NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts)
(Unaudited)
Note 1. Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies
Cbeyond, Inc., the technology ally for small and mid-sized businesses, was incorporated in Delaware on March 28, 2000.
We enable our customers to focus on their core business activities by shifting the burden of IT infrastructure management to us. Our services include cloud applications such as Microsoft® Exchange, data center infrastructure-as-a-service, cloud PBX phone systems, Microsoft® SQL Server®, Metro Ethernet, broadband Internet access, MPLS services, VPN services, mobile voice and data, information security, local and long distance voice services, administration management, and professional services to migrate and manage customer environments. We market our service offerings under four product families: TotalNetwork, TotalVoice, TotalCloud, and TotalAssist. We sell these products stand-alone or combine them into a range of bundles to satisfy the individual needs of our customers. We operate as one reportable segment based upon the financial information that our Chief Executive Officer, who is the chief operating decision maker, regularly reviews to decide how to allocate resources and assess performance.
Unaudited Interim Results
The accompanying unaudited interim Condensed Consolidated Financial Statements and information have been prepared in accordance with generally accepted accounting principles in the United States (or “GAAP”) and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all normal and recurring adjustments considered necessary to present fairly the financial position, results of operations, and cash flows for the periods presented. The results for the
three months ended
March 31, 2014
are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with our audited Consolidated Financial Statements and the notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2013
.
Recently Adopted Accounting Standards
In July 2013, the FASB issued amended guidance that requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the net operating loss or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. This amended guidance does not require new recurring disclosures. It is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption and retrospective application are permitted. We adopted this guidance on January 1, 2014 and it did not have a material impact on our Condensed Consolidated Financial Statements.
Note 2. Earnings per Share
Basic and Diluted Net Loss per Share
We calculate basic net loss per share by dividing net loss by the weighted average number of shares of common stock outstanding for the period. Our diluted net loss per share is calculated in a similar manner, but includes the effect of dilutive common equivalent shares outstanding during the year. To the extent any common equivalent shares from stock options and other common stock equivalents are anti-dilutive, they are excluded from the computation of dilutive net loss per share. We were in a net loss position for the
three months ended
March 31, 2014
and
March 31, 2013
, resulting in no difference between basic net loss per share and diluted net loss per share.
The following table summarizes our basic and diluted net loss per share calculations:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2014
|
|
2013
|
Net loss
|
$
|
(5,925
|
)
|
|
$
|
(556
|
)
|
Basic weighted average common shares outstanding
|
30,586
|
|
|
30,175
|
|
Effect of dilutive securities
|
—
|
|
|
—
|
|
Diluted weighted average common shares outstanding
|
30,586
|
|
|
30,175
|
|
Basic loss per common share
|
$
|
(0.19
|
)
|
|
$
|
(0.02
|
)
|
Diluted loss per common share
|
$
|
(0.19
|
)
|
|
$
|
(0.02
|
)
|
The following table summarizes our unexercised stock options and unvested restricted stock that were not included in the diluted net loss per share calculations because they were anti-dilutive:
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2014
|
|
2013
|
Anti-dilutive shares
|
3,675
|
|
|
4,499
|
|
Note 3. Debt
The following table summarizes significant components of debt:
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
December 31,
2013
|
Fiber Loan
|
$
|
2,000
|
|
|
$
|
2,000
|
|
Fiber capital lease obligation
|
14,711
|
|
|
14,298
|
|
Equipment capital lease obligation
|
2,325
|
|
|
2,539
|
|
Total debt
|
19,036
|
|
|
18,837
|
|
Current portion of long-term debt
|
4,268
|
|
|
3,963
|
|
Non-current portion of long-term debt
|
$
|
14,768
|
|
|
$
|
14,874
|
|
Credit Facility
We are party to a credit agreement with Bank of America (or "Credit Facility"), which provides for a
$75,000
secured revolving line of credit and a
$10,000
senior secured delayed draw term loan (or “Fiber Loan”). Our Credit Facility is available to finance working capital, capital expenditures, and other general corporate purposes.
On March 4, 2013, we entered into the first amendment to the amended and restated Credit Facility to increase the allowable capital lease and permitted acquisitions amounts to
$60,000
. We also amended the financial covenants of the Credit Facility, replacing the covenants requiring us to maintain minimum levels of Adjusted EBITDA and maximum levels of annual capital expenditures with a covenant requiring us to maintain a maximum consolidated leverage ratio and a minimum fixed charge coverage ratio. Additionally, we extended the maturity date of the Credit Facility (including the Fiber Loan) to May 2, 2018 and extended the draw period of the Fiber Loan to December 31, 2014. Fiber Loan principal payments are due in quarterly installments beginning March 31, 2015 through the maturity date of May 2, 2018.
Under the terms of the amended and restated Credit Facility, we are subject to certain financial covenants and restrictive covenants, which limit, among other items, our ability to incur additional indebtedness, make investments, pay cash dividends, sell or acquire assets, and grant security interests in our assets. The credit agreement also contains certain customary negative covenants; representations and warranties; affirmative covenants; notice provisions; indemnifications; and events of default, including change of control, cross-defaults to other debt, and judgment defaults. Through the maturity date of the Credit Facility, we are required to maintain a consolidated leverage ratio less than or equal to
1.5 to 1.0
. We are also required to maintain a consolidated fixed charge coverage ratio greater than or equal to
1.2 to 1.0
. As of
March 31, 2014
, we were in compliance with all applicable covenants.
As of
March 31, 2014
, we had no outstanding borrowings, utilized
$1,345
for letters of credit, and had
$73,655
in remaining availability under our revolving line of credit. Under our Fiber Loan, we had
$2,000
outstanding at an annual interest rate of
1.9%
and had remaining availability of
$8,000
as of
March 31, 2014
.
Borrowings under the Credit Facility, including our Fiber Loan, approximate fair value due to their variable interest rates and are based on Level 2 inputs. We value long-term debt using market or broker ask prices when available. When not available, we use a standard credit adjusted discounted cash flow model.
As of
March 31, 2014
, our Fiber Loan will be payable as follows:
|
|
|
|
|
Year ending December 31,
|
Fiber Loan payments
|
2014
|
$
|
—
|
|
2015
|
571
|
|
2016
|
571
|
|
2017
|
571
|
|
2018
|
287
|
|
Thereafter
|
—
|
|
Total
|
$
|
2,000
|
|
Note 4. Commitments
Equipment Capital Leases
During
three months ended March 31, 2014
and
2013
, we did not take delivery of any leased equipment. Effective interest rates for equipment capital leases range from
2.0%
to
5.4%
. Fixed monthly payments for equipment under capital leases will be made through December 2017.
Fiber Capital Leases
The amendments to our Credit Facility were made in connection with our strategic initiative to focus on technology-dependent customers while delivering higher network bandwidth at a lower overall cost. Starting in March 2012, we began acquiring fiber network assets in multiple markets primarily under capital leases. Our contracts include commitments expected to be satisfied through monthly payments over
5
to
20
years, and commitments expected to be satisfied through lump sum payments upon delivery. During the
three months ended
March 31, 2014
and
2013
, we took delivery of fiber assets with future minimum capital lease obligations of
$1,242
and
$3,017
, respectively.
As of
March 31, 2014
, capital lease obligations to equipment and fiber network providers will be payable as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ending December 31,
|
Equipment lease obligations
|
|
Fiber lease obligations
|
|
Total
|
2014
|
$
|
790
|
|
|
$
|
2,428
|
|
|
$
|
3,218
|
|
2015
|
882
|
|
|
3,257
|
|
|
4,139
|
|
2016
|
735
|
|
|
3,257
|
|
|
3,992
|
|
2017
|
98
|
|
|
3,186
|
|
|
3,284
|
|
2018
|
—
|
|
|
1,660
|
|
|
1,660
|
|
Thereafter
|
—
|
|
|
2,656
|
|
|
2,656
|
|
Total minimum lease payments
|
2,505
|
|
|
16,444
|
|
|
18,949
|
|
Amount representing interest
|
(180
|
)
|
|
(1,733
|
)
|
|
(1,913
|
)
|
Current portion of capital lease obligation
|
(906
|
)
|
|
(3,219
|
)
|
|
(4,125
|
)
|
Non-current portion of capital lease obligation
|
$
|
1,419
|
|
|
$
|
11,492
|
|
|
$
|
12,911
|
|
In addition to our fiber capital lease obligations, we have outstanding construction orders for fiber assets with future minimum lease payments of
$10,741
, for which we have obtained building access agreements (or "BAAs"). We enter into BAAs with building owners in order to locate equipment on-site that will be used to serve tenants and also access building risers for interior wiring. We recognize these commitments as capital lease obligations after our fiber providers complete construction and we test and accept the fiber assets.
As of
March 31, 2014
, our commitments to fiber network providers, based on estimated acceptance dates of these fiber assets, will be payable as follows:
|
|
|
|
|
Year ending December 31,
|
Fiber lease commitments
|
2014
|
$
|
1,239
|
|
2015
|
1,842
|
|
2016
|
1,842
|
|
2017
|
1,842
|
|
2018
|
1,842
|
|
Thereafter
|
2,134
|
|
Total minimum lease payments
|
$
|
10,741
|
|
Also included in our fiber agreements are contractual maintenance fees that are due over the 20-year lease period and begin upon acceptance of the related fiber assets. Future maintenance fees for our fiber, including fiber for which we have obtained a BAA, totals
$18,412
as of
March 31, 2014
.
We also have outstanding construction orders with potential future minimum lease payments of
$20,545
for which we have not yet obtained BAAs. We do not expect to be able to obtain BAAs for every order placed. Therefore, we expect a portion of these orders will never be constructed. Additional construction orders may be placed in the future.
Operating Leases
We have entered into various non-cancelable operating leases, with expirations through September 2020, for office space used in our operations and for dedicated space within multi-tenant office buildings to locate equipment on-site for serving tenants. We also lease customer circuits, including T1lines and lit fiber, under agreements with minimum volume or term commitments in order to obtain more favorable pricing on a per circuit basis.
Note 5. Strategic Realignment
In early 2012, we began a strategic shift to directly focus more of our selling and service delivery efforts toward the customers within our target market of technology-dependent small and mid-sized businesses that have complex IT needs. We announced this strategy during the first quarter of 2012 and accelerated efforts to realign our distribution channels by building a new direct sales group dedicated to managing both existing and new technology-dependent customers, reducing our traditional direct sales force, and consolidating certain offices.
Since our initial realignment actions, we have made and continue to make adjustments to our distribution channels and service organizations based on the experience gained in targeting technology-dependent customers. Our strategic transformation continued with the elimination of certain positions throughout the Company in January 2014. Our actions included a workforce reduction plan to rebalance our resources to support the continued implementation of this strategy and to address the current financial impacts of our transformation, including reducing expenses to offset a portion of expected revenue declines and the compression of margins.
This workforce reduction plan affected approximately
100
employees and resulted in
$2,261
of additional realignment charges, consisting primarily of severance and medical benefits, recognized in the first quarter of 2014 when the extent of our action was determined and could be estimated. During the first quarter of 2014, we also closed or downsized certain branch offices, incurring approximately
$326
in losses under non-cancelable office leases.
During the
three months ended
March 31, 2014
and
March 31, 2013
, we incurred realignment costs in selling, general and administrative expense of
$2,631
and
$467
, respectively, relating primarily to employee severances, facility exit costs, and revisions to certain sublease assumptions underlying existing accruals. We have incurred cumulative realignment costs of
$6,939
as of
March 31, 2014
.
The following table summarizes changes to the accrued liability associated with the strategic realignment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
costs (1)
|
|
Facility exit
costs (2)
|
|
Other
costs
|
|
Total
|
Accrued liability, December 31, 2012
|
$
|
397
|
|
|
$
|
274
|
|
|
$
|
—
|
|
|
$
|
671
|
|
Expense
|
1,431
|
|
|
481
|
|
|
244
|
|
|
2,156
|
|
Accrual adjustment
|
(84
|
)
|
|
—
|
|
|
—
|
|
|
(84
|
)
|
Payments
|
(905
|
)
|
|
(304
|
)
|
|
(165
|
)
|
|
(1,374
|
)
|
Accrued liability, December 31, 2013
|
839
|
|
|
451
|
|
|
79
|
|
|
1,369
|
|
Expense
|
2,261
|
|
|
326
|
|
|
44
|
|
|
2,631
|
|
Payments
|
(1,658
|
)
|
|
(161
|
)
|
|
(123
|
)
|
|
(1,942
|
)
|
Accrued liability, March 31, 2014
|
$
|
1,442
|
|
|
$
|
616
|
|
|
$
|
—
|
|
|
$
|
2,058
|
|
(1) The remaining employee-related liability will be paid within 12 months and approximates fair value due to the short discount period.
(2) Includes costs for relocating and consolidating certain leased offices. These charges were measured using fair value measurements with unobservable inputs (Level 3) and represent the present value of expected lease payments and direct costs to obtain a sublease, reduced by estimated sublease rental income. The timing and amount of estimated cash flows will continue to be evaluated each reporting period.
Note 6. Share-Based Compensation Plans
We maintain share-based compensation plans, governed under our 2005 Equity Incentive Award Plan, that permit the grant of nonqualified stock options, incentive stock options, restricted stock, and stock purchase rights (collectively referred to as "share-based awards"). Beginning in 2013, service-based awards generally vest over
three
years. Upon an exercise of options or a release of restricted stock, new shares are issued out of our approved stock plans. As of
March 31, 2014
, we had
1,435
share-based awards available for future grant. Compensation expense for share-based awards, including those related to our 401(k) Defined Contribution Plan (or "401(k) Plan") and our corporate bonus plans, totaled
$2,713
during the
three months ended
March 31, 2014
, and totaled
$2,979
during the
three months ended
March 31, 2013
.
In 2014,
50%
of the share-based awards granted to our Chief Executive Officer and certain other executive officers vest based on share price performance compared to the Russell 2000 Index over a
two
-year period beginning January 1, 2014 and
50%
of the share-based awards vest over a
three
-year service period. Each executive is granted a target number of shares and will ultimately earn between
0%
and
150%
of the target amount of shares based on stock price performance. The fair value of awards with a market condition is determined using a Monte Carlo model. Assumptions used in the Monte Carlo valuation model include a risk-free rate of return of
0.3%
, an expected term of
1.9
years, and volatility of
45.9%
. We considered historic and observable market data when determining these assumptions.
The following table summarizes changes in outstanding share-based awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
Stock options
|
|
Service-based
|
|
Performance-based
|
Outstanding, December 31, 2013
|
2,706
|
|
|
1,003
|
|
|
547
|
|
Granted
|
—
|
|
|
620
|
|
|
204
|
|
Stock options exercised (1)
|
(15
|
)
|
|
|
|
|
|
|
Restricted stock vested (2)
|
|
|
|
(388
|
)
|
|
(21
|
)
|
Forfeited or canceled
|
(160
|
)
|
|
(96
|
)
|
|
(8
|
)
|
Outstanding, March 31, 2014
|
2,531
|
|
|
1,139
|
|
|
722
|
|
Options exercisable, March 31, 2014
|
2,285
|
|
|
|
|
|
(1) The total intrinsic value of options exercised during the
three months ended March 31, 2014
was
$11
.
(2) The fair value of restricted shares that vested during the
three months ended March 31, 2014
was
$2,885
.
As of
March 31, 2014
, we had
$630
and
$7,797
of unrecognized compensation expense related to unvested options and restricted stock, both of which are expected to be recognized over a weighted average period of
1.7
years.
During the
three months ended
March 31, 2014
, management approved a share-based compensation plan for employee participants that provides for the settlement of
20%
of performance-based compensation under our 2014 corporate bonus plan with shares of common stock. The shares earned by the participants in this plan vest in 2015. During the
three months ended
March 31, 2014
and
March 31, 2013
, we recognized
$468
and
$489
, respectively, of share-based compensation expense under our corporate bonus plans. Based on the
March 31, 2014
share price,
65
shares would be required to satisfy the
$468
obligation relating to our 2014 corporate bonus plan as of
March 31, 2014
, assuming all participants were fully vested as of
March 31, 2014
.
We have a commitment to contribute to the 401(k) Plan at the end of each plan year, which equates to a matching contribution value as a percentage of eligible employee compensation. We match up to
3.5%
of eligible compensation contributed by employees. We fund our matching contribution in Company stock, and the number of shares we contribute is based on the share price on the last day of the plan year. Throughout the year, the ultimate number of shares that settles relating to our matching contribution remains variable until the December 31 settlement date. The 401(k) Plan does not limit the number of shares that can be issued to settle the matching contribution and the Board of Directors may elect to fund the matching contribution in cash. During the
three months ended
March 31, 2014
, we recognized
$611
of share-based compensation expense related to the 401(k) Plan compared to
$645
for the
three months ended
March 31, 2013
. Based on the
March 31, 2014
share price,
85
shares would be required to satisfy the
$616
obligation as of
March 31, 2014
, assuming all participants were fully vested as of
March 31, 2014
.
Note 7. Income Taxes
The following table summarizes significant components of our income tax expense:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2014
|
|
2013
|
Federal income tax benefit at statutory rate
|
$
|
(1,982
|
)
|
|
$
|
(130
|
)
|
State income tax (benefit) expense, net of federal effect
|
(86
|
)
|
|
48
|
|
Nondeductible expenses
|
33
|
|
|
80
|
|
Write-off deferred tax assets for non-deductible share-based compensation
|
979
|
|
|
568
|
|
Goodwill amortization
|
112
|
|
|
119
|
|
Change in valuation allowance
|
1,207
|
|
|
(431
|
)
|
Provision to return adjustments
|
—
|
|
|
(69
|
)
|
Total
|
$
|
263
|
|
|
$
|
185
|
|
When a reliable estimate of the annual effective tax rate can be made, we recognize interim period income tax expense by determining an estimated annual effective tax rate and then apply this rate to the pre-tax loss for the year-to-date period. Our estimated annual tax rate fluctuates significantly from only slight variances in estimated annual income or loss due to our proximity to break-even results. Accordingly, we recognized interim period tax expense through
March 31, 2014
based on our year-to-date effective tax rate. This methodology provides a more accurate portrayal of our year-to-date income tax expense, as well as reduces the impact that future income variances will have on the accuracy of this amount. Our income tax expense includes state income tax expense that results from Texas gross receipts-based tax, which is due regardless of profit levels. This tax is not dependent upon levels of pre-tax income or loss and has a significant influence on our effective tax rate.
Our net deferred tax assets, before valuation allowance, totaled
$41,752
at
March 31, 2014
, and primarily relate to net operating loss carryforwards. We maintain a full valuation allowance, which reduces our net deferred income tax assets to the amount that is more likely than not to be realized. In addition to our fully reserved net deferred tax assets, we maintain a deferred tax liability of
$1,359
related to goodwill amortization that is deductible for tax purposes but will likely remain non-deductible for book purposes.
Note 8. Other Liabilities
The following table summarizes significant components of other liabilities:
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
December 31,
2013
|
Accrued bonus
|
$
|
2,879
|
|
|
$
|
6,945
|
|
Accrued other compensation and benefits
|
4,349
|
|
|
2,627
|
|
Accrued other taxes
|
4,954
|
|
|
5,426
|
|
Accrued promotions
|
238
|
|
|
397
|
|
Deferred rent
|
2,586
|
|
|
2,469
|
|
Other accrued expenses
|
3,007
|
|
|
1,956
|
|
Other accrued liabilities
|
$
|
18,013
|
|
|
$
|
19,820
|
|
|
|
|
|
Non-current portion of deferred rent
|
$
|
4,125
|
|
|
$
|
4,544
|
|
Non-current deferred tax liability
|
1,359
|
|
|
1,247
|
|
Non-current other accrued expenses
|
1,074
|
|
|
1,558
|
|
Other non-current liabilities
|
$
|
6,558
|
|
|
$
|
7,349
|
|
Note 9. Share Repurchase Program
On July 24, 2013, Cbeyond's Board of Directors authorized the repurchase of up to
$20,000
of Cbeyond common shares over a
2
-year period. During the third quarter of 2013, we repurchased
$5,294
in outstanding shares, representing
778
shares at an average price of
$6.81
per share. No share repurchases have been made since the third quarter of 2013.
Repurchases are made on an opportunistic basis depending on prevailing market conditions, liquidity requirements, contractual restrictions, and other discretionary factors. Repurchases can be made from time to time in open market purchases, privately negotiated transactions, or otherwise. Repurchased shares are retired and are no longer issued and outstanding, but remain authorized shares.
Note 10. Contingencies
Legal Proceedings
From time to time, we are involved in legal proceedings arising in the ordinary course of business such as product liability, employee, personal injury, and other matters. We establish a liability with respect to contingencies when a loss is probable and we are able to reasonably estimate such loss. We believe that we have adequately reserved for these liabilities as of
March 31, 2014
. For certain matters in which the Company is involved, for which a loss is reasonably possible, we are unable to reasonably estimate a loss. While the ultimate resolution of and costs related to these matters are uncertain, we do not believe that any of these pending matters, individually or in the aggregate, could have a material adverse effect on our results of operations, financial condition, or liquidity.
As of the date of this filing, we are involved in the preliminary stage of a lawsuit with FiberLight, LLC (or "FiberLight") that we filed on August 15, 2013 in the Superior Court of Cobb County, Georgia. Among other allegations, we claim that FiberLight fraudulently represented that it owned certain fiber network assets and necessary appurtenances. We believe this ownership is material as it impacts FiberLight's ability to timely and properly complete the build-out of the network, conduct rapid repairs during the useful life of the network, and ultimately transfer ownership of the network to Cbeyond. We have rescinded the agreement with FiberLight and are seeking a return of the
$2,000
paid to FiberLight plus prejudgment interest as well as compensatory and consequential damages, punitive damages, and reimbursement of costs incurred to pursue legal action. FiberLight has filed a counterclaim asserting that Cbeyond breached its contract with FiberLight and seeking contract-related damages. Discovery in the case is not yet complete, and it is not possible to predict the outcome.
Our dispute with FiberLight relates primarily to one geographical market and does not affect any buildings where fiber circuits have already been constructed. We have placed orders for fiber circuits with an alternative fiber provider in the affected area.
In light of these events, during the third quarter of 2013 we wrote off the
$2,400
of related fiber network assets and the remaining capital lease obligation of
$400
, resulting in an expense of
$2,000
included in depreciation and amortization. We have also updated our commitment disclosures within
Note 4 to the Condensed Consolidated Financial Statements
to reflect the rescission of this contract.
Triennial Review Remand Order
The Federal Communications Commission issued its Triennial Review Remand Order (or “TRRO”) and adopted new rules, effective in March 2005, governing the obligations of incumbent local exchange carriers (or “ILECs”), to afford access to certain of their network elements, if at all, and the cost of such facilities. Certain ILECs continue to invoice us at incorrect rates, resulting in an accrual for the estimated difference between the invoiced amounts and the appropriate TRRO pricing. These amounts are generally subject to a
2
-year statutory back billing period limitation and are reversed as telecommunication cost recoveries once they pass the applicable back billing period, or once a settlement agreement is reached that may relieve a previously recognized liability. As of
March 31, 2014
and
December 31, 2013
, respectively, our accrual for TRRO totaled
$1,608
and
$1,486
.
Regulatory and Customer-based Taxation Contingencies
We operate in a highly regulated industry and are subject to regulation and oversight by telecommunications authorities at the federal, state, and local levels. Decisions made by these agencies, including the various rulings made to date regarding interpretation and implementation of the TRRO, compliance with various federal and state rules and regulations, and other administrative decisions are frequently challenged through both the regulatory process and through the court system. Challenges of this nature often are not resolved for long periods of time and occasionally include retroactive impacts. At any point in time, there are a number of similar matters before the various regulatory agencies that could be either beneficial or adverse to our operations. In addition, we are always at risk of non-compliance, which can result in fines and assessments. We regularly evaluate the potential impact of matters undergoing challenges and matters involving compliance with regulations to determine whether sufficient information exists to require disclosure and perhaps accrual. However, due to the nature of the regulatory environment, reasonably estimating the range of possible outcomes and the probabilities of the possible outcomes is difficult since many matters could range from a gain contingency to a loss contingency.
We are required to bill taxes, fees, and other amounts (collectively referred to as “taxes”) on behalf of government entities at the county, city, state, and federal level (“taxing authorities”). Each taxing authority may have one or more taxes with unique rules as to which services are subject to each tax and how those services should be taxed, the application of which involves judgment and interpretation, and heightens the risk of non-compliance. At times, the statutes and related regulations are ambiguous or appear to conflict, which further complicates our efforts to remain in compliance. Because we sell many of our services on a bundled basis and assess different taxes on the individual components included within a bundle, there is also a risk that a taxing authority could disagree with the taxable value of a bundled component.
Taxing authorities periodically perform audits to verify compliance and include all periods that remain open under applicable statutes, which range from three to four years. At any point in time, we are undergoing audits that could result in significant assessments of past taxes, fines, and interest if we were found to be non-compliant. During the course of an audit, a taxing authority may, as a matter of policy, question our interpretation or application of their rules in a manner that, if we were not successful in substantiating our position, could potentially result in a significant financial impact to us. In the course of preparing our financial statements and disclosures, we consider whether information exists which would warrant specific disclosure and perhaps accrual in such situations.
To date, we have been successful in satisfactorily demonstrating our compliance and have concluded audits with either no assessment or assessments that were not material to us. However, we cannot be assured that in every such audit in the future the merits of our position or the reasonableness of our interpretation and application of rules will prevail.
Note 11. Subsequent Event
On April 19, 2014, the Company entered into a definitive agreement to be acquired by Birch Communications, Inc. Under the terms of the agreement, which was unanimously approved by the Company's Board of Directors on April 19, 2014, the Company's stockholders will receive between
$9.97
and
$10.00
per share in cash, in a transaction valued at approximately
$323,427
. The exact amount that the Company’s stockholders will receive will be based on the actual number of shares of the Company’s common stock (including restricted stock) and stock options outstanding at the effective time of the transaction, which will be determined, in part, by stock transactions relating to previously granted stock awards to employees that occur after April 19, 2014. In connection with the transaction, Birch has obtained debt financing commitments from PNC Bank, National Association, PNC Capital Markets LLC and Jefferies Finance LLC. The transaction is subject to approval by the Company's stockholders, receipt of regulatory approvals and other customary closing conditions, and is expected to close in the third quarter of 2014.