Voltari Corp - FORM 10-Q - November 13, 2014

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 FORM 10-Q
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
or 
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: 333-186564
 
Voltari Corporation
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
90-0933943
(State of incorporation)
 
(I.R.S. Employer
Identification Number)
601 W. 26th Street, Suite 415
New York, NY 10001
(212) 388-5500
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 of 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.    x  Yes    o  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
o
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No


As of November 3, 2014, there were 4,763,131 shares of the registrant's common stock, par value of $0.001 per share, outstanding.
 



TABLE OF CONTENTS
 

 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 


PART I

Item 1.    Condensed Consolidated Financial Statements.

Voltari Corporation
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
 
September 30,
2014
 
December 31,
2013
 
 
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
12,181

 
$
24,745

Accounts receivable, net of allowance for doubtful accounts of $182 and $26, respectively
3,213

 
3,002

Prepaid expenses and other current assets
1,157

 
1,215

Assets held for sale
—

 
2,149

Total current assets
16,551

 
31,111

Property and equipment, net
4,952

 
5,815

Goodwill
2,416

 
2,416

Intangible assets, net
2,222

 
2,766

Other assets
189

 
296

Total assets
$
26,330

 
$
42,404

 
 
 
 
Liabilities, redeemable preferred stock and stockholders’ (deficit) equity
 
 
 
Current liabilities
 
 
 
Accounts payable and accrued expenses
$
4,018

 
$
4,358

Accrued compensation
935

 
1,098

Other current liabilities
1,405

 
1,157

Liabilities held for sale
—

 
568

Total current liabilities
6,358

 
7,181

Other non-current liabilities
27

 
21

Total liabilities
6,385

 
7,202

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Redeemable preferred stock, $0.001 par value; 1,199,643 shares issued and outstanding at September 30, 2014 and December 31, 2013. Redemption value: $38,682 and $35,152 at September 30, 2014 and December 31, 2013, respectively.
34,991

 
31,124

 
 
 
 
Stockholders’ (deficit) equity
 
 
 
Common stock, $0.001 par value; 625,000,000 shares authorized; 4,763,131 and 4,698,108 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
5

 
5

Additional paid-in capital
564,998

 
568,714

Accumulated deficit
(579,389
)
 
(564,036
)
Accumulated other comprehensive loss
(660
)
 
(605
)
Total stockholders’ (deficit) equity
(15,046
)
 
4,078

Total liabilities, redeemable preferred stock and stockholders’ (deficit) equity
$
26,330

 
$
42,404

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

Voltari Corporation
Condensed Consolidated Statements of Operations
(in thousands, except share data and per share amounts)
(unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014

2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Revenue
$
3,356

 
$
2,086

 
$
8,316

 
$
5,633

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Direct third-party expenses
2,129

 
1,505

 
5,465


4,120

Network operations, excluding depreciation
1,177

 
639

 
3,780


1,327

Product development, excluding depreciation
1,092

 
387

 
2,185


1,270

Sales and marketing, excluding depreciation
1,334

 
1,632

 
3,694


4,605

General and administrative, excluding depreciation
1,325

 
2,510

 
4,817


9,775

Depreciation and amortization
1,019

 
1,258

 
3,387


2,554

Total operating expenses
8,076

 
7,931

 
23,328

 
23,651

Operating loss
(4,720
)
 
(5,845
)
 
(15,012
)
 
(18,018
)
Other income (expense), net
 
 
 
 
 
 
 
Other income (expense)
1

 
22

 
5


(150
)
Interest and investment income, net
1

 
6

 
4


19

Interest expense
—

 
(324
)
 
—


(1,341
)
Total other income (expense), net
2

 
(296
)
 
9

 
(1,472
)
Loss from continuing operations before income taxes
(4,718
)
 
(6,141
)
 
(15,003
)
 
(19,490
)
Provision for income taxes
—

 
—

 
—


—

Net loss from continuing operations
(4,718
)
 
(6,141
)
 
(15,003
)
 
(19,490
)
Net (loss) income from discontinued operations
(774
)
 
(582
)
 
(350
)
 
15,023

Net loss
(5,492
)
 
(6,723
)
 
(15,353
)
 
(4,467
)
Accretion of redeemable preferred stock
(156
)
 
(132
)
 
(449
)
 
(387
)
Series J redeemable preferred stock dividends
(1,227
)
 
(1,080
)
 
(3,530
)
 
(3,106
)
Net loss attributable to common stockholders
$
(6,875
)
 
$
(7,935
)
 
$
(19,332
)
 
$
(7,960
)
 
 
 
 
 
 
 
 
Net (loss) income per share attributable to common stockholders - basic and diluted
 
 
 
 
 
 
 
Continuing operations
$
(1.30
)
 
$
(1.58
)
 
$
(4.07
)
 
$
(4.94
)
Discontinued operations
(0.17
)
 
(0.12
)
 
(0.07
)
 
3.23

Total net loss per share attributable to common stockholders
$
(1.47
)
 
$
(1.70
)
 
$
(4.14
)
 
$
(1.71
)
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – basic and diluted
4,674,079

 
4,662,287

 
4,668,826

 
4,649,345

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Voltari Corporation
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014

2013
 
 
 
 
 
 
 
 
Net loss
$
(5,492
)
 
$
(6,723
)
 
$
(15,353
)
 
$
(4,467
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Realization of cumulative translation adjustment
—

 
—

 
—

 
(8
)
Foreign currency translation adjustment
(3
)
 
127

 
(55
)
 
30

Other comprehensive (loss) income
(3
)
 
127

 
(55
)
 
22

Comprehensive loss
$
(5,495
)
 
$
(6,596
)
 
$
(15,408
)
 
$
(4,445
)
The accompanying notes are an integral part of these condensed consolidated financial statements.


4

Voltari Corporation
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
(in thousands, except share data)
(unaudited)

 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
 
 
 
Shares
 
Amount
 
 
 
 
Total
Balance as of December 31, 2013
 
4,698,108

 
$
5

 
$
568,714

 
$
(564,036
)
 
$
(605
)
 
$
4,078

Net loss
 
—

 
—

 
—

 
(15,353
)
 
—

 
(15,353
)
Other comprehensive loss
 
—

 
—

 
—

 
—

 
(55
)
 
(55
)
Redeemable preferred stock dividends
 
—

 
—

 
(3,530
)
 
—

 
—

 
(3,530
)
Accretion of redeemable preferred stock
 
—

 
—

 
(449
)
 
—

 
—

 
(449
)
Restricted stock activity
 
65,023

 
—

 
(15
)
 
—

 
—

 
(15
)
Stock-based compensation expense
 
—

 
—

 
278

 
—

 
—

 
278

Balance as of September 30, 2014
 
4,763,131

 
$
5

 
$
564,998

 
$
(579,389
)
 
$
(660
)
 
$
(15,046
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Voltari Corporation
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
 
Nine Months Ended
 
September 30, 2014
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net loss
$
(15,353
)
 
$
(4,467
)
Loss (income) from discontinued operations
350

 
(15,023
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
Depreciation and amortization
3,387

 
2,554

Stock-based compensation expense
278

 
273

Other non-cash adjustments
244

 
(236
)
Changes in operating assets and liabilities:
 
 
Accounts receivable
(350
)
 
(1,335
)
Prepaid expenses and other current assets
206

 
383

Other assets
(19
)
 
1

Accounts payable and accrued expenses
(696
)
 
(2,397
)
Net cash used in operating activities - continuing operations
(11,953
)
 
(20,247
)
Net cash provided by operating activities - discontinued operations
443

 
22,448

Net cash (used in) provided by operating activities
(11,510
)
 
2,201

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(63
)
 
(256
)
Capitalized software development costs
(2,058
)
 
(1,489
)
Net cash used in investing activities - continuing operations
(2,121
)
 
(1,745
)
Net cash provided by investing activities - discontinued operations
281

 
61

Net cash used in investing activities
(1,840
)
 
(1,684
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Repayments of debt facilities
—

 
(20,000
)
Cash paid for tax withholdings on restricted stock
(15
)
 
(586
)
Restricted short-term investments
—

 
177

Net cash used in financing activities - continuing operations
(15
)
 
(20,409
)
Effect of exchange rate changes on cash and cash equivalents
(55
)
 
39

Net decrease in cash and cash equivalents
(13,420
)
 
(19,853
)
Cash and cash equivalents at beginning of period
24,745

 
49,738

Cash reclassified to assets held for sale at beginning of period
856

 
1,790

Cash reclassified to assets held for sale at end of period
—

 
(2,149
)
Cash and cash equivalents at end of period
$
12,181

 
$
29,526

 
 
 
 
Supplemental schedule of cash flow information:
 
 
 
Cash paid for interest
$
—

 
$
3,796

Series J redeemable preferred stock dividends paid in-kind
3,418

 
2,967

The accompanying notes are an integral part of these condensed consolidated financial statements.

6
Voltari Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)



1. Business Description and Basis of Presentation

Business Description
Voltari Corporation (“Voltari” or the “Company”) empowers our customers (including brands, marketers and advertising agencies) to maximize the reach and economic potential of the mobile ecosystem through the delivery of relevance-driven merchandising, digital marketing and advertising solutions, primarily over smartphones and other mobile devices. Voltari uses advanced predictive analytics capabilities and real-time data management (including sophisticated data curation and modeling) to deliver the right content to the right person at the right time. Voltari’s unique combination of technology, expertise and go-to-market approach delivers return-on-investment for our customers.

Advertisers pay us to deliver their ads to mobile users, and we pay website and mobile application owners (or their proxies) for the use of their ad space. Our proprietary technology and data management platform allows us to analyze and augment the information accompanying web and mobile advertising opportunities and quickly deliver highly targeted and engaging ad content to consumers in both programmatic and mediated environments. Our platform uses mass volumes of third-party data along with ad response and location data and, when available, first-party consumer data to generate, in real time, a score for each unique advertising opportunity which can be measured against an advertiser's creative materials and campaign goals.

Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. The condensed consolidated balance sheet as of December 31, 2013 included herein was derived from the audited financial statements as of that date, but does not include all disclosures required by U.S. GAAP.

The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all normal recurring adjustments which are necessary for a fair statement of the results of the interim period. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC on March 31, 2014. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year or for any other period.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in certain circumstances that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates include the allowance for doubtful accounts receivable, valuation of deferred tax assets, valuation of goodwill, long-lived and intangible assets, stock-based compensation, litigation and other loss contingencies. Actual results could differ from those estimates.

The Company effected a one-for-ten reverse stock split of its common stock on April 23, 2013. The exercise price and the number of common shares issuable under the Company’s share-based compensation plans and upon exercise of the Company’s outstanding warrants to purchase common stock, as well as the issued and outstanding share capital, have been correspondingly adjusted in this Quarterly Report on Form 10-Q to reflect the reverse stock split.

Reclassifications
During 2013, we exited our U.S. carrier business and completed the sale of our Generation5 Mathematical Technology ("Gen5") business. On May 30, 2014, we completed the sale of our U.S. and Canadian messaging business. Further, on September 1, 2014, we completed the sale of our wireless carrier business in the United Kingdom ("UK"). As a result, these businesses are reported as discontinued operations in the condensed consolidated financial statements for the requisite periods presented in this Quarterly Report on Form 10-Q. See Note 5 - Discontinued Operations for further information.


7
Voltari Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)


2. Summary of Significant Accounting Policies

Our significant accounting policies are those that we believe are both important to the portrayal of our financial condition and results of operations. Management believes there have been no material changes to the significant accounting policies discussed in Note 2 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Recently Adopted Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This guidance is effective for interim and annual reporting periods beginning after December 15, 2013, with early adoption permitted. We adopted this standard on January 1, 2014, and such adoption did not have an impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The new standard requires management to evaluate for each reporting period whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern and provide related footnote disclosure in certain circumstances. The new standard is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. The Company expects to adopt this standard for our annual period ending December 31, 2016 and is currently evaluating the impact of the adoption of the new standard on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The guidance in this ASU supersedes nearly all existing revenue recognition guidance under U.S. GAAP and creates a single, principle-based revenue recognition framework that is codified in a new FASB ASC Topic 606. The core principle of this guidance is for the recognition of revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The new revenue standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years. Early adoption is not permitted. The new standard allows for either full retrospective or modified retrospective adoption. The Company is currently evaluating the transition method that will be elected and the potential effects of the adoption of the new standard on our consolidated financial statements.

In April 2014, the FASB issued ASU No. 2014-08, which amends FASB ASC Topic 205, Presentation of Financial Statements and FASB ASC Topic 360, Property, Plant, and Equipment. This standard amends the definition of a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. This guidance is effective on a prospective basis for annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals that have not been reported in financial statements previously issued or available for issuance. The Company expects to adopt this standard on a prospective basis beginning January 1, 2015. Adoption is not expected to have a material impact on our consolidated financial statements.


8
Voltari Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)


3. Property and Equipment, net

Information related to our major categories of our property and equipment, net, is as follows (dollars in thousands):
 
As of
 
September 30, 2014
 
December 31, 2013
Capitalized software
$
51,411

 
$
49,498

Computer software and equipment
24,419

 
24,357

Leasehold improvements
5,569

 
5,569

Equipment, furniture and fixtures
1,474

 
1,474

Total property and equipment
82,873

 
80,898

Less: Accumulated depreciation and amortization
(46,840
)
 
(44,002
)
Less: Accumulated impairments
(31,081
)
 
(31,081
)
Property and equipment, net
$
4,952

 
$
5,815


We capitalized software development costs associated with internal-use software of $0.4 million and $2.1 million for the three and nine months ended September 30, 2014, respectively, as compared to $0.5 million and $1.5 million for the corresponding periods in 2013, respectively.

Depreciation expense from continuing operations totaled $0.8 million and $2.8 million for the three and nine months ended September 30, 2014, respectively, as compared to $1.1 million and $2.1 million for the corresponding periods in 2013, respectively.

4. Intangible Assets, net

The following table provides information regarding our intangible assets, net for the periods presented (dollars in thousands):
 
As of September 30, 2014
 
As of December 31, 2013
 
Gross Carrying
Amount
 
Accumulated Amortization
 
Net Carrying
Amount
 
Gross Carrying
Amount
 
Accumulated Amortization
 
Net Carrying
Amount
Customer relationships
$
13,288

 
$
(13,277
)
 
$
11

 
$
14,228

 
$
(14,054
)
 
$
174

Technology
8,414

 
(6,203
)
 
2,211

 
8,693

 
(5,902
)
 
2,791

Total
21,702

 
(19,480
)
 
2,222

 
22,921

 
(19,956
)
 
2,965

Less: Held for Sale
—

 
—

 
—

 
1,220

 
(1,021
)
 
199

Total intangible assets, net
$
21,702

 
$
(19,480
)
 
$
2,222

 
$
21,701

 
$
(18,935
)
 
$
2,766


Amortization expense included in continuing operations was $0.2 million and $0.6 million for the three and nine months ended September 30, 2014, respectively, as compared to $0.2 million and $0.5 million for the corresponding periods in 2013, respectively.

Estimated annual amortization expense for definite-lived intangible assets for each of the five succeeding fiscal years are as follows (in thousands):
Fiscal year ending December 31,
 
2014 (remainder of fiscal year)
$
181

2015
750

2016
638

2017
545

2018
108


9
Voltari Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)



5. Discontinued Operations

U.S. Carrier Operations
We decided to wind down our U.S. carrier operations as a result of the termination of two material revenue generating agreements with AT&T effective June 30, 2013. Accordingly, all operations related to our U.S. carrier business are reported as discontinued operations in the condensed consolidated financial statements for the nine months ended September 30, 2013.

Gen5 and Messaging Operations
On October 31, 2013, we completed the sale of our Gen5 business and on May 30, 2014, we completed the sale of our U.S. and Canadian messaging business. The operations related to the Gen5 business and U.S. and Canadian messaging business are reported as discontinued operations in the condensed consolidated financial statements for the three and nine months ended September 30, 2013 and, for U.S. and Canadian messaging, the nine months ended September 30, 2014. The assets and liabilities related to our U.S. and Canadian messaging business are reported as held for sale on the historical consolidated balance sheet as of December 31, 2013.

UK Wireless Carrier Operations
On September 1, 2014, we completed the sale of our UK carrier business. This is consistent with the strategy we have executed over the past year to enhance our focus and resources on our mobile media and advertising business. We recognized a pre-tax gain of $0.2 million on the disposition of our UK carrier business which is included in discontinued operations in our condensed consolidated statements of operations for the three and nine months ended September 30, 2014. Accordingly, the operations related to our UK carrier business are reported as discontinued operations in the condensed consolidated financial statements for all periods presented.

Discontinued operations on the condensed consolidated statements of operations for the three months ended September 30, 2014 is as follows (in thousands):
 
Three Months Ended September 30, 2014
 
U.S. Messaging & Other
 
Canadian Messaging
 
UK Carrier
 
Total
Revenue
$
—

 
$
—

 
$
151

 
$
151

Operating (loss) income
(593
)
 
30

 
(41
)
 
(604
)
Other income
30

 
14

 
163

 
207

Pre-tax (loss) income
(563
)
 
44

 
122

 
(397
)
Net (loss) income from discontinued operations
$
(940
)
 
$
44

 
$
122

 
$
(774
)

Discontinued operations on the condensed consolidated statements of operations for the three months ended September 30, 2013 is as follows (in thousands):
 
Three Months Ended September 30, 2013
 
U.S. Carrier
 
U.S. Messaging & Other
 
Canadian Messaging & Gen5
 
UK Carrier
 
Total
Revenue
$
634

 
$
224

 
$
929

 
$
371

 
$
2,158

Operating (loss) income
(539
)
 
(140
)
 
(122
)
 
219

 
(582
)
Net (loss) income from discontinued operations
$
(539
)
 
$
(140
)
 
$
(122
)
 
$
219

 
$
(582
)

10
Voltari Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)



Discontinued operations on the condensed consolidated statements of operations for the nine months ended September 30, 2014 is as follows (in thousands):
 
Nine Months Ended September 30, 2014
 
U.S. Messaging & Other
 
Canadian Messaging
 
UK Carrier
 
Total
Revenue
$
371

 
$
451

 
$
797

 
$
1,619

Operating (loss) income
(365
)
 
(84
)
 
285

 
(164
)
Other income (expense)
113

 
(85
)
 
163

 
191

Pre-tax (loss) income
(252
)
 
(169
)
 
448

 
27

Net (loss) income from discontinued operations
$
(629
)
 
$
(169
)
 
$
448

 
$
(350
)

Discontinued operations on the condensed consolidated statements of operations for the nine months ended September 30, 2013 is as follows (in thousands):
 
Nine Months Ended September 30, 2013
 
U.S. Carrier
 
U.S. Messaging & Other
 
Canadian Messaging & Gen5
 
UK Carrier
 
Total
Revenue
$
28,759

 
$
664

 
$
3,079

 
$
1,143

 
$
33,645

Operating income (loss)
15,245

 
(493
)
 
(414
)
 
689

 
15,027

Other expense
—

 
—

 
—

 
(4
)
 
(4
)
Net income (loss) from discontinued operations
$
15,245

 
$
(493
)
 
$
(414
)
 
$
685

 
$
15,023


The assets and liabilities of the U.S. and Canadian messaging business and UK carrier business are reported as held for sale on the consolidated balance sheet as of December 31, 2013, which amounted to $2.1 million and $0.6 million, respectively. Please see Note 5 of our Quarterly Report on Form 10-Q for the period ended June 30, 2014 for further information on the major classes of these assets and liabilities. There are no assets or liabilities classified as held for sale as of September 30, 2014.

6. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following (dollars in thousands):
 
As of
 
September 30, 2014
 
December 31, 2013
Trade related
$
682

 
$
1,015

Accrued third party costs
1,168

 
1,566

Accrued taxes payable
1,575

 
1,160

Other accrued expenses
593

 
617

 
$
4,018

 
$
4,358


7. Redeemable Preferred Stock

Upon successful completion of our rights offering in October 2012, we issued 1,199,643 shares of 13% Redeemable Series J Preferred Stock (the "Series J preferred stock") and, after giving effect to the one-for-ten reverse stock split that took effect in April 2013, 1,014,982 common stock warrants in exchange for approximately $30 million in cash proceeds. Net proceeds from the rights offering of approximately $27.8 million were allocated between Series J preferred stock and common stock warrants based on their estimated relative fair market values at the date of issuance as determined by management with the assistance of a third party valuation specialist. The portion of the net proceeds from the rights offering attributable to the Series J preferred stock was

11
Voltari Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)


determined to be approximately $26.4 million and is included in Redeemable preferred stock on our condensed consolidated balance sheets at September 30, 2014 and December 31, 2013.

Our Series J preferred stock contains certain redemption features and is classified as mezzanine equity on our condensed consolidated balance sheets at September 30, 2014 and December 31, 2013 since the shares are (i) redeemable at the option of the holder upon the occurrence of certain events and (ii) have conditions for redemption which are not solely within our control. Our Series J preferred stock is redeemable at the option of the holder if the Company undergoes a change in control, which includes a person becoming a beneficial owner of securities representing at least 50% of the voting power of our company, a sale of substantially all of our assets, and certain business combinations and mergers which cause a change in 20% or more of the voting power of our company, and if we experience an ownership change (within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended), which results in a substantial limitation on our ability to use our net operating losses and related tax benefits. The difference between the carrying value of the Series J preferred stock and its liquidation value is being accreted over an anticipated redemption period of five years using the effective interest method. The shares of Series J preferred stock have limited voting rights and are not convertible into shares of our common stock or any other series or class of our capital stock.

Holders of the Series J preferred stock are entitled to an annual dividend of 13%, which is payable in cash or in-kind at our discretion, on a quarterly basis. To date, we have elected to pay all quarterly dividend payments on our Series J preferred stock, in the cumulative amount of $8.7 million, in-kind rather than in cash. Accordingly, we have increased the carrying value of our Series J preferred stock for the amount of the paid in-kind dividend payments. Dividends on the Series J preferred stock and the accretion increase the amount of net loss that is attributable to common stockholders and are presented as separate amounts on the condensed consolidated statements of operations.

Our Series J preferred stock has a preference upon dissolution, liquidation or winding up of the Company in respect of assets available for distribution to stockholders. The liquidation preference of the Series J preferred stock is initially $25 per share. If the quarterly cash dividends on the Series J preferred stock are not paid, which has been the case to date, the liquidation preference is adjusted and increased quarterly (i) until October 11, 2017, by an amount equal to 3.25% of the liquidation preference per share, as in effect at such time and (ii) thereafter by an amount equal to 3.5% of the liquidation preference per share, as in effect at such time. The quarterly accretion will continue until the shares are redeemed, or until the Company's affairs are liquidated, dissolved or wound-up.

As of September 30, 2014, our Series J preferred stock has an aggregate redemption value of approximately $38.7 million, including paid in-kind dividends of $7.5 million and accrued dividends of $1.2 million which are included within Other current liabilities on our condensed consolidated balance sheet. We recorded accretion associated with our Series J preferred stock of $0.2 million and $0.4 million for the three and nine months ended September 30, 2014, respectively, and $0.1 million and $0.4 million for the corresponding periods in 2013, respectively.

8. Net Loss Per Share Attributable to Common Stockholders

The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders for the period indicated (dollars in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Net loss attributable to common stockholders
$
(6,875
)
 
$
(7,935
)
 
$
(19,332
)
 
$
(7,960
)
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - basic and diluted
4,674,079

 
4,662,287

 
4,668,826

 
4,649,345

 
 
 
 
 
 
 
 
Net loss per share attributable to common stockholders - basic and diluted
$
(1.47
)
 
$
(1.70
)
 
$
(4.14
)
 
$
(1.71
)

Basic net loss per share attributable to common stockholders is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the applicable period. Diluted net loss per share attributable to common stockholders includes the effects of any warrants, options and other potentially dilutive securities

12
Voltari Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)


outstanding during the period. For the periods presented, there were no potentially dilutive securities outstanding, therefore basic and diluted net loss per share attributable to common stockholders are equal. The following table presents the outstanding antidilutive securities excluded from the calculation of net loss per share attributable to common stockholders:
 
September 30,
 
2014
 
2013
Warrants to purchase common stock
1,192,077

 
1,215,661

Options to purchase common stock
255,385

 
162,509

Restricted stock
73,858

 
1,075

Total securities excluded from net loss per share attributable to common stockholders
1,521,320

 
1,379,245


9. Commitments and Contingencies

Legal Proceedings
Putative Securities Class Action.  We previously announced that Joe Callan filed a putative securities class action complaint in the U.S. District Court, Western District of Washington at Seattle on behalf of all persons who purchased or otherwise acquired common stock of Motricity, Inc. ("Motricity") between June 18, 2010 and August 9, 2011 or in Motricity's initial public offering. Motricity, which was our predecessor registrant, is now our wholly-owned subsidiary and has changed its name to Voltari Operating Corp. The defendants in the case were Motricity, certain of our current and former directors and officers, including Ryan K. Wuerch, James R. Smith, Jr., Allyn P. Hebner, James N. Ryan, Jeffrey A. Bowden, Hunter C. Gary, Brett Icahn, Lady Barbara Judge CBE, Suzanne H. King, Brian V. Turner; and the underwriters in Motricity's initial public offering, including J.P. Morgan Securities, Inc., Goldman, Sachs & Co., Deutsche Bank Securities Inc., RBC Capital Markets Corporation, Robert W. Baird & Co Incorporated, Needham & Company, LLC and Pacific Crest Securities LLC. The complaint alleged violations under Sections 11 and 15 of the Securities Act of 1933, as amended, (the "Securities Act") and Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), by all defendants and under Section 10(b) of the Exchange Act by Motricity and those of our former and current officers who are named as defendants. The complaint sought, inter alia, damages, including interest and plaintiff's costs and rescission. A second putative securities class action complaint was filed by Mark Couch in October 2011 in the same court, also related to alleged violations under Sections 11 and 15 of the Securities Act, and Sections 10(b) and 20(a) of the Exchange Act. On November 7, 2011, the class actions were consolidated, and lead plaintiffs were appointed pursuant to the Private Securities Litigation Reform Act. On December 16, 2011, plaintiffs filed a consolidated complaint which added a claim under Section 12 of the Securities Act to its allegations of violations of the securities laws and extended the putative class period from August 9, 2011 to November 14, 2011.  The plaintiffs filed an amended complaint on May 11, 2012 and a second amended complaint on July 11, 2012. On August 1, 2012, we filed a motion to dismiss the second amended complaint, which was granted on January 17, 2013. A third amended complaint was filed on April 17, 2013. On May 30, 2013, we filed a motion to dismiss the third amended complaint, which was granted by the Court on October 1, 2013. On October 31, 2013, the plaintiffs filed a notice of appeal of the dismissal to the United States Court of Appeals for the Ninth Circuit. On April 25, 2014, the plaintiffs filed their opening appellate brief and on July 24, 2014 we filed our answering brief.

From time to time, we are subject to claims in legal proceedings arising in the normal course of business. We do not believe that we are currently party to any pending legal action that could reasonably be expected to have a material adverse effect on our business, financial condition, results of operations or cash flows.

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our condensed consolidated financial statements included elsewhere herein.

Forward-Looking Statements
Some of the statements contained in this Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 12E of the Securities Exchange Act of 1934, as amended, regarding our plans, objectives, expectations and intentions. Such statements include, without limitation, any statements regarding various estimates we

13

have made in preparing our financial statements, statements that refer to projections of our future operating performance, the realignment of our strategic path, including future product and service offerings, the sufficiency of our capital resources to meet our cash needs, the disposition of certain of our businesses, and the anticipated growth and trends in our businesses, including developments in the market for our products. These forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those anticipated.

Risks and uncertainties that could adversely affect our business and prospects include without limitation:
•
any financial or other information included herein based upon or otherwise incorporating judgments or estimates based upon
future performance or events;
•
our ability to raise additional capital or generate the cash necessary to continue and expand our operations;
•
our ability to raise additional capital or generate the cash necessary to redeem our Series J preferred stock if required to do so;
•
our ability to protect and make use of our substantial net operating loss carryforwards;
•
our ability to compete in the highly competitive nature of the digital advertising and marketing industry;
•
the market for our services, including the continued growth in usage of smartphones, tablets and other mobile connected
devices;
•
our ability to keep pace with technological and market developments;
•
our ability to attract and maintain customers;
•
our ability to collect and use data;
•
risks related to any acquisitions or dispositions that we may pursue;
•
the impact of government regulation, legal requirements or industry standards relating to consumer privacy and data protection;
•
our ongoing leadership transition;
•
our ability to protect the confidentiality of our proprietary information;
•
any systems failures of software errors;
•
risks associated with our international sales and operations; and
•
the impact and costs and expenses of any litigation we may be subject to now or in the future.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. Our actual results could be different from the results described in or anticipated by our forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections and may be materially better or worse than anticipated. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements represent our estimates and assumptions only as of the date of this report. We expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the date of this report, in order to reflect changes in circumstances or expectations or the occurrence of unanticipated events except to the extent required by applicable securities laws. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed above, as well as the risks and uncertainties discussed in Part I, Item 1A - Risk Factors of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and elsewhere in this Quarterly Report on Form 10-Q. We qualify all of our forward-looking statements by these cautionary statements. We caution you that these risks are not exhaustive. We operate in a continually changing business environment and new risks emerge from time to time.

Business Overview
We empower our customers (including brands, marketers and advertising agencies) to maximize the reach and economic potential of the mobile ecosystem through the delivery of relevance-driven merchandising, digital marketing and advertising solutions, primarily over smartphones and other mobile devices. Voltari uses advanced predictive analytics capabilities and real-time data management (including sophisticated data curation and modeling) to deliver the right content to the right person at the right time. Voltari’s unique combination of technology, expertise and go-to-market approach delivers return-on-investment for our customers.

Advertisers pay us to deliver their ads to mobile users, and we pay website and mobile application owners (or their proxies) for the use of their ad space. Our proprietary technology and data management platform allows us to analyze and augment the information

14

accompanying web and mobile advertising opportunities and quickly deliver highly targeted and engaging ad content to consumers in both programmatic and mediated environments. Our platform uses mass volumes of third-party data along with ad response and location data and, when available, first-party consumer data to generate, in real time, a score for each unique advertising opportunity which can be measured against an advertiser's creative materials and campaign goals. To date, we have identified more than 200 million server-side unique device profiles, many of which link multiple mobile devices to a single user. We continually collect additional anonymous data about users, audiences and their responses to mobile advertisements, which, in turn, refines our targeting and improves our placement choices.

In October 2014, we announced the expansion of our mobile advertising product suite with the formation of Emporia, an independent and transparent mobile channel for the purchase and sale of premium publisher inventory by a select group of advertisers. We are working with specialized data providers and the premiere hosts of rich media and video ad units to create unique behaviorally relevant vertical data sets for exclusive use on the Emporia platform and to formulate corresponding descriptors ("Audience Shortcuts") of those mobile users included in participating advertisers' target audience who have a real-time propensity for engagement with high-impact ad units (e.g., video and other rich media) at the time of service. Through Emporia, we expect to use our proprietary technology to offer an intuitive self-service interface that will allow advertising agencies and their trading desks to activate users defined by Audience Shortcuts at the time, and only at the time, those users are available and predicted to engage with the advertiser's content.

Prior to July 1, 2013, most of our revenue was derived from providing hosting services to wireless carriers. Starting in 2012, we began our exit from most of our international carrier business and, on June 30, 2013, concluded our U.S. carrier business. On October 31, 2013, we completed the sale of our Gen5 business. On May 30, 2014, we completed the sale of our U.S. and Canadian messaging business. Further, on September 1, 2014, we completed the sale of our wireless carrier business in the UK. We are now fully focused on our digital media and marketing business and are planning to expand our product offerings to add online and display solutions to our suite of mobile data marketing services. We are also offering predictive analytics services to, and are in active discussions with, mobile website and application owners, mobile advertising trading desks and mobile ad exchanges.

To address the challenges presented by the market conditions and the other risks and uncertainties facing our business and to realign our strategic path, we have continued to implement cost saving measures, including reductions in our workforce, the delay or cancellation of some hiring plans, and a restructuring of our facilities and data centers. We continue to review our cost structure and may implement further cost saving initiatives. These measures are designed to realign our strategic path, streamline our business and improve the quality of our product offerings while reducing costs. Our success will depend on our ability to successfully execute one or more financing alternatives, successfully develop and use new technologies and adapt our current and planned services to new customer requirements or emerging industry standards and expand our customer base, which are all subject to the risks and uncertainties discussed in Part I, Item 1A - Risk Factors of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and elsewhere in this Quarterly Report on Form 10-Q.

This realignment of our strategic path and consideration of financing options will continue to require management time and resources, while we simultaneously focus on developing new product offerings and reducing costs. We are planning to expand our product offerings to add online and display solutions to our suite of mobile data services. We are also offering predictive analytics services to, and are in active discussions with, website owners, mobile advertising trading desks and mobile ad exchanges. We cannot assure that we will be successful in our efforts in obtaining financing, realigning our strategic path, or growing our digital media and marketing business. The uncertainty inherent in our strategic realignment can be difficult to manage, may cause concerns from current and potential customers, suppliers and other third parties with whom we do business, and may increase the likelihood of turnover of officers and key employees.

As a result of the recent significant changes in our company, the termination and sale of our legacy businesses, the realignment of our strategic path and enhanced focus on our digital media and marketing business, our exploration of financing alternatives, and other changes in our business, our historical results of operations, including periods prior to the periods presented herein, are not necessarily indicative of the operating results for the full year ending December 31, 2014 or any future period.

Recent Developments
Compliance with NASDAQ Continued Listing Requirements. On May 22, 2014, we received a letter from the NASDAQ Stock Market LLC ("NASDAQ") advising that, based on the value of the Company’s stockholders’ equity, as disclosed in our Quarterly Report on Form 10-Q for the period ended March 31, 2014, we did not meet the minimum $2.5 million stockholders’ equity value requirement for continued listing on the NASDAQ Capital Market under NASDAQ Marketplace Rule 5550(b)(1). The letter also stated that, as of that date, we did not satisfy the alternative requirements for continued listing based on market value of listed securities or net income from continuing operations pursuant to NASDAQ Marketplace Rules 5550(b)(2) and 5550(b)(3), respectively. In July 2014, we submitted a plan for compliance to NASDAQ and NASDAQ has notified us that we have until November 18, 2014 to implement that

15

plan and regain compliance with the requirements for continued listing. If we are unable to cure the deficiency by that date, our common stock may be subject to delisting from NASDAQ. It is also possible that we would otherwise fail to satisfy another NASDAQ requirement for continued listing of our capital stock. This could inhibit the ability of our common stockholders to trade their shares in the open market, thereby severely limiting the liquidity of such shares. For more information, see Part II, Item 1A - Risk Factors of this Quarterly Report on Form 10-Q.

Amendment to Series J Preferred Stock. On July 18, 2014, Koala Holding LP, the record holder of 977,136 shares, or approximately 81.45%, of our issued and outstanding Series J preferred stock, executed and delivered a written consent approving an amendment to Exhibit A to our Amended and Restated Certificate of Incorporation, which we refer to as the Amendment, which sets forth the rights, privileges and restrictions granted to and imposed on the Series J preferred stock. Pursuant to the Amendment, the Company may declare and distribute dividends on its securities that rank junior to the Series J preferred stock, consisting solely of warrants or other rights to acquire newly issued shares of our common stock against the payment of a cash purchase price to the Company, without declaring or setting apart for payment dividends on the Series J preferred stock. On August 7, 2014, we filed a Definitive Information Statement on Schedule 14C with the Securities and Exchange Commission in connection with this Amendment. On September 5, 2014, we filed the Amendment with the Secretary of State of the State of Delaware.

Koala Holding LP is an entity affiliated with Carl C. Icahn who, as of November 3, 2014, beneficially owns approximately 29.8% of our outstanding shares of common stock, controls approximately 14.2% of the voting power of our common stock and beneficially owns approximately 95.5% of our Series J preferred stock.
Results of Operations
Our continuing operations consist of our mobile media and advertising business. During 2013, we exited our U.S. carrier business and completed the sale of our Gen5 business. On May 30, 2014, we completed the sale of our messaging business in the U.S. and Canada. Further, on September 1, 2014, we completed the sale of our wireless carrier business in the UK. As a result, these businesses are reported as discontinued operations in the condensed consolidated financial statements for the requisite periods presented in this Quarterly Report on Form 10-Q. See discussion of net (loss) income from discontinued operations below and Note 5 - Discontinued Operations to our condensed consolidated financial statements for more information.

Total revenue
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
 
 
 
 
September 30,
 
 
 
 
 
2014
 
2013
 
$ Change
 
% Change
 
2014
 
2013
 
$ Change
 
% Change
 
(Dollars in thousands)
Total revenue
$
3,356

  
$
2,086

  
$
1,270

  
60.9
%
 
$
8,316

  
$
5,633

 
$
2,683

  
47.6
%

Total revenue for the three months ended September 30, 2014 increased $1.3 million, or 60.9%, compared to the three months ended September 30, 2013 and total revenue for the nine months ended September 30, 2014 increased $2.7 million, or 47.6%, compared to the nine months ended September 30, 2013. The increase in total revenue for these periods is directly attributable to increased sales of mobile advertising resulting from new customer acquisitions and increased sales to existing customers.

Substantially all of our revenues from continuing operations are generated in the U.S. for all periods presented.

Three customers accounted for 41% of our total revenue for the three months ended September 30, 2014 and two customers accounted for 30% of our total revenue for the nine months ended September 30, 2014. Three customers accounted for 61% of our total revenue for the three months ended September 30, 2013 and two customers accounted for 52% of our total revenue for the nine months ended September 30, 2013.


16


Operating expenses
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
 
 
 
 
September 30,
 
 
 
 
 
2014
 
2013
 
$ Change
 
% Change
 
2014
 
2013
 
$ Change
 
% Change
 
(Dollars in thousands)
Direct third-party expenses
$
2,129

 
$
1,505

  
$
624

 
41.5
 %
 
$
5,465

 
$
4,120

 
$
1,345

 
32.6
 %
Network operations*
1,177

 
639

  
538

 
84.2

 
3,780

 
1,327

 
2,453

 
184.9

Product development*
1,092

 
387

  
705

 
182.2

 
2,185

 
1,270

 
915

 
72.0

Sales and marketing*
1,334

 
1,632

  
(298
)
 
(18.3
)
 
3,694

 
4,605

 
(911
)
 
(19.8
)
General and administrative*
1,325

 
2,510

  
(1,185
)
 
(47.2
)
 
4,817

 
9,775

 
(4,958
)
 
(50.7
)
Depreciation and amortization
1,019

 
1,258

  
(239
)
 
(19.0
)
 
3,387

 
2,554

 
833

 
32.6

Total operating expenses
$
8,076

  
$
7,931

  
$
145

 
1.8
 %
 
$
23,328

  
$
23,651

 
$
(323
)
 
(1.4
)%
*     excluding depreciation

Direct third-party expenses
For the three months ended September 30, 2014, direct third-party expenses increased $0.6 million, or 41.5%, compared to the three months ended September 30, 2013. For the nine months ended September 30, 2014, direct third-party expenses increased $1.3 million, or 32.6%, compared to the nine months ended September 30, 2013. In connection with the increased revenue, we incurred increased costs in the form of fees paid to publishers for displaying customer advertisements, ad data and serving fees.

Network operations, excluding depreciation
Network operations expense, excluding depreciation, consists primarily of personnel and outsourcing costs to operate our datacenter, as well as power, bandwidth capacity and software maintenance and support. For all periods presented, we allocated certain continuing costs previously borne by discontinued carrier and messaging operations to our mobile media and advertising business.

For the three months ended September 30, 2014, network operations expense, excluding depreciation, amounted to $1.2 million, all of which is included in net loss from continuing operations. For the three months ended September 30, 2013, these costs amounted to $1.6 million, of which $0.6 million is included in net loss from continuing operations. For the third quarter of 2014, these costs principally consist of bandwidth expenses, including hosting, infrastructure and server costs, which relate to supporting our carrier-grade data center for our ad network operation.

For the nine months ended September 30, 2014, network operations expense, excluding depreciation, amounted to $4.0 million, of which $3.8 million is included in net loss from continuing operations. For the nine months ended September 30, 2013, these costs amounted to $7.0 million, of which $1.3 million is included in net loss from continuing operations. These costs consist of the following, which are related to supporting our carrier-grade data center for our ad network operation, during the nine months ended September 30, 2014:
•
$1.7 million in bandwidth expenses, including hosting, infrastructure and server costs;
•
$0.5 million in salaries and benefits and contractor costs; and
•
$0.3 million in facilities and equipment costs, software maintenance and support, and consulting fees.

Product development, excluding depreciation
For the three months ended September 30, 2014, product development, excluding depreciation, increased $0.7 million, or 182.2%, compared to the three months ended September 30, 2013. For the nine months ended September 30, 2014, product development, excluding depreciation, increased $0.9 million, or 72.0%, compared to the nine months ended September 30, 2013. During these periods in 2014, we incurred greater non-capitalizable costs, primarily third-party consulting services, in connection with increased development of our Voltari-Connect platform, as well as Emporia product development. Our Emporia-related software development work, performed during the third quarter of 2014, is the primary driver for the increase in the non-capitalizable costs incurred during the three months ended September 30, 2014.
 

17

Sales and marketing, excluding depreciation
For the three months ended September 30, 2014, sales and marketing expense, excluding depreciation, decreased $0.3 million, or 18.3%, compared to the three months ended September 30, 2013. This decrease was primarily due to a reduction in personnel and related costs.

For the nine months ended September 30, 2014, sales and marketing expense, excluding depreciation, decreased $0.9 million, or 19.8%, compared to the nine months ended September 30, 2013. This decrease was primarily due to:
•
$0.6 million reduction in personnel and recruiting costs; and
•
$0.3 million decrease in facilities and equipment costs.

General and administrative, excluding depreciation
For the three months ended September 30, 2014, general and administrative expense, excluding depreciation, decreased $1.2 million, or 47.2%, compared to the three months ended September 30, 2013. This decrease was primarily due to:
•
$0.5 million decrease in salaries, benefits and contractor costs resulting from reductions in personnel and the use of contractors in 2014;
•
$0.4 million decrease in professional services fees, principally legal, accounting and other costs that were higher in the prior year due to work on various SEC filings in the first half of 2013 related to a reorganization transaction and the one-for-ten reverse stock split; and
•
$0.3 million reduction in business tax expense, principally driven by a Washington state tax refund received in the third quarter of 2014 resulting from an audit of prior periods.

For the nine months ended September 30, 2014, general and administrative expense, excluding depreciation, decreased $5.0 million, or 50.7%, compared to the nine months ended September 30, 2013. This decrease was primarily due to a $2.7 million reduction in the aforementioned professional services fees, a $1.9 million decrease in the aforementioned salaries and benefits and contractor costs and a $0.4 million reduction in business tax expense, principally driven by the aforementioned tax refund.

Depreciation and amortization
For the three months ended September 30, 2014, depreciation and amortization expense decreased $0.2 million, or 19.0%, compared to the three months ended September 30, 2013. This decrease was primarily due to a $0.5 million reduction in depreciation expense due to a greater number of fixed assets reaching the end of their depreciable lives in 2014, partially offset by a $0.3 million increase in amortization expense associated with our capitalized software.

For the nine months ended September 30, 2014, depreciation and amortization expense increased $0.8 million, or 32.6%, compared to the nine months ended September 30, 2013. This change was primarily attributable to a $1.0 million increase in amortization expense associated with our capitalized software, slightly offset by a $0.2 million reduction in depreciation expense related to fixed assets.

Other income (expense), net
For the three and nine months ended September 30, 2013, other expense, net, of $0.3 million and $1.5 million, respectively, consisted primarily of interest expense associated with our term loan with High River Limited Partnership, which we repaid in full in August 2013. Other income, net for the three and nine months ended September 30, 2014 was de minimis.
Net (loss) income from discontinued operations
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
 
 
 
 
September 30,
 
 
 
 
 
2014
 
2013
 
$ Change
 
% Change
 
2014
 
2013
 
$ Change
 
% Change
 
(Dollars in thousands)
Net (loss) income from discontinued operations
$
(774
)
 
$
(582
)
 
$
(192
)
  
(33.0
)%
 
$
(350
)
 
$
15,023

 
$
(15,373
)
  
(102.3
)%

Net loss from discontinued operations for the three and nine months ended September 30, 2014 of $0.8 million and $0.4 million, respectively, reflects the combined net loss attributable to the U.S. and Canadian messaging businesses, including residual charges related to operations discontinued prior to 2014, partially offset by net income generated by the UK carrier business.

18


Net loss from discontinued operations for the three months ended September 30, 2013 of $0.6 million reflects the combined net losses generated by U.S. carrier, Gen5 and the U.S. and Canadian messaging businesses, as well as residual charges related to operations discontinued prior to 2014, partially offset by net income attributable to the UK carrier business. Net income from discontinued operations for the nine months ended September 30, 2013 of $15.0 million primarily reflects the net income generated by the U.S. and UK carrier businesses, partially offset by net losses attributable to Gen5 and the U.S. and Canadian messaging operations. See Note 5 - Discontinued Operations to our condensed consolidated financial statements for more information.
Net loss
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
 
 
 
 
September 30,
 
 
 
 
 
2014
 
2013
 
$ Change
 
% Change
 
2014
 
2013
 
$ Change
 
% Change
 
(Dollars in thousands)
Net loss
$
(5,492
)
 
$
(6,723
)
 
$
1,231

  
18.3
%
 
$
(15,353
)
 
$
(4,467
)
 
$
(10,886
)
  
(243.7
)%
For the three months ended September 30, 2014, net loss was $5.5 million, compared to net loss of $6.7 million for the three months ended September 30, 2013. The $1.2 million improvement in net loss is primarily due to increased revenue of $1.3 million from continuing operations, a $0.3 million reduction in other expense, partially offset by a $0.2 million increase in net loss associated with discontinued operations and a $0.1 million increase in operating expenses.

For the nine months ended September 30, 2014, net loss was $15.4 million, compared to net loss of $4.5 million for the nine months ended September 30, 2013. The $10.9 million increase in net loss is primarily due to a $15.4 million reduction in income associated with discontinued operations, partially offset by increased revenue of $2.7 million from continuing operations and reductions in other expense of $1.5 million and operating expenses of $0.3 million.

Liquidity and Capital Resources
General
Our principal needs for liquidity have been to fund operating losses, working capital requirements, capital expenditures, debt service, restructuring expenses, international activity, acquisitions and integration. Our principal source of liquidity as of September 30, 2014 consisted of cash and cash equivalents of approximately $12.2 million.

Over the near term, we expect that the cost of operations and working capital requirements will continue to be our principal need for liquidity. In the long term, working capital requirements are expected to increase if we succeed in executing our longer-term business plan and growing our digital media and advertising business and new predictive analytics service offerings. Our cash flows may be affected by many factors including the economic environment, competitive conditions in the digital marketing and advertising industries and the success of our strategic realignment. We have seen a positive response to our strategic realignment of focusing on our core digital advertising and marketing business. We believe we will have adequate resources to fund our operations, capital expenditures and working capital needs for the next 12 months using our cash and cash equivalents on hand and through access to the capital markets. Going forward, we will continue to focus on improving sales and gross margin. Our short-term liquidity may be adversely affected if, and to the extent that, our Series J preferred stock becomes redeemable.

Our ability to achieve our business and cash flow plans is based on a number of assumptions which involve significant judgments and estimates of future performance, borrowing capacity and credit and equity finance availability, which cannot at all times be assured. Accordingly, we cannot assure that cash flows from operations and other internal and external sources of liquidity will at all times be sufficient for our cash requirements. If necessary, we may need to consider actions and steps to improve our cash position and mitigate any potential liquidity shortfall, such as modifying our business plan, pursuing additional financing to the extent available, reducing capital expenditures, pursuing and evaluating other alternatives and opportunities to obtain additional sources of liquidity and other potential actions to reduce costs. We cannot assure that any of these actions would be successful, sufficient or available on favorable terms. Any inability to generate or obtain sufficient levels of liquidity to meet our cash requirements at the level and times needed could have a material adverse impact on our business and financial position.
  
Our ability to obtain any additional financing depends upon many factors, including our then existing level of indebtedness (if any) and restrictions in any debt facilities we may establish in the future, historical business performance, financial projections, prospects and creditworthiness and external economic conditions and general liquidity in the credit and capital markets. Any financing (or subsequent refinancing) could also be extended only at costs and require us to satisfy restrictive covenants, which could further limit or restrict our business and results of operations, or be dilutive to our stockholders.

19


Cash Flows
As of September 30, 2014 and December 31, 2013, we had cash and cash equivalents of $12.2 million and $24.7 million, respectively. The decrease reflects cash used in operating activities of $11.5 million and cash used in investing activities of $1.8 million, partially offset by the impact of a $0.8 million reduction in cash classified as held for sale. There was no cash classified as held for sale as of September 30, 2014.

Net Cash Used in Operating Activities
For the nine months ended September 30, 2014, net cash of $11.5 million was used in operating activities. Operating activities from continuing operations used $12.0 million of cash consisting largely of our net loss of $15.4 million. The change in our operating assets and liabilities was mainly driven by a decrease in accounts payable and accrued expenses and an increase in accounts receivable. The decrease in accounts payable and accrued expenses is principally due to the timing of payment of third-party partner invoices during the third quarter of 2014 and a reduction in accruals relating to professional services, primarily due to lower utilization of these services based on business need. The increase in accounts receivable is directly attributable to the growth of our mobile advertising revenue. The change in our operating assets and liabilities is offset by various non-cash items, including $3.4 million for depreciation and amortization, $0.3 million for stock-based compensation expense and $0.2 million for other non-cash adjustments. Operating activities from discontinued operations provided $0.4 million of cash during the nine months ended September 30, 2014.

Net Cash Used in Investing Activities
For the nine months ended September 30, 2014, cash of $1.8 million was used in investing activities. Investing activities from continuing operations used $2.1 million of cash consisting of software development costs associated with our Voltari-Connect platform that were capitalized during the period, including costs to develop new software products and significant enhancements to existing software products. The net cash used was partially offset by investing activities from discontinued operations, which provided $0.3 million of cash during the nine months ended September 30, 2014, consisting of the cash proceeds received from the sales of our U.S. and Canadian messaging business during the second quarter and our UK wireless carrier business during the third quarter.

Net Cash Used in Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2014 was de minimis.

Off-Balance Sheet Arrangements
As of December 31, 2013 and September 30, 2014, we do not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions and in certain cases the difference may be material. Our critical accounting policies and estimates include those involved in recognition of revenue, the allowance for doubtful accounts receivable, software development costs, valuation of goodwill, long-lived and intangible assets, provision for income taxes, stock-based compensation and accounting for our redeemable preferred stock.

A detailed discussion of our critical accounting policies and estimates is available in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. There have been no material changes with respect to those policies or estimates during the period covered by this Quarterly Report on Form 10-Q.

With respect to our goodwill, management's assessment of relevant events and circumstances has not indicated it is more likely than not the fair value of our reporting unit is less than its carrying amount at September 30, 2014.  We considered the results of our annual impairment test in the fourth quarter of 2013, which indicated that the fair value of the reporting unit exceeded its carrying amount by 33.5%.  Management also considered general economic and industry conditions, our recent and planned financial performance as well as the change in the price of our common stock since 2013.

Recent Accounting Pronouncements
See discussion of recent accounting pronouncements in Note 2 - Summary of Significant Accounting Policies to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

20


Item 3.    Quantitative and Qualitative Disclosures about Market Risk.

We are not required to provide qualitative and quantitative disclosures about market risk because we are a smaller reporting company.

Item 4.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation of our Acting Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Acting Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Acting Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II
 
Item 1.    Legal Proceedings.

There have been no material changes to the legal proceedings previously disclosed in Part 1, Item 3 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, except as disclosed in Note 9 - Commitments and Contingencies to our condensed consolidated financial statements.

Item 1A.    Risk Factors.

There have been no material changes to the risk factors previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, except for the following additional risk factors which should be read in conjunction with Part I, Item 1A - Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Our failure to raise additional capital and generate the cash flows necessary to maintain and expand our operations and invest in our services could reduce our ability to continue normal operations. We may not have sufficient capital to redeem our Series J preferred stock with an aggregate redemption price, including paid-in-kind dividends and accrued dividends, of approximately $38.7 million as of September 30, 2014 if the holders of such stock require us to do so. This could adversely affect our ability to continue normal operations and could result in the loss of your entire investment.
Over the near term, we expect that the cost of operations and working capital requirements will continue to be our principal need for liquidity. In the long term, working capital requirements are expected to increase if we succeed in executing our longer-term business plan and growing our digital media and advertising business and new predictive analytics service offerings. Our cash flows may be affected by many factors including the economic environment, competitive conditions in the digital marketing and advertising industries and the success of our strategic realignment. Going forward, we will continue to focus on improving sales and gross margin. Our short-term liquidity may be adversely affected if, and to the extent that, our Series J preferred stock becomes redeemable.

Our ability to achieve our business and cash flow plans is based on a number of assumptions which involve significant judgments and estimates of future performance, borrowing capacity and credit and equity finance availability, which cannot at all times be assured. Accordingly, we cannot assure that cash flows from operations and other internal and external sources of liquidity will at all times be sufficient for our cash requirements. If necessary, we may need to consider actions and steps to improve our cash position and mitigate any potential liquidity shortfall, such as modifying our business plan, pursuing additional financing to the extent available, reducing capital expenditures, pursuing and evaluating other alternatives and opportunities to obtain additional sources of liquidity and other potential actions to reduce costs. We cannot assure that any of these actions would be successful, sufficient or available on favorable terms. Any inability to generate or obtain sufficient levels of liquidity to meet our cash requirements at the level and times needed could have a material adverse impact on our business and financial position.
  

21

Our ability to obtain any additional financing depends upon many factors, including our then existing level of indebtedness (if any) and restrictions in any debt facilities we may establish in the future, historical business performance, financial projections, prospects and creditworthiness and external economic conditions and general liquidity in the credit and capital markets. Any financing (or subsequent refinancing) could also be extended only at costs and require us to satisfy restrictive covenants, which could further limit or restrict our business and results of operations, or be dilutive to our stockholders.

If we cannot meet NASDAQ’S continued listing requirements, NASDAQ may delist our common stock which could have an adverse impact on the liquidity and market price of our common stock.
Our common stock is currently listed on the NASDAQ Capital Market. We are required to meet certain financial and other quantitative thresholds to maintain that listing. On May 22, 2014, we received a letter from NASDAQ advising that, based on the value of the Company’s stockholders’ equity, as disclosed in our Quarterly Report on Form 10-Q for the period ended March 31, 2014, we did not meet the minimum $2.5 million stockholders’ equity value requirement for continued listing on the NASDAQ Capital Market under NASDAQ Marketplace Rule 5550(b)(1). The letter also stated that, as of that date, we did not satisfy the alternative requirements for continued listing based on market value of listed securities or net income from continuing operations pursuant to NASDAQ Marketplace Rules 5550(b)(2) and 5550(b)(3), respectively. In July 2014, we submitted a plan for compliance to NASDAQ and NASDAQ has notified us that we have until November 18, 2014 to implement that plan and regain compliance with the requirements for continued listing. If we are unable to cure the deficiency by that date, our common stock may be subject to delisting from NASDAQ. It is also possible that we would otherwise fail to satisfy another NASDAQ requirement for continued listing of our capital stock. This could inhibit the ability of our common stockholders to trade their shares in the open market, thereby severely limiting the liquidity of such shares. Although stockholders may be able to trade their shares of common stock on the over-the-counter market, there can be no assurance that this would occur.  Further, the over-the-counter market provides significantly less liquidity than NASDAQ and other national securities exchanges, is thinly traded and highly volatile, has fewer market makers and is not followed by analysts.  As a result, your ability to trade or obtain quotations for these securities may be more limited than if they were quoted on NASDAQ or other national securities exchanges.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.    Defaults Upon Senior Securities.

None.

Item 4.    Mine Safety Disclosures.

Not applicable.

Item 5.    Other Information.

None.

Item 6.    Exhibits.

Exhibit Number
 
Exhibit Description
 
 
 
3.1
 
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Voltari Corporation (incorporated by reference to our Current Report on Form 8-K filed with the SEC on September 12, 2014)
 
 
 
31.1
 
Certification pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Acting Chief Executive Officer.*
 
 
 
31.2
 
Certification pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer.*
 
 
 
32.1
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Acting Chief Executive Officer.**
 
 
 
32.2
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer.**
 
 
 
101.INS
 
XBRL Instance Document.*
101.SCH
 
XBRL Taxonomy Extension Schema Document.*
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.*
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.*
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.*


*
 
Filed herewith.
 
 
 
**
 
Furnished herewith.
 
 
 


22


SIGNATURES
Pursuant to the requirements 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.

 
 
 
VOLTARI CORPORATION
 
 
 
 
Date:
November 13, 2014
By:
/s/ John Breeman
 
 
 
John Breeman
 
 
 
Chief Financial Officer (principal financial and accounting officer)




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Voltari Corp Reports