UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

For the quarterly period ended September 30, 2016

or

For the transition period from               to

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  ☒    NO  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ☒    NO  ☐

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ☐    NO  ☒

As of November 11, 2016, there were 912,754 shares of the registrant’s common stock, $0.01 par value, outstanding.

 

 

 

 

 

 

 

 

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TABLE OF CONTENTS

 

 

 

 

 

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See accompanying notes to the consolidated financial statements

 

 

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Goodman Networks Incorporated

Consolidated Statements of Operations and Comprehensive Income (Loss)

(In Thousands)

(Unaudited)

 

 

See accompanying notes to the consolidated financial statements

 

 

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Goodman Networks Incorporated

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited) 

 

 

See accompanying notes to the consolidated financial statements

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Goodman Networks Incorporated

Consolidated Statements of Cash Flows (Continued)

(In Thousands)

(Unaudited)

 

 

See accompanying notes to the 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 leading provider of installation and maintenance services for satellite communications. The Company also provides network infrastructure and professional services to the telecommunications industry.  The Company serves the satellite television industry by providing onsite installation, upgrade and maintenance of satellite television systems to both the residential and commercial market customers.  The Company’s professional services include the design, engineering, construction, deployment, and maintenance of small cell and distributed antenna systems (“DAS”). The Company’s wireless telecommunications services include the maintenance, and decommissioning of wireless networks for traditional cell towers. These highly specialized and technical services are critical to the capability of the Company’s customers to deliver video, data and voice services to their end users. 

Disposition of Business Unit

On July 6, 2016, the Company completed the sale of the Assets to Dycom pursuant to the terms and conditions of the Agreement, as amended. The Company’s financial results for the periods prior to the sale of the wireless network deployment and wireline business have been reflected in our unaudited consolidated statement of operations and comprehensive income (loss), retrospectively, as discontinued operations. Additionally, the related assets and liabilities associated with the discontinued operations in the prior years are classified as held for sale in the unaudited consolidated balance sheet.  As consideration for the Assets, Dycom paid the Company approximately $107.5 million, which was subject to a customary working capital adjustment currently estimated to require the Company to pay Dycom $4.7 million, and assumed certain liabilities of the Company. $22.5 million of the proceeds from the sale of the Assets has been deposited into an indemnity escrow account, reflected as Restricted cash in the consolidated balance sheet and will be held until certain conditions are fulfilled. We deposited the net proceeds from the sale of the Assets received as of July 6, 2016 in two accounts.  $35.0 million of the net proceeds were deposited in an account subject to the control of PNC Bank, National Association (now Midcap Financial Trust) (the “New Credit Facility Account”), and $45.3 million of the net proceeds were deposited into an account subject to the control of the collateral trustee (the “Notes Account”). See Note 3 – Discontinued Operations and Note 7 – Notes Payable for additional information.  

Restructuring Activities

In 2014, management approved, committed to and initiated plans to restructure and further improve efficiencies in operations, including further integrating the operations of Multiband Corporation (“Multiband”) and the Custom Solutions Group (“CSG”) 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 unaudited consolidated statements of operations and comprehensive income (loss). See Note 16 – Restructuring Activities for a summary of restructuring activities and costs.

 

In connection with the sale of the Company’s wireless network deployment and wireline business, the Company completed its 2014 Restructuring Plan and approved, committed to and initiated plans to reduce its selling, general and administrative costs in line with the Company’s continuing operations (the 2016 Restructuring Plan).

 

 

Note 2. Summary of Significant Accounting and Reporting Policies

The accompanying unaudited consolidated financial statements have been prepared in all material respects pursuant to 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 consolidated financial statements for the year ended December 31, 2015.

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, 2015, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 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 the disclosures presented in these unaudited consolidated financial statements are adequate and do not make the information

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misleading. Certain prior year amounts have been reclassified to conform to the current period presentation.  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 2015 Annual Report.

Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.  Intercompany balances and transactions have been eliminated in consolidation.

 

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 gross billings on uncompleted contracts as of December 31, 2015 and September 30, 2016 was $14.9 million and $8.1 million, respectively.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“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. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of ASU 2014-09 by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in ASU 2014-09 earlier for annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in ASU 2014-09 earlier for

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annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in ASU 2014-09.  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.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”), which requires in scope inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (LIFO) or the retail inventory method.   The amendments do not apply to inventory that is measured using LIFO or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. The ASU is effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. ASU 2015-11 requires prospective application, with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is evaluating the effect that ASU 2015-11 will have on its consolidated financial statements and related disclosures.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01, which provides guidance for the recognition, measurement, presentation and disclosure of financial assets and financial liabilities. ASU 2016-01 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017 and, for most provisions, is effective using the cumulative-effect transition approach. Early application is permitted for certain provisions. The Company is currently evaluating the potential effect of this ASU on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Subtopic 842) (“ASU 2016-02”). ASU 2016-02 provides revised guidance for lease accounting and related disclosure requirements, including a requirement for lessees to recognize lease assets and lease liabilities for operating leases with a duration of greater than one year. Under the previous guidance, lessees were not required to recognize assets and liabilities for operating leases on the balance sheet. ASU 2016-02 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. Modified retrospective application is required for all relevant prior periods. The Company is currently evaluating the potential impact of this ASU on its consolidated financial statements. Upon adoption, the Company expects to recognize lease assets and liabilities for certain of its operating leases on the Company’s consolidated balance sheets.

In March 2016, the FASB issued ASU No. 2016-09, Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The new guidance was developed as part of the FASB's simplification initiative. The core principle of the ASU is that all income tax effects of awards are to be recognized in the statement of operations and comprehensive income (loss) when the awards vest or are settled, it allows an employer to repurchase more of an employee's shares than it can currently for tax withholding purposes without triggering liability accounting, and allows an employer to make a policy election to account for forfeitures as they occur. ASU 2016-09 is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2016. However early adoption is permitted. The Company anticipates the adoption in the effective period and is currently evaluating the effect, if any, that the ASU 2016-09 will have on the consolidated financial statements and related disclosures.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”).  The amendments add further guidance on identifying performance obligations and also to improve the operability and understandability of the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein. Early application for public entities is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods therein. The Company is currently evaluating the potential impact of ASU 2016-10 on its consolidated financial statements.

In May 2016, the FASB issued ASU No. 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”). The amendments, among other things: (1) clarify the objective of the collectability criterion for applying paragraph 606-10-25-7; (2) permit an entity to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specify that the measurement date for noncash consideration is contract inception; (4)  provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the

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transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarify that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. The effective date of these amendments are the same date that Topic 606 is effective. Topic 606 is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein. The Company is currently evaluating the potential impact of ASU 2016-12 on its consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, which amended the guidance of FASB Accounting Standards Codification Topic 230, Statement of Cash Flows (ASC 230) on the Classification of Certain Cash Receipts and Payments (“ASU 2016-15”). The primary purpose of ASU 2016-15 is to reduce the diversity in practice which has resulted from a lack of consistent principles on this topic. The amendments of ASU 2016-15 add or clarify guidance on eight specific cash flow issues, including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The guidance of ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the impact of this guidance on its consolidated financial statements.

Recent Accounting Pronouncements Adopted in 2016.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), to simplify the presentation of debt issuance costs. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts.  The new standard is effective for the Company in the fiscal year beginning after December 15, 2015.   The Company adopted ASU No. 2015-03 as of January 1, 2016. Prior period deferred financing costs of $10.3 million in the consolidated balance sheets as of December 31, 2015, has been reclassified to conform to the current period as required by the standard. See Note 7 to the Consolidated Financial Statements for further updates.  

In April 2015, the FASB issued ASU No. 2015-05, Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”). ASU 2015-05 provides guidance for evaluating whether a cloud computing arrangement includes a software license.  If a cloud computing arrangement includes a software license, then the software license element of the arrangement should be accounted for consistently with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract. ASU 2015-05 does not change the accounting for service contracts. As a result of ASU 2015-05, all software licenses within the scope of the amendment will be accounted for consistently with other licenses of intangible assets. The new standard is effective for the Company in the fiscal year beginning after December 15, 2015. An entity can elect to adopt the amendments either: (1) prospectively to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. The Company adopted ASU 2015-05 in the first quarter of 2016. The adoption of the new guidance did not have a material effect on the consolidated financial statements and related disclosures.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). ASU 2015-16 eliminates the requirement to retrospectively account for adjustments to provisional amounts within the measurement period recognized at the acquisition date in a business combination. ASU 2015-16 requires that these adjustments be recognized in the reporting period in which the adjustment amounts are determined and be calculated as if the accounting had been completed as of the acquisition date. ASU 2015-16 is effective prospectively for fiscal years, and for interim periods within those years, beginning after December 15, 2015. The Company adopted ASU 2015-16, however the adoption of the guidance did not have a material effect on the consolidated financial statements and related disclosures.

 

 

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Note 3. Discontinued Operations

 

On July 6, 2016, the Company completed the sale of assets to Dycom pursuant to the terms and conditions of the Agreement with Dycom, pursuant to which the Company sold certain Assets to Dycom, and Dycom agreed to assume certain liabilities of the Company, related to the Company’s former wireless network deployment and wireline businesses within the Infrastructure Services segment.  As a result, the Company has classified the results of the wireless network deployment and the wireline businesses as discontinued operations in the unaudited consolidated statements of operations and comprehensive income (loss) for all periods presented. Additionally, the related assets and liabilities associated with the discontinued operations are classified as held for sale in the unaudited consolidated balance sheets.  The following table presents the aggregate carrying amounts of the classes of held for sale assets and liabilities and discontinued operations as of December 31, 2015 and September 30, 2016.

 

 

 

The following table presents the financial results related to discontinued operations for the three and nine months ended September 30, 2016 (in thousands):

 

 

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The following table presents the cash flow related to discontinued operations for the nine months ended September 30, 2016 (in thousands):

 

 

 

Note 4. Property and Equipment

Property and equipment consisted of the following: (in thousands)

 

 

Depreciation and amortization of property and equipment for the three months ended September 30, 2015 and 2016 was $0.9 million and $1.0 million, respectively, and $3.3 million and $2.9 million, for the nine months ended September 30, 2015 and 2016, which has been recorded in selling, general and administrative expenses.

The Company entered into a lease contract during 2014 for a right of use license with nonexclusive access to certain DAS deployment sites. The term of the right of use is an initial ten years with two optional renewals of five years each.  Prior to the completion, the Company recorded the cost of the DAS system within fixed assets as construction in process. In March 2016, the Company completed the DAS system and the costs are recorded to computers and office equipment and are depreciated over the asset’s useful life of 10 years.

 

 

Note 5. Goodwill and Intangibles

 

The Company assigns goodwill to a reporting unit and tests the goodwill annually on October 1 unless a triggering event had occurred.  A reporting unit is defined as an operating segment or one level below an operating segment.  The reporting units are not the equivalent to the reportable segments as we have five reporting units and three reportable segments.  The Company’s Infrastructure Services and Field Services segments are each considered a reporting unit.  The Company’s Professional Services segment includes two reporting units which are its Core Network Deployment (“CND”) reporting unit and its Central Network Engineering (“CNE”) reporting unit. 

 

The Company assesses goodwill and other intangible assets with indefinite lives for impairment annually and when an event occurs or circumstances change that would suggest a triggering event. If a triggering event is identified, a step one assessment is performed to identify any possible goodwill impairment in the period in which the event is identified. In connection with our annual assessment of goodwill performed during the fourth quarter of calendar year 2015, we updated our key assumptions, including our forecasts of revenue and income for each reporting unit. As previously noted, there can be no assurance that the revenue estimates and assumptions regarding forecasted cash flows, the impact of further declines in AT&T Inc. (“AT&T”) spending, or other inputs used in forecasting the present value of forecasted cash flows will prove to be accurate projections of future performance.

 

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Determining the fair value of a reporting unit or an indefinite-lived intangible asset involves judgment and the use of significant estimates and assumptions, particularly related to future operating results and cash flows. These estimates and assumptions include, but are not limited to, revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and identification of appropriate market comparable data. Preparation of forecasts and the selection of the discount rate involve significant judgments that we base primarily on existing firm orders, expected future orders, and general market conditions. Significant changes in these forecasts, the discount rate selected, or the weighting of the income and market approach could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge.

 

During the three months ended June 30, 2016, the Company concluded that an interim impairment test of the goodwill of its CND reporting unit within the Professional Services segment was necessary. This conclusion was based on certain indicators of impairment, including the reduction in a bid and project backlog for enterprise customers as a result of carriers reducing funding for DAS projects.  Prior to conducting the goodwill impairment test, the Company first evaluated the other long-lived assets of the CND reporting unit for recoverability. Recoverability was tested using undiscounted future cash flow projections based on management’s long-range estimates of market conditions.  The undiscounted cash flows of the long lived assets of the CND reporting unit including its customer relationships, non-competes and property and equipment exceeded the carrying value.

 

The Company then looked for indications of impairment of the goodwill of the CND reporting unit by comparing the fair value, determined using discounted cash flows using a weighted income statement and market approach, to its carrying value which indicated that a step 2 calculation to quantify the potential impairment was required. After a subsequent review of the fair value of the net assets of the CND reporting unit, it was determined that the implied fair value of goodwill was $0 and, accordingly, the entire $8.6 million goodwill balance was written-off during the three months ended June 30, 2016. The key assumptions used in the fair value calculations were projected cash flows and the discount rate.

 

The changes in goodwill, by business segment for the nine months ended September 30, 2016 are as follows (in thousands):

 

 

Intangible assets were as follows (in thousands):

 

 

Amortization of intangible assets was $1.5 million and $0.6 million for the three months ended September 30, 2015 and 2016, respectively and $4.4 million and $1.9 million for the nine months ended September 30, 2015 and 2016, respectively.  

 

 

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Note 6. Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

 

 

Note 7. Notes Payable and Line of Credit

Notes payable consist of the following (in thousands):

 

 

The table below presents the outstanding balance on the Company’s previous credit facility (in thousands):

 

 

On June 23, 2011 the Company issued $225.0 million of its 12.125% senior secured notes due July 1, 2018 (the “Notes”) at a discount of $3.9 million.  The Notes issued on June 23, 2011 carry a stated interest rate of 12.125%, with an effective rate of 12.50%. On June 13, 2013, the Company issued an additional $100.0 million of Notes through a subsidiary (the “Tack-On Notes”) as a “tack-on” under and pursuant to the indenture under which the Company issued the Notes. The Tack-On Notes were offered at 105% of their principal amount for an effective interest rate of 10.81%.  Interest is payable semi-annually each January 1 and July 1 on the Notes. The Notes are secured by: (i) a first-priority lien on substantially all of the Company’s existing and future domestic plant, property, assets and equipment including tangible and intangible assets, other than the assets that secure the Company’s revolving credit facility with Midcap Financial Trust (the “New Credit Facility”), on a first-priority basis, (ii) a first-priority lien on 100% of the capital stock of the Company’s existing and future material U.S. subsidiaries and non-voting stock of the Company’s existing and future material non-U.S. subsidiaries and 66% of all voting stock of the Company’s existing and future material non-U.S. subsidiaries and (iii) a second-priority lien on the Company’s accounts receivable, unbilled revenue on completed contracts and inventory that secured the New Credit Facility on a first-priority basis, subject, in each case, to certain exceptions and permitted liens.    

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The Notes: (i) are general senior secured obligations; (ii) are guaranteed by the Company’s existing and future wholly owned material domestic subsidiaries; (iii) rank pari passu in right of payment with all of the Company’s existing and future indebtedness that is not subordinated; (iv) are senior in right of payment to any of the Company’s existing and future subordinated indebtedness; (v) are structurally subordinated to any existing and future indebtedness and other liabilities of the Company’s non-guarantor subsidiaries; and (vi) are effectively junior to all obligations under the New Credit Facility to the extent of the value of the collateral securing the Credit Facility on a first priority basis.

 

The Company may currently redeem some or all of the Notes at a premium that will decrease over time plus accrued and unpaid interest.

Pursuant to the terms of the indenture governing the Notes, or the Indenture, and subject to certain limitations, the Company is permitted to use the net proceeds from sales of certain assets for limited purposes including, among other things, (i) acquiring all or substantially all of the assets of, or any capital stock of, a business reasonably related to the business the Company conducted when the Notes were originally issued; or (ii) making an investment in replacement assets or making a capital expenditure in or that is used or useful in a business reasonably related to the business the Company conducted when the Notes were originally issued. The Company is permitted to use the net proceeds from sales of other assets for limited purposes including, among other things, (i) making an investment in other secured assets or property or another business reasonably related to the business the Company conducted when the Notes were originally issued if, after giving effect to such investment, such business becomes a guarantor or is merged into or consolidated with the Company or any of its guarantors; (ii) making a capital expenditure with respect to certain assets; or (iii) repaying, repurchasing or redeeming principal and interest on parity lien indebtedness, including the Notes.  

Pending the final application of the net proceeds, the Company may temporarily reduce revolving credit borrowings or otherwise invest such net proceeds in any manner that is not prohibited by the Indenture.  If the Company does not use the net proceeds from asset sales as permitted by the Indenture within 360 days after their receipt, the Company will be required to make an offer to repurchase the Notes with any remaining net proceeds on a pro rata portion of the Notes at 100% of their principal amount, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase.  For any transactions entered into during such 360 day period that would constitute a permitted use of funds in the New Credit Facility Account or the Notes Account under the Indenture, the Company has up to 180 days after the end of the 360 day period to close the transaction.

 

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 and a Total Leverage Ratio not greater than 2.50 to 1.00.  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, 2016.  Had the Company been required to meet these ratio tests as of September 30, 2016, the Company would not have met the Fixed Charge Coverage Ratio or the Total Leverage Ratio.

 

Our ability to continue to pay the principal and interest on our long-term debt and to satisfy our other liabilities ultimately will be dependent upon establishing profitable operations and growing and diversifying our business.  If we are unable to improve our profitability and grow our business, it could affect our ability to make interest payments, which would trigger our debt financial covenants and cause us to not be in compliance.   The Company continues to focus on formulating and implementing an effective and efficient transaction that maximizes enterprise value and recapitalizes its senior secured notes before 2018.  Failure to restructure or refinance these obligations prior to or upon maturity could adversely impact our business and ability to comply with the covenants of our New Credit Facility and Indenture  and represents a significant uncertainty as to our ability to continue as a going concern.

 

On July 29, 2016, the Company, entered into a Revolving Loan Note (the “Revolving Loan Note”) and a Credit and Security Agreement with Midcap Financial Trust, as administrative agent and lender, and the additional lenders parties thereto from time to time (the “New Credit Agreement”), which provides for a maximum commitment of $25 million for the New Credit Facility.

 

The New Credit Facility is secured by a first lien on the Company’s accounts receivable, inventory, related contracts and other rights and other assets related to the foregoing and proceeds thereof. The New Credit Facility is subject to an intercreditor agreement dated as of June 23, 2011, by and among the Creditor, as the replacement ABL lender thereunder, and U.S. Bank, National Association, as the collateral trustee for benefit of the holders of the Notes.

 

Availability for borrowings under the New Credit Facility is subject to a borrowing base that is calculated as a function of the value of the Company’s eligible accounts receivable and inventory. Borrowings under the New Credit Facility bear interest at a floating rate equal to the sum of the current LIBOR rate plus an applicable margin of 4.85%. The New Credit Facility terminates, and all outstanding principal and interest thereunder is due and payable, on April 1, 2018.

 

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In addition, the Company is required to pay a monthly collateral management fee and, if the average end-of-day principal balance of revolving loans during the immediately preceding month is less than $6,250,000, a monthly minimum balance fee.

 

The New Credit Agreement contains customary covenants that place restrictions on, among other things, the incurrence of debt, granting of liens and sale of assets. At all times at which amounts are outstanding under the New Credit Facility, the New Credit Agreement also requires that the Company maintain at least $5,000,000 in minimum liquidity, which includes amounts available for borrowing under the New Credit Facility and unencumbered cash and cash equivalents of the Company. Further, the New Credit Agreement contains customary events of default, subject to certain materiality thresholds and grace periods for certain of those events of default. Upon an event of default, the New Credit Agreement provides that, among other things, the commitments may be terminated and the loans then outstanding may be declared due and payable.

 

Proceeds from borrowings under the New Credit Facility were used by the Company, together with cash on hand, to repay existing indebtedness outstanding under the Company’s previous credit facility with PNC Bank, National Association (the “Previous Credit Facility”) in full. On July 29, 2016, in connection with the effectiveness of the New Credit Agreement described previously, the Company terminated the commitments under the Previous Credit Facility and repaid all outstanding loans thereunder.

Under the terms of the Previous Credit Facility, the Company was required to meet certain covenants if a Triggering Event occurred. No Triggering Event was in existence as of September 30, 2016 or prior to payoff of the termination of the Previous Credit Facility.

The New Credit Facility limits the Company’s ability to make certain distributions or dividends. As of September 30, 2016 the Company had $7.7 million outstanding on the New Credit Facility.

 

 

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, accrued liabilities and the line of credit are reflected in the unaudited 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 of the capital lease obligations approximates fair value because they bear interest at rates currently available to the Company for debt with similar terms and remaining maturities.

The carrying value and fair value of the Notes as of December 31, 2015 was $326.2 million and $81.3 million, respectively, and the carrying value and fair value of the Notes as of September 30, 2016 was $325.8 million and $140.0 million, respectively. Fair value for the Notes is a Level 2 measurement and has been based on the over-the-counter-market trading prices as of the respective balance sheet dates.

 

 

Note 9. 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 vehicles, facilities and equipment under non-cancellable operating lease agreements which expire at various dates through the year 2020.  Rent expense for operating leases was approximately $1.3 million and $1.0 million for the three months ended September 30, 2015 and 2016, respectively, and $3.6 million and $3.3 million for the nine months ended September 30, 2015 and 2016.

 

 

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Note 10. Share-Based Compensation and Warrants

Share-Based Compensation

The following table summarizes stock option activity under the Goodman Networks Incorporated 2008 Long-Term Incentive Plan (the “2008 Plan”) and the Goodman Networks, Incorporated 2000 Equity Incentive Plan (the “2000 Plan”) for the nine months ended September 30, 2016:

 

 

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

 

 

The Company did not grant any stock options during nine months ended September 30, 2016.  As of September 30, 2016, there was approximately $0.3 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 0.40 years.

There were no stock options exercised during the nine months ended September 30, 2016. The intrinsic value for stock options vested and expected to vest is $5.4 million.

The compensation expense recognized for outstanding share-based awards was $1.1 million and $0.1 million for the three months ended September 30, 2015 and 2016, respectively, and $4.5 million and $0.6 million for the nine months ended September 30, 2015 and 2016.

 

 

Note 11. Related Party Transactions

In 2011, the Company issued a letter of credit to a company owned by a relative of the Company’s former Executive Chairman as a guarantee of the related party’s line of credit. The guarantee liability for the full amount of $4.0 million was paid in full in 2015 by the Company. The liability related to the guarantee was released and the Company no longer maintains any exposure related to the letter of credit. Pursuant to the agreement reached in 2014, the Company agreed to forgive the related party’s obligation to reimburse the Company for amounts advanced under the guarantee if the related party were to make a cash payment to the Company in the amount of $1.5 million plus interest at a rate of 2.0% per annum from September, 25, 2014 and satisfy certain other contingencies. The related party made a cash payment to the Company in the amount of $1.5 million in 2015; however, all obligations have not been satisfied and the related party’s pledged stock of 15,625 shares of Goodman Networks common stock remain as additional paid-in capital in the consolidated balance sheet, and at September 30, 2016, the related party owed the Company the balance of the guaranteed amount plus accrued interest.

The Company had approximately $43,000 and $41,000 of non-interest bearing advances due from a founding shareholder of the Company as of December 31, 2015 and September 30, 2016, respectively, recorded in deposits and other current assets on the unaudited consolidated balance sheets.

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Throughout the year, the Company utilizes a ranch owned by certain shareholders for meetings and conferences. The use of the ranch was expensed within the unaudited consolidated statements of operations and comprehensive income (loss) at $13,000 per month for the three and nine months ended September 30, 2015 and 2016.

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 Indenture and the New 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.

 

 

Note 12. 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’s plan provides for matching employee contributions of 100% on the first 3% of each participant’s compensation and 50% on the next 2%. For the three months ended September 30, 2015 and 2016 employer contributions totaled $1.1 million and $1.2 million, respectively, and contributions totaled $3.5 million and $3.1 million for the nine months ended September 30, 2015 and 2016, respectively.

 

 

Note 13. 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, and except as described herein, are not expected to have a material adverse effect on the Company’s business, prospects, financial condition or results of operations.  

During the three months ended September 30, 2016, in connection with the sale of the Company’s wireless network deployment and wireline business the Company disclosed the existence of an approximately $31.7 million disputed sales tax liability with the State of Texas (the “Sales Tax Liability”). To the extent the State of Texas seeks to enforce the Sales Tax Liability, the Company believes that all or a portion of the Sales Tax Liability is reimbursable by AT&T. The State of Texas may seek to enforce the Sales Tax Liability against the Company; however, the Company disputes any and all liability with respect to the Sales Tax Liability. The Company does not believe the disputed liability is probable at this time and as such, no accrual has been recorded for the assessed value of the liability.

Concentration of Credit Risk

A significant portion of the Company’s revenue is derived from AT&T and subsidiaries of AT&T, including DIRECTV.

The following table reflects the percentage of total revenue from such customer for the three and nine months ended September 30, 2015 and 2016:   

 

 

Amounts due from these significant customers at December 31, 2015 and September 30, 2016 were as follows (in thousands):

 

 

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A loss of AT&T and its subsidiaries as a customer 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. For the nine months ended September 30, 2016, the Company was not aware of any material asserted or unasserted claims in connection with these indemnity obligations.

State Sales Tax

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

 

 

 

Note 14. Income Taxes

The Company’s effective tax rate was 39.5% and 0.6% for the nine months ended September 30, 2016 and 2015, 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.  

 

 

Note 15. Segments

The Company primarily operates through three business segments, Field Services (FS), Professional Service (PS) and Infrastructure Services (IS). The Field Services segment generates revenue from the installation and service of video programming for both residential and commercial customers under a contract with a subsidiary of AT&T. The Professional Services segment provides customers with design, engineering, construction, deployment, and maintenance of small cell and distributed antenna systems (“DAS”). The Infrastructure Services segment provides maintenance and decommissioning services to wireless networks. During the second quarter we have classified the results of certain assets and liabilities within the IS segment as discontinued operations in our unaudited consolidated statements of operations and comprehensive income (loss) for all periods presented. Additionally, the related assets and liabilities associated the discontinued operations are classified as held for sale in our unaudited consolidated balance sheet. See Note 3 – Discontinued Operations for additional formation.  

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, 2015 and 2016, respectively, is presented below (in thousands):  

 

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Total assets by segment are presented below as of December 31, 2015 and September 30, 2016 (in thousands):

 

 

 

Note 16. 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 (loss).  The Company incurred a significant portion of the estimated restructuring expenses through the end of 2014.  

In connection with the sale of the Company wireless network deployment and wireline business, the Company completed its 2014 Restructuring Plan and approved, committed to and initiated plans to reduce its selling, general and administrative costs in line with the Company’s continuing operations (the 2016 Restructuring Plan).

The following table summarizes the activities associated with restructuring liabilities from December 31, 2015 to September 30, 2016 (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, and “Payments” consists of cash payments for severance, employee-related benefits, lease and other contract termination costs, and other restructuring costs.

2016 Restructuring Plan

The table below presents the 2016 restructuring costs.

 

 

The following table summarizes the inception to date restructuring costs recognized and the total restructuring costs recognized in the 2016 Restructuring Plan (in thousands):

 

 

2014 Restructure Plan

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The table below presents the 2014 restructuring costs.

 

 

The Company completed its 2014 Restructuring Plan during the second quarter of 2016. The following table summarizes the inception to date restructuring costs recognized and the total restructuring costs 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, or 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, which was merged into Goodman Networks in December 2015.

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, 2015 and 2016, and with our consolidated financial statements and notes thereto for the year ended December 31, 2015 included in our Annual Report on Form 10-K, the 2015 Annual Report, and (ii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2015 Annual Report.

Forward-Looking Statements

Certain statements contained in this Report that are not statements of historical fact are forward-looking statements. These forward-looking statements are included throughout this Report, including this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the section titled “Quantitative and Qualitative Disclosures About Market Risk” and relate to matters such as our industry, capital expenditures by wireless carriers and enterprises on telecommunications projects, business strategy, goals and expectations concerning our market position, future operations, revenues, margins, cost savings initiatives, 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 2015 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 provider of installation and maintenance services for satellite communications. We also provide network infrastructure and professional services to the telecommunications industry.  We serve the satellite television industry by providing onsite installation, upgrade and maintenance of satellite television systems to both the residential and commercial market customers.  Our professional services include the design, engineering, construction, deployment, and maintenance of small cell and distributed antenna systems (“DAS”). Our wireless telecommunications services include the maintenance, and decommissioning of wireless networks for traditional cell towers. These highly specialized and technical services are critical to the capability of our customers to deliver video, data and voice services to their end users. 

On July 6, 2016, we completed the sale of the Assets to Dycom pursuant to the terms and conditions of the Agreement, as amended.  As consideration for the Assets, Dycom paid the Company approximately $107.5 million, which was subject to a customary working capital adjustment currently estimated to require the Company to pay Dycom $4.7 million, and assumed certain liabilities of the Company. $22.5 million of the proceeds from the sale of the Assets has been deposited into an indemnity escrow account and will be held until certain conditions are fulfilled. We deposited the net proceeds from the sale of the Assets received as of July 6, 2016 in two accounts.  $35.0 million of the net proceeds were deposited in an account subject to the control of PNC Bank, National Association (now Midcap Financial Trust) (the “New Credit Facility Account”), and $45.3 million of the net proceeds were deposited into an account subject to the control of the collateral trustee (the “Notes Account”).  In connection with the sale of the Assets to Dycom, the Company is precluded from providing certain wireless services in the US and Canada to AT&T and certain small cell services to AT&T in certain geographic areas or wireline services to customers in the telecommunications industry with certain exceptions.

We operate from a broad footprint across the United States.  As of September 30, 2016, we employed over 3,600 people and operated in over 40 regional offices and warehouses.  We have established long-standing relationships with Tier-1 wireless carriers, original telecommunications equipment manufacturers, or OEMs, and a satellite television service provider, including AT&T and its subsidiaries, AT&T Mobility, LLC, or AT&T Mobility, and Alcatel-Lucent USA Inc., or Alcatel-Lucent, and Sprint/United Management Company, or Sprint.  Over the last few years, we have sought to diversify our customer base within the telecommunications industry by leveraging our long-term success and reputation for quality to win new customers such as Century Link, Inc. or Century Link and Verizon Wireless, 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. During 2015, 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, corporations and government agencies.

2014 Restructuring Plan

During 2014, our management approved, committed to and initiated plans to restructure and further improve efficiencies in our operations, or the 2014 Restructuring Plan. As part of the 2014 Restructuring Plan, we have taken steps to (i) further integrate the operations acquired in our acquisition by merger of Multiband, in 2013, and the Custom Solutions Group of Cellular Specialties, Inc., or CSG, a provider of indoor and outdoor DAS and carrier Wi-Fi solutions, services, consultations and maintenance that we acquired in 2013, 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 (loss). We incurred a significant portion of the estimated restructuring expenses related to the 2014 Restructuring Plan during 2014. We incurred over $23.0 million of expenses related to the 2014 Restructuring Plan.  In connection with the sale of certain assets used in our wireless network deployment and wireline business, we completed our 2014 Restructuring Plan.

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2016 Restructuring Plan

In connection with the sale of certain assets used in our former wireless network deployment and wireline business, we approved, committed to and initiated plans to reduce its selling, general and administrative costs in line with our continuing operations, or the 2016 Restructuring Plan. We have incurred over $2.5 million of expenses related to the 2016 Restructuring plan as of September 30, 2016 and anticipate incurring the remainder of the planned $5.0 million of expenses related to the 2016 Restructuring Plan by the end of the first half of the 2017.

Operating Segments

We primarily operate through three business segments: Field Services, Professional Services and Infrastructure Services. Through our Field Services segment, we install, upgrade and maintain satellite television systems for both residential and commercial customers. Through our Professional Services and Infrastructure Services segments, we help wireless carriers and OEMs design, engineer, deploy, integrate, maintain and decommission critical elements of wireless telecommunications networks. Following the sale of our wireless network deployment and wireline businesses during the third quarter of 2016, our business strategy and activity now primarily focus on the Field Services Segment, which generated a 17.7% gross margin for the year ended December 31, 2015.  

Field Services. Our Field Services segment provides installation and maintenance services to commercial customers and a provider of internet wireless service primarily to rural markets. We fulfilled over 1.5 million satellite television installations, upgrade or maintenance work orders during each of 2014 and 2015 for a subsidiary of AT&T, representing 28.0% of outsourced work orders for residents of single-family homes for both years.  We were the second largest AT&T in-home installation provider in the United States for each of the years ended December 31, 2014 and 2015. In addition to our residential MSA with a subsidiary of AT&T, our MSA to install equipment for multi dwelling unit, or MDU, facilities was extended in 2015 through 2018. The MSA contains an automatic one-year renewal and may be terminated by either party upon a 180 days’ notice. In addition, on January 25, 2016, we signed a one-year agreement with AT&T Services, Inc., or AT&T Services, to provide Digital Life installation and repair services in connection with our DIRECTV satellite television installation services. The contract renews annually but either party has the right to terminate the agreement upon 60 days’ notice.

Professional Services. Our Professional Services segment provides customers with highly technical services primarily related to the design, 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.

Infrastructure Services. Our Infrastructure Services segment provides program management services of field projects necessary to maintain or decommission wireless and wireline networks. On July 6, 2016, the Company completed the sale of Assets within the Infrastructure Services segment to Dycom.

In addition, we provide services related to the engineering and installation of indoor/outdoor small cell and DAS networks. 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. Demand for DAS services declined in 2015 as DAS infrastructure has largely been built in existing structures, and we completed a majority of our large stadium DAS build-outs in 2015. While a majority of large stadium DAS build-outs are completed, we will continue to refine our small cell and DAS platform services, and intend to focus our efforts to broaden our services with enterprise customers, where we believe there is more opportunity for growth.  

Customers

We served over 150 customers in 2015 and the vast majority of our revenues are from subsidiaries of AT&T. Our customer list includes several of the largest carriers and OEMs in the telecommunications industry. Revenues earned from customers other than AT&T were 22.4% and 15.7% of total revenues for the nine months ended September 30, 2015 and 2016, respectively.   If our reputation or relationships with this key customer becomes impaired, we could lose future business with this customer, which could materially adversely affect our ability to generate revenue.

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AT&T

We provide satellite television installation services for a subsidiary of AT&T. Our relationship with AT&T extends for over 18 years through our relationship with DIRECTV and is essential to the success of our Field Services segment’s operations. We have been named the Home Service Partner (“HSP”) partner of the year for both the 2014 and 2015 fiscal years. We are one of three in-home installation providers that AT&T utilizes in the United States, and during each of the years ended December 31, 2014 and 2015, we performed 28.0% of all AT&T’s outsourced installation, upgrade and maintenance activities. Our contract with AT&T has a term expiring on October 15, 2018, and contains an automatic one-year renewal. The contract may also be terminated by 180 days’ notice by either party. On January 25, 2016, we signed a one-year agreement with AT&T Services to provide Digital Life installation and repair services in connection with our satellite television installation services. The contract renews annually but is terminable upon 60 days’ notice by either party.

Sprint

In May 2012, we entered into a MSA with Sprint to provide decommissioning services for Sprint’s iDEN (push-to-talk) network, or the Sprint Agreement.  Pursuant to the Sprint Agreement we are removing equipment from Sprint’s network that is no longer in use and restoring sites to their original condition. The Sprint Agreement has an initial term of five years, and automatically renews on a monthly basis thereafter unless notice of non-renewal is provided by either party. Through December 31, 2014, we completed iDEN decommissioning work of over 11,400 cell sites under the Sprint Agreement. During 2015, we started providing radio frequency engineering services to Sprint and on October 2, 2015, we received a project award to decommission Sprint’s WIMAX network for certain regions. We have established a strong performance record with Sprint, and we continue to grow and evolve our relationship with Sprint.

Alcatel-Lucent

On July 15, 2014, we entered into a three-year MSA with Alcatel-Lucent, effective as of June 30, 2014, or the Alcatel-Lucent Contract.  Pursuant to the Alcatel-Lucent Contract, we provide, upon request, certain services, including deployment engineering, integration engineering, radio frequency engineering and other support services to Alcatel-Lucent for their GSM networks. 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 as GSM networks go end-of-life. Following the completion of the merger between Nokia and Alcatel-Lucent on January 4, 2016, we are also seeking to obtain work from Nokia on newer technologies. The 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.

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/Small Cell 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 unaudited consolidated 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.

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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. The table below presents our 18-month estimated backlog by reportable segment as of the period indicated below. The estimated backlog presented below excludes revenue related to discontinued operations:

 

 

We expect to recognize approximately 20% of our estimated backlog over the next three months ending December 31, 2016. The vast majority of estimated backlog as of September 30, 2016 originated from multi-year customer relationships, primarily with AT&T. Because we use the completed contract method of accounting for revenues and expenses from our DAS contracts, our estimated backlog includes revenue related to projects that we have begun but not completed performance.

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 not at all. 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, and other service agreements, which are generally multi-year agreements. The remainder of our work is generated pursuant to contracts for specific projects or jobs that require the construction or installation of an entire infrastructure system or specified units within an infrastructure system. Revenue from non-recurring, project specific work may experience greater variability than master service agreement work due to the need to replace the revenue as projects are completed. 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 Federal Communications Commission and state agencies.

Our Field Services segment revenues are primarily from the installation and maintenance services of subsidiaries of AT&T’s video programming systems for residents of single family homes through work order fulfillment under a MSA.  In January 2016, our Field Services segment began providing Digital Life installation and repair services in connection with our satellite television installation services under a one year MSA. The contract renews annually but either party has the right to terminate the agreement upon 60 days’ notice. The Field Services segment also installs and maintains satellite internet services through a contract with ViaSat, Inc.

Our Professional Services segment revenues are derived from wireless and wireline services through engineers who specialize in network architecture, transformation, reliability and performance. Our Professional Services segment revenues are primarily from the design and installation of DAS.

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Our Infrastructure Services segment revenues are derived from project management of decommissioning services. The vast majority of the revenues we earn in our Infrastructure Services segment are from our Sprint WIMAX decommissioning project which we were awarded during October 2015.

The following table presents our gross deferred project revenue and deferred project cost balances as of December 31, 2015 and September 30, 2016, which have been presented net on a project basis in the accompanying unaudited consolidated 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, 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 Field Services segment, cost of revenues consists primarily of salaries for technicians, fleet expenses and installation material costs used in the field work orders.

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.

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, accounting and other corporate support services.

Discontinued Operations

During the second quarter of 2016, we entered into the Agreement with Dycom, pursuant to which we sold certain assets related to our former wireless network deployment and wireline business within the Infrastructure Services segment to Dycom. We no longer provide site acquisition, construction, technology upgrades and Fiber to the Cell services.  We have classified the results of the wireless network deployment and the wireline businesses as discontinued operations in our unaudited consolidated statements of operations and comprehensive income (loss) for all periods presented.

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Results of Operations

Three Months Ended September 30, 2015 Compared to the Three Months Ended September 30, 2016

The following table sets forth information concerning our operating results by segment for the three months ended September 30, 2015 and 2016 (in thousands):

 

 

Revenues

We recognized total revenues of $104.3 million for the three months ended September 30, 2016, compared to $93.9 million for the three months ended September 30, 2015, representing an increase of $10.4 million, or 11.1%. Our aggregate revenue from subsidiaries of AT&T, a majority of which was earned through our Field Services segment, was $83.8 million for the three months ended September 30, 2016, compared to $75.0 million in the same period of 2015. The increase in our total revenues was due primarily to an increase of $10.9 million in revenues in our Field Services and our Infrastructure Services segment resulting from an increase in the volume of work partially offset by declines in revenue of $0.9 million in our Professional Services segment.

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Revenues for the Field Services segment increased by $10.9 million, or 15.1%, to $83.2 million for the three months ended September 30, 2016 as compared to $72.3 million for the three months ended September 30, 2015. The increase in the Field Services segment revenue was due primarily to a $9.3 million increase in revenue from increased volume in work orders related to the satellite installation and repair services.  We expect the increased volume in our Field Services segment to continue for the remainder of the year when compared to 2015.

Revenues for the Professional Services segment decreased $0.9 million, or 4.6% to $17.9 million for the three months ended September 30, 2016, as compared to $18.8 million for the three months ended September 30, 2015.  This decrease was primarily due to a decline in the volume of engineering services provided to Alcatel-Lucent and a reduction of DAS services provided to Duke University as we completed installations in multiple buildings. The decline in revenue was partially offset by an increase in volume of services provided to Verizon Wireless. We expect our aggregate revenues from Alcatel-Lucent to continue to decline in future periods.

Revenues for the Infrastructure Services segment increased by $0.4 million, or 12.9%, to $3.3 million for the three months ended September 30, 2016 compared to $2.9 million for the three months ended September 30, 2015. The increase was primarily due to an increase in services provided under a new project with a major carrier.  We expect revenue for our infrastructure services segment to increase through the end of the year as we continue to complete additional work orders under this new project.

Cost of Revenues

Our cost of revenues for the three months ended September 30, 2016 of $91.4 million increased by $14.3 million, or 18.6%, as compared to $77.0 million during the three months ended September 30, 2015, and occurred during a period when revenues increased 11.1% from the comparative period. Gross margins for the three months ended September 30, 2016 of 12.4% decreased from 18.0% from the same period in 2015, primarily due to increased labor costs within our Field Services segment as we ramp up our technician force to accommodate the increased demand.

Cost of revenues for the Field Services segment increased $12.7 million, or 21.3%, to $72.1 million for three months ended September 30, 2016, as compared to $59.5 million for the same period in 2015 due primarily to costs associated with the increase in the volume of services for DIRECTV in the second and third quarters of 2016. Gross margin for the three months ended September 30, 2016 was 13.3%, a decrease from 17.8% from the same period in 2015, primarily due to on-boarding costs for technicians to support the revenue growth.

Cost of revenues for the Professional Services segment increased $1.4 million, or 9.8%, to $15.8 million for the three months ended September 30, 2016 from $14.4 million during the same period in 2015 compared to a 4.6% decrease in revenue. Gross margins for the three months ended September 30, 2016 decreased to 11.7%, from 23.3% during the same period in 2015 due primarily to a delay in certain projects offset by a shift in our project mix toward those with lower margins. During the same period in prior year the Professional Services segment yielded a 23.3% margin as result of the completion of higher margin projects subsequent to the CSG acquisition as we further integrated the business.  We anticipate the margins for the Professional Services segment to increase through the remainder of year.  

Cost of revenues for the Infrastructure Services segment increased $0.3 million, or 8.0%, to $3.4 million for the three months ended September 30, 2016, from $3.2 million during the same period of 2015.  Gross margin for the three months ended September 30, 2016 of negative 5.8% increased from negative 10.6% during the same period in 2015. Margins for the three months ended September 30, 2016 increased as result of our cost cutting initiatives; however these initiatives were offset by the increased volume of work under the new Sprint program in the third quarter of 2016 as we incurred more costs than anticipated for the ramp up of the program. We anticipate the margin increases through the fourth quarter of 2016 as we continue to received work orders under the new program.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended September 30, 2016 was $15.7 million as compared to $18.1 million for the same period of 2015, representing an overall decrease of $2.3 million, or 12.9%. The decrease during the period was primarily attributable to (i) a decrease of $1.4 million in employee related costs attributable to the reduction in headcount in connection with the 2014 Restructuring Plan and the 2016 Restructuring Plan and (ii) a decrease of $1.2 million related to the stock compensation expense. We expect our selling, general and administrative expenses to further decline through the remainder of the year as we align the business with demand following the sale of the Assets and implement the 2016 Restructuring Plan.  

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Interest Expense, net

Interest expense for the three months ended September 30, 2016 of $11.1 million remained flat compared to the three months ended September 30, 2015 of $11.1 million.

Income Tax Expense

Our effective income tax rate was 128.5% and 0.4% for the three months ended September 30, 2016 and 2015, respectively. The increase in the tax rate was driven by the asset sale of certain assets during the three months ended September 30, 2016.

Restructuring Expense

The 2014 Restructuring Plan was approved, committed to and initiated during the second quarter of 2014 to further improve efficiencies in our operations.  In connection with the sale of the Assets related to our former wireless network deployment and wireline business, we completed our 2014 Restructuring Plan and approved, committed to and initiated plans to reduce our selling, general and administrative costs in line with our continuing operations, or the 2016 Restructuring Plan. Restructuring expense for the three months ended September 30, 2016 was $0.2 million, compared to $0.3 million for the same period in 2015, which was primarily related to the reduction in headcount and the closure of facilities across our business segments to realign our cost structure with our projected demand.

 

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Results of Operations

Nine Months Ended September 30, 2015 Compared to the Nine Months Ended September 30, 2016

The following table sets forth information concerning our operating results by segment for the nine months ended September 30, 2015 and 2016 (in thousands):

 

Revenues

We recognized total revenues of $282.2 million for the nine months ended September 30, 2016, compared to $254.9 million for the nine months ended September 30, 2015, representing an increase of $27.3 million, or 10.7%. Our aggregate revenue from subsidiaries of AT&T, a majority of which was earned through our Field Services segment, was $229.7 million for the nine months ended September 30, 2016, compared to $190.2 million in the same period of 2015. The increase in our total revenues was due primarily to the increase of $42.9 million in revenues in our Field Services segment resulting from an increase in the volume of work orders partially offset by the declines in our Professional Services segment of $6.9 million and a decline of $8.8 million in our Infrastructure Services segment.  

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Revenues for the Field Services segment increased by $42.9 million, or 22.4%, to $234.4 million for the nine months ended September 30, 2016 as compared to $191.5 million for the nine months ended September 30, 2015. The increase in the Field Services segment revenue was primarily due to a $39.5 million increase in revenue resulting from the increased volume in work orders related to the satellite installation and repair services.  We expect the increased volume in our Field Services segment to continue for the remainder of the year when compared to 2015.  

Revenues for the Professional Services segment decreased by $6.9 million or 13.9% to $42.3 million for the nine months ended September 30, 2016 as compared to $49.2 million for the nine months ended September 30, 2015.  This decrease was primarily due to a decline in the volume of engineering services provided to Alcatel-Lucent and a reduction of DAS services provided under our Duke contract as we completed installations in multiple buildings.  The decline in revenue was offset by an increase in volume of services provided under the Verizon Wireless contract. We expect our aggregate revenues from Alcatel-Lucent to continue to decline in future periods.

Revenues for the Infrastructure Services segment decreased by $8.8 million or 61.5% to $5.5 million for the nine months ended September 30, 2016 compared to $14.3 million for the nine months ended September 30, 2015. The decrease was primarily due to the decline in services provided to Sprint as our iDEN decommissioning work winds down combined with the decline in services provided under the Verizon Wireless project.  The decline in revenue was offset by an increase in revenue resulting from the increase in the volume of work under the new Sprint program during the third quarter of 2016.We expect revenue for our infrastructure services segment to increase as we continue to receive work orders under the new project with Sprint in the fourth quarter of 2016.

Cost of Revenues

Our cost of revenues for the nine months ended September 30, 2016 of $241.2 million increased $26.8 million or 12.5% as compared to $214.4 million during the nine months ended September 30, 2015, and occurred during a period when revenues increased $27.3 million or 10.7% from the comparative period. Gross margins for the nine months ended September 30, 2016 of 14.5% decreased from 15.9% from the same period in 2015, primarily due to increased onboarding costs under the Field Services segment. The increase was offset by the cost cutting initiatives implemented through the 2014 and 2016 Restructuring Plans.

Cost of revenues for the Field Services segment increased $42.0 million, or 26.8%, to $199.0 million for nine months ended September 30, 2016, compared to $156.9 million for the same period in 2015. Gross margin for the nine months ended September 30, 2016 was 15.1% compared to 18.0% for the same period in 2015, primarily due to on-boarding costs for technicians hired to support the revenue growth within the segment.  We expect continued growth within the Field Services segment but anticipate lower costs with the implementation of our operational improvement initiatives with a focus on training and quality.

Cost of revenues for the Professional Services segment decreased $6.8 million, or 15.6%, to $36.9 million for the nine months ended September 30, 2016 from $43.7 million during the same period in 2015. Gross margins for the nine months ended September 30, 2016 increased to 12.8%, from 11.0% during the same period in 2015 due primarily to a shift in project mix towards those with higher margins and cost cutting initiatives implemented through the 2014 Restructuring Plan and the 2016 Restructuring Plan.

Cost of revenues for the Infrastructure Services segment decreased $8.4 million, or 61.0%, to $5.4 million for the nine months ended September 30, 2016 from $13.7 million during the same period of 2015. Gross margin for the nine months ended September 30, 2016 of 2.6% decreased from 3.7% during the same period in 2015. Margins for the nine months ended September 30, 2016 decreased as we started to increase the volume of work under the new Sprint program in the third quarter of 2016 and incurred more costs than anticipated for the ramp up of the program. We anticipate the margins to increase during the fourth quarter of 2016 as we continue received work orders under the new program.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the nine months ended September 30, 2016 was $43.2 million compared to $59.1 million for the same period of 2015, representing an overall decrease of $15.9 million, or 26.9%. The decrease during the period was primarily attributable to (i) a decrease of $11.2 million in employee related costs attributable to the reduction in headcount in connection with the 2014 Restructuring Plan and the 2016 Restructuring Plan, (ii) a decrease of $3.4 million related to the stock compensation expense and (iii) a decrease of $0.9 million in computers and technology expenses.  

Interest Expense, net

Interest expense for the nine months ended September 30, 2016 of $33.1 million remained relatively flat compared to the nine months ended September 30, 2015 of $32.9 million.

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Income Tax Expense

Income tax benefit of $18.1 million for the nine months ended September 30, 2016, compared to $0.4 million for the nine months September 30, 2015 was driven by the asset sale during the three months ended September 2016.   Our effective income tax rate was 39.5% and 0.6% for the nine months ended September 30, 2016 and 2015, respectively.

Restructuring Expense

The 2014 Restructuring Plan was approved, committed to and initiated during the second quarter of 2014 to further improve efficiencies in our operations.  In connection with the sale of the Company’s wireless network deployment and wireline business, the Company completed its 2014 Restructuring Plan and approved, committed to and initiated plans to reduce its selling, general and administrative costs in line with the Company’s continuing operations, or the 2016 Restructuring Plan. Restructuring expense for the nine months ended September 30, 2016 was $1.6 million, compared to $7.9 million for the same period in 2015, which was primarily related to the reduction in headcount and the closure of facilities across our business segments to realign our cost structure with our projected demand. The reduction of selling, general and administrative expenses and certain increases in our gross profit were the result of the cost cutting measures related to the 2014 Restructuring Plan. We also began to realize a reduction in selling general and administrative expenses and certain increases in our gross profit in the third quarter of 2016 as a result of the 2016 Restructuring Plans.

Impairment Expense

During the nine months ended September 30, 2016, we adjusted our forecast for the DAS business within the Professional Services segment as it saw a delay in growth opportunities related to the DAS and small cell markets as carriers and enterprise customers delayed their investments in these network elements. We expect to perform at a market level in 2017, but the delay in growth of the DAS and small cell business continues to push revenue to future quarters and reduce margins. As such, we therefore recognized a non-cash impairment charge of $8.7 million on our goodwill associated with our Core Network Deployment (“CND”) reporting unit within our Professional Services segment as a result of our assessment of a triggering event which occurred as the restructuring plan was executed during the nine months ended September 30, 2016.  We expect our DAS business to be a critical platform in our future business, however, as carriers and enterprise customers look to DAS, small cell and WiFi to provide alternative solutions to accommodate excess demand on their networks.  The goodwill associated with the CND reporting unit was recorded as part of purchase accounting in connection with the Custom Solutions Group of Cellular Specialties, Inc., acquisition in 2013 which included an earn-out provision for which a contingent liability was initially established that expired unpaid in 2016.

EBITDA and Adjusted EBITDA – Reconciliation of Non-GAAP Financial Measures

EBITDA represents net income from continuing operations before income tax expense, interest income and expense, depreciation and amortization. EBITDA represents net income from continuing operations before income tax expense, interest income and expense, depreciation and amortization.

We have recently revised our Adjusted EBITDA to exclude transaction bonuses and executive severance expenses. The expenses represented the transaction bonuses paid as we restructured the business and our previous credit facility Because our prior reporting of Adjusted EBITDA did not adjust for these items, the Adjusted EBITDA we previously reported may not be comparable to that reported in this Quarterly Report on Form 10-Q

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 also present Adjusted EBITDA, which we define as EBITDA plus non-cash charges including (i) share-based compensation and (ii) impairment charges recognized on our long-lived assets certain restructuring fees and expenses; and charges which management believes are not related to the primary operations of the business including (i) impairment charges recognized on our long-lived assets; ii) fees and expense related to the issuance of equity of equity and debt, (iii) transaction fees and expenses related to acquisitions and dispositions, (iv) transaction bonuses paid and (v) executive severance expenses.

In previous presentations of Adjusted EBITDA, we adjusted for amortization of debt issuance costs.  We have determined to stop making such adjustment to Adjusted EBITDA as we do not believe this gives an accurate reflection of the business. Adjusted EBITDA is not a measurement under GAAP and may not be used in the same way by other companies. Management believes that Adjusted EBITDA is an important part of our Company’s internal reporting and is a key measure used by management to evaluate

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profitability and operating performance of the Company. Management also uses Adjusted EBITDA to compare the Company’s performance to that of its competitors and to eliminate certain non-cash and non-operating items in order to consistently measure from period to period its ability to fund capital expenditures, fund growth, service debt and determine bonuses. Because EBITDA and Adjusted 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 Adjusted EBITDA in addition to, and not as an alternative for, net income, operating income or any other performance measure presented in accordance with U.S. GAAP. Similarly, investors should not use EBITDA or Adjusted EBITDA as an alternative to cash flow from operating activities or as a measure of our liquidity.

Adjusted EBITDA exclude non-cash impairment charges and non-cash stock compensation expense because of the non-cash nature of these items. Adjusted EBITDA excludes net other expense because these items are not related to the primary operations of the Company.

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

 

 

Liquidity and Capital Resources

Historically, our primary sources of liquidity have been borrowings under credit facilities and the proceeds of note offerings. In 2011, we completed a $225 million private offering of 12.125% senior secured notes due 2018, or the notes. We used the proceeds of this debt offering to pay the balances remaining on notes payable to shareholders, to purchase a portion of our outstanding warrants and common stock, including all outstanding Series C Redeemable Preferred Stock, and to pay off our previous credit facility with PNC Bank, National Association, or the Previous Credit Facility. In 2013, to fund the merger with Multiband, we issued an additional $100 million aggregate principal amount of notes through our wholly owned subsidiary, or the Tack-On Notes.

As of September 30, 2016, our primary sources of liquidity were cash flows from operations, funds available under our credit facility, or the Credit Facility, with PNC Bank, National Association, or PNC Bank, and our cash balances. We had $39.8 million and $85.4 million of cash on hand at December 31, 2015 and September 30, 2016, respectively. Currently $22.5 million of the $85.4 million in cash is restricted and included within an indemnity escrow account.  We used $19.7 million of cash to pay interest on the notes in July 2016.  Following the July 2016 interest payment on the notes, we expect our cash on hand to increase until our semi-annual interest payment on the notes due on January 1, 2017. Our New Credit Facility as of September 30, 2016, permitted us to borrow up to $25.0 million, subject to a borrowing base calculation and compliance with certain covenants described below. We had $26.4 million availability for additional borrowings under our previous credit facility as of December 31, 2015 and $12.7 million of availability for additional borrowings under our New Credit Facility as of September 30, 2016, respectively.  

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On July 6, 2016, we completed the sale of the Assets within the Infrastructure Services segment, to Dycom. As consideration for the Assets, Dycom paid the Company approximately $107.5 million, which was subject to a customary working capital adjustment currently estimated to require the Company to pay Dycom $4.7 million, and assumed certain liabilities of the Company. $22.5 million of the proceeds from the sale of Assets was deposited into an indemnity escrow account and will be held until certain conditions are fulfilled.   We deposited the net proceeds from the sale of the Assets received as of July 6, 2016 in two accounts. $35.0 million of the net proceeds were deposited the New Credit Facility Account and $45.3 million of the net proceeds were deposited into the Notes Account.

Pursuant to the terms of the Indenture, and subject to certain limitations, we are permitted to use the net proceeds in the New Credit Facility Account for limited purposes including, among other things, (i) acquiring all or substantially all of the assets of, or any capital stock of, a business reasonably related to the business we conducted when the notes were originally issued; or (ii) making an investment in replacement assets or making a capital expenditure in or that is used or useful in a business reasonably related to the business we conducted when the notes were originally issued. We are permitted to use the net proceeds in the Notes Account for limited purposes including, among other things, (i) making an investment in other secured assets or property or another business reasonably related to the business we conducted when the notes were originally issued if, after giving effect to such investment, such business becomes a guarantor or is merged into or consolidated with the Company or any of its guarantors; (ii) making a capital expenditure with respect to certain assets; or (iii) repaying, repurchasing or redeeming principal and interest on parity lien indebtedness, including the notes.  

Pending the final application of the net proceeds, we may temporarily reduce revolving credit borrowings or otherwise invest such net proceeds in any manner that is not prohibited by the Indenture. If we do not use the net proceeds in each of the New Credit Facility Account and the Notes Account as permitted by the Indenture within 360 days after their receipt, we will be required to make an offer to repurchase the notes with any remaining net proceeds on a pro rata portion of the notes at 100% of their principal amount, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase.  For any transactions entered into during such 360 day period that would constitute a permitted use of funds in the New Credit Facility Account or the Notes Account under the Indenture, we have up to 180 days after the end of the 360 day period to close the transaction.

On July 29, 2016, we entered into a Credit and Security Agreement, or the New Credit Agreement with Midcap Financial Trust, or Midcap, which provides for a revolving credit facility with a maximum commitment of $25 million, or the New Credit Facility.  The availability for borrowings under the New Credit Facility is subject to a borrowing base that is calculated as a function of the value of our eligible accounts receivable and inventory. Borrowings under the New Credit Facility bear interest at a floating rate equal to the sum of the current LIBOR rate plus an applicable margin of 4.85%. The New Credit Facility terminates, and all outstanding principal and interest thereunder is due and payable, on April 1, 2018.  The New Credit Agreement contains customary covenants that place restrictions on, among other things, the incurrence of debt, granting of liens and sales of assets. At all times at which amounts are outstanding under the New Credit Facility, the New Credit Agreement also requires that we maintain at least $5.0 million in minimum liquidity, which includes amounts available for borrowing under the New Credit Facility and our unencumbered cash and cash equivalents.  We used the proceeds from borrowings under the New Credit Facility, together with cash on hand, to prepay existing indebtedness outstanding under the Previous Credit Facility and terminated the Previous Credit Facility effective July 29, 2016.

We anticipate that our future primary liquidity needs will be for working capital, debt service, including interest payments of $19.7 million on the notes due each January 1 and July 1 until the notes mature in full on July 1, 2018, capital expenditures, the repurchase of notes from the sale proceeds of the Assets 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 we may consider opportunities to either repurchase outstanding debt or repurchase outstanding shares of our common stock in the future. Such repurchases, if any, may be made through the open market or privately negotiated transactions with third parties or pursuant to one or more tender or exchange offers or otherwise, upon such terms and at such prices as we may determine. Whether we effect any such repurchases will depend on a number of factors, including prevailing market conditions, our liquidity requirements, contractual restrictions and prospects for future access to capital.  We may also fund strategic acquisitions or investments with the proceeds from equity or debt issuances. We believe that, based on our cash balance, the availability we expect under the New Credit Facility, our continued efforts to reduce costs through restructuring efforts, the expected growth in revenues and our expected cash flow from operations, we will be able to meet all of our financial obligations for the next twelve months.

 

Our ability to continue to pay the principal and interest on our long-term debt and to satisfy our other liabilities ultimately will be dependent upon establishing profitable operations and growing and diversifying our business.  In order to grow and diversify our business, we may need to raise additional capital, which may include a public or private financing or an amendment or replacement of our New Credit Facility to increase our availability for additional borrowings. See Item 1A, Risk Factors—“If we do not obtain additional capital to fund our operations and obligations, our growth may be limited,” of our 2015 Annual Report. Our ability to grow our business may also be limited by the sale of the Assets used in our former wireless network deployment and

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wireless business to Dycom and the non-competition covenant we agreed to in connection with the sale of the Assets to Dycom. If we are unable to improve our profitability and grow our business, it could affect our ability to make interest payments, which would trigger our debt financial covenants, cause us to not be in compliance with the covenants under the Indenture and the New Credit Facility and may cause us to take actions describe under Item 1A, Risk Factors—“We may be unable to generate sufficient cash to service all of our indebtedness, including the notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may be unsuccessful,” of our 2015 Annual Report. Ultimately, we may need to restructure or refinance our existing obligations, including the notes, before they come due. Such restructuring or refinancing would require the consent and cooperation of our bondholders and Midcap, would also need to be acceptable to our largest customer and may not be accomplished on terms that are acceptable to us, if at all. We continue to focus on formulating and implementing an effective and efficient transaction that maximizes enterprise value and recapitalizes its senior secured notes before 2018.   If we are unable to restructure or refinance our existing obligations, our business, ability to comply with the covenants of our New Credit Facility and Indenture and future prospects may be adversely affected and represents a significant uncertainty as to our ability to continue as a going concern.

Should we be unable to comply with the terms and conditions of the New Credit Facility, we would be required to obtain modifications to the New 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

Our Field Services segment earns revenue through installations and maintenance services provided to a subsidiary of AT&T. A large portion of the inventory for the Field Services segment is purchased under a 30-day payment terms. The Field Services segment is paid by the subsidiary of AT&T, 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 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 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 the contract.

As of September 30, 2016, we had positive working capital of $56.8 million, defined as current assets less current liabilities, as compared to $7.8 million in working capital at December 31, 2015. We are restricted to $22.5 million of the $85.4 million in cash included in our calculation of working capital. See the discussion above concerning the restrictions on the use of the proceeds from the sale of the Assets to Dycom.  To provide sufficient liquidity to conduct our operations, we may need to seek additional funding or secure the consent of the holders of the notes to use the proceeds from the sale of the Assets for purposes other than repurchases of the notes.  During the nine months ended September 30, 2016, we used working capital to on-board technicians in our Field Services segment to support our revenue growth in the Digital Life and DIRECTV installations.  Due to seasonality in our project life cycles, invoicing is generally lower in the first half of a year and did not offset the working capital needs of the business.

Cash Flow Analysis

The following table presents selected cash flow data for the nine months ended September 30, 2015 and 2016. (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 it can also be influenced by working capital needs such as the timing of customer billing, collection of receivables and the settlement of payables and other obligations.

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Net cash used in operating activities increased by $18.3 million to net cash used in operations of $50.4 million for the nine months ended September 30, 2016, as compared to the net cash used in operating activities of $32.1 million during the same period in 2015. This change was primarily attributable to the increase in accounts receivable resulting from the timing of the collections at the period ended.  

Investing Activities

Net cash provided by investing activities increased $91.2 million to $88.7 million for the nine months ended September 30, 2016 as compared cash used in the same period in 2015. The increase was attributable to the receipt of net proceeds from the sale of certain Assets related to our former wireless network deployment and wireline business within the Infrastructure Services Segment to Dycom.

Financing Activities

Net cash provided by financing activities increased by $12.1 million to $7.3 million for the nine months ended September 30, 2016, as compared to cash used in financing activities of $4.8 million during the same period in 2015. The change was driven by net borrowings under the New Credit Facility during the nine months ended September 30, 2016.

Material Covenants Under Our Indenture

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

 

 

Definitions

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

““Consolidated EBITDA” means net income, as adjusted to eliminate the impact of income tax expense, interest expense, depreciation and amortization and certain other 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) restatement fees and expenses; (vi) a tax gross-up payment made to our Chief Executive Officer to cover the his tax obligation for an award of common stock; (vii) certain restructuring redundancies or severance losses; (vii) impairment charges recognized on our long-lived assets; and (ix) fees and expenses related to the issuance of equity permitted under the Indenture.

“Fixed Charge Coverage Ratio” means the ratio of (a) Consolidated EBITDA to (b) the Fixed Charges (as defined in the Indenture) for the most recently ended four fiscal quarters.

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

Pursuant to the terms of the Indenture, the calculations of the Fixed Charge Coverage Ratio and the Total Leverage Ratio exclude any Consolidated EBITDA from discontinued operations and any Fixed Charges attributable to discontinued operations.

Consolidated EBITDA 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 New Credit Facility.

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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:

At all times at which amounts are outstanding under the New Credit Facility, the New Credit Agreement requires that we maintain at least $5 million in minimum liquidity, which includes amounts available for borrowing under the New Credit Facility and unencumbered cash and cash equivalents.  

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 and a Total Leverage Ratio not greater than 2.50 to 1.00. The holders of the notes granted a waiver to these covenants in conjunction with the issuance of the Tack-On Notes, and we have not entered into any other transaction that requires it to meet these tests as of September 30, 2016.  Had we been required to meet these ratio tests as September 30, 2016, we would not have met the Fixed Charge Coverage Ratio or the Total Leverage Ratio.

Pursuant to the terms of the Indenture, Consolidated EBITDA, when used to calculate the Fixed Charge Coverage Ratio and the Total Leverage Ratio, excludes any Consolidated EBITDA from discontinued operations.  Accordingly, we present Consolidated EBITDA excluding such discontinued operations.

Under the terms of our Previous Credit Facility, we were required to meet certain covenants if a Triggering Event occurred. No Triggering Event was in existence prior to payoff of the termination of the Previous Credit Facility. As of September 30, 2016 we had $12.7 million outstanding on the Previous Credit Facility; however upon execution of the New Credit Facility the outstanding balance was paid in full.

Reconciliation of Non-GAAP Financial Measures

We present Consolidated EBITDA, as defined 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 net income to eliminate the impact of income tax expense, interest expense, depreciation and amortization and certain other 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 our Chief Executive Officer to cover his tax obligation for an award of common stock; (vii) transaction fees and expenses related to acquisitions; (viii) certain restructuring fees and expenses; (ix) impairment charges recognized on our long-lived assets; and (ix) fees and expenses related to the issuance of equity permitted under the Indenture.

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

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The following table reconciles our Net Income to Consolidated EBITDA (in thousands):

 

 

Capital Expenditures

We estimate that we will spend approximately $5.0 million in 2016 on capital expenditures related to equipment to ramp up for the anticipated growth in the Infrastructure Services segment. As of the nine months ended September 30, 2016, $2.7 million had been spent on capital expenditures.  

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.

Guarantees

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. At September 30, 2016 we were not aware of any asserted claims for material amounts in connection with these indemnity obligations.

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Seasonality

Historically we have experienced seasonal variations in our business, primarily due to peaks in demand for our services immediately prior to and during sporting events.

For our DAS contracts, we have adopted the completed contract method; therefore, 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 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 our operating 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 accountings policies, which are further described under “Critical Accounting Policies and Estimates” and Note 2 to the Consolidated Financial Statements in the 2015 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 our accounts receivable, including amounts related to costs in excess of billings on uncompleted projects. 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

On July 29, 2016, we entered into a New Credit Facility with Midcap Financial Trust, paid the outstanding balance on the Credit Facility in full and terminated the Credit Facility. The New Credit Facility availability for borrowings is subject to a borrowing base that is calculated as a function of the value of our eligible accounts receivable and inventory. Borrowings under the New Credit Facility bear interest at a floating rate equal to the sum of the current LIBOR rate plus an applicable margin of 4.85%. The New Credit Facility terminates, and all outstanding principal and interest thereunder is due and payable, on April 1, 2018.    

Our notes payable balance at September 30, 2016 is comprised of our 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.

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Item 4. Controls and Procedures.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Interim Chief Accounting Officer, has evaluated the effectiveness of its disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered in this Report. Based on the evaluation performed, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates 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.

 

 

Item 1A. Risk Factors

There have been no material changes to the Risk Factors disclosed in our 2015 Form 10-K, except for the following:

Risks Related to Our Indebtedness

We may be unable to generate sufficient cash to service all of our indebtedness, including the notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may be unsuccessful, and in such event we may find it necessary to seek bankruptcy protection.

Our ability to make scheduled payments on our debt obligations or to refinance them depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may also be required to obtain the consent of the lenders under our New Credit Facility to refinance material portions of our indebtedness, including the notes. We cannot assure you that we will achieve or maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the notes, or to otherwise fund our liquidity needs.

 

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the notes. These alternative measures may be unsuccessful and may not permit us to meet our scheduled debt service obligations. If our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial liquidity problems and might be required to dispose of material assets or operations in addition to our sale of our former wireless network deployment and wireline businesses to Dycom in July 2016 to meet our debt service and other obligations. We may be unable to consummate those dispositions or to obtain the proceeds that we could realize from them, and these proceeds may be inadequate to meet any debt service obligations then due. Additionally, the New Credit Agreement and the Indenture limit the use of the proceeds from any disposition; as a result, we may not be allowed, under these agreements, to use proceeds from such dispositions to satisfy all current debt service obligations. Further, our ability to access the capital markets is limited, and we cannot assure you that we will be able to obtain new sources of capital on terms that are acceptable to us.

 

If we are unable to restructure or refinance our indebtedness, including the notes, or raise additional capital, we may not be able to make payments on our indebtedness, our secured lenders could foreclose against the assets securing our borrowings, and we may find it necessary to file a voluntary petition for reorganization relief under Chapter 11 of the Bankruptcy Code in order to provide us with additional time to identify an appropriate solution to our financial situation and implement a plan of reorganization aimed at improving our capital structure. Seeking bankruptcy protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. So long as a proceeding related to a Chapter 11 bankruptcy proceeding is ongoing, our senior management would be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing exclusively on our business operations. Bankruptcy protection also might make it more difficult to retain management and other key personnel necessary to the success and growth of our business. In addition, the longer a proceeding related to a bankruptcy continues, the more likely it is that our customers and suppliers would lose confidence in our ability to reorganize our businesses successfully and would seek to establish alternative commercial relationships or request financial assurances such as letters of credit and cash deposits.

 

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We may not have the ability to raise the funds necessary to finance the change of control offer, the asset sale offer required by the Indenture governing the notes.

 

Upon a change of control, subject to certain conditions, we are required to offer to repurchase all outstanding notes at 101% of the principal amount thereof, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase. Further, upon certain asset sales subject to certain conditions and exceptions, we may be required to repurchase any outstanding notes at 100% of the principal amount thereof, plus accrued and unpaid interest and additional interest, if any. If we do not use the net proceeds from the sale of the Assets to Dycom as permitted by the Indenture within 360 days after their receipt, for example, we will be required to make an offer to repurchase a pro rata portion of the notes with any remaining net proceeds at 100% of their principal amount, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase.  The source of funds for the purchases of the notes will be our available cash or other potential sources, including borrowings, proceeds from sales of assets or proceeds from sales of equity. Sufficient funds from such sources may be unavailable at the time of any change of control or asset sale to make required repurchases of the notes tendered. Our future indebtedness agreements may limit our ability to repurchase the notes and/or provide that certain change of control events or asset sales will constitute an event of default thereunder.

Ratings of the notes may cause their trading price to fall and affect the marketability of the notes.

A rating agency’s rating of the notes is not a recommendation to purchase, sell or hold any particular security, including the notes. Such ratings are limited in scope and do not comment as to material risks relating to an investment in the notes. An explanation of the significance of such ratings may be obtained from such rating agencies. We have delivered a notice of termination to all rating agencies that have rated the notes, and we cannot assure you that such credit ratings will be issued or remain in effect for any given period of time. The rating agencies also may lower, suspend or withdraw ratings on the notes in the future. Holders of the notes will have no recourse against us or any other parties in the event of a change in, or suspension or withdrawal of, such ratings. Any lowering, suspension or withdrawal of such ratings may have an adverse effect on the market prices or marketability of the notes.

 

Risks Related to Our Business

 

We derive the vast majority of our revenues from subsidiaries of AT&T including DIRECTV. As a result of the sale of the Assets to Dycom, we expect that the revenues we generate from subsidiaries of AT&T, other than DIRECTV, will significantly decline. The loss of DIRECTV as a customer would impair our business, financial condition and results of operations.

 

We derive the vast majority of our revenues from continuing operations from subsidiaries of AT&T, including DIRECTV. We derived the following amounts of our revenue from continuing operations from these sources over the past three fiscal years and the nine months ended September 30, 2016 (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 this customer is reduced.

 

In July 2015, AT&T completed its previously announced acquisition by merger of DIRECTV, and DIRECTV became a subsidiary of AT&T. With the consummation of the merger, our revenues became more concentrated and dependent on our relationship with AT&T. During the second quarter of 2016, we completed the sale of the Assets to Dycom, which included substantially all of our Infrastructure Services segment and a significant portion of our business with AT&T and its subsidiaries, other than DIRECTV. As a result, we expect that the revenues we generate from subsidiaries of AT&T, other than DIRECTV, will decline substantially in the future.

 

To the extent that our performance does not meet this customer’s expectations, or our reputation or relationships with this key customer becomes impaired, we could lose future business with this customer, which would materially adversely affect our ability to generate revenue.

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We have ongoing obligations and potential liabilities associated with the Assets sold to Dycom and the business we divested.

 

On July 6, 2016, we completed the sale of the Assets to Dycom. In connection with the divestiture, we agreed not to provide (i) certain wireless services in the United States and Canada to AT&T, (ii) certain small cell services to AT&T in certain geographic areas and (iii) wireline services to customers in the telecommunications industry with certain exceptions. These restrictions may limit our ability to grow our business and make us more dependent on our Field Services and Professional Services segments and the work we perform for our other customers. A downturn in this business could have a greater negative impact on our financial results than when we were a more diversified company.

 

We are also subject to potential liabilities associated with the Asset Sale and the business we divested. We remain liable for certain pre-closing liabilities associated with the divested business, such as taxes, employment and environmental liabilities and legal claims. Further, we made representations and warranties and agreed to covenants relating to the business divested, on which we remain liable for a period of time for breaches of representations, warranties and covenants and we also indemnify buyers in the event of such breaches and for other specific risks. Even though certain of the proceeds of the Asset Sale remain deposited in an escrow account to secure our indemnification obligations, such amounts may not be sufficient if liabilities arise, which could negatively impact our financial condition and future results of operations.

 

Claims, lawsuits, proceedings and contract disputes, including those related to our construction business, could materially adversely affect our business, financial condition or results of operations.

We are subject to various claims, lawsuits, proceedings and contract disputes that arise in the ordinary course of business. In particular, our construction activities expose us to increased risk because design, construction or systems failures can result in substantial bodily injury or damage to third parties. These actions may seek, among other things, compensation for alleged personal injury, workers’ compensation, employment discrimination, breach of contract, property damage, punitive damages, civil penalties or other losses, consequential damages, or injunctive or declaratory relief. In addition, pursuant to our service agreements, we generally indemnify our customers for claims related to the services we provide. Claimants may seek large damage awards and defending claims can involve significant costs. When appropriate, we establish reserves against these items that we believe to be adequate in light of current information, legal advice and professional indemnity insurance coverage, and we adjust such reserves from time to time according to case developments. If our reserves are inadequate, or if in the future our insurance coverage proves to be inadequate or unavailable, or if there is an increase in liabilities for which we self-insure, we could experience a reduction in our profitability and liquidity. Furthermore, if there is a customer dispute regarding performance of project services, the customer may decide to delay or withhold payment to us. For example, we are contesting a claim from the State of Texas that that we owe approximately $31.7 million in sales taxes (the “Sales Tax Liability”). To the extent that the Sales Tax Liability is enforced against us, we believe that AT&T would be contractually bound under its agreements with us to reimburse us for all or a portion of the Sales Tax Liability, although AT&T may dispute or not honor its obligation to reimburse us for the Sales Tax Liability. If we are required to pay the Sales Tax Liability and AT&T does not reimburse us for substantially all of the Sales Tax Liability, the limited reserve we have established for the Sales Tax Liability would be inadequate to cover the Sales Tax Liability, including any associated interest and penalties thereon. An adverse determination on the Sales Tax Liability or any other liability claim, lawsuit or proceeding, or delayed or withheld payments from customers in contract disputes, could have a material adverse effect on our business, financial condition or results of operations.

 

 

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.

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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

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

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EXHIBIT INDEX

 

 

 

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