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[December 31, 2012]
CIG WIRELESS CORP. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Report. The discussion in this Report contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statement made in this Report should be read and apply to all related forward-looking statements wherever they appear in this Report. Our actual results will likely differ materially from those discussed here.
General Overview We develop, operate and own wireless and broadcast communication towers in the United States. Our business consists of leasing antenna space on multi-tenant communication sites to wireless service providers. This business model launched in December 2011 pursuant to the acquisition of Communications Infrastructure Group, LLC ("CIG, LLC") described below. We were incorporated in the state of Nevada in February 2008 and are headquartered in Atlanta, Georgia.
All of our operations are located in the United States. We participate in the local tower development industry and conduct our operations principally through subsidiaries of CIG Wireless. Our wholly-owned subsidiaries are "CIG, LLC", "CIG Properties, LLC", "CIG Services, LLC", "CIG Towers, LLC", "CIG BTS Towers, LLC", "CIG GA Holding, LLC", "CIG DT Holding, LLC", and "CIG Comp Tower, LLC".
On October 7, 2011, we acquired all membership interests in CIG Services, LLC ("CIG Services"), from Communications Infrastructure Group LLC, ("CIG, LLC").
The membership interests of CIG Services were acquired by us for a nominal amount. CIG Services was formed by CIG, LLC to provide comprehensive management and support services for the operation, administration and management of wireless towers.
On October 7, 2011, we, through our subsidiary, CIG Services, have entered into seven Tower Management Agreements (each, a "Tower Management Agreement") with various related parties whereby we are to maintain, market, operate, manage and administer certain tower, rooftop or other telecommunication sites owned or managed by the related parties (the "Tower Sites"). We have acted as the exclusive agent of the various third parties and managed the Tower Sites in accordance with all outstanding Tower Site leases, easements, other applicable agreements, and applicable law and industry standards. We received a monthly fee from the related parties for the performance of the Tower Site management services. Each Tower Management Agreement is governed under the laws of the State of Georgia. On June 30, 2012, four of these Tower Management Agreements terminated in connection with the June 30, 2012 restructuring pursuant to which the various related parties received class A membership interests in CIG, LLC.
We continue to receive the monthly fees related to the remaining three agreements that are still in effect as of September 30, 2012.
On December 5, 2011, we completed the acquisition of CIG, LLC for 750,000 shares of Common Stock. Pursuant to the acquisition, we acquired all assets and assumed all liabilities of CIG, LLC.
On September 7, 2012, we completed the acquisition of nineteen communication towers and related assets and rights from Towers of Texas, Ltd., a privately held company, for a purchase price of $3.6 million in cash. The acquisition expands our portfolio of assets and our presence in the Texas region.
19 Table of Contents On September 7, 2012, we, through our subsidiary CIG Comp Tower, LLC, closed a new multi-draw term loan credit facility with Macquarie Bank Limited ("Macquarie"). The Macquarie credit facility may be drawn upon by the Borrower, as guaranteed by our subsidiary CIG Properties, LLC. Macquarie is serving as the administrative agent, collateral agent and the initial issuing lender under the Credit Facility.As of September 30, 2012, we had a Credit Facility commitment of $15 million on which we have withdrawn $10 million as of September 30, 2012.
This multi-draw term loan credit facility may be expanded up to $150 million.
As of September 30, 2012, we own 66 towers and we have presence in 15 states. We currently own 67 wireless communications towers that are online and in commercial service.
Our primary goal is to grow our business through the leasing of antenna space on our existing towers in addition to acquiring and constructing new towers. Site leasing revenues are primarily generated from wireless service providers through our long- term leasing contracts. Our tenant leases are generally for an initial term that ranges between 5 and 10 years with 3-5 renewal options of five years each. These lease contracts normally include rent escalation rates which range between 3-4% per year, including the renewal periods. We construct towers under build-to-suit arrangements which allow us to build towers in a location chosen by the wireless provider. We retain ownership of the towers built and the right to co-locate additional tenants. Tenant leases are generally paid on a monthly or annual basis. Site leasing revenue is recorded monthly on a straight-line basis over the current term of the related lease agreements. Annual payments are recorded as deferred revenue and recognized as revenue ratably over 12 months.
Monthly rental amounts received in advance are recorded as well in deferred revenue and recognized as revenue in the appropriate period.
The tower business is not seasonal. However, the availability of towers for acquisition on the market varies from time-to-time.
Our company, like all of our competitors, is bound to the tower build plans of the various carriers, which are subject to numerous variables outside our control, including the general economy, carrier cash flow, regulatory issues, and consolidation of the wireless industry.
We deploy our working capital for the acquisition of third party towers on the open market or for the construction costs of BTS towers. We rely, to a large extent, on the wireless carriers build and search ring development plans.
Possible consolidation in the industry plays a significant role in carrier builds and lease ups. Government and utilities agencies (such as Homeland Security, local police and fire departments, and port authorities) provide potential supplementary tower facilities' leasing income. Steel is the major raw material used in the construction of the towers. We use leading contractors to carry out the actual building of the towers.
Customers Our customers are the tenants on our towers and include large national wireless carriers that operate national or regional networks including AT&T, Sprint, Verizon Wireless and T-Mobile.
Sales and Marketing Our sales and marketing goals are to use existing relationships and develop new relationships with wireless service providers to lease antenna space.
Competition The primary competitors in the site leasing industry are: the independent tower owners who also provide site leasing services; the national tower development and management companies; and the wireless service providers who own and operate their own towers and lease antenna space to other providers. We believe that tower location, quality of service to tenants and prices have been and will continue to be the most significant competitive factors affecting the site leasing business. We have been providing site leasing services and development of towers since December 2011 through our subsidiary, CIG, LLC acquired by us in December 2011 which was operating in the tower business industry since 2009, so our market share is still minimal. However, we intend to increase our market share through investing in the acquisition and construction of communication towers in addition to providing excellent service to our customers.
20 Table of Contents We compete with independent tower owners who also provide site rental and network services, wireless carriers that build, own and operate their own tower networks and lease space to other wireless communication companies, and owners of alternative facilities, including rooftops, water towers, broadcast towers, DAS networks, and utility poles.
Wireless carriers that own and operate their own tower networks generally are substantially larger and have greater financial resources than us. We believe that tower location and capacity, deployment speed, quality of service and price have been and will continue to be the most significant competitive factors affecting the leasing of a tower.
Competitors in the network services business include site acquisition consultants, zoning consultants, real estate firms, right-of-way consulting firms, construction companies, tower owners and managers, radio frequency engineering consultants, telecommunications equipment vendors who can provide turnkey site development services through multiple subcontractors, and our customers' internal staffs. We believe that customers will base their decisions on the outsourcing of network services on criteria such as experience, track record, local reputation, price and time for completion of a project.
Operating costs Cost of site leasing revenue primarily consists of straight-lined site rental payments for ground; property taxes; site maintenance and monitoring costs; utilities; property insurance. Other operating costs include lease costs related to our headquarters; compensation of executives and employees and legal, accounting and administrative costs.
Employees As of September 30, 2012, we had twelve employees, ten of which are located at our headquarters in Atlanta, Georgia.
Intellectual Property We do not own any patents or trademarks at the present time. We intend to proceed with certain trademark representations as soon as reasonably feasible.
Results of operations The following table represents a comparison of our results of operations for the year ended September 30, 2012 to the year ended September 30, 2011. To provide a meaningful presentation and comparison of our results of operations, we combined the period from December 1, 2011 to September 30, 2012 (Successor) with the period from October 1, 2011 to November 30, 2011 (Predecessor) to provide the full year ended September 30, 2012 results of operations as compared to theyear ended September 30, 2011.
21 Table of Contents Fiscal Year Ended September30, 2012 September 30, 2011 Operating revenue: Rent revenue $ 1,673,224 $ 1,498,220 Origination and management fees to related parties 129,588 407,492 Service revenue 34,630 140,380 Total operating revenue 1,837,442 2,046,092 Operating expenses: Site-related costs 1,260,209 1,924,770 General and administrative expenses 7,282,926 2,182,782 Shared services from related parties 548,175 1,184,207 Depreciation and accretion expense 1,076,952 856,511 Gain on sale of fixed assets to related parties (117,547 ) (563,864 ) Loss on sale of fixed assets 6,758 - Total operating expenses 10,057,473 5,584,406 Loss from operations (8,220,031 ) (3,538,314 ) Interest income from related parties - 497,261 Interest expense (480,410 ) (390,122 ) Gain on forgiveness of debt 10,980 - Loss on extinguishment of long-term subordinated obligations to related parties (747,124 ) - Losses allocated to related party investors 2,589,803 3,291,981 Bargain purchase gain 2,020,384 - Total non-operating income 3,393,633 3,399,120 Net loss (4,826,398 ) (139,194 ) Losses attributable to non-controlling interest 844,792 - Net loss attributable to CIG Wireless stockholders (3,981,606 ) (139,194 ) Preferred stock dividends (17,744 ) - Net loss attributable to common stockholders $ (3,999,350 ) $ (139,194 ) Net loss per share Net loss per share, attributable to common stockholders, basic and diluted $ (0.20 ) Weighted average shares outstanding, basic and diluted 20,030,769 Revenues For the fiscal year ended September 30, 2012, total revenue was approximately $1.8 million, which was a decrease of $0.2 million from $2.0 million as compared to the same period in the previous year. The decrease was due to the decline of $0.4 million in service revenues and origination fees due to our new business strategy implemented in fiscal year 2012 partially offset by an increase in rent revenue of $0.2 million during the same period as compared to the previous year.
The new business strategy focuses more on building our portfolio of communication towers and expanding our presence geographically across the country.
Site-Related Costs For the fiscal year ended September 30, 2012, site-related costs were approximately $1.3 million, which was a decrease of 0.6 million from $1.9 million in the same period in the previous year. The decrease was mainly related to the elimination of search ring costs in fiscal year 2012 which totaled about $0.5 million in the year ended September 30, 2011.
General and Administrative Expenses For the fiscal year ended September 30, 2012, general and administrative expenses totaled $7.3 million which was an increase of $5.1 million as compared to $2.2 million in the same period in the previous year. We recorded $1.8 million related to stock-based compensation in connection with the issuance of stock option grants in our statement of operations for the year ended September 30, 2012. The predecessor entity incurred no stock-based compensation expense for the fiscal year ended September 30, 2011. In addition, we incurred about $2.9 million in legal, accounting, consulting and advisory fees in connection with the foundation of our corporate and business structure, costs associated with public entities and acquisition related costs.
Shared Services from Related Parties For the fiscal year ended September 30, 2012, shared services from related parties totaled $0.5 million, which was a decrease of $0.7 million from the expense of $1.2 million in the same period in the previous year. These costs include overhead, administrative and office lease expenses and are allocated on a pro rata basis based on headcount. The decrease in these expenses is related to lower usage of these services by our company in fiscal year 2012 as compared to the prior year.
22 Table of Contents Depreciation and Accretion Expense For the fiscal year ended September 30, 2012, depreciation and accretion expense totaled $1.1 million, which was an increase of $0.2 million from the expense of $0.9 million in the same period of the prior year. The increase is mainly related to the construction and capitalization of seven additional towers during fiscal year 2012 and the acquisition of nineteen communication towers in September 2012. In addition, there was an increase in the fair value of the communication towers that existed on September 30, 2011 under the ownershipof the predecessor entity.
Gain from Sale of Fixed Assets For the fiscal year ended September 30, 2012, gain from sale of fixed assets totaled $0.1 million, as compared to a gain of $0.6 million for the same period in the prior year and is related to the sale of certain communication towers.
Interest Expense For the fiscal year ended September 30, 2012, interest expense totaled $0.5 million, which was an increase of $0.1 million as compared to the same period of the prior year. Interest expense for the fiscal year 2012 included $0.3 million which represents full amortization of the beneficial conversion features associated with the issuance of convertible debt during 2012.
Forgiveness of Related Party Debt For the fiscal year ended September 30, 2012, forgiveness of related party debt was $10,980 and is associated with a loan that was due to the former sole officer who served as a director until October 5, 2011. The note holder was no longer a related party at the time of the loan forgiveness.
Loss on Extinguishment of Related Party Debt During the fiscal year 2012, and in connection with the conversion of long-term subordinated obligation into class A interests in our subsidiary, CIG, LLC, we recorded a loss on extinguishment of debt of $0.8 million. The loss is related to the difference between the fair value the class A interests and the carrying value of the converted subordinated obligation completed on June 30, 2012.Losses Allocated to Related Party Investors For the fiscal year ended September 30, 2012, we allocated $2.6 million of losses to the related party investors compared to $3.3 million in the same period of the previous year. All but one of these related party investors converted their debt into class A interests in our subsidiary, CIG, LLC on June 30, 2012.
Bargain Purchase Gain For the fiscal year ended September 30, 2012, we recorded in our statement of operations a bargain purchase gain of $2.0 million related to the two acquisitions completed during that period. This gain represents the excess of fair value of net assets acquired over the acquisition consideration.
23 Table of Contents Net Loss For the fiscal year ended September 30, 2012, net loss was $4.8 million as compared to a loss of $0.1 million in the previous year. The change was the result of costs mentioned above incurred in connection with establishing the foundation of our business, operations and corporate structure.
Liquidity and Capital Resources The following table represents our cash flows for the successor period from December 1, 2011 to September 30, 2012, the predecessor period from October 1, 2011 to November 30, 2011 and the predecessor fiscal year ended September 30, 2011.
December 1, 2011 to October 1, 2011 to Fiscal Year Ended September 30, 2012 November 30, 2011 September 30, 2011 Successor Predecessor Predecessor Net cash used in operating activities $ (4,554,898 ) $ (893,814 ) $ (1,238,687 ) Net cash (used in) provided by investing activities (4,314,527 ) 125,229 (418,771 ) Net cash provided by (used in) financing activities 11,674,896 1,570,761 (4,382,356 ) Net increase (decrease) in cash 2,805,471 802,176 (6,039,814 ) Cash and cash equivalents, at beginning of period 67,961 214,675 6,254,489 Cash and cash equivalents, at end of period $ 2,873,432 $ 1,016,851 $ 214,675 Overview We entered the communication tower industry through our predecessor company in 2009 in connection with the acquisition of our subsidiary, CIG, LLC.The acquisition was settled as a non-cash acquisition. Since that time, we have entered into multiple loans and notes payable with related parties. The proceeds were used to fund our operations, establishing our corporate foundation as well as constructing and developing new towers. During the year ended September 30, 2012, we completed the construction of seven new communications towers. In addition, we entered into a new credit facility ("Credit Facility") on September 7, 2012 and we completed the acquisition of nineteen towers.
As of September 30, 2012, the balance of our cash and cash equivalents was $2.9 million. We believe that this balance will be sufficient to meet our cash requirements to operate our business over the next twelve months. However, this balance is not sufficient enough to provide the funds required to grow our business and execute on our plan for acquiring and building new communication towers. Our plan is to use the funds available through the Credit Facility and raise capital to support our business plan. However, there is no certainty that we will be successful at raising capital, nor is there certainty around the amount of funds that may be raised. In addition, the success of our efforts will be subject to the performance of the market and investor sentiment regarding the macro and micro conditions under which we operate including stock market volatility.
Cash Flows from Operating Activities Our net cash used in operating activities was $4.6 million during the period of December 1, 2011 to September 30, 2012 which mainly consisted of major expenditures around accounting, advisory and legal costs incurred with the establishment and restructuring of our business and corporate structure in addition to transaction costs associated with the acquisition of CIG, LLC and Towers of Texas. The predecessor's net cash used during the two months ended November 30, 2011 and the fiscal year ended September 30, 2011 was $0.9 million and $1.2 million, respectively.
24 Table of Contents Cash Flows from Investing Activities Our cash used in investing activities was $4.3 million during the period of December 1, 2011 to September 30, 2012 which mainly consisted of $1.5 million related to payments for the construction of communication towers and purchase of software and equipment and $2.5 million spent the acquisition of communication towers of the Towers of Texas acquisition presented net of the cash acquired from the acquisition of CIG, LLC of $1.0 million. The CIG, LLC acquisition was consummated as a non-cash transaction through the issuance of 750,000 of common shares of CIG Wireless. In addition, there was an increase in restricted cash resulting from the reserve interest account required in accordance with the terms of our Credit Facility as well as preferred stock subscriptions for which preferred shares were in the process of being issued as of September 30, 2012.
The predecessor entity's net cash provided by investing activities for the two months ended November 30, 2011 was $0.1 million, consisting of the proceeds from sale of one communication tower of $0.4 million partially offset by $0.3 million spent on construction of communication towers. For the year ended September 30, 2011, the predecessor entity's net cash used in investing activities was $0.4 million consisting of $5.2 million spent on the construction of towers partially offset by the proceeds of approximately $4.8 million from the sale of communication towers.
Cash Flows from Financing Activities Our net cash provided by financing activities for the period of December 1, 2011 to September 30, 2012 was $11.7 million mainly consisting of the following: a) net proceeds of $9.2 million obtained through the Credit Facility entered into on September 7, 2012, b) $0.4 million and $0.3 million obtained through the issuance of 232,450 shares and 114,290 shares of common stock and series B preferred stock, respectively, c) proceeds from related parties borrowings of $2.7 million of which $1.7 million were proceeds from convertible debt, partially offset by d) distributions to related party investors of $0.2 million, e) payments for debt issuance costs of $0.2 million incurred in connection with the Credit Facility, and f) payments of $0.1 million for equity issuance costs for conversion of debt and net advances to related parties of $0.4 million.
The predecessor entity's net cash provided by financing activities for the two months ended November 30, 2011 was $1.6 million mainly consisting of net advance from related parties. For the year ended September 30, 2011, the predecessor's net cash used in financing activities was $4.4 consisting of distributions to related party investors of $2.0 million and net advances to related parties of $2.6 million partially offset by contributions from related party investorsof $0.3 million.
Non-Cash Investing and Financing Activities The following table represents our non-cash investing and financing activities for the successor period from December 1, 2011 to September 30, 2012, the predecessor period from October 1, 2011 to November 30, 2011 and the fiscal year ended September 30, 2011.
October 1, 2011 Fiscal year December 1, 2011 to to November 30, Ended September September 30, 2012 2011 30, 2011 Successor Predecessor Predecessor Noncash Investing and Financing Activities: Conversion of preferred shares to common $ 10 $ - $ - Common stock issued for preferred dividend 16,301 - - Common stock issued for acquisition of CIG LLC 75,000 - - Asset retirement obligation 165,349 - 72,945 Debt discounts due to beneficial conversion features 336,667 - - Conversion of long-term subordinated obligations to notes payable 1,300,250 - - Conversion of long-term subordinated obligations to non-controlling interest 10,680,356 - - Common stock issued for note payable 1,980,678 - - Common stock issued for accounts payable 241,935 - - Forgiveness of related party debt $ - $ - $ 889,556 25 Table of Contents On December 23, 2011, 1,000,000 shares of Series A 4% convertible redeemable preferred stock, par value $0.00001 per share, along with the accrued dividends of $16,301 were converted into 1,008,110 shares of common stock. We originally issued the preferred shares on October 7, 2011 at $2.00 per share which resulted in aggregate proceeds of $2,000,000. These proceeds are not presented in the table of cash flows above as the period presented for the successor entity starts from December 1, 2011.
On December 5, 2011, we acquired CIG, LLC from BAC Berlin Atlantic Holding GmbH & Co. KG for 750,000 common shares issued at a fair value of $0.10 per share which was the price per share of the last issuance of common equity transaction for cash we completed during the fiscal year 2009.
During the period of December 1, 2012 to September 30, 2012, we established an asset retirement obligation of $0.2 million in connection with the towers that were constructed and capitalized during the period and the towers purchased through asset acquisitions.
During the period from December 1, 2012 to September 30, 2012, we borrowed various loans from ENEX in the amount of $2.7 million at an annual interest of 4%, $1.7 million of which was convertible into common stock at $3.00 per share.
The loans were due thirty days upon demand and were secured by our assets. In connection with the convertible loans, we recorded debt discounts of $0.3 million due to beneficial conversion features. On June 27, 2012, approximately $2.0 million of these loans along with the related accrued and unpaid interest were converted into 660,226 shares of common stock. As of September 30, 2012, the outstanding balance of the loans due to ENEX was $0.8 million, all of which are convertible into common stock at $3.00 per share.
In addition, $0.2 million of accounts payable balances due to CRG Finance were converted into 80,645 shares of common stock.
In connection with the conversion of the long-term subordinated obligations due to the following related party investors, Compartment IT2, LP, Compartment IT5, LP and Compartment IT9, LP, we issued respectively three notes payable to these investors in the amount of $0.8 million, $0.4 million and $0.1 million maturing on December 31, 2014, December 31, 2014 and March 31, 2015, respectively. In addition, $10.7 million of the long-term subordinated obligations due to these related party investors were converted into three preferred Class A Membership Interests: Class A-IT2, Class A-IT5 and Class A-IT9. The notes are unsecured, payable in installments through a repayment schedule until maturity and bear interest at 4% per annum.
Credit Facility On September 7, 2012, our company, through our subsidiary CIG Comp Tower, LLC ("Comp Tower, or the "Borrower"), closed a new multi-draw term loan credit facility (the "Credit Facility") with Macquarie Bank Limited ("Macquarie").
The Credit Facility may be drawn upon by the Borrower, as guaranteed by our subsidiary CIG Properties, LLC (the "Guarantor"). Macquarie is serving as the administrative agent, collateral agent and the initial issuing lender under the Credit Facility. The Credit Agreement, dated as of August 17, 2012, was made by and among the Borrower, the lenders who are from time-to-time party thereto, and Macquarie (the "Credit Agreement"); the Security Agreement, dated as of September 7, 2012, by and among the Borrower and the Guarantor, and Macquarie (the "Security Agreement"), and the Guaranty, dated as of September 7, 2012, by the Guarantor in favor of Macquarie (the "Guaranty"). The maturity date for repayment of all draws on the Credit Facility is September 6, 2017. Comp Tower is a wholly-owned subsidiary of CIG Properties. The obligations of Comp Tower and CIG Properties are secured by first priority pledges of all of the equity interests of Comp Tower and first priority security interests in all tangible and intangible assets of Comp Tower and CIG Properties. This multi-draw term loan credit facility may be expanded up to $150 million.
The Credit Facility does not amortize during its term and the entire outstanding balance including any accrued and unpaid interest is due and payable on the maturity date. Comp Tower has the option to designate the reference rate of interest for each specific borrowing under the Credit Facility as amounts are advanced. Borrowings under the Credit Facility can be drawn either as Adjusted Base Advances subject to Adjusted Base Rate interest pus a margin of 6.25%; or as Adjusted Eurodollar Advances subject to Eurodollar Rate interest plus a margin of 7.25%. The Credit Facility obligations of the Borrower include payments of commitment fees of 2%, administrative agent fees, early termination fees and underutilization fees. The interest and commitment fee is paid around the 15th of each month.
26 Table of Contents We have the option to repay all the draws on the Credit Facility together with all accrued and unpaid interest. In addition, the Credit Facility contains yield protection provisions customary for facilities of this type, protecting the lenders in the event of breakage losses or changes in reserve or capital adequacy requirements applicable to the lenders.
Under the terms of the Credit Facility, the administrative agent has certain rights of first refusal to provide financing on all tower acquisitions proposed by us or our subsidiaries. If the administrative agent declines to provide such financing for any reason, we or our subsidiaries other than the CIG Properties or its subsidiaries may obtain third party financing to purchase such tower assets.
The Credit Facility Agreement contains conventional representations and warranties, affirmative covenants, negative covenants, and financial compliance covenants customary for transactions of this type. Events of default include failure to pay interest on any loan under the Credit Facility, any material violation of any representation or warranty under the Credit Agreement, failure to observe or perform certain covenants under the Credit Agreement, a change in control of the Borrower, default under any other material indebtedness of the Borrower, bankruptcy and similar proceedings and failure to pay disbursements from advances issued under the Credit Facility, as well as other customary default provisions. Upon an event of default, the applicable interest rate increases by 2% under the Credit Facility and the lenders have the right to accelerate payments under the Credit Facility, or call all obligations due under certain circumstances. We expect to satisfy our cash requirements for working capital, acquisitions and construction of new towers through equity financing and funds available through the Credit Facility.
As of September 30, 2012, we had an outstanding balance of $10.0 million under the credit facility and the associated unamortized balance of the discountswas $0.8 million.
Series B 6% Convertible Redeemable Preferred Stock On July 25, 2012, the Board of Directors approved the issuance of Series B 6% 2012 Convertible Redeemable Preferred Stock (the "Series B Preferred Stock") from our authorized preferred stock. On August 14, 2012, the Certificate of Designations was filed with the State of Nevada regarding the rights and preferences of the Series B Preferred Stock. The Series B Preferred Stock is convertible to Common Stock at the stated value conversion price of $3.00 per share. The Series B Preferred Stock has a dividend payable at the rate of 6% per annum and may be redeemed at our sole discretion at any time after the third anniversary of the date of issuance if the Series B Preferred Stock has not been converted to Common Stock as of such date. The Series B Preferred Stock automatically converts into Common Stock upon the closing of an underwritten public offering of shares of Common Stock having a total gross offering value of not less than $40 million. All Series B Preferred Stock will vote together with Common Stock except with respect to any matters pertaining only to the Series B Preferred Stock as to which the Series B Preferred Stock will vote as a separate class. Up to 1,700,000 shares of the Series B Preferred Stock are authorized for issuance by us at a purchase price of $3.00 per share.
We expect to raise additional equity capital during the foreseeable future through the private placement of Common Stock and other securities in non-public private securities offerings and issuances pursuant to one or more exemptions from registration under the Securities Act of 1933, as amended.
Atypical Silent Partnership Agreements Between November 2009 and February 2010, we entered into six Atypical Silent Partnership Agreements with related party limited partnership investors through our predecessor subsidiary, CIG, LLC. Pursuant to these agreements, the related party investors made contributions to us for the acquisition of tower assets which are segregated on the books by investment group. No separate legal entity was created through these agreements. The investment agreements all have similar terms, conditions, and termination dates as defined in the agreements.
Termination dates range between December 31, 2014 and September 30, 2015. On each such termination date, each respective investor may elect termination of the arrangement and we must then make distributions. Because these are mandatory variable repayment obligations occurring on each termination date, the net obligations to these investors are classified as long-term subordinated obligations in our consolidated balance sheets. Management fees, origination fees and interest charged to the investors and third-party consulting and other revenue received by the Company not related to the operation of the towers owned by the investors are separated in the statements of operations.
Except for each termination date, we have the option, in our sole discretion on whether to pay any proceeds from operations or tower sales to the investors.
The following is a summary of the net profits and liquidation interests of the six investors prior to the June 30, 2012 internal restructuring and issuance of the Class A Interests (described in detail below under the caption "Restructuring"): 27 Table of Contents Interests Investor Name Related Party Company InfraTrust Fuenf GmbH u. Co. KG (IT5) 99.999 % 0.001 % Infrastructure Asset Pool, LLLP (ITAP) 99.999 % 0.001 % InfraTrust Zwei GmbH u. Co. KG (IT2) 99.999 % 0.001 % InfraTrust Premium Sieben GmbH & Co. KG (ITP7) 70 % 30 % InfraTrust Premium Neun GmbH & Co. KG (ITP9) 60 % 40 % Diana Damme (Damme) 60 % 40 % Profits are allocated to the related party investors until they obtain designated rates of return of between 8 - 20%. Once the rates of return are obtained by the related party investors, subsequent profits are allocated based upon ownership. Losses are allocated at 100% to the investors until net profits are generated.
Restructuring On June 30, 2012, we restructured the ownership of certain of our subsidiaries and our related party investor agreements (the "Restructuring") intended to align our organization with our strategic plans, including anticipated near-term financing.
Prior to the Restructuring, title to a number of the wireless communications towers was held by CIG LLC. However, profit participation rights in the towers (the "Profit Participation") was separately reserved to related party investment funds domiciled in the Republic of Germany: InfraTrust Zwei GmbH & Co. KG, InfraTrust Fünf GmbH & Co. KG, and BAC Infratrust Premium Neun & Co. KG (collectively, the "Funds"). The respective Profit Participation rights were previously set forth in three separate Atypical Silent Partnership Agreements with CIG LLC (the "ASPs").
The Restructuring was required and requested by the manager of the Funds in order to provide a more conventional legal structure for the ownership of our towers, while maintaining substantially the same economic rights for the Funds as derived from the towers. Pursuant to the Restructuring, the Funds will now derive their economic rights in the towers through preferred Class A Membership Interests of CIG LLC, as further described below.
In 2011, the Funds were dual chartered as limited partnerships in the State of Georgia (collectively, the "Georgia LPs"). The Georgia LPs are controlled and owned by the Funds, as follows: Compartment IT2, LP, Compartment IT5, LP and Compartment IT9, LP corresponding to InfraTrust Zwei GmbH & Co. KG, Infratrust Fünf GmbH & Co. KG and BAC Infratrust Premium Neun & Co. KG, respectively.
The CIG LLC Amended and Restated Operating Agreement, dated June 30, 2012, (the "A&R Operating Agreement") provides for three preferred Class A Membership Interests: Class A-IT2, Class A-IT5 and Class A-IT9 (collectively, the "Class A Interests"), issued to Compartment IT2, LP, Compartment IT5, LP and Compartment IT9, LP, respectively.
At the closing of the Restructuring, the ASPs were assigned and transferred from the Funds to the corresponding Georgia LPs in connection with the exchange for the Class A Membership Interests. CIG LLC issued each Georgia LP preferred Class A Membership Interests to replicate the Profit Participation rights previously held through the respective ASPs prior to the Restructuring. The ASPs terminated upon effectiveness of the exchange for Class A Interests.
The CIG LLC A&R Operating Agreement also provides for a class of management membership interests (the "Management Interests"), which were issued to CIG Towers, LLC, our subsidiary. CIG, LLC will be managed by another subsidiary, CIG Solutions, LLC ("CIG Solutions"), as manager. Management of CIG, LLC remains subject to unanimous consent of the Class A Interests for certain Company actions. As manager, CIG Solutions will receive a management fee of 1% of the capital contributions made by the holders of the Class A-IT2 Interests and Class A-IT9 Interests plus any related party loans and a broker fee of 5% of the gross value of new towers attributable to the Class A-IT5 Interests plus any related party loans. The capital contributions are defined by the value of the tower assets previously underlying the respective ASPs exchanged for the Class A Interests.
Distributions will be made to Compartment IT2, LP by CIG LLC from: (i) available funds related to the communication towers attributable to the Class A-IT2 Interests; and (ii) available funds related to any and all communication towers subsequently acquired with proceeds from loans derived from collateralization of towers attributable to the Class A-IT2 Interests, in the following order ofpriority: 28 Table of Contents 1) 20% return in an amount equal to an internal rate of return on the previously contributed capital calculated from February 16, 2010, to the holders of the Class A-IT2 Interests (this 20% return is contingent upon there being net profits generated from the towers); then 2) 80% to the holders of the Class A-IT2 Interests and 20% to the holders of the Management Interests.
Distributions will be made to Compartment IT5, LP by CIG LLC from: (i) available funds related to the communication towers attributable to the Class A-IT5 Interests; and (ii) available funds related to any and all communication towers subsequently acquired with proceeds from loans derived from collateralization of towers attributable to the Class A-IT5 Interests, in the following order of priority: 1) 20% return on its capital contribution, in an amount equal to an internal rate of return on the previously contributed capital calculated from December 21, 2010 to the holders of the Class A-IT5 Interests (this 20% return is contingent upon there being net profits generated from the towers); then 2) 80% to the holders of the Class A-IT5 Interests and 20% to the holders of the Management Interests.
Distributions will be made to Compartment IT9, LP by CIG LLC from: (i) available funds related to the communication towers attributable to the Class A-IT9 Interests; and (ii) available funds related to any and all communication towers subsequently acquired with proceeds from loans derived from collateralization of towers attributable to the Class A-IT9 Interests, in the following order of priority: 1) 10% return on its capital contribution, in an amount equal to an internal rate of return on the previously contributed capital calculated from February 26, 2010 to the holders of the Class A-IT9 Interests (this 10% return is contingent upon there being net profits generated from the towers); then 2) 80% to the holders of the Class A-IT9 Interests and 20% to the holders of the Management Interests.
Distributions will be made to the holder of the Management Interests as per above and also from all other funds available for distribution which are: (i) not related to the respective communication towers attributable to the Class A Interests; and (ii) not related to any and all communication towers subsequently acquired with proceeds from loans derived from collateralization of the towers attributable to Class A Interests. Funds available for distribution are determined by reference to revenues less expenses, subject to customary accounting adjustments and reserves.
In the event of a liquidation of CIG LLC, the holders of each of the Class A Interests will receive the net proceeds from the liquidation of the corresponding communication towers and related assets contributed by the respective Georgia LPs to CIG LLC.
At the discretion of the Funds' manager, the Class A Interests are convertible into common shares, at any time prior to the first anniversary of the date the Common Stock becomes eligible for electronic book-entry delivery and settlement depository services by the Depository Trust Company ("DTC Eligibility"). The Class A Interests will convert into such number of shares of Common Stock equal to the Class A Member's capital account calculated as of June 30, 2012 adjusted for the difference between the fair value of the cell phone tower assets as of June 30, 2012 compared to the carrying book value of the cell phone tower assets as of June 30, 2012) divided by a conversion price per share calculated by reference to the dollar value which is equal to 25% less than the prior twenty trading days' volume weighted average price of the Common Stock. After the first anniversary date of DTC Eligibility, the Class A Interests remain convertible into Common Stock without discount upon termination or liquidation of the respective Georgia LP. The conversion rights of the holders of the Class A Interests may only be exercised in full. The conversion price is subject to customary anti-dilution protections.
The shares of Common Stock issued by us upon conversion of the Class A Interests will be subject to a market stand-down provision, in which the converted shares may not be sold or traded during the 12 months following issuance. On December 31, 2014 for the Class A-IT2 Interests and Class A-IT5 Interests and on March 31, 2015 for the Class A-IT9 Interests and upon termination of the Class A interest by the Funds as a result of liquidation, the conversion of the relevant Class A Interests into Common Stock will be effectuated at a conversion price equal to the prior twenty trading days' volume weighted average price of the Common Stock. The Class A Interests may not convert into the number of shares of Common Stock that exceed the number of authorized shares of Common Stock, less the number of issued and outstanding shares of Common Stock, less the number of shares of Common Stock issuable under all our other outstanding convertible instruments, and also less any of our other obligations to issue shares ofCommon Stock.
29 Table of Contents Other Third-Party Loans As of September 30, 2012, we had outstanding loans in the amount of $35,000 due upon demand to CRG Finance. The loans are unsecured, and bear interest at 10% per annum.
Contractual Obligations The following table summarizes our contractual obligations as of September 30, 2012 after giving effect to Towers of Texas acquisition and the new credit facility, these contractual obligations relate primarily to our outstanding borrowings and lease obligations for land interests under our towers over the term of the lease including option renewals. The debt maturities reflect contractual maturity dates and the related interest is calculated assuming a fixed interest rate through the maturity dates of debt obligations.
Fiscal Year Ended September 30, 2013 2014 2015 2016 2017 Thereafter Totals Credit facility $ - $ - $ - $ - $ 10,000,000 $ - $ 10,000,000 Third-party notes payable 35,000 - - - - - 35,000 Related-party notes payable 1,200,100 400,100 500,050 - - - 2,100,250 Future interest payments 950,000 950,000 1,082,738 950,000 890,137 - 4,822,875 Lease obligations 698,549 736,820 733,106 746,988 749,754 11,202,748 14,867,965 Total $ 2,883,649 $ 2,086,920 $ 2,315,894 $ 1,696,988 $ 11,639,891 $ 11,202,748 $ 31,826,090 Critical Accounting Policies and Estimates Our Management's discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. We evaluate our policies and estimates on an ongoing basis, including those related to impairment of assets, asset retirement obligations, depreciation and amortization expense, acquisitions, revenue recognition, rent expense, stock-based compensation and income taxes. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following list is not a comprehensive list of our critical accounting policies; however, we believe that they necessary to provide an understanding of our financial condition and results of operations.
Principles of Consolidation and Fiscal Year End We and our consolidated entities report on a 12-month accounting year that ends on the last day of September of each year. The consolidated financial statements included elsewhere in this Report include our financial statements and our wholly-owned subsidiaries for the ten months ended September 30, 2012 (Successor), two months ended November 30, 2011 (Predecessor) and fiscal year ended September 30, 2011 (Predecessor). All significant intercompany balances and transactions have been eliminated in consolidation.
30 Table of Contents Revenue Recognition and Accounts Receivable Site leasing revenues are recognized on a monthly basis under lease agreements when earned and when collectability is reasonably assured, regardless of whether the payments from the tenants are received in equal monthly amounts. Fixed escalation clauses present in non-cancellable lease agreements, excluding those tied to the Consumer Price Index or other incentives present in lease agreements with our tenants are recognized on a straight-line basis over the fixed, non-cancellable terms of the applicable leases. Site leasing payments received in advance are recorded as deferred revenue in the consolidated balance sheets and recognized as revenues when earned.
Accounts receivable consists primarily of amounts due from tenants. Related party accounts receivable represent amounts due from parties that are deemed to be related in accordance with GAAP and represented separately from other account receivable. We derive the largest portion of our revenues corresponding trade receivables and the related deferred rent asset from a small number of tenants in the telecommunications industry. For the year ended September 30, 2012, approximately 62% of our revenues were derived from three tenants in the industry.
We evaluate periodically our accounts receivable to determine the need for an allowance for doubtful accounts. This evaluation is based on the history of past write-offs, and the aging and materiality of the balances. For the year ended September 30, 2012, management determined that an allowance for doubtful accounts is not necessary.
Concentrations We have certain customers that make up more than 10% of total revenues. During the year ended September 30, 2012, we had two customers each making up more than 10% of total revenue. The customers individually made up 35% and 14% of total revenues. During the year ended September 30, 2011, we had two customers each making up more than 10% of total revenue. The customers individually made up 34% and 13% of total revenues.
Rent Expense and Deferred Rent Liability Many of the leases underlying our tower sites have fixed term rent escalations, which provide for annual or per term increases in the amount of future ground rent payable. We calculate straight-line ground rent expense for these leases based on the term of the underlying ground lease plus all periods, if any, for which failure to renew the lease imposes an economic additional charge to us such that renewal appears, at the inception of the lease, to be reasonably assured. In addition to the straight-line ground rent expense recorded, we also record an associated straight-line rent liability which is represented under deferred rent liability in the consolidated financial statements included in this Report.
Stock-Based Compensation We account for stock-based compensation in accordance with Codification ASC 718, "Compensation, Stock Compensation" which requires us to recognize expense based on the fair value of our stock-based compensation awards. ASC 718 requires the use of a valuation model to calculate the fair value of the stock-based awards.
We have elected to use the Black-Scholes options pricing model to determine the grant date fair value of stock option awards. We measure stock-based compensation based on the fair values of all stock-based awards on the dates of grant, and recognize stock-based compensation expense using the straight-line method over the vesting periods. Stock-based compensation expense was $1.8 million for the year ended September 30, 2012.
Cash and Cash Equivalents We consider all highly liquid instruments, readily convertible to cash and have an original maturity of three months or less to be cash equivalents. There were no cash equivalents as of September 30, 2012 and September 30, 2011.
Property, Equipment and Software Property and equipment primarily consists of the telecommunication towers and is stated at cost for constructed towers or acquired as an asset acquisition or estimated fair values for towers acquired in a business acquisition. Costs incurred during the construction phase of the towers are capitalized. These costs include direct costs, labor and other indirect costs. Additions, renovations and improvements are capitalized, while maintenance and repairs are expensed. Upon the sale or retirement of an asset, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is recognized and recorded in the consolidated statements of operations in the period the sale or retirement occurs. The carrying value of property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the estimated future cash flows (undiscounted) expected to result from the use and eventual disposition of the asset group is less than the carrying amount of the asset group, an impairment loss is recognized which is measured based on the fair value of the asset. Construction in process is impaired when projects are abandoned or terminated.
31 Table of Contents Depreciation expense for our property and equipment is computed using the straight-line method over the estimated useful lives of the underlying assets.
The substantial portion of our property and equipment represents the cost of our telecommunication towers which is depreciated with an estimated useful life equal to the shorter of (1) 20 years or (2) the term, including option renewals, of the ground lease.
Asset Retirement Obligations We recognize asset retirement obligations associated with our legal obligation to remove the telecommunication towers or remediate the land on which the tower resides. In determining the fair value of these asset retirement obligations we must make several subjective and highly judgmental estimates such as those related to future removal or remediation costs and discount rates. In the period a telecommunication tower is acquired or constructed, we record an estimate fair value of the asset retirement obligation and we accrete such liability through the tower's useful life which does not exceed 20 years. The associated retirement costs are capitalized and included in property, equipment and software and depreciated over their estimated useful life.
Acquisitions For acquisitions that meet the criteria of a business, we use the acquisition method to record the transaction. The cost of an acquisition is measured as the fair value of the consideration transferred ("Purchase Price") on the acquisition date. The Purchase Price is then allocated between the assets acquired and liabilities assumed based on their estimated fair values on the date of the acquisition. The excess, if any, of the Purchase Price over the net identifiable assets acquired and liabilities assumed is recognized as goodwill.
If the Purchase Price is lower than the fair value of the identifiable net assets acquired, the difference is recognized as a gain on business acquisition.
Acquisition costs are expensed and included in general and administrative expenses in our consolidated statements of operations.
For acquisitions that do not meet the criteria of a business acquisition, we allocate the Purchase Price to the value of the towers acquired and any related intangible assets.
The fair value of the assets acquired and liabilities assumed is calculated using various approaches such as the replacement cost model or the discounted cash flow valuation method which involves management judgments and estimates around cash flows, useful life of the assets, age of the towers and discount rates.
Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. The benefit of tax positions taken or expected to be taken in our income tax returns are recognized in our consolidated financial statements if such positions are more likely than not to be sustained upon examination.
Recent Accounting Pronouncements Recent accounting pronouncements are included in Note 2 to the accompanying notes to the consolidated financial statements and are incorporated herein by reference thereto.
Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons.
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