Notes to Consolidated Financial Statements
(Unaudited)
Anterix Inc. (formerly known as pdvWireless, Inc., the “Company”) is a wireless communications company focused on empowering the modernization of critical infrastructure and enterprise business communications by enabling broadband connectivity. The Company’s foundational spectrum provides the ability to transform its customers’ operations to meet new business complexities while achieving higher levels of performance and safety. The Company is the largest holder of licensed spectrum in the 900 MHz band (896-901/935-940 MHz) with nationwide coverage throughout the contiguous United States, Hawaii, Alaska and Puerto Rico. On average, the Company holds approximately 60% of the channels in the 900 MHz band in the top 20 metropolitan market areas in the United States. The Company is currently pursuing a regulatory proceeding at the Federal Communications Commission (the “FCC”) that seeks to modernize and realign the 900 MHz band by allowing it to be utilized for the deployment of broadband networks, technologies and solutions.
The Company was originally incorporated in California in 1997 and reincorporated in Delaware in 2014. In November 2015, the Company changed its name from Pacific DataVision, Inc. to pdvWireless, Inc. On August 6, 2019, the Company changed its name from pdvWireless, Inc. to Anterix Inc. The Company maintains offices in Woodland Park, New Jersey and McLean, Virginia.
Historically, the Company generated revenue principally from its pdvConnect and TeamConnect businesses. pdvConnect is a mobile communication and workforce management solution. The Company historically marketed pdvConnect primarily through two Tier 1 carriers in the United States. In Fiscal 2016, it began offering a commercial push-to-talk (“PTT”) service, which was marketed as TeamConnect, in seven major metropolitan areas throughout the United States, including Atlanta, Baltimore/Washington, Chicago, Dallas, Houston, New York and Philadelphia. It primarily offered the TeamConnect service to customers indirectly through third-party sales representatives who were primarily selected from Motorola’s nationwide dealer network.
In June 2018, the Company announced its plan to restructure its business to align and focus its business priorities on its spectrum initiatives aimed at modernizing and realigning the 900 MHz band to increase its usability and capacity, including for the future deployment of broadband and other advanced technologies and services. In December 2018, the Company’s board of directors approved the transfer of the Company’s TeamConnect business and support for its pdvConnect business.
In July 2019, the Company completed a registered follow-on offering in which it sold 2,222,223 shares of its common stock at a purchase price to the public of $45.00 per share. Net proceeds were approximately $94.2 million after deducting $5.5 million in underwriting discounts and commissions, and $0.3 million in offering expenses.
2. Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
The unaudited consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information. Pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with US GAAP have been condensed or omitted.
Because certain information and footnote disclosures have been condensed or omitted, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2019, as filed on May 20, 2019 with the SEC. In the Company’s opinion all normal and recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included. The Company believes that the disclosures made in the unaudited consolidated interim financial statements are adequate to make the information not misleading. The results of operations for the interim periods presented are not necessarily indicative of the results for the year. The Company is also required to make certain estimates with regard to the valuation of awards and forfeiture rates for its share-based award programs. New estimates in the period relate to determining the Company’s estimated incremental borrowing rate in recognizing right of use assets and operating lease liabilities. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the financial statements in the applicable period. Accordingly, actual results could materially differ from those estimates.
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, including PDV Spectrum Holding Company, LLC formed in April 2014. All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain prior year amounts have been reclassified to conform to the presentation of the corresponding amounts in the financial statements for the three and six months ended September 30, 2019. These reclassifications had no effect on previously reported net loss or net loss per common share basic and diluted.
Cash and Cash Equivalents
All highly liquid investments with maturities of three months or less at the time of purchase are considered cash equivalents. Cash equivalents are stated at cost, which approximates the quoted market value and include amounts held in money market funds.
Intangible Assets
Intangible assets are wireless licenses that will be used to provide the Company with the exclusive right to utilize designated radio frequency spectrum to provide wireless communication services. While licenses are issued for only a fixed time, generally ten years, such licenses are subject to renewal by the FCC. License renewals have occurred routinely and at nominal cost in the past. There are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of the Company’s wireless licenses. As a result, the Company has determined that the wireless licenses should be treated as an indefinite-lived intangible asset. The Company will evaluate the useful life determination for its wireless licenses each year to determine whether events and circumstances continue to support their treatment as an indefinite useful life asset.
The licenses are tested for impairment annually on an aggregate basis, as the Company will be utilizing the wireless licenses on an integrated basis as part of developing broadband. In Fiscal 2019, the Company performed a step one quantitative impairment test to determine if the fair value is greater than carrying value. Estimated fair value is determined using a market-based approach. There are no triggering events indicating impairment in the six months ended September 30, 2019.
Long-Lived Asset and Right of Use Asset Impairment
The Company evaluates long-lived assets, including right of use assets, other than intangible assets with indefinite lives, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Asset groups are determined at the lowest level for which identifiable cash flows are largely independent of cash flows of other groups of assets and liabilities. When the carrying amount of the asset groups are not recoverable and exceeds its fair value, an impairment loss is recognized equal to the excess of the asset group’s carrying value over the estimated fair value.
Equity Method Investment
The Company’s 19.5% investment in TeamConnect LLC (“LLC”) for which the Company is not the primary beneficiary and does not influence or control the activities that most significantly impact the LLC’s economic performance, are not consolidated and are accounted for under the equity method of accounting. Under the equity method of accounting, the LLC’s accounts are not reflected within the Company’s consolidated balance sheets and statements of operations. The Company's share of the earnings of the LLC is reported as income (loss) on equity method investment in the Company’s consolidated statements of operations. The Company’s carrying value in an equity method investment is reported as equity method investment on the Company’s consolidated balance sheets.
If the Company’s carrying value in an equity method is reduced to zero, no further losses are recorded in the Company’s consolidated financial statements unless the Company guarantees obligations of the LLC or commits additional funding. When the LLC subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.
Leases
Leases in which the Company is the lessee are comprised of corporate office space and tower space. Substantially all of the leases are classified as operating leases. The Company is obligated under certain lease agreements for office space with lease terms expiring on various dates from October 14, 2025 through June 30, 2027, which includes a ten-year lease extension for its corporate headquarters. The Company entered into multiple lease agreements for tower space related to its spectrum holdings.
In accordance with Financial Accounting Standards Board, (“FASB”) Accounting Standards Update (“ASU”) 2016-02 Leases (“ASC 842”), the Company recognized right of use (“ROU”) assets and corresponding lease liabilities on its Consolidated Balance Sheet for its operating lease agreements. The Company elected the package of practical expedients for its long-term operating leases, which permits the Company not to reassess under the new standard the prior conclusions about lease identification, lease classification and initial direct costs. See Note 9 – Leases for further discussion, including the impact on the Company’s consolidated financial statements and required disclosures.
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities as well as from net operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities from a change in income tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is established when it is estimated that it is more likely than not that the tax benefit of a deferred tax asset will not be realized.
Revenue Recognition
Revenues are recognized when a contract with a customer exists and control of the promised goods or services is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services and the identified performance obligation has been satisfied.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Accounting Standards Update 2014-09, Revenue from Contracts with Customers, (“ASC 606”). A contract’s transaction price is allocated to each distinct performance obligation and is recognized as revenue when, or as, the performance obligation is satisfied, which typically occurs when the services are rendered. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. The Company’s contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. It generally determines standalone selling prices based on the prices charged to customers under contracts involving only the relevant performance obligation. Judgment may be used to determine the standalone selling prices for items that are not sold separately, including services provided at no additional charge. Most of the Company’s performance obligations are satisfied over time as services are provided.
The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. The Company has determined that certain sales commissions meet the requirements to be capitalized and have been recorded as an asset upon the Company’s adoption of ASC 606. As a result of the customers being assigned to A BEEP and Goosetown (see Note 3 below), the Company’s capitalized sales commissions were impaired on April 1, 2019.
Stock Compensation
The Company accounts for stock options in accordance with US GAAP, which requires the measurement and recognition of compensation expense, based on the estimated fair value of awards granted to consultants, employees and directors. The Company estimates the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Company’s statements of operations over the requisite service periods. In the event the participant’s employment by or engagement with (as a director or otherwise) the Company terminates before exercise of the options granted, the stock options granted to the participant shall immediately expire and all rights to purchase shares thereunder shall immediately cease and expire and be of no further force or effect, other than applicable exercise rights for vested shares that may extend past the termination date as provided for in the participant’s applicable option award agreement. Additionally, the Compensation Committee adopted an Executive Severance Plan (the “Severance Plan”) in February 2015, which was amended in February 2019, and the Company subsequently entered into Severance Plan Participation Agreements with its executive officers and certain key employees. In addition to providing participants with severance payments, the Severance Plan provides for accelerated vesting and extends the exercise period for outstanding equity awards if the Company terminates a participant’s service for reasons other than cause, death or disability or the participant terminates his or her service for good reason, whether before or after a change of control (each of such terms as defined in the Severance Plan).
To calculate option-based compensation, the Company uses the Black-Scholes option-pricing model. The Company’s determination of fair value of option-based awards on the date of grant using the Black-Scholes model is affected by assumptions regarding a number of subjective variables.
The fair value of restricted stock, restricted stock units and performance units are measured based upon the quoted closing market price for the stock on the date of grant. The compensation cost for the restricted stock and restricted stock units is recognized on a straight-line basis over the vesting period. The compensation cost for the performance units is recognized when the performance criteria are expected to be complete.
No tax benefits have been attributed to the share-based compensation expense because the Company maintains a full valuation allowance for all net deferred tax assets.
Accounting for Uncertainty in Income Taxes
The Company recognizes the effect of tax positions only when they are more likely than not to be sustained. Management has determined that the Company had no uncertain tax positions that would require financial statement recognition or disclosure. The Company is no longer subject to U.S. federal, state or local income tax examinations for periods prior to 2016. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.
Net Loss Per Share of Common Stock
Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. For purposes of the diluted net loss per share calculation, preferred stock, stock options, restricted stock and warrants are considered to be potentially dilutive securities. Because the Company has reported a net loss for the three months and six months ended September 30, 2019 and 2018, respectively, diluted net loss per common share is the same as basic net loss per common share for those periods.
Common stock equivalents resulting from potentially dilutive securities approximated 1,409,000 and 1,179,000 at September 30, 2019 and 2018, respectively, and have not been included in the dilutive weighted average shares of common stock outstanding, as their effects are anti-dilutive.
Recently Issued Accounting Pronouncements
Other accounting standards that have been issued or proposed by the FASB or other standard-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.
Recently Adopted Accounting Pronouncements
Accounting for Leases
In February 2016, the FASB issued ASC 842, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. Originally, entities were required to adopt ASU 2016-02 using a modified retrospective approach at the beginning of the earliest comparative period presented in the financial statements and the recognition of a cumulative-effect adjustment to the opening balance of retained earnings. The FASB subsequently issued ASU 2018-10 and ASU 2018-11 in July 2018, which provide clarifications and improvements to ASU 2016-02 (collectively, the “new lease standard”). ASU 2018-11 also provides the optional transition method which allows companies to apply the new lease standard at the adoption date instead of at the earliest comparative period presented and continue to apply the provisions of the previous lease standard in its annual disclosures for the comparative periods. The new lease standard requires lessees to present a ROU asset and a corresponding lease liability on the balance sheet. Lessor accounting is substantially unchanged compared to the current accounting guidance. Additional footnote disclosures related to leases will also be required.
On April 1, 2019, the Company adopted the new lease standard using the optional transition method. The comparative financial information will not be restated and will continue to be reported under the previous lease standard in effect during those periods. In addition, the new lease standard provides a number of optional practical expedients in transition. The Company elected the package of practical expedients. As such, the Company will not reassess whether expired or existing contracts are or contain a lease; will not need to reassess the lease classifications or reassess the initial direct costs associated with expired or existing leases. The Company did not elect the use of hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company.
The new lease standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize ROU assets or lease liabilities, including not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company elected the practical expedient to not separate lease and non-lease components for certain classes of assets (office buildings).
On April 1, 2019, the Company recognized ROU assets of $7.1 million and lease liabilities of approximately $9.4 million, derecognized deferred rent liabilities of approximately $2.3 million and did not record an adjustment to accumulated deficit. When measuring lease liabilities for leases that were classified as operating leases, the Company discounted lease payments using its estimated incremental borrowing rate at April 1, 2019. The weighted average incremental borrowing rate applied was 13%. The Company’s adoption of the new lease standard did not impact its consolidated statements of operations and its statements of cash flows. No cumulative effect adjustment was recognized as the amount was not material. See Note 9 – Leases for further discussion, including the impact on the Company’s consolidated financial statements and required disclosures.
Stock Compensation
In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-based Payment Accounting. ASU 2018-07 addresses several aspects of the accounting for nonemployee share-based payment transactions, including share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for the Company’s fiscal year 2020 beginning April 1, 2019. As a result of adopting the ASU on April 1, 2019, the Company reduced its accumulated deficit by $188,000. See Note 11 – Stock Acquisition Rights, Stock Options and Warrants for further discussion, including the impact on the Company’s consolidated financial statements and required disclosures.
3.Revenue
On April 1, 2018, the Company adopted ASC 606 using the modified retrospective method and recognized the cumulative effect of initially applying the guidance as an adjustment to the opening balance of retained deficit. The Company applied the new revenue standard to new and existing contracts that were not complete as of the date of initial application. As a result of applying this standard using the modified retrospective method, the Company has presented financial results and applied its accounting policies for the period beginning April 1, 2018 under ASC 606, while prior period results and accounting policies have not been adjusted and are reflected under legacy GAAP pursuant to Accounting Standard Codification 605.
In December 2018, the Company’s board of directors approved the transfer of its TeamConnect business and support for its pdvConnect business to help reduce operating costs and to allow the management team and the Company to focus on its FCC initiatives and future broadband opportunities. Specifically, the Company entered into: (i) a Customer Acquisition and Resale Agreement with A BEEP LLC (“A BEEP”) on January 2, 2019, (ii) a Customer Acquisition, Resale and Licensing Agreement with Goosetown Enterprises, Inc. (“Goosetown”) on January 2, 2019 and (iii) a memorandum of understanding (“MOU”) with the principals of Goosetown on December 31, 2018. Under the A BEEP and Goosetown Agreements, the Company agreed to: (i) transfer its TeamConnect customers located in the Atlanta, Chicago, Dallas, Houston and Phoenix metropolitan markets to A BEEP, (ii) transfer its TeamConnect customers located in the Baltimore/Washington DC, Philadelphia and New York metropolitan markets to Goosetown, (iii) provide A BEEP and Goosetown with access to the TeamConnect Metro and Campus Systems (the, “MotoTRBO Systems ”) and (iv) grant A BEEP and Goosetown the right to resell access to the MotoTRBO Systems pursuant to separate Mobile Virtual Network Operation arrangements for a two-year period. The Company also granted Goosetown a license to sell the business applications the Company developed for its TeamConnect service. On March 31, 2019, the agreements were amended to formally set the transition date for the businesses as April 1, 2019 and to clarify the responsibilities between the parties.
Under these agreements, A BEEP and Goosetown agreed to provide customer care, billing and collection services for their respective acquired customers. The Company continued to provide these services through April 1, 2019 to help facilitate the transitioning of the acquired customers. Additionally, the Company is required to maintain and pay all site lease, backhaul and utility costs required to operate the MotoTRBO Systems for a two-year period. As part of the Company’s efforts to clear the 900 MHz spectrum for broadband use, A BEEP and Goosetown are required to migrate the acquired customers off the MotoTRBO Systems over the two-year period. In consideration for the customers and rights the Company transferred, A BEEP and Goosetown are required to pay a certain portion of the recurring revenues they receive from the acquired customers ranging from 100% to 20% during the terms of the agreements. Additionally, A BEEP is required to pay the Company a portion of recurring revenue from customers who utilize A BEEP’s push-to-talk Diga-talk Plus application service ranging from 35% to 15% for a period of two years. Goosetown is required to pay the Company 20% of recurring revenues from the TeamConnect applications it licensed for a period of two years.
Service Revenue. The Company has historically derived its service revenue from a fixed monthly recurring unit price per user, with 30-day payment terms, for the pdvConnect, TeamConnect and Diga-talk service offerings.
pdvConnect is a proprietary cloud-based mobile resource management solution which has historically been sold as a separate software-as-a-service offering for dispatch-centric business customers who utilize Tier 1 cellular networks, and to a lesser extent, who utilize land mobile radio networks not operated by the Company. pdvConnect was historically sold directly by the Company or through two Tier 1 domestic carriers. The service is contracted and billed on a month-to-month basis, and the Company satisfies its performance obligation over time as the services are delivered.
TeamConnect combines pdvConnect with push-to-talk (“PTT”) mobile communication services involving digital network architecture and mobile devices. The contract period for the TeamConnect service varies from a month-to-month basis to 24 months. The customer is billed at the beginning of each month of the contract term. The Company recognizes revenue as it satisfies its performance obligation over time as the services are delivered. On April 1, 2019, these customers were transitioned to A BEEP and Goosetown. A BEEP and Goosetown agreed to pay the Company a certain portion of the recurring revenues during the term of the agreements. While the customer remains on the Company’s MotoTRBO Systems, the portion of recurring revenues paid by A BEEP and Goosetown is recorded as revenue.
Diga-talk is a mobile communications offering that was being resold by the Company for the three and six months ended September 30, 2018. The service was contracted and billed on a month-to-month basis. The determination was made that the Company was the principal in this reseller arrangement since the customer viewed the Company as fulfilling the performance obligations and therefore, recorded revenue on a gross basis over time upon delivery of the services. On April 1, 2019, these customers were transferred to A BEEP and the Company no longer has revenue for this offering.
Spectrum Revenue. In September 2014, Motorola paid the Company an upfront, fully-paid fee of $7.5 million in order to use a portion of the Company’s wireless spectrum licenses. The payment of the fee is accounted for as deferred revenue on the Company’s consolidated balance sheets and is recognized ratably as the service is provided over the contractual term of approximately ten years. The revenue recognized for the three and six months ended September 30, 2019 and 2018 were approximately $182,000 and $364,000, respectively.
Other Revenue. The Company historically derived other revenue primarily from either the sale of radios and accessories for TeamConnect and Diga-talk as well as the rental of radios for TeamConnect based on 30-day payment terms. The Company recognized radio and accessory revenue when a customer takes possession of the device. As of April 1, 2019 and the transition of customers to A BEEP and Goosetown, the Company no longer sells radios and accessories nor rents radios for TeamConnect.
Contract Assets. Contract assets includes the portion of the Company’s future service invoices which has been allocated to the discounted price of the radios and amortized as a reduction against service revenue over the contract period.
The Company also recognized a contract asset for the incremental costs of obtaining a contract with a customer. These costs include commissions for sales people and commissions paid to third-party dealers. These costs are amortized ratably using the portfolio approach over the estimated customer contract period. The Company reviews the contract asset on a periodic basis to determine if an impairment exists. If it is determined that there was an impairment, the contract asset will be expensed. Under the previous accounting standard, the Company expensed commissions as incurred.
As a result of the customers being transferred to A BEEP and Goosetown, all contract and contract acquisition costs were impaired. The Company increased direct cost of revenue amounting to $178,000 for the six months ended September 30, 2019, and sales and support expense amounting to $258,000 for the six months ended September 30, 2019.
The following table presents the activity for the Company’s contract assets (in thousands):
|
|
|
|
Contract Assets
|
Balance as of April 1, 2018
|
$
|
768
|
Additions
|
|
284
|
Amortization
|
|
(558)
|
Impairment
|
|
(58)
|
Balance at March 31, 2019
|
|
436
|
Impairment
|
|
(436)
|
Balance at September 30, 2019
|
$
|
—
|
|
|
|
Contract liabilities. Contract liabilities primarily relate to advance consideration received from customers for spectrum services, for which revenue is recognized over time, as the services are performed. These contract liabilities are recorded as deferred revenue on the balance sheet. The related liability as of March 31, 2019 of $4.2 million has been reduced by revenue recognized in the six months ended September 30, 2019 of $0.4 million leaving a remaining liability of $3.8 million as of September 30, 2019.
4. Property and Equipment
Property and equipment consists of the following at September 30, 2019 and March 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
September 30,
|
|
March 31,
|
|
|
|
useful life
|
|
2019
|
|
2019
|
Network sites and equipment
|
|
|
5-10 years
|
|
$
|
15,864
|
|
$
|
15,954
|
Furniture and fixture and other equipment
|
|
|
2-5 years
|
|
|
282
|
|
|
1,026
|
Computer equipment
|
|
|
5-7 years
|
|
|
83
|
|
|
140
|
Computer software
|
|
|
1-7 years
|
|
|
509
|
|
|
28
|
Leasehold improvements
|
|
|
Shorter of the lease term or 10 years
|
|
|
232
|
|
|
351
|
|
|
|
|
|
|
16,970
|
|
|
17,499
|
Less accumulated depreciation
|
|
|
|
|
|
8,340
|
|
|
7,952
|
|
|
|
|
|
|
8,630
|
|
|
9,547
|
Construction in process
|
|
|
|
|
|
19
|
|
|
283
|
Property and equipment, net
|
|
|
|
|
$
|
8,649
|
|
$
|
9,830
|
Depreciation expense for the three months ended September 30, 2019 and 2018 amounted to $0.6 million and $0.7 million, respectively. The depreciation expense for the six months ended September 30, 2019 and 2018 amounted to $1.3 million and $1.4 million, respectively. During the six months ended September 30, 2018, the Company recorded a $0.5 million non-cash charge for long-lived asset impairment of its radio assets to reduce the carrying value to the estimated recoverable amount. There was no impairment charge for the three and six months ended September 30, 2019. Computer software includes software developed or obtained for internal use during the application development stage with an estimated useful life of 5 to 7 years. Leasehold improvements include certain allowances for tenant improvements related to the expansion of the Company’s corporate headquarters. As of September 30, 2019, construction in progress primarily relates to various computer equipment that were not in service. As of March 31, 2019, construction in progress primarily relates to various software and web projects being developed internally. On September 30, 2019, the Company transferred network, computer and other equipment with a net book value of $72,000 used to support the pdvConnect application services in exchange for a 19.5% ownership interest to the LLC.
5.Intangible Assets
Wireless licenses are considered indefinite-lived intangible assets. Indefinite-lived intangible assets are not subject to amortization but instead are tested for impairment annually, or more frequently if an event indicates that the asset might be impaired. There were no impairment charges related to the Company’s indefinite-lived intangible assets during the three and six months ended September 30, 2019 and 2018.
During the quarter ended September 30, 2019, the Company entered into an agreement with a third party to acquire wireless licenses for cash consideration of $0.2 million, upon FCC approval.
Intangible assets consist of the following at September 30, 2019 and March 31, 2019 (in thousands):
|
|
|
|
|
|
Wireless Licenses
|
Balance at March 31, 2019
|
|
$
|
107,548
|
Acquisitions
|
|
|
202
|
Reclassed to property and equipment
|
|
|
(5)
|
Balance at September 30, 2019
|
|
$
|
107,745
|
6. Equity Method Investment
In connection with the transfer of its TeamConnect business and support for its pdvConnect business, the Company entered into a memorandum of understanding (“MOU”) with the principals of Goosetown on December 31, 2018. Under the MOU, the Company agreed to assign the intellectual property rights to its pdvConnect application to the LLC, a new entity formed by the principals of Goosetown, in exchange for a 19.5% ownership interest in the LLC, effective April 30, 2019. The Goosetown principals have agreed to fund the future operations of the LLC, subject to certain limitations. The LLC has assumed the Company’s software support and maintenance obligations under the Goosetown and A BEEP Agreements. The LLC has also assumed customer care services related to the Company’s pdvConnect application. The Company provided transition services to the LLC through April 1, 2019 to facilitate an orderly transition of the customer care services.
As of September 30, 2019, the Company transferred network, computer and other equipment with a net book value of $72,000, and recorded an investment in the LLC amounting to $14,000 and loss on disposal of assets amounting to $58,000 relating to the transfer of the assets as of such date. The Company anticipates that it will complete the transfer of the intellectual property rights to the LCC during the third quarter of fiscal 2020.
During the six months ended September 30, 2019, the change in the carrying value of the investment in the LLC is summarized as follows (in thousands):
|
|
|
|
|
|
Equity Method Investment
|
Equity method investment carrying value at March 31, 2019
|
|
$
|
—
|
Contribution
|
|
|
14
|
Share of net income from LLC
|
|
|
15
|
Equity method investment carrying value at September 30, 2019
|
|
$
|
29
|
7.Related Party Transactions
As of March 31, 2019, the Company owed $5,000 to a consultant firm who is an affiliate of a significant holder of the Company. No such services were provided and owed to the consulting firm for the three and six months ending September 30, 2019 and 2018, respectively.
The Company purchased $2,000 and $1,000 of equipment from Motorola for the three months ended September 30, 2019 and 2018, respectively. The Company paid $11,000 and $10,000 for services from Motorola for the six months ended September 30, 2019 and 2018, respectively. The Motorola revenue recognized for the three and six months ended September 30, 2019 and 2018 were approximately $182,000 and $364,000, respectively. As of September 30, 2019 and March 31, 2019, the Company owed $84,000 and $60,000 to Motorola, respectively.
Under the terms of the MOU, the Company is obligated to pay the LLC a monthly service fee for a 24-month period ending on January 7, 2021 for its assumption of the Company’s support obligations under the A BEEP and Goosetown agreements. The Company is also obligated to pay the LLC a certain portion of the billed revenue received by the Company from pdvConnect customers for a 48-month period. For the three and six months ended September 30, 2019, the Company incurred $250,000 and $514,000 under the MOU, respectively. As of September 30, 2019 and March 31, 2019, the Company owed $30,000 and $118,000 to the LLC, respectively.
8.Impairment and Restructuring Charges
Long-lived Assets and Right of Use Assets Impairment.
During the six months ended September 30, 2018, the Company reviewed assets designated for its TeamConnect business. As a result of the Company’s transfer of the TeamConnect business, it determined that the carrying value of radios and related accessories were not fully recoverable. As a result, the Company recorded a non-cash asset impairment charge of $0.5 million in the six months ending September 30, 2018 to reduce the carrying value of these assets to zero. There was no impairment charge for the six months ending September 30, 2019.
Restructuring Charges.
April 2018 and June 2018 restructuring activities. In April 2018, the Company announced a shift in its focus and resources in order to pursue its regulatory initiatives at the FCC and prepare for the future deployment of broadband and other advanced technologies and services. In light of this shift in focus, the Company’s board of directors also approved a chief executive officer transition plan, under which, John Pescatore, the Company’s chief executive officer and president, transitioned to the position of vice chairman and Morgan O’Brien, the Company’s then-current vice chairman, assumed the position as the new chief executive officer. In connection with the transition, the Company and Mr. Pescatore entered into a Continued Service, Consulting and Transition Agreement and a separate Consulting Agreement (the “CEO Transition Agreements”) and the Company also entered into additional consulting and transition agreements with several other key employees.
On June 1, 2018, the Company’s board of directors approved an initial plan to restructure its business aimed at reducing the operating costs of its TeamConnect and pdvConnect businesses and better aligning and focusing its business priorities on its spectrum initiatives. As part of the restructuring plan, the Company eliminated approximately 20 positions, or 20% of its workforce, primarily from its TeamConnect and pdvConnect businesses. In August 2018, the Company continued with its restructuring efforts and eliminated approximately seven additional positions.
For the six months ended September 30, 2019, total accrued restructuring charges for the April 2018 and June 2018 restructuring activities were as follows (in thousands):
|
|
|
|
|
|
Restructuring Activities
|
Balance at March 31, 2019
|
|
$
|
2,655
|
Cash payments
|
|
|
(1,036)
|
Balance at September 30, 2019 (classified as current liabilities - restructuring reserve)
|
|
$
|
1,619
|
|
|
|
|
December 2018 cost reductions. On December 31, 2018, the Company’s board of directors approved the following cost reduction actions: (i) the elimination of approximately 20 positions, or 30% of the Company’s workforce and (ii) the closure of its office in San Diego, California (collectively, the “December 2018 Cost-Reduction Actions”). For the three and six months ended September 30, 2019, the Company recorded an additional restructuring charge relating to the December 2018 Cost-Reduction Actions amounting to $28,000 and $172,000, respectively, related to employee severance and benefit costs. For the six months ended September 30, 2019, the Company reduced the facility exit costs accrual for our San Diego, California office by approximately $28,000. An additional $91,000 of restructuring charges will be incurred approximately through the third quarter of fiscal 2021 related to employee retention costs. The Company completed the cost reduction and restructuring actions in July 31, 2019, and the related cash payments for severance costs was completed by the end of August 31, 2019.
For the six months ended September 30, 2019, total December 2018 cost reduction charges were as follows (in thousands):
|
|
|
|
|
|
Restructuring Activities
|
Balance at March 31, 2019
|
|
$
|
679
|
Severance costs
|
|
|
172
|
Facility exit
|
|
|
(28)
|
Cash payments
|
|
|
(645)
|
Balance at September 30, 2019
|
|
|
178
|
Less amount classified as current liabilities - restructuring reserve
|
|
|
136
|
Noncurrent liabilities - included in other liabilities
|
|
$
|
42
|
|
|
|
|
9. Leases
A lease is defined as a contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On April 1, 2019, the Company adopted ASC 842 and it primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.
Substantially all of the leases in which the Company is the lessee are comprised of corporate office space and tower space. The Company is obligated under certain lease agreements for office space with lease terms expiring on various dates from October 14, 2025 through June 30, 2027, which includes a ten-year lease extension for its corporate headquarters. The Company entered into multiple lease agreements for tower space related to its TeamConnect business. The lease expiration dates range from April 16, 2020 to June 30, 2026.
Substantially all of the Company’s leases are classified as operating leases, and as such, were previously not recognized on the Company’s Consolidated Balance Sheet. With the adoption of Topic 842, operating lease agreements are required to be recognized on the Consolidated Balance Sheet as ROU assets and corresponding lease liabilities.
On April 1, 2019, the Company recognized ROU assets of $7.1 million and lease liabilities of approximately $9.4 million, and derecognized deferred rent liabilities of approximately $2.3 million. The Company elected not to recognize ROU assets and lease liabilities arising from short-term office leases, leases with initial terms of twelve months or less (deemed immaterial) on the Consolidated Balance Sheets.
ROU assets include any prepaid lease payments and exclude any lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate the lease if it is reasonably certain that the Company will exercise that option.
When measuring lease liabilities for leases that were classified as operating leases, the Company discounted lease payments using its estimated incremental borrowing rate at April 1, 2019. The weighted average incremental borrowing rate applied was 13%. As of September 30, 2019, the Company’s leases had a remaining weighted average term of 5.35 years.
Rent expense amounted to approximately $0.7 million and $1.3 million for the three and six months ended September 30, 2019, respectively. Total rent expense amounted to approximately $0.6 million and $1.3 million for the three and six months ended September 30, 2018, respectively.
The following table presents net lease cost (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
September 30, 2019
|
|
September 30, 2019
|
Lease cost
|
|
|
|
|
|
|
Operating lease cost (cost resulting from lease payments)
|
|
$
|
666
|
|
$
|
1,290
|
Short term lease cost
|
|
|
10
|
|
|
32
|
Sublease income
|
|
|
(5)
|
|
|
(9)
|
Net lease cost
|
|
$
|
671
|
|
$
|
1,313
|
The following table presents other supplemental lease information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
September 30, 2019
|
Operating lease - operating cash flows (fixed payments)
|
|
|
|
|
$
|
1,321
|
Operating lease - operating cash flows (liability reduction)
|
|
|
|
|
$
|
661
|
Right of use assets obtained in exchange for new operating lease liabilities
|
|
|
|
|
$
|
7,915
|
Non-current assets - right of use assets, net
|
|
|
|
|
$
|
7,217
|
Current liabilities - operating lease liabilities
|
|
|
|
|
$
|
1,687
|
Non-current liabilities - operating lease liabilities
|
|
|
|
|
$
|
7,844
|
|
|
|
|
|
|
|
Future minimum payments under non-cancelable leases for office and tower spaces (exclusive of real estate tax, utilities, maintenance and other costs borne by the Company), for the remaining terms of the leases following the six months ended September 30, 2019 are as follows (in thousands):
|
|
|
|
|
|
|
Operating
|
Fiscal Year
|
|
|
Leases
|
2020 (excluding the six months ended September 30, 2019)
|
|
$
|
1,398
|
2021
|
|
|
2,670
|
2022
|
|
|
2,265
|
2023
|
|
|
2,098
|
2024
|
|
|
1,893
|
After 2024
|
|
|
3,054
|
Total future minimum lease payments
|
|
|
13,378
|
Amount representing interest
|
|
|
(3,847)
|
Present value of net future minimum lease payments
|
|
$
|
9,531
|
10. Income Taxes
On December 22, 2017, new federal tax provisions under the Tax Cuts and Jobs Act of 2017 (“TCJA”) were signed into law. The TCJA includes numerous changes to existing corporate income tax laws. These changes include, among others, a permanent reduction in the federal corporate income tax rate from the highest marginal rate of 35% to a fixed rate of 21%, effective as of January 1, 2018, and a provision that federal net operating losses (“NOLs”) incurred in tax years ending after December 31, 2017 may be carried forward indefinitely. As a result, the Company may now consider indefinite lived assets and the associated deferred tax liability as a source of future taxable income when assessing the potential to realize future tax deductions from indefinite carryforwards of NOLs and interest expense.
As of March 31, 2018, the Company had federal and state NOL carryforwards of approximately $125.7 million and $51.3 million, respectively, expiring in various amounts from 2019 through 2037, to offset future taxable income. Per the TCJA, federal and TCJA-adhering state NOLs of approximately $34.1 million and $4.4 million, respectively, generated in fiscal year ended March 31, 2018 can be carried forward indefinitely and are not subject to the 80% of taxable income NOL deduction limitation. As of March 31, 2019, the Company had federal and state NOL carryforwards of approximately $164.0 million and $74.0 million, respectively, expiring in various amounts from 2020 through 2037, to offset future taxable income. Federal and state NOLs of approximately $72.6 million and $10.3 million, respectively, can be carried forward indefinitely but a portion of federal and state NOLs of approximately $38.5 million and $6.0 million, respectively, is limited to 80% of future taxable income when used. For the six months ended September 30, 2019, the Company incurred federal and state operating losses of approximately $19.4 million and $11.5 million, respectively, to offset future taxable income, of which $22.4 million can be carried forward indefinitely, but can only offset 80% of taxable income when used.
The Company used a discrete effective tax rate method to calculate taxes for the three- and six-month ended September 30, 2019. The Company determined that applying an estimate of the annual effective tax rate would not provide a reasonable estimate as small changes in estimated “ordinary” loss would result in significant changes in the estimated annual effective tax rate. Accordingly, for the six months ending September 30, 2019, the Company recorded a total deferred tax expense of $463,000 due to the inability to use some portion of federal and state NOL carryforwards against the deferred tax liability created by the amortization of indefinite-lived intangibles.
11. Stock Acquisition Rights, Stock Options and Warrants
The Company established the 2014 Stock Plan (the “2014 Stock Plan”) to attract, retain and reward individuals who contribute to the achievement of the Company’s goals and objectives. This 2014 Stock Plan superseded previous stock plans although under such previous plans, 23,550 stock option shares were outstanding and vested as of September 30, 2019.
The Company’s board of directors has reserved 3,805,223 shares of common stock for issuance under its 2014 Stock Plan as of September 30, 2019, of which 821,333 shares are available for future issuance. The number of shares will continue to automatically increase each January 1 through January 1, 2024 by an amount equal to the lesser of (i) 5% of the number of shares of common stock issued and outstanding on the immediately preceding December 31 or (ii) a lesser amount determined by the board of directors. Effective January 1, 2019, the board of directors elected to increase the shares authorized under the 2014 Stock Plan by 293,528 shares which represented 2% of the of the common stock issued and outstanding as of December 31, 2018.
Restricted Stock and Restricted Stock Units
A summary of non-vested restricted stock activity for the six months ended September 30, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
Restricted
|
|
Grant Day
|
|
|
Stock
|
|
Fair Value
|
Non-vested restricted stock outstanding at March 31, 2019
|
|
279,212
|
|
$
|
28.71
|
Granted
|
|
165,315
|
|
|
42.28
|
Forfeited
|
|
(2,163)
|
|
|
(22.85)
|
Vested
|
|
(86,274)
|
|
|
(28.41)
|
Non-vested restricted stock outstanding at September 30, 2019
|
|
356,090
|
|
$
|
35.12
|
The Company recognizes compensation expense for restricted stock on a straight-line basis over the explicit vesting period. Vested restricted stock units are settled and issuable upon the earlier of the date the employee ceases to be an employee of the Company or a date certain in the future. Stock compensation expense related to restricted stock was approximately $1.0 million and $2.0 million for the three and six months ended September 30, 2019, respectively. Stock compensation expense related to restricted stock was approximately $1.4 million and $2.6 million for the three and six months ended September 30, 2018, respectively.
In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-based Payment Accounting. ASU 2018-07 addresses several aspects of the accounting for nonemployee share-based payment transactions, including share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for the Company’s fiscal year 2020 beginning April 1, 2019. As a result of adopting the ASU on April 1, 2019, the Company reduced its accumulated deficit by $14,000 relating to restricted stock.
Stock compensation expense for restricted stock is accounted for in general and administrative expense in the Company’s Consolidated Statement of Operations. At September 30, 2019, there was $10.5 million of unvested compensation expense for restricted stock, which is expected to be recognized over a weighted average period of 3.12 years.
Performance Stock Units
During the three and six months ended September 30, 2019, the Company did not award any performance stock units under the 2014 Stock Plan. Outstanding performance stock units represent the number of shares of the Company’s common stock that the recipient would receive upon the Company’s attainment of the applicable performance goals. The units will vest in full upon attainment, prior to January 13, 2020, of (A) a Final Order from the FCC providing for the creation and allocation of licenses for spectrum in the 900 MHz band consisting of paired blocks of contiguous spectrum, each containing at least 3 MHz of contiguous spectrum, authorized for broadband wireless communications uses and (B) the lack of objection by the Company's board of directors to the terms and conditions (including, but not limited to, the rebanding, clearing and relocation procedures, license assignment and award mechanisms, and technical and operational rules) set forth or referenced in the Final Order. These awards do not forfeit.
A summary of the performance stock unit activity for the six months ended September 30, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
Performance
|
|
Grant Day
|
|
|
Stock
|
|
Fair Value
|
Performance stock outstanding at March 31, 2019
|
|
109,138
|
|
$
|
23.80
|
Granted
|
|
—
|
|
|
—
|
Forfeited
|
|
—
|
|
|
—
|
Vested
|
|
—
|
|
|
—
|
Performance stock outstanding at September 30, 2019
|
|
109,138
|
|
$
|
23.80
|
For the three and six months ended September 30, 2019 and 2018, there was no stock compensation expense recognized for the performance units. At September 30, 2019, there was approximately $2.6 million of unvested compensation expense related to the outstanding performance stock units.
Stock Options
A summary of stock option activity for the six months ended September 30, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted Average
Exercise Price
|
Options outstanding at March 31, 2019
|
|
1,923,634
|
|
$
|
23.64
|
Options granted
|
|
—
|
|
|
—
|
Options exercised
|
|
(89,323)
|
|
|
(21.49)
|
Options forfeited/expired
|
|
(9,875)
|
|
|
(48.14)
|
Options outstanding at September 30, 2019
|
|
1,824,436
|
|
$
|
23.61
|
There were no options granted for the three and six months ended September 30, 2019.
Performance Stock Options
A summary of the performance stock options as of September 30, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Options
|
|
Weighted Average
Exercise Price
|
Performance Options outstanding at March 31, 2019
|
|
179,945
|
|
$
|
25.83
|
Performance Options granted
|
|
—
|
|
|
—
|
Performance Options exercised
|
|
—
|
|
|
—
|
Performance Options forfeited/expired
|
|
—
|
|
|
—
|
Performance Options outstanding at September 30, 2019
|
|
179,945
|
|
$
|
25.83
|
|
|
|
|
|
|
The performance options will vest in full immediately upon attainment of the performance goals. Performance is based upon the Company’s achievement, prior to January 13, 2020, of (A) a Final Order from the FCC providing for the creation and allocation of licenses for spectrum in the 900 MHz band consisting of paired blocks of contiguous spectrum, each containing at least 3 MHz of contiguous spectrum, authorized for broadband wireless communications uses and (B) the lack of objection by the Company's Board of Directors to the terms and conditions (including, but not limited to, the rebanding, clearing and relocation procedures, license assignment and award mechanisms, and technical and operational rules) set forth or referenced in the Final Order.
Stock compensation expense related to the amortization of the fair value of stock options (other than the performance stock options) issued was approximately $0.4 million and $1.0 million for the three and six months ended September 30, 2019. For the three and six months ended September 30, 2018, the comparable stock compensation expense was approximately $2.1 million and $4.8 million, respectively, which included $1.1 million of expense related to the consulting and transition agreements and $2.1 million of expense related to the modification of option grants held by the Company’s former chief executive officer and president. The stock compensation expense is included in general and administrative expense in the accompanying Consolidated Statement of Operations.
In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-based Payment Accounting. ASU 2018-07 addresses several aspects of the accounting for nonemployee share-based payment transactions, including share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for the Company’s fiscal year 2020 beginning April 1, 2019. As a result of adopting the ASU on April 1, 2019, the Company reduced its accumulated deficit by $174,000 relating to stock options.
As of September 30, 2019, there was approximately $3.1 million of unrecognized compensation cost related to non-vested stock options granted under the Company’s stock option plans, of which $2.0 million pertains to the non-performance based stock options which is expected to be recognized over a weighted-average period of 2.2 years.
Motorola Investment
On September 15, 2014, Motorola invested $10.0 million to purchase 500,000 Class B Units of the Company’s subsidiary, PDV Spectrum Holding Company, LLC (at a price equal to $20.00 per unit). The Company owns 100% of the Class A Units in this subsidiary. Motorola has the right at any time to convert its 500,000 Class B Units into 500,000 shares of the Company’s common stock. The Company also has the right to force Motorola’s conversion of these Class B Units into shares of its common stock at its election. Motorola is not entitled to any assets, profits or distributions from the operations of the subsidiary. In addition, Motorola’s conversion ratio from Class B Units to shares of the Company’s common stock is fixed on a one-for-one basis, and is not dependent on the performance or valuation of either the Company or the subsidiary. The Class B Units have no redemption or call provisions and can only be converted into shares of the Company’s common stock. Management has determined that this investment does not meet the criteria for temporary equity or non-controlling interest due to the limited rights that Motorola has as a holder of Class B Units, and accordingly has presented this investment as part of its permanent equity within Additional Paid-in Capital in the accompanying consolidated financial statements.
12. Contingencies
Litigation
From time to time, the Company may be involved in litigation that arises from the ordinary operations of the business, such as contractual or employment disputes or other general actions. The Company is not involved in any material legal proceedings at this time.
13. Concentrations of Credit Risk
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable.
The Company places its cash and temporary cash investments with financial institutions for which credit loss is not anticipated.
As of September 30, 2019, the Company sells its pdvConnect product and extends credit predominately to two third-party carriers. The Company maintains allowances for doubtful accounts based on factors surrounding the write-off history, historical trends, and other information.
14. Business Concentrations
For the three and six months ended September 30, 2019, the Company had two domestic carriers that accounted for approximately 23% and 25% of operating revenues, respectively. For the three and six months ended September 30, 2018, the Company had one domestic carrier that accounted for approximately 28% and 31% of operating revenues, respectively.
As of September 30, 2019, the Company had two domestic carriers that accounted for approximately 67% of accounts receivable. As of March 31, 2019, the Company had one domestic carrier that accounted for approximately 31% of accounts receivable.
15. Subsequent Event
Consistent with the Company’s transfer of support for the pdvConnect business to TeamConnect LLC (the “LLC”), the Company received notice from one of the Tier 1 carrier partners who markets pdvConnect that the Tier 1 carrier partner had signed a contract directly with the LLC to continue marketing pdvConnect and that it would be terminating its contract with the Company, effective as of October 31, 2019. As a result, revenue from sales of pdvConnect by this Tier 1 carrier will transfer to the LLC effective November 1, 2019. The Company has a 19.5% equity investment in the LLC. As disclosed in the Form 10-Q for the quarter ended June 30, 2018, the Company had previously announced that the largest customer of the pdvConnect service planned to terminate its use of the service, which termination ultimately occurred in October 2019. As a result of the loss of this significant customer, the Company’s implementation of the restructuring plan, and the related measures taken to reduce the operating costs of the Company’s TeamConnect and pdvConnect businesses, principally in the sales and marketing areas, the operating revenues from these businesses have exhibited a decline since the quarter ended September 30, 2018 and are expected to continue to exhibit a decline for the next several quarters.