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Boingo Wireless
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$20.34 44 $895
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
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8-K 2019-05-08 Earnings, Exhibits
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8-K 2018-06-07 Shareholder Vote
8-K 2018-05-03 Earnings, Exhibits
8-K 2018-03-31 Enter Agreement
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WIFI 2019-03-31
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 a19-7699_1ex31d1.htm
EX-31.2 a19-7699_1ex31d2.htm
EX-32.1 a19-7699_1ex32d1.htm

Boingo Wireless Earnings 2019-03-31

WIFI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a19-7699_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2019

 

OR

 

o         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)

 

Delaware

 

95-4856877

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

10960 Wilshire Blvd., 23rd Floor

 

 

Los Angeles, California

 

90024

(Address of principal executive offices)

 

(Zip Code)

 

(310) 586-5180

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, $0.0001 par value

 

The NASDAQ Stock Market LLC

 

WIFI

(Title of each class)

 

(Name of each exchange on which registered)

 

(Trading symbol)

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).   Yes  x  No  o

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller Reporting Company o

 

 

 

 

 

Emerging Growth Company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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

 

As of May 3, 2019, there were 43,985,167 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

PART I — FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

Financial Statements (unaudited)

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

 

 

 

 

Condensed Consolidated Statements of Operations

4

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

5

 

 

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity

6

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

7

 

 

 

 

 

 

Notes to the Condensed Consolidated Financial Statements

8

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

37

 

 

 

 

 

Item 4.

Controls and Procedures

37

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

Item 1.

Legal Proceedings

37

 

 

 

 

 

Item 1A.

Risk Factors

37

 

 

 

 

 

Item 6.

Exhibits

38

 

 

 

SIGNATURES

39

 

2


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)

 

 

 

March 31,
2019

 

December 31,
2018

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

69,016

 

$

149,412

 

Marketable securities

 

36,888

 

 

Accounts receivable, net

 

38,434

 

42,766

 

Prepaid expenses and other current assets

 

8,823

 

7,815

 

Total current assets

 

153,161

 

199,993

 

Property and equipment, net

 

329,734

 

314,179

 

Operating lease right-of-use assets

 

16,478

 

 

Goodwill

 

58,890

 

59,640

 

Intangible assets, net

 

18,021

 

19,152

 

Other assets

 

10,784

 

9,936

 

Total assets

 

$

587,068

 

$

602,900

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

25,829

 

$

21,543

 

Accrued expenses and other liabilities

 

57,765

 

62,653

 

Deferred revenue

 

68,351

 

80,383

 

Current portion of operating leases

 

2,736

 

 

Current portion of long-term debt

 

778

 

 

Current portion of finance leases

 

3,843

 

4,201

 

Current portion of notes payable

 

2,204

 

2,411

 

Total current liabilities

 

161,506

 

171,191

 

Deferred revenue, net of current portion

 

149,675

 

137,205

 

Long-term portion of operating leases

 

18,915

 

 

Long-term debt

 

156,411

 

151,670

 

Long-term portion of finance leases

 

2,475

 

3,293

 

Long-term portion of notes payable

 

1,148

 

1,618

 

Deferred tax liabilities

 

1,132

 

1,073

 

Other liabilities

 

1,268

 

6,728

 

Total liabilities

 

492,530

 

472,778

 

 

 

 

 

 

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.0001 par value; 5,000 shares authorized; no shares issued and outstanding

 

 

 

Common stock, $0.0001 par value; 100,000 shares authorized; 43,979 and 42,669 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

4

 

4

 

Additional paid-in capital

 

228,805

 

259,132

 

Accumulated deficit

 

(135,083

)

(129,930

)

Accumulated other comprehensive loss

 

(1,317

)

(1,295

)

Total common stockholders’ equity

 

92,409

 

127,911

 

Non-controlling interests

 

2,129

 

2,211

 

Total stockholders’ equity

 

94,538

 

130,122

 

Total liabilities and stockholders’ equity

 

$

587,068

 

$

602,900

 

 

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

 

3


Table of Contents

 

Boingo Wireless, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

Revenue

 

$

66,473

 

$

58,159

 

Costs and operating expenses:

 

 

 

 

 

Network access

 

31,411

 

26,565

 

Network operations

 

14,142

 

12,846

 

Development and technology

 

8,999

 

7,425

 

Selling and marketing

 

5,867

 

5,463

 

General and administrative

 

8,294

 

7,699

 

Amortization of intangible assets

 

1,131

 

727

 

Total costs and operating expenses

 

69,844

 

60,725

 

Loss from operations

 

(3,371

)

(2,566

)

Interest and other expense, net

 

(1,676

)

(79

)

Loss before income taxes

 

(5,047

)

(2,645

)

Income tax expense

 

192

 

128

 

Net loss

 

(5,239

)

(2,773

)

Net (loss) income attributable to non-controlling interests

 

(86

)

456

 

Net loss attributable to common stockholders

 

$

(5,153

)

$

(3,229

)

 

 

 

 

 

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

Basic

 

$

(0.12

)

$

(0.08

)

Diluted

 

$

(0.12

)

$

(0.08

)

 

 

 

 

 

 

Weighted average shares used in computing net loss per share attributable to common stockholders:

 

 

 

 

 

Basic

 

43,527

 

41,330

 

Diluted

 

43,527

 

41,330

 

 

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

 

4


Table of Contents

 

Boingo Wireless, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

Net loss

 

$

(5,239

)

$

(2,773

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

Foreign currency translation adjustments

 

(34

)

(4

)

Unrealized gain on marketable securities

 

16

 

 

Comprehensive loss

 

(5,257

)

(2,777

)

Comprehensive (loss) income attributable to non-controlling interest

 

(82

)

453

 

Comprehensive loss attributable to common stockholders

 

$

(5,175

)

$

(3,230

)

 

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

 

5


Table of Contents

 

Boingo Wireless, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common

 

Common

 

Additional

 

 

 

Other

 

Non-

 

Total

 

 

 

Stock

 

Stock

 

Paid-in

 

Accumulated

 

Comprehensive

 

controlling

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Loss

 

Interests

 

Equity

 

Balance at December 31, 2018

 

42,669

 

$

4

 

$

259,132

 

$

(129,930

)

$

(1,295

)

$

2,211

 

$

130,122

 

Issuance of common stock under stock incentive plans

 

1,310

 

 

6

 

 

 

 

6

 

Shares withheld for taxes

 

 

 

(32,907

)

 

 

 

(32,907

)

Stock-based compensation expense

 

 

 

2,574

 

 

 

 

2,574

 

Net loss

 

 

 

 

(5,153

)

 

(86

)

(5,239

)

Other comprehensive loss

 

 

 

 

 

(22

)

4

 

(18

)

Balance at March 31, 2019

 

43,979

 

$

4

 

$

228,805

 

$

(135,083

)

$

(1,317

)

$

2,129

 

$

94,538

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

40,995

 

$

4

 

$

230,679

 

$

(131,967

)

$

(898

)

$

1,212

 

$

99,030

 

Issuance of common stock under stock incentive plans

 

758

 

 

4,228

 

 

 

 

4,228

 

Shares withheld for taxes

 

 

 

(6,340

)

 

 

 

(6,340

)

Stock-based compensation expense

 

 

 

3,312

 

 

 

 

3,312

 

Cumulative effect of a change in accounting principle

 

 

 

 

3,257

 

 

69

 

3,326

 

Net loss

 

 

 

 

(3,229

)

 

456

 

(2,773

)

Other comprehensive loss

 

 

 

 

 

(1

)

(3

)

(4

)

Balance at March 31, 2018

 

41,753

 

$

4

 

$

231,879

 

$

(131,939

)

$

(899

)

$

1,734

 

$

100,779

 

 

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

 

6


Table of Contents

 

Boingo Wireless, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(5,239

)

$

(2,773

)

Adjustments to reconcile net loss including non-controlling interests to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization of property and equipment

 

19,009

 

20,606

 

Amortization of intangible assets

 

1,131

 

727

 

Impairment loss and loss on disposal of fixed assets and intangible assets held for sale, net

 

91

 

70

 

Stock-based compensation

 

2,344

 

3,126

 

Amortization of deferred financing costs and debt discount, net of amounts capitalized

 

2,256

 

 

Amortization of operating lease right-of-use assets

 

438

 

 

Unrealized gains and amortization of premiums/discounts for marketable securities

 

(207

)

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

4,307

 

(3,799

)

Prepaid expenses and other assets

 

(13

)

551

 

Accounts payable

 

1,397

 

706

 

Accrued expenses and other liabilities

 

(1,481

)

1,014

 

Deferred revenue

 

439

 

(2,958

)

Operating lease liabilities

 

(729

)

 

Net cash provided by operating activities

 

23,743

 

17,270

 

Cash flows from investing activities

 

 

 

 

 

Purchases of marketable securities

 

(36,665

)

 

Purchases of property and equipment

 

(32,390

)

(21,117

)

Net cash used in investing activities

 

(69,055

)

(21,117

)

Cash flows from financing activities

 

 

 

 

 

Debt issuance costs

 

(1,687

)

 

Proceeds from credit facility

 

3,500

 

 

Principal payments on credit facility

 

(194

)

(219

)

Payments of acquisition related consideration

 

(1,952

)

 

Proceeds from exercise of stock options

 

6

 

4,228

 

Payments of finance leases and notes payable

 

(1,853

)

(1,450

)

Payments of withholding tax on net issuance of restricted stock units

 

(32,907

)

(6,340

)

Net cash used in financing activities

 

(35,087

)

(3,781

)

Effect of exchange rates on cash

 

3

 

7

 

Net decrease in cash, cash equivalents, and restricted cash

 

(80,396

)

(7,621

)

Cash and cash equivalents at beginning of period

 

149,412

 

26,685

 

Cash, cash equivalents, and restricted cash at end of period

 

$

69,016

 

$

19,064

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

Property and equipment costs included in accounts payable, accrued expenses and other liabilities

 

$

39,309

 

$

20,377

 

Purchase of equipment and prepaid maintenance services under capital financing arrangements

 

$

 

$

1,930

 

Capitalized stock-based compensation included in property and equipment costs

 

$

230

 

$

186

 

Purchase price for business acquisition included in accrued expenses and other liabilities

 

$

2,961

 

$

 

Debt issuance costs included in accrued expenses and other liabilities

 

$

125

 

$

 

Financed sale of intangible assets held for sale

 

$

311

 

$

 

 

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

 

7


Table of Contents

 

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 wireless connectivity solutions for smartphones, tablets, laptops, wearables and other wireless-enabled consumer devices. 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 wireless networks. Wholesale offerings include distributed antenna systems (“DAS”) or small cells, which are cellular extension networks, multifamily, carrier offload, Wi-Fi roaming, value-added services, private label Wi-Fi, and location-based services. Retail products include Wi-Fi services for military personnel living in the barracks of U.S. Army, Air Force and Marine bases around the world, and Wi-Fi subscriptions and day passes that provide access to over 1.2 million commercial hotspots worldwide. 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, global consumer brands, and property owners, as well as troops stationed at military bases and Internet savvy consumers on the go.

 

2. Summary of significant accounting policies

 

Basis of presentation

 

The accompanying interim condensed consolidated financial statements and related notes for the three months ended March 31, 2019 and 2018 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 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, 2018 contained in our annual report on Form 10-K filed with the SEC on March 1, 2019. 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, reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of our results of operations and cash flows for the three months ended March 31, 2019 and 2018, and our financial position as of March 31, 2019. 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.

 

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which eliminates the separate accounting model for nonemployee share-based payment awards and generally requires companies to account for share-based payment transactions with nonemployees in the same way as share-based payment transactions with employees. The accounting remains different for attribution, which represents how the equity-based payment cost is recognized over the vesting period, and a contractual term election for valuing nonemployee equity share options. The standard is effective for interim and annual periods beginning after December 15, 2018. We adopted ASU 2018-07 on January 1, 2019 and the adoption of this standard did not have a material impact on our condensed consolidated financial statements.

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued a new standard related to leases, which was codified into Accounting Standards Codification (“ASC”) 842, Leases. ASC 842 requires lessees to recognize assets and liabilities for all leases with lease terms of more than 12 months on the balance sheet. Under ASC 842, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. On January 1, 2019, we adopted ASC 842 using the modified retrospective transition approach. ASC 842 permits two methods of adoption and we elected to apply the guidance to each lease that had commenced as of January 1, 2019 with a cumulative-effect adjustment to the opening balance of retained earnings as of that date. ASC 842 permits various optional transition practical expedients. The discount rate used to calculate the present value of the future payments was determined as of January 1, 2019 for existing lease contracts and was generally based on our incremental borrowing rate as of January 1, 2019 commensurate with the remaining lease term. We also elected the package of practical expedients which included the following: (i) an entity need not reassess whether any expired or existing contracts are or contain leases; (ii) an entity need not reassess the lease classification for any expired or existing leases; and (iii) an entity need not reassess initial direct costs for any existing leases. The standard had a material impact on our condensed consolidated balance sheet but did not have an impact on our condensed consolidated statement of operations and our condensed consolidated statement of cash flows. The most significant impact was the recognition of right-of-use (“ROU”) assets and liabilities related to our operating leases, while our accounting for finance leases remained substantially unchanged. Adoption of the new standard resulted in the recording of $16,916 of operating lease ROU assets and $22,338 of operating lease ROU liabilities as of January 1, 2019.

 

8


Table of Contents

 

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 Chicago Concourse Development Group, LLC and our 75% ownership of Boingo Holding Participacoes Ltda. in accordance with 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.

 

Marketable securities

 

Our marketable securities consist of available-for-sale securities with original maturities exceeding three months. According to 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 March 31, 2019, we had $36,888 in marketable securities. We had no marketable securities at December 31, 2018.

 

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 expense, net.

 

For the three months ended March 31, 2019 and 2018, we had no significant realized or unrealized gains or losses from investments in marketable securities classified as available-for-sale. As of March 31, 2019, we had $16 of cumulative unrealized gains, net of tax, which was $0 as of March 31, 2019 due to the full valuation allowance established against our deferred tax assets, in accumulated other comprehensive loss.

 

Segment and geographic information

 

We operate as one reportable segment; a service provider of wireless connectivity solutions across our managed and operated network and aggregated network for mobile devices such as laptops, smartphones, tablets 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.

 

All significant long-lived tangible assets are held in the United States of America. We do not disclose sales by geographic area because to do so would be impracticable.

 

The following is a summary of our revenue disaggregated by product offerings:

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Revenue:

 

 

 

 

 

Military/multifamily

 

$

25,897

 

$

15,854

 

DAS

 

24,095

 

23,645

 

Wholesale—Wi-Fi

 

11,020

 

11,149

 

Retail

 

3,926

 

5,310

 

Advertising and other

 

1,535

 

2,201

 

Total revenue

 

$

66,473

 

$

58,159

 

 

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Revenue recognition

 

We generate revenue from several sources including: (i) military and retail customers under subscription plans for month-to-month network access that automatically renew, and military and retail single-use access from sales of hourly, daily or other single- use access plans, (ii) arrangements with property owners for multifamily properties that provide for network installation and monthly Wi-Fi services and support for residents and employees, (iii) DAS customers that are telecom operators under long-term contracts for access to our DAS at our managed and operated locations, (iv) arrangements with wholesale Wi-Fi customers that provide software licensing, network access, and/or professional services fees, and (v) 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.

 

Revenues are recognized when a contract with a customer exists and control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services and the identified performance obligation has been satisfied. Contracts entered into at or near the same time with the same customer are combined and accounted for as a single contract if the contracts have a single commercial objective, the amount of consideration is dependent on the price or performance of the other contract, or the services promised in the contracts are a single performance obligation. Contract amendments are routine in the performance of our DAS, wholesale Wi-Fi, and advertising contracts. Contracts are often amended to account for changes in contract specifications or requirements or expand network access services. In most instances, our DAS and wholesale Wi-Fi contract amendments are for additional goods or services that are distinct, and the contract price increases by an amount that reflects the standalone selling price of the additional goods or services; therefore, such contract amendments are accounted for as separate contracts. Contract amendments for our advertising contracts are also generally for additional goods or services that are distinct; however, the contract price does not increase by an amount that reflects the standalone selling price of the additional goods or services. Advertising contract amendments are therefore generally accounted for as contract modifications under the prospective method. Contract amendments to transaction prices with no change in remaining services are accounted for as contract modifications under the cumulative catch-up method.

 

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and is recognized as revenue when, or as, the performance obligation is satisfied, which typically occurs when the services are rendered. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers. Judgment may be used to determine the standalone selling prices for items that are not sold separately, including services provided at no additional charge. Most of our performance obligations are satisfied over time as services are provided. We generally recognize revenue on a gross basis as we are primarily responsible for fulfilling the promises to provide the specified goods or services, we are responsible for paying all costs related to the goods or services before they have been transferred to the customer, and we have discretion in establishing prices for the specified goods or services. Revenue is presented net of any sales and value added taxes.

 

Payment terms vary on a contract-by-contract basis, although terms generally include a requirement of payment within 30 to 60 days for non-recurring payments, the first day of the monthly or quarterly billing cycle for recurring payments for DAS and wholesale Wi-Fi contracts, and the first day of the month prior to the month that services are provided for multifamily contracts. We apply a practical expedient for purposes of determining whether a significant financing component may exist for our contracts if, at contract inception, we expect that the period between when we transfer the promised good or service to the customer and when the customer pays for that good or service will be one year or less. In instances where the customer pays for a good or service one year or more in advance of the period when we transfer the promised good or service to the customer, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is not to receive financing from our customers or to provide customers with financing but rather to maximize our profitability on the customer contract. Specifically, inclusion of non-refundable upfront fees in our long-term customer contracts increases the likelihood that the customer will be committed through the end of the contractual term and ensures recoverability of the capital outlay that we incur in expectation of the customer fulfilling its contractual obligations. We may also provide service credits to our customers if we fail to meet contractual monthly system uptime requirements and we account for the variable consideration related to these service credits using the most likely amount method.

 

For contracts that include variable consideration, we estimate the amount of consideration at contract inception under the expected value method or the most likely amount method and include the amount of variable consideration that is not considered to be constrained. Significant judgment is used in constraining estimates of variable consideration. We update our estimates at the end of each reporting period as additional information becomes available.

 

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Timing of revenue recognition may differ from the timing of invoicing to customers. We record unbilled receivables (contract assets) when revenue is recognized prior to invoicing, deferred revenue (contract liabilities) when revenue is recognized after invoicing, and receivables when we have an unconditional right to consideration to invoice and receive payment in the future. We present our DAS, multifamily, and wholesale Wi-Fi contracts in our condensed consolidated balance sheet as either a contract asset or a contract liability with any unconditional rights to consideration presented separately as a receivable. Our other customer contracts generally do not have any significant contract asset or contract liability balances. Generally, a significant portion of the billing for our DAS contracts occurs prior to revenue recognition, resulting in our DAS contracts being presented as contract liabilities. In contrast, our wholesale Wi-Fi contracts that contain recurring fees with annual escalations are generally presented as contract assets as revenue is recognized prior to invoicing. Our multifamily contracts can be presented as either contract liabilities or contract assets primarily as a result of timing of invoicing for the network installations.

 

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the three months ended March 31, 2019 and are included in prepaid expenses and other current assets and non-current other assets on our condensed consolidated balance sheets. We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less, the most significant of which relates to sales commissions related to obtaining our advertising customer contracts. Contract costs are evaluated for impairment in accordance with ASC 310, Receivables.

 

Military and retail

 

Military and retail customers must review and agree to abide by our standard “Customer Agreement (With Acceptable Use Policy) and End User License Agreement” before they are able to sign up for our subscription or single-use Wi-Fi network access services. Our military and retail customer contracts generally contain a single performance obligationprovide non-exclusive access to Wi-Fi services, together with performance of standard maintenance, customer support, and the Wi-Finder app to facilitate seamless connection to the Company’s Wi-Fi network. The performance obligation is considered a series of distinct services as the performance obligation is satisfied over time and the same time-based input method would be used to measure our progress toward complete satisfaction of the performance obligation to transfer each distinct service in the series to the customer. Our contracts also provide our military and retail subscription customers with the option to renew the agreement when the subscription term is over. We do not consider this option to provide the customer with a material right that should be accounted for as a separate performance obligation because the customer would not receive a discount if it decided to renew and the option to renew is cancellable within 5 days’ notice prior to the end of the then current term by either party.

 

The contract transaction price is determined based on the subscription or single-use plan selected by the customer. Our military and retail service plans are for fixed price services as described on our website. From time to time, we offer promotional discounts that result in an immediate reduction in the price paid by the customer. Subscription fees from military and retail customers are paid monthly in advance. We provide refunds for our military and retail services on a case-by-case basis. Refunds and credit card chargeback amounts are not significant and are recorded as contra-revenue in the period the refunds are made, or chargebacks are received.

 

Subscription fee revenue is recognized ratably over the subscription period. Revenue generated from military and retail single-use access is recognized when access is provided, and the performance obligation is satisfied.

 

Multifamily

 

We enter into long-term contracts with property owners. The initial term of our contracts with property owners generally range from three to five years and the contracts may contain renewal options. Some of our contracts provide termination for convenience clauses that may or may not include substantive termination penalties. We apply judgment in determining the contract term, which is the period during which we have present and enforceable rights and obligations. Our customer contracts generally contain two performance obligations: (i) install the network required to provide Wi-Fi services; and (ii) provide Wi-Fi services and technical support to the residents and employees. Our contracts may also provide our property owners with the option to renew the agreement. We do not consider this option to provide the property owner with a material right that should be accounted for as a separate performance obligation because the property owner would not receive a discount if it decided to renew and the option to renew is generally cancellable by either party subject to the notice of non-renewal requirements specified in the contract. Our contracts may also provide our customers with the option to purchase additional future services. We do not consider this option to provide the customer with a material right that should be accounted for as a separate performance obligation since the cost of the additional future services are generally at market rates for such services and we are not automatically obligated to stand ready to deliver these additional goods or services because the customer may reject our proposal.

 

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Our contract fee structure includes a network installation fee and recurring Wi-Fi service and support fees. The network installation fee is generally structured as a firm-fixed price arrangement and becomes payable as certain contract and/or installation milestones are achieved. We generally estimate variable consideration for unpriced change orders using the most likely amount method based on the expected price for those services. If network installations are not completed by specified dates, we may be subject to network installation penalties. We estimate the variable consideration for our network installation fees using the most likely amount method based on the amount of network installation penalties we expect to incur. Title to the network generally transfers to the property owner once installation is completed and the network has been accepted. We generally recognize revenue related to our network installation performance obligation using a cost-to-cost method over the network installation period. We may provide latent defect warranties for materials and installation labor services related to our network installation services. Our warranty obligations are generally not accounted for as separate performance obligations as warranties cannot be separately purchased and warranties do not provide a service in addition to the assurance that the network will function as expected.

 

The recurring fees commence once the network is launched with recurring fees generally based upon a fixed or variable occupancy rate. The recurring Wi-Fi service fees may be adjusted prospectively for changes in circuit and/or video content costs, and Wi-Fi support fees may escalate on an annual basis. We estimate the variable consideration for our recurring fees using the expected value method with the exception of the variable consideration related to actual occupancy rates, which we record when we have the contractual right to bill. We evaluate our estimates of variable consideration each period and record a cumulative catch-up adjustment in the period in which changes occur for the amount allocated to satisfied performance obligations. We recognize revenue related to the recurring fees on a monthly basis over the contract term as the Wi-Fi services and support is rendered, and the performance obligation is satisfied.

 

DAS

 

We enter into long-term contracts with telecom operators at our managed and operated locations. The initial term of our contracts with telecom operators generally range from five to twenty years and the agreements generally contain renewal options. Some of our contracts provide termination for convenience clauses that may or may not include substantive termination penalties. We apply judgment in determining the contract term, the period during which we have present and enforceable rights and obligations. Our DAS customer contracts generally contain a single performance obligationprovide non-exclusive access to our DAS or small cell networks to provide telecom operators’ customers with access to the licensed wireless spectrum, together with providing telecom operators with construction, installation, optimization/engineering, maintenance services and agreed-upon storage space for the telecom operators’ transmission equipment, each related to providing such licensed wireless spectrum to the telecom operators. The performance obligation is considered a series of distinct services as the performance obligation is satisfied over time and the same time-based input method would be used to measure our progress toward complete satisfaction of the performance obligation to transfer each distinct service in the series to the customer. Our contract fee structure generally includes a non-refundable upfront fee and we evaluated whether customer options to renew services give rise to a material right that should be accounted for as a separate performance obligation because of those non-refundable upfront fees. We believe that a material right generally does not exist for our DAS customer contracts that contain renewal options because the telecom operators’ decision to renew is highly dependent upon our ability to maintain our exclusivity as the DAS service provider at the venue location and our limited operating history with venue and customer renewals. The telecom operators will make the decision to incur the capital improvement costs at the venue location irrespective of our remaining exclusivity period with the venue as the telecom operators expect that the assets will continue to be serviced regardless of whether we will remain such exclusive DAS service provider. Our contracts also provide our DAS customers with the option to purchase additional future services such as upgrades or enhancements. This option is not considered to provide the customer with a material right that should be accounted for as a separate performance obligation since the cost of the additional future services depends entirely on the market rate of such services at the time such services are requested and we are not automatically obligated to stand ready to deliver these additional goods or services as the customer may reject our proposal. Periodically, we install and sell DAS networks to customers where we do not have service contracts or remaining obligations beyond the installation of those networks and we recognize build-out fees for such projects as revenue when the installation work is completed, and the network has been accepted by the customer.

 

Our contract fee structure may include varying components of an upfront build-out fee and recurring access, maintenance, and other fees. The upfront build-out fee is generally structured as a firm-fixed price or cost-plus arrangement and becomes payable as certain contract and/or construction milestones are achieved. Our DAS and small cell networks are neutral-host networks that can accommodate multiple telecom operators. Some of our DAS customer contracts provide for credits that may be issued to existing telecom operators for additional telecom operators subsequently joining the DAS network. The credits are generally based upon a fixed dollar amount per additional telecom operator, a fixed percentage amount of the original build-out fee paid by the telecom operator per additional telecom operator, or a proportionate share based upon the split among the relevant number of telecom operators for the actual costs incurred by all telecom operators to construct the DAS network. In most cases, there is significant uncertainty on whether additional telecom operator contracts will be executed at inception of the contract with the existing telecom operator. We believe that the upfront build-out fee is fixed consideration once the build-out is complete and any subsequent credits that may be issued would be accounted for in a manner similar to a contract modification under the prospective method because (i) the execution of customer contracts with additional telecom carriers is at our sole election and (ii) we would not execute agreements with additional telecom carriers if it would not increase our revenues and gross profits at the venue level. Further, the credits issued to the existing telecom operator changes the transaction price on a go-forward basis, which corresponds with the decline in service levels for

 

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the existing telecom operator once the neutral-host DAS network can be accessed by the additional telecom operator. The recurring access, maintenance, and other fees generally escalate on an annual basis. The recurring fees are variable consideration until the contract term and annual escalation dates are fixed. We estimate the variable consideration for our recurring fees using the most likely amount method based on the expected commencement date for the services. We evaluate our estimates of variable consideration each period and record a cumulative catch-up adjustment in the period in which changes occur for the amount allocated to satisfied performance obligations.

 

We generally recognize revenue related to our single performance obligation for our DAS customer contract monthly over the contract term once the customer has the ability to access the DAS network and we commence maintenance on the DAS network.

 

Wholesale Wi-Fi

 

We enter into long-term contracts with enterprise customers such as telecom operators, cable companies, technology companies, and enterprise software/services companies, that pay us usage-based Wi-Fi network access and software licensing fees to allow their customers’ access to our footprint worldwide. We also enter into long-term contracts with financial institutions and other enterprise customers who provide access to our Wi-Fi footprint as a value-added service for their customers. The initial term of our contracts with wholesale Wi-Fi customers generally range from one to three years and the agreements generally contain renewal options. Some of our contracts provide termination for convenience clauses that may or may not include substantive termination penalties. We apply judgment in determining the contract term, the period during which we have present and enforceable rights and obligations. Our wholesale Wi-Fi customer contracts generally contain a single performance obligationprovide non-exclusive rights to access our Wi-Fi networks to provide wholesale Wi-Fi customers’ end customers with access to the high-speed broadband network that may be bundled together with integration services, support services, and/or performance of standard maintenance. The performance obligation is considered a series of distinct services as the performance obligation is satisfied over time and the same time-based input method or usage-based output method would be used to measure our progress toward complete satisfaction of the performance obligation to transfer each distinct service in the series to the customer. Our contracts may also provide our enterprise customers with the option to renew the agreement. This option is not considered to provide the customer with a material right that should be accounted for as a separate performance obligation because the customer would not receive a discount if it decided to renew and the option to renew is generally cancellable by either party subject to the notice of non-renewal requirements specified in the contract. Our contracts may also provide our wholesale Wi-Fi customers with the option to purchase additional future services. We do not consider this option to provide the customer with a material right that should be accounted for as a separate performance obligation since the cost of the additional future services are generally at market rates for such services and we are not automatically obligated to stand ready to deliver these additional goods or services because the customer may reject our proposal. Periodically, we install and sell Wi-Fi networks to customers where we do not have service contracts or remaining obligations beyond the installation of those networks and we recognize build-out fees for such projects as revenue when the installation work is completed, and the network has been accepted by the customer.

 

Our contract fee structure may include varying components of a minimum fee and usage-based fees. Minimum fees represent fixed price consideration while usage-based fees represent variable consideration. With respect to variable consideration, our commitment to our wholesale Wi-Fi customers consists of providing continuous access to the network. It is therefore a single performance obligation to stand ready to perform and we allocate the variable fees charged for usage when we have the contractual right to bill. The variable component of revenue is recognized based on the actual usage during the period.

 

Wholesale Wi-Fi revenue is recognized as it is earned over the relevant contract term with variable consideration recognized when we have the contractual right to bill.

 

Advertising

 

We generally enter into short-term cancellable insertion orders with our advertising customers for advertising campaigns that are served at our managed and operated locations and other locations where we solely provide authorized access to a partner’s Wi-Fi network through sponsored and promotional programs. Our sponsorship advertising arrangements are generally priced under a cost per engagement structure, which is a set price per click or engagement, or a cost per install structure for third party application downloads. Our display advertising arrangements are priced based on cost per thousand impressions. Insertion orders may also include bonus items. Our advertising customer contracts may contain multiple performance obligations with each distinct service. These distinct services may include an advertisement video or banner impressions in the contract bundled with the requirement to provide network, space on the website, and integration of customer advertisement onto the website, and each is generally considered to be its own performance obligation. The performance obligations are considered a series of distinct services as the performance obligations are satisfied over time and the same action-based output method would be used to measure our progress toward complete satisfaction of the performance obligation to transfer each distinct service in the series to the customer.

 

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The contract transaction price is comprised of variable consideration based on the stated rates applied against the number of units delivered inclusive of the bonus units subject to the maximums provided for in the insertion order. It is customary for us to provide additional units over and above the amounts contractually required; however, there are a number of factors that can also negatively impact our ability to deliver the units required by the customer such as service outages at the venue resulting from power or circuit failures and customer cancellation of the remaining undelivered units under the insertion order due to campaign performance or budgetary constraints. Typically, the advertising campaign periods are short in duration. We therefore use the contractual rates per the insertion orders and actual units delivered to determine the transaction price each period end. The transaction price is allocated to each performance obligation based on the standalone selling price of each performance obligation.

 

Advertising revenue is recognized ratably over the service period based on actual units delivered subject to the maximums provided for in the insertion order.

 

Leases

 

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, current portion of operating and finance leases, and long-term portion of operating and finance leases in our condensed consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of operating and finance leases, and long-term portion of operating and finance leases in our condensed consolidated balance sheets.

 

Operating and finance lease ROU assets and ROU liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are accounted for separately for the asset classes maintained. We exclude short-term leases with a lease term of 12 months or less at commencement date from our condensed consolidated balance sheets.

 

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. Excess windfall tax benefits and tax deficiencies related to our stock option exercises and restricted stock unit (“RSU”) vesting are recognized as an income tax benefit or expense in our condensed consolidated statements of operations in the period they are deducted on the income tax return. Excess windfall tax benefits and tax deficiencies are therefore not anticipated when determining the annual effective tax rate and are instead recognized in the interim period in which those items occur.

 

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.

 

As of March 31, 2019, we had an immaterial amount of unremitted earnings in our subsidiaries located outside of the U.S. for which state taxes have not been paid. Our intention is to indefinitely reinvest these earnings outside the U.S. If we were to remit our foreign earnings, we would be subject to state income taxes or withholding taxes imposed on actual distributions, or currency transaction gains (losses) that would result in taxation upon remittance. However, the amounts of any such tax liabilities resulting from the repatriation of foreign earnings are not material.

 

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 sheets. As of March 31, 2019 and December 31, 2018, the Company had $(1,333) and $(1,295), respectively, of cumulative foreign currency translation adjustments, net of tax, which was $0 as of March 31, 2019 and December 31, 2018 due to the full valuation allowance established against our deferred tax assets, in accumulated other comprehensive loss.

 

The functional currency for our other foreign subsidiaries is the U.S. dollar. Gains and losses from the revaluation of foreign currency transactions and monetary assets and liabilities are included in the condensed consolidated statements of operations.

 

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Use of estimates

 

The preparation of accompanying condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the accompanying condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Assets and liabilities which are subject to significant judgment and the use of estimates include the allowance for doubtful accounts, recoverability of goodwill and long-lived assets, valuation allowances with respect to deferred tax assets, uncertain tax positions, useful lives associated with property and equipment, valuation of ROU assets and ROU liabilities, valuation and useful lives of intangible assets, valuation of contingent consideration, contract assets and contract liabilities including estimates of variable consideration, and the valuation and assumptions underlying stock-based compensation and other equity instruments. On an ongoing basis, we evaluate our estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities.

 

Fair value of financial instruments

 

Fair value is defined as the price that would be received from selling an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market in which it would transact, and we consider assumptions that market participants would use when pricing the asset or liability.

 

The accounting guidance for fair value measurement also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:

 

·                  Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 

·                  Level 2—Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly.

 

·                  Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The carrying amount reflected in the accompanying condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, other assets, accounts payable, accrued expenses and other liabilities, and deferred revenue approximates fair value due to the short duration and nature of these financial instruments.

 

Recent accounting pronouncements

 

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires customers to apply the same criteria for capitalizing implementation costs incurred in a cloud computing arrangement that is hosted by the vendor as they would for an arrangement that has a software license. The standard is effective for interim and annual periods beginning after December 15, 2019 and early adoption is permitted. The standard can be adopted prospectively or retrospectively. We are currently evaluating the expected impact of this new standard.

 

3. Acquisitions

 

Elauwit Networks, LLC

 

On August 1, 2018, we acquired the assets of Elauwit Networks, LLC (“Elauwit”) for $28,000 plus other contingent consideration. Elauwit provides data and video services to multi-unit dwelling properties including student housing, condominiums, apartments, senior living, and hospitality industries throughout the U.S. In addition, Elauwit builds and maintains the network that supports these services for property owners and managers and provides support for residents and employees.

 

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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 $29,537, which includes contingent consideration fair valued at $961. At the closing date, we paid cash of $15,576. $13,000 of the purchase price was held back for the following: (i) $11,000 held back for third-party consents not obtained at closing for certain customer agreements, which will be released as Elauwit delivers third-party consents with respect to such customer agreements; and (ii) a $2,000 indemnification holdback that is being retained for a period of 12 months following the closing of the acquisition. In 2018, we paid $9,048 of the amounts held back for third-party consents. We paid the remaining $1,952 for amounts held back for third-party consents in January 2019. The contingent consideration could require payments in the aggregate amount of up to $15,000 that would be due and payable subject to certain conditions and the successful achievement of annual revenue targets for the acquired business during the 2019 and 2020 fiscal years. The contingent consideration is subject to acceleration under certain corporate events.

 

The fair value of the contingent consideration is based on Level 3 inputs. Further changes in the fair value of the contingent consideration will be recorded through operating income (loss). The contingent consideration was valued at the date of acquisition using the Monte Carlo method reflecting the average expected monthly revenue, an annual risk-free rate of 2.78%, and an annual revenue volatility rate of 40%.

 

The identifiable intangible assets were primarily valued using the excess earnings, relief from royalty, and loss-of-revenue methods using discount rates ranging from 8.0% to 21.0% and a 1.0% royalty rate, where applicable, except for certain backlog intangible assets held for sale that were valued at fair value less costs to sell using a discount rate of 8%. The amortizable intangible assets held for use are being amortized on a straight-line basis over their estimated useful lives. Intangible assets held for sale are not amortized. We allocated the excess of the purchase price over the fair value of assets acquired and liabilities assumed to goodwill, which is deductible for tax purposes. The goodwill arising from the Elauwit acquisition is attributable primarily to expected synergies and other benefits, including the acquired workforce, from combining Elauwit with us.

 

ASC 805 provides for a measurement period not to exceed one year from the acquisition date to adjust the provisional amounts recognized at the acquisition date to reflect 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. During the three months ended March 31, 2019, we recorded a measurement period adjustment to increase the value of backlog intangible assets held for sale and decrease goodwill by $750 as a result of the identification of additional assets that were acquired. Intangible assets held for sale are included within prepaid expenses and other current assets on the condensed consolidated balance sheets. To date, we have not recorded any other material measurement period adjustments. The following summarizes the preliminary purchase price allocation:

 

 

 

Estimated
Fair Value

 

Weighted Average
Estimated Useful
Life (years)

 

Consideration:

 

 

 

 

 

Cash paid

 

$

15,576

 

 

 

Holdback consideration

 

13,000

 

 

 

Contingent consideration

 

961

 

 

 

Total consideration

 

$

29,537

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed:

 

 

 

 

 

Accounts receivable

 

$

4,494

 

 

 

Prepaid expenses and other current assets

 

1,687

 

 

 

Property and equipment

 

195

 

 

 

Other non-current assets

 

177

 

 

 

Accounts payable

 

(2,049

)

 

 

Accrued expenses and other liabilities

 

(683

)

 

 

Deferred revenue

 

(3,854

)

 

 

Other non-current liabilities

 

(307

)

 

 

Net tangible liabilities acquired

 

(340

)

 

 

Backlog

 

7,030

 

5.0

 

Backlog - held for sale

 

750

 

 

Customer relationships

 

2,490

 

10.0

 

Partner relationships

 

1,200

 

10.0

 

Transition services agreement

 

540

 

2.0

 

Non-compete agreement

 

1,380

 

3.0

 

Goodwill

 

16,487

 

 

 

Total purchase price

 

$

29,537

 

 

 

 

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Table of Contents

 

The following table presents the results of Elauwit included in the Company’s revenue and net loss:

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Revenue

 

$

7,420

 

$

 

Net loss

 

(2,357

)

 

 

Pro forma results (Unaudited)

 

The following table presents the unaudited pro forma results of the Company for the three months ended March 31, 2018 as if the acquisition of Elauwit had occurred on January 1, 2017 and therefore includes Elauwit’s revenue and net income (loss), as adjusted, for such period. These results are not intended to reflect the actual operations of the Company had the acquisition occurred on January 1, 2017. Income taxes were calculated based on the effective tax rate for 2018, excluding the tax effects on the equity component of Convertible Notes recorded in 2018. Acquisition transaction costs have been excluded from the pro forma net loss.

 

 

 

Three Months Ended
March 31, 2018

 

Revenue

 

$

64,546

 

Net loss

 

(3,399

)

Net loss attributable to common stockholders

 

(3,848

)

Net loss per share attributable to common stockholders

 

 

 

Basic

 

$

(0.09

)

Diluted

 

$

(0.09

)

 

4. Cash and cash equivalents and marketable securities

 

Cash and cash equivalents and marketable securities consisted of the following:

 

 

 

March 31,
2019

 

December 31,
2018

 

Cash and cash equivalents:

 

 

 

 

 

Cash

 

$

4,611

 

$

11,689

 

Money market accounts

 

59,910

 

137,723

 

Marketable securities

 

4,495

 

 

Total cash and cash equivalents

 

$

69,016

 

$

149,412

 

Short-term marketable securities—available-for-sale:

 

 

 

 

 

Marketable securities

 

$

36,888

 

$

 

Total short-term marketable securities

 

$

36,888

 

$

 

 

All contractual maturities of marketable securities were less than one year at March 31, 2019. Marketable securities consist primarily of debt securities which include commercial paper and debt instruments including notes issued by foreign or domestic industrial and financial corporations and governments which pay in U.S. dollars and carry a rating of A or better. For the three months ended March 31, 2019 and 2018, interest income was $714 and $8, respectively, which is included in interest and other expense, net in the accompanying condensed consolidated statements of operations.

 

5. Contract assets and contract liabilities

 

The opening and closing balances of our contract asset, net and contract liability, net balances from contracts with customers for the three months ended March 31, 2019 are as follows:

 

 

 

Contract
assets, net

 

Contract
liabilities, net

 

Balance at December 31, 2018

 

$

468

 

$

217,733

 

Balance at March 31, 2019

 

1,117

 

218,029

 

Change

 

$

649

 

$

296

 

 

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Table of Contents

 

The current and non-current portions of our contract assets, net are included within prepaid expenses and other current assets and other assets, respectively, and current and non-current portions of our contract liabilities, net are included within deferred revenue and deferred revenue, net of current portion, respectively, in our condensed consolidated balance sheets. Contract assets, net is generated from our multifamily and wholesale Wi-Fi contracts and the change in the contract assets, net balance includes activity related to amounts invoiced offset by revenue recognized from performance obligations satisfied in the current reporting period.

 

Contract liabilities are recorded when fees are collected, or we have an unconditional right to consideration (a receivable) in advance of delivery of goods or services. The change in contract liabilities, net balance is related to customer activity associated with each of our product offerings including the receipt of cash payments and the satisfaction of our performance obligations. Revenues for the three months ended March 31, 2019 include the following:

 

 

 

Three Months Ended
March 31, 2019

 

Amounts included in the beginning of period contract liability balance

 

$

28,871

 

Amounts associated with performance obligations satisfied in previous periods

 

294

 

 

As of March 31, 2019, the aggregate amount of the transaction price allocated to remaining service performance obligations for our DAS contracts was $202,993. We expect to recognize this revenue as service is provided over the remaining contract term. As of March 31, 2019, our DAS contracts have a remaining duration of less than one year to approximately fifteen years.

 

Certain of our wholesale Wi-Fi contracts include variable consideration based on usage. This variable consideration has been excluded from the disclosure of remaining performance obligations. As of March 31, 2019, the aggregate amount of the transaction price allocated to remaining service performance obligations for certain of our wholesale Wi-Fi contracts with guaranteed minimum consideration was $9,863. We expect to recognize this revenue as service is provided over the remaining contract term. As of March 31, 2019, our wholesale Wi-Fi contracts have a remaining duration of less than one year to approximately fifteen years.

 

Information about remaining performance obligations that are part of a contract that has an original expected duration of one year or less have been excluded from the above, which primarily consists of network installations for our multifamily customers and monthly service contracts.

 

6. Property and equipment

 

The following is a summary of property and equipment, at cost less accumulated depreciation and amortization:

 

 

 

March 31,
2019

 

December 31,
2018

 

Leasehold improvements

 

$

485,162

 

$

474,808

 

Construction in progress

 

61,080

 

40,369

 

Software

 

53,971

 

51,534

 

Computer equipment

 

15,257

 

14,215

 

Furniture, fixtures and office equipment

 

2,144

 

2,141

 

Total property and equipment

 

617,614

 

583,067

 

Less: accumulated depreciation and amortization

 

(287,880

)

(268,888

)

Total property and equipment, net

 

$

329,734

 

$

314,179

 

 

Depreciation and amortization expense, which includes depreciation and amortization for property and equipment under finance leases, is allocated as follows in the accompanying condensed consolidated statements of operations:

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Network access

 

$

11,582

 

$

13,587

 

Network operations

 

4,386

 

4,256

 

Development and technology

 

2,779

 

2,508

 

General and administrative

 

262

 

255

 

Total depreciation and amortization of property and equipment

 

$

19,009

 

$

20,606

 

 

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7. Accrued expenses and other liabilities

 

Accrued expenses and other liabilities consisted of the following:

 

 

 

March 31,
2019

 

December 31,
2018

 

Accrued construction in progress

 

$

21,035

 

20,930

 

Accrued customer liabilities

 

14,445

 

$

15,219

 

Revenue share

 

5,251

 

5,514

 

Accrued taxes

 

3,397

 

2,745

 

Salaries and wages

 

2,802

 

4,425

 

Holdback consideration

 

2,000

 

2,000

 

Accrued partner network

 

1,331

 

1,228

 

Accrued professional fees

 

1,298

 

1,434

 

Acquisition purchase consideration

 

 

1,952

 

Other

 

6,206

 

7,206

 

Total accrued expenses and other liabilities

 

$

57,765

 

$

62,653

 

 

8. Convertible Notes

 

In October 2018, the Company sold, through the initial purchasers, convertible senior notes (“Convertible Notes”) to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended, for gross proceeds of $201,250. The Convertible Notes are senior, unsecured obligations with interest payable semi-annually in cash at a rate of 1.00% per annum on April 1st and October 1st of each year, beginning on April 1, 2019. The Convertible Notes will mature on October 1, 2023 unless they are redeemed, repurchased or converted prior to such date. Prior to April 1, 2023, the Convertible Notes are convertible at the option of holders only during certain periods and upon satisfaction of certain conditions. Thereafter, the Convertible Notes will be convertible at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. Upon conversion, the Convertible Notes may be settled in shares of the Company’s common stock, cash or a combination of cash and shares of the Company’s common stock, at the Company’s election.

 

The Convertible Notes have an initial conversion rate of 23.6323 shares of common stock per $1,000 principal amount of the Convertible Notes, which will be subject to customary anti-dilution adjustments in certain circumstances. This represents an initial effective conversion price of approximately $42.31 per share, which represents a premium of approximately 30% to the $32.55 per share closing price of the Company’s common stock on October 2, 2018, the date the Company priced the offering.

 

The Company may redeem all or any portion of the Convertible Notes, at its option, on or after October 5, 2021, at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date, if the last reported sale price of the Company’s stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides written notice of redemption.

 

Holders of Convertible Notes may require the Company to repurchase their Convertible Notes upon the occurrence of certain events that constitute a fundamental change under the indenture governing the Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. In connection with certain corporate events or if the Company issues a notice of redemption prior to the maturity date, it will, under certain circumstances, increase the conversion rate for holders who elect to convert their Convertible Notes in connection with such corporate event or notice of redemption.

 

In connection with the pricing of the Convertible Notes, the Company entered into privately negotiated capped call transactions with a financial institution. The capped call transactions initially cover, subject to customary anti-dilution adjustments, the number of shares of the Company’s common stock that initially underlie the Convertible Notes. The cap price of the capped call transactions is initially $65.10 per share of the Company’s common stock, representing a premium of 100% above the closing price of $32.55 per share of the Company’s common stock on October 2, 2018, and is subject to certain adjustments under the terms of the capped call transactions. The capped call transactions are expected generally to reduce potential dilution to the Company’s common stock upon conversion of the Convertible Notes and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount of any converted Convertible Notes upon conversion thereof, with such reduction and/or offset subject to a cap based on the cap price.

 

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Table of Contents

 

The following table summarizes the Convertible Notes as of March 31, 2019:

 

 

 

March 31,
2019

 

Par value of the Convertible Notes

 

$

201,250

 

Unamortized debt discounts

 

(43,052

)

Unamortized debt issuance costs

 

(4,315

)

Net carrying value of Convertible Notes

 

$

153,883

 

 

The fair value of our Convertible Notes was $181,552 as of March 31, 2019. The estimated fair value of Convertible Notes is based on market rates and the closing trading price of the Convertible Notes as of March 28, 2019 and is classified as Level 2 in the fair value hierarchy. As of March 31, 2019, the if-converted value of the Convertible Notes did not exceed the principal amount.

 

Debt issuance costs are amortized on an effective interest basis over the term of the Convertible Notes. Debt issuance cost amortization expense, net of amounts capitalized, is included in interest and other expense, net in the accompanying condensed consolidated statements of operations for the three months ended March 31, 2019. The following table sets forth interest expense related to the Convertible Notes for the three months ended March 31, 2019:

 

 

 

March 31,
2019

 

Contractual interest expense

 

$

503

 

Amortization of debt issuance costs

 

208

 

Amortization of debt discount

 

2,006

 

Total

 

$

2,717

 

Effective interest rate of the liability component

 

7.1

%

 

During the three months ended March 31, 2019, we capitalized $465 of amortization and interest expense related to the Convertible Notes.

 

Amortization expense for our debt discount and debt issuance costs through 2023 are as follows:

 

 

 

Debt
Discounts

 

Debt Issuance
Costs

 

April 1, 2019—December 31, 2019

 

$

6,239

 

$

642

 

January 1, 2020—December 31, 2020

 

8,864

 

901

 

January 1, 2021—December 31, 2021

 

9,528

 

955

 

January 1, 2022—December 31, 2022

 

10,241

 

1,015

 

January 1, 2023—December 31, 2023

 

8,180

 

802

 

 

 

$

43,052

 

$

4,315

 

 

9. Credit Facility

 

In February 2019, we entered into a Credit Agreement (the “Credit Agreement”) and related agreements with Bank of America, N.A. acting as agent for lenders named therein, including Bank of America, N.A., Silicon Valley Bank, Bank of the West, Zions Bancorporation, N.A. dba California Bank & Trust, and Barclays Bank PLC (the “Lenders”), for a secured credit facility in the form of a revolving line of credit of up to $150,000 (the “Revolving Line of Credit”) and a term loan of $3,500 (the “Term Loan” and together with the Revolving Line of Credit, the “Credit Facility”). We may use borrowings under the Credit Facility for general working capital and corporate purposes. In general, amounts borrowed under the Credit Facility are secured by a lien against all assets, with certain exclusions.

 

As of March 31, 2019, we had no amounts outstanding under the Revolving Line of Credit and $3,306 outstanding under the Term Loan. Amounts borrowed under the Revolving Line of Credit and Term Loan will bear variable interest at the greater of LIBOR plus 1.75% - 2.75% or Lender’s Prime Rate plus 0.75% - 1.75% per year and we will pay a fee of 0.25% - 0.5% per year on any unused portion of the Revolving Line of Credit. The Term Loan requires quarterly payments of interest and principal until it is repaid in full on the maturity date but may be prepaid in whole or part at any time. Our Credit Facility will mature on April 3, 2023. Repayment of amounts borrowed under the Credit Facility may be accelerated in the event that we are in violation of the representations, warranties and covenants made in the Credit Agreement, including certain financial covenants set forth therein, and under other specified default events including, but not limited to, non-payment or inability to pay debt, breach of cross default provisions, insolvency provisions, and change of control.

 

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Table of Contents

 

The Company is subject to customary financial and non-financial covenants under the Credit Facility, including a minimum quarterly consolidated senior secured leverage ratio, a minimum quarterly consolidated total leverage ratio, a maximum quarterly consolidated fixed charge coverage ratio, and cash on hand minimums.

 

Principal payments due under our Term Loan through 2023 are as follows:

 

 

 

Principal Payments

 

April 1, 2019—December 31, 2019

 

$

583

 

January 1, 2020—December 31, 2020

 

778

 

January 1, 2021—December 31, 2021

 

778

 

January 1, 2022—December 31, 2022

 

778

 

January 1, 2023—December 31, 2023

 

389

 

 

 

$

3,306

 

 

Debt issuance costs are amortized on a straight-line basis over the term of the Credit Facility. Amortization expense related to debt issuance costs, net of amounts capitalized, are included in interest and other expense in the accompanying condensed consolidated statements of operations for the three months ended March 31, 2019. Amortization and interest expense expensed during the three months ended March 31, 2019 amounted to $56. The interest rate for the Credit Facility for the three months ended March 31, 2019 was 4.2%.

 

Amortization expense for our debt issuance costs through 2023 are as follows:

 

 

 

Amortization 
Expense

 

April 1, 2019—December 31, 2019

 

$

343

 

January 1, 2020—December 31, 2020

 

457

 

January 1, 2021—December 31, 2021

 

457

 

January 1, 2022—December 31, 2022

 

457

 

January 1, 2023—December 31, 2023

 

120

 

 

 

$

1,834

 

 

10. Leases

 

We have operating and finance leases for corporate offices, datacenters, data communication equipment and database software. Our operating leases have remaining lease terms of less than one year to nine years and our finance leases have remaining lease terms of one month to two years. Some of our operating leases may include one or more options to renew and can extend the lease term from 1 year to 10 years. The exercise of operating lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Some of our operating lease agreements include options to terminate the leases upon written notice and may include early termination penalties. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. As of March 31, 2019, assets recorded under finance leases were $12,280 and accumulated depreciation and amortization associated with finance leases was $3,809.

 

The components of lease expense were as follows:

 

 

 

Three Months 
Ended March 31,
 2019

 

Operating lease expense

 

$

885

 

Finance lease expense:

 

 

 

Depreciation and amortization of assets included in property and equipment, net

 

524

 

Interest on lease liabilities

 

56

 

Total finance lease expense

 

$

580

 

 

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Table of Contents

 

Supplemental cash flow information related to leases was as follows:

 

 

 

Three Months 
Ended March 31,
 2019

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

Operating cash flows from operating leases

 

$

(977

)

Operating cash flows from finance leases

 

(56

)

Financing cash flows from finance leases

 

(1,176

)

Right-of-use assets obtained in exchange for lease obligations:

 

 

 

Operating leases

 

16,916

 

 

Operating lease ROU assets obtained in exchange for lease obligations include the effects of the adoption of ASC 842 effective January 1, 2019.

 

Other information related to leases was as follows:

 

 

 

March 31, 2019

 

Weighted average remaining lease term:

 

 

 

Operating leases

 

6.8 years

 

Financing leases

 

1.7 years

 

Weighted average discount rate:

 

 

 

Operating leases

 

5.3%

 

Finance leases

 

3.2%

 

 

Future minimum lease payments under non-cancellable leases as of March 31, 2019 as presented in accordance with ASC 842 were as follows:

 

 

 

Operating 
Leases

 

Finance 
Leases

 

April 1, 2019 – December 31, 2019

 

$

2,739

 

$

3,142

 

January 1, 2020—December 31, 2020

 

3,609

 

2,784

 

January 1, 2021—December 31, 2021

 

3,508

 

574

 

January 1, 2022—December 31, 2022

 

3,541

 

 

January 1, 2023—December 31, 2023

 

3,626

 

 

January 1, 2024—December 31, 2024

 

3,639

 

 

Thereafter

 

5,235

 

 

Total future minimum lease payments

 

25,897

 

6,500

 

Less: Imputed interest

 

(4,246

)

(182

)

Total

 

21,651

 

6,318

 

Current portion of operating and finance leases

 

2,736

 

3,843

 

Long-term portion of operating and finance leases

 

$

18,915

 

$

2,475

 

 

Future minimum lease payments under non-cancellable leases as of December 31, 2018 as presented in accordance with ASC 840, Leases, were as follows:

 

 

 

Operating 
Leases

 

Capital 
Leases

 

January 1, 2019 – December 31, 2019

 

$

3,573

 

$

4,373

 

January 1, 2020—December 31, 2020

 

3,456

 

2,783

 

January 1, 2021—December 31, 2021

 

3,385

 

574

 

January 1, 2022—December 31, 2022

 

3,414

 

 

January 1, 2023—December 31, 2023

 

3,495

 

 

Thereafter

 

8,835

 

 

Minimum lease payments

 

$

26,158

 

7,730

 

Less: Amounts representing interest ranging from 1.3% to 7.7%

 

 

 

(236

)

Minimum lease payments

 

 

 

7,494

 

Current portion of capital leases

 

 

 

4,201

 

Long-term portion of capital leases

 

 

 

 

$

3,293

 

 

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Table of Contents

 

11. Notes payable

 

We enter into financed maintenance arrangements for some of our leased data communication equipment. Future minimum lease payments under notes payable as of March 31, 2019 were as follows:

 

 

 

Notes Payable

 

April 1, 2019 – December 31, 2019

 

$

1,775

 

January 1, 2020—December 31, 2020

 

1,541

 

January 1, 2021—December 31, 2021

 

95

 

Total future minimum payments

 

3,411

 

Less: Imputed interest

 

(59

)

Total

 

3,352

 

Current portion of note payable

 

2,204

 

Long-term portion of notes payable

 

$

1,148

 

 

12. Fair value measurement

 

The following table sets forth our financial assets and liabilities that are measured at fair value on a recurring basis:

 

At March 31, 2019

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Money market accounts

 

$

59,910

 

$

 

$

 

$

59,910

 

Marketable securities

 

4,463

 

36,920

 

 

41,383

 

Total assets

 

$

64,373

 

$

36,920

 

$

 

$

101,293

 

Liabilities:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

$

 

$

961

 

$

961

 

Total liabilities

 

$

 

$

 

$

961

 

$

961

 

 

At December 31, 2018

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Money market accounts

 

$

137,723

 

$

 

$

 

$

137,723

 

Total assets

 

$

137,723

 

$

 

$

 

$

137,723

 

Liabilities:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

$

 

$

961

 

$

961

 

Total liabilities

 

$

 

$

 

$

961

 

$

961

 

 

Our marketable securities utilize Level 1 and Level 2 inputs and consist primarily of corporate securities, which primarily include commercial paper and debt instruments including notes issued by foreign or domestic industrial and financial corporations and governments 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.

 

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Table of Contents

 

The Company’s contingent consideration obligation was initially recorded at fair value and the Company will revalue this obligation each reporting period until the related contingencies are resolved. The fair value measurement is estimated using probability-weighted discounted cash flow approaches that are based on significant unobservable inputs related to achievement of estimated annual sales and are reviewed quarterly. Significant changes to estimated annual sales and discount rates would result in corresponding changes in the fair value of this obligation. There were no significant changes to the fair value of our contingent consideration liabilities during the three months ended March 31, 2019. The following table presents a reconciliation of the beginning and ending amounts related to the fair value of contingent consideration categorized as Level 3:

 

Balance, December 31, 2018

 

$

961

 

Payment of contingent consideration

 

 

Change in fair value

 

 

Balance, March 31, 2019

 

$

961

 

 

13. Income taxes

 

Income tax expense of $192 and $128 reflects an effective tax rate of 3.8% and 4.8% for the three months ended March 31, 2019 and 2018, respectively. Our effective tax rate differs from the statutory rate primarily due to our valuation allowance for the three months ended March 31, 2019 and 2018.

 

We operate within federal, state and international taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues which may require an extended period to resolve. We are subject to taxation in the United States and in various states. Our tax years 2015 and forward are subject to examination by the IRS and our tax years 2014 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 2015 tax year. Although the ultimate outcome is unknown, we believe that any adjustments that may result from examination is not likely to have a material adverse effect on our condensed consolidated results of operations, financial position or cash flows.

 

14. Commitments and contingencies

 

Letters of credit

 

We have entered into Letter of Credit Authorization agreements (collectively, “Letters of Credit”), which are issued under our Credit Agreement. 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 March 31, 2019, we have Letters of Credit totaling $12,498 that are scheduled to expire or renew over the next two years. There have been no drafts drawn under these Letters of Credit as of March 31, 2019.

 

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. Legal costs are expensed as incurred.

 

Other matters

 

We have received a claim from one of our venue partners with respect to contractual terms on our revenue share payments. The claim asserts that we have underpaid revenue share payments and related interest by approximately $4,600. We are currently in settlement discussions with our venue partner. As of March 31, 2019, we have accrued for the probable and estimable losses that have been incurred, which have been recorded as general and administrative expenses in the condensed consolidated statements of operations. We are not currently a party to any other claims that we believe could have a material adverse effect on our business, financial position, results of operations or cash flows.

 

15. 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 non-statutory stock options, stock appreciation rights, restricted shares of our common stock, stock units, and performance cash awards. As of March 31, 2019, options to purchase approximately 290,000 shares of common stock and RSUs covering approximately 970,000 shares of common stock were outstanding under the 2011 Plan.

 

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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:

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Network operations

 

$

506

 

$

537

 

Development and technology

 

303

 

278

 

Selling and marketing

 

529

 

473

 

General and administrative

 

1,006

 

1,838

 

Total stock-based compensation expense

 

$

2,344

 

$

3,126

 

 

During the three months ended March 31, 2019 and 2018, we capitalized $230 and $186, respectively, of stock-based compensation expense.

 

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 remaining 75% vesting monthly thereafter. These awards are valued as of the measurement date and the stock-based compensation expense, net of forfeitures, is recognized on a straight-line basis over the requisite service period.

 

A summary of the stock option activity is as follows:

 

 

 

Number of
Options
(000’s)

 

Weighted
Average
Exercise
Price

 

Weighted-
Average
Remaining
Contract
Life
(years)

 

Aggregate
Intrinsic
Value

 

Outstanding at December 31, 2018

 

304

 

$

7.49

 

3.8

 

$

3,970

 

Exercised

 

(4

)

$

2.01

 

 

 

 

 

Canceled/forfeited

 

 

$

 

 

 

 

 

Outstanding and exercisable at March 31, 2019

 

300

 

$

7.55

 

3.6

 

$

4,766

 

 

Restricted stock unit awards

 

We grant service-based RSUs to executive and non-executive personnel and non-employee directors. The service-based RSUs granted to executive and non-executive personnel generally vest over a three-year period subject to continuous service on each vesting date. The service-based RSUs for our non-employee directors generally vest over a one-year period for existing members and 33.3% per year over a three-year period for new members subject to continuous service on each vesting date.

 

We grant performance-based RSUs to executive personnel. These awards vest subject to certain performance objectives based on the Company’s revenue growth, Adjusted EBITDA growth, and/or relative total stockholder return 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 and performance-based RSUs generally vest over a three-year period 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.

 

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A summary of the RSU activity is as follows:

 

 

 

Number of Shares
(000’s)

 

Weighted Average
Grant-Date Fair
Value

 

Non-vested at December 31, 2018

 

3,119

 

$

8.60

 

Granted(1)

 

517

 

$

23.36

 

Vested

 

(2,656

)

$

6.58

 

Canceled/forfeited

 

(10

)

$

25.51

 

Non-vested at March 31, 2019

 

970

 

$

21.80

 

 


(1)         The RSUs granted to all of our named executive officers in 2017 were subject to satisfaction of specified service-based and performance-based conditions. The performance objectives were subject to under- or over- achievement on a sliding scale, with a threshold of 50% of the target number of RSUs and a maximum of 150% of the target RSUs. In February 2019, our Compensation Committee determined actual achievement of the 2017 performance-based RSUs resulting in additional RSUs granted of approximately 29,000 at a grant-date fair value of $11.94 per share during the three months ended March 31, 2019.

 

During the three months ended March 31, 2019, approximately 2,656,000 shares of RSUs vested. The Company issued approximately 1,306,000 shares and the remaining shares were withheld to pay minimum statutory federal, state, and local employment payroll taxes on those vested awards.

 

16. Net loss per share attributable to common stockholders

 

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

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

 

 

(in thousands)

 

Numerator:

 

 

 

 

 

Net loss attributable to common stockholders, basic and diluted

 

$

(5,153

)

$

(3,229

)

Denominator:

 

 

 

 

 

Weighted average common stock, basic and diluted

 

43,527

 

41,330

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

Basic and diluted

 

$

(0.12

)

$

(0.08

)

 

For the three months ended March 31, 2019 and 2018, we excluded all assumed exercises of stock options and the assumed issuance of common stock under RSUs from the computation of diluted net loss per share as the effect would be anti-dilutive due to the net loss for the period. For the three months ended March 31, 2019, we also excluded the shares that would be issuable assuming conversion of the Convertible Notes and the shares for the capped call as their effect would be anti-dilutive. Diluted EPS for our Convertible Notes is calculated under the treasury method in accordance with ASC 260, Earnings Per Share.

 

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 three months ended March 31, 2019. As of March 31, 2019, the remaining approved amount for repurchases was approximately $5,180.

 

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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, 2018, filed with the Securities Exchange Commission on March 1, 2019.

 

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, including our Annual Report on Form 10-K for the year ended December 31, 2018. 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 to the people and things they love.

 

We acquire long-term wireless rights at large venues like airports, transportation hubs, stadiums/arenas, military bases, multifamily properties, universities, convention centers, and office campuses; we build high-quality wireless networks such as distributed antenna systems (“DAS”), Wi-Fi, and small cells at those venues; and we monetize the wireless networks through a number of products and services.

 

Over the past 17 years, we’ve built a global footprint of wireless networks that we estimate reaches more than a billion consumers annually. We operate 59 DAS networks containing approximately 31,100 DAS nodes, and believe we are the largest operator of indoor DAS networks in the world. Our Wi-Fi network, which includes locations we manage and operate ourselves (our “managed and operated locations”) as well as networks managed and operated by third-parties with whom we contract for access (our “roaming” networks), includes over 1.2 million commercial Wi-Fi hotspots in more than 100 countries around the world.

 

We generate revenue from our wireless networks in a number of ways, including our multifamily, DAS, small cells and wholesale Wi-Fi offerings, which are targeted towards businesses, and our military, retail, and advertising offerings, which are targeted towards consumers.

 

Military/multifamily revenue, which is driven by military personnel who purchase Wi-Fi services on military bases, and multifamily revenue, which is driven by property owners who purchase network installation services and recurring monthly Wi-Fi services and support, accounted for approximately 39% of our total revenue for the three months ended March 31, 2019. As of March 31, 2019, we have grown our military subscriber base to approximately 147,000, an increase of approximately 3.5% over the prior year comparative period. Retail revenue, which is driven by consumers who purchase a recurring monthly subscription plan or one-time Wi-Fi access, accounted for approximately 6% of our total revenue for the three months ended March 31, 2019. As of March 31, 2019, our retail subscriber base was approximately 113,000, a decrease of approximately 32.7% over the prior year comparative period.

 

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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 or small cell networks at locations where we manage and operate the wireless network. For the three months ended March 31, 2019, DAS revenue accounted for approximately 36% of our revenue.

 

Our wholesale customers such as telecom operators, cable companies, technology companies, and enterprise software/services companies, pay us usage-based Wi-Fi network access and software licensing fees to allow their customers’ access to our footprint worldwide. Wholesale Wi-Fi revenue also includes financial institutions and other enterprise customers who provide Boingo as a value-added service for their customers. For the three months ended March 31, 2019, wholesale Wi-Fi revenue accounted for approximately 17% of our revenue.

 

We also generate revenue from advertisers that seek to reach consumers via sponsored Wi-Fi access. For the three months ended March 31, 2019, advertising and other revenue accounted for approximately 2% of our revenue.

 

Our customer agreements for certain DAS networks include both a fixed and variable fee structure with the highest percentage of sales typically occurring in the fourth quarter of each year and the lowest percentage of sales occurring in the first quarter of each year. Our multifamily network installation services have historically been performed for the student housing market with the highest percentage of revenues typically occurring in the third quarter of each year. We expect these trends to continue. We do not expect significant seasonal impact for any of our other products.

 

In support of our overall business strategy, we are focused on the following objectives:

 

·                       expand our footprint of managed and operated and aggregated networks;

 

·                       leverage our neutral-host business model to grow DAS, small cell, and wholesale roaming partnerships;

 

·                       expand our carrier offload relationships; and

 

·                       increase our brand awareness.

 

Key Business Metrics

 

In addition to monitoring traditional financial measures, we also monitor our operating performance using key performance indicators. Our key performance indicators follow:

 

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.

 

Subscribersmilitary and Subscribersretail.  These metrics represent the number of paying customers who are on a month-to-month subscription plan at a given period end.

 

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

 

Revenue

 

Our revenue consists of military/multifamily revenue, retail revenue, DAS revenue, wholesale Wi-Fi revenue, and advertising and other revenue.

 

Military/multifamily and retail.  We generate revenue from sales to military and retail individuals of month-to-month network access subscriptions that automatically renew and hourly, daily or other single-use access, primarily through charge card transactions. We also generate multifamily revenue from property owners who pay us a recurring monthly fee for Wi-Fi services including building and maintaining the network that supports these services and providing support for residents and employees of the properties.

 

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Table of Contents

 

DAS.  We generate revenue from telecom operator partners that pay us network build-out fees, inclusive of network upgrades, and access fees for our DAS and small cell networks.

 

Wholesale—Wi-Fi.  We generate revenue from wholesale Wi-Fi partners that license our software and pay usage-based monthly network access fees to allow their customers to access our global Wi-Fi network. Usage-based network access fees may be measured in minutes, connects, megabytes or gigabytes, and in most cases are subject to minimum volume commitments. Other wholesale Wi-Fi partners pay us monthly fees to provide a Wi-Fi infrastructure that we install, manage and operate at their venues for their customers under a service provider arrangement.

 

Advertising and other.  We generate revenue from advertisers that seek to reach visitors to our landing pages at our managed and operated network locations with online advertising, promotional and sponsored programs and at locations where we solely provide authorized access to a partner’s Wi-Fi network through sponsored access and promotional programs. In addition, we receive revenue from partners in certain venues where we manage and operate the Wi-Fi network.

 

Results of Operations

 

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

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

 

 

(unaudited)
(in thousands)

 

Consolidated Statement of Operations Data:

 

 

 

 

 

Revenue

 

$

66,473

 

$

58,159

 

Costs and operating expenses:

 

 

 

 

 

Network access

 

31,411

 

26,565

 

Network operations

 

14,142

 

12,846

 

Development and technology

 

8,999

 

7,425

 

Selling and marketing

 

5,867

 

5,463

 

General and administrative

 

8,294

 

7,699

 

Amortization of intangible assets

 

1,131

 

727

 

Total costs and operating expenses

 

69,844

 

60,725

 

Loss from operations

 

(3,371

)

(2,566

)

Interest and other expense, net

 

(1,676

)

(79

)

Loss before income taxes

 

(5,047

)

(2,645

)

Income tax expense

 

192

 

128

 

Net loss

 

(5,239

)

(2,773

)

Net (loss) income attributable to non-controlling interests

 

(86

)

456

 

Net loss attributable to common stockholders

 

$

(5,153

)

$

(3,229

)

 

Depreciation and amortization expense included in costs and operating expenses:

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

 

 

(unaudited)
(in thousands)

 

Network access

 

$

11,582

 

$

13,587

 

Network operations

 

4,386

 

4,256

 

Development and technology

 

2,779

 

2,508

 

General and administrative

 

262

 

255

 

Total(1)

 

$

19,009

 

$

20,606

 

 


(1)         The $1.6 million decrease in depreciation and amortization of property and equipment for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, is primarily due to the $2.0 million decrease in depreciation expense related to certain DAS build-out projects that were depreciated over a longer estimated useful life resulting from the successful extension of certain venue agreements, which was partially offset by depreciation expense for new DAS build-out projects that were completed and launched in 2018 and 2019.

 

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

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

 

 

(unaudited)
(in thousands)

 

Network operations

 

$

506

 

$

537

 

Development and technology

 

303

 

278

 

Selling and marketing

 

529

 

473

 

General and administrative

 

1,006

 

1,838

 

Total(2)

 

$

2,344

 

$

3,126

 

 


(2)         The $0.8 million decrease in stock compensation expense for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, is primarily due to the decrease in stock-based compensation expense related to the multi-year 2016 RSUs for our previous Chief Executive Officer and Chief Financial Officer, which became fully vested in February 2019. No similar multi-year RSUs were granted to any of our executives after 2016. During each of the three months ended March 31, 2019 and 2018, we capitalized $0.2 million of stock-based compensation expense.

 

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
March 31,

 

 

 

2019

 

2018

 

 

 

(unaudited)
(as a percentage of revenue)

 

Consolidated Statement of Operations Data:

 

 

 

 

 

Revenue

 

100.0

%

100.0

%

Costs and operating expenses:

 

 

 

 

 

Network access

 

47.3

 

45.7

 

Network operations

 

21.3

 

22.1

 

Development and technology

 

13.5

 

12.8

 

Selling and marketing

 

8.8

 

9.4

 

General and administrative

 

12.5

 

13.2

 

Amortization of intangible assets

 

1.7

 

1.3

 

Total costs and operating expenses

 

105.1

 

104.4

 

Loss from operations

 

(5.1

)

(4.4

)

Interest and other expense, net

 

(2.5

)

(0.1

)

Loss before income taxes

 

(7.6

)

(4.5

)

Income tax expense

 

0.3

 

0.2

 

Net loss

 

(7.9

)

(4.8

)

Net (loss) income attributable to non-controlling interests

 

(0.1

)

0.8

 

Net loss attributable to common stockholders

 

(7.8

)%

(5.6

)%

 

Three Months ended March 31, 2019 and 2018

 

Revenue

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

Change

 

% Change

 

 

 

(unaudited)

 

 

 

(in thousands, except percentages)

 

Revenue:

 

 

 

 

 

 

 

 

 

Military/multifamily

 

$

25,897

 

$

15,854

 

$

10,043

 

63.3

 

DAS

 

24,095

 

23,645

 

450

 

1.9

 

Wholesale—Wi-Fi

 

11,020

 

11,149

 

(129

)

(1.2

)

Retail

 

3,926

 

5,310

 

(1,384

)

(26.1

)

Advertising and other

 

1,535

 

2,201

 

(666

)

(30.3

)

Total revenue

 

$

66,473

 

$

58,159

 

$

8,314

 

14.3

 

 

 

 

 

 

 

 

 

 

 

Key business metrics:

 

 

 

 

 

 

 

 

 

DAS nodes

 

31.1

 

24.2

 

6.9

 

28.5

 

Subscribers—military

 

147

 

142

 

5

 

3.5

 

Subscribers—retail

 

113

 

168

 

(55

)

(32.7

)

Connects

 

78,625

 

65,901

 

12,724

 

19.3

 

 

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Military/multifamily.  Military/multifamily revenue increased $10.0 million, or 63.3%, for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, due to a $7.4 million increase in multifamily revenues resulting from our Elauwit Networks, LLC acquisition in August 2018, and a $2.6 million increase in military subscriber revenue, which was driven primarily by the increase in military subscribers and a 11.9% increase in the average monthly revenue per military subscriber in 2019 compared to 2018.

 

DAS.  DAS revenue increased $0.5 million, or 1.9%, for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, due to a $1.4 million increase in access fees from our telecom operators. The increase was partially offset by a $0.9 million decrease from build-out projects in our managed and operated locations, which was primarily due to the successful renewal of certain of our customer contracts resulting in the reamortization of the remaining deferred build revenues over a longer contract term.

 

WholesaleWi-Fi.  Wholesale Wi-Fi revenue decreased $0.1 million, or 1.2% for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, due to a $0.5 million decrease in partner usage based fees, which was partially offset by a $0.4 million increase in fees primarily earned from our venue partners who pay us to provide a Wi-Fi infrastructure that we install, manage and operate at their venues.

 

Retail.  Retail revenue decreased $1.4 million, or 26.1%, for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, due to a $1.1 million decrease in retail subscriber revenue, which was driven primarily by the decrease in retail subscribers, and a $0.3 million decrease in retail single-use revenue.

 

Advertising and other.  Advertising and other revenue decreased $0.7 million , or 30.3%  for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, due to a $0.7 million decrease in advertising sales at our managed and operated locations resulting from an decrease in the number of premium ad units sold.

 

Costs and Operating Expenses

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

Change

 

% Change

 

 

 

(unaudited)

 

 

 

(in thousands, except percentages)

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

Network access

 

$

31,411

 

$

26,565

 

$

4,846

 

18.2

 

Network operations

 

14,142

 

12,846

 

1,296