UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the Quarterly Period Ended June 30,
2012
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934
|
For the transition period from
to
Commission file number: 000-32451
LIGHTYEAR NETWORK SOLUTIONS, INC.
(Exact name of registrant as specified
in its charter)
Nevada
|
|
91-1829866
|
(State or Other Jurisdiction of
|
|
(I.R.S. Employer
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Incorporation or Organization)
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Identification No.)
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1901 Eastpoint Parkway
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Louisville, Kentucky
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40223
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(Address of Principal Executive Offices)
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(Zip Code)
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Registrant’s telephone number,
including area code: 502-244-6666
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
x
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
x
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 definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
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|
|
|
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Large accelerated filer
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¨
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|
Accelerated filer
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¨
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|
|
|
|
Non-accelerated filer
|
|
¨
(Do not check if a smaller reporting company)
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|
Smaller reporting company
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|
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes
¨
No
x
As of August 9, 2012, there were 22,086,641 shares of the issuer’s
common stock outstanding.
Lightyear Network Solutions, Inc. and
Subsidiaries
Table of Contents
PART I
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FINANCIAL INFORMATION
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ITEM 1. Financial Statements.
|
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|
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Condensed Consolidated Balance Sheets as of
|
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June 30, 2012 (Unaudited) and December 31, 2011
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1
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Unaudited Condensed Consolidated Statements of Operations for the
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Three and Six Months Ended June 30, 2012 and 2011
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2
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Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Deficiency for the
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Six Months Ended June 30, 2012
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3
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Unaudited Condensed Consolidated Statements of Cash Flows for the
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Six Months Ended June 30, 2012 and 2011
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4
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Notes to Unaudited Condensed Consolidated Financial Statements
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5
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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12
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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
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17
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ITEM 4. Controls and Procedures.
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17
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PART II
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OTHER INFORMATION
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ITEM 1. Legal Proceedings.
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19
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ITEM 1A. Risk Factors.
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19
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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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19
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ITEM 3. Defaults Upon Senior Securities.
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19
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ITEM 4. Mine Safety Disclosures.
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19
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ITEM 5. Other Information.
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19
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ITEM 6. Exhibits.
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19
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Signatures.
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20
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Lightyear Network Solutions,
Inc. and Subsidiaries
Condensed Consolidated Balance
Sheets
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June 30,
|
|
|
December 31,
|
|
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|
2012
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|
2011
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|
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|
(unaudited)
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|
Assets
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Current Assets:
|
|
|
|
|
|
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Cash
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$
|
38,300
|
|
|
$
|
108,133
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Accounts receivable, net
|
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|
4,864,805
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|
|
|
5,237,404
|
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Vendor deposits
|
|
|
1,905,175
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|
|
|
1,771,028
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Inventories, net
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397,453
|
|
|
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335,964
|
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Prepaid expenses and other current assets
|
|
|
2,228,266
|
|
|
|
2,523,039
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|
Total Current Assets
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|
|
9,433,999
|
|
|
|
9,975,568
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|
|
|
|
|
|
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Property and equipment, net
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7,032,009
|
|
|
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7,161,057
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Intangible assets, net
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|
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1,710,416
|
|
|
|
1,928,749
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|
Total Assets
|
|
$
|
18,176,424
|
|
|
$
|
19,065,374
|
|
|
|
|
|
|
|
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Liabilities and Stockholders' Deficiency
|
|
|
|
|
|
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|
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|
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|
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Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
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|
$
|
6,961,558
|
|
|
$
|
7,216,117
|
|
Interest payable - related parties
|
|
|
46,647
|
|
|
|
47,282
|
|
Accrued agent commissions
|
|
|
544,674
|
|
|
|
530,268
|
|
Accrued agent commissions - related parties
|
|
|
1,070
|
|
|
|
1,069
|
|
Deferred revenue
|
|
|
548,775
|
|
|
|
427,715
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Other liabilities
|
|
|
1,800,973
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|
|
|
1,876,163
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|
Other liabilities - related parties
|
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111,605
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|
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81,718
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|
Current portion of notes payable
|
|
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909,393
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|
|
|
895,918
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|
Current portion of capital lease obligations
|
|
|
205,431
|
|
|
|
239,203
|
|
Total Current Liabilities
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|
11,130,126
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|
|
|
11,315,453
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|
Notes payable, non-current portion
|
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2,873,612
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|
|
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3,334,992
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Capital lease obligation, non-current portion
|
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|
776,622
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|
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|
758,750
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|
Note payable - related party
|
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|
6,250,000
|
|
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|
6,250,000
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|
Deferred tax liability, non-current portion, net
|
|
|
326,683
|
|
|
|
326,683
|
|
Total Liabilities
|
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|
21,357,043
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|
|
|
21,985,878
|
|
Commitments and contingencies
|
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|
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|
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Stockholders' Deficiency:
|
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|
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Common stock, $0.001 par value; 70,000,000 shares authorized;
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22,086,641 shares issued and outstanding at
|
|
|
|
|
|
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June 30, 2012 and December 31, 2011
|
|
|
22,087
|
|
|
|
22,087
|
|
Note receivable from affiliate
|
|
|
(1,223,203
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)
|
|
|
(1,223,203
|
)
|
Additional paid-in capital
|
|
|
9,999,180
|
|
|
|
9,490,226
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|
Accumulated deficit
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|
(11,978,683
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)
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(11,209,614
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)
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Total Stockholders' Deficiency
|
|
|
(3,180,619
|
)
|
|
|
(2,920,504
|
)
|
Total Liabilities and Stockholders' Deficiency
|
|
$
|
18,176,424
|
|
|
$
|
19,065,374
|
|
See Notes to these Condensed Consolidated Financial Statements
Lightyear Network Solutions,
Inc. and Subsidiaries
Condensed Consolidated Statements
of Operations
(unaudited)
|
|
For The Three Months
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|
|
For The Six Months
|
|
|
|
Ended June 30,
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Ended June 30,
|
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2012
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2011
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2012
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2011
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|
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|
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Revenues
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|
$
|
16,819,505
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$
|
17,846,656
|
|
|
$
|
33,794,344
|
|
|
$
|
36,477,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cost of revenues
|
|
|
11,185,350
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|
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|
11,603,934
|
|
|
|
22,251,107
|
|
|
|
23,646,048
|
|
Gross Profit
|
|
|
5,634,155
|
|
|
|
6,242,722
|
|
|
|
11,543,237
|
|
|
|
12,830,999
|
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|
|
|
|
|
|
|
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|
|
|
|
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|
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Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Commission expense
|
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|
1,386,508
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|
|
|
1,482,261
|
|
|
|
2,890,722
|
|
|
|
3,036,403
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|
Commission expense - related parties
|
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|
18,653
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|
|
|
(54,621
|
)
|
|
|
36,477
|
|
|
|
(16,568
|
)
|
Depreciation and amortization
|
|
|
332,342
|
|
|
|
425,712
|
|
|
|
666,912
|
|
|
|
845,788
|
|
Bad debt expense
|
|
|
232,145
|
|
|
|
193,771
|
|
|
|
459,878
|
|
|
|
503,508
|
|
Selling, general and administrative expenses
|
|
|
3,658,825
|
|
|
|
4,395,057
|
|
|
|
7,901,308
|
|
|
|
9,242,756
|
|
Selling, general and administrative expenses - related party
|
|
|
22,769
|
|
|
|
50,072
|
|
|
|
96,769
|
|
|
|
50,072
|
|
Total Operating Expenses
|
|
|
5,651,242
|
|
|
|
6,492,252
|
|
|
|
12,052,066
|
|
|
|
13,661,959
|
|
Loss From Operations
|
|
|
(17,087
|
)
|
|
|
(249,530
|
)
|
|
|
(508,829
|
)
|
|
|
(830,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Expense) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
62
|
|
|
|
8,040
|
|
|
|
3,075
|
|
|
|
16,032
|
|
Interest income - related parties
|
|
|
-
|
|
|
|
190,570
|
|
|
|
-
|
|
|
|
378,303
|
|
Interest expense
|
|
|
(60,976
|
)
|
|
|
(75,102
|
)
|
|
|
(124,832
|
)
|
|
|
(157,698
|
)
|
Interest expense - related parties
|
|
|
(69,883
|
)
|
|
|
(97,389
|
)
|
|
|
(139,910
|
)
|
|
|
(197,817
|
)
|
Other income
|
|
|
34
|
|
|
|
1,845
|
|
|
|
1,427
|
|
|
|
111,068
|
|
Total Other (Expense) Income
|
|
|
(130,763
|
)
|
|
|
27,964
|
|
|
|
(260,240
|
)
|
|
|
149,888
|
|
Loss before income taxes
|
|
|
(147,850
|
)
|
|
|
(221,566
|
)
|
|
|
(769,069
|
)
|
|
|
(681,072
|
)
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
123,800
|
|
Net Loss
|
|
|
(147,850
|
)
|
|
|
(221,566
|
)
|
|
|
(769,069
|
)
|
|
|
(557,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Preferred Stock Dividends
|
|
|
-
|
|
|
|
(378,959
|
)
|
|
|
-
|
|
|
|
(753,755
|
)
|
Loss Attributable to Common Stockholders
|
|
$
|
(147,850
|
)
|
|
$
|
(600,525
|
)
|
|
$
|
(769,069
|
)
|
|
$
|
(1,311,027
|
)
|
Net Loss Per Common Share - Basic and Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.06
|
)
|
Weighted Average Number of Common Shares Outstanding - Basic and Diluted
|
|
|
22,312,328
|
|
|
|
22,076,127
|
|
|
|
22,295,763
|
|
|
|
21,335,947
|
|
See Notes to these Condensed Consolidated Financial
Statements
Lightyear Network Solutions,
Inc. and Subsidiaries
Condensed Consolidated Statement
of Changes in Stockholders' Deficiency
For The Six Months Ended June
30, 2012
(unaudited)
|
|
|
|
|
|
|
|
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
From
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Affiliate
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance - December 31, 2011
|
|
|
22,086,641
|
|
|
$
|
22,087
|
|
|
$
|
(1,223,203
|
)
|
|
$
|
9,490,226
|
|
|
$
|
(11,209,614
|
)
|
|
$
|
(2,920,504
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
508,954
|
|
|
|
-
|
|
|
|
508,954
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(769,069
|
)
|
|
|
(769,069
|
)
|
Balance - June 30, 2012
|
|
|
22,086,641
|
|
|
$
|
22,087
|
|
|
$
|
(1,223,203
|
)
|
|
$
|
9,999,180
|
|
|
$
|
(11,978,683
|
)
|
|
$
|
(3,180,619
|
)
|
See Notes to these Condensed Consolidated Financial
Statements
Lightyear Network Solutions,
Inc. and Subsidiaries
Condensed Consolidated Statements
of Cash Flows
(unaudited)
|
|
For The Six Months
|
|
|
|
Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(769,069
|
)
|
|
$
|
(557,272
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
666,912
|
|
|
|
845,788
|
|
Provision for bad debt expense
|
|
|
459,878
|
|
|
|
503,508
|
|
Stock-based compensation
|
|
|
508,954
|
|
|
|
325,184
|
|
Interest income from affiliate
|
|
|
-
|
|
|
|
(378,303
|
)
|
Deferred taxes
|
|
|
-
|
|
|
|
(123,800
|
)
|
Gain on sale of fixed assets
|
|
|
-
|
|
|
|
(109,315
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(87,279
|
)
|
|
|
(1,230,508
|
)
|
Other assets
|
|
|
-
|
|
|
|
(5,254
|
)
|
Vendor deposits
|
|
|
(134,147
|
)
|
|
|
(210,435
|
)
|
Inventories
|
|
|
(61,489
|
)
|
|
|
46,816
|
|
Prepaid expenses and other current assets
|
|
|
294,773
|
|
|
|
158,003
|
|
Accounts payable
|
|
|
(254,559
|
)
|
|
|
(47,048
|
)
|
Interest payable - related parties
|
|
|
(635
|
)
|
|
|
(48,536
|
)
|
Accrued agent commissions
|
|
|
14,406
|
|
|
|
(52,080
|
)
|
Accrued agent commissions - related parties
|
|
|
1
|
|
|
|
(13,404
|
)
|
Deferred revenue
|
|
|
121,060
|
|
|
|
47,377
|
|
Other liabilities
|
|
|
(75,190
|
)
|
|
|
236,704
|
|
Other liabilities - related parties
|
|
|
29,887
|
|
|
|
(18,783
|
)
|
Total Adjustments
|
|
|
1,482,572
|
|
|
|
(74,086
|
)
|
Net Cash Provided by (Used in) Operating Activities
|
|
|
713,503
|
|
|
|
(631,358
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(193,301
|
)
|
|
|
(826,856
|
)
|
Proceeds from sale of fixed assets
|
|
|
-
|
|
|
|
191,261
|
|
Net Cash Used in Investing Activities
|
|
|
(193,301
|
)
|
|
|
(635,595
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Repayments of obligations payable - related party
|
|
|
-
|
|
|
|
(1,000,000
|
)
|
Repayments of capital lease obligations
|
|
|
(142,130
|
)
|
|
|
(163,564
|
)
|
Repayments of notes payable
|
|
|
(447,905
|
)
|
|
|
(290,739
|
)
|
Repayments of short term borrowings
|
|
|
-
|
|
|
|
(320,428
|
)
|
Proceeds from notes payable
|
|
|
-
|
|
|
|
2,000,000
|
|
Proceeds from cash surrender value of life insurance
|
|
|
-
|
|
|
|
316,736
|
|
Net Cash (Used In) Provided by Financing Activities
|
|
|
(590,035
|
)
|
|
|
542,005
|
|
Net Decrease In Cash
|
|
|
(69,833
|
)
|
|
|
(724,948
|
)
|
|
|
|
|
|
|
|
|
|
Cash - Beginning
|
|
|
108,133
|
|
|
|
1,009,209
|
|
Cash - Ending
|
|
$
|
38,300
|
|
|
$
|
284,261
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
259,074
|
|
|
$
|
408,506
|
|
Non-cash investing and financing activites:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment via capital lease
|
|
$
|
126,230
|
|
|
$
|
143,370
|
|
See Notes to these Condensed Consolidated Financial
Statements
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note A – Organization, Operations
and Basis of Presentation
Organization and Operations
Lightyear Network Solutions, Inc. (“LNSI”) was incorporated
in 1997 and operates through its wholly owned subsidiaries, Lightyear Network Solutions, LLC, a Kentucky limited liability company
organized in 2003 (“Lightyear LLC”), and SE Acquisitions, LLC d/b/a Lightyear Network Solutions of Kentucky, a Kentucky
limited liability company organized on June 22, 2010, (“Lightyear-KY”). The Company was organized for the purpose of
selling and marketing telecommunication services and solutions, and owning other companies which sell and market telecommunication
services and solutions. Lightyear provides telecommunications services throughout the United States and Puerto Rico primarily through
a distribution network of authorized independent agents and representatives. Lightyear is a licensed local carrier in 44 states
and provides long distance service in 49 states and Puerto Rico. Lightyear delivers service to approximately 70,000 customer locations
with a significant concentration in the five state area of Kentucky, Ohio, Indiana, Florida and Georgia. In addition to long distance
and local service, Lightyear currently offers a wide array of telecommunications services including internet/intranet, calling
cards, advanced data, wireless, Voice over Internet Protocol (“VoIP”) and conference calling. Lightyear maintains its
own network infrastructure and is a telecommunications reseller and competes, both directly at the wholesale level and through
agents and representatives, at the retail level. Lightyear is subject to regulatory requirements imposed by the Federal Communications
Commission (“FCC”) and state and local governmental agencies. Regulations by the FCC as well as state agencies include
limitations on types of services and service areas offered to the public.
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial statements. In the opinion of management, such statements include all adjustments
(consisting only of normal recurring items) which are considered necessary for a fair presentation of the condensed consolidated
financial statements of Lightyear Network Solutions, Inc. and Subsidiaries (“Lightyear,” or the “Company”)
as of June 30, 2012. The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative
of the operating results for the full year. It is suggested that these unaudited condensed consolidated financial statements be
read in conjunction with the consolidated financial statements and related disclosures of Lightyear for the year ended December
31, 2011 which were filed with the Securities and Exchange Commission on March 30, 2012. The Company evaluates events that have
occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did
not identify any recognized or nonrecognized subsequent events that would have required further adjustment or disclosure in the
unaudited condensed consolidated financial statements.
Liquidity Plan
Since the Company began operations in 2004, it has historically
incurred significant operating losses. Through February 12, 2010, the date of the Company’s reverse merger transaction, Lightyear
LLC had an accumulated member’s deficit of approximately $26.6 million. As of June 30, 2012, Lightyear had a cash balance
of $38,300, a working capital deficit of $1.7 million and was in violation of two of its debt covenants. On August 6, 2012, a counterparty
waived two second quarter 2012 debt covenant violations that resulted from earnings forecast shortfalls (see Note D).
For the six months ended June 30, 2012, the Company’s
operating activities provided $0.7 million of cash, while $0.2 million and $0.6 million were used to purchase property and equipment
and to service debt, respectively. The Company’s future capital requirements are expected to be driven by (i) network build-out
costs; (ii) debt reduction and debt service (including a $6.3 principal payment due to a related party on August 30, 2013); (iii)
public/investor relations costs; (iv) acquisition opportunities; and (v) the need to supplement working capital levels. The Company
believes that its current cash and cash expected to be generated from operating activities will be sufficient to meet its working
capital and capital expenditure requirements for at least the next 12 months. In addition, the Company continues to investigate
the capital markets for sources of funding, which could take the form of additional debt or equity financings, however there can
be no assurance that the Company will be successful in securing such capital. If the Company is unable to raise additional funds,
the Company might (a) initiate additional cost reductions; (b) forego acquisition or network build-out opportunities; and/or (c)
seek extensions of the scheduled payment obligations, including the long term related party note payable.
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note B – Summary of Significant
Accounting Policies
Principles of Consolidation
The balance sheets, statements of operations and cash flows
of the Company and its wholly-owned subsidiaries have been included in our condensed consolidated financial statements. All intercompany
accounts and transactions have been eliminated. The Company and its wholly-owned subsidiaries are managed as a single business
and a single segment. Activity with its wholly-owned subsidiary, Lightyear Alliance of Puerto Rico, LLC, is insignificant.
Estimates
The preparation of condensed consolidated financial statements
in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company’s
significant estimates include the reserves related to receivables, the recoverability and useful lives of long lived assets, anticipated
carrier credits, the valuation allowance related to deferred tax assets and the valuation of equity instruments.
Accounts Receivable
Accounts receivable are shown net of an allowance for doubtful
accounts of $1,606,948 and $1,215,735 as of June 30, 2012 and December 31, 2011, respectively. The Company’s management has
established an allowance for doubtful accounts sufficient to cover probable and reasonably estimable losses. The allowance for
doubtful accounts considers a number of factors, including collection experience, current economic trends, estimates of forecasted
write-offs, aging of the accounts receivable portfolios, industry norms, regulatory decisions and other factors. Management’s
policy is to fully reserve all accounts that are 180-days past due. Accounts are written off after use of a collection agency is
deemed to be no longer effective.
Revenue Recognition
Telecommunications services income such as access revenue and
usage revenue are recognized on the accrual basis as services are provided. In general, access revenue is billed one month in advance
and is recognized when earned. Wireless handheld devices are sold at a discount when bundled with a long-term wireless service
contract. We recognize the equipment revenue and associated costs when title has passed and the equipment has been accepted by
the customer. The Company provides administrative and support services to its agents and pays commissions based on revenues from
the agents’ accounts. Amounts invoiced to customers in advance of services are reflected as deferred revenues.
The Company pays certain agents an initial lump sum commission.
A portion of this commission is deferred and is amortized over a three month period.
Cost of revenues represents primarily the direct costs associated
with the cost of transmitting and terminating traffic on other carriers’ facilities.
Commissions paid to acquire customer call traffic are expensed
in the period when associated call revenues are recognized.
The accounting standards guidance provides for how taxes collected
from customers and remitted to governmental authorities should be presented in the income statement. The guidance states that if
taxes are reported on a gross basis (included as revenue) a company should disclose those amounts, if significant. The Company
does not include excise and other sales related taxes in its revenues.
Fair Value of Financial Instruments
The Company’s financial instruments are cash, accounts
receivable and accounts payable each of which approximate their fair values based upon their short term nature. The Company’s
other financial instruments include notes payable, capital lease obligations and obligations payable. The carrying value, of these
instruments, approximate fair value, as they bear terms and conditions comparable to market, for obligations with similar terms
and maturities.
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note B – Summary of Significant
Accounting Policies
– Continued
Stock-Based Compensation
The Company measures the cost of services received in exchange
for an award of equity instruments based on the fair value of the award. For employees and directors, the award is measured on
the grant date. For non-employees, the award is measured on the grant date and then non-vested amounts are re-measured at each
financial reporting date. The fair value amount is then recognized over the period during which services are required to be provided
in exchange for the award, usually the vesting period.
Loss Per Common Share
Basic loss per share is computed using the weighted average
number of common shares outstanding during the period. Diluted loss per share is computed using the weighted average number of
common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental
common shares issuable upon the exercise of stock options and warrants (using the treasury stock method) and the conversion of
the Company’s convertible preferred stock (using the if-converted method).
The following table reconciles the numerator and denominator
for the calculation:
|
|
For The Three Months
|
|
|
For The Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(147,850
|
)
|
|
$
|
(221,566
|
)
|
|
$
|
(769,069
|
)
|
|
$
|
(557,272
|
)
|
Cumulative preferred stock dividends
|
|
|
-
|
|
|
|
(378,959
|
)
|
|
|
-
|
|
|
|
(753,755
|
)
|
Numerator for basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(147,850
|
)
|
|
$
|
(600,525
|
)
|
|
$
|
(769,069
|
)
|
|
$
|
(1,311,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock shares outstanding
|
|
|
22,086,641
|
|
|
|
21,962,581
|
|
|
|
22,086,641
|
|
|
|
21,242,432
|
|
Weighted average warrants outstanding with an
exercise price of $0.01 or less
|
|
|
225,687
|
|
|
|
113,546
|
|
|
|
209,122
|
|
|
|
93,515
|
|
Weighted average basic and diluted shares outstanding
|
|
|
22,312,328
|
|
|
|
22,076,127
|
|
|
|
22,295,763
|
|
|
|
21,335,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per basic and diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
Cumulative preferred stock dividends
|
|
|
-
|
|
|
|
(0.02
|
)
|
|
|
-
|
|
|
|
(0.03
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.06
|
)
|
The following securities are excluded from
the calculation of weighted average dilutive common shares, because their inclusion would have been antidilutive:
|
|
As of
|
|
|
|
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
Employee stock options
|
|
|
847,999
|
|
|
|
722,000
|
|
Warrants
|
|
|
1,056,270
|
|
|
|
1,045,720
|
|
Convertible preferred stock
|
|
|
-
|
|
|
|
9,500,000
|
|
Unvested restricted stock
|
|
|
-
|
|
|
|
12,987
|
|
Total potentially dilutive shares
|
|
|
1,904,269
|
|
|
|
11,280,707
|
|
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note B – Summary of Significant
Accounting Policies
– Continued
Recently Issued and Adopted Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2012-02, “Intangibles—Goodwill and Other (Topic 350) - Testing
Indefinite-Lived Intangible Assets for Impairment." This ASU simplifies the impairment testing of indefinite-lived intangible
assets by eliminating the requirement to perform an annual quantitative test for impairment, unless a qualitative assessment reveals
that impairment is likely. While the update is effective for impairment tests performed for fiscal years beginning after September
15, 2012, early adoption is permitted. The Company expects to adopt ASU 2012-02 during 2012, which is expected to alter the Company’s
annual procedures, but is not expected to have a material impact on the Company’s consolidated financial statements.
Note C – Other Liabilities
Other liabilities consist of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Excise, state, local and property taxes payable
|
|
$
|
869,903
|
|
|
$
|
843,671
|
|
Other accrued expenses
|
|
|
228,595
|
|
|
|
165,485
|
|
Payroll, payroll taxes and bonuses
|
|
|
327,811
|
|
|
|
373,398
|
|
Deferred rent
|
|
|
230,076
|
|
|
|
260,086
|
|
Regulatory fees
|
|
|
46,171
|
|
|
|
132,133
|
|
Customer security deposits
|
|
|
98,417
|
|
|
|
101,390
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,800,973
|
|
|
$
|
1,876,163
|
|
Note D – Notes Payable
The Company has a secured promissory note arrangement with a
bank with a principal balance of approximately $1.8 million at June 30, 2012. On May 8, 2012, the bank waived two first quarter
2012 debt covenant violations that resulted from earnings forecast shortfalls. As of June 30, 2012, Lightyear was in violation
of two of its debt covenants that resulted from earnings forecast shortfalls.
On August
6, 2012, the bank waived two second quarter 2012 debt covenant violations.
The
Company is in discussions with the bank with regards to resetting the debt covenants on a go forward basis.
Note E – Related Party Transactions
Lightyear has significant transactions with its largest shareholder,
LY Holdings, LLC (“LY Holdings”) and members of LY Holdings. Lightyear also conducts business with certain companies
or individuals which are related parties either by having common ownership or because they are controlled by members of LY Holdings,
the directors and/or officers of the Company or by relatives of members of LY Holdings, directors of the Company and/or officers
of the Company. Aggregate related party transactions are segregated on the face of the balance sheets and statements of operations.
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note E – Related Party Transactions
– Continued
Commission expense – related parties includes certain
VoIP and wireless revenue override payments due to directors of the Company and/or members of LY Holdings. On June 22, 2011, all
but one holder of the override rights waived their right to such payments for the second half of 2010 and the full year 2011, which
resulted in the Company reversing approximately $86,000 of liabilities. On February 7, 2012, the same holders of the override rights
waived their right to such payments for the year 2012. During the three and six months ended June 30, 2012, Lightyear recorded
approximately $15,000 and $30,000 of VoIP and wireless revenue override expense, respectively. During the three and six months
ended June 30, 2011, Lightyear recorded approximately $55,000 and $17,000 of VoIP and wireless revenue override net credits, respectively.
The Company obtained consulting services from a former officer
and director, pursuant to a one year consulting agreement which terminated on April 30, 2012. Aggregate consulting expense was
approximately $23,000 and $97,000 for the three and six months ended June 30, 2012, respectively, and was approximately $50,000
for the three and six months ended June 30, 2011.
Note F – Supplier Concentration
Of the telecommunications services used in its operations, Lightyear
acquired approximately 30%, 23%, and 13% during the three months ended June 30, 2012 from three suppliers and 30%, 22% and 13%
during the six months ended June 30, 2012 from the same three suppliers. The Company acquired approximately 30% and 24% during
the three months ended June 30, 2011 from two suppliers and 28%, 24% and 10% during the six months ended June 30, 2011 from three
suppliers. Although there are other suppliers of these services, a change in suppliers could have an adverse effect on the business
which could ultimately negatively affect operating results.
Note G – Stockholders’ Deficiency
Warrants
Additional Warrants
In connection with a prior equity financing, the Company is
required to periodically issue exercisable five-year warrants to purchase shares of common stock to investors with an exercise
price of $0.01 per share and to selling agents with an exercise price of $4.00 per share (the “Additional Warrants”).
The Additional Warrants are issued pursuant to a pre-determined formula at the end of each calendar quarter during which shares
originally purchased in the equity financing are held by the original investor. The Additional Warrants are eligible to be issued
for a period of five years from the equity financing. The Company issued 71,829 Additional Warrants (65,299 were issued to investors
and 6,530 were issued to selling agents) during the six months ended June 30, 2012. As of June 30, 2012, there were 283,641 Additional
Warrants outstanding, of which 257,856 were issued to investors and 25,785 were issued to selling agents. See Note H – Commitments
and Contingencies – Warrant Dispute.
Summary
As of June 30, 2012, in the aggregate there were 1,314,126 warrants
outstanding and exercisable which had a weighted average exercise price of $3.22, a weighted average remaining contractual life
of 3.4 years and an aggregate intrinsic value of approximately $28,000.
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note G – Stockholders’ Deficiency -
Continued
Stock Option Grants
On December 28, 2011, the Company entered into Option Termination
Agreements with certain members of its management team (the “Optionees”), including each of the Company’s executive
officers, through which the Company agreed to terminate all of the outstanding stock options that were previously issued to the
Optionees pursuant to the Company’s 2010 Stock and Incentive Compensation Plan. The Optionees each received a total of $1.00
in consideration for the termination of their options, which accounted for 687,500 of the Company’s options outstanding.
Such options were deemed to have negligible value as of the termination date. On March 1, 2012, the Company granted ten-year incentive
stock options to the Optionees to purchase an aggregate of 732,500 shares of common stock at an exercise price of $0.22 per share.
Of the total, 50% of the options vest immediately and 50% vest on the one-year anniversary of the grants. Since cancellation and
issuance of new options is deemed to represent a modification of the original options, the approximate incremental $63,000 value
of the new options was added to the approximate $663,000 of unrecognized compensation cost associated with the original options
and the combined amount of $726,000 is being amortized proportionate to the vesting period.
On March 20, 2012, the Company granted ten-year incentive stock
options to new and existing employees to purchase an aggregate of 74,000 shares of common stock at an exercise price of $0.21 per
share. The options vest as follows: (i) options to purchase an aggregate of 71,000 shares of common stock granted to existing employees
vest 50% immediately and 50% vest on the one-year anniversary of the grants; and (ii) an option to purchase 3,000 shares of common
stock granted to a new employee vests ratably on an annual basis over a three-year term. The aggregate grant date value of approximately
$6,200 is being amortized proportionate to the respective vesting periods.
The Company has computed the fair value of options granted using
the Black-Scholes option pricing model. Forfeitures are estimated at the time of valuation and reduce expense ratably over the
vesting period. This estimate will be adjusted periodically based on the extent to which actual forfeitures differ, or
are expected to differ, from the previous estimate, when it is material. The expected term of options granted represents the
estimated period of time that options granted are expected to be outstanding. The Company utilizes the “simplified”
method to develop an estimate of the expected term of “plain vanilla” option grants. Given that LNSI's shares have
only been publicly traded in their current form since February 12, 2010, until such time as LNSI has sufficient trading history
to compute the historical volatility of its common stock, the Company is utilizing an expected volatility figure based on a review
of the historical volatilities, over a period of time equivalent to the expected life of these options, of similarly positioned
public companies within its industry. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon
bonds with a remaining term consistent with the expected term of the options.
In applying the Black-Scholes option pricing model, the Company
used the following weighted average assumptions:
|
|
Six Months Ended
|
|
|
|
June 30, 2012
|
|
Risk free interest rate
|
|
|
0.95
|
%
|
Expected term (years)
|
|
|
5.25
|
|
Expected volatility
|
|
|
42.90
|
%
|
Expected dividends
|
|
|
0.00
|
%
|
The weighted average estimated fair value of the stock options
granted during the three months ended March 31, 2012 was $0.09 per share. There were no options granted during the three months
ended June 30, 2012 and the three and six months ended June 30, 2011.
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note G – Stockholders’ Deficiency -
Continued
Stock Option Grants
– Continued
The Company recognized approximately $103,000 and $509,000 of
stock-based compensation expense during the three and six months ended June 30, 2012, respectively, and approximately $184,000
and $298,000 of stock-based compensation expense during the three and six months ended June 30, 2011, respectively, related to
employee stock option grants, which is reflected as selling, general and administrative expense in the condensed consolidated statements
of operations. As of June 30, 2012, there was approximately $275,000 of unrecognized employee stock-based compensation expense
related to stock option grants that will be amortized over a weighted average period of 0.8 years. During the six months ended
June 30, 2012, options to purchase 806,500 shares of common stock at a weighted average exercise price of $0.22 per share were
granted. During the six months ended June 30, 2012, options to purchase 55,167 shares of common stock at a weighted average exercise
price of $0.75 per share were forfeited. As of June 30, 2012, there were 847,999 outstanding stock options with a weighted average
exercise price of $0.30 per share, a weighted average remaining contractual life of 9.6 years and no intrinsic value. As of June
30, 2012, there were 448,065 exercisable stock options with a weighted average exercise price of $0.33 per share, a weighted average
remaining contractual life of 9.5 years and no intrinsic value.
Restricted Stock Grants
The Company recognized approximately $9,000 and $28,000 of stock-based
compensation during the three and six months ended June 30, 2011, respectively, related to director restricted stock grants issued
on October 12, 2010, which is reflected as professional fees expense in the condensed consolidated statements of operations. As
of June 30, 2012, there were no unvested restricted stock grants and, accordingly, there was no unrecognized non-employee stock-based
compensation expense related to restricted stock grants.
Note H – Commitments and Contingencies
Litigation
Alden Halpern v. Lightyear Network Solutions, Inc. fka Libra
Alliance Corporation
was filed in Nevada District Court on March 1, 2012. The plaintiff alleges violations of federal
and state securities laws with respect to his purchase of Lightyear securities. Mr. Halpern alleges that Lightyear falsely represented
that the shares he was purchasing were “free-trading.” Lightyear denied the allegations. Mr. Halpern claimed damages
of $750,000. On June 7, 2012, Mr. Halpern filed an Opposition to Defendant’s Motion to Dismiss and on June 25, 2012, Lightyear
filed a Defendant’s Reply in Support of Its Motion to Dismiss. Lightyear notified its insurance carriers concerning
this matter and continues to contest the allegations vigorously. Lightyear has not recorded a provision for any loss that could
be incurred as a result of the matter as Lightyear believes the allegations are without merit.
As of June 30, 2012, other claims have been asserted against
Lightyear which arose in the normal course of business. While there can be no assurance, management believes that the ultimate
outcome of these legal claims will not have a material adverse effect on the condensed consolidated financial statements of the
Company.
Warrant Dispute
The Company’s former selling agent, on behalf of certain
investors in the Company’s private placement, has disputed the Company’s methodology for computing the quantity of
Additional Warrants that are issuable at each quarter end. The Company has issued Additional Warrants to purchase an insignificant
number of common shares in partial settlement of this dispute with some of the investors. While there can be no assurance, management
believes that the ultimate outcome of this dispute with the remaining investors will not have a material adverse effect on the
condensed consolidated financial statements of the Company.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis of the results of operations
and financial condition of Lightyear Network Solutions, Inc. and Subsidiaries (“Lightyear” or the “Company”)
for the three and six months ended June 30, 2012 and 2011 should be read in conjunction with our financial statements and the notes
to those financial statements that are included elsewhere in this Quarterly Report on Form 10-Q. References in this Management’s
Discussion and Analysis of Financial Condition and Results of Operations to “
us
,” “
we
,” “
our
,”
and similar terms refer to Lightyear. References to Lightyear LLC refer to the Company’s wholly-owned subsidiary Lightyear
Network Solutions, LLC. This discussion includes forward-looking statements based upon current expectations that involve risks
and uncertainties. Words such as “anticipate,” “estimate,” “plan,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,”
“should,” “could,” and similar expressions are used to identify forward-looking statements. Actual results
and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number
of factors. See “Risk Factors” under Item 1A of Part I of Lightyear’s Form 10-K filed March 30, 2012.
Overview
Lightyear, through its wholly owned subsidiaries,
Lightyear Network Solutions, LLC, a Kentucky limited liability company (“Lightyear LLC”), SE Acquisitions, LLC d/b/a
Lightyear Network Solutions of Kentucky, a Kentucky limited liability company (“Lightyear-KY”), provides telecommunications
services throughout the United States primarily through a distribution network of authorized agents. In addition to long distance
and local service, Lightyear currently offers a wide array of telecommunications products and services including internet/intranet,
calling cards, advanced data, conferencing, VoIP services and wireless services. Lightyear LLC also operates in Puerto Rico through
its wholly-owned subsidiary, Lightyear Alliance of Puerto Rico, LLC, a Kentucky limited liability company.
Lightyear provides telecommunications services
in 49 states and Puerto Rico and is a licensed local carrier in 44 states. We sell our products and services primarily through
a distribution network of more than 150 authorized independent agents and more than 7,000 independent representatives.
Lightyear provides service to approximately
70,000 customer locations as of June 30, 2012, with a significant concentration in the five state area of Kentucky, Ohio, Indiana,
Florida and Georgia. We have built regional customer concentrations which provide a contiguous service area and operational efficiencies,
resulting in higher margins, as well as a nationwide distribution network through which additional new concentrations may be built.
We intend to increase our revenue and earnings
via a combination of organic and acquisition growth. We intend to grow organically by expanding our revenue base from agents through
creative marketing and incentive plans, new carrier partnerships and enhancements to our wireless, VoIP and data products lines
which complement our history of selling landline services.
We continue to search for combinations with
small to mid-sized competitors and thereby aggregate revenue, and increase earnings through the elimination of duplicate costs.
Each series of combinations will be followed by a period of integration and consolidation. Potential acquisition candidates are
expected to meet specific criteria including the following:
|
·
|
Supporting or providing Cloud based services;
|
|
·
|
Trained technical staff meeting our internal requirements and the
requirements of our customers.
|
Upon locating suitable target candidates,
we anticipate entering into non-binding letters of intent to set forth the basic business terms of potential acquisitions, which
will usually be subject to various closing conditions, including due diligence, the negotiation of definitive acquisition documents,
regulatory consents and other customary matters. Factors which may affect future acquisition decisions include the quality and
potential profitability of the business under consideration, and our profitability and ability to finance the transaction.
We continue to review opportunities for
expansion of our network. Criteria for future builds would include the immediate and substantial reduction of cost of goods sold
or support of a committed revenue stream.
Lightyear-KY falls within the FCC’s
definition of a rural Competitive Local Exchange Carrier (CLEC) because its entire service area falls within rural markets. This
allows us to charge a premium “rural exempt” rate for interstate switched access services. On November 18, 2011, the
FCC released an order (the Order) which established a framework for reform of the intercarrier compensation system and Federal
Universal Service Fund. We estimate that the Order could have the impact of reducing our revenues by less than 1% during 2012 and
2013, and by approximately1.5% and 2.8% in 2014 and 2015, respectively.
Results of Operations
Revenues
Our revenues are primarily derived from
the sales and provision of the following services:
Cost of Revenues
Cost of revenues consist primarily of carrier access fees, network
costs and usage fees associated with providing our wholesale telecommunications services.
Operating Expenses
Operating expenses include:
|
·
|
commission expense which consists of payments to agents based on a
percentage of the monthly billings and upfront payments to agents at the time the customer was acquired;
|
|
·
|
depreciation and amortization, including depreciation of long-lived
property, plant and equipment and amortization of intangible assets where applicable;
|
|
·
|
bad debt expense represents an estimate of the incremental non-collectible
receivables; and
|
|
·
|
selling, general and administrative expenses which consist of selling,
advertising, marketing, billing and promotion expenses, plus salaries and benefits, rent associated with our office space, professional
fees, travel and entertainment, depreciation and amortization and other costs.
|
Other (Expense) Income
|
·
|
Interest income – related parties represents interest earned
on the notes receivable from LY Holdings that were extinguished in November 2011.
|
|
·
|
Interest expense represents interest payable on notes payable to financial
institutions or on capital lease obligations.
|
|
·
|
Interest expense – related parties represents interest payable
on a non-current note payable to a Company director.
|
Three Months Ended June 30, 2012 Compared to Three Months
Ended June 30, 2011
Overview
Loss from operations was $0.02 million and
$0.2 million for the three months ended June 30, 2012 and 2011, respectively, an improvement of $0.18 million, due to a $0.8 million
reduction in operating expenses (primarily headcount and related costs) partially offsetting a $0.6 million reduction in gross
profit (due to a 6% decline in revenues).
Revenues
Revenues were approximately $16.8 million
and $17.8 million, respectively, for the quarters ended June 30, 2012 and 2011, a decrease of $1.0 million or 6%. The decrease
of $1.0 million resulted primarily from continued market pressures, including heightened competition. The following table presents
our operating revenues by product category for the quarters ended June 30, 2012 and 2011.
|
|
(in millions)
|
|
|
|
For The Three Months
|
|
|
|
Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
Voice service
|
|
$
|
4.2
|
|
|
$
|
4.3
|
|
Local service
|
|
|
6.7
|
|
|
|
7.6
|
|
VoIP
|
|
|
0.8
|
|
|
|
0.9
|
|
Data services
|
|
|
1.7
|
|
|
|
1.9
|
|
Wireless services
|
|
|
1.4
|
|
|
|
0.9
|
|
Representative fees
|
|
|
0.4
|
|
|
|
0.5
|
|
Regulatory revenue
|
|
|
0.8
|
|
|
|
0.8
|
|
Other services
|
|
|
0.8
|
|
|
|
0.9
|
|
TOTAL
|
|
$
|
16.8
|
|
|
$
|
17.8
|
|
Cost of Revenues
Cost of revenues for the quarters ended
June 30, 2012 and 2011 amounted to approximately $11.2 million (67% of revenue) and $11.6 million (65% of revenue), respectively,
a decrease of $0.4 million or 4%. The decrease in cost of sales was primarily related to the lower revenues.
Gross Profit
Gross profits were approximately $5.6 million
(33% of revenue) and $6.2 million (35% of revenue), respectively for the quarters ended June 30, 2012 and 2011, a decrease of $0.6
million or 10%, or a 2.0% change in the gross margin percentage. The decline in revenues has been concentrated in the higher-margin
revenue streams, such that the decline in the gross margin percentage is a function of the revenue mix.
Operating Expenses
Operating expenses decreased $0.8 million,
or 13%, to $5.7 million from $6.5 million for the quarters ended June 30, 2012 and 2011, respectively. The decrease was attributable
to the 22% decrease in depreciation expense due to the sale of fixed assets in 2011 and reductions in headcount and related costs
due to a 27% decline in full-time employees from 210 at June 30, 2011 to 153 at June 30, 2012.
Other (Expense) Income
Interest income declined 100% from $0.2
million due to the elimination of certain notes receivable due from related parties. Interest expense decreased $0.04 million or
24% to $0.1 million from $0.2 million, due principally to lower rates on indebtedness and lower principal balances on existing
facilities, which declined from approximately $12 million at June 30, 2011 to approximately $11 million at June 30, 2012.
Six Months Ended June 30, 2012 Compared to Six Months
Ended June 30, 2011
Overview
Loss from operations was $0.5 million and
$0.8 million for the six months ended June 30, 2012 and 2011, respectively, an improvement of $0.3 million, due to a $1.6 million
reduction in operating expenses (primarily headcount and related costs) partially offsetting a $1.3 million reduction in gross
profit (due to a 7% decline in revenues).
Revenues
Revenues were approximately $33.8 million
and $36.5 million, respectively, for the six months ended June 30, 2012 and 2011, a decrease of $2.7 million or 7%. The decrease
of $2.7 million resulted primarily from continued market pressures, including heightened competition. The following table presents
our operating revenues by product category for the six months ended June 30, 2012 and 2011.
|
|
(in millions)
|
|
|
|
For The Six Months
|
|
|
|
Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
Voice service
|
|
$
|
8.3
|
|
|
$
|
9.3
|
|
Local service
|
|
|
13.6
|
|
|
|
15.4
|
|
VoIP
|
|
|
1.7
|
|
|
|
1.8
|
|
Data services
|
|
|
3.4
|
|
|
|
3.8
|
|
Wireless services
|
|
|
2.7
|
|
|
|
1.8
|
|
Representative fees
|
|
|
0.9
|
|
|
|
1.0
|
|
Regulatory revenue
|
|
|
1.6
|
|
|
|
1.7
|
|
Other services
|
|
|
1.6
|
|
|
|
1.7
|
|
TOTAL
|
|
$
|
33.8
|
|
|
$
|
36.5
|
|
Cost of Revenues
Cost of revenues for the six months ended
June 30, 2012 and 2011 amounted to approximately $22.3 million (66% of revenue) and $23.6 million (65% of revenue), respectively,
a decrease of $1.3 million or 6%. The decrease in cost of sales was primarily related to the lower revenues.
Gross Profit
Gross profits were approximately $11.5 million
(34% of revenue) and $12.8 million (35% of revenue), respectively, for the six months ended June 30, 2012 and 2011, a decrease
of $1.3 million or 10%, or a 1.0% change in the gross margin percentage. The decline in revenues has been concentrated in the higher-margin
revenue streams, such that the decline in the gross margin percentage is a function of the revenue mix.
Operating Expenses
Operating expenses decreased $1.6 million,
or 12%, to $12.1 million from $13.7 million for the six months ended June 30, 2012 and 2011, respectively. The decrease was attributable
to the 21% decrease in depreciation expense due to the sale of fixed assets in 2011 and reductions in headcount and related costs
due to a 27% decline in full-time employees from 210 at June 30, 2011 to 153 at June 30, 2012.
Other (Expense) Income
Interest income declined 99% from $0.4 million
due to the elimination of certain notes receivable due from related parties. Interest expense decreased $0.09 million or 26% to
$0.3 million from $0.4 million, due principally to lower rates on indebtedness and lower aggregate principal balances on existing
facilities, which declined from approximately $12 million at June 30, 2011 to approximately $11 million at June 30, 2012.
Liquidity and Capital Resources
Overview
Since Lightyear began operations in 2004, we have incurred significant
operating losses. Through February 12, 2010, the date of the Company’s reverse merger transaction, Lightyear had an accumulated
member’s deficit of approximately $26.6 million. As a result, we have managed our cash receipts and disbursements, as well
as our operating costs in order to maintain an adequate level of cash. As of June 30, 2012, Lightyear had a cash balance of $38,300,
a working capital deficit of $1.7 million and was in violation of two of its debt covenants.
We have instituted cost reductions, raised
our customer credit requirements, and implemented efforts to increase revenues through targeted promotions over the past 18 months,
all toward the goal of achieving positive cash flow from operations. During the six months ended June 30, 2012, we generated $0.7
million of cash flow from operating activities and used $0.2 million and $0.6 million to purchase property and equipment and to
service debt, respectively.
Currently, the most significant item impacting
Lightyear’s liquidity is a note and interest payable to a Company director of $6.3 million. On March 20, 2012, the Company
director agreed to forbear from demanding payment of the principal balance until August 30, 2013.
In addition, we have a secured promissory
note arrangement with a bank with a principal balance of approximately $1.8 million at June 30, 2012. We are currently making principal
and interest payments totaling $37,780 per month and all remaining principal and interest is due on the January 25, 2014 maturity
date. On May 8, 2012, the bank waived two first quarter debt covenant violations that resulted from earnings forecast shortfalls.
On August 6, 2012, the bank waived two second quarter 2012 debt covenant violations that also resulted from earnings forecast shortfalls.
We are in discussions with the bank with regards to resetting the debt covenants on a go forward basis, but the bank may not agree
to reset the debt covenants.
Six Months Ended June 30, 2012 and 2011
Operating Activities
Net cash provided by operating activities
was $0.7 million for the six months ended June 30, 2012 compared to $0.6 million of net cash used for the six months ended June
30, 2011. The amount provided during the six months ended June 30, 2012 was primarily due to cash used to fund our operations which
generated a net loss of $0.8 million, positively adjusted for non-cash expenses in the aggregate amount of $1.6 million, and $0.1
million of cash used to fund changes in operating assets and liabilities. The amount used during the six months ended June 30,
2011 was primarily due to cash used to fund our operations which generated a net loss of $0.6 million, positively adjusted for
non-cash expenses in the aggregate amount of $1.1 million, and $1.1 million of cash used to fund changes in operating assets and
liabilities, primarily due to a build-up of accounts receivable.
Investing Activities
Net cash used in investing activities was
$0.2 million for the six months ended June 30, 2012 compared to $0.6 million for the six months ended June 30, 2011. The usage
of cash during the six months ended June 30, 2012 was attributable to $0.2 million for purchases of property and equipment. The
usage of cash during the six months ended June 30, 2011 was attributable to $0.8 million for purchases of property and equipment,
partially offset by the proceeds from the sale of fixed assets totaling $0.2 million.
Financing Activities
Net cash used in financing activities was
$0.6 million for the six months ended June 30, 2012 compared to $0.5 million of net cash provided by financing activities for the
six months ended June 30, 2011. The cash used in financing activities for the six months ended June 30, 2012 related to principal
payments made on the Company’s notes payable and capital lease obligations. The cash provided by financing for the six months
ended June 30, 2011 included $2.0 million of net proceeds from a new credit facility and $0.3 million of proceeds from the cash
surrender value of a life insurance policy, offset by repayments of $1.0 million and $0.8 million against the obligation to related
party and other obligations, respectively.
Potential Future Requirements and
Sources of Liquidity
We expect our 2012 operating activities
to be self-sufficient from a cash perspective, but there can be no assurance that this objective will be met. Our future capital
requirements are expected to be driven by (i) network build-out costs; (ii) debt reduction and debt service; (iii) public/investor
relations costs; (iv) acquisition opportunities; and (v) the need to supplement working capital levels. We are currently investigating
the capital markets for sources of funding, which could take the form of additional debt or equity financings. There can be no
assurance that the Company will be successful in securing additional capital. If the Company is unable to raise additional funds,
the Company might (a) initiate additional cost reductions; (b) forego acquisition or network build-out opportunities; and/or (c)
seek extensions of our scheduled payment obligations, including the non-current note payable to a Company director.
Off Balance Sheet Arrangements
As of June 30, 2012, we have provided irrevocable
standby letters of credit, aggregating approximately $100,000 to five states, which automatically renew for terms not longer than
one year, unless notified otherwise. As of June 30, 2012 and December 31, 2011, these letters of credit had not been drawn upon.
Critical Accounting Policies
There are no material changes from the critical
accounting policies set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
of our December 31, 2011 financial statements filed on Form 10-K dated March 30, 2012. Please refer to that document for disclosures
regarding the critical accounting policies related to our business.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
Not applicable.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures
designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), such as this quarterly report, is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed
with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive
Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Internal
controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions
are properly authorized, recorded and reported; and (2) our assets are safeguarded against unauthorized or improper use, to
permit the preparation of our condensed consolidated financial statements in conformity with United States generally accepted accounting
principles.
In connection with the preparation of this Quarterly Report
on Form 10-Q for the quarter ended June 30, 2012, management, with the participation of our Chief Executive Officer and Interim
Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures
(as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Chief Executive Officer and Interim
Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report on Form 10-Q, our disclosure
controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls
or in other factors that could significantly affect these controls, during our quarter ended June 30, 2012, that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On July 9,
2012, Elaine G. Bush notified us that, effective July 20, 2012, she was
resigning her
position as our Chief Financial Officer and all other positions she holds with Lightyear. On July 25, 2012, we appointed Randy
Ammon as our Interim Chief Financial Officer.
Limitations of the Effectiveness of Control
A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent
limitations of any control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within
a company have been detected.
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings.
Alden Halpern v. Lightyear Network Solutions, Inc. fka Libra
Alliance Corporation
was filed in Nevada District Court on March 1, 2012. The plaintiff alleges violations of federal
and state securities laws with respect to his purchase of our securities. Mr. Halpern alleges that we falsely represented that
the shares he was purchasing were “free-trading.” We have denied the allegations. Mr. Halpern claimed damages
of $750,000. On June 7, 2012, Mr. Halpern filed an Opposition to Defendant’s Motion to Dismiss and on June 25, 2012, we filed
a Defendant’s Reply in Support of Its Motion to Dismiss. We notified our insurance carriers concerning this matter and
continue to contest the allegations vigorously. We have not recorded a provision for any loss that could be incurred as a result
of the matter as we believe the allegations are without merit.
As of June 30, 2012, other claims have been asserted against
us which arose in the normal course of business. While there can be no assurance, management believes that the ultimate outcome
of these legal claims will not have a material adverse effect on our consolidated financial statements.
I
tem 2.
Unregistered Sales of Equity Securities and
Use of Proceeds.
Item 3.
Defaults Upon Senior Securities.
|
(a)
|
There has been no material default in the payment of principal or interest with respect to any of our indebtedness.
|
Item 4.
Mine Safety
Disclosures.
Not applicable.
Item 5.
Other Information.
Not applicable.
Item 6.
Exhibits.
Exhibit
|
|
Description
|
31.1
|
|
Chief Executive Officer Certification *
|
31.2
|
|
Chief Financial Officer Certification *
|
32
|
|
Section 1350 Certification **
|
101.INS
|
|
XBRL Instance Document **
|
101.SCH
|
|
XBRL Schema Document **
|
101.CAL
|
|
XBRL Calculation Linkbase Document **
|
101.DEF
|
|
XBRL Definition Linkbase Document **
|
101.LAB
|
|
XBRL Label Linkbase Document **
|
101.PRE
|
|
XBRL Presentation Linkbase Document **
|
|
|
|
*
|
|
Filed herewith
|
**
|
|
Furnished herewith
|
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized
LIGHTYEAR NETWORK SOLUTIONS, INC.
|
|
|
|
|
By:
|
/s/
|
Stephen M. Lochmueller
|
|
|
|
Stephen M. Lochmueller
|
|
|
|
Chief Executive Officer
|
|
|
|
|
By:
|
/s/
|
Randy Ammon
|
|
|
|
Randy Ammon
|
|
|
|
President, Chief Operating Officer
|
|
|
|
and Interim Chief Financial Officer
|
|
|
|
Date: August 14, 2012
|
|
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