ) | ||||||||
Interest income |
12 | 12 | 96 | 17 | ||||||||||||
Other income |
16 | | 16 | | ||||||||||||
Loss before provision for income taxes |
(3,397 | ) | (7,170 | ) | (8,161) | (10,620 | ) | |||||||||
Provision for income taxes |
(358 | ) | (242 | ) | (699 | ) | (530 | ) | ||||||||
Net loss |
(3,755 | ) | (7,412 | ) | (8,860 | ) | (11,150 | ) | ||||||||
Dividends on preferred stock |
(17,704 | ) | (19,907 | ) | (34,892 | ) | (38,626 | ) | ||||||||
Loss available to common shareholders |
$ | (21,459 | ) | $ | (27,319 | ) | $ | (43,752 | ) | $ | (49,776 | ) | ||||
Loss available per common share basic and diluted |
$ | (2.21 | ) | $ | (2.82 | ) | $ | (4.52 | ) | $ | (5.14 | ) | ||||
Weighted average common shares outstanding basic and diluted |
9,688,771 | 9,691,287 | 9,684,139 | 9,686,684 | ||||||||||||
See notes to unaudited condensed consolidated financial statements.
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Broadview Networks Holdings, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended June 30, | ||||||||
2009 | 2010 | |||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | (8,860 | ) | $ | (11,150 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Depreciation |
16,404 | 15,711 | ||||||
Amortization of deferred financing costs |
1,313 | 1,313 | ||||||
Amortization of intangible assets |
9,365 | 7,010 | ||||||
Amortization of bond premium |
(444 | ) | (497 | ) | ||||
Provision for doubtful accounts |
3,916 | 2,438 | ||||||
Write-off of costs incurred in conneciton with initial public offering |
| 3,669 | ||||||
Share-based compensation |
116 | 59 | ||||||
Deferred income taxes |
484 | 485 | ||||||
Other |
41 | 23 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
2,228 | 1,688 | ||||||
Other current assets |
(311 | ) | 426 | |||||
Other assets |
(672 | ) | 130 | |||||
Accounts payable |
3,354 | (130 | ) | |||||
Accrued expenses and other current liabilities |
(13,763 | ) | (5,201 | ) | ||||
Taxes payable |
2,820 | (2,580 | ) | |||||
Deferred revenues |
(1,003 | ) | (371 | ) | ||||
Deferred rent payable |
(133 | ) | (26 | ) | ||||
Net cash provided by operating activities |
14,855 | 12,997 | ||||||
Cash flows from investing activities |
||||||||
Purchases of property and equipment |
(13,631 | ) | (16,474 | ) | ||||
Purchases of investment securities |
(60,574 | ) | (70,653 | ) | ||||
Sales of investment securities |
60,539 | 75,655 | ||||||
Other |
(108 | ) | (216 | ) | ||||
Net cash used in investing activities |
(13,774 | ) | (11,688 | ) | ||||
Cash flows from financing activities |
||||||||
Drawdowns on revolving credit facility |
620 | 642 | ||||||
Repayments of revolving credit facility |
(1,620 | ) | (7,020 | ) | ||||
Proceeds from capital lease financing |
215 | 142 | ||||||
Payments on capital lease obligations |
(2,005 | ) | (1,832 | ) | ||||
Net cash used in financing activities |
(2,790 | ) | (8,068 | ) | ||||
Net decrease in cash and cash equivalents |
(1,709 | ) | (6,759 | ) | ||||
Cash and cash equivalents at beginning of period |
22,177 | 21,975 | ||||||
Cash and cash equivalents at end of period |
$ | 20,468 | $ | 15,216 | ||||
See notes to unaudited condensed consolidated financial statements.
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Broadview Networks Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share information)
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share information)
1. Organization and Description of Business
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared
based upon Securities and Exchange Commission (SEC) rules that permit reduced disclosure for
interim periods. These financial statements reflect all adjustments necessary for a fair
presentation of the results of operations and financial condition for the interim periods shown,
including normal recurring accruals and other items. The results for interim periods are not
necessarily indicative of results for the full year. For a more complete discussion of significant
accounting policies and certain other information, the Companys interim unaudited financial
statements should be read in conjunction with its audited financial statements as of and for the
year ended December 31, 2009 included in the Companys Form 10-K. The condensed consolidated
interim financial statements include both the Companys accounts and the accounts of its
wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in
consolidation. The Company has evaluated the impact of subsequent events through the date the
condensed consolidated financial statements were filed with the SEC.
The preparation of the condensed consolidated financial statements in conformity with U.S.
generally accepted accounting principles (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 amount of revenues and expenses during the reporting period. Management periodically
reviews such estimates and assumptions as circumstances dictate. Actual results could differ from
those estimates.
The Company has reclassified prior year amounts to conform to the current year presentation,
the most significant of which pertain to the issuance of credits to customers. The Company issues
credits in an effort to acquire, retain and incentivize its customers. The Company has historically
classified these credits in its selling, general and administrative expenses. The Company has
reclassified these credits from selling, general and administrative expenses and is now reflecting
them as a reduction in revenue. As a result, revenues and selling, general and administrative
expenses have been reduced by $768 and $1,504 for the three and six months ended June 30, 2009,
respectively.
The Company is an integrated communications company whose primary interests consist of
wholly-owned subsidiaries Broadview Networks, Inc. (BNI), Bridgecom Holdings, Inc. (BH),
Corecomm-ATX, Inc. (ATX) and Eureka Broadband Corporation (Eureka, InfoHighway or IH). The
Company also provides phone systems and other customer service offerings through its subsidiary,
Bridgecom Solutions Group, Inc. (BSG). The Company was founded in 1996 to take advantage of the
deregulation of the U.S. telecommunications market following the Telecommunications Act of 1996.
The Company has one reportable segment providing domestic wireline telecommunications services
consisting of local and long distance voice services, Internet, and data services to commercial
customers in the northeast United States.
2. Investment Securities
Investment securities represent the Companys investment in short-term U.S. Treasury notes.
The Companys primary objectives for purchasing these investment securities are liquidity and
safety of principal. The Company considers these investment securities to be available-for-sale.
Accordingly, these investments are recorded at their fair value of $23,549 and $18,554 as of
December 31, 2009 and June 30, 2010, respectively. The fair value of these investment securities
are based on publicly quoted market prices, which are Level 1 inputs under the fair value
hierarchy. All of the Companys investment securities mature in less than one year. The cost and
fair value of these investment securities were not materially different as of December 31, 2009 and
June 30, 2010. During the six months ended June 30, 2009 and 2010, the Company purchased $60,574
and $70,653 and sold $60,539 and $75,655 respectively, of U.S. Treasury notes. All unrealized and
realized gains are determined by specific identification.
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Broadview Networks Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share information)
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share information)
3. Recent Accounting Pronouncements
On January 1, 2010, the Company adopted the accounting standard that amends the requirements
for disclosures regarding fair value measures for annual, as well as interim, reporting periods.
This standard was effective prospectively for all interim and annual reporting periods ending after
December 15, 2009. The Company was not required to include any significant additional disclosures
to its condensed consolidated financial statements, as a result of adopting this standard.
On June 15, 2009, the Company prospectively adopted the accounting standard regarding the
accounting for, and disclosure of, events that occur after the balance sheet date but before the
financial statements are issued. The adoption of this standard has not had a significant impact on
its financial position or results of operations. The Company included additional disclosures in
Note 1 to its condensed consolidated financial statements as a result of adopting this standard.
4. InfoHighway Acquisition
In connection with the acquisition of InfoHighway in 2007, warrants to acquire 16,711 units,
with each such unit comprised of 1 share of Series B-1 Preferred Stock and 25 shares of Class A
Common Stock, remain outstanding. The warrants are generally exercisable for a period of up to five
years, with the exercise price of each warrant unit determined based on the cash flow generated
from a certain customer of the legacy InfoHighway entity during the two year period following
closing of the acquisition. As certain cash flow parameters are met as calculated and agreed upon
for the twelve months ended May 31, 2008 and the twelve months ended May 31, 2009, the exercise
price on the warrants may decrease from $883.58 per unit to an exercise price of $0.01 per unit.
As of August 12, 2010, the exercise price on the warrants has not been determined.
Negotiations are occurring between the Company and the warrant holders as to how certain carrier
disputes relating specifically to InfoHighway that were in existence at the acquisition date and
arising subsequent to that date will be handled in the cash flow calculation. The Company will not
adjust the value of the warrants until an exercise price has been determined. When the exercise
price for the warrants is resolved, the Company will utilize a Black-Scholes model to determine the
aggregate value of the warrants. If the Company determines that the value of the warrants has
increased, the Company will record additional merger consideration and related goodwill at such
point of determination.
5. Fair Values of Financial Instruments
The Companys financial instruments include cash and cash equivalents, certificates of
deposit, investments in U.S. Treasury notes, trade accounts receivable, accounts payable, and
long-term debt. The Companys available cash balances are invested on a short-term basis (generally
overnight) and, accordingly, are not subject to significant risks associated with changes in
interest rates. All of the Companys cash flows are derived from operations within the United
States and are not subject to market risk associated with changes in foreign exchanges rates. The
carrying amounts of the Companys cash and cash equivalents, certificates of deposit, trade
accounts receivable and accounts payable reported in the consolidated balance sheets as of December
31, 2009 and June 30, 2010 are deemed to approximate fair value because of their liquidity and
short-term nature. The carrying amounts of the Companys investments in U.S. Treasury notes are
recorded at their fair value of $23,549 and $18,554, which are based on the publicly quoted market
price as of December 31, 2009 and June 30, 2010, respectively.
As of December 31, 2009 and June 30, 2010, the fair value of the long-term debt outstanding
under the Companys revolving credit facility approximated its carrying value of $23,500 and
$17,122, respectively, due to its variable market-based interest rate. The fair value of the
Companys senior secured notes at December 31, 2009 and June 30, 2010 was $287,250 and $291,000,
respectively, which was based on the publicly quoted closing price of the notes at those dates. The
publicly quoted closing price used to value the Companys senior secured notes is considered to be
a Level 1 input in the fair value hierarchy. The carrying value of the Companys senior secured
notes due 2012 at December 31, 2009 and June 30, 2010 was $303,010 and $302,513 respectively.
6. Commitments and Contingencies
The Company has, in the ordinary course of its business, disputed certain billings from
carriers and has recorded the estimated settlement amount of the disputed balances. The settlement
estimate is based on various factors, including historical results of prior dispute settlements.
The amount of such charges in dispute at June 30, 2010 was approximately $17,960. The Company
believes that the ultimate settlement of these disputes will be at amounts less than the amount
disputed and has accrued the estimated settlement in accrued expenses and other current liabilities
at June 30, 2010. It is possible that the actual settlement of such disputes may differ from these
estimates and the Company may settle at amounts greater than the estimates.
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Broadview Networks Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share information)
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share information)
6. Commitments and Contingencies (continued)
The Company has entered into commercial agreements with vendors under which it purchases
certain services that it had previously leased under the unbundled network platform provisions of
the Telecommunications Act of 1996 as well as special access services. The agreements, which expire
between 2011 and 2013, require certain minimum purchase obligations and contain fixed pricing over
their term. For the six months ended June 30, 2010, the Company met the minimum purchase
obligations.
The Company is involved in claims and legal actions arising in the ordinary course of
business. Management is of the opinion that the ultimate outcome of these matters will not have a
material adverse impact on the Companys consolidated financial position, results of operations, or
cash flows. For more information, see our Form 10-K for the year ended December 31, 2009.
7. Long-term Debt Guarantees
The Companys senior secured notes are fully, unconditionally and irrevocably guaranteed on a
senior secured basis, jointly and severally, by each of the Companys existing and future domestic
restricted subsidiaries. The notes and the guarantees rank senior in right of payment to all
existing and future subordinated indebtedness of the Company and its subsidiary guarantors, as
applicable, and equal in right of payment with all existing and future senior indebtedness of the
Company and of such subsidiaries.
The notes and the guarantees are secured by a lien on substantially all of the Companys
assets, provided, however, that pursuant to the terms of an intercreditor agreement, the security
interest in those assets consisting of receivables, inventory, deposit accounts, securities
accounts and certain other assets that secure the notes and the guarantees are contractually
subordinated to a lien thereon that secures the Companys revolving credit facility with an
aggregate principal amount of $25,000 and certain other permitted indebtedness.
8. Income Taxes
The Company completed a study of its available net operating loss carryforwards (NOLs)
resulting from previous mergers. The utilization of these NOLs are subject to restrictions pursuant
to Section 382 of the Internal Revenue Code. As such, it was determined that certain NOLs recorded
by the Company as deferred tax assets were limited. At December 31, 2009, the Company had NOLs
available totaling $134,976, which begin to expire in 2012. The Company has provided a full
valuation allowance against the net deferred tax asset because management does not believe it is
more likely than not that this asset will be realized. If the Company achieves profitability, the
net deferred tax assets may be available to offset future income tax liabilities.
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Broadview Networks Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share information)
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share information)
9. Loss per share
The following is a reconciliation of the numerators and denominators of the basic and diluted
net loss per share computations for the three and six months ended June 30, 2009 and 2010:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
Loss available to common shareholders (Numerator): |
||||||||||||||||
Net loss |
$ | (3,755 | ) | $ | (7,412 | ) | $ | (8,860 | ) | $ | (11,150 | ) | ||||
Dividends on preferred stock |
(17,704 | ) | (19,907 | ) | (34,892 | ) | (38,626 | ) | ||||||||
Loss available to common shareholders |
$ | (21,459 | ) | $ | (27,319 | ) | $ | (43,752 | ) | $ | (49,776 | ) | ||||
Shares (Denominator): |
||||||||||||||||
Weighted average common shares outstanding: |
||||||||||||||||
Class A common stock |
9,342,880 | 9,333,680 | 9,342,880 | 9,333,680 | ||||||||||||
Class B common stock |
345,891 | 357,607 | 341,259 | 353,004 | ||||||||||||
Total weighted average common shares outstanding basic and diluted |
9,688,771 | 9,691,287 | 9,684,139 | 9,686,684 | ||||||||||||
Loss available per common share basic and diluted |
$ | (2.21 | ) | $ | (2.82 | ) | $ | (4.52 | ) | $ | (5.14 | ) | ||||
For the six months ended June 30, 2009 and 2010, the Company had outstanding options,
warrants, restricted stock units and preferred stock, which are convertible into or exercisable for
common shares of 13,502,141 and 14,281,039 respectively, that were not included in the calculation
of diluted loss per common share because the effect would have been anti-dilutive.
Dividends accumulate on the Companys Preferred Stock. The loss available to common shareholders
must be computed by adding any dividends accumulated for the period to net losses. The aggregate
accumulated dividends on the Companys Preferred Stock was $245,829 and $284,455 respectively, as
of December 31, 2009 and June 30, 2010. The per share amounts of accumulated dividends on the
Companys Preferred Stock was $25.37 and $29.37, respectively, as of December 31, 2009 and June 30,
2010. The Company has not declared any dividends.
11
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and
Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere in this
quarterly report and our Form 10-K for the year ended December 31, 2009 filed with the Securities
and Exchange Commission (the SEC). Certain information contained in the discussion and analysis
set forth below and elsewhere in this quarterly report, including information with respect to our
plans and strategies for our business and related financing, includes forward-looking statements
that involve risk and uncertainties. In evaluating such statements, prospective investors should
specifically consider the various factors identified in this quarterly report that could cause
results to differ materially from those expressed in such forward-looking statements, including
matters set forth in our Form 10-K for the year ended December 31, 2009 filed with the SEC.
Overview
We are a leading competitive communications provider, in terms of revenue, offering voice and
data communications and managed network solutions to business customers of all sizes throughout the
country with a concentration in 20 markets across 10 states throughout the Northeast and
Mid-Atlantic United States, including major metropolitan markets such as New York, Philadelphia,
Baltimore, Washington, D.C. and Boston. To meet the demands of communications-intensive business
customers, we offer dedicated local and long distance voice, high-speed data and integrated
services, as well as value-added products and services such as managed services and hosted VoIP
solutions (also known as cloud-based Communication as a Service (CaaS)). Our network architecture
pairs the strength of a traditional infrastructure with an IP platform, built into our core and
extending to the edge, to support dynamic growth of Voice Over Internet Protocol (VoIP),
Multiprotocol Label Switching (MPLS) and other next generation technologies. In addition, our
network topology incorporates metro Ethernet access in key markets, enabling us to provide T-1
equivalent and high-speed Ethernet access services via unbundled network element loops to customers
served from selected major metropolitan collocations, significantly increasing our margins while
also enhancing capacity and speed of certain service offerings.
We recorded operating losses of $32.1 million and $3.0 million for the years ended December
31, 2007 and 2008, respectively. For the year ended December 31, 2009 and for the six months ended
June 30, 2010, we recorded operating income of $26.4 million and $8.7 million, respectively. For
the years ended December 31, 2007, 2008 and 2009 and for the six months ended June 30, 2010, we
recorded net losses of $65.5 million, $42.9 million, $13.9 million and $11.1 million, respectively.
Although we expect to continue to have net losses for the foreseeable future, we continue to search
for ways of increasing operating efficiencies that could lead to potentially more profitable net
results.
Our business is subject to several macro trends, some of which negatively affect our operating
performance. Among these negative trends are lower usage per customer, which translates into less
usage based revenue and lower unit pricing for certain services. In addition, we continue to face
other industry wide trends including rapid technology changes and overall increases in competition
from existing large competitors such as Verizon and established cable operators, other competitive
local exchange carriers and new entrants such as VoIP, wireless and other service providers. These
factors are partially mitigated by several positive trends. These include a more stable customer
base, increasing revenue per customer due to the trend of customers buying more products from us as
we deploy new technology and expand our offerings, a focus on larger customers and an overall
increase in demand for data, managed and enhanced services. Although our overall revenue has
declined since 2008, we have mitigated the impact of the revenue decline on our overall operating
results by reducing costs of revenue and SG&A costs, the achievement of operating efficiencies
throughout the organization and by the net effect of non-recurring gains and losses.
As of June 30, 2010, we have approximately 260 sales, sales management and sales support
employees, including approximately 190 quota-bearing sales representatives, who target small and
medium sized business or enterprise customers located within the footprint of our switching centers
and approximately 260 collocations. We also offer our hosted IP product, Officesuite, on a
nationwide basis and have chosen our agent sales channel as our primary distribution channel. We
focus our sales efforts on communications intensive business customers who purchase multiple
products that can be cost-effectively delivered on our network. These customers generally purchase
high margin services in multi-year contracts and result in high retention rates. We believe that a
lack of focus on the small and medium sized business segment from the Regional Bell Operating
Companies has created an increased demand for alternatives in the small and medium sized business
communications market. Consequently, we view this market as a sustainable growth opportunity and
have focused our strategies on providing small and medium sized businesses with a competitive
communications solution.
12
Table of Contents
We focus our business strategy on providing services based on our T-1 based products, which we
believe offer greater value to customers, increase customer retention and provide revenue growth
opportunities for us. Historically, the Companys revenue was dominated by off-net, voice revenue
from smaller customers. We have transitioned a large percentage of our revenue base to T-1 based
products. Revenue from the sale of T-1 based products and managed services represents approximately
48.0% of our total revenue and approximately 54.6% of our retail revenue stream, with typical
incremental gross profit margins in excess of 60%.
Our facilities-based network encompasses approximately 3,000 route miles of metro and
long-haul fiber, approximately 260 collocations and approximately 500 lit buildings. Our network
has the ability to deliver traditional services, such as Plain Old Telephone Service (POTS) and
T-1 lines, as well as Digital Subscriber Line, and next generation services, such as dynamic VoIP
integrated T-1s, Ethernet in the first mile, hosted VoIP solutions, and MPLS Virtual Private
Networks. We provide services to our customers primarily through our network of owned
telecommunications switches, data routers and related equipment and owned and leased communications
lines and transport facilities using a variety of access methods, including unbundled network
element loops, special access circuits and digital T-1 transmission lines for our on-net customers.
A significant portion of our customer base has been migrated to a cost-effective and efficient
IP-based platform, which enhances the performance of our network. As of June 30, 2010,
approximately 75% of our total lines were provisioned on-net.
Results of Operations
The following table sets forth, for the periods indicated, certain financial data as a
percentage of total revenues.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Voice and data services |
86.8 | % | 88.2 | % | 86.6 | % | 88.0 | % | ||||||||
Wholesale |
4.2 | % | 5.2 | % | 4.2 | % | 5.0 | % | ||||||||
Access |
5.5 | % | 4.2 | % | 5.5 | % | 4.7 | % | ||||||||
Total network services |
96.5 | % | 97.6 | % | 96.3 | % | 97.7 | % | ||||||||
Other |
3.5 | % | 2.4 | % | 3.7 | % | 2.3 | % | ||||||||
Total revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Operating expenses: |
||||||||||||||||
Network services |
47.7 | % | 47.4 | % | 48.2 | % | 47.0 | % | ||||||||
Other cost of revenues |
1.7 | % | 0.8 | % | 1.9 | % | 0.8 | % | ||||||||
Selling, general and
administrative |
34.1 | % | 38.6 | % | 34.1 | % | 37.1 | % | ||||||||
Depreciation and amortization |
10.6 | % | 11.0 | % | 10.8 | % | 10.9 | % | ||||||||
Total operating expenses |
94.1 | % | 97.8 | % | 95.0 | % | 95.8 | % | ||||||||
Income from operations |
5.9 | % | 2.2 | % | 5.0 | % | 4.2 | % | ||||||||
Interest expense |
(8.8 | %) | (9.2 | %) | (8.4 | %) | (9.3 | %) | ||||||||
Interest income |
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||
Other income |
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||
Loss before provision for
income taxes |
(2.9 | %) | (7.0 | %) | (3.4 | %) | (5.1 | %) | ||||||||
Provision for income taxes |
(0.3 | %) | (0.2 | %) | (0.3 | %) | (0.2 | %) | ||||||||
Net loss |
(3.2 | %) | (7.2 | %) | (3.7 | %) | (5.3 | %) | ||||||||
13
Table of Contents
Key Components of Results of Operations
Revenues
Our revenues, as detailed in the table above, consist of network services revenues, which
consists primarily of voice and data managed and hosted services, wholesale services and access
services. Voice and data services consist of local dial tone, long distance and data services, as
well as managed and hosted services. Wholesale services consist of voice and data services, data
collocation services and transport services. Access services, includes carrier access and
reciprocal compensation revenue, which consists primarily of usage charges that we bill to other
carriers to originate and terminate their calls from and to our customers. Network services
revenues represents a predominantly recurring revenue stream linked to our retail and wholesale
customers.
We generate approximately 88% of our revenues from retail end customer voice and data products
and services. Revenue from end customer data includes T-1/T-3, integrated T-1 data and other
managed services trending to an increasing percentage of our overall revenue even as voice
revenues, predominately POTS and long distance services, remain the core of our revenue base. Data
cabling, service installation and wiring and phone systems sales and installation also form a small
but growing portion of our overall business. We continue to focus on data, managed and hosted
services as growth opportunities as we expect the industry to trend toward lower usage components
of legacy products such as long distance and local usage. This lower usage is primarily driven by
trends toward customers using more online and wireless communications.
Cost of Revenues (exclusive of depreciation and amortization)
Our network services cost of revenues consist primarily of the cost of operating our network
facilities. Determining our cost of revenues requires significant estimates. The network components
for our facilities-based business include the cost of:
| leasing local loops and digital T-1 lines which connect our customers to our network; |
||
| leasing high capacity digital lines that connect our switching equipment to our
collocations; |
||
| leasing high capacity digital lines that interconnect our network with the incumbent
local exchange carriers; |
||
| leasing space, power and terminal connections in the incumbent local exchange carrier
central offices for collocating our equipment; |
||
| signaling system network connectivity; and |
||
| Internet transit and peering, which is the cost of delivering Internet traffic from our
customers to the public Internet. |
The costs to obtain local loops, digital T-1 lines and high capacity digital interoffice
transport facilities from the incumbent local exchange carriers vary by carrier and by state and
are regulated under federal and state laws. We do not anticipate any significant changes in Verizon
local loop, digital T-1 line or high capacity digital interoffice transport facility rates in the
near future. Except for our lit buildings, in virtually all areas, we obtain local loops, T-1 lines
and interoffice transport capacity from the incumbent local exchange carriers. We obtain
interoffice facilities from carriers other than the incumbent local exchange carriers, where
possible, in order to lower costs and improve network redundancy; however, in most cases, the
incumbent local exchange carriers are our only source for local loops and T-1 lines.
Our off-net network services cost of revenues consists of amounts we pay to Verizon and AT&T
pursuant to our commercial agreements with them. Rates for such services are prescribed in the
commercial agreements and available for the term of the agreements. The commercial agreements,
which expire between 2011 and 2013, require certain minimum purchase obligations, which we have met
in all of the years we were under the commercial agreements.
Our network services cost of revenues also includes the fees we pay for long distance, data
and other services. We have entered into long-term wholesale purchasing agreements for these
services. Some of the agreements contain significant termination penalties and/or minimum usage
volume commitments. In the event we fail to meet minimum volume commitments, we may be obligated to
pay underutilization charges. We do not anticipate having to pay any underutilization charges in
the foreseeable future.
14
Table of Contents
Gross Profit (exclusive of depreciation and amortization)
Gross profit (exclusive of depreciation and amortization), referred to herein as gross
profit, as presented in this Managements Discussion and Analysis of Financial Condition and
Results of Operations, represents income from operations, before depreciation and amortization, and
selling, general and administrative expenses (SG&A). Gross profit is a non-GAAP financial measure
used by our management, together with financial measures prepared in accordance with GAAP such as
revenue and cost of revenue, to assess our historical and prospective operating performance.
The following table sets forth, for the periods indicated, a reconciliation of gross profit to
income from operations as income from operations is calculated in accordance with GAAP:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
Income from operations |
$ | 6,699 | $ | 2,258 | $ | 11,828 | $ | 8,726 | ||||||||
Depreciation and amortization |
12,245 | 11,343 | 25,803 | 22,751 | ||||||||||||
Selling, general and
administrative |
39,629 | 39,701 | 81,262 | 77,471 | ||||||||||||
Gross profit (exclusive of
depreciation and amortization) |
$ | 58,573 | $ | 53,302 | $ | 118,893 | $ | 108,948 | ||||||||
Gross profit is a measure of the general efficiency of our network costs in comparison to our
revenue. As we expense the current cost of our network against current period revenue, we use this
measure as a tool to monitor our progress with regards to network optimization and other operating
metrics.
Our management also uses gross profit to evaluate performance relative to that of our
competitors. This financial measure permits a comparative assessment of operating performance,
relative to our performance based on our GAAP results, while isolating the effects of certain items
that vary from period to period without any correlation to core operating performance or that vary
widely among similar companies. Our management believes that gross profit is a particularly useful
comparative measure within our industry.
We provide information relating to our gross profit so that analysts, investors and other
interested persons have the same data that management uses to assess our operating performance,
which permits them to obtain a better understanding of our operating performance and to evaluate
the efficacy of the methodology and information used by our management to evaluate and measure such
performance on a standalone and a comparative basis.
Our gross profit may not be directly comparable to similarly titled measures reported by other
companies due to differences in accounting policies and items excluded or included in the
adjustments, which limits its usefulness as a comparative measure. In addition, gross profit has
other limitations as an analytical financial measure. These limitations include the following:
| gross profit does not reflect our capital expenditures, future requirements for capital
expenditures or contractual commitments to purchase capital equipment; |
||
| gross profit does not reflect the interest expense, or the cash requirements necessary to
service interest or principal payments, associated with our indebtedness; |
||
| although depreciation and amortization are non-cash charges, the assets being depreciated
and amortized will likely have to be replaced in the future, and gross profit does not
reflect any cash requirements for such replacements; and |
||
| gross profit does not reflect the SG&A expenses necessary to run our ongoing operations. |
15
Table of Contents
Our management compensates for these limitations by relying primarily on our GAAP results to
evaluate its operating performance and by considering independently the economic effects of the
foregoing items that are or are not reflected in gross profit. As a result of these limitations,
gross profit should not be considered as an alternative to income from operations, as calculated in
accordance with GAAP, as a measure of operating performance.
Selling, General and Administrative
SG&A is comprised primarily of salaries and related expenses, software development expenses,
non-cash compensation, occupancy costs, sales and marketing expenses, commission expenses, bad debt
expense, billing expenses, professional services expenses and insurance expenses.
Determining our allowance for doubtful accounts receivable requires significant estimates. In
determining the proper level for the allowance we consider factors such as historical collections
experience, the aging of the accounts receivable portfolio and economic conditions. We perform a
credit review process on each new customer that involves reviewing the customers current service
provider bill and payment history, matching customers with national databases for delinquent
customers and, in some cases, requesting credit reviews through Dun & Bradstreet Corporation.
Depreciation and Amortization
Our depreciation and amortization expense currently includes depreciation for network related
voice and data equipment, fiber, back-office systems, third party conversion costs, furniture,
fixtures, leasehold improvements, office equipment and computers and amortization of intangibles
associated with mergers, acquisitions and software development costs.
Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2010
Set forth below is a discussion and analysis of our results of operations for the three months
ended June 30, 2009 and 2010.
The following table provides a breakdown of components of our statements of operations for the
three months ended June 30, 2009 and 2010:
Three Months Ended June 30, | ||||||||||||||||||||
2009 | 2010 | |||||||||||||||||||
% of Total | % of Total | |||||||||||||||||||
Amount | Revenues | Amount | Revenues | % Change | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Network services |
$ | 112,011 | 96.5 | % | $ | 100,478 | 97.6 | % | (10.3 | %) | ||||||||||
Other |
4,039 | 3.5 | % | 2,429 | 2.4 | % | (39.9 | %) | ||||||||||||
Total revenues |
116,050 | 100.0 | % | 102,907 | 100.0 | % | (11.3 | %) | ||||||||||||
Cost of revenues: |
||||||||||||||||||||
Network services |
55,352 | 47.7 | % | 48,799 | 47.4 | % | (11.8 | %) | ||||||||||||
Other |
2,125 | 1.7 | % | 806 | 0.8 | % | (62.1 | %) | ||||||||||||
Total cost of revenues |
57,477 | 49.4 | % | 49,605 | 48.2 | % | (13.7 | %) | ||||||||||||
Gross profit: |
||||||||||||||||||||
Network services |
56,659 | 48.8 | % | 51,679 | 50.2 | % | (8.8 | %) | ||||||||||||
Other |
1,914 | 1.8 | % | 1,623 | 1.6 | % | (15.2 | %) | ||||||||||||
Total gross profit |
$ | 58,573 | 50.6 | % | $ | 53,302 | 51.8 | % | (9.0 | %) | ||||||||||
16
Table of Contents
Revenues
Revenues for the three months ended June 30, 2009 and 2010 were as follows:
Three Months Ended June 30, | ||||||||||||||||||||
2009 | 2010 | |||||||||||||||||||
% of Total | % of Total | |||||||||||||||||||
Amount | Revenues | Amount | Revenues | % Change | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Voice and data services |
$ | 100,757 | 86.8 | % | $ | 90,754 | 88.2 | % | (9.9 | %) | ||||||||||
Wholesale |
4,882 | 4.2 | % | 5,353 | 5.2 | % | 9.6 | % | ||||||||||||
Access |
6,372 | 5.5 | % | 4,371 | 4.2 | % | (31.4 | %) | ||||||||||||
Total network services |
112,011 | 96.5 | % | 100,478 | 97.6 | % | (10.3 | %) | ||||||||||||
Other |
4,039 | 3.5 | % | 2,429 | 2.4 | % | (39.9 | %) | ||||||||||||
Total revenues |
$ | 116,050 | 100.0 | % | $ | 102,907 | 100.0 | % | (11.3 | %) | ||||||||||
Revenues from voice services have decreased $11.8 million or 16.0% between 2009 and 2010. This
decrease is due to increased line churn, lower usage revenue per customer, lower prices per unit
for certain services and a lower number of lines and customers. Our revenues from data services
have decreased by $0.6 million or 2.3% between 2009 and 2010. Our carrier access revenues have
decreased primarily due to decreasing revenue from voice services, which reduces our revenues from
access originations and terminations and reciprocal compensation. In addition, carrier access
revenues have also decreased due to lower fees charged to the carriers, government mandated rate
decreases and the impact of disputed access charges. Our wholesale revenue increased primarily as a
result of organic growth of our T-1 and data products, as well as from voice terminations. Our
other revenues include data cabling, service installation and wiring and phone systems sales and
installation, which continue to decline due to the current economic environment.
Cost of Revenues (exclusive of depreciation and amortization)
Cost of revenues were $49.6 million for the three months ended June 30, 2010, a decrease of
13.7% from $57.5 million for the same period in 2009 as we identified and eliminated inefficiencies
in our operating platforms. The decrease is also due to our overall decline in revenue. Our costs
consist primarily of those incurred from other providers and those incurred from the cost of our
network. Costs where we purchased services or products from third party providers comprised $45.2
million, or 78.7%, of our total cost of revenues for the three months ended June 30, 2009 and $38.1
million, or 76.8%, in the three months ended June 30, 2010. The most significant components of our
costs purchased from third party providers consist of costs related to our Verizon wholesale
advantage contract, unbundled network element loop costs and T-1 costs, which totaled $11.3
million, $6.3 million and $13.5 million, respectively, for the three months ended June 30, 2009.
These costs totaled $8.7 million, $5.5 million and $12.1 million, respectively, for the three
months ended June 30, 2010. Combined these costs decreased by 15.4% between 2009 and 2010. We have
experienced a decrease in costs where we purchased services or products from third parties as a
percentage of total cost of revenues primarily due to our effective migration of lines to lower
cost platforms.
Gross Profit (exclusive of depreciation and amortization)
Gross profit was $53.3 million for the three months ended June 30, 2010, a decrease of 9.0%
from $58.6 million for the same period in 2009. As a percentage of revenues, gross profit increased
to 51.8% in 2010 from 50.6% in 2009. The increase in gross profit percentage is primarily due to
lower costs resulting from provisioning more lines from resale and unbundled network platforms to
on-net facilities. We are focusing sales initiatives towards increasing the amount of data and
integrated T-1 lines sold, as we believe that these initiatives will produce incrementally higher
margins than those currently reported from POTS services. In addition, we continue to drive
additional cost saving initiatives, including provisioning customers to our on-net facilities,
identifying additional inaccuracies in billing from existing carriers, renegotiating existing
agreements and executing new agreements with additional interexchange carriers.
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Table of Contents
Selling, General and Administrative
SG&A expenses were $39.7 million, 38.6% of revenues, for the three months ended June 30, 2010,
an increase of 0.3% from $39.6 million, 34.1% of revenues, for the same period in 2009. As of
December 31, 2009, our other non-current assets included $3.7 million of costs associated with the
registration statement filed with the SEC for a potential initial public offering. We have elected
not to complete the offering at this time and have charged these costs to operations during the
three months ended June 30, 2010. This increase in SG&A expenses between 2009 and 2010 has been
offset by the following: i) decreased employee costs of $2.2 million from reduced employee
headcount; ii) decreased bad debt expenses of $0.5 million from improved accounts receivable
collections and iii) decreased accounts receivable write-offs; and decreased commission expenses of
$1.1 million as a result of declining revenue and the reduction of estimates for royalty
liabilities. Excluding the costs incurred in connection with our initial public offering, our SG&A
as a percentage of revenue was 35.0%. This increase in SG&A as a percentage of revenue is due to
our overall revenue decline. We continue to look for additional cost savings in various categories
including headcount and professional services.
Depreciation and Amortization
Depreciation and amortization costs were $11.3 million for the three months ended June 30,
2010, a decrease of 7.4% from $12.2 million for the same period in 2009. This decrease in
depreciation and amortization expense was primarily due to fully amortizing one of our acquired
customer base intangible assets during 2009. Amortization expense included in our results of
operations for customer base intangible assets for the three months ended June 30, 2010 was $3.1
million, a decrease of $0.6 million from $3.7 million included in our results of operations during
the same period in 2009.
Interest
Interest expense was $9.5 million for the three months ended June 30, 2010, a decrease of 5.9%
from $10.1 million for the same period in 2009. The decrease was primarily due to lower interest
expense as a result of having a lower average outstanding debt balance for the three months ended
June 30, 2010 compared to the same period in 2009. The lower average debt balance is due to reduced
borrowings under our revolving credit facility and our capital leases. Our effective annual
interest rates for the three months ended June 30, 2009 and 2010 are as follows:
Three Months Ended June 30, | ||||||||
2009 | 2010 | |||||||
Interest expense |
$ | 10,124 | $ | 9,440 | ||||
Weighted average debt outstanding |
331,054 | 323,817 | ||||||
Effective annual interest rate |
12.23 | % | 11.66 | % |
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2010
Set forth below is a discussion and analysis of our results of operations for the six months
ended June 30, 2009 and 2010.
The following table provides a breakdown of components of our statements of operations for the
six months ended June 30, 2009 and 2010:
Six Months Ended June 30, | ||||||||||||||||||||
2009 | 2010 | |||||||||||||||||||
% of Total | % of Total | |||||||||||||||||||
Amount | Revenues | Amount | Revenues | % Change | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Network services |
$ | 229,097 | 96.3 | % | $ | 203,868 | 97.7 | % | (11.0 | %) | ||||||||||
Other |
8,924 | 3.7 | % | 4,745 | 2.3 | % | (46.8 | %) | ||||||||||||
Total revenues |
238,021 | 100.0 | % | 208,613 | 100.0 | % | (12.4 | %) | ||||||||||||
Cost of revenues: |
||||||||||||||||||||
Network services |
114,720 | 48.2 | % | 98,054 | 47.0 | % | (14.5 | %) | ||||||||||||
Other |
4,408 | 1.9 | % | 1,611 | 0.8 | % | (63.5 | %) | ||||||||||||
Total cost of revenues |
119,128 | 50.1 | % | 99,665 | 47.8 | % | (16.3 | %) | ||||||||||||
Gross profit: |
||||||||||||||||||||
Network services |
114,377 | 48.1 | % | 105,814 | 50.7 | % | (7.5 | %) | ||||||||||||
Other |
4,516 | 1.8 | % | 3,134 | 1.5 | % | (30.6 | %) | ||||||||||||
Total gross profit |
$ | 118,893 | 49.9 | % | $ | 108,948 | 52.2 | % | (8.4 | %) | ||||||||||
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Table of Contents
Revenues
Revenues for the six months ended June 30, 2009 and 2010 were as follows:
Six Months Ended June 30, | ||||||||||||||||||||
2009 | 2010 | |||||||||||||||||||
% of Total | % of Total | |||||||||||||||||||
Amount | Revenues | Amount | Revenues | % Change | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Voice and data services |
$ | 206,202 | 86.6 | % | $ | 183,380 | 88.0 | % | (11.1 | %) | ||||||||||
Wholesale |
9,882 | 4.2 | % | 10,589 | 5.0 | % | 7.2 | % | ||||||||||||
Access |
13,013 | 5.5 | % | 9,899 | 4.7 | % | (23.9 | %) | ||||||||||||
Total network
services |
229,097 | 96.3 | % | 203,868 | 97.7 | % | (11.0 | %) | ||||||||||||
Other |
8,924 | 3.7 | % | 4,745 | 2.3 | % | (46.8 | %) | ||||||||||||
Total revenues |
$ | 238,021 | 100.0 | % | $ | 208,613 | 100.0 | % | (12.4 | %) | ||||||||||
Revenues from voice services have decreased $25.4 million, or 16.7%, between 2009 and 2010.
This decrease is due to increased line churn, lower usage revenue per customer, lower prices per
unit for certain services and a lower number of lines and customers. Our revenues from data
services have decreased by $1.3 million, or 2.4%, between 2009 and 2010. Our carrier access
revenues have decreased primarily due to decreasing revenue from voice services, which reduces our
revenues from access originations and terminations and reciprocal compensation. In addition,
carrier access revenues have also decreased due to lower fees charged to the carriers, government
mandated rate decreases and the impact of disputed access charges. Our wholesale revenue increased
primarily as a result of organic growth of our T-1 and data products as well as from voice
terminations. Our other revenues include data cabling, service installation and wiring and phone
systems sales and installation, which continue to decline due to the current economic environment.
Cost of Revenues (exclusive of depreciation and amortization)
Cost of revenues were $99.7 million for the six months ended June 30, 2010, a decrease of
16.3% from $119.1 million for the same period in 2009 as we identified and eliminated
inefficiencies in our operating platforms. The decrease is also due to our overall decline in
revenue. Our costs consist primarily of those incurred from other providers and those incurred from
the cost of our network. Costs where we purchased services or products from third party providers
comprised $94.0 million, or 78.9%, of our total cost of revenues for the six months ended June 30,
2009 and $76.8 million, or 77.1%, in the six months ended June 30, 2010. The most significant
components of our costs purchased from third party providers consist of costs related to our
Verizon wholesale advantage contract, unbundled network element loop costs and T-1 costs, which
totaled $23.7 million, $12.9 million and $27.1 million, respectively, for the six months ended June
30, 2009. These costs totaled $18.3 million, $11.3 million and $24.1 million, respectively, for the
six months ended June 30, 2010. Combined these costs decreased by 15.7% between
2009 and 2010. We have experienced a decrease in costs where we purchased services or products
from third parties as a percentage of total cost of revenues primarily due to our effective
migration of lines to lower cost platforms.
Gross Profit (exclusive of depreciation and amortization)
Gross profit was $108.9 million for the six months ended June 30, 2010, a decrease of 8.4%
from $118.9 million for the same period in 2009. As a percentage of revenues gross profit increased
to 52.2% in 2010 from 49.9% in 2009. The increase in gross profit percentage is primarily due lower
costs resulting from provisioning more lines from resale and unbundled network platform to on-net.
We are focusing sales initiatives towards increasing the amount of data and integrated T-1 lines
sold, as we believe that these initiatives will produce incrementally higher margins than those
currently reported from POTS services. In addition, we continue to drive additional cost saving
initiatives, including provisioning customers to our on-net facilities, identifying additional
inaccuracies in billing from existing carriers, renegotiating existing agreements and executing new
agreements with additional interexchange carriers.
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Selling, General and Administrative
SG&A expenses were $77.5 million, 37.1% of revenues, for the six months ended June 30, 2010, a
decrease of 4.7% from $81.3 million, 34.1% of revenues, for the same period in 2009. As of December
31, 2009, our other non-current assets included $3.7 million of costs associated with the registration
statement filed with the SEC for a potential initial public offering. We have elected not to
complete the offering at this time and have charged these costs to operations during the six months
ended June 30, 2010. This decrease in SG&A expenses between 2009 and 2010 is a result of: i)
decreased employee costs of $4.1 million from reduced employee headcount; ii) decreased bad debt
expenses of $1.5 million from improved accounts receivable collections and decreased accounts
receivable write-offs; and iii) decreased commission expenses of $2.1 million as a result of
declining revenue and the reduction of estimates for royalty liabilities. Excluding the costs
incurred in connection with our initial public offering, our SG&A as a percentage of revenue was
35.4%. This increase in SG&A as a percentage of revenue due to our overall revenue decline. We
continue to look for additional cost savings in various categories including headcount and
professional services.
Depreciation and Amortization
Depreciation and amortization costs were $22.8 million for the six months ended June 30, 2010,
a decrease of 11.6% from $25.8 million for the same period in 2009. This decrease in depreciation
and amortization expense was due to fully amortizing one of our acquired customer base intangible
assets during 2009. Amortization expense included in our results of operations for customer base
intangible assets for the six months ended June 30, 2010 was $6.1 million, a decrease of $2.3
million from $8.4 million included in our results of operations during the same period in 2009.
Interest
Interest expense was $19.4 million for the six months ended June 30, 2010, a decrease of 3.5%
from $20.1 million for the same period in 2009. The decrease was primarily due to lower interest
expense as a result of having a lower average outstanding debt balance for the six months ended
June 30, 2010 compared to the same period in 2009. The lower average debt balance is due to reduced
borrowings under our revolving credit facility and capital leases. The decrease was offset by
interest accrued in connection with a state gross receipts tax matters. Our effective annual
interest rates for the six months ended June 30, 2009 and 2010 are as follows:
Six Months Ended June 30, | ||||||||
2009 | 2010 | |||||||
Interest expense |
$ | 20,101 | $ | 19,363 | ||||
Weighted average debt outstanding |
331,747 | 325,845 | ||||||
Effective annual interest rate |
12.12 | % | 11.88 | % |
Off-Balance Sheet Arrangements
We have no special purpose or limited purpose entities that provide off-balance sheet
financing, liquidity, or market or credit risk support, and we do not currently engage in hedging,
research and development services, or other relationships that expose us to any liabilities that
are not reflected on the face of our financial statements.
We do maintain standby letters of credit outstanding of $3.2 million, of which $1.3 million
are fully collateralized by the letter of credit subfacility under our revolving credit facility.
We posted cash collateral of $1.9
million for the remaining letters of credit. These standby letters of credit were issued as
collateral in connection with some of our leased facilities and pursuant to state regulatory
requirements.
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Liquidity and Capital Resources
Our principal sources of liquidity are cash from operations, our cash, cash equivalents and
investments and our capital lease line. Our short-term liquidity requirements consist of interest
on our notes, capital expenditures and working capital. Our long-term liquidity requirements
consist of the principal amount of our notes and our outstanding borrowings under our revolving
credit facility. Based on our current level of operations and anticipated growth, we believe that
our existing cash, cash equivalents and available borrowings under our revolving credit facility
will be sufficient to fund our operations and to service our notes for at least the next 12 months.
Further, a significant majority of our planned capital expenditures are success-based
expenditures, meaning that it is directly linked to new revenue, and if they are made, they will be
made only when it is determined that they will directly lead to more profitable revenue. Our
existing capital lease provider was recently acquired, which limited our ability to borrow under
the lease line. As a result, during July 2010, we entered into a new $5 million capital lease
facility. As of June 30, 2010, we had $3.2 million of capital lease obligations outstanding under
our existing capital lease line. As of June 30, 2010, we had $17.1 million of outstanding
borrowings under our $25 million revolving credit facility, all of which we have invested in U.S.
Treasury notes. Additionally, we have used our revolving credit facility to collateralize $1.3
million of outstanding letters of credit as of June 30, 2010. Outstanding borrowings under our
revolving credit facility are due and payable on August 23, 2011. As a result, outstanding
borrowings under our revolving credit facility will be reflected as a current obligation of the
Company commencing August 23, 2010. Our cash and cash equivalents are being held in several large
financial institutions, although most of our balances exceed the Federal Deposit Insurance
Corporation insurance limits.
As of June 30, 2010, we required approximately $85.3 million in cash to service the interest
due on our notes throughout the remaining life of the notes. We may need to refinance all or a
portion of our indebtedness, including the notes, at or before maturity. We cannot assure you that
we will be able to refinance any of our indebtedness, including the notes and our revolving credit
facility, on commercially reasonable terms or at all. However, we continuously evaluate and
consider all financing opportunities. Any future acquisitions or other significant unplanned costs
or cash requirements may also require that we raise additional funds through the issuance of debt
or equity.
Disputes
We are involved in a variety of disputes with multiple carrier vendors relating to billings of
approximately $18.0 million as of June 30, 2010. While we hope to resolve these disputes through
negotiation, we may be compelled to arbitrate these matters. The resolution of these disputes may
require us to pay the vendor an amount that is greater than the amount for which we have planned or
even the amount the vendor claims is owed if late payment charges are assessed, which could
materially adversely affect our business, financial condition, results of operations and cash flows
and which may cause us to be unable to meet certain covenants related to our senior indebtedness,
which would result in a default under such indebtedness. In the event that disputes are not
resolved in our favor and we are unable to pay the vendor charges in a timely manner, the vendor
may deny us access to the network facilities that we require to serve our customers. If the vendor
notifies us of an impending embargo of this nature, we may be required to notify our customers of
a potential loss of service, which may cause a substantial loss of customers. It is not possible at
this time to predict the outcome of these disputes.
We believe we have accrued an amount appropriate to settle all remaining disputed charges.
However, it is possible that the actual settlement of any remaining disputes may differ from our
reserves and that we may settle at amounts greater than the estimates. We believe we have
sufficient cash on hand to fund any differences between our expected and actual settlement amounts.
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2010
Cash Flows from Operating Activities
Cash provided by operating activities was $14.9 million for the six months ended June 30,
2009, compared to $13.0 million for the same period in 2010. During each of the six months ended
June 30, 2010 and 2009, we paid $17.1 million in interest expense on our notes. Although our income
from operations declined from $11.8 million for the six months ended June 30, 2009 to $8.7 million
for the six months ended June 30, 2010, this decline did not
impact our cash flow from operations. As discussed above, we incurred a non-cash charge of
$3.7 million during the six months ended June 30, 2010 in connection with our decision to not
complete our initial public offering. During the six months ended June 30, 2010 we settled several
outstanding telecommunications , state and local tax matters, which contributed to the reduction in cash
provided by operating activities between 2009 and 2010.
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Cash Flows from Investing Activities
Cash used in investing activities was $13.8 million for the six months ended June 31, 2009,
compared to cash used in investing activities of $11.7 million for the same period in 2010. During
2010, we generated $5.0 million in cash flow from the sales of investment securities in excess of
the investment securities we purchased during the same period. This improvement in cash flow
between 2009 and 2010 was partially offset by increased capital expenditures of $2.8 million
between 2009 and 2010.
Cash Flows from Financing Activities
Cash flows used in financing activities was $2.8 million for the six months ended June 30,
2009, compared to $8.1 million for the same period in 2010. The change in cash flows from financing
activities was primarily due to a repayment of borrowings under our revolving credit facility of
$7.0 million during the six months ended June 30, 2010 as compared to $1.6 million during the same
period in 2009.
New Accounting Standards
The following accounting standards have been issued, which we will need to adopt in the
future.
In September 2009, the accounting standard regarding multiple deliverable arrangements was
updated to require the use of the relative selling price method when allocating revenue in these
types of arrangements. This method allows a vendor to use its best estimate of selling price if
neither vendor specific objective evidence nor third party evidence of selling price exists when
evaluating multiple deliverable arrangements. This standard update is effective January 1, 2011 and
may be adopted prospectively for revenue arrangements entered into or materially modified after the
date of adoption or retrospectively for all revenue arrangements for all periods presented. We are
currently evaluating the impact that this standard update will have on our consolidated financial
statements.
In September 2009, the accounting standard regarding arrangements that include software
elements was updated to require tangible products that contain software and non-software elements
that work together to deliver the products essential functionality to be evaluated under the
accounting standard regarding multiple deliverable arrangements. This standard update is effective
January 1, 2011 and may be adopted prospectively for revenue arrangements entered into or
materially modified after the date of adoption or retrospectively for all revenue arrangements for
all periods presented. We are currently evaluating the impact that this standard update will have
on our consolidated financial statements.
Application of Critical Accounting Policies and Estimates
The preparation of the condensed consolidated financial statements in accordance with GAAP
requires us to make judgments, estimates and assumptions regarding uncertainties that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses. We use historical experience and all available
information to make these judgments and estimates and actual results could differ from those
estimates and assumptions that are used to prepare our financial statements at any given time.
Despite these inherent limitations, management believes that Managements Discussion and Analysis
of Financial Condition and Results of Operations and the accompanying condensed consolidated
financial statements and footnotes provide a meaningful and fair perspective of our financial
condition and our operating results for the current period. For more information, see our Form 10-K
for the year ended December 31, 2009.
Other Matters
At December 31, 2009, we had NOLs available totaling $135.0 million, which begin to expire in
2012. To the extent that our ability to use these NOLs against any future taxable income is
limited, our cash flow available for operations and debt service would be reduced. We have provided
a full valuation allowance against the net deferred tax assets because we do not believe it is more
likely than not that this asset will be realized. If we achieve profitability, the net deferred tax
assets may be available to offset future income tax liabilities.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, our financial position is subject to a variety of risks,
such as the collectability of our accounts receivable and the recoverability of the carrying values
of our long-term assets. Our long-term obligations consist primarily of long-term debt with fixed
interest rates and our revolving credit facility with a variable interest rate. We are not exposed
to market risks from changes in foreign currency exchange rates or commodity prices. We do not hold
any derivative financial instruments nor do we hold any securities for trading or speculative
purposes.
We continually monitor the collectability of our accounts receivable and have not noted any
significant changes in our collections as a result of the current economic and market conditions.
We believe that our allowance for doubtful accounts is adequate as of June 30, 2010. Should the
market conditions continue to worsen or should our customers ability to pay decrease, we may be
required to increase our allowance for doubtful accounts, which would result in a charge to our
SG&A expenses.
Our available cash balances are invested on a short-term basis (generally overnight) and,
accordingly, are not subject to significant risks associated with changes in interest rates.
Substantially all of our cash flows are derived from our operations within the United States and we
are not subject to market risk associated with changes in foreign exchange rates.
Our investment securities are classified as available for sale, and consequently, are recorded
on the balance sheet at fair value with unrealized gains and losses reflected in stockholders
deficiency. Our investment securities are comprised solely of short-term U.S. Treasury notes with
original maturity dates of less than one year. These investment securities, like all fixed income
instruments, are subject to interest rate risk and will fall in value if market interest rates
increase.
The fair value of our 11 3/8% senior secured notes due 2012 was approximately $291.0 million
at June 30, 2010. Our senior secured notes, like all fixed rate securities are subject to interest
rate risk and will fall in value if market interest rates increase.
The fair value of the long-term debt outstanding under our revolving credit facility
approximates its carrying value of $17.1 million due to its variable interest rate. A change in
interest rates of 100 basis points would change our interest expense by $171 on an annual basis.
Item 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for
timely decisions regarding required disclosure. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives,
and management is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
As required by SEC Rule 15d-15(b), we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and procedures
as of the end of the period covered by this report. Based on the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were
effective as of June 30, 2010. For information regarding the Companys internal control over
financial reporting, see our Form 10-K for the year ended December 31, 2009.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Companys internal controls over financial reporting during
the quarter ended June 30, 2010 that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are also party to certain legal actions and regulatory investigations and enforcement
proceedings arising in the ordinary course of business. We are also involved in certain billing and
contractual disputes with our vendors. We do not believe that the ultimate outcome of any of the
foregoing actions will result in any liability that would have a material adverse effect on our
financial condition, results of operations or cash flows.
For more information, see the section entitled Managements Discussion and Analysis of
Financial Condition and Results of Operations and our Form 10-K for the year ended December 31,
2009.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those set forth in our Form 10-K
for the year ended December 31, 2009, which should be read in conjunction with this report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved)
Item 5. Other Information
None.
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Item 6. Exhibits
The following exhibits are filed herewith:
Exhibit No. | Description | |
31.1
|
Certification of the Companys Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of the Companys Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification of the Companys Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification of the Companys Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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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, on August 12, 2010.
BROADVIEW NETWORKS HOLDINGS, INC. |
||||
By: | /s/ Michael K. Robinson | |||
Name: | Michael K. Robinson | |||
Title: | Chief Executive Officer, President and Assistant Treasurer | |||
By: | /s/ Corey Rinker | |||
Name: | Corey Rinker | |||
Title: | Chief Financial Officer, Treasurer and Assistant Secretary |
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EXHIBIT INDEX
Exhibit | ||
No. | Description | |
31.1
|
Certification of the Companys Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of the Companys Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification of the Companys Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification of the Companys Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
27