Item 1. Financial Statements
IPASS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands)
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
10,368
|
|
|
$
|
16,072
|
|
Accounts receivable, net of allowance for doubtful accounts of $225 and $142, respectively
|
9,444
|
|
|
12,361
|
|
Prepaid expenses
|
1,693
|
|
|
1,344
|
|
Other current assets
|
134
|
|
|
225
|
|
Total current assets
|
21,639
|
|
|
30,002
|
|
Property and equipment, net
|
1,904
|
|
|
2,485
|
|
Other assets
|
712
|
|
|
688
|
|
Total assets
|
$
|
24,255
|
|
|
$
|
33,175
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
6,909
|
|
|
$
|
7,069
|
|
Accrued liabilities
|
3,457
|
|
|
3,874
|
|
Deferred revenue, short-term
|
2,738
|
|
|
2,412
|
|
Total current liabilities
|
13,104
|
|
|
13,355
|
|
Deferred revenue, long-term
|
121
|
|
|
67
|
|
Other long-term liabilities
|
1,028
|
|
|
1,123
|
|
Total liabilities
|
14,253
|
|
|
14,545
|
|
Stockholders’ equity:
|
|
|
|
Common stock
|
68
|
|
|
68
|
|
Additional paid-in capital
|
224,733
|
|
|
223,777
|
|
Accumulated deficit
|
(214,799
|
)
|
|
(205,215
|
)
|
Total stockholders’ equity
|
10,002
|
|
|
18,630
|
|
Total liabilities and stockholders’ equity
|
$
|
24,255
|
|
|
$
|
33,175
|
|
See Accompanying Notes to Condensed Consolidated Financial Statements
IPASS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(Unaudited; in thousands, except shares and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenue
|
$
|
13,474
|
|
|
$
|
16,497
|
|
|
$
|
27,760
|
|
|
$
|
31,228
|
|
Cost of revenue and operating expenses:
|
|
|
|
|
|
|
|
Network access costs
|
9,598
|
|
|
8,466
|
|
|
19,157
|
|
|
15,908
|
|
Network operations
|
1,514
|
|
|
1,780
|
|
|
3,206
|
|
|
3,878
|
|
Research and development
|
2,137
|
|
|
1,762
|
|
|
4,111
|
|
|
3,902
|
|
Sales and marketing
|
2,615
|
|
|
2,895
|
|
|
5,069
|
|
|
5,732
|
|
General and administrative
|
2,546
|
|
|
2,765
|
|
|
5,318
|
|
|
5,755
|
|
Restructuring charges and related adjustments
|
—
|
|
|
30
|
|
|
—
|
|
|
788
|
|
Total cost of revenue and operating expenses
|
18,410
|
|
|
17,698
|
|
|
36,861
|
|
|
35,963
|
|
Operating loss
|
(4,936
|
)
|
|
(1,201
|
)
|
|
(9,101
|
)
|
|
(4,735
|
)
|
Interest income, net
|
14
|
|
|
6
|
|
|
28
|
|
|
11
|
|
Foreign exchange loss, net
|
(129
|
)
|
|
(120
|
)
|
|
(179
|
)
|
|
(230
|
)
|
Loss before provision for income taxes
|
(5,051
|
)
|
|
(1,315
|
)
|
|
(9,252
|
)
|
|
(4,954
|
)
|
Provision for income taxes
|
217
|
|
|
62
|
|
|
332
|
|
|
153
|
|
Net loss
|
$
|
(5,268
|
)
|
|
$
|
(1,377
|
)
|
|
$
|
(9,584
|
)
|
|
$
|
(5,107
|
)
|
Comprehensive loss
|
$
|
(5,268
|
)
|
|
$
|
(1,377
|
)
|
|
$
|
(9,584
|
)
|
|
$
|
(5,107
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
|
|
|
|
|
|
Net loss per share
|
$
|
(0.08
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic and diluted
|
65,667,559
|
|
|
63,452,673
|
|
|
65,616,234
|
|
|
63,430,412
|
|
See Accompanying Notes to the Condensed Consolidated Financial Statements
IPASS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
Cash flows from operating activities:
|
|
|
|
Net loss
|
$
|
(9,584
|
)
|
|
$
|
(5,107
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
Stock-based compensation expense
|
693
|
|
|
492
|
|
Depreciation and amortization
|
796
|
|
|
1,371
|
|
Provision for doubtful accounts
|
110
|
|
|
36
|
|
Changes in operating assets and liabilities:
|
|
|
|
Accounts receivable
|
2,807
|
|
|
(1,736
|
)
|
Prepaid expenses and other current assets
|
(258
|
)
|
|
1,264
|
|
Other assets
|
(24
|
)
|
|
(18
|
)
|
Accounts payable
|
62
|
|
|
531
|
|
Accrued liabilities
|
(417
|
)
|
|
(774
|
)
|
Deferred revenue
|
380
|
|
|
(252
|
)
|
Other liabilities
|
(95
|
)
|
|
45
|
|
Net cash used in operating activities
|
(5,530
|
)
|
|
(4,148
|
)
|
Cash flows from investing activities:
|
|
|
|
Purchases of property and equipment
|
(437
|
)
|
|
(131
|
)
|
Net cash used in investing activities
|
(437
|
)
|
|
(131
|
)
|
Cash flows from financing activities:
|
|
|
|
Net proceeds from issuance of common stock
|
263
|
|
|
1,035
|
|
Principal payments for vendor financed property and equipment
|
—
|
|
|
(567
|
)
|
Stock repurchase
|
—
|
|
|
(345
|
)
|
Net cash provided by financing activities
|
263
|
|
|
123
|
|
Net decrease in cash and cash equivalents
|
(5,704
|
)
|
|
(4,156
|
)
|
Cash and cash equivalents at beginning of period
|
16,072
|
|
|
20,294
|
|
Cash and cash equivalents at end of period
|
$
|
10,368
|
|
|
$
|
16,138
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
Net cash paid for taxes
|
$
|
116
|
|
|
$
|
108
|
|
Accrued amounts for acquisition of property and equipment
|
$
|
151
|
|
|
$
|
11
|
|
See Accompanying Notes to Condensed Consolidated Financial Statements
IPASS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation and Recent Accounting Pronouncements
Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of iPass Inc. and its wholly owned subsidiaries ("iPass" and the “Company”). The Condensed Consolidated Financial Statements that accompany these notes have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2016. The Condensed Consolidated Financial Statements as of and for the year ended December 31, 2016, were derived from audited financial statements but do not include all disclosures required by GAAP. The interim financial information is unaudited but reflects all normal adjustments that are, in the opinion of management, necessary to provide a fair presentation for the interim periods presented. This interim financial information should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The results of operations for the three and six months ended
June 30, 2017
are not necessarily indicative of the operating results for the full fiscal year or any future periods.
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results that the Company experiences may differ materially from those estimates. Estimates are used for, but not limited to, the valuation of accounts receivables, other long-lived assets, recognition of deferred revenue, network access costs, stock-based compensation, legal contingencies, and income taxes.
The Company reports total comprehensive net loss in a single continuous financial statement within its Condensed Consolidated Statements of Operations and Comprehensive Loss. The Company’s comprehensive net loss is equivalent to its total net loss because the Company does not have any transactions that are recorded through other comprehensive loss.
Going Concern
The accompanying financial statements were prepared on a going concern basis in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The going concern basis of presentation assumes that the Company will continue in operation for the next twelve months from the date the financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business and does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the Company’s inability to continue as a going concern. The Company’s history of losses, limited liquidity and other factors raise substantial doubt about the Company’s ability to continue as a going concern. In order for the Company to continue operations beyond the next twelve months and be able to discharge its liabilities and commitments in the normal course of business it may need to raise additional capital or implement additional cost cutting measures. There can be no assurance that the Company will be able to achieve sustainable profitable operations or obtain additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to management.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations. Subsequently, the FASB issued the following accounting standard updates related to Topic 606, Revenue Contracts with Customers:
|
|
•
|
ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) in March 2016. ASU 2016-08 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on principal versus agent considerations.
|
|
|
•
|
ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing in April 2016. ASU 2016-10 does not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on identifying performance obligations and the licensing.
|
|
|
•
|
ASUs No. 2016-12 and 2016-20, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. These ASUs do not change the core principle of revenue recognition in Topic 606 but clarifies the implementation guidance on a few narrow areas and adds some practical expedients to the guidance.
|
The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company established an internal implementation team and engaged a third-party advisory firm to assist in the implementation of the new standard. The Company continues to assess the overall impact the adoption of ASU 2014-09 will have on its consolidated financial statements, and to evaluate whether to adopt the guidance using the full or modified retrospective basis.
Note 2. Financial Instruments and Fair Value
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction in the principal or most advantageous market between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers assumptions that market participants would use when pricing the asset or liability.
Fair Value Hierarchy
The three levels of inputs that may be used to measure fair value are as follows:
|
|
•
|
Level 1—Quoted prices in active markets for identical assets or liabilities;
|
|
|
•
|
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
|
|
|
•
|
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
The recurring fair value measurements of these financial assets (excluding cash) were determined using the following inputs at
June 30, 2017
, and
December 31, 2016
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017
|
|
As of December 31, 2016
|
|
Fair Value
Measured Using
|
|
Total
Balance
|
|
Fair Value
Measured Using
|
|
Total
Balance
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(In thousands)
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
(1)
|
$
|
9,138
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,138
|
|
|
$
|
14,083
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,083
|
|
Total financial assets
|
$
|
9,138
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,138
|
|
|
$
|
14,083
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,083
|
|
|
|
(1)
|
Held in cash and cash equivalents on the Company’s condensed consolidated balance sheets.
|
There were
no
transfers between Levels 1, 2, and 3 from
December 31, 2016
through
June 30, 2017
. As of
June 30, 2017
and
December 31, 2016
, the carrying amounts of accounts receivable, accounts payable, and accrued liabilities approximated fair value due to their short maturities (refer to Note 5 and Note 6 for discussion related to Accrued Restructuring and Vendor Financed Property and Equipment).
Note 3. Property and Equipment, net
Property and equipment, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31, 2016
|
|
(In thousands)
|
Equipment
|
$
|
10,677
|
|
|
$
|
10,492
|
|
Furniture and fixtures
|
378
|
|
|
378
|
|
Computer software
|
10,719
|
|
|
10,431
|
|
Construction in progress
|
35
|
|
|
303
|
|
Leasehold improvements
|
542
|
|
|
536
|
|
|
22,351
|
|
|
22,140
|
|
Less: Accumulated depreciation and amortization
|
(20,447
|
)
|
|
(19,655
|
)
|
Property and equipment, net
|
$
|
1,904
|
|
|
$
|
2,485
|
|
For the three months and six months ended June 30, 2017, depreciation expense was approximately
$0.3 million
and
$0.8 million
, respectively. For the three months and six months ended June 30, 2016, depreciation expense was approximately
$0.7 million
and
$1.4 million
, respectively.
During the three and six months ended June 30, 2017, the Company retired less than
$0.1 million
gross property and equipment. During the three and six months ended June 30, 2016, the Company retired less than
$0.1 million
gross property and equipment.
Note 4. Accrued Liabilities
Accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31, 2016
|
|
(In thousands)
|
Accrued tax liabilities
|
$
|
947
|
|
|
$
|
927
|
|
Accrued bonus, commissions and other employee benefits
|
675
|
|
|
808
|
|
Accrued vendor financed software
(1)
|
135
|
|
|
373
|
|
Amounts due to customers
|
817
|
|
|
869
|
|
Other accrued liabilities
|
883
|
|
|
897
|
|
|
$
|
3,457
|
|
|
$
|
3,874
|
|
|
|
(1)
|
See Note 6 "Vendor Financed Property and Equipment"
|
Note 5. Accrued Restructuring
During the second quarter of 2015, the Company announced a restructuring plan (the "Q2 2015 Plan") intended to flatten the organization, create a more nimble sales and delivery infrastructure to support a SaaS go to market strategy, and accelerate the cash flow break-even point for the Company. The Q2 2015 Plan reduced headcount globally by approximately
14%
and the Company recorded approximately
$4.2 million
of restructuring charges in 2015 and had less than
$0.1
million of payments remaining as of June 30, 2016 for employees termination costs. As of December 31, 2016, the Company had completed all of the related payments associated with Q2 2015 Plan.
During the first quarter of 2016, the Company announced a restructuring plan (the "Q1 2016 Plan") with the stated purpose to achieve positive Adjusted EBITDA profitability in 2016. The Q1 2016 Plan reduced headcount globally by
57
employees, or
30%
of the workforce, and primarily eliminated positions in engineering and network operations groups, including a reduction of personnel in the India team. The Company recorded approximately
$0.8
million of restructuring charges in 2016 and had less than
$0.1
million of payments remaining as of June 30, 2016. As of December 31, 2016, the Company had completed all of the related payments associated with Q1 2016 Plan.
The following is a rollforward of restructuring liability for the Plans:
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Beginning balance
|
$
|
—
|
|
|
$
|
379
|
|
Restructuring charges and related adjustments
|
—
|
|
|
30
|
|
Payments and adjustments
|
—
|
|
|
(398
|
)
|
Ending balance
|
$
|
—
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Beginning balance
|
$
|
—
|
|
|
$
|
249
|
|
Restructuring charges and related adjustments
|
—
|
|
|
788
|
|
Payments and adjustments
|
—
|
|
|
(1,026
|
)
|
Ending balance
|
$
|
—
|
|
|
$
|
11
|
|
Note 6. Vendor Financed Property and Equipment
In October 2013, the Company acquired enterprise database software (under a term unlimited license agreement) and infrastructure hardware. This purchase was financed through a vendor and was payable over
three
years. In April 2014, the Company acquired additional enterprise infrastructure hardware which was financed through the vendor and was payable over
two
years. The total purchases financed by the vendor were approximately
$3.1 million
. All payments were completed in fiscal year 2016.
In October 2016, the Company extended the license related to the previously acquired software for approximately
$0.5 million
to be paid over
one
year. Since October 2016, the Company made approximately
$0.4 million
of principal payments, and as of June 30, 2017, approximately
$0.1 million
was recorded in accrued liabilities. All payments are expected to be completed in fiscal year 2017, based on the payment terms.
Note 7. Commitments and Contingencies
Lease and Purchase Commitments
The Company leases facilities under operating leases that expire at various dates through October 2020. Future minimum lease payments under these operating leases as of June 30, 2017, are as follows:
|
|
|
|
|
Year
|
Operating
Leases
|
|
(In thousands)
|
Remainder of 2017
|
$
|
822
|
|
2018
|
1,322
|
|
2019
|
1,180
|
|
2020
|
926
|
|
|
$
|
4,250
|
|
The Company has contracts with certain network service providers which have minimum purchase commitments that
expire on various dates through December 2019
. Future minimum purchase commitments under these network service agreements as of June 30, 2017, are as follows:
|
|
|
|
|
Year
|
Minimum
Purchase
Commitments
|
|
(In thousands)
|
Remainder of 2017
|
$
|
16,699
|
|
2018
|
6,647
|
|
2019
|
403
|
|
|
$
|
23,749
|
|
Unclaimed Property Compliance
The Company has received notices from several states stating that they have appointed an agent to conduct an examination of the books and records of the Company to determine whether it has complied with state unclaimed property laws. In addition to seeking the turnover of unclaimed property subject to escheat laws, the states may seek interest, penalties, costs of examinations, and other relief. If the potential loss from any payment claim is considered probable and the amount or
the range of the loss can be estimated, the Company accrues a liability for the estimated loss. To date, the Company is not able to estimate the possible payment, if any, due to the early stages of this matter.
Legal Proceedings
The Company is involved in legal proceedings and claims arising in the ordinary course of business. While there can be no assurances as to the ultimate outcome of any litigation involving the Company, management does not believe any such pending legal proceeding or claim will result in a judgment or settlement that would have a material adverse effect on the Company’s financial position, results of operations or cash flows.
In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third-parties. Certain indemnification agreements may not be subject to maximum loss clauses. If the potential loss from any indemnification claim is considered probable and the amount or the range of the loss can be estimated, the Company accrues a liability for the estimated loss. To date, claims under such indemnification provisions have not been significant.
Note 8. Net Loss Per Share
Basic net loss per common share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding plus dilutive potential common shares as determined using the treasury stock method for outstanding stock options, restricted stock-based awards and shares issuable under the employee stock purchase plan, unless the result of adding such shares would be anti-dilutive. Unvested participating securities are included in the weighted daily average number of shares outstanding used in the calculation of diluted net income per common share, but are excluded from the calculation of diluted net loss per share. In a net loss position, basic and diluted net loss per common share are equal, since the weighted average number of shares used to compute diluted net loss per common share excludes anti-dilutive securities, including participating securities. As a result of the Company’s net loss for the three and six months ended June 30, 2017 and 2016, the Company has excluded all potential shares of common stock from the diluted net loss per share calculation as their inclusion would have had an anti-dilutive effect.
The following table sets forth the computation of basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands, except share and per share amounts)
|
|
(In thousands, except share and per share amounts)
|
Numerator:
|
|
|
|
|
|
|
|
Net loss
|
$
|
(5,268
|
)
|
|
$
|
(1,377
|
)
|
|
$
|
(9,584
|
)
|
|
$
|
(5,107
|
)
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic and diluted
|
65,667,559
|
|
|
63,452,673
|
|
|
65,616,234
|
|
|
63,430,412
|
|
|
|
|
|
|
|
|
|
Total loss per share - basic and diluted:
|
|
|
|
|
|
|
|
Total net loss per share
|
$
|
(0.08
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.08
|
)
|
The following weighted average potential shares of common stock have been excluded from the computation of diluted net loss per share because the effect of including these shares would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Options to purchase common stock
|
4,952,867
|
|
|
9,211,366
|
|
|
4,669,545
|
|
|
8,772,610
|
|
Restricted stock awards, including participating securities
|
212,498
|
|
|
245,832
|
|
|
215,831
|
|
|
265,832
|
|
Total
|
5,165,365
|
|
|
9,457,198
|
|
|
4,885,376
|
|
|
9,038,442
|
|
Note 9. Segment and Geographical Information
The following table presents total Company revenue by country or by geographical region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobility Services
|
Three Months Ended June 30,
|
|
Six Months Ended
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
United States
|
48
|
%
|
|
44
|
%
|
|
46
|
%
|
|
43
|
%
|
|
Europe, Middle East and Africa
|
43
|
%
|
|
43
|
%
|
|
44
|
%
|
|
44
|
%
|
|
Asia Pacific
|
6
|
%
|
|
12
|
%
|
|
7
|
%
|
|
12
|
%
|
|
Rest of the World
|
3
|
%
|
|
1
|
%
|
|
3
|
%
|
|
1
|
%
|
|
For the three months and six months ended June 30, 2017, the United States represented
48%
and
46%
of revenue, respectively, and Germany represented
14%
for both periods.
One
customer, a channel reseller, represented
11%
of total revenues for the three and six months ended June 30, 2017.
For the three months and six months ended June 30, 2016, the United States represented
44%
and
43%
of revenue, respectively, and Germany represented
14%
for both periods. One customer, a channel reseller, represented
11%
of total revenues for the three months and six months ended June 30, 2016.
Substantially all of the Company’s long-lived assets are located in the United States.
Note 10. Stock Repurchase Program
On November 3, 2015, the Company’s Board of Directors authorized a share repurchase program of up to
$3.0 million
of the Company’s common stock beginning in the fourth quarter of 2015. Under the repurchase program, the Company was authorized to repurchase shares through open market purchases, in accordance with applicable federal securities laws, including through trading plans under Rule 10b5-1 of the Securities and Exchange Act of 1934. The repurchase program ran through December 31, 2016. The number of shares repurchased and the timing of purchases were based on general business and market conditions, and other factors, including legal requirements. During the six months ending June 30, 2016, the Company repurchased
339,228
shares for
$345,296
under the repurchase program, for an average price of
$1.02
.
Note 11. Subsequent Events
Management has evaluated events subsequent to June 30, 2017, through the date the accompanying consolidated financial statements were filed with the Securities and Exchange Commission for transactions and other events that may require adjustment of and/or disclosure in such financial statements, and noted no additional significant subsequent event that needs to be disclosed.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (or “MD&A”) is provided in addition to the condensed consolidated financial statements and notes, included elsewhere in this report, to assist readers in understanding our results of operations, financial condition, and cash flows. The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and with the MD&A in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016.
This MD&A is organized as follows:
|
|
|
|
Overview
|
|
Discussion of our business
|
|
|
Business Portfolio and Our Strategy
|
|
Description of our business and strategy
|
|
|
|
Significant Trends and Events
|
|
Operating, financial and other material trends and events that affect our company and may reflect our performance
|
|
|
Key Operating Metrics
|
|
Discussion of key operating metrics that we use to evaluate our operating performance
|
|
|
Critical Accounting Policies and
Estimates
|
|
Accounting policies and estimates that we believe are most important to understanding the assumptions and judgments incorporated in our reported financial results
|
|
|
Results of Operations
|
|
An analysis of our financial results comparing the three and six months ended June 30, 2017, and June 30, 2016
|
|
|
Liquidity and Capital Resources
|
|
An analysis of changes in our balance sheet and cash flows, and discussion of our financial condition, potential sources of liquidity and other required disclosures
|
The various sections of this MD&A contain forward-looking statements regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expect,” “will,” “anticipate,” “intend,” “believe,” “estimate,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements which refer to projections of our future financial performance, our anticipated trends in our business, and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified in “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q, for factors that may cause actual results to be different from those expressed in these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and, except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Investors and others should note that we announce material financial information to our investors using our investor relations website, SEC filings, press releases, public conference calls and webcasts. We also use social media to communicate with our customers and the public about our company, our products and services and other matters relating to our business and market. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the U.S. social media channels including the iPass Twitter Feed, the iPass LinkedIn Feed, the iPass Google+ Feed, the iPass Facebook Page, the iPass Blog and the iPass Instagram account. These social media channels may be updated from time to time.
Overview
iPass (NASDAQ: IPAS) is a leading provider of global mobile connectivity, offering simple, secure, always-on Wi-Fi access on any mobile device. Built on a software-as-a-service ("SaaS") platform, the iPass cloud-based service keeps its customers connected by providing unlimited Wi-Fi connectivity on unlimited devices. iPass is the world’s largest Wi-Fi network, with more than 60 million hotspots in more than 120 countries, at airports, hotels, train stations, convention centers, outdoor venues, inflight, and more. Using patented technology, the iPass SmartConnect
TM
platform takes the guesswork out of Wi-Fi, automatically connecting customers to the best hotspot for their needs.
Customers simply download the iPass app to experience
UNLIMITED
,
EVERYWHERE
and
INVISIBLE
Wi-Fi
.
Business Highlights
Strategic iPass Assets
We believe iPass has a unique set of global mobile connectivity assets that provide us with competitive advantages. We see our three core assets as follows:
Our Technology Platform
: Our application (app) is an intelligent cloud-based service manager that securely connects users and devices to our global Wi-Fi footprint. The app is built on the backbone of years of iPass’ intellectual property and is developed from our own Software Development Kit ("SDK") that allows partners and customers to integrate the same technological advancements into their own applications. Benefits of the technology include:
|
|
•
|
iPass SmartConnect
TM
which is evolving mobile connectivity expectations from “best efforts” to a truly intelligent always-best-connected experience, solving for problems like false positives, network outages, and low connection success rates.
|
|
|
•
|
Last-Mile VPN security to protect user data, even at free Wi-Fi hotspots.
|
|
|
•
|
Veri-Fi
TM
big data aggregation and analysis intelligence to rate hotspots on critical quality of service criteria, optimize network performance attributes, and provide intelligent data to a variety of partner use cases.
|
|
|
•
|
Hotspot discovery and curation to keep our network growing both organically and commercially in the places our users need to use.
|
Our Back-end Infrastructure
: We have a global authentication fabric of integrated servers, cloud-based virtualized assets, and software that is interconnected with over 160 unique global Wi-Fi networks. This infrastructure allows us to provide secure, highly-available and seamless four-party global authentication, clearing and settlement of Wi-Fi users for our partners and customers. This infrastructure makes the over 60 million hotspots we aggregate look and feel like iPass hotspots; there is no need to enter personal data, watch commercials, or spend any nonproductive time logging into these locations, the platform just connects. Between our physical colocation facilities and our growing virtualization of cloud-based infrastructure assets, we have the ability to process millions of data records per day to drive the performance of our aggregated network and the evolving use cases of our big data analyses. The architecture is built on a telecom based transaction and reporting clearing back-end that would be time consuming and expensive to replicate.
Our Wi-Fi Network
: We have a Wi-Fi network footprint and supply chain that consists of over 60 million hotspots in over 120 countries and territories, including major airports, convention centers, planes, trains, train stations, hotels, restaurants, retail, and small business locations. In addition, with our embedded curation feature, we continue to identify and provide access to millions more free access hotspots in virtually every country in the world, providing additional connectivity options for our SmartConnect users. As a proponent of the sharing economy, our footprint also includes millions of community and free hotspots, providing the overlay benefits of our iPass SmartConnect technology aggregating all available connection opportunities for the users of our service.
The combination of the above assets allows us to drive three distinct but interconnected monetization streams in the future; technology integration through our SDK, big data intelligence, and our historical mobile connectivity solutions.
Business Portfolio and Go-to-Market Strategy
We have a single reportable operating segment, Mobile Connectivity Services. Our Mobile Connectivity Services offer a standard cloud-based solution allowing our customers and their users access to our global Wi-Fi network to stay
connected to the people and information that matters most. We categorize our services in two broad go-to-market approaches:
Enterprise (Business to Business or B2B):
This go-to-market strategy focuses on providing mobile connectivity solutions to enterprises ranging from large to small. With an easy-to-download application, a user on a variety of platforms (Windows, Mac, iOS, Android) can quickly access our hosted service and connect to our over 60 million Wi-Fi hotspots around the globe. While we continue to have existing customers that procure our services under a variety of pay-as-you go or flat rate pricing plans, in 2015 we introduced our UNLIMITED pricing. Under UNLIMITED, for a set price per subscriber per month, our customers have access to our entire network of hotspots without the worries of throttling usage or running up large overage expenses. For the quarter ended June 30, 2017, 20% of Enterprise revenue was generated from UNLIMITED customers.
Strategic Partnerships (Business to Business to Consumer or B2B2C):
This strategy is executed through business development deals intended to open channel distributions for our product to reach the consumer market. While the channel customer may use a combination of our platform, technology infrastructure, or network, each deal is negotiated independently based on specific customer needs. Strategic Partnerships include global OEMs (Original Equipment Manufacturers), loyalty programs like credit card companies, software product and service providers, and communication companies. With the advent of our SDK and big data generated from iPass SmartConnect, we envision additional monetization streams in the future with our strategic partners.
Our Corporate Strategy
We intend to leverage our unique set of assets across our go-to-market strategies to drive growth in new customer acquisition, subscribed users, and devices accessing our services. As part of our Mobile Connectivity Services strategy, we have rebuilt our product and service delivery across three main value creation initiatives.
UNLIMITED - Wi-Fi without boundaries
For a flat monthly per user rate, users have UNLIMITED access to our global network. Using our iPass SmartConnect technology and big data intelligence, we maximize the user experience while effectively optimizing our network cost structure.
EVERYWHERE - World’s largest Wi-Fi network
We continue to add strategic partners, bolstering our footprint in planes, trains, hotels, airports, restaurants, and cafes. And with our business development activities and B2B2C channel expansion, our services are proliferating on user devices around the globe.
INVISIBLE - Wi-Fi as easy as cellular
Our platform is an artificial intelligence network sniffer, finding, categorizing, rating, and optimizing networks and connections. It provides last mile VPN tunnel security and is designed to maximize connection success rates. For customers looking to leverage our intellectual property and platform functionality into their customized products, we launched our SDK in the first quarter of 2016. INVISIBLE also incorporates the iPass big data initiative, branded as Veri-Fi, to aggregate, analyze, and provide intelligent insight on a variety of potential use case applications.
For a detailed discussion regarding our mobility business, including our strategy and our service offerings, see “Item 1. Business” included in our Annual Report on Form 10-K for the year ended December 31, 2016.
Significant Trends and Events
The following describes recent significant trends and events of our business.
Product Evolution
While we have and will continue to sell and support customers on our pay-as-you-go usage and varying flat rate price plans, we continue to focus primarily on selling our UNLIMITED subscriptions to new or renewal customers. Our product is being optimized for UNLIMITED, providing always-on, secure connectivity to users, without any usage restrictions. While iPass SmartConnect is optimized for UNLIMITED customers, it can have unintended impacts on our legacy pay-per-use customers and associated revenues as it is designed to optimize the user quality of service attributes, such as connection success rates, often over purely connecting a user to any available hotspot, irrespective of the quality of that hotspot connection. In the first half of 2017, our pay-per-use revenue was adversely impacted as we continued to evolve the algorithms that optimize
quality of service with always best-connected attributes. In the second quarter, we continued to have connectivity issues, especially in our metered pay-as-you-go customers that can be attributed to a variety of factors including; network quality of service, virus and intrusion threat concerns, increased reliance on unlimited data cellular plans, and customer churn. We introduced iPass SmartConnect
TM
SDK, which provides the tools to build adaptive network selection applications for smartphones, tablets, and laptops. Developers can access iPass core technologies to activate, authenticate, connect, and create custom interfaces for presenting and selecting Wi-Fi networks. Applications built using the iPass SDK have instant and secure access to the iPass network. The SDK is designed for enterprises, operators and solution vendors seeking to leverage iPass wireless connectivity technology in their applications.
Network Access Investments
We continue leveraging the power of network curation, community, and strategic partner procurement. And while pure numbers emphasize an element of our EVERYWHERE initiative, more importantly we are enhancing our network through our platform technology to improve the user experience and mitigate issues like “false positives” (a network that broadcasts a signal but is not active in the iPass footprint), failed authentications, poor bandwidth, or other quality issues. To support our UNLIMITED strategy and to meet the needs of our customers' increasing consumption of Wi-Fi, we continue to invest in Network Access through selective investment decisions to lock up additional network capacity and drive the effective cost of data connectivity continually down. While we have not been successful in filling our network capacity purchases, we do continue to drive down the cost per unit of our network access costs, to $3.77 per hour in the second quarter, from $4.02 per hour, $4.80 per hour, and $5.12 per hour in full year 2016, 2015, and 2014, respectively.
Customer Roll-Out Initiatives
One area we struggled with in 2016 was converting committed sales contracts, as reported through our ACV metric, into recognized revenue. We had a significant amount of reported ACV in backlog at December 31, 2016 as contracts were delayed due to customer roll-out schedules, difficulties in implementing our SDK technology, and other integration issues. In 2017, we have created a dedicated SDK support team and will be working closely with new customers and partners to accelerate rollouts and convert backlog into billing and ultimately revenue recognized at a more rapid pace. Through June 30, 2017, we have had only limited success in accelerating the conversion of backlog but continue to refine our efforts. Our lack of success in converting backlog is the largest single risk associated with the going concern issue discussed in the "Liquidity and Capital Resources" Section.
Key Operating Metrics
Described below are key metrics that we use to evaluate our operating performance:
Total iPass Wi-Fi Network Users
Total iPass Wi-Fi Network Users (Enterprise and Strategic Partnerships) is the number of our platform users each month in a given quarter that used Wi-Fi network services from iPass. As our UNLIMITED subscriptions ramp and a significant number of our new or renewal customers are billed under UNLIMITED, this metric will likely transform to a SaaS-like benchmark: number of total subscribers.
Total iPass Active Platform Users
Total iPass Active Platform Users is the number of users who were billed platform fees and who have deployed the platform, regardless of whether they have actually used the Wi-Fi network services. Similar to Total iPass Wi-Fi Network Users, as our UNLIMITED pricing ramps and a significant number of our new or renewal customers are billed under UNLIMITED, this metric will likely transform to a unified SaaS-like benchmark: number of total subscribers. This metric excludes UNLIMITED subscribers unless they have actively accessed network during the period.
Hours Consumed
Hours Consumed represent the average number of network hours consumed by our customers each month in a given quarter. This operating metric is an indicator of the improvement of our technology performance, our customers' satisfaction, and the expansion of our network.
The following table summarizes the number of active users of iPass services as well as the hours consumed (in thousands). Each number of users below is calculated as the average number of active users per month, during a given quarter, for which a fee billed by iPass for either Wi-Fi or Platform service. Hours represent the monthly average hours consumed by our Wi-Fi Network Users during a given quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
June 30,
2017
|
|
March 31,
2017
|
|
December 31,
2016
|
|
September 30,
2016
|
|
June 30,
2016
|
|
|
Wi-Fi Network Users:
|
|
|
|
|
|
|
|
|
|
Enterprise
|
74
|
|
|
76
|
|
|
81
|
|
|
77
|
|
|
83
|
|
Strategic Partnerships
|
65
|
|
|
48
|
|
|
47
|
|
|
56
|
|
|
42
|
|
Total Wi-Fi Network Users
|
139
|
|
|
124
|
|
|
128
|
|
|
133
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
Total Active Platform Users
|
786
|
|
|
752
|
|
|
732
|
|
|
738
|
|
|
794
|
|
|
|
|
|
|
|
|
|
|
|
Network Hours Consumed:
|
|
|
|
|
|
|
|
|
|
Unlimited and Strategic Partnerships
|
521
|
|
|
407
|
|
|
402
|
|
|
371
|
|
|
231
|
|
Other Pricing Plans
|
327
|
|
|
363
|
|
|
393
|
|
|
383
|
|
|
447
|
|
Total Network Hours Consumed
|
848
|
|
|
770
|
|
|
795
|
|
|
754
|
|
|
678
|
|
Gross Margin
Gross Margin represents Total Revenue less Network Access Costs less Network Operations costs divided by Total Revenue and is comprehensive and insightful to the overall performance of the business, incorporating our overall costs to acquire, support, maintain, and provide network and network related services. Gross margin by quarter over the last five quarters was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
June 30,
2017
|
|
March 31,
2017
|
|
December 31,
2016
|
|
September 30,
2016
|
|
June 30,
2016
|
Gross Margin
|
17.5
|
%
|
|
21.2
|
%
|
|
34.9
|
%
|
|
35.2
|
%
|
|
37.9
|
%
|
Deferred revenue (Short-term plus Long-term)
Deferred Revenue represents the sales invoiced in advance of recognition under our revenue recognition policy. The fluctuation of deferred revenue is primarily driven by upfront payments received from our customers for annual subscriptions and fluctuations in number of devices shipped by an OEM strategic partner. Under the OEM agreement, we bill upfront on devices shipped and recognize revenue over the future obligation period to deliver related Wi-Fi services. The following table represents balances (in thousands) as of the period end date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
June 30,
2017
|
|
March 31,
2017
|
|
December 31,
2016
|
|
September 30,
2016
|
|
June 30,
2016
|
Total Deferred Revenue
|
$
|
2,859
|
|
|
$
|
3,217
|
|
|
$
|
2,479
|
|
|
$
|
2,563
|
|
|
$
|
2,300
|
|
Annual Contract Value ("ACV")
Annual Contract Value represents the annualized sales value committed under contract for newly acquired customers or significant upsell, in total across our Enterprise and Strategic Partnership go-to-market strategies, in the period. While ACV does not represent current revenue, it is a lead indicator of future revenue, especially as we migrate to a more SaaS-like recurring monthly subscription model under UNLIMITED pricing. Because ACV is not an alternative measure for GAAP revenue, but only an operational metric to provide insight on the health and progress of our sales pipeline and revised go-to-market strategy, the signing of committed contract value should not be assumed to have met our entire revenue recognition criteria. For example, while persuasive evidence of an arrangement always exist before reporting ACV, service may not yet have been provided to the customer or collections may not yet be determined to be reasonably assured. We make reasonable efforts to substantiate the viability of all reported ACV, but future events could change that conclusion. As an example, when a previously reported ACV customer fails to perform under the committed contract, such remaining calculated ACV will be reversed in the current period reported ACV. In the second quarter of 2017, we reversed $1.9 million of previously reported ACV due to contract terminations or significant delays in roll out schedules. The following table represents ACV (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
June 30,
2017
|
|
March 31,
2017
|
|
December 31,
2016
|
|
September 30,
2016
|
|
June 30,
2016
|
|
Annual Contract Value
|
$
|
(991
|
)
|
|
$
|
780
|
|
|
$
|
4,771
|
|
|
$
|
3,667
|
|
|
$
|
2,287
|
|
|
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on our historical experience, knowledge of current conditions and our belief of what could occur in the future considering available information, including assumptions that we believe to be reasonable under the circumstances. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results could differ materially from the amounts reported based on these policies. On an ongoing basis, we evaluate our estimates and judgments. There have been no significant changes in our critical accounting policies and estimates during the six months ended June 30, 2017, as compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016.
Recent Accounting Pronouncements
See Note 1 "Basis of Presentation and Recent Accounting Pronouncements" included in Part I, Item 1, of this report for information regarding recent accounting pronouncements.
Results of Operations
Sources of Revenue
We differentiate and analyze our revenue generation streams as follows:
Enterprise
revenues consist of Wi-Fi, platform, and other fees charged to enterprise customers of the iPass service. Revenues are generated by customers that purchase our service on a per user per month subscription basis ("Unlimited Customers") or under a variety of other pricing models which may include pay-as-you-go usage, flat rate pricing per active user, separate platform fees, and other ancillary services such as consulting or platform customization.
Strategic Partnership
revenues consist of Wi-Fi, platform, and other fees charged to our strategic partnership customers. In contrast to Enterprise revenue, pricing on these deals is negotiated specific to the customer needs and can include per device charges, platform only charges (including SDK), cost-plus or pay-as-you-go arrangements on Wi-Fi usage, and various other pricing mechanisms.
Legacy iPC
revenues consist of Dial-up and 3G network, our iPC platform, and related platform services, as well as iPC driven network usage, including iPC user driven Wi-Fi and minimum commit shortfall.
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Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
|
(In thousands)
|
Revenue Mobile Connectivity Services
|
$
|
13,474
|
|
|
$
|
16,497
|
|
|
$
|
27,760
|
|
|
$
|
31,228
|
|
Enterprise
|
10,776
|
|
|
12,897
|
|
|
22,051
|
|
|
25,118
|
|
Unlimited Customers
|
2,212
|
|
|
1,013
|
|
|
4,382
|
|
|
1,786
|
|
Other Pricing Plan Customers
|
8,564
|
|
|
11,884
|
|
|
17,669
|
|
|
23,332
|
|
Strategic Partnerships
|
2,301
|
|
|
3,035
|
|
|
4,890
|
|
|
4,944
|
|
Legacy iPC
|
397
|
|
|
565
|
|
|
819
|
|
|
1,166
|
|
For the three months ended June 30, 2017, revenue decreased $3.0 million or 18% as compared to the same period in 2016. This was due to lower Enterprise revenue of $2.1 million, lower Strategic Partnerships revenue of $0.7 million and lower Legacy iPC revenue of $0.2 million.
For the six months ended June 30, 2017, revenue decreased $3.4 million or 11% as compared to the same period in 2016. This was due to lower Enterprise revenue of $3.0 million and lower Legacy iPC revenue of $0.4 million, driven by churn and declining usage from our pay-as-you-go enterprise customers.
Gross Margin
We use gross margin as a metric to assist us in assessing the profitability of our various network and network related services. Our overall gross margin is defined as Total Revenue less Network Access Costs less Network Operations costs divided by total revenue.
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|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Gross Margin (%)
|
17.5
|
%
|
|
37.9
|
%
|
|
19.4
|
%
|
|
36.6
|
%
|
For the three and six months ended June 30, 2017, gross margin decreased by 20.4 and 17.2 percentage points, respectively, as compared to the same period in 2016 which is primarily due to the increase of our network access costs as a result of the investment in additional network capacity. We have purchased additional capacity to support our go to market initiatives on UNLIMITED and Strategic partners, and drive down our cost per unit of network consumed down. While our unit costs to acquire network have declined, revenue decreases have been steeper resulting in declining gross margin.
Cost of Revenue and Operating Expenses
Network Access Costs (NAC)
NAC consists of charges for network access which we pay to our network service providers and other direct cost of sales. We purchase NAC in a combination of pay-as-you-go and fixed-price-for-capacity arrangements.
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|
Three Months Ended
June 30,
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|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
|
(In thousands)
|
Network access costs
|
9,598
|
|
|
8,466
|
|
|
$
|
19,157
|
|
|
$
|
15,908
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|
As a percentage of total revenue
|
71.2
|
%
|
|
51.3
|
%
|
|
69.0
|
%
|
|
50.9
|
%
|
For the three and six months ended June 30, 2017, network access costs increased by approximately $1.1 million or 13.4% and $3.2 million or 20%, as compared to the same period in 2016. This was mainly due to the purchasing strategy to commit spend to acquire additional network capacity and the significant increase in network hours consumed.
For the six months ended June 30, 2017, network access costs as a percentage of total revenue increased 18.1 percentage points, as compared to the same period in 2016. This was primarily due to the increase in commit spend to acquire additional network capacity and a decrease in our Enterprise revenue.
Network Operations
Network operations expenses consist of compensation and benefits for our network engineering, customer support and network access quality personnel, outside consultants, transaction center fees, network equipment depreciation, and allocated overhead costs.
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|
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|
|
|
|
|
|
Three Months Ended
June 30,
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|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
|
(In thousands)
|
Network operations costs
|
1,514
|
|
|
1,780
|
|
|
3,206
|
|
|
3,878
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|
As a percentage of total revenue
|
11.2
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%
|
|
10.8
|
%
|
|
11.5
|
%
|
|
12.4
|
%
|
For the three and six months ended June 30, 2017, network operations expense decreased $0.3 million or 14.9% and $0.7 million or 17.3%, as compared to the same period in 2016, due to a decrease in depreciation expense.
Research and Development
Research and development expenses consist of compensation and benefits for our research and development personnel, software, consulting, and allocated overhead costs.
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|
|
|
Three Months Ended
June 30,
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|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
|
(In thousands)
|
Research and development expense
|
2,137
|
|
|
1,762
|
|
|
$
|
4,111
|
|
|
$
|
3,902
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|
As a percentage of total revenue
|
15.9
|
%
|
|
10.7
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%
|
|
14.8
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%
|
|
12.5
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%
|
For the three months ended June 30, 2017, research and development expense increased by $0.4 million or 21.3%, as compared to the same period in 2016, mainly due to increase in licenses and fees of $0.2 million, and an increase of professional services and support of $0.2 million.
For the six months ended June 30, 2017, research and development expense increased by $0.2 million or 5.4%, as compared to the same period in 2016, mainly due to increase in licenses and fees.
Sales and Marketing
Sales and marketing expenses consist of compensation, benefits, advertising and lead generation costs, and allocated overhead costs.
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|
|
|
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|
|
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|
|
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|
|
|
Three Months Ended
June 30,
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|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
|
(In thousands)
|
Sales and marketing expense
|
2,615
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|
|
2,895
|
|
|
$
|
5,069
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|
|
$
|
5,732
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|
As a percentage of total revenue
|
19.4
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%
|
|
17.5
|
%
|
|
18.3
|
%
|
|
18.4
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%
|
For the three months ended June 30, 2017, sales and marketing expense decreased by $0.3 million or 9.7%, compared to the same period in 2016, due to a decrease in commission and bonus expense.
For the six months ended June 30, 2017, sales and marketing expense decreased by $0.7 million or 11.6%, compared to the same period in 2016, mainly due to a decrease in commission and bonus expense of $0.6 million and decrease in marketing expense of $0.1 million.
General and Administrative
General and administrative expenses consist primarily of compensation and benefits for general and administrative personnel, facilities, legal and accounting expenses.
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|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
|
(In thousands)
|
General and administrative expense
|
2,546
|
|
|
2,765
|
|
|
5,318
|
|
|
5,755
|
|
As a percentage of total revenue
|
18.9
|
%
|
|
16.8
|
%
|
|
19.2
|
%
|
|
18.4
|
%
|
For the three and six months ended June 30, 2017, general and administrative expense decreased $0.2 million or 7.9% and $0.4 million or 7.6%, as compared to the same period in 2016, mainly due to the decrease in headcount related expenses.
Other Income and Expenses
Foreign Exchange Gains and Losses
Foreign exchange gains and losses primarily include realized and unrealized gains and losses on foreign currency transactions. Foreign currency exchange rate fluctuations impact the re-measurement of certain assets and liabilities denominated in currencies other than the U.S. Dollar and generate unrealized foreign exchange gains or losses. In addition, some of our network access costs are invoiced in currencies other than the U.S. Dollar. The transactional settlement of these outstanding invoices and other cross-currency transactions generate realized foreign exchange gains or losses depending on the fluctuation of exchange rates between the date of invoicing and the date of payment.
For the three and six months ended June 30, 2017 and 2016, we did not enter into any hedging contracts.
Foreign exchange loss for the three and six months ended June 30, 2017 was approximately $0.1 million and $0.2 million, respectively, primarily due to the re-measurement of certain assets and liabilities denominated in currencies other than the U.S. Dollar. Foreign exchange loss for the three and six months ended June 30, 2016 was approximately $0.1 million and $0.2 million, respectively.
Provision for Income Taxes
Income tax expense for the three and six months ended June 30, 2017 was approximately $0.2 million and $0.3 million, respectively, and is primarily related to foreign taxes on expected profits in the foreign jurisdictions. Income tax expense for each of the three and six months ended June 30, 2016 was approximately $0.1 million.
Liquidity and Capital Resources
We had cash and cash equivalents of $10.4 million at June 30, 2017, compared to $16.1 million at December 31, 2016.
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|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Cash Flows
|
|
Net cash used in operating activities
|
$
|
(5,530
|
)
|
|
$
|
(4,148
|
)
|
Net cash used in investing activities
|
(437
|
)
|
|
(131
|
)
|
Net cash provided by financing activities
|
263
|
|
|
123
|
|
Net decrease in cash and cash equivalents
|
$
|
(5,704
|
)
|
|
$
|
(4,156
|
)
|
Operating Activities
Net cash used in operating activities increased by approximately $1.4 million for the six months ended June 30, 2017 compared to the same period in 2016. Changes in working capital in the 2017 period were favorable $3.4 million as a result of timing of payables and receivables. Cash used as a result of net loss, after adjustment for non-cash items, increased by approximately $4.8 million driven mostly by the increase in net loss.
Investing Activities
Net cash used in investing activities increased by approximately $0.3 million for the six months ending June 30, 2017 compared to the same period in 2016. This increase is primarily a result of higher purchases of property and equipment during the 2017 period.
Financing Activities
Net cash provided by financing activities increased by approximately $0.1 million for six months ending June 30, 2017 compared to the same period in 2016. The increase is due to the $0.3 million paid for the repurchased shares and $0.6 million paid as principal payment for vendor financed property and equipment in 2016, offset in part by $0.8 million of incremental cash collected on option exercises during the 2016 period.
Sources of Cash and Future Cash Requirements
We have historically relied on existing cash and cash equivalents for our liquidity needs. We use a professional investment management firm to manage a large portion of our cash, which is invested primarily in money market accounts. We believe that based on our current revenue prospects and our anticipated cash flows from operations, our existing cash balances may not be sufficient to meet our working capital and operating resource expenditure requirements for the next twelve months. Achievement of our objectives will be dependent upon the ability to obtain additional capital, to generate revenue from current and planned business operations, or to control our costs. However, there is no assurance that we will be able to achieve these objectives, therefore substantial doubt about its ability to continue as a going concern exists.
The amount of cash and cash equivalents held by our foreign subsidiaries as of June 30, 2017 and December 31, 2016 was $0.4 million and $0.4 million, respectively. We currently do not intend to distribute any of our cumulative earnings by our foreign subsidiaries to the parent company in the U.S.
Primary Uses of Cash
Our principal use of cash during the three months ended June 30, 2017 was for network access costs, payroll related expenses, payments for vendor financing equipment purchase, and general operating expenses including marketing, office rent, and capital expenditures.
Contractual Obligations
The following are our contractual obligations as of March 31, 2017:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less Than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
(In thousands)
|
Operating Lease Obligations
|
$
|
4,250
|
|
|
$
|
1,515
|
|
|
$
|
2,735
|
|
|
$
|
—
|
|
Other Purchase Commitments
|
23,749
|
|
|
21,527
|
|
|
2,222
|
|
|
—
|
|
Total Contractual Obligations (1)
|
$
|
27,999
|
|
|
$
|
23,042
|
|
|
$
|
4,957
|
|
|
$
|
—
|
|
(1) See Note 7 "Commitments and Contingencies"
Our contractual commitments at December 31, 2016, were $37.3 million. For information on our contractual commitments at December 31, 2016, see “Contractual Obligations” in Item 7, Management’s Discussion and Analysis of Financial Conditions and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2016.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. We did not have any off-balance sheet arrangements at June 30, 2017, and December 31, 2016, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.