UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

For the quarterly period ended September 30, 2014

Commission File Number: 333-186684

 

 

Goodman Networks Incorporated

(Exact name of registrant as specified in its charter)

 

 

972-406-9692

(Registrant’s 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  þ    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  þ    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  þ

The number of shares of the registrant's common stock outstanding at November 13, 2014 was 912,754.

 

 

 

 

 

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Goodman Networks Incorporated

Quarterly Report for the Nine Months Ended September 30, 2014

TABLE OF CONTENTS

 

 

 

 

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PART I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

Goodman Networks Incorporated

Consolidated Balance Sheets

(In thousands, Except Share Amounts and Par Value)

 

 

See Notes to Consolidated Financial Statements

 

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Goodman Networks Incorporated

Consolidated Statements of Operations and Comprehensive Income

(Unaudited, In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements

 

 

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Goodman Networks Incorporated

Consolidated Statements of Cash Flows

(Unaudited, In Thousands)

 

 

 

 

See Notes to Consolidated Financial Statements

 

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Goodman Networks Incorporated

Consolidated Statements of Cash Flows (Continued)

(Unaudited, In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements

 

 

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Goodman Networks Incorporated

Notes to Consolidated Financial Statements (Unaudited)

 

Note 1. Organization and Business

Goodman Networks Incorporated, a Texas corporation, (“Goodman Networks” and collectively with its subsidiaries, the “Company”), is a national provider of end-to-end network infrastructure and professional services to the wireless telecommunications industry. The Company’s wireless telecommunications services span the full network lifecycle, including the design, engineering, construction, deployment, integration, maintenance, and decommissioning of wireless networks. Goodman Networks performs these services across multiple network infrastructures, including traditional cell towers as well as next generation small cell and distributed antenna systems (“DAS”). The Company also serves the satellite television industry by providing onsite installation, upgrade and maintenance of satellite television systems to both the residential and commercial markets customers. These highly specialized and technical services are critical to the capability of the Company’s customers to deliver voice, data and video services to their end users.

Merger with Multiband

On May 21, 2013, Goodman Networks entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Manatee Merger Sub Corporation, a wholly owned subsidiary of Goodman Networks (“MergerSub”), and Multiband Corporation (“Multiband”), pursuant to which on August 30, 2013, Multiband merged with and into MergerSub, with Multiband surviving the merger (the “Merger”). The aggregate purchase price, excluding merger-related fees and expenses, was approximately $101.1 million. Upon the closing of the Merger, Multiband became a wholly owned subsidiary of Goodman Networks, and Multiband and its subsidiaries became restricted subsidiaries and guarantors under the indenture (the “Indenture”) governing the Company’s 12.125% senior secured notes due 2018 (the “Notes”) and the Company’s amended and restated senior secured revolving credit facility (the “Credit Facility”). To finance the Merger the Company, through its wholly owned subsidiary, sold an additional $100 million of Notes (the “Tack-On Notes”) under terms substantially identical to those of the $225 million aggregate principal amount of Notes issued in June 2011 (the “Original Notes”). The Company paid the remainder of the merger consideration from cash on hand. Upon completion of the Merger, the Company redeemed the Tack-On Notes in exchange for the issuance of an equivalent amount of Notes, which are classified as a long-term liability on the Company’s balance sheet upon the closing of the Merger because they mature in July 2018.

Sale of MDU Assets

On December 31, 2013, the Company sold certain assets (the “MDU Assets”) to DIRECTV MDU, LLC (“DIRECTV MDU”), and DIRECTV MDU assumed certain liabilities of the Company, related to the division of the Company’s business involved with the ownership and operation of subscription based video, high-speed internet and voice services and related call center functions to multiple dwelling unit customers, lodging and institution customers and commercial establishments, (such assets, collectively, the “MDU Assets”). The operations of the MDU Assets were previously reported in the Company’s “Other Services” segment. In consideration for the MDU Assets, DIRECTV MDU paid the Company $12.5 million and additional non-cash consideration, assumed certain liabilities, and extended the existing Multiband/DIRECTV HSP Agreement, resulting in a four-year remaining term ending on December 31, 2017.

Restructuring Activities

During the second quarter of 2014, management approved, committed to and initiated plans to restructure and further improve efficiencies in operations, including further integrating the operations of Multiband and Custom Solutions Group of Cellular Specialties, Inc. (the “2014 Restructuring Plan”). The restructuring costs associated with the 2014 Restructuring Plan are recorded in the restructuring expense line item within the consolidated statements of operations and comprehensive income.

See Note 15 – Restructuring Activities for a summary of restructuring activities and costs.

 

Note 2. Summary of Significant Accounting and Reporting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in all material respects in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying unaudited consolidated financial statements have been prepared on the same basis as the financial statements for the year ended December 31, 2013.

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Because certain information and footnote disclosures have been condensed or omitted, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2013, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Annual Report”). In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included. Management believes that the disclosures made in these unaudited consolidated financial statements are adequate to make the information not misleading. Interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year.

There have been no changes in the Company’s significant accounting policies from those that were disclosed in the Company’s 2013 Annual Report.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Key estimates for the Company include: the recognition of revenue, in particular, estimated losses on long term construction contracts, allowance for doubtful accounts; inventory valuation; asset lives used in computing depreciation and amortization; valuation of intangible assets; valuation of contingent consideration; allowance for self-insurance health care claims incurred but not reported; valuation of stock options and other equity awards, particularly related to fair value estimates; accounting for income taxes; contingencies; and litigation. While management believes that such estimates are reasonable when considered in conjunction with the financial position and results of operations taken as a whole, actual results could differ from those estimates, and such differences may be material to the consolidated financial statements.

Revenue Recognition

The Company recognizes revenue when: (i) persuasive evidence of a customer arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured and (iv) product delivery has occurred or services have been rendered. The Company recognizes revenue as services are performed and completed.

The Company enters into contracts that require the construction and/or installation of specific units within a network system. Revenue from construction and installation contracts is recorded using the completed contract method of accounting. Under the completed contract method, revenues and costs from construction and installation projects are recognized only upon substantial completion of the project. Project costs typically include direct materials, labor and subcontractor costs, and indirect costs related to contract performance, such as indirect labor, supplies, and tools. Provisions for estimated losses on uncompleted contracts are recognized when it has been determined that a loss is probable.

The Company also enters into contracts to provide engineering and integration services related to network architecture, transformation, reliability and performance. Revenues and costs from service contracts are generally recognized at the time the services are completed under the completed performance model. Services are generally performed under master or other services agreements and are billed on a contractually agreed price per unit of service on a work order basis. Services invoiced prior to the performance of the obligation are recorded in deferred revenue and recognized as the services are performed.

The total amount of progress payments netted against contract costs on uncompleted contracts as of December 31, 2013 and September 30, 2014 was $197.9 million and $194.2 million, respectively.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization. The Company depreciates property and equipment using the straight-line method over the estimated useful lives of the related assets, which are 3 years for software, 3 to 4 years for computers and office equipment, 5 to 7 years for furniture and fixtures, 5 to 30 years for buildings and improvements, 3 to 7 years for other equipment and 5 years for vehicles. Leasehold improvements and assets acquired under capital leases are amortized using the straight-line method over the lesser of the estimated useful lives or the remaining term of the related leases. Major additions and improvements to property and equipment are capitalized. Routine maintenance and repair costs are expensed as incurred.

The Company periodically reviews long-lived assets whenever adverse events or changes in circumstances indicate the carrying value of the asset may not be recoverable. In assessing recoverability, assumptions regarding estimated future cash flows and other factors must be made to determine if an impairment loss may exist, and, if so, estimate fair value. If these estimates or their related assumptions change in the future, the Company may be required to record impairment losses for these assets.

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During the third quarter of 2014, the Company listed for sale the Multiband headquarters building in Minnetonka, Minnesota. The Company evaluated the carrying value against the fair value of the building less costs that will be incurred to complete the sale of the building and concluded that the value of the building was impaired. Accordingly, an impairment charge of $1.8 million has been included in the accompanying consolidated statements of operations and comprehensive income.

Foreign Currency Translation

During the third quarter of 2014, the Company entered into an arrangement to provide small cell services in Germany performed by our subsidiary, Goodman Networks GmbH.

The Company's functional currency for all operations worldwide is the U.S. dollar. Nonmonetary assets and liabilities are translated at historical rates and monetary assets and liabilities are translated at exchange rates in effect at the end of the year. Income statement accounts and cash flows are translated at average rates for the period. Gains and losses from translation of foreign currency financial statements into U.S. dollars are included as a component of shareholders’ equity in other comprehensive income. Gains and losses resulting from foreign currency transactions are included in current results of operations.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements  (Topic 205) and Property, Plant, and Equipment (Topic 360) — Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). The amendments in ASU 2014-08 change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. The new guidance is effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. The Company elected to early adopt ASU No. 2014-08 effective April 1, 2014. The adoption of the new guidance did not have a material impact on the Company.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

Note 3. Business Combinations

Acquisition of the Custom Solutions Group of Cellular Specialties, Inc.

On February 28, 2013, the Company completed the acquisition of 100% of the assets of the Custom Solutions Group of Cellular Specialties, Inc. (“CSG”), which provides indoor and outdoor wireless DAS, small cell and Wi-Fi solutions, services, consultations and maintenance. The purchase price consists of $18.0 million in cash, earn-out payments of up to an aggregate of $17.0 million through December 31, 2015 and the assumption of certain liabilities related to the acquired business. The Company acquired CSG to expand its in-building DAS, small cell and Wi-Fi offload solutions.

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The following table summarizes the consideration transferred to acquire CSG and the amounts of identified assets acquired and liabilities assumed at the acquisition date (in thousands):

 

The acquisition of CSG includes a contingent consideration arrangement that requires additional consideration to be paid by the Company to CSG’s former owners based upon the financial performance of CSG over a three-year period immediately following the close of the acquisition. Amounts payable under the contingent consideration arrangement are payable annually over a three-year period. The range of undiscounted amounts the Company could pay under the arrangement is between $0 and $17.0 million. The fair value of the contingent consideration recognized on the acquisition date of $9.2 million was estimated by applying the income approach. That measure is based on significant inputs not observable in the market, which is referred to as a Level 3 input. The liability for the contingent consideration is included within accrued liabilities on the consolidated balance sheet.    

See Note 8 – Fair Value Measurements for current period activity related to the Company’s contingent consideration arrangements.

The Company acquired $7.4 million of gross contractual accounts receivable. The fair value of the acquired receivables was $7.4 million.

The goodwill is attributable to the workforce of the acquired business and the synergies expected to arise after the Company’s acquisition of CSG. The goodwill has been assigned in its entirety to the Professional Services segment. Goodwill is deductible for tax purposes.

As part of the purchase price, the Company determined that CSG’s separately identifiable intangible assets were its customer backlog, customer relationships, non-compete agreements and trade name. The intangible assets including goodwill were assigned to the Company’s Professional Services reporting unit. The Company used the income approach to value the identifiable intangibles, which is a Level 3 measurement. This approach calculates fair value by discounting the after-tax cash flow back to a present value. The baseline data for this analysis was the cash flow estimates used to price the transaction. Cash flows were forecasted and then discounted using a discount rate applicable to the intangible asset and reporting unit. Discount rates ranged from 18.5% to 23.0% and are based on the estimated weighted average cost of capital which employs an estimate of the required equity rate of return and after-tax cost of debt for the reporting unit.

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The following table is a summary of the fair value estimates of the identifiable intangibles and their weighted-average useful lives:

 

The Company incurred approximately $0.7 million of acquisition-related costs, $0.4 million of which were recorded in selling, general and administrative costs for the nine months ended September 30, 2013. No expenses related to the acquisition have been capitalized.

 

Acquisition of Design Build Technologies

On August 8, 2013, the Company acquired 100% of the assets of Design Build Technologies, LLC (“DBT”), a former subcontractor of the Company in the southeast region of the United States, for $1.3 million in cash. The Company received certain assets, tower crews, and a non-compete agreement from the owner of DBT, who became an employee of the Company upon the close of the transaction. DBT was acquired to augment Goodman Networks’ existing workforce capabilities and reduce its dependence on subcontractors.

The following table summarizes the consideration transferred to acquire DBT and the amounts of identified assets acquired and liabilities assumed at the acquisition date (in thousands):

 

The acquisition of DBT includes a contingent consideration arrangement that requires additional consideration to be paid by the Company to DBT’s former owners based upon the retention of specified thresholds of tower crew personnel measured at the end of each of the six quarterly periods subsequent to the acquisition. Amounts payable under the contingent consideration arrangement are payable quarterly over an 18-month period. The range of undiscounted amounts the Company could pay under the arrangement is between $0 and $0.9 million. The fair value of the contingent consideration recognized on the acquisition date of $0.7 million was estimated by applying the income approach. That measure is based on significant inputs not observable in the market, which is referred to as a Level 3 input. The liability for the contingent consideration is included within accrued liabilities on the consolidated balance sheet.

See Note 8 – Fair Value Measurements for current period activity related to the Company’s contingent consideration arrangements.

The goodwill is attributable to the workforce of the acquired business and the synergies expected to arise after the Company’s acquisition of DBT. The goodwill has been assigned in its entirety to the Infrastructure Services segment. Goodwill is deductible for tax purposes.

Merger with Multiband

On August 30, 2013, the Company completed its acquisition of Multiband. The aggregate purchase price, excluding merger-related fees and expenses, was approximately $101.1 million. The Merger provided the Company with customer diversification, a large and talented work force and new strategic capabilities. The Company believes the Merger will allow the combined company to continue to serve its current customers, while enabling it to support emerging wireless opportunities, such as the evolution toward small cell architectures currently occurring in the telecommunications industry.

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The following table summarizes the consideration transferred to acquire Multiband and the amounts of identified assets acquired and liabilities assumed at the acquisition date (in thousands):

 

The Company acquired $28.4 million of gross contractual accounts receivable. The fair value of the acquired receivables was $28.0 million.

The goodwill is attributable to the workforce of the acquired business and the synergies expected to arise after the Company’s acquisition of Multiband. The goodwill has been assigned primarily to the Field Services segment. The Company does not expect the goodwill to be deductible for tax purposes.

As part of the purchase price, the Company determined that Multiband’s separately identifiable intangible assets were its customer contracts, customer relationships, customer backlog, trade name, software and right of entry contracts. The intangible assets including goodwill were assigned to two of the Company’s four reporting units, Field Services and Other Services. The Company used the income approach to value the identifiable intangibles, which is a Level 3 measurement. This approach calculates fair value by discounting the after-tax cash flow back to a present value. The baseline data for this analysis was the cash flow estimates used to price the transaction. Cash flows were forecasted and then discounted using a discount rate applicable to the intangible asset and reporting unit. Discount rates ranged from 9.5% to 11.5% and are based on the estimated weighted average cost of capital which employs an estimate of the required equity rate of return and after-tax cost of debt for each reporting unit.

Because the Merger was accounted for as a stock purchase, assets acquired cannot be revalued for tax purposes; accordingly, a deferred tax asset of $1.7 million was recorded at the date of the Merger for the book tax cost basis difference related to the assets.

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The following table is a summary of the fair value estimates of the identifiable intangibles and their weighted-average useful lives (dollars in thousands):

 

As of December 31, 2012, Multiband had generated net operating loss carryforwards (“NOLs”), of approximately $47.5 million to reduce future federal taxable income and $46.0 million to reduce future state taxable income. Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), limits a corporation’s future ability to utilize any NOLs generated before a change in ownership, as well as certain subsequently recognized “built-in” losses and deductions, if any, existing as of the date of the change in ownership. As a result of the Merger, Multiband’s ability to utilize NOLs may be subject to additional limitations under Section 382 of the Code.

Pursuant to the Merger Agreement, all restricted stock and stock options held by directors and employees of Multiband as of the Merger date became fully vested. The Company recorded a charge of $1.4 million during the three months ended September 30, 2013 for the acceleration of these awards, which has been recorded in selling, general and administrative expenses.

The Company incurred approximately $3.8 million of acquisition-related costs, all of which were recorded in selling, general and administrative costs for the nine months ended September 30, 2013. No expenses related to the acquisition have been capitalized.

Note 4. Goodwill and Intangible Assets

The changes in goodwill, by business segment, for the nine months ended September 30, 2014 are as follows (in thousands):

 

 

In the first quarter of 2014, the Company integrated the Other Services segment with the Infrastructure Services, Professional Services and Field Services segments, and as a result the Company no longer has an Other Services segment.

See Note 14 – Segments for further discussion on business segments.

 

Intangible assets as of September 30, 2014 are as follows (in thousands):

 

 

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The changes in intangible assets for the nine months ended September 30, 2014 are as follows (in thousands):

 

 

During the second quarter of 2014, the Company closed its office in Sarasota, Florida. In connection with the office closure, the Company determined that certain customer relationships not related to carrier or large original equipment manufacturer (“OEM”) customers that were primarily supported by the operations of the Sarasota office were impaired.

 

During the third quarter of 2014, the Company terminated the remaining significant arrangement that utilized the Company’s internally developed MBeM software acquired in the acquisition of Multiband. As a result, the Company concluded that the carrying value of the software asset was impaired.

 

As each of these impairments were a direct result of the 2014 Restructuring Plan, the impairment charges have been included in restructuring expense in the accompanying consolidated statements of operations and comprehensive income.

Note 5. Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

 

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Note 6. Notes Payable and Line of Credit

Notes payable consist of the following (in thousands):

 

 

The terms of the Indenture require the Company to meet certain ratio tests giving effect to anticipated transactions, including borrowing debt and making restricted payments prior to entering these transactions. These ratio tests are, as defined per the Indenture, a Fixed Charge Coverage Ratio of at least 2.00 to 1.00 (which was 1.48 to 1.00 at September 30, 2014) and a Total Leverage Ratio not greater than 2.50 to 1.00 (which was 5.31 to 1.00 at September 30, 2014). The holders of the Notes granted a waiver to these covenants in conjunction with the issuance of the Tack-On Notes, and the Company has not entered into any other transaction that requires it to meet these tests as of September 30, 2014. Had the Company been required to meet these ratio tests as of September 30, 2014, the Company would not have met the Fixed Charge Coverage Ratio or the Total Leverage Ratio.

Under the terms of the Credit Facility, the Company must maintain a Fixed Charge Coverage Ratio equal to at least 1.25 to 1.00 (which ratio was 1.78 to 1.00 at September 30, 2014) and a Leverage Ratio no greater than 5.50 to 1.00 (which ratio was 4.20 to 1.00 at September 30, 2014) during such time as a Triggering Event is continuing. The Leverage Ratio required during such time as a Triggering Event will decrease to 5.00 to 1.00 on January 1, 2015. A “Triggering Event” occurs when the Company’s undrawn availability (measured as of the last date of each month) on the Credit Facility has failed to equal at least $10 million for two consecutive months and continues until undrawn availability equals at least $20 million for at least three consecutive months. The Company is only required to maintain such ratios at such time that a Triggering Event is in existence. Failure to comply with such ratios during the existence of a Triggering Event constitutes an Event of Default (as defined therein) under the Credit Facility. Had the Company been required to meet these ratio tests as of September 30, 2014, the Company would have met the Fixed Charge Coverage Ratio and the Leverage Ratio.

The Credit Facility has a maximum commitment of $50.0 million, subject to a borrowing base calculation and the compliance with certain covenants described above. The amounts available for additional borrowings available under the Credit Facility at December 31, 2013 and September 30, 2014 were $45.5 million and $22.9 million, respectively, subject to compliance with certain covenants described above.

The mortgage payable related to the Multiband headquarters building was refinanced with Commerce Bank on March 28, 2014, with an interest rate of 5.75% per annum and 59 required monthly payments of principal and interest of $31,000 through March 2019. A final balloon payment of $2.9 million is also due in March 2019. As additional collateral for the mortgage, Multiband Special Purpose, LLC, a wholly owned subsidiary of the Company (“MBSP”), deposited $1.0 million in escrow, which is classified as deposits and other assets on the balance sheet at September 30, 2014. During the third quarter of 2014, the Company listed for sale the Multiband headquarters building in Minnetonka, Minnesota. The building and associated mortgage have been recorded as assets and liability related to assets held for sale, respectively, in the accompanying consolidated balance sheets.

The original mortgage related to the Multiband headquarters building from American United Life Insurance Company was paid in full on March 28, 2014. The related letter of credit issued in the lender’s favor as collateral for the mortgage by MBSP, and fully backed by a certificate of deposit held by the lender of $1.4 million, was repaid to Multiband in April 2014.

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Note 7. Leases

The Company leases certain equipment under capital leases. The economic substance of these leases is that the Company is financing the acquisition of the equipment through the leases and accordingly, the equipment is recorded as an asset and the leases are recorded as liabilities.

Operating lease commitments relate primarily to rental of the facilities and equipment under non-cancellable operating lease agreements that expire at various dates through the year 2017. Rent expense for operating leases was approximately $2.4 million and $7.4 million for the three months ended September 30, 2013 and 2014, respectively and approximately $6.2 million and $21.6 million for the nine months ended September 30, 2013 and 2014, respectively.

Note 8. Fair Value Measurements

The carrying values of cash and cash equivalents, accounts receivable, costs in excess of billings on uncompleted projects, accounts payable and accrued liabilities are reflected in the consolidated balance sheet at historical cost, which is materially representative of their fair value due to the relatively short-term maturities of these assets and liabilities.

The carrying value and fair value of the Notes as of September 30, 2014 were $326.8 million and $344.9 million, respectively. Fair value for the Notes is a Level 2 measurement and has been based on the over-the-counter market trading price as of September 30, 2014.

The Company has certain contingent liabilities related to the DBT and CSG acquisitions. The Company adjusts these liabilities to fair value at each reporting period. The Company values contingent consideration related to acquisitions on a recurring basis using Level 3 inputs such as forecasted net revenue and earnings before interest, taxes, depreciation and amortization, and discount rates. During the third quarter of 2014, the Company recorded a $9.0 million reduction to the fair value of the CSG contingent consideration liability based upon changes in management’s forecast for the CSG operations during the remainder of the earn-out period partially as a result of the deferral of certain projects by AT&T.

The change in contingent consideration is as follows for the nine months ending September 30, 2014 (in thousands):

 

 

Note 9. Share-Based Compensation and Warrants

Share-Based Compensation

The following table summarizes stock option activity under the 2008 Long-Term Incentive Plan and the 2000 Equity Incentive Plan for the nine months ended September 30, 2014:

 

 

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The fair values of option awards granted during the periods presented were estimated at the grant date using a Black-Scholes option pricing model with the following assumptions: 

 

 

The weighted average grant date fair value for the options granted in the three months ended September 30, 2013 and 2014 was $46.01 and $57.49, respectively.

As of September 30, 2014, there were approximately $9.1 million of unrecognized compensation costs related to non-vested stock options. These costs are expected to be recognized over a remaining weighted average vesting period of 0.9 years.

The compensation expense recognized for outstanding share-based awards was $1.1 million and $2.1 million for the three months ended September 30, 2013 and 2014, respectively, and $3.4 million and $4.2 million for the nine months ended September 30, 2013 and 2014, respectively.

Warrants

In October 2010, the Company issued warrants to purchase 160,408 shares of its common stock at an exercise price of $1.00 per share, which expire in May 2020, in connection with (1) the issuance of subordinated notes payable to a shareholder in April and May of 2010 and (2) the execution of the First Amendment to the Fifth Amended and Restated Shareholders’ Agreement, dated June 23, 2011, as amended. The fair value of the warrants was recorded as a discount on the subordinated notes payable. During June 2011, the shareholder and holder of the warrants sold 117,050 of those warrants to the Company for $7.5 million. In April 2014, all 43,358 outstanding warrants were exercised. In connection with the exercise of the warrants, the Company issued 43,358 shares of common stock and received proceeds of $43,358.

Note 10. Related Party Transactions

The Company had approximately $50,000 and $49,000 in a non-interest bearing advance due from a founding shareholder of the Company as of December 31, 2013 and September 30, 2014, respectively. Scheduled repayments are made through payroll deductions.

The Company uses a ranch owned by certain shareholders to entertain employees and customers. For the use of the ranch, the Company paid and expensed $13,000 per month during the nine months ended September 30, 2013 and 2014.

From time to time, the Company engages in transactions with executive officers, directors, shareholders or their immediate family members of these persons (subject to the terms and conditions of the Notes and the Credit Facility). These transactions are negotiated between related parties without arm’s length bargaining and, as a result, the terms of these transactions could be different than transactions negotiated between unrelated persons.

See Note 12 – Commitments and Contingencies for other transactions among related parties.

Note 11. Employee Benefit Plan

The Company sponsors a 401(k) retirement savings plan for its employees. Eligible employees are allowed to contribute a portion of their compensation, not to exceed a specified contribution limit imposed by the Internal Revenue Code. The Company provides for matching employee contributions equal to 50% on the first 8% of each participant’s compensation. Employer contributions were $0.9 million and $0.8 million for the three months ended September 30, 2013 and 2014, respectively, and $2.4 million and $2.6 million for the nine months ended September 30, 2013 and 2014, respectively.

One of the Company’s 401(k) plans allows for a discretionary profit sharing contribution. The profit sharing contribution expense was $0 million for both the three months ended September 30, 2013 and 2014 and $0 and $0.4 million for the nine months ended September 30, 2013 and 2014, respectively.

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Note 12. Commitments and Contingencies

General Litigation

The Company is from time to time party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract and/or property damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. Based upon information currently available, the Company believes that the ultimate outcome of all current litigation and other claims, individually and taken together, will not have a material adverse effect on the Company’s business, prospects, financial condition or results of operations.

Concentration of Credit Risk

A significant portion of the Company’s revenue is derived from two significant customers. On May 18, 2014, these customers announced that they had entered into an agreement to merge. The following table reflects the percentage of total revenue from the Company’s significant customers for the three and nine months ended September 30, 2013 and 2014:

 

 

Accounts receivable due from these significant customers at December 31, 2013 and September 30, 2014 are as follows (in thousands):

 

 

A loss of any of these customers would have a material adverse effect on the financial condition of the Company.

Indemnities

The Company generally indemnifies its customers for services it provides under its contracts which may subject the Company to indemnity claims, liability and related litigations. As of December 31, 2013 and September 30, 2014, the Company was not aware of any material asserted or unasserted claims in connection with these indemnity obligations.

Guarantee

In October 2011, the Company issued a letter of credit to a company owned by a relative of the Executive Chairman as a guarantee of a related party’s line of credit. The maximum available amount to be drawn on the line of credit is $4.0 million. In the event of default on the line of credit by the related party, the letter of credit provides that Company will have the option either to enter into a note purchase agreement with the lender or to permit a drawing on the letter of credit in an amount not to exceed the amount by which the outstanding obligation exceeds the value of the related party’s collateral securing the line of credit, but in no event more than $4.0 million. The Company’s letter of credit was originally due to expire in July 2012 and prior to expiration has been amended each year thereafter to extend the expiration date by one year. The letter of credit was most recently amended to extend the guarantee of the related party’s line of credit until July 2015.

The Company’s exposure with respect to the letter of credit is supported by a reimbursement agreement from the related party, secured by a pledge of assets and stock of the related party. As of December 31, 2011, the Company concluded that it will likely be required to perform for the full exposure under the guarantee, and therefore, recorded a liability in the amount of $4.0 million as other operating expense and accrued liabilities in the Company’s consolidated financial statements for the fourth quarter of 2011.

In the third quarter of 2014, the Company and the related party negotiated an arrangement whereby the Company agreed not to pursue the pledged collateral for a period of time not extending beyond May 5, 2016 (the “Forbearance Period”) in the event the line of credit is drawn upon in exchange for the related party’s pledge to the Company of 15,625 shares of Goodman Networks common stock. In addition, the Company agreed to discharge and deem paid-in-full all obligations of the related party to the Company if on or prior to the end of the Forbearance Period, the related party makes a cash payment to the Company in the amount of $1.5

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million plus interest at a rate of 2.0% per annum from September 25, 2014. Pursuant to the agreement the Company agreed to instruct the lender to draw on the letter of credit. As a result of the agreement reached in the third quarter of 2014, the Company recorded other income of $1.5 million in the consolidated income statement and recorded the pledged stock as additional paid-in capital in the consolidated balance sheet. The guarantee liability for the full amount of $4.0 million remains in accrued liabilities as of September 30, 2014.

State Sales Tax

The Company is routinely subject to sales tax audits that could result in additional sales taxes and interest owed to various taxing authorities. Any additional sales taxes and interest assessed against the Company will be invoiced to the appropriate customer. However, no assurances can be made that such customers would be willing to pay the additional sales tax or interest.

Legal Proceedings Involving the U.S. Department of Labor

In December 2009, the U.S. Department of Labor sued various individuals that are either stockholders, directors, trustees and/or advisors to DirecTECH Holding Company, Inc. (“DTHC”), and its Employee Stock Ownership Plan. Multiband was not named in this complaint. In May 2011, three of these individuals settled the complaint with the U.S. Department of Labor (upon information and belief, a portion of this settlement was funded by the individuals’ insurance carrier) in the approximate amount of $8.6 million and those same individuals have filed suit against Multiband for reimbursement of certain expenses. The basis for these reimbursement demands are certain corporate indemnification agreements that were entered into by the former DTHC operating subsidiaries and Multiband. Two of those defendants had their claims denied during the second quarter of 2012, in a summary arbitration proceeding. This denial was appealed and the summary judgment award was overturned by a federal court judge in February 2013. Multiband appealed the federal court’s decision to the Sixth Circuit Court of Appeals. In January 2014, the Sixth Circuit Court of Appeals reversed the decision and reinstated the arbitration award granting summary judgment to Multiband. In April 2014, the individuals filed a writ of certiorari to appeal the matter to the United States Supreme Court. On June 23, 2014, the United States Supreme Court denied the petition for a writ of certiorari, and the Sixth Circuit decision is now final.

Note 13. Income Taxes

The Company’s effective tax rate was (7.0)% and 10.9% for the three months ended September 30, 2013 and 2014, respectively, and (25.8)% and 52.8% for the nine months ended September 30, 2013 and 2014, respectively. In determining the quarterly provision for income taxes, management uses an actual year to date effective tax rate. The effect of significant discrete items is separately recognized in the quarter in which such items occur. Significant factors that could affect the annual effective tax rate include management’s assessment of certain tax matters, the location and amount of taxable earnings, changes in certain non-deductible expenses and expected credits.

In assessing the ability to realize deferred tax assets, the Company considers whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences become deductible. A valuation allowance has been provided to reduce the deferred tax assets to an amount management believes is more likely than not to be realized. Expected realization of deferred tax assets for which a valuation allowance has not been recognized is based upon the reversal of existing taxable temporary differences.

As of September 30, 2014, the Company expects the existing temporary differences to reverse against a portion of the net operating loss carryforwards. The valuation allowance totaled $17.6 million and $17.4 million as of December 31, 2013 and September 30, 2014, respectively, and relates to deferred tax assets associated with certain federal and state net operating loss carryforwards.

In the first quarter of 2014, the Company received a “no change” notice from the Internal Revenue Service related to the tax period ended 2011 audit of Multiband and therefore released $2.1 million of related reserves for uncertain tax positions. In September 2014, the statute of limitations expired for Multiband’s 2010 tax return, and the Company released an additional $2.3 million of reserves for uncertain tax positions. The release of these reserves was recorded as a reduction of the related net operating loss carryforwards. The related release of accrued interest and penalties is recorded as a current tax benefit.

Note 14. Segments

Prior to the merger with Multiband, the Company operated its business in two segments: Professional Services (PS) and Infrastructure Services (IS). Subsequent to the merger with Multiband, the Company began operating its business in two additional segments: Field Services (FS) and Other Services (Other). The Professional Services segment provides customers with highly technical services primarily related to installing, testing, and commissioning and decommissioning of core, or central office, equipment of wireless carrier networks from a variety of vendors. The Infrastructure Services segment provides program management

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services of field projects necessary for deploying, upgrading, and maintaining wireless networks. The Field Services segment generates revenue from the installation, upgrade and maintenance of DIRECTV satellite television systems. The Other Services segment was comprised of the Company’s multi-dwelling unit and energy, engineering and construction (“EE&C”) services lines of business.

On December 31, 2013, the Company sold certain assets to DIRECTV MDU, and DIRECTV MDU assumed certain liabilities of the Company, related to the division of the Company’s business involved with the ownership and operation of subscription based video, high-speed internet and voice services and related call center functions to multiple dwelling unit customers, lodging and institution customers and commercial establishments (such assets are collectively referred to as the “MDU Assets”). The operations of the MDU Assets were previously reported in the Company’s Other Services segment. In addition, in the first quarter of 2014, the Company integrated the EE&C line of business with the Infrastructure Services and Professional Services segments, and as a result the Company no longer has an Other Services segment.

There were no material intersegment transfers or sales during the periods presented. Selected segment financial information for the three and nine months ended September 30, 2013 and 2014 are presented below (in thousands):

 

 

 

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Asset information is evaluated by management at the corporate level and is not available by reportable segment.

Note 15. Restructuring Activities

During the second quarter of 2014, the Company’s management approved, committed to and initiated plans to implement the 2014 Restructuring Plan. The restructuring costs associated with the 2014 Restructuring Plan are recorded in the restructuring expense line item within the consolidated statements of operations and comprehensive income. The Company expects to incur the majority of the estimated remaining restructuring expenses through the end of 2014. Any changes to the estimates of executing the 2014 Restructuring Plan will be reflected in future results of operations.

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The following tables summarize the activities associated with restructuring liabilities for the three and nine months ended September 30, 2014 (in thousands), all of which are included in accrued liabilities in the accompanying consolidated balance sheets. In the table below, "Charges" represents the initial charge related to the restructuring activity. "Payments" consists of cash payments for severance, employee-related benefits, lease and other contract termination costs, and other restructuring costs.

 

 

 

 

The following table summarizes the inception to date restructuring costs recognized and the total restructuring costs expected to be recognized in the 2014 Restructuring Plan (in thousands):

 

 

 

 

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

The terms “we,” “us” and “our” as used in this Quarterly Report on Form 10-Q (this “Report”) refer to Goodman Networks Incorporated and its directly and indirectly owned subsidiaries on a consolidated basis; references to “Goodman Networks” or our “Company” refer solely to Goodman Networks Incorporated and references to “Multiband” refer to our subsidiary, Multiband Corporation.

The following discussion and analysis summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with (i) the accompanying unaudited consolidated financial statements and notes thereto for the three and nine months ended September 30, 2013 and 2014, and with our consolidated financial statements and notes thereto for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K (the “2013 Annual Report”) and (ii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2013 Annual Report.

Forward-Looking Statements

Certain statements contained in this Report are not statements of historical fact and are forward-looking statements. These forward-looking statements are included throughout this Report, including the sections entitled “Risk Factors,” “Quantitative and Qualitative Disclosures About Market Risk,” and this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, revenues, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. Words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “would,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. We have based these forward-looking statements on our current assumptions, expectations and projections about future events.

Forward-looking statements involve significant risks and uncertainties that could cause the actual results to differ materially from those anticipated in such statements. Most of these factors are outside our control and difficult to predict. Factors that may cause such differences include, but are not limited to:

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For a more detailed discussion of these and other factors that may affect our business and that could cause the actual results to differ materially from those anticipated in these forward-looking statements, see “Risk Factors” in this Report and the 2013 Annual Report. We caution that the foregoing list of factors is not exclusive, and new factors may emerge, or changes to the foregoing factors may occur, that could impact our business. All subsequent written and oral forward-looking statements concerning our business attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements above. We do not undertake any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Report except to the extent required by applicable securities laws.

Overview

We are a leading national provider of end-to-end network infrastructure and professional services to the wireless telecommunications industry. Our wireless telecommunications services span the full network lifecycle, including the design, engineering, construction, deployment, integration, maintenance, and decommissioning of wireless networks. We perform these services across multiple network infrastructures, including traditional cell towers as well as next generation small cell and distributed antenna systems, or DAS. We also serve the satellite television industry by providing onsite installation, upgrading and maintenance of satellite television systems to both the residential and commercial markets customers. These highly specialized and technical services are critical to the capability of our customers to deliver voice, data and video services to their end users.

We operate from a broad footprint, having provided services during 2013 in all 50 states. As of September 30, 2014, we employed over 4,500 people and operated 63 regional offices and warehouses. During the year ended December 31, 2013, we completed over 65,000 telecommunications projects and fulfilled over 1.5 million satellite television installation, upgrade or maintenance work orders. We have established strong, long-standing relationships with Tier-1 wireless carriers and original telecommunications equipment manufacturers, or OEMs, including AT&T Mobility, LLC, or AT&T, Alcatel-Lucent USA Inc., or Alcatel-Lucent, Sprint/United Management Company, or Sprint, as well as DIRECTV. Over the last few years, we have diversified our customer base within the telecommunications industry by leveraging our long-term success and reputation for quality to win new customers such as Nokia Solutions and Networks B.V., or NSN, T-Mobile International AG, or T-Mobile, and Verizon Wireless Inc., or Verizon. We generated nearly all of our revenues over the past several years under master service agreements, or MSAs, that establish a framework, including pricing and other terms, for providing ongoing services. We believe our long-standing relationships with our largest customers, which are governed by MSAs that historically have been renewed or extended, provide us with high visibility to our future revenue. During 2013, we also provided small cell or DAS services to over 100 enterprises including higher education institutions, stadiums for professional and collegiate sports events, hotels and resorts, major retailers, hospitals and government agencies.

Significant Transactions

Merger with Multiband Corporation

On August 30, 2013, we completed a merger with Multiband pursuant to which Multiband became a wholly owned subsidiary of Goodman Networks. The aggregate purchase price, excluding merger-related fees and expenses, was approximately $101.1 million. Upon the closing of the merger, Multiband and its subsidiaries became restricted subsidiaries and guarantors under the indenture, or the Indenture, governing the Company’s 12.125% senior secured notes due 2018, or the notes, and the Company’s amended and restated senior secured revolving credit facility, or the Credit Facility. To fund the merger with Multiband, the Company, through its wholly owned subsidiary, sold an additional $100 million of senior secured notes due 2018, or the tack-on notes, under terms substantially identical to those of the $225 million in aggregate principal amount of notes issued in June 2011, or the original notes. The Company paid the remainder of the merger consideration from cash on hand.

Disposition of the MDU Assets

On December 31, 2013, we sold certain assets to DIRECTV MDU, LLC, or DIRECTV MDU, and DIRECTV MDU assumed certain liabilities of the Company, related to the division of our business involved with the ownership and operation of subscription based video, high-speed internet and voice services and related call center functions to multiple dwelling unit customers, lodging and institution customers and commercial establishments, or, such assets, collectively, the MDU Assets. The operations of the MDU Assets were previously reported in our “Other Services” segment. In consideration for the MDU Assets, DIRECTV MDU paid us $12.5 million and additional non-cash consideration, assumed certain liabilities, and extended the existing Multiband/DIRECTV HSP Agreement, resulting in a four-year remaining term ending on December 31, 2017.

Acquisition of the Custom Solutions Group of Cellular Specialties, Inc.

On February 28, 2013, we completed the acquisition of the Custom Solutions Group of Cellular Specialties, Inc., or CSG, which provides indoor and outdoor wireless distributed antenna system, or DAS, and carrier Wi-Fi solutions, services, consultations and maintenance. The purchase price consisted of $18.0 million in cash, earn-out payments of up to an aggregate of $17.0 million

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through December 31, 2015 and the assumption of certain liabilities related to the acquired business. We believe the acquisition will help better serve our customers’ evolving needs by addressing the increasingly used small cell and DAS offload solutions.

2014 Restructuring Plan

During the second quarter of 2014, our management approved, committed to and initiated plans to restructure and further improve efficiencies in our operations (the “2014 Restructuring Plan”). As part of the 2014 Restructuring Plan, we have taken steps to (i) further integrate our Multiband and CSG operations, including elimination of redundant positions and information technology infrastructure to realize acquisition synergies, (ii) exit certain locations to bring our overhead costs in line with our revenue, and (iii) eliminate certain headcount to bring our costs in line with our forecasted demand. The restructuring costs associated with the 2014 Restructuring Plan are recorded in the restructuring expense line item within our consolidated statements of operations and comprehensive income. We expect to incur the majority of the estimated remaining restructuring expenses through the end of 2014. Any changes to the estimates of executing the 2014 Restructuring Plan will be reflected in our future results of operations.

Operating Segments

Prior to the merger with Multiband, we operated our business in two segments: Professional Services and Infrastructure Services.

Professional Services. Our Professional Services segment provides customers with highly technical services primarily related to designing, engineering, integration and performance optimization of transport, or “backhaul,” and core, or “central office,” equipment of enterprise and wireless carrier networks. When a network operator integrates a new element into its live network or performs a network-wide upgrade, a team of in-house engineers from our Professional Services segment can administer the complete network design, equipment compatibility assessments and configuration guidelines, the migration of data traffic onto the new or modified network and the network activation.

In addition, we provide services related to the design, engineering, installation, integration and maintenance of indoor small cell and DAS networks. Our acquisition of CSG was incorporated into our Professional Services segment, which has enhanced our ability to provide end-to-end in-building services from design and engineering to maintenance. Our enterprise small cell and DAS customers often require most or all of the services listed above and may also purchase consulting, post-deployment monitoring, performance optimization and maintenance services.

Infrastructure Services. Our Infrastructure Services segment provides program management services of field projects necessary to deploy, upgrade, maintain or decommission wireless outdoor networks. We support wireless carriers in their implementation of critical technologies such as long-term evolution, or 4G-LTE, the addition of new macro and outdoor small cell sites, increase of capacity at their existing cell sites through additional spectrum allocations, as well as other optimization and maintenance activities at cell sites. When a network provider requests our services to build or modify a cell site, our Infrastructure Services segment is able to: (i) handle the required pre-construction leasing, zoning, permitting and entitlement activities for the acquisition of the cell site, (ii) prepare site designs, structural analysis and certified drawings and (iii) manage the construction or modification of the site including tower-top and ground equipment installation. These services are managed by our wireless project and construction managers and are performed by a combination of scoping engineers, real estate specialists, ground crews, line and antenna crews and equipment technicians, either employed by us or retained by us as subcontractors.

Our Infrastructure Services segment also provides fiber and wireless backhaul services to carriers. Our fiber backhaul services, or Fiber to the Cell services, connect existing points in the fiber networks of wireline carriers to thousands of cell sites needing the bandwidth and ethernet capabilities for upgrading capacity. Our microwave backhaul services provide a turnkey solution offering site audit, site acquisition, microwave line of sight surveys, path design, installation, testing and activation services. This fiber and wireless backhaul work often involves planning, route engineering, right-of-way (for fiber work) and permitting, logistics, project management, construction inspection and optical fiber splicing services. Backhaul work is performed to extend an existing optical fiber network owned by a wireline carrier, typically between several hundred yards to a few miles, to the cell site.

We began operating the following additional segment and line of business in connection with the closing of the merger with Multiband:

Field Services. Our Field Services segment provides installation and maintenance services to DIRECTV, commercial customers and a provider of internet wireless service primarily to rural markets. Our wholly owned subsidiary Multiband, which we acquired in August 2013, fulfilled over 1.5 million satellite television installation, upgrade or maintenance work orders during 2013 for DIRECTV, which represented 27.6% of DIRECTV’s outsourced work orders for residents of single-family homes during 2013. We were the second largest DIRECTV in-home installation provider in the United States for the year ended December 31, 2013.

In the first quarter of 2014, we integrated our Engineering, Energy & Construction, or EE&C, line of business with our Infrastructure Services and Professional Services segments, and as a result no longer have an Other Services segment. We have not

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restated the corresponding items of segment information for the year ended December 31, 2013 because the employees that previously comprised the EE&C line of business are now serving customers within the Infrastructure Services segment and the remaining operations of the Other Services segment that were realigned to the Infrastructure Services, Professional Services or Field Services segments are not material to those segments individually.

Customers

For the year ended December 31, 2013, we provided services to customers across 47 states. Following our acquisition of Multiband, we began providing services to DIRECTV. The vast majority of our revenues relate to our MSAs with subsidiaries of AT&T Inc., DIRECTV and Alcatel-Lucent. For the years ended December 31, 2011, 2012 and 2013 and the nine months ended September 30, 2014, subsidiaries of AT&T Inc., DIRECTV and Alcatel-Lucent combined to provide 99.1%, 96.3%, 87.3% and 89.8% of our revenues, respectively. On May 18, 2014, AT&T Inc. and DIRECTV announced that they had entered into a merger agreement pursuant to which DIRECTV would merge with a subsidiary of AT&T Inc. The closing of the merger is subject to several conditions, including review and approval by the Federal Communications Commission, or the FCC, and the Department of Justice. If the merger occurs, our revenues would become more concentrated and dependent on our relationship with AT&T Inc.

AT&T

We provide site acquisition, construction, technology upgrades, Fiber to the Cell and maintenance services for AT&T Mobility, LLC, or AT&T, at cell sites in 9 of 31 distinct AT&T markets, or Turf Markets, as the sole, primary or secondary vendor, pursuant to a multi-year MSA that we entered into with AT&T and have amended and replaced from time to time. We refer to our MSAs with AT&T related to its turf program collectively as the “Mobility Turf Contract.” We have generated an aggregate of approximately $2.99 billion of revenue from subsidiaries of AT&T Inc. collectively for the period from January 1, 2009 through September 30, 2014.

 

We recently restructured our Mobility Turf Contract to consist of a general MSA with subordinate MSAs governing the services we provide thereunder. Effective January 14, 2014, we entered into the general MSA and a subordinate MSA governing site acquisition services, and on September 1, 2014, we entered into a subordinate MSA governing program management, project management, architecture and engineering, construction management and equipment installation services, or the Subordinate Construction MSA. The services governed by these subordinate MSAs were formerly provided pursuant to our previous Mobility Turf Contract MSA. The general MSA provides for a term expiring on August 31, 2016, and the Subordinate Construction MSA provides for a term expiring on August 31, 2017. AT&T has the option to renew both contracts on a yearly basis thereafter. Aside from extending the term of our Mobility Turf Contract, we do not anticipate that its restructuring will have a material effect on our results of operations.

We provide other services to AT&T in addition to those provided under the Mobility Turf Contract. Those services include the deployment of indoor small cell systems, DAS systems and microwave transmission facilities and central office services. We recently entered into a DAS Installation Services Agreement and Subordinate Material and Services Agreement with a subsidiary of AT&T Inc. to provide these services.

DIRECTV

With the acquisition of Multiband, DIRECTV became our second largest customer. The relationship between Multiband and DIRECTV has lasted for over 17 years and is essential to the success of our Field Services segment’s operations. We are one of three in-home installation providers that DIRECTV utilizes in the United States, and during the year ended December 31, 2013, Multiband performed 27.6% of all DIRECTV’s outsourced installation, upgrade and maintenance activities. Our contract with DIRECTV has a term expiring on December 31, 2017, and contains an automatic one-year renewal. The contract may also be terminated by 180 days’ notice by either party. Until December 31, 2013, we also provided customer support and billing services to certain of DIRECTV’s customers through our Other Services segment pursuant to a separate arrangement.

Alcatel-Lucent

On July 15, 2014, we entered into a three-year MSA with Alcatel-Lucent, effective as of June 30, 2014, or the 2014 Alcatel-Lucent Contract. The 2014 Alcatel-Lucent Contract will replace the five year MSA we entered into with Alcatel-Lucent in November 2009, or the Alcatel-Lucent Contract. Pursuant to the 2014 Alcatel-Lucent Contract, we will provide, upon request, certain services, including deployment engineering, integration engineering, radio frequency engineering and other support services to Alcatel-Lucent that were formerly provided under the Alcatel-Lucent Contract. Although we have experienced a decline in the amount of legacy work that we have performed for Alcatel-Lucent and we expect this decline to continue under the 2014 Alcatel-Lucent Contract, we are also seeking to obtain work from Alcatel-Lucent on newer technologies. The 2014 Alcatel-Lucent Contract has an initial term ending June 30, 2017, after which the parties may mutually agree to extend the term on a yearly basis.

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Sprint

In May 2012, we entered into an MSA with Sprint to provide decommissioning services for Sprint’s iDEN (push-to-talk) network. We are removing equipment from Sprint’s network that is no longer in use and restoring sites to their original condition. For the years ended December 31, 2012 and 2013 and for the nine months ended September 30, 2014, we recognized $11.9 million, $34.0 million and $43.4 million of revenue, respectively, related to the services we provide for Sprint.

Enterprise Customers

We provide services to enterprise customers through our Professional Services segment. These service offerings consist of the design, installation and maintenance of DAS systems to customers such as Fortune 500 companies, hotels, hospitals, college campuses, airports and sports stadiums.

Key Components of Operating Results

The following is a discussion of key line items included in our financial statements for the periods presented below under the heading “Results of Operations.” We utilize revenues, gross profit, net income and earnings before interest, income taxes, depreciation and amortization, or EBITDA, as significant performance indicators.

Estimated Backlog

We refer to the amount of revenue we expect to recognize over the next 18 months from future work on uncompleted contracts, including MSAs and work we expect to be assigned to us under MSAs, and based on historical levels of work under such MSAs and new contractual agreements on which work has not begun, as our “estimated backlog.” We determine the amount of estimated backlog for work under MSAs based on historical trends, anticipated seasonal impacts and estimates of customer demand based upon communications with our customers. Our 18-month estimated backlog as of September 30, 2014 was $1.8 billion, including $0.4 billion of estimated backlog from DIRECTV. We expect to recognize approximately $0.3 billion of our estimated backlog in the three months ended December 31, 2014. The vast majority of estimated backlog as of September 30, 2014 has originated from multi-year customer relationships primarily with AT&T, DIRECTV and Alcatel-Lucent.

Because we use the completed contract method of accounting for revenues and expenses from our long-term construction contracts, our estimated backlog includes revenue related to projects that we have begun but not completed performance. Therefore, our estimated backlog contains amounts related to work that we have already performed but not completed.

While our estimated backlog includes amounts under MSAs and other service agreements, our customers are generally not contractually committed to purchase a minimum amount of services under these agreements, most of which can be cancelled on short or no advance notice. Therefore, our estimates concerning customers’ requirements may not be accurate. The timing of revenues for construction and installation projects included in our estimated backlog can be subject to change as a result of customer delays, regulatory requirements and other project related factors that may delay completion. Changes in timing could cause estimated revenues to be realized in periods later than originally expected or unrealized. Consequently, our estimated backlog as of any date is not a reliable indicator of our future revenues and earnings.

Revenues

Our revenues are generated primarily from projects performed under MSAs including the design, engineering, construction, deployment, integration, maintenance, and decommissioning of wireless networks. Our MSAs generally contain customer-specified service requirements, such as discrete pricing for individual tasks as well as various other terms depending on the nature of the services provided, and typically provide for termination upon short or no advance notice.

Our revenues fluctuate as a result of the timing of the completion of our projects and changes in the capital expenditure and maintenance budgets of our customers, which may be affected by overall economic conditions, consumer demands on telecommunications and satellite television providers, the introduction of new technologies, the physical maintenance needs of our customers’ infrastructure and the actions of the government, including the FCC and state agencies.

Our Professional Services segment revenues are derived from wireless and wireline services through engineers who specialize in network architecture, transformation, reliability and performance. Until our acquisition of CSG in February 2013, the vast majority of our revenues for the Professional Services segment were attributable to work performed pursuant to the Alcatel-Lucent Contract. The acquisition of the assets of CSG expanded our revenues from enterprise, small cell and DAS customers.

Our Infrastructure Services segment revenues are derived from project management, site acquisition, architecture and engineering, construction management, equipment installation and drive-testing verification services. The vast majority of the revenues

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we earn in our Infrastructure Services segment are from subsidiaries of AT&T Inc. and are primarily comprised of work performed under the Mobility Turf Contract. Substantially all of our revenues are earned under fixed-unit price contracts. We have historically had success in certain circumstances seeking price adjustments from customers to avoid losses on projects undertaken pursuant to these contracts.

Our Field Services segment revenues are derived from the installation and service of DIRECTV video programming systems for residents of single family homes through work order fulfillment under a contract with DIRECTV.

The following table presents our gross deferred project revenue and deferred project cost balances as of December 31, 2013 and September 30, 2014, which have been presented net on a project basis in the accompanying financial statements (in thousands):

 

Cost of Revenues

Our costs of revenues include the costs of providing services or completing the projects under our MSAs, including operations payroll and benefits, subcontractor costs, equipment rental, fuel, materials not provided by our customers and insurance. Profitability will be reduced or eliminated if actual costs to complete a project exceed original estimates on fixed-unit price projects under our MSAs. Estimated losses on projects under our MSAs are recognized immediately when estimated costs to complete a project exceed the expected revenue to be received for a project.

For our Professional Services segment, cost of revenues consists primarily of salaries and benefits paid to our employees. In addition to salaried employees, we hire a relatively small amount of temporary subcontractors to perform work within our Professional Services segment. An additional small percentage of cost of revenues includes materials and supplies.

For our Infrastructure Services segment, cost of revenues consists primarily of operating expenses such as salaries and related headcount expenses, subcontractor expenses and cost of materials used in the projects. The majority of these costs have historically consisted of payments made to subcontractors hired to perform work for us, typically on a fixed-unit price basis tied to completion of the given project. During periods of increased demand, subcontractors may charge more for their services. In addition, we typically bill our customers for raw materials used in the performance of services plus a certain percentage of our costs. Additional costs to us that are not included in this billing primarily include storage and shipping of materials.

For our Field Services segment, cost of revenues consists primarily of salaries for technicians, fleet expenses, costs of installation materials used in the field projects and subcontractor expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of salaries and related headcount expenses, sales commissions and bonuses, professional fees, travel, facilities, communication expenses, depreciation and amortization and other corporate overhead. Corporate overhead costs include costs associated with corporate staff, corporate management, human resources, information technology, finance and other corporate support services.

Our selling, general and administrative expenses are not allocated to a reporting segment. We expect our selling, general and administrative expenses to increase as a result of additional expenses associated with being a public company, including increased personnel costs, legal costs, accounting costs, board compensation expense, investor relations costs, director and officer insurance premiums, share-based compensation and costs associated with our compliance with Section 404 of the Sarbanes-Oxley Act of 2002, and other applicable regulations of the Securities and Exchange Commission, or the SEC.

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Results of Operations

Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2014

The following table sets forth information concerning our operating results by segment for the three months ended September 30, 2013 and 2014 (in thousands).

 

Revenues

We recognized total revenues of $363.8 million for the three months ended September 30, 2014, compared to $235.6 million for the three months ended September 30, 2013, representing an increase of $128.2 million, or 54.4%. Our aggregate revenue from subsidiaries of AT&T Inc., a majority of which was earned through our Infrastructure Services segment, was $257.2 million for the three months ended September 30, 2014, compared to $158.3 million in the same period of 2013. A significant amount of our revenue increase was due to increased volume of services provided to subsidiaries of AT&T Inc. and the inclusion of Multiband revenues for the full three months ended September 30, 2014. For the three months ended September 30, 2014, Multiband revenues were $72.2 million, compared to $27.8 million of revenues from Multiband during the three months ended September 30, 2013, as Multiband’s revenues were only included in our results beginning August 31, 2013. These increases were partially offset by a decline in revenues from the Professional Services segment.

Revenues for the Professional Services segment decreased $3.9 million, or 13.7%, to $24.8 million in the three months ended September 30, 2014 from $28.7 million in the same period of 2013. This decrease was primarily due to an anticipated decline of 40% on the volume of CDMA services provided to Alcatel-Lucent, which was partially offset by an increase in the number of DAS projects. Our aggregate revenue from Alcatel-Lucent for the three months ended September 30, 2014 was $10.2 million compared to $16.9 million in the same period of 2013.

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Revenues for the Infrastructure Services segment increased by $88.1 million, or 49.2%, to $267.2 million for the three months ended September 30, 2014 from $179.1 million in the same period of 2013. The increase was primarily due to an increase in the volume of site acquisition contract completions as well as the accelerated deployment of 4G-LTE networks by our largest customers. During the second quarter of 2014, AT&T deferred certain capital expenditures with us. We began to see an impact to the volume of services provided to subsidiaries of AT&T Inc. in the second quarter of 2014 due to the deferral of these AT&T capital expenditures and we expect this impact to continue through the remainder of the year.

The Field Services segment is comprised of operations acquired in the merger with Multiband and was therefore only included in our results beginning August 31, 2013. The Field Services segment contributed revenues of $71.8 million for the three months ended September 30, 2014.

Cost of Revenues

Our cost of revenues for the three months ended September 30, 2014, of $300.8 million increased $99.4 million, or 49.4%, as compared to $201.3 million for the three months ended September 30, 2013, and occurred during a period when revenues increased 54.4% from the comparative period. Cost of revenues represented 82.7% and 85.4% of total revenues for the three months ended September 30, 2014 and 2013, respectively, due to the increase in site acquisition contract completions in the three months ended September 30, 2014.

Cost of revenues for the Professional Services segment decreased $0.2 million to $22.7 million for the three months ended September 30, 2014 from $22.9 million for the same period of 2013. Cost of revenues for the Professional Services segment decreased 0.8% while revenues for the Professional Services segment decreased by 13.7% from the comparative period primarily related to a reduction of project workload under the Alcatel-Lucent Contract, which consists primarily of engineering services, and an increase in the volume of DAS projects which include both installation and materials. As part of the 2014 Restructuring Plan we have taken steps to reduce our Professional Services headcount to better align it with projected demand.

Cost of revenues for the Infrastructure Services segment increased $65.2 million to $220.8 million for the three months ended September 30, 2014 from $155.6 million for the same period of 2013 or 41.9%. This increase is primarily related to the 49.2% increase in revenue for the Infrastructure Services segment compared to same quarter of the prior year. Infrastructure Services cost of revenues as a percentage of Infrastructure Services revenues decreased to 82.6% in the three months ended September 30, 2014 from 86.9% in the comparable period in 2013 primarily due to arrangements we entered into with subcontractors in 2013 due to the high demand for tower crews which did not recur in 2014.

The Field Services segment is comprised of operations acquired in the merger with Multiband and was therefore only included in our results beginning August 31, 2013. Cost of revenues for the Field Services segment was of $57.3 million for the three months ended September 30, 2014, which included a $3.8 million gain realized upon return of leased vehicles.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended September 30, 2014 were $27.9 million as compared to $32.7 million for the same period of 2013, representing an overall decrease of $4.7 million, or 14.5%. The decrease during the period is primarily attributable to (i) a $9.0 million reduction of the fair value of the earn-out obligation related to the acquisition of CSG and (ii) a $3.4 million reduction in professional services primarily related to restatement related charges incurred in the second quarter of 2013 that did not recur in 2014, both of which were partially offset by (i) an increase of $7.1 million in employee related costs and the inclusion of Multiband for the full three months, and (ii) an increase in compensation expense recognized for outstanding share-based awards of $1.1 million. Selling, general and administrative expense as a percentage of revenue for the three months ended September 30, 2014 was 7.7% compared to 13.9% for the three months ended September 30, 2013. The change in the fair value of the CSG earn-out decreased selling, general and administrative expenses as a percentage of revenues by 3.5% for the three months ended September 30, 2014.

Other Operating Income

Other operating income for the three months ended September 30, 2014 and 2013 was $1.7 million and $0, respectively. The other operating income earned during the three months ended September 30, 2014 was primarily due to a $1.5 million reduction in our estimate of the fair value of our guarantee of indebtedness of a related party as a result of the pledge of certain assets to secure the related party’s reimbursement to us. See “Off-Balance Sheet Arrangements—Guarantee.”

Interest Expense

Interest expense for the three months ended September 30, 2014 and 2013, was $11.2 million and $11.6 million, respectively.

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Income Tax Expense (Benefit)

As a result of income before taxes, we recorded income tax expense of $2.1 million for the three months ended September 30, 2014, compared to a benefit of $0.7 million for the same period of 2013. Our effective income tax rate was 10.9% and (7.0)% for the three months ended September 30, 2014 and 2013, respectively.

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2014

The following table sets forth information concerning our operating results by segment for the nine months ended September 30, 2013 and 2014 (in thousands).

 

Revenues

We recognized total revenues of $890.9 million for the nine months ended September 30, 2014, compared to $573.7 million for the nine months ended September 30, 2013, representing an increase of $317.3 million, or 55.3%. Our aggregate revenue from subsidiaries of AT&T Inc., a majority of which was earned through our Infrastructure Services segment, was $585.8 million for the nine months ended September 30, 2014, compared to $433.2 million in the same period of 2013. A significant amount of our revenue increase was due to increased volume of services provided to subsidiaries of AT&T Inc. and the inclusion of Multiband revenues for the full first nine months of the year. For the first nine months of 2014, Multiband revenues were $197.9 million, compared to $27.8 million of revenues from Multiband during the nine months ended September 30, 2013, as Multiband’s revenues were only included in our results beginning August 31, 2013. These increases in revenue were partially offset by a decline in revenues from the Professional Services segment.

Revenues for the Professional Services segment decreased $6.6 million, or 8.5%, to $71.4 million in the nine months ended September 30, 2014 from $78.0 million in the same period of 2013. The acquisition of CSG contributed revenues of $30.6 million in the

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nine months ended September 30, 2014 as compared to $26.0 million for the comparable period in 2013. Excluding the CSG revenues, our Professional Services revenues declined $11.2 million, or 21.5%. This decrease was primarily due to an anticipated decline in the volume of CDMA services provided to Alcatel-Lucent. Our aggregate revenue from Alcatel-Lucent for the nine months ended September 30, 2014 was $31.7 million compared to $42.4 million in the same period of 2013.

Revenues for the Infrastructure Services segment increased by $156.4 million, or 33.4%, to $624.2 million for the nine months ended September 30, 2014 from $467.8 million in the same period of 2013. The increase was primarily due to an increase in the volume of site acquisition contract completions as well as the accelerated deployment of 4G-LTE networks by our largest customers. During the second quarter of 2014, AT&T deferred certain capital expenditures with us. We began to see an impact to the volume of services provided to subsidiaries of AT&T Inc. in the second quarter of 2014 due to a deferral of these capital expenditures. We expect this impact to continue through the remainder of the year and are uncertain whether AT&T will maintain this level of capital expenditures with us.

The Field Services segment is comprised of operations acquired in the merger with Multiband and was therefore only included in our results beginning August 31, 2013. The Field Services segment contributed revenues of $195.3 million for the nine months ended September 30, 2014.

Cost of Revenues

Our cost of revenues for the nine months ended September 30, 2014, of $758.3 million increased $269.0 million, or 55.0%, as compared to $489.3 million for the nine months ended September 30, 2013, and occurred during a period when revenues increased 55.3% from the comparative period. Cost of revenues represented 85.1% and 85.3% of total revenues for the nine months ended September 30, 2014 and 2013, respectively.

Cost of revenues for the Professional Services segment increased $5.1 million to $67.7 million for the nine months ended September 30, 2014 from $62.6 million for the same period of 2013. The operation of the assets acquired in the acquisition of CSG contributed cost of revenues of $29.3 million during the nine months ended September 30, 2014 as compared to $18.9 million for the comparable period in 2013. Excluding CSG cost of revenues, our Professional Services cost of revenues declined $5.3 million, or 12.1%. This decrease was primarily related to a reduction of project workload under the Alcatel-Lucent Contract. Cost of revenues for the Professional Services segment increased 8.1% while revenues for the Professional Services segment decreased by 8.5% from the comparative period primarily related to a reduction of project workload under the Alcatel-Lucent Contract. As part of the 2014 Restructuring Plan we have taken steps to reduce our Professional Services headcount to better align it with projected demand.

Cost of revenues for the Infrastructure Services segment increased $116.3 million to $520.1 million for the nine months ended September 30, 2014 from $403.8 million for the same period of 2013 or 28.8%. This is primarily related to the 33.4% increase in revenue for the Infrastructure Services segment compared to same quarter of the prior year. Infrastructure Services cost of revenues as a percentage of Infrastructure Services revenues decreased to 83.3% in the nine months ended September 30, 2014 from 86.3% in the comparable period in 2013 primarily due to arrangements we entered into with subcontractors in 2013 due to the high demand for tower crews which did not recur in 2014.

The Field Services segment is comprised of operations acquired in the merger with Multiband and was therefore only included in our results beginning August 31, 2013. Cost of revenues for the Field Services segment was of $170.5 million for the nine months ended September 30, 2014, which included a $6.3 million gain realized upon return of leased vehicles.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the nine months ended September 30, 2014 were $88.4 million as compared to $83.1 million for the same period of 2013, representing an overall increase of $5.3 million, or 6.4%. The increase during the period is primarily attributable to (i) an increase of $23.4 million related to employee related costs and the inclusion of Multiband for the full nine months and (ii) an increase in compensation expense recognized for outstanding share-based awards of $0.8 million. These increases were partially offset by a (i) a $9.5 million reduction in the fair value of the earn-out obligation related to the acquisition of CSG and (ii) a $11.1 million reduction in professional services primarily related to restatement related charges incurred during the nine months ended September 30, 2013 that did not recur in 2014. Selling, general and administrative expense as a percentage of revenue for the nine months ended September 30, 2014 were 9.9% compared to 14.5% for the nine months ended September 20, 2013. The change in the fair value of the CSG earn-out decreased selling, general and administrative expenses as a percentage of revenues by 1.0% for the nine months ended September 30, 2014.

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Other Operating Income

Other operating income for the nine months ended September 30, 2014 and 2013 was $3.2 million and $0, respectively. The other operating income earned during the nine months ended September 30, 2014 was primarily related (i) to successful negotiations with DIRECTV that enabled us to bill DIRECTV $1.2 million for services performed prior to the acquisition of Multiband, (ii) favorable settlement of $0.4 million related to litigation with a former executive of the Company, and (iii) a $1.5 million reduction in our estimate of the fair value of our guarantee of indebtedness with a related party. See “Off-Balance Sheet Arrangements—Guarantee.”

Interest Expense

Interest expense for the nine months ended September 30, 2014 and 2013, was $34.3 million and $28.8 million, respectively. This increase is primarily attributable to the issuance of the tack-on notes on June 13, 2013, with respect to which interest expense was only included in our nine months ended September 30, 2013 results beginning on such date.

Income Tax Expense (Benefit)

As a result of income before taxes, we recorded income tax expense of $2.2 million for the nine months ended September 30, 2014, compared to a benefit of $7.1 million for the same period of 2013. Our effective income tax rate was 52.8% and (25.8)% for the nine months ended September 30, 2014 and 2013, respectively. The increase in the effective tax rate is due to the effect of state taxes and permanent items applied to our relatively low income before taxes for the nine months ended September 30, 2014.

Liquidity and Capital Resources

Historically, our primary sources of liquidity have been borrowings under credit facilities and the proceeds of bond offerings. In 2011, we completed a $225 million private offering of the original notes. We used the proceeds of this debt offering to pay the balances remaining on notes payable to stockholders, to purchase a portion of our outstanding warrants and common stock, including all outstanding Series C Redeemable Preferred Stock, and to pay off our prior credit facility. In 2013, to fund the merger with Multiband, we issued $100 million aggregate principal amount of the tack-on notes, and collectively with the original notes, the notes, in exchange for an equal aggregate principal amount of notes issued by our wholly owned subsidiary, GNET Escrow Corp. On July 7, 2014, to fulfill our obligations under a registration rights agreement entered in connection with the funding of the Multiband acquisition, we closed the exchange offer for the tack-on notes, pursuant to which we exchanged all of the tack-on notes for an equal principal amount of notes in a transaction registered with the SEC.

Our primary sources of liquidity are currently cash flows from continuing operations, funds available under our Credit Facility with PNC Bank, National Association, or PNC Bank, and our cash balances. We had $59.4 million and $82.2 million of cash on hand at December 31, 2013 and September 30, 2014, respectively. The Credit Facility permits us to borrow up to $50.0 million, subject to a borrowing base calculation and the compliance with certain covenants described below. As of September 30, 2014, our borrowing base under the Credit Facility was $27.4 million. We had $45.5 million and $22.9 million of availability for additional borrowings under our Credit Facility as of December 31, 2013 and September 30, 2014, respectively, subject to compliance with certain covenants described below.

We anticipate that our future primary liquidity needs will be for working capital, capital expenditures, debt service and any strategic acquisitions or investments that we make. We evaluate opportunities for strategic acquisitions and investments from time to time that may require cash and may consider opportunities to either repurchase outstanding debt or repurchase outstanding shares of our common stock in the future. We may also fund strategic acquisitions or investments with the proceeds from equity or debt issuances. In addition, during 2013 and the nine months ended September 30, 2014 we spent approximately $1.1 million and $1.9 million, respectively, in contributions to charitable and religious organizations. We intend to make similar contributions in the future as we believe such contributions reflect our core values. We believe that, based on our cash balance, the availability we expect under the Credit Facility and our expected cash flow from operations, we will be able to meet all of our financial obligations for the next twelve months.

Should we be unable to comply with the terms and conditions of the Credit Facility, we would be required to obtain modifications to the Credit Facility or another source of financing to continue to operate as we anticipate, and we may not be able to obtain any such modifications or find another source of financing on acceptable terms or at all.

Working Capital

We bill our Professional Services customers for a portion of our services in advance, and the remainder as the work is performed in accordance with the billing milestones contained in the contract. Revenues from the Professional Services segment are

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recognized on a completed performance method for our non-construction activities and on the completed contract method of accounting for construction projects.

Our Infrastructure Services revenues are primarily from fixed-unit price projects and are recognized under the completed contract method of accounting, and we bill for our services as we complete certain billing milestones contained in the contract. Our collection terms are generally one percent if paid in twenty days, net sixty days for AT&T. Our Mobility Turf Contract allows AT&T to retain 10% of the amount due, on a per site basis, until the job is completed. For certain customers, including AT&T, we maintain inventory to meet the requirements for materials under the contracts. Occasionally, certain customers pay us in advance for a portion of the materials we purchase for their projects, or allow us to pre-bill them for materials purchases up to specified amounts. Our agreements with material providers usually allow us to pay them within 45 days of delivery. Our agreements with subcontractors usually have terms of 60 days. As of September 30, 2014, we had $57.0 million in working capital, defined as current assets less current liabilities, as compared to $46.4 million in working capital at December 31, 2013.

Our Field Services segment earns revenue through installations and maintenance services provided to DIRECTV. A large portion of the inventory for Field Services segment is purchased from DIRECTV under 30-day payment terms. The Field Services segment is paid by DIRECTV for its services on a weekly basis approximately two weeks after the work is completed. The weekly payment received includes a reimbursement for certain inventory used during the installation process.

 

We have taken deliberate steps since March 31, 2014 to enhance our working capital position. During the second quarter of 2014, we began participating in an AT&T sponsored vendor finance program with Citibank, N.A., or Citibank, that is discussed under “Supplier Finance Program” below. This program has reduced our collection time on AT&T invoices and has significantly reduced the AT&T invoices subject to a one percent discount on invoices for early payment. In addition, we have reengineered our processes to improve our efforts to more timely invoice our clients for services provided. We have also begun to implement corporate restructuring and integration activities as a result of our 2014 Restructuring Plan that we expect will improve efficiencies in our operations and reduce our costs and expenses. These efforts have begun to, and we anticipate that they will continue to, increase our cash on hand and reduce the difference between billings in excess of costs on uncompleted projects and costs in excess of billings on uncompleted projects.

 

Supplier Finance Program

 

On May 8, 2014, we entered into an AT&T-sponsored vendor finance program with Citibank that has the effect of reducing the collection cycle time on AT&T invoices. This program eliminates the one percent discount on each invoice offered to AT&T for payment within twenty days. We do, however, pay Citibank a discount fee of LIBOR (as defined) plus one percent per annum on the dollar amount of AT&T receivables sold to Citibank from the date of sale until the scheduled payment date of 60 days from acceptance of the invoice. We expect this change to have a positive effect on working capital as well as a favorable change to gross profit for the Infrastructure Services segment. Our election to move to this program does, however, cause AT&T receivables to be removed from the borrowing base calculation under the Credit Facility. While the maximum commitment under the Credit Facility remains at $50.0 million, we expect the net availability under the Credit Facility to decline compared to historical levels as a result of the elimination of the AT&T receivables from the borrowing base calculation. Assuming the program was in place as of December 31, 2013, the elimination of AT&T receivables from our borrowing base calculation would have caused our borrowing base to reduce from $50.0 million to $35.9 million, and our availability for additional borrowings under the Credit Facility after giving effect to outstanding borrowings and letters of credit to reduce from $45.5 million to $31.4 million. Our borrowing base and availability for additional borrowings under the Credit Facility were $27.4 million and $22.9 million at September 30, 2014.

 

Cash Flow Analysis

The following table presents selected cash flow data for the nine months ended September 30, 2013 and 2014 (in thousands).

 

Operating Activities

Cash flow provided by or used in operations is primarily influenced by demand for our services, operating income and the type of services we provide, but can also be influenced by working capital needs such as the timing of customer billing, collection of

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receivables and the settlement of payables and other obligations. Working capital needs historically have been higher from April through October due to the seasonality of our business. Conversely, a portion of working capital assets has historically been converted to cash in the first quarter.

Net cash provided by (used in) operating activities increased by $123.4 million to $45.0 million for the nine months ended September 30, 2014, as compared to the same period in 2013. This change is primarily attributable to invoicing related to amounts included in our costs in excess of billings, collections on accounts receivables and the receipt of an income tax receivable of $13.0 million, partially offset by an increase in interest paid of $6.8 million. The decrease in our accounts receivable is partially due to reduced payment terms per the vendor finance program with Citibank.

Investing Activities

Net cash used in investing activities decreased by $108.4 million to $14.4 million for the nine months ended September 30, 2014 as compared to the same period in 2013 primarily related to our acquisitions of CSG and Multiband in 2013. Net cash used in investing activities primarily consists of DAS-related construction that we intend to lease the right to use to major carriers.

Financing Activities

Net cash used in financing activities decreased by $109.7 million to $7.8 million for the nine months ended September 30, 2014 as compared to the same period in 2013. The change was driven primarily by the issuance of the tack-on notes in connection with the acquisition of Multiband in 2013.

Material Covenants under our Indenture and Credit Facility

We are subject to certain incurrence and maintenance covenants under the Indenture and the Credit Facility, as described below.

 

Definitions

Under the Indenture, “Consolidated EBITDA”, “Fixed Charge Coverage Ratio” and “Total Leverage Ratio” are defined as follows:

“Consolidated EBITDA” means EBITDA, as adjusted to eliminate the impact of certain items, including: (i) share-based compensation (non-cash portion), (ii) certain professional and consulting fees identified in the Indenture, (iii) severance expense (paid to certain senior level employees), (iv) amortization of debt issuance costs, (v) expenses related to the 2014 Restructuring Plan and (vi) impairment of long-lived assets.

“Fixed Charge Coverage Ratio” means the ratio of (a) Consolidated EBITDA to (b) the Fixed Charges (as defined in the Indenture) for the applicable period.

“Total Leverage Ratio” means the ratio of (a) total indebtedness of the Company to (b) the Company’s Consolidated EBITDA for the most recently ended four fiscal quarters.

Under the Credit Facility, “Fixed Charge Coverage Ratio” and “Leverage Ratio” are defined as follows:

“Fixed Charge Coverage Ratio” means the ratio of (a) EBITDA plus fees, costs and expenses incurred in connection with the Recapitalization minus unfinanced capital expenditures made during such period but only to the extent made after the occurrence of the most recent Triggering Event; to (b) all senior debt payments made during such period plus cash taxes paid during such period plus all cash dividends paid during such period, but only to the extent paid after the occurrence of the most recent Triggering Event. We are not required to comply with the Fixed Charge Coverage Ratio until the occurrence of a Triggering Event that is continuing.

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“Leverage Ratio” means the ratio of (a) funded debt of the Company to (b) EBITDA for the trailing twelve months ending as of the last day of such fiscal period. We are not required to comply with the Leverage Ratio until the occurrence of a Triggering Event that is continuing.

We previously referred to Consolidated EBITDA as “Adjusted EBITDA” throughout our external communications, however in this Quarterly Report and our external communications we now refer to Consolidated EBITDA as “Consolidated EBITDA.” References to Adjusted EBITDA are to a different measure. These financial measures and the related ratios described above are not calculated in accordance with generally accepted accounting principles, or GAAP, and are presented below for the purpose of demonstrating compliance with our debt covenants.

Applicability of Covenants

As described in more detail below, compliance with such ratios is only required upon the incurrence of debt or the making of a restricted payment, as applicable. If we are permitted to incur any debt or make any restricted payment under the Indenture, we will be permitted to incur such debt or make such restricted payment under the Credit Facility.

Under the Indenture, if we do not meet a Fixed Charge Coverage Ratio of at least 2.00 to 1.00, we may not consummate any of the following transactions:

Under the terms of the Credit Facility, we must maintain a Fixed Charge Coverage Ratio equal to at least 1.25 to 1.00 (which ratio was 1.78 to 1.00 at September 30, 2014) and a Leverage Ratio no greater than as described in the table above (which ratio was 4.20 to 1.00 at September 30, 2014) during such time as a Triggering Event is continuing. A “Triggering Event” occurs when our undrawn availability (measured as of the last date of each month) on the Credit Facility has failed to equal at least $10 million for two consecutive months and continues until our undrawn availability equals $20 million for at least three consecutive months. We are only required to maintain such ratios at such time that a Triggering Event is in existence. Failure to comply with such ratios during the existence of a Triggering Event constitutes an Event of Default (as defined therein) under the Credit Facility. Had we been required to meet these ratio tests as of September 30, 2014, we would have met the Fixed Charge Coverage Ratio and the Leverage Ratio.

Under the terms of the Indenture, we are required to meet certain ratio tests giving effect to anticipated transactions, including borrowing debt and making restricted payments prior to entering these transactions. Under the Indenture, these ratio tests include a Fixed Charge Coverage Ratio of at least 2.00 to 1.00 (which ratio was 1.48 to 1.00 at September 30, 2014) and a Total Leverage Ratio not greater than 2.50 to 1.00 (which ratio was 5.31 to 1.00 at September 30, 2014). Excluding the merger with Multiband, with respect to which holders of the notes waived compliance with both ratios pursuant to the Consent Letter, we have not entered into any transaction that requires us to meet these tests as of September 30, 2014. Had we been required to meet these ratio tests as of September 30, 2014, we would not have met the Fixed Charge Coverage Ratio or the Total Leverage Ratio.

Reconciliation of Non-GAAP Financial Measures

EBITDA represents net income before income tax expense, interest, depreciation and amortization. We present EBITDA because we consider it to be an important supplemental measure of our operating performance and we believe that such information will be used by securities analysts, investors and other interested parties in the evaluation of high yield issuers, many of which present EBITDA when reporting their results. We consider EBITDA to be an operating performance measure, and not a liquidity measure, that provides a measure of operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies.

We present Consolidated EBITDA, which is referred to as Consolidated EBITDA in the Indenture, because certain covenants in the Indenture that affect our ability to incur additional indebtedness as well as to enter into certain other transactions are calculated based on Consolidated EBITDA. Consolidated EBITDA adjusts EBITDA to eliminate the impact of certain items, including: (i) share-based compensation (non-cash portion); (ii) certain professional and consultant fees identified in the Indenture; (iii) severance expense (paid to certain senior level employees); (iv) amortization of debt issuance costs; (v) restatement fees and expenses; (vi) a tax gross-up payment made to the Company’s Chief Executive Officer to cover his tax obligation for an award of common stock; (vii) transaction fees and expenses related to acquisitions, the making of certain permitted investments, the issuance of equity or the incurrence of permitted debt; (viii) expenses related to the 2014 Restructuring Plan; and (ix) impairment of long-lived assets.

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Because EBITDA and Consolidated EBITDA are not recognized measurements under U.S. GAAP, they have limitations as analytical tools. Because of these limitations, when analyzing our operating performance, investors should use EBITDA and Consolidated EBITDA in addition to, and not as an alternative for, net income, operating income or any other performance measure presented in accordance with GAAP. Similarly, investors should not use EBITDA or Consolidated EBITDA as an alternative to cash flow from operating activities or as a measure of our liquidity.

The following table reconciles our net income to EBITDA and EBITDA to Consolidated EBITDA (in thousands):

 

 

Mortgage

In March 2014, our wholly owned subsidiary, Multiband Special Purpose, LLC (“MBSP”), refinanced the mortgage payable related to the Multiband headquarters in Minnetonka, Minnesota with Commerce Bank, for the amount of $3.8 million with an interest rate of 5.75% per annum. The loan is payable in monthly installments, with the final payment due in March 2019, and is secured by a lien on Multiband’s headquarters. As additional collateral for the mortgage, MBSP deposited $1.0 million in the lender’s favor. During the third quarter of 2014, we listed for sale the Multiband headquarters building in Minnetonka, Minnesota. The building and associated mortgage have been recorded as assets and liabilities held for sale, respectively in the accompanying consolidated balance sheet.

Capital Expenditures

We estimate that we will spend approximately $20 million in 2014 on capital expenditures. The increase over previous years is primarily related to network construction costs. We expect to recover a portion of these costs through arrangements with wireless carriers. We also expect an increase in capital expenditures as a result of certain business process automation initiatives that we have implemented in order to further streamline systems and reporting.

Acquisition-Related Contingent Consideration

In our acquisitions of CSG and DBT, we have agreed to make future cash earn-out payments to the sellers, which are contingent upon the future performance of the acquired businesses. The estimated fair value, which is the estimated payout discounted for the time value of money, of the earn-out obligations recorded as of September 30, 2014 was $1.2 million, $0.5 million of which was recorded as a current liability in our consolidated balance sheet. During the third quarter of 2014, we recorded a $9.0 million

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reduction to the fair value of the CSG contingent consideration liability based upon changes in management’s forecast for the CSG operations during the remainder of the earn-out period partially as a result of the deferral of certain projects by AT&T.

Off-Balance Sheet Arrangements

We have entered into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected in our balance sheets. Our significant off-balance sheet transactions include liabilities associated with non-cancellable operating leases, letter of credit obligations, and performance and payment bonds entered into in the normal course of business. We have not engaged in any off-balance sheet financing arrangements through special purpose entities.

Leases

We enter into non-cancellable operating leases for certain of our facility, vehicle and equipment needs. These leases allow us to conserve cash by paying a monthly lease rental fee for use of facilities, vehicles and equipment rather than purchasing them. We may decide to cancel or terminate a lease before the end of its term, in which case we are typically liable to the lessor for the remaining lease payments under the term of the lease.

Guarantee

In October 2011, we issued a letter of credit as a guarantee of a related party’s line of credit. The maximum available to be drawn on the line of credit is $4.0 million. In the event of default on the line of credit by the related party, the letter of credit provides that we will have the option to enter into a note purchase agreement with the lender or to permit a drawing on the letter of credit in an amount not to exceed the amount by which the outstanding obligation exceeds the value of the related party’s collateral securing the line of credit, but in no event more than $4.0 million. Our letter of credit was originally due to expire in July 2012 and prior to expiration has been amended each year thereafter to extend the expiration date by one year. The letter of credit was most recently amended to extend the guarantee of the related party’s line of credit until July 2015.

Our exposure with respect to the letter of credit is supported by a reimbursement agreement from the related party, secured by a pledge of assets and stock of the related party. As of December 31, 2011, we concluded that we will likely be required to perform for the full exposure under the guarantee and therefore recorded a liability in the amount of $4.0 million included in accrued liabilities in our consolidated financial statements in the fourth quarter of 2011. This guarantee liability for the full amount of $4.0 million remains in accrued liabilities as of September 30, 2014.

In the third quarter of 2014, we and the related party negotiated an arrangement whereby we agreed not to pursue the pledged collateral for a period of time not extending beyond May 5, 2016 (the “Forbearance Period”) in the event the line of credit is drawn upon in exchange for the related party’s pledge to us of 15,625 shares of Goodman Networks common stock. In addition, we agreed to discharge and deem paid-in-full all obligations of the related party to us if on or prior to the end of the Forbearance Period, the related party makes a cash payment to us in the amount of $1.5 million plus interest at a rate of 2.0% per annum from September 25, 2014. Pursuant to the agreement we agreed to instruct the lender to draw on the letter of credit. As a result of the agreement reached in the third quarter of 2014, we recorded other income of $1.5 million in the consolidated income statement and recorded the pledged stock as additional paid-in capital on the consolidated balance sheet. The guarantee liability for the full amount of $4.0 million remains in accrued liabilities as of September 30, 2014.

Indemnification Obligations

We generally indemnify our customers for the services we provide under our contracts, as well as other specified liabilities, which may subject us to indemnity claims, liabilities and related litigation. As of September 30, 2014, we are not aware of any asserted claims for material amounts in connection with these indemnity obligations.

Seasonality

Historically we have experienced seasonal variations in our business primarily due to the capital planning cycles of certain of our customers. Generally, AT&T’s annual capital plans are not finalized to the project level until sometime during the first three months of the year, resulting in reduced capital spending in the first quarter relative to the rest of the year. This results in a significant portion of contracts related to our Infrastructure Services segment being completed during the fourth quarter of each year. Because we have adopted the completed contract method, we do not recognize revenue or expenses on contracts until we have substantially completed the contract. Accordingly, the recognition of revenue and expenses on contracts that span quarters may also cause our reported results of operations to experience significant fluctuations.

Our Field Services segment’s results of operations may also fluctuate significantly from quarter to quarter. We typically generate more revenues in our Field Services segment during the third quarter of each year due to favorable weather conditions and

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DIRECTV’s sports promotional efforts. Because a significant portion of the Field Services segment’s expenses are relatively fixed, a variation in the number of customer engagements or the timing of the initiation or completion of those engagements can cause significant fluctuations in operating results from quarter to quarter.

As a result, we have historically experienced, and may continue to experience significant differences in operations results from quarter to quarter. As a result of these seasonal variations and our methodology for the recognition of revenue and expenses on projects, comparisons of operating measures between quarters may not be as meaningful as comparisons between longer reporting periods.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our consolidated financial statements. From time to time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. We have reviewed and approved these significant accounting policies, which are further described under “Critical Accounting Policies and Estimates” and Note 2 to the Consolidated Financial Statements in the 2013 Annual Report.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our primary exposure to market risk relates to unfavorable changes in concentration of credit risk and interest rates.

Credit Risk

We are subject to concentrations of credit risk related primarily to our cash and cash equivalents and our accounts receivable, including amounts related to costs in excess of billings on uncompleted projects. Substantially all of our cash investments are managed by what we believe to be high credit quality financial institutions. In accordance with our investment policies, these institutions are authorized to invest this cash in a diversified portfolio of what we believe to be high-quality investments, which primarily include short-term dollar denominated bank deposits to provide Federal Deposit Insurance Corporation backing of the deposits. We do not currently believe the principal amounts of these investments are subject to any material risk of loss. In addition, as we grant credit under normal payment terms, generally without collateral, we are subject to potential credit risk related to our customers’ ability to pay for services provided. This risk may be heightened as a result of the depressed economic and financial market conditions that have existed in recent years. However, we believe the concentration of credit risk related to trade accounts receivable and costs in excess of billings on uncompleted contracts is limited because of the financial strength of our customers. We perform ongoing credit risk assessments of our customers and financial institutions.

Interest Rate Risk

The interest on outstanding balances under our Credit Facility accrues at variable rates based, at our option, on the agent bank’s base rate (as defined in the Credit Facility) plus a margin of between 1.50% and 2.00%, or at LIBOR (not subject to a floor) plus a margin of between 2.50% and 3.00%, depending on certain financial thresholds. We had no outstanding borrowings under our Credit Facility as of September 30, 2014. Our notes payable balance at September 30, 2014 is comprised of our original notes and tack-on notes due in 2018, which bear a fixed rate of interest of 12.125%. Due to the fixed rate of interest on the notes, changes in interest rates would not have an impact on the related interest expense.

The mortgage payable related to the Multiband headquarters building was refinanced with Commerce Bank on March 28, 2014, with a fixed interest rate of 5.75% per annum. Due to the fixed rate of interest on the mortgage, changes in interest rates would not have an impact on the related interest expense.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”) was performed under the supervision and with the participation of our senior management, including our Executive Chairman, Chief Executive Officer and interim Chief Financial Officer. The purpose of

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disclosure controls and procedures is to ensure that information required to be disclosed in the reports we file or submit is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Executive Chairman, Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

As previously disclosed under “Item 9A – Controls and Procedures” in our 2013 Annual Report, we concluded that our internal control over financial reporting was not effective based on the material weakness identified. Based on that material weakness in internal control over financial reporting, which we view as an integral part of our disclosure controls and procedures, our Executive Chairman, Chief Executive Officer and interim Chief Financial Officer have concluded that, as of the quarter ended September 30, 2014, our disclosure controls and procedures were not effective. Nevertheless, based on a number of factors, including the performance of additional procedures by management designed to ensure the reliability of our financial reporting, we believe that the consolidated financial statements in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.

Management’s Remediation Initiatives and Changes in Internal Control over Financial Reporting

We continue to make progress towards achieving the effectiveness of our disclosure controls and procedures. Remediation generally requires making changes to how controls are designed and then adhering to those changes for a sufficient period of time such that the effectiveness of those changes is demonstrated with an appropriate amount of consistency. We believe that we have made significant improvements in our internal control over financial reporting and are committed to remediating our material weakness. Our remediation initiatives are intended to further address our specific material weakness and to continue to enhance our internal control over financial reporting. The Company has developed processes and procedures necessary to remediate its internal control weakness and as of September 30, 2014 these enhanced procedures continue to be evaluated and tested. We anticipate that our revised processes and procedures will be operating during the fourth quarter of 2014, however, these enhanced processes and procedures will likely not be in place for a sufficient period of time subsequent to implementation to conclude that they are operating effectively as of December 31, 2014 and therefore we may not be able to conclude that the material weakness has been remediated as of December 31, 2014. There have been no material changes to our remediation initiatives since the issuance of our 2013 Annual Report on March 31, 2014.

There were no material changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15 and 15d-15 that occurred during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

We are from time to time party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, lost wages, pain and suffering, breach of contract and/or property damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. Based upon information currently available, we believe that the ultimate outcome of all current litigation and other claims, including settlements, in the aggregate will not have a material adverse effect on our overall financial condition for purposes of financial reporting.

In December 2009, the U.S. Department of Labor sued various individuals that are either stockholders, directors, trustees and/or advisors to DirecTECH Holding Company, Inc., or DTHC, and its Employee Stock Ownership Plan. Multiband was not named in this complaint. In May 2011, three of these individuals settled the complaint with the U.S. Department of Labor (upon information and belief, a portion of this settlement was funded by the individuals’ insurance carrier) in the approximate amount of $8.6 million and those same individuals have filed suit against Multiband for reimbursement of certain expenses. The basis for these reimbursement demands are certain corporate indemnification agreements that were entered into by the former DTHC operating subsidiaries and Multiband. Two of those defendants had their claims denied during the second quarter of 2012, in a summary arbitration proceeding. This denial was appealed and the summary judgment award was overturned by a federal court judge in February 2013. Multiband appealed the federal court’s decision to the Sixth Circuit Court of Appeals. In January 2014, the Sixth Circuit Court of Appeals reversed the decision and reinstated the arbitration award granting summary judgment to Multiband. In April 2014, the individuals filed a writ of certiorari to appeal the matter to the United States Supreme Court. On June 23, 2014, the United States Supreme Court denied the petition for a writ of certiorari, and the Sixth Circuit decision is now final.

 

Item 1A. Risk Factors

Except as set forth below, there have been no material changes to the risk factors disclosed under “Item 1A. Risk Factors” of the 2013 Annual Report. For additional information concerning our risk factors, please refer to “Item 1A. Risk Factors” of the 2013 Annual Report.

We derive the vast majority of our revenues from subsidiaries of AT&T Inc. and DIRECTV. The loss of any of these customers or a reduction in their demand for our services would impair our business, financial condition and results of operations.

We derive the vast majority of our revenues from subsidiaries of AT&T Inc. and DIRECTV. We derived our revenue from the following sources over the past two fiscal years and the nine months ended September 30, 2014 (dollars in thousands):

 

Because we derive the vast majority of our revenues from these customers, and certain of our services for AT&T are provided on a territory basis, with no required commitment for AT&T to spend a specified amount in such territory with us, we could experience a material adverse effect to our business, financial condition or results of operations if the amount of business we obtain from these customers is reduced. On May 18, 2014, AT&T Inc. and DIRECTV announced that they had entered into a merger agreement pursuant to which DIRECTV would merge with a subsidiary of AT&T Inc. The closing of the merger is subject to several conditions, including review and approval by the FCC and the Department of Justice. If the merger occurs, our revenues could become more concentrated and dependent on our relationship with AT&T Inc. To the extent that our performance does not meet customer expectations, or our reputation or relationships with our key customers are impaired, we may lose future business with such customers, which would materially adversely affect our ability to generate revenue. Any of these factors could negatively impact our business, financial condition or results of operations.

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We depend on a limited number of key personnel who would be difficult to replace.

We depend, in part, on the performance of Ron Hill, our Chief Executive Officer and President, John Goodman, our Executive Chairman, and Cari Shyiak, our Chief Operating Officer, to operate and grow our business. We previously depended, in part, on Randal S. Dumas, our former Chief Financial Officer, Scott E. Pickett, our former Chief Marketing Officer and Executive Vice President of Strategic Planning and Mergers and Acquisitions, and James L. Mandel, who served as Multiband’s Chief Executive Officer. The loss of any of Messrs. Hill, Goodman or Shyiak could negatively impact our ability to execute our business strategies. Although we have entered into employment agreements with Messrs. Hill, Goodman and Shyiak, we may be unable to retain them or replace any of them if we lose their services for any reason. We recently amended our bylaws to provide that our Chief Executive Officer will be responsible for the general supervision and management of the Company and our Executive Chairman will be responsible for, among other things, providing advice and counsel to our Chief Executive Officer in areas such as corporate and strategic planning and policy, mergers and acquisitions, corporate objectives, annual financial budgets, capital expenditures, evaluating and hiring employees, and communicating with investment bankers, lenders or other financial sponsors. Mr. Goodman remains a critical and integral part of our day-to-day business. While his duties have changed, Mr. Goodman has simply redeployed his executive experience gained through continuous service to our business as our co-founder to manage both short- and long-term future business strategy. In connection with the amendment to our bylaws, we and Mr. Goodman amended and restated Mr. Goodman’s employment agreement to, among other things, extend the term of his employment to a period of three years. Mr. Goodman has advised us that he has no plans to leave the Company. We cannot assure you, despite Mr. Goodman’s expressed interest in continuing in his position with the Company, that we will not suffer adverse impacts to the Company as a result of this transition, nor can we assure you that we will not suffer adverse impacts as a result of the losses of Messrs. Dumas, Mandel or Pickett.

The Field Services segment is highly dependent on our strategic alliance with DIRECTV and a major alteration or termination of that alliance could adversely affect our business.

The Field Services segment is highly dependent on our relationship with DIRECTV. Our current MSA with DIRECTV was extended in December 2013 and expires on December 31, 2017. The term of this agreement automatically renews for additional one-year periods unless either DIRECTV or we give written notice of termination at least 90 days in advance of expiration of the then current term.

The agreement can be terminated on 180 days’ notice by either party. Although DIRECTV may not terminate the agreement if it were to complete its proposed merger with AT&T Inc., the agreement does not require DIRECTV to undertake any work with us. DIRECTV may also change the terms of its agreement with us, and has done so to Multiband in the past, to terms that are more favorable to DIRECTV. Any adverse alteration or termination of our agreement with DIRECTV would have a material adverse effect on our business. In addition, a significant decrease in the number of jobs we complete for DIRECTV could have a material adverse effect on our business, financial condition and results of operations.

Our ability to borrow under the Credit Facility is subject to fluctuations of our borrowing base calculation due to the amount of our receivables with customers other than AT&T.

The borrowings available under the Credit Facility are subject to fluctuations in the calculation of a borrowing base, which is based on the value of our eligible accounts receivable and up to $10.0 million of eligible inventory. On May 8, 2014, we entered into an AT&T-sponsored vendor finance program to reduce our effective collection cycle time on AT&T invoices, but to facilitate the program, we amended the Credit Facility to remove the AT&T receivables as collateral thereunder. Our receivables with AT&T therefore no longer contribute to our borrowing base under the Credit Facility. While the maximum commitment on the Credit Facility remains at $50.0 million, we expect the net availability thereunder to decline compared to historical levels as a result of the elimination of the AT&T receivables from the borrowing base calculation. Assuming this program was in place as of December 31, 2013, the elimination of AT&T receivables from our borrowing base calculation would have caused our borrowing base under the Credit Facility to reduce from $50.0 million to $35.9 million and our availability for additional borrowings under the Credit Facility after giving effect to outstanding borrowings and letters of credit to reduce from $45.5 million to $31.4 million. At September 30, 2014, our borrowing base under the Credit Facility was $27.4 million and our availability for additional borrowings after giving effect to outstanding borrowings and letters of credit was $22.9 million. As a result, the availability under the Credit Facility fluctuates with the level of receivables with customers other than AT&T and reduces as we collect receivables or if they are not paid within a certain period of time. If the value of our eligible inventory were to significantly decrease, it could also reduce our borrowing capacity. If our borrowing base is reduced below the level of outstanding borrowings on the Credit Facility, then a portion of the outstanding indebtedness under the Credit Facility could become due and payable. If that should occur, we may be forced to use the proceeds from the collection of receivables to repay the facility or we may be unable to repay all of our obligations under the Credit Facility, which could force us to sell significant assets or allow our assets to be foreclosed upon. Should our liquidity needs exceed our cash on hand and borrowings available under the Credit Facility, we would be required to obtain modifications of the Credit Facility or secure another source of financing to continue to operate our business, which may not be available at a favorable price, or at all.

 

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

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

None.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

A list of exhibits filed herewith is contained in the Exhibit Index that immediately precedes such exhibits and is incorporated by reference herein.

 

 

 

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Signatures

The Company has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

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EXHIBIT INDEX

 

 

 

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