Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note A – Organization, Operations and Basis of Presentation
Organization and Operations
Lightyear Network Solutions, Inc. (“LNSI”) was
incorporated in 1997 and operates through its wholly owned subsidiaries, Lightyear Network Solutions, LLC, a Kentucky limited
liability company organized in 2003 (“Lightyear LLC”), and SE Acquisitions, LLC d/b/a Lightyear Network Solutions
of Kentucky, a Kentucky limited liability company organized on June 22, 2010 (“Lightyear-KY”) (collectively, “Lightyear”
or the “Company”). The Company was organized for the purpose of selling and marketing telecommunication services and
solutions, and owning other companies which sell and market telecommunication services and solutions. Lightyear provides telecommunications
services throughout the United States and Puerto Rico primarily through a distribution network of authorized independent agents
and representatives. In addition to long distance and local service, Lightyear currently offers a wide array of telecommunications
services including internet/intranet, calling cards, advanced data, wireless, Voice over Internet Protocol (“VoIP”)
and conference calling. Lightyear is a licensed local carrier in 43 states and provides long distance service in 49 states and
Puerto Rico. Lightyear delivers service to approximately 54,000 customer locations. Lightyear maintains its own network infrastructure
and is a telecommunications reseller and competes, both directly at the wholesale level and through agents and representatives,
at the retail level. Lightyear is subject to regulatory requirements imposed by the Federal Communications Commission (“FCC”),
state and local governmental agencies. Regulations by the FCC as well as state agencies include limitations on types of services
and service areas offered to the public.
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial statements. In the opinion of management, such statements include all adjustments
(consisting only of normal recurring items) which are considered necessary for a fair presentation of the condensed consolidated
financial statements of the Company as of March 31, 2013 and for the three months then ended. The results of operations for
the three months ended March 31, 2013 are not necessarily indicative of the operating results for the full year. These unaudited
condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related
disclosures of Lightyear for the year ended December 31, 2012 which were filed with the Securities and Exchange Commission on
April 1, 2013. The Company evaluates events that have occurred after the balance sheet date but before the financial statements
are issued. Based upon the evaluation, the Company did not identify any recognized or nonrecognized subsequent events that would
have required further adjustment or disclosure in the unaudited condensed consolidated financial statements.
Note B – Going Concern and Management Plans
As of March 31, 2013, Lightyear had cash of approximately $46,000,
a working capital deficit of approximately $9,700,000 and an accumulated deficit of approximately $14,045,000.
The Company’s principal sources of liquidity consist
of available borrowings under its revolving credit line, potential cash provided by operations, and cash on hand. As of March
31, 2013, the Company has approximately $250,000 of the $500,000 revolving credit line limit outstanding.
The Company has a significant amount of notes payable due within
the next year. The revolving credit line matures on December 19, 2013. Currently, the Company has approximately $250,000 that
will be due on this note. The Company has a bank loan that matures on January 25, 2014, at which time a balloon payment of approximately
$1,247,000 will be due. Additionally, the Company has a loan with a related party that will mature on February 28, 2014. At the
time of maturity, a balloon payment of $6,250,000 will be due.
Until recently, the cash and cash generated from operations
have been sufficient to fund the Company’s capital needs and operating expenses. However, the Company believes that there
will be insufficient cash generated to pay the balloon payments that are due in the next twelve months on the various notes. If
the Company is unable to refinance the maturing notes by the time they are due, it may be forced to sell its assets, restructure
its indebtedness, submit to foreclosure proceedings, cease operations or seek bankruptcy or reorganization protection. As a result
of these actual and anticipated events, the lower than desired working capital and the likely settlement payments due to the FCC
(see Note K – Commitments and Contingencies), there is substantial doubt about the Company’s ability to continue as
a going concern.
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note B – Going Concern and Management Plans
–
Continued
On May 13, 2013, effective May 10, 2013, the Company entered
into an Asset Purchase Agreement (the “APA”) whereby, subject to certain approvals and conditions, substantially all
of the Company’s assets will be sold to Birch Communications, Inc. for $22 million (subject to certain purchase price adjustments)
(the “Asset Sale”). In addition, the Company’s Board of Directors also approved a Plan of Dissolution, whereby,
subject to the closing of the Asset Sale, the Company will utilize the proceeds from the Asset Sale to satisfy the Company’s
liabilities to creditors and will wind down and liquidate the Company, with all remaining funds, if any, being distributed to
the Company’s common stockholders. See Note L – Subsequent Events for additional details.
The accompanying unaudited condensed consolidated financial
statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern and the
realization of assets and satisfaction of liabilities in the normal course of business. The unaudited condensed consolidated financial
statements do not include any adjustment that might be necessary should the Company be unable to continue as a going concern or
be required to apply the liquidation basis of accounting should the Asset Sale be consummated.
Note C – Summary of Significant Accounting Policies
Principles of Consolidation
The balance sheets, statements of operations, changes in stockholders’
deficiency, and cash flows of the Company and its wholly-owned subsidiaries have been included in our condensed consolidated financial
statements. All intercompany accounts and transactions have been eliminated. The Company and its wholly-owned subsidiaries are
managed as a single business and a single segment. Activity with its wholly-owned subsidiary, Lightyear Alliance of Puerto Rico,
LLC, is insignificant.
Estimates
The preparation of condensed consolidated financial statements
in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company’s
significant estimates include the reserves related to receivables, the recoverability and useful lives of long lived assets, anticipated
carrier credits, the valuation allowance related to deferred tax assets and the valuation of equity instruments.
Accounts Receivable
Accounts receivable are shown net of an allowance for doubtful
accounts of $871,629 and $772,479 as of March 31, 2013 and December 31, 2012, respectively. The Company’s management has
established an allowance for doubtful accounts sufficient to cover probable and reasonably estimable losses. The allowance for
doubtful accounts considers a number of factors, including collection experience, current economic trends, estimates of forecasted
write-offs, aging of the accounts receivable portfolios, industry norms, regulatory decisions and other factors. Management’s
policy is to fully reserve all accounts that are 180 days past due. Accounts are written off after use of a collection agency
is deemed to be no longer effective.
Revenue Recognition
Telecommunications services income such as access revenue and
usage revenue are recognized on the accrual basis as services are provided. In general, access revenue is billed one month in
advance and is recognized when earned. Wireless handheld devices are sold at a discount when bundled with a long-term wireless
service contract. We recognize the equipment revenue and associated costs when title has passed and the equipment has been accepted
by the customer. The Company provides administrative and support services to its agents and pays commissions based on revenues
from the agents’ accounts. Amounts invoiced to customers in advance of services are reflected as deferred revenues.
The Company pays certain agents an initial lump sum commission.
A portion of this commission is deferred and is amortized over a three month period.
Cost of revenues represents primarily the direct costs associated
with the cost of transmitting and terminating traffic on other carriers’ facilities.
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note C – Summary of Significant
Accounting Policies
– Continued
Revenue Recognition
– Continued
Commissions paid to acquire customer call traffic are expensed
in the period when associated call revenues are recognized.
The accounting standards guidance provides for how taxes collected
from customers and remitted to governmental authorities should be presented in the statements of operations. The guidance states
that if taxes are reported on a gross basis (included as revenue) a company should disclose those amounts, if significant. The
Company does not include excise and other sales related taxes in its revenues.
Fair Value of Financial Instruments
The Company’s financial instruments are cash, accounts
receivable and accounts payable, each of which approximate their fair values based upon their short term nature. The Company’s
other financial instruments include notes payable and capital lease obligations. The carrying value of these instruments approximate
fair value, as they bear terms and conditions comparable to market, for obligations with similar terms and maturities.
Stock-Based Compensation
The Company measures the cost of services received in exchange
for an award of equity instruments based on the fair value of the award. For employees and directors, the award is measured on
the grant date. For non-employees, the award is measured on the grant date and then is re-measured at each vesting date and financial
reporting date. The fair value amount is then recognized over the period during which services are required to be provided in
exchange for the award, usually the vesting period.
Loss Per Common Share
Basic loss per share is computed using the weighted average
number of common shares outstanding during the period. Diluted loss per share is computed using the weighted average number of
common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the
incremental common shares issuable upon the exercise of stock options and warrants (using the treasury stock method).
The following table reconciles the numerator and denominator
for the calculation:
|
|
For The Three Months Ended
|
|
|
|
March 31
|
|
|
|
2013
|
|
|
2012
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(572,856
|
)
|
|
$
|
(621,219
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
22,086,641
|
|
|
|
22,086,641
|
|
Weighted average warrants outstanding
with an exercise price of $0.01 or less
|
|
|
319,710
|
|
|
|
192,917
|
|
Weighted average basic and diluted
shares outstanding
|
|
|
22,406,351
|
|
|
|
22,279,558
|
|
|
|
|
|
|
|
|
|
|
Loss per basic and diluted share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
The following securities are excluded from the calculation
of weighted average dilutive common shares, because their inclusion would have been antidilutive:
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Employee stock options
|
|
|
732,500
|
|
|
|
891,500
|
|
Warrants
|
|
|
1,065,429
|
|
|
|
1,053,014
|
|
Total potentially dilutive shares
|
|
|
1,797,929
|
|
|
|
1,944,514
|
|
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note C – Summary of Significant
Accounting Policies
– Continued
Recently Issued Accounting Pronouncements
In April 2013, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2013-07, “Presentation of Financial Statements (Topic 205) -
Liquidation Basis of Accounting." This ASU addresses the requirements and methods of applying the liquidation basis of accounting
and the disclosure requirements within Accounting Standards Codification ("ASC") Topic 205 for the purpose of providing
consistency between the financial reporting of U.S. GAAP liquidating entities. Generally, this ASU provides guidance for the preparation
of financial statements and disclosures when liquidation is imminent. This ASU is effective for periods beginning after December
15, 2013 and would only have an impact on the Company’s condensed consolidated financial statements or disclosures if liquidation
of the Company became imminent.
Note D – Property and Equipment
Property and equipment consists of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
Range of Estimated
|
|
|
2013
|
|
|
2012
|
|
|
Useful Lives
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
-
|
|
|
$
|
313,875
|
|
|
Not depreciable
|
Equipment and computers
|
|
|
7,269,502
|
|
|
|
7,223,733
|
|
|
1 - 25 years
|
Buildings
|
|
|
68,716
|
|
|
|
985,352
|
|
|
10 - 30 years
|
Furniture and fixtures
|
|
|
67,781
|
|
|
|
67,781
|
|
|
1 - 5 years
|
Vehicles
|
|
|
330,540
|
|
|
|
331,033
|
|
|
5 - 7 years
|
Leasehold improvements
|
|
|
866,055
|
|
|
|
866,055
|
|
|
[A]
|
|
|
|
8,602,594
|
|
|
|
9,787,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation and
amortization
|
|
|
(4,385,947
|
)
|
|
|
(4,276,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
4,216,647
|
|
|
$
|
5,511,426
|
|
|
|
[A] Leasehold improvements are amortized over the lesser of
the term of the lease or the asset's economic useful life
Depreciation and amortization expense for the three months
ended March 31, 2013 and 2012 was approximately $175,000 and $220,000, respectively.
On January 17, 2013, Lightyear-KY exercised an option under
a lease to purchase certain leased property (the “Leased Premises”, see Note F – Capital Lease Obligations).
Immediately following its purchase of the Leased Premises, Lightyear-KY sold the Leased Premises and five additional adjacent
properties for a cash purchase price of $1,275,000 (the “Pikeville Sale”). See Note G – Notes Payable for details
of the repayment of the related indebtedness. There was no gain or loss recorded in conjunction with the Pikeville Sale because
the Company recorded an impairment charge of approximately $938,000 in connection with the assets being sold as of December 31,
2012.
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note E – Other Liabilities
Other liabilities consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excise, state, local and property taxes payable
|
|
$
|
742,984
|
|
|
$
|
729,118
|
|
Other accrued expenses
|
|
|
198,003
|
|
|
|
126,426
|
|
Payroll, payroll taxes and bonuses
|
|
|
142,966
|
|
|
|
300,139
|
|
Deferred rent
|
|
|
185,061
|
|
|
|
200,066
|
|
FCC settlement
|
|
|
477,000
|
|
|
|
-
|
|
Regulatory fees
|
|
|
314,923
|
|
|
|
205,527
|
|
Customer security deposits
|
|
|
100,097
|
|
|
|
106,448
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,161,034
|
|
|
$
|
1,667,724
|
|
Note F – Capital Lease Obligations
The Company leased a building and land which Lightyear-KY used
as its Administrative and Customer Care Headquarters. The original term of the lease was 10 years through December 31, 2013. Lightyear-KY
had an option to purchase the Leased Premises at any time during the term of the Lease upon written notice to the lessor at least
30 days before the date on which Lightyear-KY desired to exercise the option and purchase the Leased Premises. On January 17,
2013, the Company exercised the option to purchase the Leased Premises, which, pursuant to its terms, resulted in the termination
of the lease. Pursuant to its terms, the capitalized lease obligation, which had a principal balance of approximately $737,000,
was terminated upon exercise of the option. See Note D – Property and Equipment and Note G – Notes Payable for additional
details.
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note G – Notes Payable
Notes payable are as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(unaudited)
|
|
|
|
|
Note payable - variable interest rate (5.00% as of March 31, 2013).
The note has monthly principal and interest payments of $47,874. Principal and unpaid interest due on September 30, 2015.
The note payable is secured by a first priority security interest in Lightyear-KY's assets. The note is further secured by
a first priority perfected security interest in the membership interests in Lightyear-KY held by LNSI.
|
|
$
|
1,347,242
|
|
|
$
|
1,473,218
|
|
|
|
|
|
|
|
|
|
|
Note payable - variable interest rate (4.25% as of December 31, 2012). The note
had monthly principal and interest payments of $871. Principal and unpaid interest was due on January 26, 2014. The note payable
was secured by a mortgage on a specific real property and is further secured by the assignment of future rents. [1]
|
|
|
-
|
|
|
|
11,041
|
|
|
|
|
|
|
|
|
|
|
Note payable - variable interest rate (4.25% as of December 31, 2012). The note
had monthly principal and interest payments of $970. Principal and unpaid interest was due on October 18, 2024. The note payable
was secured by a mortgage on a specific real property. [1]
|
|
|
-
|
|
|
|
102,375
|
|
|
|
|
|
|
|
|
|
|
Note payable - fixed interest rate of 6.99%. The note had monthly principal and
interest payments of $935. Principal and unpaid interest was due on October 1, 2020.The note payable was secured by a mortgage
on a specific real property. [1]
|
|
|
-
|
|
|
|
65,936
|
|
|
|
|
|
|
|
|
|
|
Note payable - fixed interest rate of 6.25%. The note has monthly principal and
interest payments of $2,882. Principal and unpaid interest due on April 4, 2015.The note payable is secured by motor vehicles
owned by Lightyear-KY.
|
|
|
67,317
|
|
|
|
74,831
|
|
|
|
|
|
|
|
|
|
|
Note payable - fixed interest rate of 6.00%. The note has monthly principal and
interest payments of $37,780. Unpaid principal and interest due on January 25, 2014. The note payable is secured by Lightyear
LLC’s lockbox bank account, business operating bank account, other tangible and intangible assets, the pledge
of two million shares of the Company’s common stock owned by LY Holdings, as well as the personal guaranties
of certain directors of the Company and a guaranty by Lightyear LLC. [2]
|
|
|
1,517,584
|
|
|
|
1,607,569
|
|
|
|
|
|
|
|
|
|
|
Revolving $500,000 secured commercial promissory note (the
"Credit Facility"). The Credit Facility matures on December 19, 2013 and bears interest at an annual rate equal to the
bank’s index rate plus 1.75%, but not more than 5.00% per annum. The Company is required to make monthly interest
payments, with the outstanding principal amount payable at maturity. The Credit Facility is secured by a subordinated
security interest in all of Lightyear’s assets and the personal guaranty of a director (Chris Sullivan or “Sullivan”).
|
|
|
249,666
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Notes Payable
|
|
|
3,181,809
|
|
|
|
3,334,970
|
|
Less: Current Portion
|
|
|
2,317,331
|
|
|
|
934,529
|
|
Non-Current Portion of Notes Payable
|
|
$
|
864,478
|
|
|
$
|
2,400,441
|
|
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note G – Notes Payable
– Continued
|
[1]
|
On January 17, 2013, the Company repaid notes payable with
an aggregate principal balance of approximately $179,000 in connection
with the Pikeville Sale because the assets sold had been collateralizing
these loans. See Note D – Property and Equipment and Note
E – Capital Lease Obligations for additional details.
|
|
[2]
|
The Company is required to make a balloon payment, consisting
of unpaid principal and interest, of approximately $1,247,000
on January 25, 2014. On March 29, 2013, the bank elected to eliminate
certain earnings-related debt covenants effective January 1,
2013 for the balance of the loan term.
|
Note H – Related Party Transactions
Lightyear has significant transactions with its largest stockholder,
LY Holdings, LLC (“LY Holdings”) and members of LY Holdings. Lightyear also conducts business with certain companies
or individuals which are related parties either by having common ownership or because they are controlled by members of LY Holdings,
the directors and/or officers of the Company or by relatives of members of LY Holdings, directors of the Company and/or officers
of the Company. Aggregate related party transactions are segregated on the face of the balance sheets and statements of operations.
On March 20, 2013, Chris Sullivan agreed to forbear from demanding
repayment of a note with a principal amount of $6,250,000 (the “Settlement Note”) until February 28, 2014.
Commission expense – related parties includes certain
VoIP and wireless revenue override payments due to directors of the Company and/or members of LY Holdings (the “Letter Agreement
Holders”). During the three months ended March 31, 2013 and 2012, Lightyear recorded approximately $46,000 and $14,000 of
VoIP and wireless revenue override expense, respectively, which was classified as commission expense – related parties in
the condensed consolidated statements of operations. All of the Letter Agreement Holders (with the exception of one holder) agreed
to waive their rights to revenue override payments during 2012. As of March 31, 2013, the Company has accrued approximately $188,000
related to VoIP and wireless revenue override payments.
The Company obtained consulting services from a former officer
and director, pursuant to a one year consulting agreement which terminated on April 30, 2012. Aggregate consulting expense was
approximately $0 and $74,000 for the three months ended March 31, 2013 and 2012, respectively, which was classified as selling,
general and administrative expenses – related party in the condensed consolidated statements of operations.
Note I – Supplier Concentration
Of the telecommunications services used in its operations,
Lightyear secured approximately 32%, 21%, and 13% during the three months ended March 31, 2013 from three suppliers and 31%, 21%
and 12% during the three months ended March 31, 2012 from the same three suppliers. Although there are other suppliers of these
services, a change in suppliers could have an adverse effect on the business which could ultimately negatively affect operating
results.
Note J – Stockholders’ Deficiency
Warrants
Additional Warrants
In connection with a prior equity financing, the Company is
required to periodically issue exercisable five-year warrants to purchase shares of common stock to investors with an exercise
price of $0.01 per share and to selling agents with an exercise price of $4.00 per share (the “Additional Warrants”).
The Additional Warrants are issued pursuant to a pre-determined formula at the end of each calendar quarter during which shares
originally purchased in the equity financing are held by the original investor. The Additional Warrants are eligible to be issued
for a period of five years from the equity financing. The Company issued 33,077 Additional Warrants (30,070 were issued to investors
and 3,007 were issued to selling agents) during the three months ended March 31, 2013. As of March 31, 2013, there were 384,390
Additional Warrants outstanding, of which 349,446 were issued to investors and 34,944 were issued to selling agents.
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note J – Stockholders’
Deficiency
– Continued
Warrants
– Continued
Summary
A summary of the warrant activity for the three months ended
March 31, 2013 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
In Years
|
|
|
Value
|
|
Outstanding at December 31, 2012
|
|
|
1,381,798
|
|
|
$
|
3.08
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
33,077
|
|
|
|
0.37
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2013
|
|
|
1,414,875
|
|
|
$
|
3.01
|
|
|
|
2.8
|
|
|
$
|
24,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2013
|
|
|
1,414,875
|
|
|
$
|
3.01
|
|
|
|
2.8
|
|
|
$
|
24,461
|
|
Stock Option Grants
The Company has computed the fair value of options granted
using the Black-Scholes option pricing model. Forfeitures are estimated at the time of valuation and reduce expense ratably over
the vesting period. This estimate will be adjusted periodically based on the extent to which actual forfeitures differ, or are
expected to differ, from the previous estimate, when it is material. The expected term of options granted represents the estimated
period of time that options granted are expected to be outstanding. The Company utilizes the “simplified” method to
develop an estimate of the expected term of “plain vanilla” option grants. Given that LNSI's shares have only been
publicly traded in their current form since February 12, 2010, until such time as LNSI has sufficient trading history to compute
the historical volatility of its common stock, the Company is utilizing an expected volatility figure based on a review of the
historical volatilities, over a period of time equivalent to the expected life of these options, of similarly positioned public
companies within its industry. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon
bonds with a remaining term consistent with the expected term of the options.
In applying the Black-Scholes option pricing model, the Company
used the following weighted average assumptions:
|
|
For The Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Risk free interest rate
|
|
|
n/a
|
|
|
|
0.95
|
%
|
Expected term (years)
|
|
|
n/a
|
|
|
|
5.25
|
|
Expected volatility
|
|
|
n/a
|
|
|
|
42.90
|
%
|
Expected dividends
|
|
|
n/a
|
|
|
|
0.00
|
%
|
The weighted average estimated fair value of the stock options
granted during the three months ended March 31, 2012 was $0.09 per share.
The Company recognized approximately $57,000 and $406,000 of
stock-based compensation expense during the three months ended March 31, 2013 and 2012, respectively, related to stock option
grants, which is reflected as selling, general and administrative expense in the condensed consolidated statements of operations.
As of March 31, 2013, there was approximately $23,000 of unrecognized employee stock-based compensation expense related to stock
option grants that will be amortized over a weighted average period of 0.1 years.
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note J – Stockholders’
Deficiency
– Continued
Stock Option Grants
– Continued
A summary of the status of options issued under the 2010 Stock
and Incentive Compensation Plan during the three months ended March 31, 2013 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
In Years
|
|
|
Value
|
|
Balance, December 31, 2012
|
|
|
738,832
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(6,332
|
)
|
|
|
0.43
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2013
|
|
|
732,500
|
|
|
$
|
0.31
|
|
|
|
8.7
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2013
|
|
|
709,984
|
|
|
$
|
0.28
|
|
|
|
8.8
|
|
|
$
|
-
|
|
Note K – Commitments and Contingencies
Operating Lease
On February 18, 2013, Lightyear-KY entered into an agreement
to lease approximately 17,000 square feet of an office building in Pikeville, Kentucky which will house the operations formerly
located at the Lease Premises discussed above. The lease, which has rent of $2,917 per month, expires on September 7, 2014.
Litigation and Regulatory
Alden Halpern v. Lightyear Network Solutions, Inc. fka Libra
Alliance Corporation
was filed in Nevada District Court on March 1, 2012. The plaintiff alleges violations of federal and
state securities laws with respect to his purchase of Lightyear securities. Mr. Halpern alleges that Lightyear falsely represented
that the shares he was purchasing were “free-trading.” Lightyear denied the allegations. Mr. Halpern claimed damages
of $750,000. On September 26, 2012, the Court granted Lightyear’s Motion to Dismiss, but provided Mr. Halpern with 30 days
to amend his complaint to provide more details concerning the claim. On October 25, 2012, Mr. Halpern filed a motion to file the
First Amended Complaint and Lightyear objected. On January 23, 2013, the Court granted Mr. Halpern’s Motion for Leave to
Amend the Complaint. On February 11, 2013, Lightyear filed its Answer to the Amended Complaint. Lightyear notified its insurance
carriers concerning this matter and continues to contest the allegations vigorously. Lightyear has not recorded a provision as
the Company is unable to state that an outcome in this matter will be unfavorable or estimate the amount or range of a potential
loss.
In July 2008, the Enforcement Bureau of the Federal Communications
Commission (“FCC”) notified Lightyear that it was investigating allegations that Lightyear may have violated certain
FCC rules related to the payment of certain regulatory fees since January 2005. Lightyear responded to the data request in September
2008 and provided information concerning Lightyear’s Universal Service Fund contributions and other regulatory fees. In
August 2012, the FCC asked for updated information and Lightyear responded in October 2012. In March 2013, Lightyear executed
a tolling agreement with the FCC extending the statute of limitations until June 14, 2013 with respect to the investigation. Lightyear
believes that it has paid all applicable regulatory fees, but has learned that the FCC’s investigation primarily relates
to the timing of the Company’s payments. While there is no final agreement, based on conversations with the FCC, on April
22, 2013, Lightyear believes this matter will most likely be settled with a voluntary contribution to the Universal Service Fund
of approximately $477,000. Accordingly, Lightyear has recorded this estimated liability and recognized an increase in cost of
goods sold.
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note L – Subsequent Events
Asset Purchase Agreement
On May 13, 2013, effective May 10, 2013, the Company entered
into an APA with Birch Communications, Inc. (“Birch”) pursuant to which the Company will sell, and Birch will acquire,
substantially all of the assets (the “Assets”) of the Company. The base purchase price for the Assets under the APA
is $22 million, and is subject primarily to downward adjustment depending on whether the Company meets certain pre-closing financial
targets or on account of specified working capital adjustments, as described in more detail in the APA. The proposed transaction
is subject to Company stockholder approval, customary regulatory approvals and other closing conditions. The Company intends to
call a Special Meeting of the stockholders to seek approval of the APA and will file proxy materials with the Securities and Exchange
Commission as soon as practicable.
The Company expects to use the net proceeds from the transaction
to fund (a) repayment of the Company’s approximately $9.4 million of outstanding secured indebtedness, including but not
limited to the $6.25 million Settlement Note and (b) satisfaction of an estimated amount of approximately $9.5 million of other
Company obligations, including vendor obligations, transaction costs, severance and other post-closing costs. At closing, $2.2
million of the purchase price will be placed into escrow to serve as security for payments in satisfaction of (a) any post-closing
adjustment; or (b) the Company’s indemnification obligations under the APA. Any remaining amounts will be released from
escrow no later than December 15, 2013. The Company estimates transaction costs will total approximately $0.5 million.
Under the APA, the Company must pay Birch a termination fee
of $0.5 million if the Company terminates the APA to enter into a “superior proposal” (as that term is defined in
the APA) or if the Company’s stockholders do not approve the Asset Sale. Birch may terminate the APA at any time upon payment
to the Company of a $0.5 million termination fee.
On May 13, 2013, effective May 10, 2013, as a condition to
Birch entering into the APA, Birch and LY Holdings (an affiliate and 45% beneficial owner of the Company) entered into a voting
agreement, pursuant to which, among other things, LY Holdings has agreed, subject to the terms thereof, to vote all of its shares
of common stock in favor of approval of the APA at the Company’s stockholder meeting.
Plan of Dissolution
On May 9, 2013, the Company’s board of directors approved
the liquidation and dissolution of the Company pursuant to a Plan of Dissolution (the “Plan of Dissolution”), subject
to stockholder approval. The Company intends to call a Special Meeting of the stockholders to seek approval of the Plan of Dissolution
and will file proxy materials with the Securities and Exchange Commission as soon as practicable. The Plan of Dissolution provides
for the liquidation and dissolution of the Company only upon consummation of the transactions contemplated by the APA. Following
payment of all debt and other liabilities of the Company, including vendor obligations, severance, transaction costs and other
post-closing expenses, the Company expects to distribute the remaining proceeds, if any, to its common stockholders.
Amendment to Interest Note
On May 10, 2013, in connection with the APA, the Company and
LY Holdings agreed to amend the terms of a note receivable with a principal amount of $1,223,203 (the “Interest Note”).
The maturity date for that portion of indebtedness under the Interest Note to be set off against any distribution in connection
with the APA was amended to be the earlier of (i) the date LY Holdings will be due a monetary distribution, if any, from the Company
following consummation of the transactions contemplated by the APA or (ii) November 4, 2016, the original maturity date. The amendment
states that any potential distribution to LY Holdings in connection with a distribution to common stockholders associated with
the dissolution of the Company following the closing of the Asset Sale, will first be offset against the outstanding principal
and interest on the Interest Note.
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note L – Subsequent Events
– Continued
Retention Agreements
On May 13, 2013, in connection with the APA, the Company also
entered into retention agreements with each of the three named executive officers. Under the terms of the retention agreements,
each of the named executive officers has agreed to remain employed in his current capacity for purposes of consummating the transactions
contemplated by the APA (“Closing”) and to complete the liquidation, winding up and dissolution of the Company pursuant
to the Plan of Dissolution.
Under the retention agreements, each named executive officer
is entitled to a one-time payment equal to his current annual base salary (potentially an aggregate of $555,000) upon either (i)
his termination by the Company without cause or (ii) the consummation of the transactions contemplated by the APA and the subsequent
liquidation, winding up and dissolution of the Company. Each named executive officer is entitled to a one-time payment equal to
one-half his current annual base salary upon his voluntary termination of employment with the Company (or his death) following
the consummation of the transactions contemplated by the APA but before the liquidation, winding up and dissolution of the Company.
No named executive officer will be entitled to any payments under the retention agreements if any such officer (i) voluntarily
terminates his employment with the Company (or dies) before consummation of the transactions contemplated by the APA or (ii) is
terminated by the Company for cause.
Acceleration of Additional Warrants
On May 9, 2013, in connection with the APA, the Board approved
the acceleration of the issuance (prior to the record date of the Special Meeting) of all of the Additional Warrants (see Note
J – Stockholders’ Deficiency – Warrants – Additional Warrants for additional details) that are issuable
in future periods. As a result, warrants to purchase approximately 297,000 shares of common stock at an exercise price of $0.01
per share will be issued.
Amendment to Articles of Incorporation
On May 9, 2013, pursuant to the terms of the APA, the Board
approved, subject to stockholder approval, an amendment to the Company’s Articles of Incorporation to change the name of
the Company to “LYNS INC.” following the consummation of the transactions contemplated by the APA.