h

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

OR

 

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to              

 

Commission file number: 001-35155

 

BOINGO WIRELESS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

(310) 586-5180

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐

 

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

 

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

 

 

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

 

As of October 31, 2014, there were 36,086,026 shares of the registrant’s common stock outstanding.

 

 

 

---

 

TABLE OF CONTENTS

 

 

 

---

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Boingo Wireless, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except per share amounts)

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements. 

---

 

Boingo Wireless, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share amounts)

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

---

 

 

Boingo Wireless, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(In thousands)

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

---

 

Boingo Wireless, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(In thousands)

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

---

 

Boingo Wireless, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

---

 

 

Boingo Wireless, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except shares and per share amounts)

 

1. The business

 

Boingo Wireless, Inc. and its subsidiaries (collectively “we, “us”, “our” or “the Company”) is a leading global provider of mobile Internet solutions for smartphones, tablet computers, laptops, and other wireless-enabled consumer devices. The Company has more than a million small cell networks for cellular distributed antenna system (“DAS”) and Wi-Fi access that reach more than one billion consumers annually. Boingo Wireless, Inc. was incorporated on April 16, 2001 in the State of Delaware. We have a diverse monetization model that enables us to generate revenues from wholesale partnerships, retail sales, and advertising across these small cell networks. Wholesale offerings include Wi-Fi roaming, private label Wi-Fi, location based services, and DAS, which are cellular extension networks. Retail products include Wi-Fi subscriptions and day passes that provide access to more than one million commercial hotspots worldwide, and Internet Protocol television (“IPTV”) services and residential broadband for military barracks. Advertising revenue is driven by Wi-Fi sponsorships at airports, hotels, cafes and restaurants, and public spaces. Our customers include some of the world’s largest carriers, telecommunications service providers and global consumer brands, as well as Internet savvy consumers on the go and troops stationed at military bases.

 

2. Summary of significant accounting policies

 

Basis of presentation

 

The accompanying interim unaudited condensed consolidated financial statements and related notes for the three and nine months ended September 30, 2014 and 2013 are unaudited. The unaudited interim condensed consolidated financial information has been prepared in accordance with the rules and regulations of the SEC for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”) in the United States of America (“U.S.”) for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2013 contained in our annual report on Form 10-K filed with the SEC on March 17, 2014. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and in the opinion of management, reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of our results of operations and cash flows for the three and nine months ended September 30, 2014 and 2013, and our financial position as of September 30, 2014. The year-end balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. Interim results are not necessarily indicative of the results to be expected for an entire year or any other future year or interim period.

 

Principles of consolidation

 

The unaudited condensed consolidated financial statements include our accounts and the accounts of our majority owned subsidiaries. We consolidate our 70% ownership of Concourse Communications Detroit, LLC, our 70% ownership of Chicago Concourse Development Group, LLC and our 75% ownership of Boingo Holding Participacoes Ltda. in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation. Other parties’ interests in consolidated entities are reported as non-controlling interests. All intercompany balances and transactions have been eliminated in consolidation.

 

Business combinations

 

The results of businesses acquired in a business combination are included in the Company’s condensed consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities of

---

 

an acquired business being recorded at their estimated fair values on the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill.

 

The Company performs valuations of assets acquired and liabilities assumed for a business acquisition and allocates the purchase price to its respective net tangible and intangible assets. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates including the selection of valuation methodologies, estimates of future revenues and cash flows, discount rates, royalty rates and selection of comparable companies. The Company engages the assistance of valuation specialists in concluding on fair values of assets and liabilities assumed in a business combination.

 

Transaction costs associated with business combinations are expensed as incurred, and are included in general and administrative expenses in the condensed consolidated statements of operations. There were no significant transaction costs associated with business combinations for the three and nine months ended September 30, 2014. There were no significant transaction costs associated with business combinations for the three months ended September 30, 2013. Transaction costs associated with business combinations were $192 for the nine months ended September 30, 2013.

 

Segment and geographical information

 

We operate as one reportable segment; a service provider of mobile Internet solutions across our managed and operated network and aggregated network for mobile devices such as laptops, smartphones, tablet computers and other wireless-enabled consumer devices. This single segment is consistent with the internal organization structure and the manner in which operations are reviewed and managed by our Chief Executive Officer, the chief operating decision maker.

 

Revenue is predominately generated and all significant long-lived tangible assets are held in the U.S. We do not disclose sales by geographic area because to do so would be impracticable. The following is a summary of our revenue by primary revenue source:

 

 

 

Marketable securities

 

Our marketable securities consist of available-for-sale securities with original maturities exceeding three months. In accordance with FASB ASC 320, Investments—Debt and Equity Securities, we have classified securities, which have readily determinable fair values and are highly liquid, as short-term because such securities are expected to be realized within a one-year period. At September 30, 2014 and December 31, 2013, we had $17,261 and $32,962, respectively, in marketable securities.

 

Marketable securities are reported at fair value with the related unrealized gains and losses reported as other comprehensive income (loss) until realized or until a determination is made that an other-than-temporary decline in market value has occurred. No significant unrealized gains and losses have been reported during the periods presented. Factors considered by us in assessing whether an other-than-temporary impairment has occurred include the nature of the investment, whether the decline in fair value is attributable to specific adverse conditions affecting the investment, the financial condition of the investee, the severity and the duration of the impairment and whether we have the ability to hold the investment to maturity. When it is determined that an other-than-temporary impairment has occurred, the investment is

---

 

written down to its market value at the end of the period in which it is determined that an other-than-temporary decline has occurred. The cost of marketable securities sold is based upon the specific identification method. Any realized gains or losses on the sale of investments are reflected as a component of interest and other income (expense), net.

 

For the nine months ended September 30, 2014 and 2013, we had no significant realized gains or losses from investments in marketable securities classified as available-for-sale. As of September 30, 2014 and December 31, 2013, we had no unrealized gains or losses in accumulated other comprehensive loss.

 

Revenue recognition

 

We generate revenue from several sources including: (i) platform service arrangements with wholesale customers that provide software licensing, network access, and professional services fees, (ii) wholesale customers that are telecom operators under long-term contracts for access to our DAS at our managed and operated locations, (iii) retail customers under subscription plans for month-to-month network access that automatically renew, and retail single-use access from sales of hourly, daily or other single-use access plans, and (iv) display advertisements and sponsorships on our walled garden sign-in pages. Software licensed by our wholesale platform services customers can only be used during the term of the service arrangements and has no utility to them upon termination of the service arrangement.

 

We recognize revenue when an arrangement exists, services have been rendered, fees are fixed or determinable, no significant obligations remain related to the earned fees and collection of the related receivable is reasonably assured.

 

Services provided to wholesale partners under platform service arrangements generally contain several elements including: (i) a term license to use our software to access our Wi-Fi network, (ii) access fees for network usage, and (iii) professional services for software integration and customization and to maintain the Wi-Fi service. The term license, monthly minimum network access fees and professional services are billed on a monthly basis based upon predetermined fixed rates. Once the term license for integration and customization are delivered, the fees from the arrangement are recognized ratably over the remaining term of the platform service arrangement. The initial term of platform service license agreements is generally between one to five years and the agreements generally contain renewal clauses. Revenue for network access fees in excess of the monthly minimum amounts is recognized when earned. All elements within existing platform service arrangements are generally delivered and earned concurrently throughout the term of the respective service arrangement.

 

Revenue generated from access to our DAS networks consists of build-out fees and recurring access fees under certain long-term contracts with telecom operators. Build-out fees paid upfront are generally deferred and recognized ratably over the term of the estimated customer relationship period, once the build-out is complete. Minimum monthly access fees for usage of the DAS networks are non-cancellable and generally escalate on an annual basis. These minimum monthly access fees are recognized ratably over the term of the telecom operator agreement. The initial term of our contracts with telecom operators and wholesale partners generally range from two to ten years and the agreements generally contain renewal clauses. Revenue from network access fees in excess of the monthly minimums is recognized when earned.

 

In instances where the minimum monthly network access fees escalate over the term of the wholesale service arrangement, an unbilled receivable is recognized when performance is within our control and when we have reasonable assurance that the unbilled receivable balance will be collected.

 

We adopted the provisions of Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605)—Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”), on a prospective basis on January 1, 2011. For multiple-deliverable arrangements entered into prior to January 1, 2011 that are accounted for under ASC 605-25, Revenue Recognition—Multiple- Deliverable Revenue Arrangements, we defer recognition of revenue for the full arrangement and recognize all revenue ratably over the wholesale service period for platform service arrangements and the term of the estimated customer relationship period for DAS arrangements, because we do not have evidence of fair value for the undelivered elements in the arrangement. For multiple-deliverable arrangements entered into or materially modified after January 1, 2011 that are accounted for under ASC 605-25, we evaluate whether or not separate units of accounting exist and then allocate the arrangement consideration to all units of accounting based on the relative selling price method using estimated selling prices because vendor specific objective evidence and third party evidence is not

---

 

available. We recognize the revenue associated with the separate units of accounting upon completion of such services or ratably over the wholesale service period for platform service arrangements and the term of the estimated customer relationship period for DAS arrangements.

 

Subscription fees from retail customers are paid monthly in advance and revenue is deferred for the portions of monthly recurring subscription fees collected in advance. We provide refunds for our Wi-Fi and IPTV services on a case-by-case basis.  These amounts are not significant and are recorded as contra-revenue in the period the refunds are made. Subscription fee revenue is recognized ratably over the subscription period. Revenue generated from retail single-use access is recognized when earned.

 

Advertising revenue is generated from advertisements on our managed and operated or partner networks. In determining whether an arrangement exists, we ensure that a binding arrangement is in place, such as a standard insertion order or a fully executed customer-specific agreement. Obligations pursuant to our advertising revenue arrangements typically include a minimum number of units or the satisfaction of certain performance criteria. Advertising and other revenue is recognized when the services are performed.

 

Foreign currency translation

 

Our Brazilian subsidiary uses the Brazilian Real as its functional currency. Assets and liabilities of our Brazilian subsidiary are translated to U.S. dollars at period-end rates of exchange, and revenues and expenses are translated at average exchange rates prevailing for each month. The resulting translation adjustments are made directly to a separate component of other comprehensive loss, which is reflected in stockholders’ equity in our condensed consolidated balance sheet. As of September 30, 2014 and December 31, 2013, the Company had $(214) and $0, respectively, of cumulative foreign currency translation adjustments, net of tax in accumulated other comprehensive loss.

 

Some of our subsidiaries also enter into transactions and have monetary assets and liabilities that are denominated in a currency other than the entities’ respective functional currencies. Gains and losses from the revaluation of foreign currency transactions and monetary assets and liabilities are included in the condensed consolidated statements of operations.

 

Recent accounting pronouncements

 

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which explicitly requires management to assess an entity’s ability to continue as a going concern in connection with each annual and interim period. Management will assess if there is substantial doubt about an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. Disclosures will be required if conditions give rise to substantial doubt. The standard will be effective for the first annual period ending after December 15, 2016. Early adoption is permitted. We are currently evaluating the expected impact of this new standard.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which is intended to improve and converge the financial reporting requirements for revenue from contracts with customers between U.S. GAAP and International Accounting Standards. In accordance with this new standard, an entity would recognize revenue to depict the transfer of promised goods or services. The standard establishes a five-step model and related application guidance, which will replace most existing revenue recognition guidance in U.S. GAAP. The standard will be effective for annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption is not permitted. An entity may choose to adopt the new standard either retrospectively or through a cumulative effect adjustment as of the start of the first period for which it applies the new standard. We are currently evaluating the expected impact of this new standard on our reporting of revenue contracts in our consolidated financial statements.   

 

---

 

3. Acquisitions

 

Electronic Media Systems, Inc. and Advanced Wireless Group, LLC

 

On October 31, 2013, we acquired all outstanding stock of Electronic Media Systems, Inc. and all membership interests in its subsidiary, Advanced Wireless Group, LLC, not otherwise owned by Electronic Media Systems, Inc. such that we are now the beneficial owner of all membership interests of Advanced Wireless, Group, LLC (collectively, “AWG”). AWG operated public Wi-Fi in seventeen U.S. airports including Los Angeles International, Charlotte/Douglas International, Miami International, Minneapolis- St. Paul International, Detroit Metropolitan Airport, and Boston’s Logan International. We have included the operating results of AWG in our condensed consolidated financial statements since the date of acquisition.

 

The acquisition has been accounted for under the acquisition method of accounting in accordance with FASB ASC 805, Business Combinations. As such, the assets acquired and liabilities assumed are recorded at their acquisition-date fair values. The total purchase price was $17,527, which includes cash paid at closing, net equity adjustments, holdback consideration to be paid and the fair value of additional contingent consideration that would be due and payable upon the successful extension of a specified airport Wi-Fi contract. On July 29, 2014, we paid $147 to the previous AWG shareholders as settlement for the net equity adjustments that were not finalized as of the acquisition date.

 

The fair value of the contingent consideration is based on Level 3 inputs, which are discussed in Note 6. Further changes in the fair value of the contingent consideration are recorded through operating (loss) income. On July 29, 2014, we paid the contingent consideration in the amount of $1,000 to the previous AWG shareholders. We allocated the excess of the purchase price over the fair value of assets acquired and liabilities assumed to goodwill, which is primarily not deductible for tax purposes. The goodwill arising from the AWG acquisition is attributable primarily to expected synergies and other benefits, including the acquired workforce, from combining AWG with us.

 

The contingent consideration was valued at the date of acquisition using a discount rate of 3.1%. The identifiable intangible assets were primarily valued using the excess earnings, relief from royalty, with-and-without and replacement cost methods using discount rates ranging from 12.0% to 14.0% and royalty rates of 0.5%.

 

During the nine months ended September 30, 2014, we finalized our purchase price allocation, which was preliminary as of December 31, 2013 due to estimated net equity adjustments and the filing of AWG’s final short period 2013 tax returns, both of which impacted the final purchase price allocation. As these purchase accounting adjustments were finalized during the measurement period, we retrospectively adjusted the provisional amounts recognized at the acquisition date to reflect the new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. As a result, goodwill decreased by $28, accrued expenses and other liabilities increased by $147, and accumulated deficit increased by $175 as of December 31, 2013 as compared to the audited consolidated financial statements contained in our annual report on Form 10-K filed with the SEC on March 17, 2014. The increase in accumulated deficit was the result of the valuation allowance that was established by the Company against its deferred tax assets as of December 31, 2013. The final purchase price allocation resulted in a $175 decrease in deferred tax liabilities and goodwill; accordingly, the Company had to increase the valuation allowance for deferred tax assets by $175, resulting in additional deferred tax expense for the year ended December 31, 2013.

 

---

 

The amortizable intangible assets are being amortized straight-line over their estimated useful lives. The following summarizes the final purchase price allocation:

 

 

 

Endeka Group, Inc.

 

On February 22, 2013, we acquired all outstanding stock of Endeka Group, Inc. (“Endeka”). Endeka is a provider of commercial wireless broadband and IPTV services at certain military bases, as well as Wi-Fi services to certain federal law enforcement training facilities. We acquired Endeka because Endeka’s portfolio of venues and management team are natural additions to our managed network business. We have included the operating results of Endeka in our condensed consolidated financial statements since the date of acquisition.

 

The acquisition has been accounted for under the acquisition method of accounting in accordance with FASB ASC 805. As such, the assets acquired and liabilities assumed are recorded at their acquisition-date fair values. The total purchase price was $6,498, which includes cash paid at closing, holdback consideration to be paid and the fair value of additional contingent consideration comprised of two components: (i) a payment (“Build Payment”) if the amount of the capital expenditures incurred for the substantial completion of a specified build project is less than a target; and (ii) a payment (“Milestone Payment”) based on revenue generated by certain contracts in fiscal year 2014. There is no maximum to the contingent consideration payments for the Milestone Payment. We do not expect to make any payments associated with the Build Payment. The Milestone Payment will be paid on or around February 28, 2015.

 

---

 

The fair value of the contingent consideration is based on Level 3 inputs. Further changes in the fair value of the contingent consideration are recorded through operating (loss) income. We allocated the excess of the purchase price over the fair value of assets acquired and liabilities assumed to goodwill, which is not deductible for tax purposes. The goodwill arising from the Endeka acquisition is attributable primarily to expected synergies and other benefits, including the acquired workforce, from combining Endeka with us.

 

The contingent consideration was valued at the date of acquisition using a discounted cash flow method with probability weighted cash flows and a discount rate of 50.5%. The identifiable intangible assets were primarily valued using the excess earnings, relief from royalty, and replacement cost methods using discount rates ranging from 40.0% to 50.0% and royalty rates ranging from 0.5% to 1.5%, where applicable.

 

The amortizable intangible assets are being amortized straight-line over their estimated useful lives. The following summarizes the final purchase price allocation:

 

 

 

During the nine months ended September 30, 2014, we paid the holdback consideration in the amount of $275 to the previous Endeka shareholders.

 

Pro forma results

 

The following table presents the unaudited pro forma results of the Company for the three and nine months ended September 30, 2013 as if the acquisitions of AWG and Endeka had occurred on January 1, 2012. These results are not intended to reflect the actual operations of the Company had the acquisitions occurred on January 1, 2012. We did

---

 

not record any incremental income taxes for pro forma net income (loss) because we established a valuation allowance in 2013.

 

 

 

4. Cash and cash equivalents

 

Cash and cash equivalents consisted of the following:

 

 

 

For the nine months ended September 30, 2014 and 2013, interest income was $105 and $145, respectively, which is included in interest and other income (expense), net in the accompanying condensed consolidated statements of operations.

 

5. Property and equipment

 

Property and equipment consisted of the following:

 

 

 

Depreciation and amortization of property and equipment is allocated as follows in the accompanying condensed consolidated statements of operations:

 

 

 

---

 

During the three and nine months ended September 30, 2014, the Company recognized $406 of impairment losses, which is included within development and technology expenses in the accompanying condensed consolidated statements of operations, related to a change in the use of certain software developed for internal use that indicated that the carrying value of those assets will not be recoverable.

 

6. Fair value measurement

 

ASC 820 establishes a three-tiered hierarchy that draws a distinction between market participant assumptions based on (i) quoted prices (unadjusted) in active markets for identical assets and liabilities (Level 1); (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2); and (iii) unobservable inputs that require us to use present value and other valuation techniques in the determination of fair value (Level 3). The following table sets forth our financial assets and liabilities that are measured at fair value on a recurring basis:

 

 

 

 

 

Our marketable securities utilize Level 2 inputs and consist primarily of corporate securities which include commercial paper and corporate debt instruments including notes issued by foreign or domestic corporations which pay in U.S. dollars and carry a rating of A or better. We have evaluated the various types of securities in our investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs.  Due to variations in trading volumes and the lack of quoted market prices in active markets, our fixed maturities are classified as Level 2 securities. The fair value of our fixed maturity marketable securities is derived through the use of a third party pricing source using recent reported trades for identical or similar securities, making adjustments through the reporting date based upon available market observable data.

 

The Company used the income approach to value the contingent consideration as of September 30, 2014. The contingent consideration used a discounted cash flow method with probability weighted cash flows for Endeka. The following table presents a reconciliation of the beginning and ending amounts related to the fair value of contingent consideration, categorized as Level 3:

 

 

 

 

---

 

7. Accrued expenses and other liabilities

 

Accrued expenses and other liabilities consisted of the following:

 

 

 

 

 

8. Income taxes

 

We calculate our interim income tax provision in accordance with ASC 270, Interim Reporting, and ASC 740, Accounting for Income Taxes. At the end of each interim period, we estimate the annual effective tax rate and apply that rate to our ordinary quarterly earnings. The tax expense or benefit related to significant, unusual, or extraordinary items is recognized in the interim period in which those items occur. In addition, the effect of changes in enacted tax laws, rates, or tax status is recognized in the interim period in which the change occurs.

 

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment, including the expected operating income (loss) for the year, projections of the proportion of income (loss) earned and taxed in various states, permanent and temporary differences as a result of differences between amounts measured and recognized in accordance with tax laws and financial accounting standards, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained, or as the tax environment changes.

 

Income tax expense (benefit) of $378 and $(382) reflects an effective tax rate of (3.1%) and 35.6% for the nine months ended September 30, 2014 and 2013, respectively. Our effective tax rate differs from the statutory rate primarily due to our valuation allowance for the nine months ended September 30, 2014. Our effective tax rate differs from the statutory rate primarily due to benefits from disqualifying dispositions of incentive stock options and non-tax deductible transaction costs related to the acquisition of Endeka for the nine months ended September 30, 2013. At September 30, 2014, we have net deferred tax liabilities of $2,454, which include net operating loss carry-forwards. As of September 30, 2014 and December 31, 2013, we had $461 and $445, respectively, of uncertain tax positions, $106 of which is a reduction to deferred tax assets, which is presented net of uncertain tax positions, in the accompanying condensed consolidated balance sheets. We accrue interest and penalties related to unrecognized tax benefits as a component of income taxes. As of September 30, 2014 and December 31, 2013, we have accrued $69 and $53, respectively, for related interest, net of federal income tax benefits, and penalties. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of September 30, 2014 was $286.

 

We are subject to taxation in the United States and in various states. Our tax years 2011 and forward are subject to examination by the IRS and our tax years 2009 and forward are subject to examination by material state jurisdictions. However, due to prior year loss carryovers, the IRS and state tax authorities may examine any tax years for which the carryovers are used to offset future taxable income. We are currently subject to examination by the IRS for our 2011 tax year. Although the ultimate outcome is unknown, we believe that any adjustments that may result from the examination is not likely to have a material, adverse effect on our condensed consolidated results of operations, financial position or cash flows.

 

---

 

9. Commitments and contingencies

 

Letters of credit

 

We have entered into Letter of Credit Authorization agreements (collectively, “Letters of Credit”) with Silicon Valley Bank. The Letters of Credit are irrevocable and serve as performance guarantees that will allow our customers to draw upon the available funds if we are in default. As of September 30, 2014, we have Letters of Credit totaling $3,307 that are scheduled to expire over the next thirteen-month period. There have been no drafts drawn under these Letters of Credit as of September 30, 2014. Subsequent to September 30, 2014, the Company increased the value of one Letter of Credit by $1,789.

 

Legal proceedings

 

From time to time, we may be subject to claims, suits, investigations and proceedings arising out of the normal course of business. We are not currently a party to any litigation that we believe could have a material adverse effect on our business, financial position, results of operations or cash flows.

 

10. Stock incentive plans

 

In March 2011, our board of directors approved the 2011 Equity Incentive Plan (“2011 Plan”).  The 2011 Plan provides for the grant of incentive and nonstatutory stock options, stock appreciation rights, restricted shares of our common stock, stock units, and performance cash awards.  As of January 1 of each year, the number of shares of common stock reserved for issuance under our stock incentive plan shall automatically be increased by a number equal to the lesser of (a) 4.5% of the total number of shares of common stock then outstanding, (b) 3,000,000 shares of common stock and (c) as determined by our board of directors.  As of September 30, 2014, 8,693,162 shares of common stock are reserved for issuance.

 

No further awards will be made under our Amended and Restated 2001 Stock Incentive Plan (“2001 Plan”), and it will be terminated.  Options outstanding under the 2001 Plan will continue to be governed by their existing terms.

 

Stock-based compensation expense is allocated as follows on the accompanying condensed consolidated statements of operations:

 

 

 

We capitalized $130 and $291 of stock-based compensation expense during the three and nine months ended September 30, 2014, respectively.

 

Stock option awards

 

We grant stock option awards to both employees and non-employee directors. The grant date for these awards is the same as the measurement date. The stock option awards generally vest over a four year service period with 25% vesting when the individual completes 12 months of continuous service and the balance vesting monthly thereafter subject to continuous service on each vesting date. These awards are valued as of the measurement date and the stock-based compensation expense, net of estimated and actual forfeitures, is recognized on a straight-line basis over the requisite service period.

---

 

 

A summary of the stock option activity is as follows:

 

 

 

The significant assumptions used for newly-issued stock option grants for the nine months ended September 30, 2014 were an expected term of 6.25 years, an expected volatility of 48.6%, a risk free interest rate of 1.8% and no expected dividends.  The weighted average grant date fair value for stock option grants for the nine months ended September 30, 2014 was $2.92.

 

Restricted stock unit awards

 

We grant time-based restricted stock units (“RSU”) to executive and non-executive personnel and non-employee directors. The time-based RSUs granted to executive and non-executive personnel generally vest over a two to three year period subject to continuous service on each vesting date. The time-based RSUs for our non-employee directors generally vest over a one year period for existing members and 25% per year over a four-year period for new members subject to continuous service on each vesting date.

 

During the nine months ended September 30, 2014, we granted performance-based RSUs to executive personnel. These awards vest subject to certain performance objectives based on the Company’s annual revenue growth achieved during the specified performance period and certain long-term service conditions. The maximum number of RSUs that may vest is determined based on actual Company achievement with one-third of the performance-based RSUs vesting when the individual completes 12 months of continuous service and the balance vesting over a series of eight successive equal quarterly installments thereafter subject to continuous service on each vesting date. We recognize stock-based compensation expense for performance-based RSUs when we believe that it is probable that the performance objectives will be met.

 

A summary of the nonvested RSU activity under the 2011 Plan is as follows:

 

 

 

During the nine months ended September 30, 2014, 707,468 shares of time-based RSUs vested. The Company issued 485,671 shares and the remaining shares were withheld to pay minimum statutory federal, state, and local employment payroll taxes on those vested awards.

 

---

 

11. Net (loss) income per share attributable to common stockholders

 

The following table sets forth the computation of basic and diluted net (loss) income per share attributable to common stockholders:

 

 

 

For the three months ended September 30, 2013, 3,086,287 options to purchase common stock were not included in the computation of diluted net income per share as the inclusion would have been anti-dilutive. For the nine months ended September 30, 2013, we excluded all stock options and RSUs from the computation of diluted net loss per share due to the net loss for the period. For the three and nine months ended September 30, 2014, we excluded all stock options and RSUs from the computation of diluted net loss per share due to the net loss for the period as the inclusion would be anti-dilutive.

 

On April 1, 2013, the Company approved a stock repurchase program to repurchase up to $10,000 of the Company’s common stock in the open market, exclusive of any commissions, markups or expenses. The stock repurchased will be retired and will resume the status of authorized but unissued shares of common stock. The Company did not repurchase any of our common stock during the nine months ended September 30, 2014. During the nine months ended September 30, 2013, we repurchased and retired approximately 362,000 shares under this program for approximately $2,541, excluding commissions paid, or an average price per share of $7.02. As of September 30, 2014, the remaining approved amount for repurchases was approximately $5,180.

 

 

 

 

 

 

---

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in “Item 1. Financial Statements” of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and the section titled “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities Exchange Commission on March 17, 2014.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, as amended, based on our current expectations, estimates and projections about our operations, industry, financial condition, performance, results of operations, and liquidity. Statements containing words such as “may,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “project,” “projections,” “business outlook,” “estimate,” or similar expressions constitute forward-looking statements. These forward-looking statements include, but are not limited to, statements about future financial performance; revenues; metrics; operating expenses; market trends, including those in the markets in which we compete; operating and marketing efficiencies; liquidity; cash flows and uses of cash; dividends; capital expenditures; depreciation and amortization; tax payments; foreign currency exchange rates; hedging arrangements; our ability to repay indebtedness, pay dividends and invest in initiatives; our products and services; pricing; competition; strategies; and new business initiatives, products, services, and features. Potential factors that could affect the matters about which the forward-looking statements are made include, among others, the factors disclosed in the section entitled “Risk Factors” in this Quarterly Report on Form 10-Q and additional factors that accompany the related forward-looking statements in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as the date hereof. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that may cause actual performance and results to differ materially from those predicted. Reported results should not be considered an indication of future performance. Except as required by law, we undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

Overview

 

Boingo helps the world stay connected.

 

We have established a global footprint of small cell networks that provide high-speed, high-bandwidth wireless Internet service to smartphones, tablet computers, laptops, and other wireless-enabled devices. Small cells are low-powered radio access nodes that operate in licensed and unlicensed spectrum that have a range of 10 meters to 1 to 2 kilometers. These small cell networks cover more than a million distributed antenna system (“DAS”) and Wi-Fi locations and reach more than one billion consumers annually. With the proliferation of mobile Internet-enabled wireless devices, and growth of high-bandwidth usage from streaming media and smartphone apps, we expect these small cells to play a significant role in helping meet the ever-increasing data demands of connected consumers who are accustomed to the benefits of broadband performance at home and work and are seeking the same applications, performance and availability on-the-go.

 

Our small cell networks include DAS and Wi-Fi networks that we manage and operate ourselves, which we refer to as our “managed and operated” locations, as well as Wi-Fi networks managed and operated by third-parties with whom we contract for access, which we refer to as our “roaming” networks. Our managed and operated locations are typically located in large venues with big audiences, such as airports, stadiums, arenas, universities, convention centers, shopping malls, and military bases where we install a wireless network infrastructure and generally have exclusive multi-year agreements. Our roaming networks comprise more than one million commercial Wi-Fi hotspots in over 100

---

 

countries around the world. We also sell advertising and sponsorships on other Wi-Fi networks that are not part of our network on behalf of the network owner.

 

We generate revenue through wholesale partnerships, retail sales, and advertising and sponsorships. We have direct customer relationships with users who have purchased our mobile Internet services, and we also provide mobile Internet access and solutions to our partners, which include telecom operators, cable companies, technology companies, enterprise software and services companies, and communications service providers to allow their millions of users to connect to the mobile Internet through hotspots in our network. Our software solution—which provides one-click access to our global footprint of hotspots—has been rebranded for wholesale partners, in addition to being marketed under the Boingo brand. In combination with our back-end system infrastructure, it creates a global roaming solution for operators, carriers and other service providers.

 

We generate wholesale revenue from telecom operators that pay us build-out fees and recurring access fees so that their cellular customers may use our DAS networks at locations where we manage and operate the wireless network. In addition, our partners pay us usage-based Wi-Fi network access and software licensing fees to allow their customers’ access to our footprint worldwide.

 

We generate revenue from individual users purchasing month-to-month retail subscription plans that automatically renew hotspot specific single-use access to our network, or residential broadband and Internet Protocol television (“IPTV”) services in military barracks. As of September 30, 2014 and 2013, we had approximately 286,000 and 313,000 subscribers, respectively.

 

We also generate revenue from advertisers that seek to reach our users with sponsored access, promotional programs and online display advertising at locations where we manage and operate the Wi-Fi network and locations where we solely provide authorized access to a partner’s Wi-Fi network through sponsored access and promotional programs.

 

We believe we are the leading global provider of commercial mobile Wi-Fi Internet solutions and indoor DAS services for carriers. Key elements of our strategy are to:

 

 

 

 

 

Reconciliation of Non-GAAP Financial Measures

 

We define Adjusted EBITDA as net (loss) income attributable to common stockholders plus depreciation and amortization of property and equipment, income tax expense (benefit), amortization of intangible assets, stock-based compensation expense, non-controlling interests and interest and other (income) expense, net.

 

We believe that Adjusted EBITDA is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods. We believe that:

 

 

 

We use Adjusted EBITDA in conjunction with traditional GAAP measures as part of our overall assessment of our performance, for planning purposes, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance.

 

We do not place undue reliance on Adjusted EBITDA as our only measure of operating performance. Adjusted EBITDA should not be considered as a substitute for other measures of financial performance reported in accordance with GAAP. There are limitations to using non-GAAP financial measures, including that other companies may calculate these measures differently than we do.

 

We compensate for the inherent limitations associated with using Adjusted EBITDA through disclosure of these limitations, presentation of our financial statements in accordance with GAAP and reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net (loss) income attributable to common stockholders.

 

The following provides a reconciliation of net (loss) income attributable to common stockholders to Adjusted EBITDA:

 

 

 

 

---

 

Results of Operations

 

The following tables set forth our results of operations for the specified periods.

 

 

 

Depreciation and amortization expense included in costs and operating expenses:

 

 

 

---

 

---

 

Stock-based compensation expense included in costs and operating expenses:

 

 

---

 

The $2.0 million increase in stock-based compensation expense for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 is due primarily to $2.5 million of additional stock-based compensation expense related to the stock options and restricted stock units (“RSU”) issued in 2013 and 2014, which was partially offset by $0.5 million of additional reductions recorded in 2013 for employees who left the Company during 2013.

 

The following table sets forth our results of operations for the specified periods as a percentage of our revenue for those periods.

 

 

 

---

 

Three Months ended September 30, 2014 and 2013

 

Revenue

 

 

 

There are four key metrics that we use to monitor results and activity in the business as follows:

 

Subscribers.  This metric represents the number of paying retail customers who are on a recurring month-to-month subscription plan at a given period end.

 

Monthly churn.  This metric shows the number of subscribers who canceled their subscriptions in a given month, expressed as a percentage of the average subscribers in that month. The churn in a given period is the average monthly churn in that period. This measure is one indicator of the longevity of our subscribers. Some of our customers who cancel subscriptions maintain accounts for single-use access.

 

Connects.  This metric shows how often individuals connect to our non-military global Wi-Fi network in a given period. The connects include retail and wholesale customers in both customer pay locations and customer free locations where we are a paid service provider or receive sponsorship or promotional fees. We count each connect as a single connect regardless of how many times the individual accesses the network at a given venue during their 24 hour period. This measure is an indicator of paid activity throughout our network.

 

DAS nodes.  This metric represents the number of active DAS nodes as of the end of the period. A DAS node is a single communications endpoint, typically an antenna, which transmits or receives radio frequency signals wirelessly. This measure is an indicator of the reach of our DAS network.

 

Total revenue. Total revenue increased $2.2 million or 7.7%, for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013.

 

Wholesale.  Wholesale revenue increased $0.8 million, or 5.7%, for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, due to a $0.5 million increase in DAS access fees from our telecom operators, a $0.2 million increase in partner usage-based fees, and a $0.2 million increase in our wholesale service provider revenues. The increase was partially offset by a $0.2 decrease in revenues related to new build-out projects in our managed and operated locations. Wholesale revenue for the three months ended September 30, 2014 includes $0.7 million from a Wi-Fi build-out project.

 

Retail subscription. Retail subscription revenue decreased $0.4 million, or 4.9%, for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013. The decrease is primarily due a decrease in our average monthly subscribers which was partially offset by a 2.0% increase in our average monthly

---

 

revenue per subscriber for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013.

 

Retail single-use.  Retail single-use revenue increased $0.3 million, or 11.5%, for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013. Retail single-use revenue includes $0.6 million of revenues related to the venues acquired from Electronic Media Systems, Inc. and Advanced Wireless Group, LLC (collectively, “AWG”) in October 2013.

 

Advertising and other.  Advertising and other revenue increased $1.6 million, or 51.6%, for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013 primarily due to a $2.0 million increase in advertising sales at our managed and operated locations, which includes $1.7 million of advertising sales at the venues acquired from AWG in October 2013. 

 

Costs and Operating Expenses

 

 

 

Network access. Network access costs increased $1.4 million, or 10.2%, for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013. The increase is primarily due to a $2.0 million increase in depreciation expense,  a $1.9 million increase in revenue share paid to venues in our managed and operated locations, and a $0.9 million increase in internet connectivity expenses. The increases were partially offset by a $2.5 million decrease in other direct costs and a $0.9 million decrease from customer usage at partner venues.

 

Network operations. Network operations expenses increased $1.8 million, or 38.9%, for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, due to a $1.0 million increase in personnel related expenses primarily resulting from increased headcount,  a $0.3 million increase in depreciation expense, a $0.2 million increase in network maintenance expense, and a $0.3 million increase in other operating expenses.

 

Development and technology. Development and technology expenses increased $1.3 million, or 51.2% for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, due to a $0.4 million impairment loss related to a change in the use of certain software developed for internal use,  a $0.3 million increase in depreciation expense,  a $0.2 million increase in hardware and software maintenance expenses, and a $0.4 million increase in other operating expenses for the three months ended September 30, 2014.

 

Selling and marketing. Selling and marketing expenses increased $0.5 million, or 14.7%, for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, due primarily to a $0.6 million increase in personnel related expenses primarily resulting from increased headcount.

 

General and administrative.  General and administrative expenses increased $1.1 million, or 34.5%, for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, due to a $0.6 million increase in personnel related expenses, inclusive of a $0.3 million increase in stock-based compensation expenses, a $0.2 million increase in consulting expenses, and a $0.3 million increase in other operating expense.

 

---

 

Amortization of intangible assets.  Amortization of intangible assets expense increased $0.4 million, or 77.3%, for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, primarily due to our acquisition of AWG in October 2013.

 

Interest and Other Income (Expense), Net

 

Interest and other income (expense), net, remained essentially unchanged for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013.

 

Income Tax Expense

 

We had income tax expense of $0.1 million for the three months ended September 30, 2014 compared to $0.3 million for the three months ended September 30, 2013. Our effective tax rate decreased to (2.2%) for the three months ended September 30, 2014 compared to 33.0% for the three months ended September 30, 2013 due primarily to the valuation allowance we established at year-end in 2013.

 

Non-controlling Interests

 

Non-controlling interests remained essentially unchanged for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013.

 

Net (Loss) Income Attributable to Common Stockholders

 

We generated a  net loss for the three months ended September 30, 2014 as compared to net income for the three months ended September 30, 2013, primarily as a result of the $6.5 million increase in costs and operating expenses which was partially offset by the $2.2 million increase in revenues and the $0.2 million decrease in income tax expense.  We generated a diluted net loss per share for the three months ended September 30, 2014 primarily as a result of our net loss.

 

Adjusted EBITDA

 

Adjusted EBITDA was $6.7 million for the three months ended September 30, 2014, down 10.4% from the $7.4 million recorded in the three months ended September 30, 2013. As a percent of revenue, Adjusted EBITDA was 21.6% for the three months ended September 30, 2014, down from 25.9% of revenue for the three months ended September 30, 2013. The Adjusted EBITDA decrease was due primarily to the $4.2 million increase in our net loss attributable to common stockholders and a $0.2 million decrease in income tax expense for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The decrease was partially offset by a $3.0 million increase in depreciation and amortization expense, a $0.5 million increase in stock-based compensation expenses and a $0.1 million increase in non-controlling interest for the three months ended September 30, 2014 compared to the three months ended September 30, 2013.

 

---

 

Nine Months ended September 30, 2014 and 2013

 

Revenue

 

 

 

 

Total revenue. Total revenue increased $7.7 million or 9.9%, for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013.

 

Wholesale.  Wholesale revenue increased $0.9 million, or 2.4%, for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, due to a $2.8 million increase in revenues related to new build-out projects in our managed and operated locations, which includes $0.7 million of revenue related to a Wi-Fi build-out project, a $1.1 million increase in DAS access fees from our telecom operators, and a $0.4 million increase in our wholesale service provider revenues. The increases were partially offset by a $3.4 million decrease in partner usage-based fees.

 

Retail subscription. Retail subscription revenue decreased $0.8 million, or 3.0%, for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. The decrease is primarily due to a decrease in our average monthly subscribers for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013.

 

Retail single-use.  Retail single-use revenue remained essentially unchanged for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. Retail single-use revenue includes $1.8 million of revenues related to the venues acquired from AWG in October 2013.

 

Advertising and other.  Advertising and other revenue increased $7.3 million, or 116.4%, for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013 due primarily to an  $8.0 million increase in advertising sales at our managed and operated locations, which includes $5.2 million of advertising sales at the venues acquired from AWG in October 2013. The increase was partially offset by a $0.7 million decrease in other revenues.

 

 

---

 

Costs and Operating Expenses

 

 

 

Network access. Network access costs increased $6.9 million, or 19.9%, for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. The increase is primarily due to a $5.2 million increase in revenue share paid to venues in our managed and operated locations,  a  $4.3 million increase in depreciation expense and a $2.1 million increase in internet connectivity expenses. The increases were partially offset by a $2.7 million decrease in other direct costs, which includes $0.4 million of costs related to a Wi-Fi build out project, and a $2.1 million decrease from customer usage at partner venues.

 

Network operations. Network operations expenses increased $4.7 million, or 35.3%, for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, due to a $2.9 million increase in personnel related expenses primarily resulting from increased headcount, a $0.8 million increase in depreciation expense, a $0.3 million increase in network maintenance expenses, a $0.2 million increase in travel and entertainment expenses, a $0.2 million increase in hardware and software expenses and a $0.3 million increase in other operating expenses.

 

Development and technology. Development and technology expenses increased $2.3 million, or 27.4% for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, due to a $0.9 million increase in depreciation expense, a $0.7 million increase in hardware and software maintenance expenses, a $0.4 million impairment loss related to a change in the use of certain software developed for internal use,  a $0.2 million increase in technology service expenses, and a $0.5 million increase in other operating expenses for the nine months ended September 30, 2014. The increases were partially offset by a $0.4 million decrease in personnel related expenses.

 

Selling and marketing. Selling and marketing expenses increased $1.5 million, or 15.1%, for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, due primarily to a $2.0 million increase in personnel related expenses primarily resulting from increased headcount. The increase was partially offset by a $0.5 million decrease in marketing related expenses.

 

General and administrative.  General and administrative expenses increased $1.8 million, or 16.0%, for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, due primarily to a $1.8 million increase in personnel related expenses, inclusive of a $1.2 million increase in stock-based compensation expenses, and a $0.2 million increase in consulting expenses. The increase was partially offset by a $0.2 million decrease in other operating expenses.    

 

Amortization of intangible assets.  Amortization of intangible assets expense increased $1.4 million, or 93.1%, for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, primarily due to our acquisitions of Endeka Group, Inc. and AWG in February 2013 and October 2013, respectively.

 

Interest and Other Income, Net

 

Interest and other income, net, remained essentially unchanged for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013.

 

---

 

Income Tax Expense (Benefit)

 

We had income tax expense of $0.4 million for the nine months ended September 30, 2014 compared to income tax benefit of $0.4 million for the nine months ended September 30, 2013. Our effective tax rate decreased to (3.1)% for the nine months ended September 30, 2014 compared to 35.6% for the nine months ended September 30, 2013 due primarily to the valuation allowance we established at year end in 2013.

 

Non-controlling Interests

 

Non-controlling interests remained essentially unchanged for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013.

 

Net Loss Attributable to Common Stockholders

 

Our net loss for the nine months ended September 30, 2014 increased as compared to the nine months ended September 30, 2013, primarily as a result of the $18.6 million increase in costs and operating expenses and the $0.8 million decrease in income tax benefits, which was partially offset by the $7.7 million increase in revenues. Our diluted net loss per share increased primarily as a result of the increase in our net loss.

 

Adjusted EBITDA

 

Adjusted EBITDA was $15.7 million for the nine months ended September 30, 2014, down 8.6% from the $17.1 million recorded in the nine months ended September 30, 2013. As a percent of revenue, Adjusted EBITDA was 18.3% for the nine months ended September 30, 2014, down from 22.0% of revenue for the nine months ended September 30, 2013. The Adjusted EBITDA decrease was due primarily to the $11.8 million increase in our net loss attributable to common stockholders for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The decrease was partially offset by a $7.4 million increase in depreciation and amortization expense, a $2.0 million increase in stock-based compensation expenses, a $0.8 million decrease in income tax benefits, and a $0.1 million increase in non-controlling interest.

 

Liquidity and Capital Resources

 

We have financed our operations primarily through cash provided by operating activities.  Our primary sources of liquidity as of September 30, 2014 consisted of $4.0 million of cash and cash equivalents and $17.3 million of marketable securities.

 

Our principal uses of liquidity have been to fund our operations, working capital requirements, capital expenditures and acquisitions. Our capital expenditures in the nine months ended September 30, 2014 were $55.0 million, of which $27.6 million will be reimbursed through revenue for DAS build-out projects from our telecom operators.

 

We believe that our existing cash and cash equivalents, working capital and our cash flow from operations will be sufficient to fund our operations for at least the next 12 months. However, we are currently seeking debt financing to assist in funding our capital requirements and any potential acquisitions and believe we will be successful in securing such additional debt financing in the near term. There can be no assurance, however, that future industry-specific or other developments, general economic trends, or other matters will not adversely affect our operations or our ability to meet our future cash requirements. Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and size of our managed and operated location expansion efforts, the timing and extent of spending to support product development efforts, the timing of introductions of new solutions and enhancements to existing solutions and the continuing market acceptance of our solutions. We expect our capital expenditures for the remainder of 2014 will range from $10 million to $15 million, excluding capital expenditures for DAS build-out projects which are reimbursed through revenue from our telecom operator customers. The majority of our remaining 2014 capital expenditures will be used to build out residential broadband and IPTV networks for troops stationed on military bases pursuant to our contracts with the U.S. government. The investment of these resources will occur in advance of

---

 

experiencing any direct benefit from them including generation of revenues. The U.S. government may modify, curtail or terminate its contracts with us, either at its convenience or for default based on performance. Any such modification, curtailment, or termination of one or more of our government contracts could have a material adverse effect on our earnings, cash flow and/or financial position. Additional funds may not be available on terms favorable to us, or at all. 

 

The following table sets forth cash flow data for the nine months ended September 30:

 

 

 

Net Cash Provided by Operating Activities

 

For the nine months ended September 30, 2014, we generated $18.6 million of net cash from operating activities, an increase of $6.1 million from the prior year comparative period. The increase is primarily due to a $6.3 million change in our operating assets and liabilities, net of effect of acquisition, a $7.4 million increase in depreciation and amortization expenses, a $1.7 million decrease in excess windfall tax benefits from stock option exercises, a $2.0 million increase in stock-based compensation expenses, a $0.3 million decrease in our deferred tax liabilities, and a $0.4 million increase in impairment losses. The increases were partially offset by the $11.7 million increase in our net loss and the $0.4 million change in fair value for our contingent consideration liabilities.

 

Net Cash Used in Investing Activities

 

For the nine months ended September 30, 2014, we used $39.0 million in investing activities, an increase of $20.1 million from the prior year comparative period. This increase is primarily due to a $35.9 million increase in purchases of property and equipment and $0.1 million of cash paid for net equity adjustments for the acquisition of AWG. The increase was partially offset by a $10.6 million increase in cash provided by net proceeds from net sales of marketable securities, $4.9 million of cash used for the acquisition of Endeka during the nine months ended September 30, 2013, and a $0.4 million decrease in restricted cash.

 

Net Cash Used in Financing Activities

 

For the nine months ended September 30, 2014, we used $2.9 million in financing activities, a decrease of $4.1 million from the prior year comparative period. This decrease is primarily due to $6.1 million of cash used for payment of certain assumed liabilities related to the acquisition of Endeka and $2.6 million of cash used for the repurchase of stock during the nine months ended September 30, 2013, and $0.3 million increase in proceeds from exercise of stock options during the nine months ended September 30, 2014 as compared to the comparative prior year period. The decreases were partially offset by the $1.7 million decrease in excess windfall tax benefits from stock option exercises, $1.4 million in cash used to pay minimum statutory taxes related to our time-based RSUs that vested during the nine months ended September 30, 2014, $1.3 million in cash used to pay contingent liabilities and other acquisition related consideration during the nine months ended September 30, 2014, and a $0.4 million increase in cash paid for capital leases and notes payable.

 

Contractual Obligations and Commitments

During August 2014, we entered into a lease amendment to expand the amount of space leased and extend the term of the lease for our corporate headquarters in Los Angeles, California.

 

---

 

The following table sets forth our contractual obligations and commitments as of September 30, 2014:

 

---

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet financing arrangements and we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

Critical Accounting Policies and Estimates

 

There have been no material changes to our critical accounting policies and estimates from the information provided for the year ended December 31, 2013 in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our annual report on Form 10-K filed by us with the SEC on March 17, 2014.

 

Recently Issued Accounting Standards

 

    Information regarding recent accounting pronouncements is contained in Note 2 “Summary of Significant Accounting Policies” to the accompanying condensed consolidated financial statements included in Part I, Item 1, which is incorporated herein by this reference.

 

---

 

Item 3.Quantitative and Qualitative Disclosure about Market Risk

 

Market risk represents the potential loss arising from adverse changes in the value of financial instruments. The risk of loss is assessed based on the likelihood of adverse changes in fair values, cash flows or future earnings.

 

We have established guidelines relative to the diversification and maturities of investments to maintain safety and liquidity. These guidelines are reviewed periodically and may be modified depending on market conditions. Although investments may be subject to credit risk, our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure from any single issue, issuer or type of investment. At September 30, 2014, our market risk sensitive instruments consisted of marketable securities available-for-sale, which are comprised of highly rated short-term corporate bonds.

 

Marketable securities available-for-sale are carried at fair value and are intended for use in meeting our ongoing liquidity needs. Unrealized gains and losses on available-for-sale securities, which are deemed to be temporary, are reported as a separate component of stockholders’ equity, net of tax. Unrealized gains and losses on available-for-sale securities have not been significant. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization, along with realized gains and losses is included in interest and other income (expense), net.

 

We are exposed to foreign currency exchange rate risk inherent in conducting business globally in numerous currencies, of which the most significant to our operations for the nine months ended September 30, 2014 was the Brazilian Real. We are primarily exposed to foreign currency fluctuations related to the operations of our subsidiary in Brazil whose financial statements are not denominated in the U.S. Dollar.  Currently, we do not enter into currency forward exchange or option contracts to hedge foreign currency exposures.

 

Item 4.Controls and Procedures

 

Disclosure Controls and Procedures. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness, as of September 30, 2014, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

 

Changes in Internal Control over Financial Reporting. During the three months ended September 30, 2014, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

PART II. OTHER INFORMATION

 

Item 1.Legal Proceedings

 

The information set forth in Note 9 “Commitments and Contingencies,” to the unaudited condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q, is incorporated herein by this reference.

 

---

 

Item 1A.Risk Factors

 

Certain Factors Affecting Boingo Wireless, Inc.

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, which we incorporate by reference into this Quarterly Report on Form 10-Q, which could materially affect our business, results of operations, cash flows, or financial condition. The risks described in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results. There have been no material changes in the risk factors contained in our Annual Report on Form 10-K.

 

---

 

Item 6.Exhibits

 

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q:

 

 

---

*Confidential treatment has been requested for portions of this exhibit.  These portions have been omitted from the Form 10-Q and submitted separately to the Securities and Exchange Commission.

†Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

---

 

SIGNATURES

 

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

 

 

 

 

 

---